DC Velocity - March 2015

newsworthy

THERE WAS NO SHORTAGE OF STAKEHOLDERS that felt let down by BNSF Railway’s 2014 operating performance. Add to that one more stakeholder: the owner.

In his annual letter to shareholders released Feb. 28, Warren E. Buffett, chairman and CEO of BNSF parent Berkshire Hathaway Inc., said the story at the Fort Worth, Texas-based railroad last year was “not good,” adding that it “disappointed many of its customers” in 2014. The railroad’s well-documented service issues—the result of a bad-tasting brew of foul weather, a paralyzed infrastructure connecting the railroad’s Northern region and Chicago, and a shortage of crews and equipment to handle a surge in energy shipments as well as other freight—came in spite of industry-record capital expenditures that the railroad has made in recent years, Buffett noted.

In language that will likely make BNSF folks squirm, the 84-year-old multibillionaire businessman and investor said that although the unit spent far more than did its chief rival, Union Pacific Corp., UP suffered fewer problems, gained market share from BNSF, and beat its rival’s earnings by a record amount. “Clearly, we have a lot of work to do,” Buffett said.

Buffett said Berkshire is “wasting no time” putting BNSF back on track. He said BNSF’s $6 billion in projected 2015 capital expenditures will be equal to 26 percent of its estimated revenues, an outlay that is “largely unheard of among railroads.” By comparison, BNSF’s average annual capital spending between 2009 and 2013 equaled roughly 18 percent of annual revenue, Buffett noted. BNSF’s projections are also much higher than UP’s forecast of spending 16 to 17 percent of annual revenue on CapEx for the near future, he added.

“Our huge investments will soon lead to a system with
greater capacity and much better service,” Buffett wrote.
“Improved profits should follow.”
BNSF’s operating metrics began to improve in the second
half of the year and have gotten better into 2015, according
to the “Railroad Performance Measures” website, where six
of the seven major North American railroads post weekly
performance data. According to the website, BNSF’s aver-
age train speed, as of the week ending Feb. 20, stood at 23. 8
miles per hour. In early June 2014, BNSF’s average train
speed was reported at 20. 7 miles per hour. Terminal dwell
times, which stood at more than 30 hours across BNSF’s
network in mid-July, had been reduced to slightly less than
27 hours by Feb. 20, according to data posted on the site.

BUFFETT’S BIG BET

Buffett, who is Omaha, Neb.-based Berkshire’s largest shareholder, is a master at finding businesses with so-called wide competitive moats and seasoned, successful managers, and then leaving the managers alone to run the business. His shareholder letter, eagerly awaited by virtually everyone in the investment community, is often self-deprecating, with Buffett spending more time critiquing himself and his rare investment mistakes than singling out Berkshire’s operating companies. His public criticism of BNSF is unusual and may reflect the importance that the railroad holds in the Berkshire galaxy.

In 2009, Berkshire bought the 77 percent of BNSF it didn’t already own for $26.7 billion, which remains its costliest acquisition. At the time, Buffett called the transaction an “all-in bet” on the future of the U.S. economy, a significant statement given that the economy was trying to dig out from its worst downturn in more than 70 years.

Despite last year’s setbacks, BNSF managed to increase net earnings to $3.86 billion from $3.7 billion in 2013. Revenues rose to $23.2 billion from slightly more than $22 billion. However, in a reflection of the persistent problems, its net earnings and revenues rose at a slower pace than they did in the 2012 and 2013 reporting years. Operating expenses in 2014 increased to $16.2 billion from $15.3 billion in 2013 and $14.8 billion in 2012, according to Berkshire data.