As we discussed last week in our coverage of Berkshire Hathaway’s (BRK.A) second quarter results, the company’s newly acquired railroad subsidiary posted improved results for the quarter. Burlington Northern Santa Fe (BNI) posted net earnings of $603 million on revenues of $4,094 million. Since the consolidation of Burlington Northern at the close of the acquisition on February 12, 2010, the company has posted net earnings of $885 million on revenues of $6,167 million. Revenues for the second quarter were 23 percent higher than revenues for the second quarter of 2009, reflecting the sharp improvement in economic conditions since the depths of the recession. In this article, we will focus on Burlington Northern’s somewhat surprising $250 million dividend payment to Berkshire Hathaway in the second quarter and what meaning this has, if any, on plans for future capital expenditures.

Controversy Regarding Acquisition

In this rather lengthy article, we will analyze Berkshire’s business performance in detail after a brief section on the distortion in Berkshire’s “headline earnings number” caused by the derivatives portfolio. We also present a detailed trend analysis, including spreadsheets and graphs, of Berkshire’s results for the past ten quarters which reveals the progress of the business since the depths of the recession in early to mid 2009.

Derivatives – The Elephant in the Room

There is little doubt that Amtrak’s Acela represents a very attractive way to travel between Washington D.C. and New York City. Leaving Washington D.C. a short distance from the United States Capitol, one can arrive at Penn Station in midtown Manhattan in roughly two hours and forty five minutes. While catching a flight between Washington and New York is a viable alternative, it is necessary to leave the city center to reach the airport. Combined with security procedures, it can easily take longer to travel between central locations in the two cities by air compared to the speed offered by America’s version of “high speed rail”.

High speed passenger rail service has been a hallmark of the transportation systems in Europe and Japan for many years. More recently, China has rapidly expanded its high speed passenger rail system. Compared to America’s relatively slow Acela service, which shares tracks with freight carriers, China’s high speed rail system has lines that regularly run at 217 miles per hour on dedicated passenger tracks.

Toward the end of today's front-page New York Times article headlined "Federal Report Faults Banks on Huge Bonuses" comes this:

Mr. Feinberg then approached each of the 17 companies with his proposed remedy during conference calls over the last two weeks. The 11 companies that have fully repaid their bailout money are American Express, Bank of America, Bank of New York Mellon, Boston Private, Capital One Financial, Goldman Sachs, JPMorgan, Morgan Stanley, PNC Financial, US Bancorp and Wells Fargo.

The American Association of Railroads ((AAR)) just came out with their monthly report on railroad traffic. The major news is that railroad carloads declined in June as compared to May by 1.3%. This will mark the second consecutive monthly decline in railroad carloads. However, carloads were up 10.6% year over year in June.

One would expect some improvement considering we were at depression levels last year. But as you can see from the chart below, railroad volume has never fully recovered from the highs in 2006 and 2007, which shows that despite all the hype about a recovery, the US economy is still depressed.

From the AAR:

• U.S. freight railroads riginated 1,153,675 carloads in May 2010, an average of 288,419 carloads per week. That’s up 15.8% from May 2009 (which is the second highest percentage gain ever, behind April 2010 — see chart below right) but down 11.8% from May 2008.

• U.S. railroads averaged 294,758 carloads per week in April 2010 and 288,793 in March 2010. Thus, May 2010’s average was actually down slightly from those months (see chart below left). One month does not a trend make, but it would obviously be worrisome if the decline continued.

• In May 2010, 18 of the 19 major commodity categories saw carload gains compared to May 2009, but just one saw carload gains compared to May 2008. Commodities with the largest carload gains included coal (up 32,081 carloads, or 6.8%), steel and other primary metal products (up 19,641 carloads, or 96.6%), and motor vehicles and parts (up 19,138 carloads, or 58.1%). The tables and charts beginning on page 5 have much more commodity-level detail.

• U.S. railroads originated 867,516 intermodal trailers and containers in May 2010, an average of 216,879 per week (see chart top of next page). That’s the highest average since October 2008, up 18.9% from May 2009, and the largest year-over-year monthly gain since AAR records begin in 1990. Intermodal volume has risen in absolute terms for three straight months.

• As was the case in April 2010, the big year-over-year percentage gains in May 2010 U.S. rail traffic were partly a function of easy comparisons (May 2009 was a miserable month for rail traffic) and partly a function of real traffic growth.

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund filings.)

Next up in our series is Bruce Berkowitz's Fairholme Capital Management. While not a hedge fund, we track Berkowitz because despite managing over $10 billion, he runs quite a concentrated portfolio. Not to mention, he was named fund manager of the decade by Morningstar.

The Association of American Railroads [AAR] released data for week 18, 2010 on Thursday. Data from the recent releases indicates a degree of leveling off in volumes. Perhaps this indicates a new normal at levels somewhere between the 2009 levels and pre-recession levels.

The following charts show intermodal and carloads freight volumes since 2007, along with a 52 week moving average.

This year’s Berkshire Hathaway (BRK.A) annual meeting in Omaha provided CEO Warren Buffett to tackle really one main topic -- The Goldman Sachs Group (GS).

Buffett, always the teacher, explained the transaction at issue, analyzed what Goldman did and what it should have done (which were the same thing) and said the entire episode was nonmaterial to the future of Goldman. Buffett spent more time talking about Goldman than any other topic.