2014: Why does BNSF assume debt while paying dividends to Berkshire?

GREGG WARREN: Thank you. As you know, Berkshire’s cash balances are an issue for some investors. Especially with excess cash being in the 25 to $30 billion range the last couple of years, and Berkshire having a more difficult time than it’s had historically reinvesting capital as quickly as it comes in.

Although Berkshire did provide $3.5 billion of the $3.6 billion of cash that was used to acquire NV Energy last year, with MidAmerican funding the remainder with debt, was there something that kept Berkshire from providing all of the capital for the acquisition, perhaps via inter-company debt?

And on a separate note, can you provide with us some insight into the decision to allow MidAmerican to retain all of its earnings, while Burlington Northern, which spent $3 billion on capital expenditures last year and is on pace to spend $5 billion this year, continues to pay a distribution to Berkshire, all while it takes on additional debt to help fund capital spending?

WARREN BUFFETT: Yeah. MidAmerican, now renamed Berkshire Hathaway Energy — we’ll call it BH Energy — will have multiple opportunities, I hope, and we’ve seen two of them in the last 12 months, to buy other businesses.

And, as you noted, we spent a substantial amount of money on NV Energy and two days ago we agreed to buy transmission lines in Alberta.

So, we will — we hope we will — and so far we’ve been able to — come up with really large businesses to buy at BH Energy.

That will not — at BNSF, we will spend a lot of money to have the best railroad possible. But we’re not going to be buying other businesses.

So, we distribute substantial money out of BNSF and we will continue to do so because it’ll earn substantial money. And it can easily handle the debt that it has and will incur.

Whereas, at Berkshire Hathaway Energy, we have pretty much the appropriate level of debt at both the subsidiary and the parent company level. So as we buy things, we need not only the retained earnings that we have, but occasionally we need some money from the shareholders.

And there are three shareholders of BH Energy. Berkshire owns 90 percent and then Greg and Walter Scott have the balance.

And so, if we make a large acquisition and we need a little more equity, we will have a pro rata subscription, which the other two shareholders are welcome to participate in. But if they don’t — if they decided not to, it wouldn’t hurt them. They’d still have an improvement in the value of their shares.

So those two companies are quite different that way.

I hope that more possible deals for Berkshire Hathaway Energy come along. And I think they will.

So we may invest many, many, many billions there. We will invest billions at the railroad, but it’ll all be to improve the railroad. It won’t be to buy additional businesses.

So far this year, if you think about it, counting yesterday — now, two of these deals started last year — but we’ve spent 5 billion on acquisitions, roughly.

And, of course, in the first quarter, we spent another 2.8 billion on property, plant, and equipment.

But we are finding — we are finding things to do that tend to sop up the cash.

We always will have $20 billion around Berkshire. We will never be dependent on the kindness of strangers. It didn’t work that well for Blanche DuBois, either.

But in any event, the — we don’t count on bank lines. You know, we don’t count on — we don’t count on anything.

There will be some time in the next 100 years, and it may be tomorrow and it may be 100 years from now, and nobody knows, you know, where we cannot depend on anybody else to keep our own strength and to maintain our operations.

And we spent too long building Berkshire to have that one moment destroy us.

I mean, we lent money, as you probably know, to Harley-Davidson at 15 percent. And we lent it at a time when short-term rates were probably a half a percent.

Well, Harley-Davidson is a fine company — but it, like Goldman Sachs and General Electric and a bunch of other companies —we lent money to Tiffany’s — they — you know, they needed — when you need cash, you know, it’s the thing — it’s the only thing — you need. And it’s because other people aren’t coming up with it.

I’ve always said that, you know, cash is — available cash or credit — is a lot like oxygen: that you don’t notice it — the lack of it — 99.9 percent of the time.

But if it’s absent, it’s the only thing you notice. And we don’t want to be in that position.

So we will keep 20 billion. We will never go to sleep at night worrying about any event that’s taken place that could hurt our ability to keep playing our game.

And above 20 billion, we’ll try to find ways to invest it intelligently. And so far, we’ve generally done it. I mean, right — you know, we always had something above that.

But, you know, we’ve spent a fair amount of money so far this year. We’ll probably spend more later in the year.

So, so far, I feel we could get the cash out at reasonable returns. We never feel a compulsion to use it though, just because it’s there.

Charlie?

CHARLIE MUNGER: I think we’re very lucky to have these businesses that can employ a lot of new capital at very respectable rates.

And if — earlier in the history of Berkshire, we didn’t have such automatic opportunities. And now that we’re so affluent, we really are way better off having these opportunities.

It’s a blessing. I mean, who would want to get rid of MidAmerican and the Burlington Northern Railroad? Nobody in his right mind.

I mean, we love the opportunity to invest more capital intelligently in a world where short-term interest rates are half a percent, or lower.

WARREN BUFFETT: And we love the opportunity to go in with 3G at Heinz and —

CHARLIE MUNGER: Yes.

WARREN BUFFETT: —employ significant capital. We’ll get the chances to use capital.

Eventually, you know, compound interest will catch up with us. And it’s certainly dampened things.

But it hasn’t delivered its final blow yet.