BNSF Fuel Surcharge on Coal Transportation – By the Numbers

Implications:     The BNSF and other railroads charge in new coal transportation tariffs and contracts a fuel surcharge to recover the cost of fuel.  Other freight moves also come under fuel surcharges.  The commentary that follows discusses by the numbers the BNSF’s fuel surcharge on coal transportation.

Analysis:     For coal transportation, the BNSF began implementing a fuel surcharge on coal transportation in the 2003- to 2004-timeframe on coal that moves under tariffs and contracts.  It is stipulated in BNSF Rules Book 6100 – Item 3381 – Coal Mileage-Based Fuel Surcharge.  The fuel surcharge is based on the monthly U. S. Average Price of Retail On-Highway Diesel Fuel (HDF) and is applied to the deliveries two months later.
 
     For BNSF coal transportation deliveries in May 2008, the fuel surcharge would be based on the March HDF.  In this rising oil price market, the BNSF’s diesel expenditure in March is not recovered until May; affecting Q1 earnings because of the lag in recovery to Q2.

    The fuel surcharge is a per-railcar charge and is based on the one-way mileage between the mine and plant.  For May 2008, the fuel surcharge on coal transportation is $0.44/ton.  For a hypothetical 1,000 one-way coal haul on BNSF, this equates to $440 per railcar.  At 118 tons of coal per railcar, this equals a $3.73/ton fuel surcharge.
 
     The BNSF transports 15% of coal by tariff and 85% of coal by contract.  Of the contract moves, nearly 1/3 are legacy agreements that do not yet include a fuel surcharge mechanism.  (Note:  These legacy agreements are also substantially under current market rates that will rise significantly once re-priced.)  In 2007, the BNSF transported 291 million tons of coal.  Of this total, 247 million tons (85% of 291) move under contract.  This means approximately 82 million tons (1/3 of 247) of coal transported by the BNSF does not yet have a fuel surcharge.  Using the May 2008 fuel surcharge rate on a 1,000 mile average haul that equates to $3.73/ton and those 82 million tons of coal not subject yet to a fuel surcharge, this is $306 million per year in un-recovered fuel costs for the BNSF’s coal transportation.  Once these legacy coal transportation contracts expire and are renegotiated with a fuel surcharge, these fuel costs will be recovered, improving the BNSF’s revenues.  The same can be said for the other Class I Railroads as their legacy coal contracts expire and new contracts include fuel surcharges.