BNSF Closes the RR Books, Finally - plus STB/Eastern Rail Map



SWARS is next week….the US is thawing out at last….and Warren praises his railroad investment….and
the eastern rail map is the talk of the industry.

Warren by zoom: Berkshire Hathaway finally reported results that followed a pattern we have become
familiar with: FY20 earnings down 48% but Q4/20 earnings up 23%. BH is sitting on ~$138B in cash,
despite spending $25B in share repurchases last year (and a higher amount YTD!). No succession plans
were announced….In his annual letter, CEO whatsisname praised their investment in BNSF (“Our second
and third most valuable assets – it’s pretty much a toss-up at this point – are Berkshire’s 100%
ownership of BNSF, America’s largest railroad measured by freight volume, and our 5.4% ownership of
Apple” – good company indeed) and “Asset-heavy companies, however, can be good investments.
Indeed, we are delighted with our two giants – BNSF and BHE”. Since buying BNSF in 2010, CAPEX has
totaled $41B – but their dividends to BH have exceeded that ($41.8B). WB also praised management
*CEO Carl Ice and “his number two” Katie Farmer’s “extraordinary job”, and now with Katie F in charge,
he told his shareholders that “Your railroad is in good hands”. Indeed.

BNSF increased operating income by 3% in Q4/20 and outperformed arch-rival Union Pacific in many
categories – with one glaring exception. It’s now officially the biggest railroad – Q4/20 revenues were
$5.7B vs $5.1B (FY $20.9B vs $19.5). BNSF’s revenues decreased 3% on +3% volumes (UP was -
1%/+3%). The OR dropped 250bps – to 60.3%, nicely done (see Warren’s praise, above). But UNP
produced an (adjusted) OR of 55.6% dropped 4.1%, widening their OR gap. FY20 results were 61.6%
versus 59.9%. But – this can be explained somewhat not just by PSR applications and timing but even
more so the mix of the railroads – BNSF’s b top brand positioning shows a 56%/44% split in what BNSF
calls “Consumer Products” and UNP calls “Premium” (to be fair, that split is reversed in merchandise,
which both call “Industrial Products”). That premium gap widened in Q4/20 as BNSF reported a 13%
volume increase vs +9%. Clearly, ROIC would be the determinant here, not OR (UNP’s was 14.3% in that
most difficult of years; Warren keeps his rail ROIC to himself. Both did well – and will continue to do
so intermediate-term, at least, in Ag; interestingly, UNP “outperformed” in coal by sporting a 16%
volume decline vs BNSF’s 21% drop. After years of outspending their rival, BNSF’s 2021 CAPEX plan is
only just larger than that of known Capex hawk UNP’s - $3B vs $2.9B. 2021 should be a better year to
look at the relative performances of the two giants of the west….BNSF’s 2021 will be as usual be led by
IM and grain exports….

The Railway Map of the eastern North American continent is being redrawn – CN by investing in Quebec
and Halifax (and maybe/maybe not in upstate NY – below). CP through its’ CMQ acquisition. CSX
through its possible sale of the Massena line (again, below) but more importantly, it’s pending Pan Am
Railway acquisition. And Genesee & Wyoming and Norfolk Southern by (forgive me) the art of the
deal. The STB is revealing some of its intentions, which might impact future deals (of all sizes).

  1. The CSX application to the Surface Transportation Board for the ~$700mm (it’s said) Pan Am deal is
    in – and while some have decried the lack of financials (synergy & economy projections), the
    diplomatic positioning is fascinating. Getting the other two big powers in New England (NSC &
    GWR) to agree to support the deal should mean easy STB passage (but you never know – again, see
    below). The key was always elusive – what were the trip-wires contained in the deal between PAR
    and NSC to create the Pan Am Southern (PAS)? Now we have some idea, of the future, anyway. So
    let's break it down, with the limited numbers we have:

    • CSX gets control of the (~$80mm) PAR, extending hauls and reaching the Irving lines with good
      business in New Brunswick – and water access in St John. PAR has been on a roll with classic
      short-line hustle – will CSX be able to maintain this or see PAR as a node? CSX stated that it
      won't change any traffic routes or volumes for the “next few years – nor change any routes,
      patterns or types of service”. One thing that it will be able to do is upgrade PAR’s infrastructure
      (notably in Maine, where most of the track cannot take the, of course, now standard 286 cars,
      and can apply both “big rail economics” and PSR to the region.
    • GWR gets to operate the Pan Am Southern (now to be called the Berkshire & Eastern) which
      also provides a lot of adjacent connects for its three largish New England short lines (NEC, P&W,
      CS). Many (myself included) thought that Brookfield-owned (and backed) GWR was a logical
      buyer for the PAR until CSX stepped in – in some ways they now get to eat their cake and keep
      their cash.
    • NSC gets to have GWR as a neutral carrier in the PAS (i.e.; a positive by avoiding a negative, as
      they did via Massena below – and that’s not nothing) – and gets trackage rights over CSX (and
      PAR) and GWR from ~Albany to the IM/auto hub of Ayer, MA. There will be some required
      capital work, and there are limitations (one train a day in each direction capped at 9000’, which
      used to be big). But Norfolk is most pleased by this new IM opportunity….

