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BNSF RAILWAY CO - 10-Q - Management's Narrative Analysis of Results of Operations.

May 2, 2014

Management's narrative analysis relates to the results of operations of BNSF Railway Company and its majority-owned subsidiaries (collectively BNSF Railway, Registrant or Company). The following narrative analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes.

The following narrative analysis of results of operations includes a comparative analysis of the three months ended March 31, 2014 and 2013.

Results of Operations

Revenues Summary

The following tables present BNSF Railway's revenue information by business group: Revenues (in millions) Cars / Units (in thousands) Three Months Ended March 31, Three Months Ended March 31, 2014 2013 2014 2013 Consumer Products $ 1,663$ 1,661 1,194 1,188 Industrial Products 1,407 1,337 452 448 Coal 1,224 1,209 563 542 Agricultural Products 976 911 236 244 Total Freight Revenues 5,270 5,118 2,445 2,422 Other Revenues 64 62 Total Operating Revenues $ 5,334$ 5,180 Average Revenue Per Car / Unit Three Months Ended March 31, 2014 2013 Consumer Products $ 1,393 $ 1,398 Industrial Products 3,113 2,984 Coal 2,174 2,231 Agricultural Products 4,136 3,734 Total Freight Revenues $ 2,155 $ 2,113 Fuel Surcharges

Freight revenues include both revenue for transportation services and fuel surcharges. BNSF Railway's fuel surcharge program is intended to recover its incremental fuel costs when fuel prices exceed a threshold fuel price. Fuel surcharges are calculated differently depending on the type of commodity transported. BNSF Railway has two standard fuel surcharge programs - Percent of Revenue and Mileage-Based. In addition, in certain commodities, fuel surcharge is calculated using a fuel price from a time period that can be up to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel surcharge may significantly differ.

The following table presents fuel surcharge and fuel expense information (in millions):

Three Months Ended March 31, 2014 2013 Total fuel expense a $ 1,159 $ 1,122 BNSF Railway fuel surcharges $ 703 $ 711 a Total fuel expense includes locomotive and non-locomotive fuel. 17


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Three Months Ended March 31, 2014 vs. the Three Months Ended March 31, 2013


Revenues for the three months ended March 31, 2014, were $5,334 million, an increase of $154 million, or 3 percent as compared with the three months ended March 31, 2013. The increase in revenues is due to the following changes in underlying trends in revenues:

? Average revenue per car / unit increased primarily as a result of increased rate per car / unit.

In addition to an increase in average revenue per car / unit, the following changes in underlying trends in volumes also impacted the change in revenues:

? Consumer Products unit volumes increased due to higher international and domestic intermodal traffic, offset by reductions in automotive. ? Industrial Products unit volumes increased primarily due to higher shipments of petroleum products, driven mainly by increased crude unit train loadings.

? Coal unit volumes increased primarily due to higher demand.

? Agricultural Products unit volumes decreased primarily due to severe weather issues and service-related challenges.


Operating expenses for the three months ended March 31, 2014, were $3,974 million, an increase of $262 million, or 7 percent, as compared with the three months ended March 31, 2013. A significant portion of this increase is due to the following changes in underlying trends in expenses, which includes increased costs related to severe weather issues and service-related challenges:

? Compensation and benefits expense increased primarily due to wage inflation, higher overtime and higher average headcount. ? Fuel expense increased due to higher volumes and lower fuel efficiency, partially offset by lower average fuel prices. ? Depreciation and amortization expense increased due to additional assets in service. ? Materials and other expense increased as a result of higher crew transportation, lodging and other travel costs, utilities and locomotive materials. ? There were no significant changes in the underlying trends for purchased services expense, equipment rents expense, interest expense and the effective tax rate. 18


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Forward-Looking Information

To the extent that statements made by the Company relate to the Company's future economic performance or business outlook, projections or expectations of financial or operational results, or refer to matters that are not historical facts, such statements are "forward-looking" statements within the meaning of the federal securities laws.

Forward-looking statements involve a number of risks and uncertainties, and actual performance or results may differ materially. For a discussion of material risks and uncertainties that the Company faces, see the discussion in Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K. Important factors that could cause actual results to differ materially include, but are not limited to, the following:

Economic and industry conditions: material adverse changes in economic or industry conditions, both in the United States and globally; volatility in the capital or credit markets including changes affecting the timely availability and cost of capital; changes in customer demand, effects of adverse economic conditions affecting shippers or BNSF Railway's supplier base, and effects due to more stringent regulatory policies such as the regulation of carbon dioxide emissions that could reduce the demand for coal or governmental tariffs or subsidies that could affect the demand for grain, the impact of low natural gas prices on coal demand for electric power plants, changes in environmental laws and other laws and regulations that could affect the demand for drilling products and products produced by drilling, changes in fuel prices and other key materials, the impact of high barriers of entry for prospective new suppliers and disruptions in supply chains for these materials; competition and consolidation within the transportation industry; and changes in crew availability, labor and benefits costs and labor difficulties, including stoppages affecting either BNSF Railway's operations or customers' abilities to deliver goods to BNSF Railway for shipment.

Legal, legislative and regulatory factors: developments and changes in laws and regulations, including those affecting train operations or the marketing of services; the ultimate outcome of shipper and rate claims subject to adjudication; claims, investigations or litigation alleging violations of the antitrust laws; increased economic regulation of the rail industry through legislative action and revised rules and standards applied by the U.S. Surface Transportation Board in various areas including rates and services; developments in environmental investigations or proceedings with respect to rail operations or current or past ownership or control of real property or properties owned by others impacted by BNSF Railway operations; losses resulting from claims and litigation relating to personal injuries, asbestos and other occupational diseases; the release of hazardous materials, environmental contamination and damage to property; regulation, restrictions or caps, or other controls of diesel emissions that could affect operations or increase costs; the availability of adequate insurance to cover the risks associated with operations.

Operating factors: changes in operating conditions and costs; operational and other difficulties in implementing positive train control technology, including increased compliance or operational costs or penalties; restrictions on development and expansion plans due to environmental concerns; disruptions to BNSF Railway's technology network including computer systems and software, such as cybersecurity intrusions, misappropriation of assets or sensitive information, corruption of data or operations disruptions; as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of BNSF Railway's or other railroads' operating systems, structures, or equipment including the effects of acts of terrorism on the Company's system or other railroads' systems or other links in the transportation chain.

The Company cautions against placing undue reliance on forward-looking statements, which reflect its current beliefs and are based on information currently available to it as of the date a forward-looking statement is made. The Company undertakes no obligation to revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs. In the event the Company does update any forward-looking statement, no inference should be made that the Company will make additional updates with respect to that statement, related matters, or any other forward-looking statements.



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Source: Edgar Glimpses

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