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The falloffs in earnings within the utilities and rails are quite depressing.

It takes some fairly careful assessment to determine how much of that is one-time versus cyclical versus permanent.
In constant collars, trailing four quarters net income at the railroad is down -21% from the rolling year peak, and net income at BHE down -38% from the rolling year peak.

For rails, this is the seventh quarter of falling TTM net income. First slowly, then rapidly.
The explanation is mostly simple: lower volumes and higher non-fuel costs. The volumes are presumably almost entirely a cyclical problem that could be ignored. As for the costs, beats me.
If doing a cyclical adjustment, I figure the railroad can probably make on average at least the lowest real rolling-four-quarter figure that they managed in recent years.
I took all the inflation adjusted figures for rolling years ending mid 2019 through end 2022. If you take the lowest, the four quarters to 2020-Q3, that adjusts the net income for rails up by $814m for the last four quarters.

For utilities, there are several issues, but the biggest is certainly the $1.6bn year to date in liability provisions for the 2020 wildfires. The cumulative provision is now $2.4bn. It's hard to assess what the business is worth while taking this into account. The final number may get higher. An optimist would see it as a truly one time loss, even though it may get bigger. The pessimist may see this as a long term trend of utilities being held liable for third party damages from time to time, meaning it's a permanent hit to the earning power...again of an unknown size. So, for a cyclical adjustment I took an approach like the one above: ignore the long term uptrend of real earnings in the utilities division due to expansion. Simply look at the lowest inflation-adjusted rolling-four-quarter net earnings in the last few years, and use that number as a proxy for the forward earning power. In this case I took the lowest number in the range calendar 2020 through to the year ending June 2023. Using that figure rather than the actual trailing four quarters figure would make the net income for BHE $1.12bn higher. Even though that's an after-tax number, it's still a smaller adjustment than the loss provisions in the last year.

The sum of those two cyclical adjustments, if I decide to stick with them, would bump net income in the operating subs by $1.934bn. That leaves the sum of real operating earnings among the "steady" things I track -1.7% off their peak instead of -8.7% off their peak. The four horsemen of the "steady" things are rails, utilities, MS&R+equity method, and a cyclically adjusted estimate of underwriting profit.

But wait, there's more.
The Homeservices lawsuit judgment is also quite the thing. As it only happened Tuesday, I'm pretty impressed they got a good write-up into the 10Q! I am going to ignore that one for now. That selective blindness is built on the following rationales: (a) because of appeals the final amount which will actually be paid in these cases is not yet known, (b) this decision may restructure the entire business model and have serious implications for the future earning power which I can not yet fathom, and (c) therefore I want to kick it down the road. That sounds overly sanguine, but if (a big if) it's a one time loss it's probably down in the rounding error of valuation exercises for a company the size of Berkshire.

Jim

"For utilities, there are several issues, but the biggest is certainly the $1.6bn year to date in liability provisions for the 2020 wildfires. The cumulative provision is now $2.4bn... The pessimist may see this as a long term trend of utilities being held liable for third party damages from time to time, meaning it's a permanent hit to the earning power."

Put me down as a pessimist. Wildfire liabilities bankrupted PG&E.

I wonder if BNSF's reluctance to firmly embrace PSR (because it burdens the customer with very precise delivery times for freight to be loaded and shipped) is having the unintended consequence of leaving BNSF with the least well run customers (those whose own performance leaves them incapable of operating to PSR precision requirements). I note we lost another intermodal customer this quarter. I'm guessing that they (intermodal customers) tend to be the most supportive of PSR, its tighter scheduling and its much higher operating efficiencies. Greg Abel has defended BNSF's management and their resistance to PSR "because customers don't like it". I'm thinking there may be a slow culling or exchange of customers based on how well or poorly the customer's business is managed. Other industries have demonstrated that abilities to deliver to very precise time windows force suppliers and customers alike to operate at much higher efficiency/productivity levels while also lowering working capital requirements. Suppliers who don't improve performance are left with the weakest performers as their customers. Admittedly, the culture required for successful PSR is a more disciplined culture than pre-PSR culture and performance levels. Culture change is hard. Especially underneath a parent culture as strong as Berkshire's.

Just a quick thought on BNSF earnings weakness.

Oh boy, as to BNSF and PSR...a lot of stuff going on in the railroad business these days and my view is polar opposite of the suggestion above. Watch closely, rail stocks like NSC are down more than 1/3rd needing 50% upside to get back to the manipulated prices of recent times.

Berkshire BNSF capital allocation has been excellent and decsions excellent too in comparison to the US rails. I have owned NSC since 1976 and UNP-CSX and CNI-CP for some three decades.

Norfolk has reopened the yard here in Linwood NC, fully staffed again from the complete closure (you know, the operating ratio obsession) of a couple years ago. And all that stock bought back 100 points above the current price using debt?

Let's stick with BNSF. UNP has shot itself in the foot in about 20 different ways that will be felt for years. They have recruited some skilled assistance so hopefully they'll get back on track.

