Buffett’s Railroad Boosts Capital Plan 11% to $3.9 Billion

Warren Buffett’s Berkshire Hathaway Inc. plans to boost capital spending at its railroad to $3.9 billion this year, an increase of 11 percent from 2011, as the company adds capacity for coal shipments.

The 2012 proposal includes $2.1 billion on the core network and $1.1 billion on locomotive, freight car and equipment acquisitions, the BNSF Railway Co. said in a statement today. The Fort Worth, Texas-based unit is also spending $300 million this year on a U.S. rail-safety mandate.

The largest U.S. freight railroads may lift capital expenditures to a record $13 billion in 2012 as their revenue rises amid gains in freight traffic, the Association of American Railroads said Jan. 30. BNSF’s weekly volume climbed to a three-year high as the economy improved outside of the housing market, Buffett, Berkshire’s chairman and chief executive officer, said in October.

“We’re probably only year two into the recovery,” said Peter Nesvold, an analyst with Jefferies & Co. in New York. Spending is driven by rail volume that’s expanding faster than the economy as the industry catches up to its pre-recession high point, Nesvold said.

The railroad’s plan calls for $400 million in terminal, intermodal-expansion and efficiency projects, including on coal routes. The rail serves mines in the Western U.S., including Wyoming’s Powder River Basin, which holds the largest and cheapest U.S. reserves of the power-plant fuel.

Fuel Prices

BNSF is also benefiting as oil drilling in the northern-U.S. Bakken region outpaces pipeline growth, boosting petroleum shipments by rail. Intermodal shipments, which can move by sea, rail and highway, are rising as higher fuel prices prompt truckers to partner with railroads to move containers over long distances.

The investment will “ensure our infrastructure remains strong and improve the efficiency of our operations,” Matthew Rose, CEO of the railroad, said in the statement.

About 70 percent of railroad capital expenditures are earmarked for maintenance, according to Nesvold, the analyst. Most rails are using the rest of the spending to improve efficiency by laying double tracks or expanding terminals, to buy new rail cars and locomotives and to expand their intermodal systems to compete better against trucks, Nesvold said.

Union Pacific

Union Pacific Corp. had capital investments of $3.18 billion in 2011 and is forecast to spend $3.52 billion this year, according to the average of analysts surveyed by Bloomberg. Norfolk Southern Corp. is predicted to raise spending this year to $2.37 billion from $2.16 billion in 2011. CSX Corp. will probably keep spending at about $2.24 billion compared with $2.3 billion last year, according to the estimates.

Berkshire spent $26.5 billion in February 2010 to acquire the 77.5 percent of Burlington Northern Santa Fe it didn’t already own. Buffett has called the investment by his Omaha, Nebraska-based company an “all-in wager” on the U.S. economy.

“That’s stuff moving around the country, supplying merchants and doing all kinds of things,” he said at Fortune magazine’s Most Powerful Women conference in October, referring to rising freight.

Burlington paid $2.75 billion of dividends to its parent in the first nine months of last year and said another $750 million was declared for the fourth quarter of 2011.

(Updates with analyst’s comment in the fourth paragraph.)
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