Buffett takes on chokepoint in Chicago with BNSF

Warren Buffett and Bill Gates face a roadblock on the route toward payoff on their investment in U.S. freight transportation, Bloomberg reports. Chicago, whose railroads made it hog butcher for the world a century ago, is a tangle of bottlenecks where a quarter of the nation's rail freight stalls while trying to navigate the city.

"We can’t keep running
trains from Los Angeles to Chicago in 55 hours and then take 36 hours to get a
rail car from one side of Chicago to the next," said Matt Rose, chief
executive officer of BNSF. "We either need to fix Chicago or avoid it."

For Buffett, 79, a
solution could help overcome skepticism about his $26-billion bid for BNSF, which shareholders
are to vote on tomorrow. For the Chicago area, speedier passage could head off
a loss of rail traffic, jobs and tax revenue when the city is coping with a
drop in trade-show business.

Part of the answer may
come from Calpers. The California Public Employees’ Retirement System is
backing two and possibly three rail yards outside Chicago to handle intermodal
freight. The yards would help reduce the typical day-and-a-half slog across the
city’s intersecting Amtrak, commuter train and freight tracks, helping
railroads in their quest to take more shipping from the trucking industry.

The first is a $1-billion
BNSF yard that opened in 2002. Calpers’s real estate unit, CenterPoint
Properties Trust, is scheduled to open a $2-billion Union Pacific facility
nearby in September. Negotiations are under way with Canadian National Railway Co. for a third yard, said Michael Mullen,
CenterPoint’s chief executive.

The Bill &
Melinda Gates Foundation is
one of Montreal- based Canadian National’s 10 biggest
shareholders, with 1.8 percent of the stock, according to data compiled by
Bloomberg. Michael Larson of
Cascade Investment LLC in Kirkland, Washington, investment manager for Gates,
54, didn’t return calls seeking comment. Amy Enright, a spokeswoman for the
foundation, referred calls to Larson.

A train ride through BNSF’s
new yard caught Buffett’s attention, Rose said. He briefed the Berkshire Hathaway Inc.
chairman on the rail connections to the West Coast and on a surrounding network
of distribution centers in April 2008, a year after Buffett first invested in
Burlington.

"He loved it," said Rose,
50. Nineteen months later, Buffett offered to buy the rest of the Fort Worth,
Texas-based company. Buffett didn’t respond to a request for comment e- mailed
to his assistant Carrie Kizer.

Buffett was impressed by
how the facility works with big retailers such as Wal-Mart Stores Inc., Rose
said. Bentonville, Ark.-based Wal-Mart owns a distribution center half a mile
away to receive goods arriving from Asia. Being so close to the yard slashes
shipping costs: Retailers spend about $2,000 to send each container from
Shanghai to Joliet, Illinois, then $25 more to reach nearby distribution
facilities, Mullen said. The additional cost would shoot to $200 a container
for a facility five miles away, he said.

What Buffett called his "all-in
wager" on the U.S. economy’s future prompted Standard & Poor’s to strip
Berkshire of its last AAA credit rating. Oil prices in the $70 to $80 range
favor railroads over long-haul trucking as an investment, said Eric Marshall,
research director of Dallas-based Hodges Capital Management. Berkshire’s Class
A shares have gained 15 percent to $111,700 since Nov. 2, the day before the
Burlington deal was announced.

"All the railroads will
do well because they’re the low- cost provider of transportation," said
Marshall, whose firm sold 500,000 BNSF shares after Buffett’s offer and used
the proceeds to acquire 556,000 shares in Kansas City Southern. "When oil was
at $20 a barrel, that was not the case."

Kansas City Southern
is installing new intermodal technology to connect Chicago and other U.S.
cities with Mexico, Marshall said. Its shares have risen 26 percent to $30.33
since Nov. 2.

Success in railroads now
hinges on which companies best take advantage of intermodal shipments, which
produce more revenue per carload than other freight. Donald Broughton, a
St. Louis-based analyst for Avondale Partners LLC, has a "buy" rating on Union
Pacific because it’s winning intermodal freight from BNSF.

By the end of 2009, BNSF’s
weekly lead over Union Pacific in intermodal container shipments had dwindled
to 11,355 from 32,500 in late 2008, Broughton said in a report.

Union Pacific is likely
to capture even more business from BNSF, Broughton said, when its intermodal
yard opens in September about 40 miles southwest of Chicago in Joliet. Union
Pacific shares have gained 12 percent in the wake of the BNSF agreement, while Canadian
National’s have gained 2.4 percent.

Buffett’s investment in
Burlington opens doors for the entire railroad industry on Wall Street and in
Washington, Rose said.

"It’s a vote of
confidence that railroads can provide significant value to the capital markets
and great social value," he said.

After the recession ends,
population growth and economic expansion will spur U.S. freight shipments to
rise at a compounded annual rate of 2.2 percent for the next decade, and
intermodal traffic to increase 3.6 percent per year, estimated Charles Clowdis, an
IHS Global Insight analyst in Lexington, Massachusetts.

The new intermodal
freight yards near Chicago will digest some of this growth, said Hani Mahmassani,
director of Northwestern University’s Transportation Center, in Evanston, Illinois, which studies global
transportation systems. But they’re not big enough to shift large volumes of
traffic out of the central city, so they won’t solve all its rail traffic
problems, he said.

Losing its role as the
nation’s premier rail hub would harm the regional economy for generations, said
Jeffery Sriver,
director of rail infrastructure at the Chicago Department of Transportation.
Chicago faces growing competition from new intermodal switching yards planned
or built by BNSF near Kansas City and by Canadian National in Memphis, Tenn.

The railroads helped
Chicago become a center for slaughterhouses, mail-order retail and steelmaking.
In the process, Chicago developed expertise that allows it to compete as a global
city today, said Saskia Sassen, a
Columbia University sociologist.

"New York does finance,"
Sassen said. "Chicago has legal, financial and transportation skills that are
rooted in the material practice of making things."

Calpers bought CenterPoint,
an Oak Brook, Ill.-based real estate investment trust, for $3.4 billion in
2006. Starting in 2001, CenterPoint purchased 6,000 acres of land on an
abandoned U.S. Army arsenal in Joliet. The core of the BNSF yard is a set of
parallel tracks where four trains, each 1.5 miles long, are loaded and unloaded
simultaneously. Workers need 10 hours to unload trains onto tractor- trailers
— half as much time as a decade ago — for companies such as Wal-Mart, which
uses global positioning satellites to track each container, dispatching truck
drivers via e-mail as trains approach.

Such improvements grew
out of a crisis. After winter storms snarled traffic in 1999, Chicago Mayor Richard Daley formed a
coalition of six freight railroads, plus city and state officials and Amtrak.
The group wants to fix 78 local bottlenecks at a cost of $2.5 billion,
according to its Web site. The coalition has secured $761 million so far, about
a quarter from railroads and the rest from government.

It has applied for $300
million of the $1.5 billion in rail infrastructure grants President Barack Obama’s
administration will award later this month. The group also is seeking $700
million from a transportation bill pending in Congress.

When Obama announced $8
billion in high-speed rail grants Jan. 28, he included $133 million for a new
overpass near 63rd Street and Interstate Highway 94 on Chicago’s south side.
Each day, the overpass will allow 82 passenger trains and 46 freight trains to
pass by at different levels, instead of having to take turns for a clear track.

Federal Railroad
Administrator Joseph Szabo called
Chicago infrastructure the most significant freight bottleneck in the U.S.

"You don’t achieve much
traveling 110 miles an hour in a cornfield if you can’t get into the city,"
Szabo told reporters last month. "Chicago has to get fixed."