All-in moment for Warren Buffett: As billionaire praises his BNSF, customers rail against delays
NEW YORK — When American investor Warren Buffett addresses Berkshire Hathaway’s shareholders at the conglomerate’s annual meeting on Saturday, he is sure to laud the impressive growth of BNSF Railroad, his company’s largest-ever acquisition.
The railroad, which was struggling amid the Great Recession when Berkshire bought it for $26 billion in 2010, returned a $3.8 billion profit last year. In his annual letter to Berkshire, shareholders in February, Buffett called BNSF, whose 32,000 miles of track spans 28 states, “the most important artery in our economy’s circulatory system,” handling 15 percent of all inter-city freight across America.
Praising BNSF’s smooth relations with customers and regulators, Buffett wrote: “Like Noah, who foresaw early on the need for dependable transportation, we know it’s our job to plan ahead.” Buffett was likening BNSF’s foresight to the biblical figure Noah and his vessel.
He added: “America’s rail system has never been in better shape.”
What Buffett didn’t mention is that a growing number of BNSF’s customers say the vital artery is clogged, causing economic losses for industrial firms and farmers scrambling to get their products to market.
As more U.S. goods ride the rails amid an economic recovery, delays can reverberate widely. A harsh winter bungled rail schedules this year, causing slower train speeds, terminal log-jams and stranded crews and locomotives.
Other major railroads, including giant Union Pacific Corp, also have experienced interruptions. Railyards in and around Chicago, a gateway for several major lines, have been backed up for months after record snowfall there over the winter. Even BNSF itself has suffered: Berkshire said on Friday that its first quarter rail unit’s earnings, which fell 9 percent to $724 million, was “negatively affected by severe weather conditions and service-related challenges.
Some shippers believe the winter woes are only part of the problem. The concerns have been greatest across the Great Plains and the Upper Midwest, where BNSF is among the dominant rail players and has been the biggest beneficiary of a boom in shipping a high-value commodity — crude oil — from the Bakken oil patch of North Dakota and Montana.
According to a Reuters analysis of filings made to the U.S. Surface Transportation Board (STB), the rail industry’s economic regulator, over the last month more than four dozen industrial trade groups, lawmakers or commodity firms who rely on BNSF and other major Class 1 railroads have lodged complaints or pleas for regulator action to improve their rail service.
One common claim is that railroads, including BNSF, may be de-prioritizing the shipment of other commodities to make way for higher-priced crude oil on their trains, which railroads deny.
“BNSF is not favoring crude shipments over other shippers. This is a case of rapid growth for several commodities using parts of our railroad network that hadn’t previously seen that kind of volume,” said BNSF spokeswoman Roxanne Butler in an email.
Amid a shale drilling boom, crude-by-rail cargoes are up by around 44-fold since 2008, to nearly a million barrels per day according to industry data. Most of the crude riding the rails originates in the Bakken. BNSF said crude still represents just 4 percent of its total traffic.
Buffett’s ‘all in wager’
When Berkshire bought BNSF, Buffett called it “an all-in wager on the economic future of the United States.” At the time, he told TV commentator Charlie Rose that BNSF was “interwoven with the American economy in a way that, if the American economy prospers, the business will prosper.”
And prospered it has. Last year, amid a boost in rail cargoes, BNSF’s revenue topped $20 billion and the firm invested nearly $4 billion. It plans to boost spending to $5 billion this year. And despite a weaker first quarter, Berkshire said it expects BNSF’s profits to top 2013 for the rest of the year.
But some analysts say the pace of BNSF’s investment has failed to keep up with demand. In a March 14 research note, Morgan Stanley analysts wrote that the winter service woes “indicate too little capex was invested given the growth.”
At an STB hearing on April 10, BNSF executives apologized for winter-related delays and pledged to deploy more locomotives and crews to improve service in coming months.
Their assurances haven’t convinced all customers. United Sugars, whose member firms supply about a fourth of U.S. sugar demand, informed the STB it “harbors grave concerns that BNSF will not be able to quickly resolve its service problems.” Interruptions will cost it tens of millions of dollars this year, and part of the stranded beet crop may rot on the ground.
Rotting beets, waiting passengers
Among others to raise concern are producers of coal, fertilizer, ethanol and steel — even passenger train operator Amtrak. Their complaints aren’t focused solely on BNSF. CP and Union Pacific have been subject to criticism as well.
But BNSF owns some key routes. On Amtrak’s Empire Builder line from Chicago to Seattle, which traverses the Bakken region on BNSF track, on-time performance has dropped to 27 percent so far this year, down from 76 percent in 2009.
“We’ve had very frank conversations with BNSF about their performance,” said Amtrak spokesman Marc Magliari. “The’ve been candid there are issues out there, and they are hiring more crews and locomotives.”
Power utility trade group, the Western Coal Traffic League, told the U.S. rail regulator last month that BNSF was offering “declining service metrics,” adding that “members fear they will run out of coal, if not now, by summer.”
Nucor Corp, the largest U.S. steel manufacturer, wrote that during the first quarter rail journeys that usually take two weeks required up to two months. The delays “severely affected” profits, it told the regulator.
“We are not seeing improvement now that the weather has improved,” the company wrote.
Warning on intervention
The STB has authority to make railroads prioritize shipping of certain goods during bottlenecks, and some customers are calling on the regulator to act. Last month it granted one such request, ordering BNSF and CP railroads to report their schedules for speedier delivery of fertilizer ahead of the spring planting season, which they did.
STB spokesman Dennis Watson declined comment on whether further regulatory action is planned.
BNSF has bristled at the possibility of further government intervention, telling the regulator in a letter last week that “the extreme step of directing recovery measures to the benefit of a particular commodity group or geographic locale” would hurt overall network speed and other customers.
However, it has acknowledged customer concerns and pledged to address them promptly. “The message that we have fallen short on executing from a service perspective was also very clear,” BNSF executive vice president Stevan Bobb wrote in the letter.
Again, shippers of staple commodities are concerned railroads are neglecting their cargoes in favor of $100 a barrel oil.
“We’re all paying the price for the railroads’ infatuation with moving crude oil,” said Bob Dineen, head of the Renewable Fuels Association. “Oil companies aren’t complaining. They think the service has been fine.”