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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-11535
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Burlington Northern Santa Fe Corporation
(Exact name of registrant as specified in its charter)
Delaware 41-1804964
(State of Incorporation) (I.R.S. Employer Identification
No.)
2650 Lou Menk Drive
Second Floor
Fort Worth, Texas 76131-2830
(Address of principal executive offices, including zip code)
817/333-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, $0.01 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Exchange
----------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $11.616 billion on January 31, 2001. For purposes
of this calculation only, the registrant has excluded stock beneficially owned
by directors and officers. By doing so, the registrant does not admit that such
persons are affiliates within the meaning of Rule 405 under the Securities Act
of 1933 or for any other purpose.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock, $0.01 par value, 392,452,205 shares outstanding as of January
31, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents from which parts thereof have been incorporated
by reference and the part of the Form 10-K into which such information is
incorporated:
Burlington Northern Santa Fe Corporation's definitive Proxy
Statement, to be filed not later than 120 days after the end of
the fiscal year covered by this report.......................... PART III
TABLE OF CONTENTS
Page
----
PART I
Items 1 and 2. Business and Properties.................................... 1
Item 3. Legal Proceedings................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............... 9
EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.................................................................. 10
Item 6. Selected Financial Data........................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 24
Item 8. Financial Statements and Supplementary Data....................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant............... 52
Item 11. Executive Compensation........................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management... 53
Item 13. Certain Relationships and Related Transactions................... 53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 54
SIGNATURES................................................................ S-1
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE................................. F-1
EXHIBITS.................................................................. E-1
PART I
ITEMS 1 and 2. Business and Properties
Burlington Northern Santa Fe Corporation (BNSF) was incorporated in the
State of Delaware on December 16, 1994. On September 22, 1995, the stockholders
of Burlington Northern Inc. (BNI) and Santa Fe Pacific Corporation (SFP) became
the stockholders of BNSF pursuant to a business combination of the two
companies. To effect the combination, BNSF was formed to act as the parent
holding company of BNI and SFP. BNI and SFP each owned a large, Class I
railroad: Burlington Northern Railroad Company (BNRR) and The Atchison, Topeka
and Santa Fe Railway Company (ATSF), respectively.
On December 30, 1996, BNI merged with and into SFP. On December 31, 1996,
ATSF merged with and into BNRR, and BNRR changed its name to The Burlington
Northern and Santa Fe Railway Company (BNSF Railway). On January 2, 1998, SFP
merged with and into BNSF Railway.
Through its subsidiaries, BNSF is engaged primarily in the rail
transportation business. At December 31, 2000, BNSF and its subsidiaries had
approximately 39,600 employees. The rail operations of BNSF Railway, BNSF's
principal operating subsidiary, comprise one of the largest railroad systems in
the United States. BNSF Railway's business and operations are described below.
On December 18, 1999, BNSF and Canadian National Railway Company (CN)
entered into an agreement to combine their companies. Pursuant to the Amended
and Restated Combination Agreement dated as of December 18, 1999 by and among
BNSF, CN, North American Railways, Inc. (North American Railways) and Western
Merger Sub, Inc. (the Combination Agreement), the combined enterprise was to
consist of two public companies--North American Railways and CN--to comply with
Canadian requirements prohibiting any person and that person's associates from
owning more than 15 percent of the voting rights in CN and to ensure that the
combination would be tax-efficient for each company's shareholders. Upon
completion of the combination, BNSF was to be a wholly owned subsidiary of
North American Railways, and all shareholders were to have voting interests in
both North American Railways and CN and economic interests in the combined
companies. Completion of the combination required approval of the shareholders
of BNSF and CN. The combination was also subject to approval of the U. S.
Surface Transportation Board (STB), compliance with the Competition Act
(Canada), and approval by the Quebec Superior Court.
On March 17, 2000, the STB served a Decision (STB Ex Parte No. 582)
directing Class I railroads to suspend activity relating to any railroad
transaction that would be deemed a "major transaction" under STB regulations,
"pending development of new rules" by the STB governing merger transactions.
The Decision followed a four-day hearing that ended March 10, 2000, which the
STB held to discuss the impact of future rail consolidations on the present and
future structure of the rail industry and what the evolving structure of the
North American railroad industry should be. The Decision stated that no filings
relating to a major railroad transaction would be accepted for 15 months. The
Decision also suspended the Notice of Intent to File Railroad Control
Application that had been filed by BNSF and CN on December 20, 1999, giving
notice of their intent to file a joint application for STB approval of their
proposed rail combination on or after March 20, 2000.
On March 17, 2000, BNSF, CN, and the Western Coal Traffic League filed
petitions for review of the STB's March 17, 2000 Decision in the United States
Court of Appeals for the District of Columbia Circuit. On March 29, 2000, BNSF
filed a petition for stay of the STB's decision pending judicial review with
the United States Court of Appeals for the District of Columbia Circuit.
On July 14, 2000, the United States Court of Appeals for the District of
Columbia Circuit ruled and upheld the STB's authority to impose the moratorium
that precluded BNSF and CN from filing their control application with the STB
during the pendency of the moratorium. On July 20, 2000, BNSF and CN announced
their mutual termination of the Combination Agreement with neither party paying
any break-up fees.
