(BRK.A), (BRK.B)
Just 14 months after announcing ambitious plans to build 5,000 Next Generation tank cars, BNSF Railway has dropped its plan to both build and lease tank cars. The plan for the railroad to build tank cars was unusual, as tank cars are usually owned either by leasing companies, or directly by the crude oil or chemicals suppliers.
The move comes just as the U.S. Department of Transportation (DOT) released its new tank car rule. Among the things the new rule will do is require “a new, enhanced tank car standard and an aggressive, risk-based retrofitting schedule for older tank cars carrying crude oil and ethanol.”
Increased Safety Standards for Tank Cars New and Old
“Enhanced Standards for New and Existing Tank Cars for use in an HHFT—New tank cars constructed after October 1, 2015, are required to meet the new DOT Specification 117 design or performance criteria. The prescribed car has a 9/16 inch tank shell, 11 gauge jacket, 1/2 inch full-height head shield, thermal protection, and improved pressure relief valves and bottom outlet valves. Existing tank cars must be retrofitted with the same key components based on a prescriptive, risk-based retrofit schedule. As a result of the aggressive, risk-based approach, the final rule will require replacing the entire fleet of DOT-111 tank cars for Packing Group I, which covers most crude shipped by rail, within three years and all non-jacketed CPC-1232s, in the same service, within approximately five years.”
Why the Change of Heart for BNSF?
BNSF cited customer concerns as its primary reason for dropping its move into the leasing business.
“BNSF owning or leasing tank cars was not viewed as useful,” the railroad detailed in a letter to customers.
But Not So Quick
BNSF may have dropped its plan to build tank cars, but that doesn’t mean Berkshire Hathaway will not be in the tank car business. Berkshire already builds and leases tank cars through its UTLX Union Tank Car, a subsidiary of Berkshire’s Marmon Group, and the new rule will bring lots of new business for UTLX, as the company not only builds 6,000 new tank cars per year, but retrofits thousands of old ones as well.
© 2015 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.