advertisement

---

Last year, BNSF Railway Co. registered record operating earnings, along with four other large non-insurance holdings: Iscar Ltd., Lubrizol Corp., Marmon Group and MidAmerican Energy Co., according to a letter Berkshire Hathaway Inc. recently sent to its shareholders. In aggregate, the five businesses earned more than $9 billion in pre-tax dollars.

“Contrast that to seven years ago, when we owned only one of the five, MidAmerican, whose pre-tax earnings were $393 million,” said Berkshire Chairman and Chief Executive Officer Warren Buffet in the letter. “Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping $10 billion.”

In 2011, BNSF generated revenue of $19.5 billion compared with $16.9 billion in 2010 (comparison figures from 2010 include historical accounting through Feb. 12, 2010, and purchase accounting afterward, according to Berkshire). Operating earnings climbed from $4.5 billion to $5.3 billion, pre-tax earnings rose from $4 billion to $4.7 billion and net earnings increased from $2.5 billion to about $3 billion.

Commenting on BNSF’s ongoing infrastructure and operational improvements, Buffett said Berkshire “must, without fail,” maintain and improve the railroad’s 23,000 miles of track along with 13,000 bridges, 80 tunnels, 6,900 locomotives and 78,600 freight cars.

“This job requires us to have ample financial resources under all economic scenarios and to have the human talent that can instantly and effectively deal with the vicissitudes of nature, such as the widespread flooding BNSF labored under last summer,” he wrote.

Buffett also decried federal efforts to “re-regulate” the rail industry that would compromise Berkshire’s and BNSF’s plan to continue reinvesting “massive” amounts of capital in the railroad. The Class I regularly invests “far more” than its depreciation charge, he wrote.

“Though many people decry our country’s inadequate infrastructure spending, that criticism cannot be levied against the railroad industry. It is pouring money — funds from the private sector — into the investment projects needed to provide better and more extensive service in the future,” said Buffett. “If railroads were not making these huge expenditures, our country’s publicly financed highway system would face even greater congestion and maintenance problems than exist today.”

Making large reinvestments similar to BNSF “would be foolish” if the Class I could not earn appropriate returns, he wrote.

“But I am confident it will do so because of the value it delivers,” said Buffett. “Many years ago Ben Franklin counseled, ‘Keep thy shop, and thy shop will keep thee.’ Translating this to our regulated businesses, he might today say, ‘Take care of your customer, and the regulator — your customer’s representative — will take care of you.’ Good behavior by each party begets good behavior in return.”