  2. STB Massena line decision is still reverberating in the industry – although, interestingly, not so much
    with shareholders. To be fair, the decision is actually a continuation of their earlier (2-1) vote on the
    conditions placed on the sale of the upstate NY lines from CSX to CN.

    • My interpretation was – if this is what happens in upstate NY, what are the ramifications for
      complicated, national, final (?) rail M&A? I come out on “deal killer”
    • The short line interpretation – and these can and in fact do exist simultaneously – is that the
      Board is clearly signally not just an interventionist stance (as I have argued) but specifically a
      position in opposition to the so-called “paper barriers” that limited the acquirer short line access
      to rails other than the Class One seller. I believe, philosophically, that “a deal is a deal” (the C1
      might not have sold that line. Or sold it for a lot more money, without a P/B. But then, I do not
      have a vote on the STB. Some have told me that it might be permanent paper barriers that are
      the key issue….What makes this hard to figure is that it involves a segment sale from a C1….to a
      C1. So, some ramifications:

      • Might this put the nail in the coffin of C1 segment sales, which, led by CSX, had a mini-revival in recent years? CSX itself has gone from seller to buyer, with Pan Am, and
        others are either buying (CP) or stating that they weren’t selling (CN being an exception
        – see the as yet uncompleted WC process)
      • Conrail had a say in this, which means 50% owner NSC (along with CSX) had a say in this
        application, which is interesting. I think NS would be against the CN linking with the
        NYSW which serves as a bridge line upstate (NY) and would provide CN with NY/NJ
        water access. That is likely not something NS would want to see….The NYSW,
        meanwhile, is one of my favorites – it is headquartered in Cooperstown!
      • My “sources” are divided on whether the CSX/CN team will admit defeat on this one
        issue and re-apply, or stick to their guns….Also (green-tinged on purpose)

    • The AAR issued an environmental report today – here is the summary fact sheet: AAR-FreightRail-Climate-Change-Fact-Sheet.pdf
    • The Chairman of the STB, Martin Oberman, will speak on Friday to the Environmental Law &
      Policy Center: Webinar Registration - Zoom
    • New DOT Secretary Buttigieg went on “Late Night with Seth Meyers” last week and explained
      how infrastructure is a top-tier priority (and his “infrastructure” definition is ours – not
      broadband, etc) but it and other transport policy can be used for social good, specifically
      environmentally, which is fine….but he did specifically mention EV and the highway so I hope
      the RR lobbyists are busy (distributing the AAR report, among other things). Bloomberg
      BusinessWeek reports on the serious effort about to get underway to get a $2T infrastructure
      plan passed (“in August” before the 9/30 surface transportation reauthorization is due). As
      always funding is the battle point – raising the fuel tax even as EVs are growing share? User
      fees? In fact, today’s NYT highlights the difficulties that may emerge on this supposedly “bipartisan” issue – funding fights on the right and priorities on the left – beware of the phrase
      “human infrastructure”. In fact, the left presents the biggest direct threat to rails in the
      possibility of mandating two-man crews to please the Teamsters and the AFL-CIO….
    • On a related note, the American Society of Civil Engineers will issue its “Infrastructure Report
      Card” on Wednesday (3/3); last time (2017) the US got a D+ with only rails getting a B (and that
      includes passenger). Perhaps nothing presents a better picture of private expenditure than,
      after the initial subsidization of the HIS, the grades: (Railroads’ “B”) and public (highways’ D)
    • Rail Pulse continues to make progress with news expected this week on some key “Phase One”
      supplier/partner additions – not a major partner (such as another C1) yet, but that should follow,
      too. This open architecture platform rail-car based telematics/visibility standard setter will aid
      shippers in choosing rail, provide visibility to all partner operations, solve interline and
      demurrage issues – and help grow carload freight
    • US (only) rail headcount was down 12% YOY in January
    • The FRA issued an emergency order requiring masks on all rail (and related) workers with fines
      of ~$119K/day for non-compliance; meanwhile, rails were called “essential” in the pandemic
      but haven’t yet gotten their workers moved up in priority in vaxxing….
    • Kansas City Southern hits more water – getting their long-awaited access to Vera Cruz on
      2/11. This could be a big deal and worth more than an “also” mention….
    • Canadian rails had yet another record grain haul in January and February – the spit, BTW, is
      57/43, CN
    • It’s Good to be King: TCI (whose greatest hits include the CSX proxy fight and major positions in
      CP, CNI, and UNP) CEO Chris Hohn paid himself $479mm last year – NOT a typo; that represents
      69% of TCI’s reported profit…. Billionaire hedge fund boss pays himself UK record of £343m |
      Executive pay and bonuses | The Guardian
    • Justin Turner always makes me smile (feel free to ignore): Extended Cut of Turner's walk-off
      three-run homer - YouTube


Anthony B. Hatch 
abh consulting 
Twitter @ABHatch18