BNSF’s parent company responds to KCS merger activity

Count BNSF (NYSE: BRK.B) as one of those watching how efforts by Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) to acquire Kansas City Southern (NYSE: KSU) play out.

Executives with BNSF parent company Berkshire Hathaway noted on Saturday during the company’s annual shareholder meeting that BNSF will seek opportunities to protect its franchise as the merger proceedings go before the Surface Transportation Board for review.

BNSF has a “strong presence” in Mexico, although not as strong as its competitors, with some of BNSF’s intermodal business involved in cross-border movements, according to Greg Abel, CEO for Berkshire Hathaway Energy and vice chairman of the company’s noninsurance operations.

The Canadian railways’ interest in Kansas City Southern is not so much for its carload volume but for the opportunity to expand and create a transcontinental railroad at a time when interest rates are low, according to Berkshire Hathaway CEO Warren Buffett.

“There’s no magic to the Kansas City Southern. … The number of carloads carried is not going to change that much. But it is kind of interesting,” Buffett said.

BNSF’s first-quarter net profit rises 5%

BNSF’s net earnings were $1.25 billion in the first quarter of 2021, a 5% increase from $1.19 billion in the first quarter of 2020, the railroad reported Monday.

First-quarter total revenues were $5.4 billion, a 0.3% decrease compared with $5.42 billion year-over-year. Although volumes rose by 5% year-over-year, average revenue per car/unit slipped 5% on business mix changes and lower fuel surcharge revenue.

Meanwhile, operating expenses were $3.51 billion in the first quarter, compared with $3.59 billion a year ago.

The decline in operating expenses contributed to a 4% in operating earnings to nearly $1.89 billion. BNSF’s operating ratio was 63.7%, which is 1.5 points lower than the first quarter of 2020.

“The COVID-19 pandemic caused a significant economic slowdown that adversely affected the demand for our services in 2020,” Berkshire Hathaway said Saturday. “The effects of the COVID-19 pandemic are ongoing, and the full extent to which it may impact our business and financial results remain uncertain and will depend on future developments.”

By business segment, volumes for consumer products and agricultural products were up, while volumes for industrial products and coal were down.

BNSF’s consumer products reported operating revenues of $1.9 billion, a 7% increase from the first quarter of 2020. Although volumes were up by 15%, average revenue per car/unit was down year-over-year. Increased retail sales, inventory replenishment by retailers and higher e-commerce activity drove international and domestic intermodal shipments higher, which in turn boosted consumer products. However, automotive shipments fell amid production impacts from a global microchip shortage.

Agricultural products operating revenues rose 14% to $1.3 billion on a 12% increase in volumes. Revenue per car/unit also rose year-over-year. Higher grain exports fuel the volume increase.

But industrial products operating revenues slipped 16% to $1.2 billion on a 13% drop in volumes and lower average revenue per car/unit. Reduced production and demand in the energy sector contributed to lower petroleum products and sand volume, Berkshire Hathaway said. Winter storms in Texas and the U.S. Gulf Coast also lowered shipments of chemicals, plastics and aggregates in the first quarter.

And operating revenues for coal fell 10% to $686 million on an 12% decrease in volume, offset by higher average revenue per car/unit. Lower utility demand in the early part of the first quarter, along with severe winter storms, impacted first-quarter volumes.