1
Track Configuration
BNSF Railway operates over a railroad system consisting of, at December 31,
2000, approximately 33,500 route miles of track (excluding second, third and
fourth main tracks, yard tracks, and sidings), approximately 25,000 miles of
which are owned route miles, including easements, through 28 states and two
Canadian provinces. Approximately 7,500 route miles of BNSF Railway's system
consist of trackage rights that permit BNSF Railway to operate its trains with
its crews over another railroad's tracks. BNSF Railway operates over other
trackage through lease or contractual arrangements.
As of December 31, 2000, the total BNSF Railway system, including first,
second, third and fourth main tracks, yard tracks, and sidings, consisted of
approximately 51,000 operated miles of track, all of which were owned by or
held under easement by BNSF Railway except for approximately 8,200 miles
operated under trackage rights agreements with other parties. At December 31,
2000, approximately 26,700 miles of BNSF Railway's track consisted of 112-pound
per yard or heavier rail, including approximately 18,900 track miles of 131-
pound per yard or heavier rail.
Equipment Configuration
BNSF Railway owned or had under non-cancelable leases exceeding one year the
following units of railroad rolling stock as of the dates shown below:
At December 31, 2000 1999 1998
--------------- ------ ------ ------
Diesel Locomotives...................................... 4,966 5,095 4,992
====== ====== ======
Locomotives Under Power Purchase Agreements............. 99 99 99
====== ====== ======
Freight Cars:
Box-general purpose................................... 896 913 948
Box-specially equipped................................ 9,785 10,111 10,295
Open Hopper........................................... 9,984 10,287 10,772
Covered Hopper........................................ 44,632 45,463 44,643
Gondola............................................... 12,415 12,753 12,427
Refrigerator.......................................... 6,111 6,236 6,476
Autorack.............................................. 4,775 4,799 3,304
Flat.................................................. 6,389 6,468 6,289
Tank.................................................. 480 482 489
Caboose............................................... 305 319 351
Other................................................. 727 728 729
------ ------ ------
Total Freight Cars.................................... 96,499 98,559 96,723
====== ====== ======
Domestic Containers..................................... 10,999 11,019 9,849
Trailers................................................ 2,201 2,213 2,410
Domestic Chassis........................................ 9,405 9,406 9,409
Company Service Cars.................................... 4,334 4,399 4,685
Commuter Passenger Cars................................. 141 141 141
In addition to the chassis, containers, trailers, and freight cars shown
above, BNSF Railway had under short-term leases 18,844 chassis, 13,692
containers, 2,675 trailers, and 2,270 freight cars at December 31, 2000. The
average age from date of manufacture of the locomotive fleet at December 31,
2000 was 11.863 years; the average age from date of manufacture or
remanufacture of the freight car fleet at December 31, 2000 was 17.24 years.
These averages are not weighted to reflect the greater capacities of the newer
equipment.
2
Capital Expenditures and Maintenance
BNSF Railway cash capital expenditures for the periods indicated were as
follows:
Year Ended December 31, 2000 1999 1998
----------------------- ------ ------ ------
(in millions)
Maintenance of Way
Rail................................................. $ 210 $ 256 $ 238
Ties................................................. 206 170 220
Surfacing............................................ 134 130 136
Other................................................ 285 254 205
------ ------ ------
Total Maintenance of Way........................... 835 810 799
Mechanical............................................. 221 240 243
Information Services................................... 66 74 76
Other.................................................. 144 151 185
------ ------ ------
Total Maintenance of Business...................... 1,266 1,275 1,303
New Locomotives and Freight Cars....................... -- 261 340
Terminal and Line Expansion............................ 99 233 487
Other Projects......................................... 34 19 17
------ ------ ------
Total Capital Expenditures............................. $1,399 $1,788 $2,147
====== ====== ======
The above table does not include expenditures for equipment financed through
operating leases (principally, locomotives and rolling stock). BNSF's planned
2001 cash capital commitments approximate $1.5 billion. Approximately $1.3
billion of the total planned capital commitments will be for maintenance of
business activities, primarily consisting of expenditures to maintain BNSF's
track, signals, bridges and tunnels, as well as to overhaul locomotives and
freight cars with the remaining to be spent on terminal and line expansions and
other projects.
As of December 31, 2000, General Electric Company, the Electro-Motive
Division of General Motors Corporation, and Boise Locomotive Corporation
performed locomotive maintenance and overhauls for BNSF Railway under various
maintenance agreements that covered approximately 3,000 locomotives. These
agreements require the work to be done at BNSF Railway's facilities using BNSF
Railway employees.
The majority of maintenance of way expenditures for track has been for rail
and tie refurbishment and track resurfacing. The extent of the BNSF Railway
track maintenance program is depicted in the following table:
Year Ended December 31, 2000 1999 1998
----------------------- ------ ------ ------
Track miles of rail laid (1)............................ 732 926 1,029
Cross ties inserted (thousands)(1)...................... 2,527 2,365 2,452
Track resurfaced (miles)................................ 11,228 10,505 12,383
- --------
(1) Includes expenditures for both maintenance of existing route system and
expansion projects. These expenditures are primarily capitalized.