Union Pacific's debt is up 248% since 2014, operating earnings up 17%. Stock buybacks and div's since 2014 have exceeded net income by a bunch. Currently the stock of course is down significantly and as you'd expect buybacks are nil and going to be nil - the debt cost to do them is prohibitive.

UNP has under cap-ex'd in its obssession with running and keeping the stock price up - again idebting itself aggressively to do so.

I love Berkshire Hathaway more every time I look at the other railroads and their decisions.

Sorry for the newbie questions, these aren't criticisms, I'm just trying to follow the accounting discussions in more detail than I have previously:

Why worry about values off peak for RRs?
In general, point statistics like "off-peak" seem less informative than e.g. "off-trend"
What was the peak? Was it some weird one-off spike, or was it simply the high of a generally wavy graph?

From the report:
"The decreases were primarily attributable to lower overall freight volumes and higher non-fuel operating costs, partially offset by lower fuel costs."
Is that all the explanation we get, i.e. volume (which you were potentially attributing to cyclical) and "higher non-fuel operating costs"?

If cyclical, shouldn't other RR's show similar?

Seems odd that "non-fuel operating costs" had a big impact. What could cause that in a RR i.e. examples of such costs?

Utilities:
> is certainly the $1.6bn year to date in liability provisions for the 2020 wildfires.
As a newbie, I know companies can set aside 'provisions' and this shows under 'current liabilities', that's what you meant?

> That leaves the sum of real operating earnings among the "steady" things I track -1.7% off their peak instead of -8.7% off their peak.
Given your initial comment "The falloffs in earnings within the utilities and rails are quite depressing", I gather this is a strawman optimist view? IOW, under the assumptions made, it ain't so bad -- but one can certainly question those assumptions.

A newbie question
> leaving BNSF with the least well run customers
How does that impact operating BNSF earnings?

> Oh boy, as to BNSF and PSR...a lot of stuff going on in the railroad business these days
What kind of stuff?
Regarding your comment about "manipulatd prices", you mean buybacks and use of debt and stuff by other RRs, while Berkshire continues to be just a solid workhorse? So, you're not worried/depressed about BRK holdings?

For other newbies to rail, PSR is Precision Scheduled Railroading
https://iclsystems.com/en/blog/qa-series-introduct...

Wouldn't there be significant capex to change to PSR e.g. locomotives, huge new software packages etc?

"A newbie question
> leaving BNSF with the least well run customers
How does that impact operating BNSF earnings?"

The assumption is that if trains don't leave until all customers' freight is on board and a sufficiently long train is built in the yard (admittedly some exaggeration here), and poorly run customers frequently don't deliver their freight on time or in quantities expected or properly packaged and labeled, then the cost to serve those customers is higher and service interruptions more frequent.

"Wouldn't there be significant capex to change to PSR e.g. locomotives, huge new software packages etc?"

I'm not a RR guy and certainly no expert on PSR but I think the case for change to PSR is built on fewer assets needed, not more. The biggest challenge with PSR, as I understand it, is the amount of process and policy change involved, including the impact on customer performance requirements.

By the way, I agree with Dealraker's views on BRK and its ownership of BNSF vs. the other Class 1's. I was just trying to figure out where/why the costs were increasing (and a presumably material intermodal customer lost) . Also, based on Harrison's record shown in the link from tedthedog, competing against properly executed PSR would seem to require a higher level of performance under the traditional system that BNSF continues to use. None of that is meant to be a comment on balance sheet management or other aspects of BNSF ownership.

Reading this explanation of PSR: https://www.up.com/customers/track-record/tr091019..., I don't see why it's not a good idea.

I think Berkshire will eventually adopt PSR to compete


Geico lagged significantly in tech forever. Todd playing catch up to Progressive

I don't see why it's not a good idea.

My read is that BRK is very sensitive to customer relations and how that impacts their regulators. Their reputation in their regulated industries is strong, and they wish to maintain that. So they've been slow to adopt PSR.

That doesn't mean that economics and competitive financial performance won't force them to do so. It's just seeking the right balance between customer service and financial returns to their owners. How will BNSF's owner - who must represent not only himself but shareholder's interest - vote on that balance?

I have to believe that's been a factor so far - a very patient, long term focused, owner.

I think Berkshire will eventually adopt PSR to compete

I think it is more complicated than yes or no on something like this. Berkshire/BNSF doesn't have to do anything. They don't have pressure from shareholders or armchair experts focusing on one ratio over other factors.

All railroads aren't the same, and BNSF has unique characteristics being a very long-route western railroad with a bunch of one-way traffic (where empty carloads head the other direction). Berkshire/BNSF has tried to make additional investments in order to increase market share, including spending a lot of money on logistics centers where they developed the real estate for customers to locate in their rail-centric business parks - and some of that new business is because customers like them better. Buffett likes to say that PSR is sort of the customer conforming to the railroad, vs. the railroad conforming to the customers needs.

BNSF can adopt aspects of PSR where and when they want to without having to check a box for wall street analysts that we are 100% on the Hunter Harrison kool-aid and just look at our operating ratio targets and we are going to be lean and mean at all costs.

