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Berkshire's letter: BNSF let us down, and Buffett may be on his way out

A BNSF Railway Company train.
Matthew Staver | Bloomberg | Getty Images
A BNSF Railway Company train.

Berkshire Hathaway increased its net worth by $18.3 billion last year, the company said in its 50th annual letter on Saturday, with a "good year" marred in part by underperformance at its Santa Fe railroad unit.

The Omaha, Nebraska based conglomerate run by billionaire Warren Buffett also dropped a big hint that the era of its larger-than-life CEO was nearing a close.

Buffett, an octogenarian who is one of the world's wealthiest men, is closing in on retirement after decades at the helm. In the letter, he referred to discussions had with Vice Chairman Charlie Munger about selecting a new chief, and strongly suggested the candidate would be promoted from within.

Berkshire reported a net profit of $4.16 billion, or $2,529 a Class A share, down from $4.99 billion, or $2,297 a share, a year earlier. Operating earnings, excluding some items, were $2,412 per Class A share, against the prior year's $2,297 a share.

In its annual report, Berkshire said its five largest "powerhouse" non-insurance businesses bring in record pre-tax earnings. It also saw its per share book value rise by 8.3 percent in 2014, its slowest rate of gain since 2011. Berkshire's per share market value rose by 27 percent during the year, giving it a compounded annual gain of 21.6 percent since 1965.

The company called 2014 "a good year," but cited disappointing performance by BNSF—its railroad operation—as its lone trouble spot. "During the year, BNSF disappointed many of its customers. These shippers depend on us, and service failures can badly hurt their business."

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Berkshire, however, called BNSF its "most important non-insurance subsidiary," and plans to spend $6 billion on improving plant and equipment assets in the coming year. "That sum is nearly 50 percent more than any other railroad has spent in a single year and is a truly extraordinary amount," the company said.

Nevertheless, BNSF's revenues grew year over year, by nearly $3.9 billion in 2014 against a $3.8 billion gain in the comparable year.

In 2009, Buffett purchased BNSF for $26 billion. Last year, the railroad pulled in revenue of more than $23 billion.

Peering into Berkshire's future

Buffett sounded a downbeat note about the future. In his letter to shareholders, the billionaire all but conceded that Berkshire's stellar performance wasn't entirely sustainable. He also hinted at a potential successor, a source of speculation for years.

"The bad news is that Berkshire's long-term gains—measured by percentages, not by dollars—cannot be dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big."

At some point, "Berkshire's earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company's earnings," Buffett wrote.

The 84 year old mogul also hinted that he has located someone to succeed him as Berkshire's chief.

"Both the board and I believe we now have the right person to succeed me as CEO—a successor ready to assume the job the day after I die or step down," the billionaire said "In certain important respects, this person will do a better job than I am doing," he added.

Buffett has floated his son, Howard, to succeed him as a non-executive chairman once Buffett steps down. He said the move would ensure continuity in the event the company chooses "the wrong CEO...and there occurs a need for the chairman to move forcefully." Buffett, however, added that was unlikely to happen.

"Our directors believe that our future CEOs should come from internal candidates whom the Berkshire board has grown to know well," he wrote.

--Reuters contributed to this article.