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Warren Buffett is not a proponent of using the concept of “synergies” to justify acquisitions and generally encourages Berkshire Hathaway (BRK.A, BRK.B) subsidiaries to operate independently. Business unit managers, or “all stars” as Mr. Buffett referred to them in his biennial letter included in the company’s 2010 annual report (pdf), are given the authority to make all operational decisions and must consult with Mr. Buffett only in cases where changes in post-retirement benefits or major capital expenditures are proposed.

However, the fact that synergies are not mandated by headquarters does not mean that Berkshire subsidiaries may not find it beneficial to work with each other on mutually beneficial terms. When Burlington Northern Santa Fe (BNSF) was acquired last year, a number of analysts wondered whether potential business relationships could be developed between Berkshire’s large utility business and the railroad. In particular, MidAmerican Energy has ongoing needs for transporting coal from mines to power plants. In addition, the railroad right of ways could prove interesting if the utility wishes to build new power transmission lines or (perhaps less likely) new natural gas pipelines in the future.

While we emphasize that our observation is mostly speculative, it was interesting to note a subtle change in MidAmerican’s 2010 10-K report which was filed this morning. There is only one reference to BNSF in the report which reads as follows:

MidAmerican Energy has a long-haul coal transportation agreement with Union Pacific Railroad Company (“Union Pacific”) that expires in 2012. Under this agreement, Union Pacific delivers coal directly to MidAmerican Energy’s George Neal and Walter Scott, Jr. Energy Centers and to an interchange point with Canadian Pacific Railway for short-haul delivery to the Louisa and Riverside Energy Centers. MidAmerican Energy has the ability to use BNSF Railway Company, an affiliate company, for delivery of coal to the Walter Scott, Jr., Louisa and Riverside Energy Centers should the need arise.

A similar passage appeared in MidAmerican’s 2009 10-K report but had two material differences:

MidAmerican Energy has a long-haul coal transportation agreement with Union Pacific Railroad Company (“Union Pacific”). Under this agreement, Union Pacific delivers coal directly to MidAmerican Energy’s George Neal and Walter Scott, Jr. Energy Centers and to an interchange point with Canadian Pacific Railway for short-haul delivery to the Louisa and Riverside Energy Centers. MidAmerican Energy has the ability to use BNSF Railway Company, an affiliate company, for delivery of a small amount of coal to the Walter Scott, Jr., Louisa and Riverside Energy Centers should the need arise.

The 2010 10-K refers to the expiration of the Union Pacific (UNP) agreement in 2012 and drops the term “small” when describing the potential to use BNSF for delivery of coal “should the need arise”.

These differences in wording are relatively minor and it does not necessarily indicate any change in policy. Both Union Pacific and BNSF serve the Powder River Basin area in Wyoming and MidAmerican may continue to do business with Union Pacific which could have facilities better suited to the utility’s coal transportation needs. Nevertheless, we find it interesting that (1) the expiration of what is probably a routine agreement was mentioned and (2) we no longer have a qualification of “small” characterizing the potential for BNSF to transport coal for MidAmerican.

The Rational Walk will publish a comprehensive report on Berkshire Hathaway entitled “In Search of the Buffett Premium” later this week. The report includes detailed information regarding Burlington Northern Santa Fe and MidAmerican Energy. The report is currently available for pre-order.

Source: Assessing 'Synergy' Potential Between 2 Berkshire Subsidiaries