Buffett and BNSF management are fully aware of what is going on in their industry and they are pretty sharp, rational operators. BNSF being private and making decisions with different time frames and motivations will probably result in a much better railroad over time vs. the alternative of quarterly conference calls, buzz-words, financial engineering, and on and on.

Are you saying that BNSF will be better off having not adopted PSR and that we retain better customers because PSR is too burdensome? This PSR is a lot to digest and I can't tell if it is designed to make the railroads more efficient and profitable at the customers expense or if it's something both sides are embracing and benefitting from.

I don't see why it's not a good idea.

One possible short explanation, in the form of an overgeneralization: great for the railroad's cost profile, but the customers hate it.

PSR railroads seem to think their monopoly power is sufficient that the happiness of their customers with the service simply doesn't matter to their long term success. The cable company approach to client relations.

Jim

My thoughts about BNSF vs the other US rails is way-way-way past/above something like PSR. BNSF is just not run to avoid cyclical downs nor is it run to spoon feed or retain hyper data focused investors obsessed with operating ratios and/or quarter EPS figures. So we fixate on trendy termanology and on EPS and operating ratios, forget how these grand
very high stake/highly sellable/presentable stats were attained...

...because the stock prices went through the roof. Fast forward eps and then...(well, that managment group is either gone or dead for the next show). "We are focused on getting the debt down, the debt costs are the reason we aren't making the quarter" and other such so predictable-I-pee-in-my-pants issues. "And oh yea...one more thing...that last bunch of heros didn't even do maintenance properly and the quit cap-ex cold turkey...so we are behind."

It is a - with much less downside - similarity to the 25 year ago period when AIG and GE, in many places in the same business Berkshire, were literally gods of the insurance business while Buffett was the local lame idiot who simply could not keep up with Greenberg and Welch.

These things take time. I was aware of Hunter Harrison for a long-long time, read the book about him not long ago, and my view is simply he's yet another "one-stop shopping" attraction to those who like those sort of things. "My rail is better than yours 'cause we got a 55% OR and yours is "61."

And GE's Employer Re had massive profits while Berkshire's General Re recorded losses. Anybody remember the largest one-time write down in insurance history by the GREAT Hack Belch's GE while the door slapped him in the ass as he ran out?

And as far as PSR relating to BNSF, the article below addresses that. I discuss this issue, and have for years, with several guys who work for NSC who live close to me and the re-opened yard that almost adjoins my property. It isn't a grand draw-the-line-in-the-sand PSR or not thing, not an absolute change to adopt a more car focused (instead of train focused) model, it is greatly more complex that that and has been part of the operating equation for decades.

HH was a cut to the bone guy, and that's what made him popular with those focused shorter term- fast forwarding the big stock increase and then they leave and go to the next railroad. NSC is reversing countless things they did to run up earnings and I can absolutely assure you this is, as we say, just the beginning.

The article is a few years old.

https://www.supplychaindive.com/news/bnsf-PSR-addi...

Dealraker's conversation with NSC management:

D: "Remember just back in 2017..."

NS: "Whut's up dude?"

D: "Stockholder's equity was $12 bil, debt $9 bil..."

NS: "So...whut's the big deal...deal?"

D: "Now stockholder's equity $12 bil debt $16 bil and it rose 2 bil kinda fast so..."

NS: "You say we might have an addiction or something?"

D: "You got it dudes!"


Footnote: Management splurged buying 2.2 bil of stock at 35% above the current price just recently, then bought half a bil more at 20% higher. Today? You can be 100% certain the "Let's conserve cash and get down the debt" is going to be the focus coming up at some time, yet at some point.

And your stock supporting buybacks, significant buybacks, will cease for a long-long-long time. Predictable things are simply predictable. Meanwhile the swarming euphoric articles screaming "buy NSC...look at this fabulous chart and don't miss out" are long gone, not coming back anytime soon.

It was all a part of the HH envy machine all while he chain smoke cigaretts and took a few hundred mil from CSX while cutting employee benefits to the bone, not even one day of sick leave? Really? Cut employees, cut yards, cut lines, cut cap ex, buyback stock with debt, and god forbid whatever you do either leave for another railroad or die...whichever works best for you. Short term people love this stuff; long term despise it all.

All while long term shareholders just watch and shake their heads. Been here, done that, too many times in my life. When you take a chaisaw to a business you get a chainsaw outcome.

In short, and I'll end my BNSF rants, if you think long term you will come to appreciate the management of NSC. If you want to blow in and out of stocks based on a supposed hero or industry term that creates obsessive thoughts? Then surely go for the PSR and all the things it stands for.

The entire railroad industry outside of BNSF is due for a reality check.

In short, and I'll end my BNSF rants, if you think long term you will come to appreciate the management of NSC.

Did you perhaps mean the reverse?
i.e.
In short, and I'll end my NSC rants, if you think long term you will come to appreciate the management of BNSF.

Jim

Oh boy...did I word that wrong. Old age rules. Meant you'll appreciate the management of BNSF.

Yes Jim. Shocking error. I gotta start editing my posts but I write as conversation.

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