The Real Reason for Berkshire Hathaway to Invest in Burlington Northern Santa Fe Corp.

Warren Buffett's attraction to Burlington Northern Santa Fe (BNI) may be due in part to the railroad's strategic importance to Berkshire Hathaway.

In recent years Buffett has increasingly been building up Berkshire's energy portfolio, primarily through its MidAmerican Energy Holdings unit. Energy has now joined insurance as one of Berkshire's two major sectors.


MidAmerican's energy assets include coal-fired power plants in the midwest for MidAmerican Energy Co. and the Pacific northwest for PacifiCorp. Take a look at BNSF's network map, and you'll see that the railroad's tracks go right through the states in which MidAmerican Energy Holdings operates.


As much as environmentalists decry the effect coal has on the environment, it's still the raw material that generates the vast majority of electricity in the U.S. That's not likely to change anytime soon. If plug-in hybrid vehicles grow in popularity, that will leave the country less dependent on oil but more dependent on electricity, which translates into the need for more coal.


The coal that BNSF hauls is responsible for more than 10 percent of the electricity produced in the U.S. More than 90 percent of BNSF's coal comes from Wyoming and Montana's Powder River Basin, whose abundant low-sulfur coal burns cleaner and, according to the company, more economically for utilities.


In other words, it's likely that Burlington Northern will be hauling ample coal for the foreseeable future, and its customers presumably include the power plants controlled by MidAmerican. Is it possible that Buffett's attraction to BNI stems from the desire to control an important shipping vehicle for Berkshire's growing array of power plants?


That seems logical. While most investors choose individual stocks solely for the prospects of that one company, Buffett is thinking about the big picture for Berkshire. Should Buffett someday make a bid for the entire company, Burlington Northern would seemingly complement MidAmerican, while also profitably hauling freight for outside companies.


This is not to say that the other theories behind Buffett's big bet on BNI have no merit. The company does seem poised to profit off a rebound in imports from China. It will be a cheaper alternative to trucking should oil prices go back up. It would be virtually impossible for a competitor to replace Burlington's massive rail network, which gives BNI the moat that Buffett so desires. But it seems feasible that Buffett is also looking at how BNI could someday fit into the Berkshire organization as a stand-alone firm.


One fact that weakens this argument is that Berkshire hasn't bought any BNI shares for many months now. Berkshire still owns about 22.6 percent of the company, a stake worth $6.3 billion. BNI is still trading around $80 a share, which is about where Buffett bought many of the shares.


Remember, however, that Buffett didn't complete his purchase of GEICO for Berkshire until 1994, nearly two decades after he bought a major chunk in the 1970s.

Is it possible that Berkshire will follow a similar path to owning BNI outright? Only time will tell. But if the company does, it will own a valuable transportation network to link up its growing power portfolio.