Warren Buffett’s Berkshire Hathaway Inc. can count the $8.1 billion premium it paid to acquire Burlington Northern Santa Fe Corp. in the formula used to calculate prices for some shippers, a decision that may make it harder for some rail customers to challenge their rates.
The U.S. Surface Transportation Board, which regulates some rail rates, today ruled that Berkshire may count the premium from its 2009 purchase of BNSF by spreading those costs over seven years.
Shippers moving products, including coal, asked the regulator to prohibit the company from counting the premium in its cost base, saying Berkshire was unfairly trying to make them reimburse its expenses in the $26.5 billion BNSF acquisition. The deal was the largest in Warren Buffett’s more than four decades as Berkshire’s chairman and chief executive officer.
Today’s ruling may make it harder for shippers of grain, coal and chemicals to challenge their rates, because the regulator’s decision allows railroads to show higher expenses than if they couldn’t build in the acquisition costs.
“It makes it harder to pursue rate cases, which are already very hard to win,” said Robert Szabo, an attorney with VanNess Feldman in Washington who represents railroad customers. Shippers known as captive, who are only served by one railroad, can challenge their rates with the STB through a process they consider lengthy and expensive.
BNSF said the ruling upheld the regulator’s precedent to factor acquisition costs into its accounting, which it said follows Generally Accepted Accounting Principles and Securities and Exchange Commission procedures.
“The decision today essentially supports well-settled board precedent and confirms our assertion that this methodology would have no appreciable impact on customers,” Steve Forsberg, a spokesman for BNSF, based in Fort Worth, Texas, said in an e-mail.
Buffett, whose company is based in Omaha, Nebraska, didn’t immediately return a message seeking comment sent to an assistant.
The ruling affects a small portion of Burlington Northern customers, said Anthony Hatch, an independent rail analyst based in New York who has tracked railroad companies for almost three decades.
“I don’t think it’s a very big deal for BNSF in terms of their bottom line,” Hatch said in a telephone interview.
The ruling provides a disincentive for future railroad mergers by making them more expensive, said Hatch, who said he doesn’t expect large railroad mergers in the U.S. The country is served by two large U.S.-based railroads in its eastern half and two others in its western half following a series of mergers that consolidated the industry.
The STB, which regulates rail mergers and acquisitions, previously criticized Berkshire for not getting its approval before buying Burlington Northern, then the second-largest U.S. railroad by traffic.
Buffett agreed to buy the BNSF shares that Berkshire didn’t already own in 2009 for $100 a share, or 31 percent more that the railroad’s closing price the day before the announcement.
He’s called the acquisition an “all-in wager” on the U.S. and justified the price Berkshire paid in an interview with Charlie Rose on PBS in 2009, saying that it was a good asset for his company to own for the next century.
“You don’t get bargains on things like that,” Buffett told Rose. “It’s not cheap.”
BNSF has boosted Berkshire’s earnings since the deal was completed and reduced the company’s reliance on profit from insurance operations and Buffett’s investments. The railroad has benefited from increased shipping tied to U.S. oil production and provided about a quarter of Berkshire’s $22.2 billion in profit before income taxes last year.
-- With assistance from Noah Buhayar in New York. Editors: Bernard Kohn, Elizabeth Wasserman