What is UTLX to Berkshire?

When Berkshire Hathaway acquired Marmon Group at the end of 2007, many market participants were unfamiliar with the new addition to the Berkshire family, including me. Marmon, like Berkshire, is a conglomerate of businesses, with 125 different units. Many of these units are small with only a handful of employees. But one is quite large, and seems to fit with some other businesses Berkshire has been assembling: Union Tank Car. Next time you are stopped at a railroad track and see a train go by, you might see some tank cars with UTLX stenciled on them. Berkshire now owns a fleet of 70,000 such cars. Of the $7.5B purchase for Marmon, I estimate somewhere in the neighborhood of $2B is accounted for by Union Tank Car (UTLX). In 2006, UTLX achieved around $200M in net income on $1.9B in sales and reported a book value of $1.2B. You can see the 10-K here: (http://www.secinfo.com/d14D5a.u1tht.htm#5phq) So what does Berkshire want with 70,000 tank cars for lease and plants to build more tank cars? Currently rail tank cars are used to haul a number of products, from ethanol to corn syrup, to petrochemicals. But I think Berkshire may have bigger plans. As you know, Berkshire has acquired, for all practical purposes, a controlling stake in Burlington Northern Santa Fe Railroad, which moves a significant portion of this nation’s coal and ethanol. Berkshire also owns the MidAmerican utility. Among other things, MidAmerican owns natural gas transmission pipelines, and coal fired power plants throughout the Midwest and West. Despite being a “boring utility”, Mid American has recently been involved in many new projects, including investigating new nuclear plants, building a gas pipeline from Alaska to the lower 48, and developing a geothermal plant in Southern California, The future of energy production and use in the United States is unclear. While demand for energy is constantly increasing, supply is under attack from many directions. Coal, which is cheap and plentiful in the U.S. (and used for half our electricity generation), is not popular with the global warming crowd. Nuclear is extremely expensive and building nuclear capacity near population centers is difficult. Ethanol has its doubters for a number of reasons. Oil and natural gas are subject to wild price moves and supply fears. Berkshire’s combined energy distribution (MidAmerican, Burlington Northern, and UTLX) holdings have the capability to respond to a number of outcomes. UTLX tank cars could transport large volumes of petro products, ethanol, or even liquefied coal-diesel fuel. MidAmerican could provide natural gas pipelines from Alaska, wind farms, or even expand in geothermal, not to mention add coal plant capacity if global warming pressure fades. Burlington can haul anything. What if Berkshire became front and center in a massive coal to liquids development push? Montana and Wyoming have the coal. Burlington has the tracks. UTLX has the tank cars. Berkshire has the money and the power generation capability. The idea excites me, but a number of obstacles stand in the way. Any which way you slice it, Berkshire is positioning itself to distribute a lot of energy, much of it sourced from the United States. UTLX is a piece of the puzzle. Long term, this is good news for America, and hopefully for Berkshire shareholders. ___________ Mike Rubsam is President of Liberty Steward Capital and is long shares of BRKB and BNI.