Questions for Buffett

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. After more than half a century in charge of Berkshire Hathaway, Warren Buffett and Charlie Munger might think that they've heard every question. But Gregg Warren, our Berkshire Hathaway analyst, who will be on a panel asking them questions at the meeting this year, is trying to come up with some topics that will shed some new insight on the business.

Gregg, thanks for joining me.

Gregg Warren: Thanks for having me.

Glaser: So, I know this is always a tall task to come up with new topics, new areas to discuss with Charlie and Warren. How do you go about kind of thinking about the right things to ask them during the meeting?

Warren: In some ways Berkshire makes it a little bit easier on maybe me and Jonathan Brandt, who is the other "gereralist/analyst" who sits on the panel, because as you know, they have one insurance analyst from the sell side every year and they kind of rotate that position. But Jonathan Brandt and I sort of begged off of insurance questions. So, it allows us to really focus more on the rest of the operating businesses overall, including the investments.

So, from that perspective, we try to dig around and see if there is anything that's sort of piquing the interest of our analysts who cover some of these companies like Kraft Heinz or the railroads, to sort of get their intake into good questions that might elicit some additional information. Part of the battle is coming up with good questions that can get Warren and Charlie talking about particular pieces of the business, potentially offering us some nuggets of information that allow us to understand the businesses better, but at the same time keep the shareholders and the tenants sort of involved with the entire process. So, from that perspective, it is sort of a challenge. But there's always plenty of things that come up and I think this year is going to be no different than past years.

Glaser: So, I know you don’t want to tip your hat about exactly what you're going to ask them. But I know one topic that's been on your mind is energy generally, particularly how it relates to the railroad. What would you like to figure about how they are thinking about BNSF and the decline in energy prices?

Warren: Yeah, I would expect the energy prices to be probably one of the biggest topics that comes up at this year's meeting, mainly because of what we've seen just within the last couple of years here. I mean, oil prices have fallen precipitously. Natural gas prices have fallen as well, and then you also have sort of the side impact on coal. We've seen volumes fall off dramatically. What we saw from the first quarter so far this year, it's down about 30% year over year overall for the railroad industry as far as shipments of coal. And that's sort of a byproduct of having historically low natural gas prices.

So, I guess with BNSF in mind our questions will revolve around how is the business responding to this dislocation? The expectation within the railroad industry always was that there would be a gradual, continual secular decline in the use of coal as more plants sort of went offline, faced with sort of the headwinds of regulation and sort of emission controls. So, from that perspective, we had already sort of planned this and the railroads have already kind of planned this in. But you go from maybe a 2% to 3% volume decline every year, so kind of a 20%. It has a big impact and a big ripple through because then you've got to start thinking about what do you do with these cars that you have allocated to this particular piece of the business. And in BNSF's case, it's about a fifth of their volume and a fifth of their revenue coming from coal shipments. So, from that perspective, we've got to sort of look at how do they offset that? Do they pick up more intermodal traffic, do they pick up more ag traffic? I mean, how do they sort of handle this kind of a disruption, and does it impact pricing within sort of the regions in which they operate?

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Glaser: And Berkshire Hathaway Energy is of course impacted by energy prices.

Warren: Yeah, I think Berkshire Hathaway Energy is sort of in a different boat. From an input perspective, this helps them out because lower nat gas prices allow them to ramp up sort of the natural gas priced plants. They've actually been far more aggressive about reducing the amount of coal-fired plants they have. They are down to 30% now of their total plant from more than 50% at the beginning of the century. So, they have been fairly aggressive relative to their peers and we've always believed that Berkshire Hathaway Energy was advantaged when it comes to capital allocation because they don't pay a dividend out every year. Most of their competitors, their publicly traded competitors, are paying 60% to 70% of their earnings out as a dividend to shareholders every year.

Buffett has told Greg Abel and the other managers at Berkshire Energy to keep the cash, put it to work, figure out what the investments are you need to be doing. And one of the ones that they've done the last 10 to 15 years now has been renewables. They have been very aggressive on buying up and installing wind-powered plants and solar-powered plants. In fact, when you look at sort of Iowa, which is the hub of mid-American energy, recent invests or recently announced investments will move the contribution of wind-powered generation to about 85% of their overall generation needs. The expectation is they can get to 100%.

And when you think about sort of where the future of that business goes, having the lowest-cost plant, which renewables gives you, because you're no longer reliant upon coal pricing or natural gas pricing, allows you to sort of offset some of the impact that could come down from distributed generation longer term. And as we move forward, our expectation is they will start looking at more transmission assets because ideally transmissions are going to be where the future is for this is business as opposed to generation.

Glaser: On the investment front, what do you want to ask them? I know you track this pretty closely about what Berkshire is buying and selling in terms of securities.

Warren: Yeah, I think from the energy front, it'd be kind of interesting to see what sort of their rationale is on their investment in Phillips 66. Right now they own about 14% of the company overall. They've been aggressive with the share purchases since pretty much midway through the third quarter. They did a big dip there and then early part of this year they also ramped up their buying of the stock.

It's hard to sort of frame a question for the meeting where we'll get a straight answer. But if I were to actually sit down with Warren off to the side and say, "Hey, what are you really looking at here? Do you see this as a longer-term play on downstream energy? Do you view this as just an attractive entry price for the stock, or are you hoarding up low-cost stock to use sort of in a swap?" Because a few years back they actually traded some shares that they had in Phillips 66 for a lubricating pipeline, a lubricating business that was within that organization. And if Buffett is looking for ways to do things tax-efficient, he could again swap shares of Phillips 66 for another piece of the business within that organization if they are looking at it from that perspective. But it would be curious to sort of see what their thinking is there.

They also bought up some shares in Kinder Morgan, a pipeline company, during the first quarter. I feel that that's probably either Todd or Ted's stake at this point. It was a much smaller stake overall and that may just be more of a play on sort of a cheap stock price at that point.

Glaser: Gregg, we're looking forward to your questions and of course, the answers.

Warren: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.