BNSF Railway planned 2001 track maintenance of way program, together with
expansion projects, will result in the installation of approximately 816 track
miles of rail, the replacement of about 2.6 million ties and the resurfacing of
approximately 11,500 miles of track.
3
Property and Facilities
BNSF Railway operates facilities and equipment to maintain its track,
locomotives and freight cars. It also owns or leases other equipment to support
rail operations, such as highway trailers, containers and vehicles. Support
facilities for rail operations include yards and terminals throughout its rail
network, system locomotive shops to perform locomotive servicing and
maintenance, a centralized network operations center for train dispatching and
network operations monitoring and management in Fort Worth, Texas, computers,
telecommunications equipment, signal systems, and other support systems.
Transfer facilities are maintained for rail-to-rail as well as intermodal
transfer of containers, trailers and other freight traffic. These facilities
include 37 major intermodal hubs located across the system and three intermodal
hub centers off-line used in connection with haulage agreements with other
railroads. BNSF Railway's largest intermodal facilities in terms of 2000 volume
are:
Intermodal Facilities Units
--------------------- ---------
Hobart Yard (Los Angeles)...................................... 1,057,000
Corwith Yard (Chicago)......................................... 755,000
Willow Springs (Illinois)...................................... 697,000
Chicago Hub Center............................................. 446,000
Alliance (Texas)............................................... 412,000
San Bernardino (California).................................... 388,000
Argentine (Kansas)............................................. 249,000
BNSF Railway owns 27 automotive distribution facilities where automobiles
are loaded or unloaded from multi-level rail cars and serves eight port
facilities in the United States and Canada.
BNSF Railway's largest freight car classification yards based on the average
daily number of cars processed (excluding cars that do not change trains at the
terminal and intermodal and coal cars) are shown below:
Daily Average
Classification Yard Cars Processed
------------------- --------------
Argentine (Kansas)........................................ 2,046
Galesburg (Illinois)...................................... 1,553
Pasco (Washington)........................................ 1,443
Barstow (California)...................................... 1,281
Memphis (Tennessee)....................................... 1,242
Certain BNSF Railway properties and other assets are subject to liens
securing, as of December 31, 2000, $467 million of mortgage debt. Certain
locomotives and rolling stock of BNSF Railway are subject to equipment
obligations and leases, as referred to in Note 8 to the Consolidated Financial
Statements included in this filing.
Employees and Labor Relations
Productivity as measured by revenue ton miles per employee has risen
steadily in the last three years, while compensation and benefits expense per
revenue ton mile decreased over the same period, as shown in the table below.
Year Ended December 31, 2000 1999 1998
----------------------- ------ ------ ------
Thousand revenue ton miles divided by average number of
Employees............................................. 12,342 11,564 10,576
Compensation and benefits expense per thousand revenue
ton miles............................................. $5.55 $5.62 $6.00
4
Approximately 89 percent of BNSF Railway employees are union-represented.
They work under collective bargaining agreements with 13 different labor
organizations. The negotiating process for new, major collective bargaining
agreements covering all of BNSF Railway's union employees has been underway
since the bargaining round was initiated November 1, 1999. Wages, health and
welfare benefits, work rules, and other issues have traditionally been
addressed through industry-wide negotiations. These negotiations have generally
taken place over a number of months and have previously not resulted in any
extended work stoppages. The existing agreements will continue to remain in
effect until new agreements are reached or the Railway Labor Act's procedures
(which include mediation, cooling-off periods, and the possibility of
Presidential intervention) are exhausted. The current agreements provide for
periodic wage increases until new agreements are reached. The National
Carriers' Conference Committee, BNSF's multi-employer collective bargaining
representative, recently reached a tentative agreement with the United
Transportation Union (UTU) covering wage and work rule issues through the year
2004 for conductors, brakemen, yardmen, yardmasters and firemen (approximately
one third of BNSF's unionized workforce). The agreement is subject to
ratification by the UTU's membership. Health and welfare benefit issues were
not resolved by this agreement, and will remain the subject of continuing
negotiations.
Railroad industry personnel are covered by the Railroad Retirement System
instead of Social Security. BNSF Railway's contributions under the Railroad
Retirement System are approximately triple those in industries covered by
Social Security.
Railroad industry personnel are also covered by the Federal Employers'
Liability Act (FELA) rather than by state workers' compensation systems. FELA
is a fault-based system, with compensation for injuries settled by negotiation
and litigation, not subject to specific statutory limitations on the amount of
recovery. By contrast, most other industries are covered under state, no-fault
workers' compensation plans with standard compensation schedules. BNSF Railway
believes it has adequate recorded liabilities for its FELA claims. However, the
ultimate costs of these FELA claims are uncertain and the actual costs could be
significantly higher than anticipated.
Business Mix
In serving the Midwest, Pacific Northwest and the Western, Southwestern, and
Southeastern regions and ports of the country, BNSF Railway transports, through
one operating transportation services segment, a wide range of products and
commodities derived from manufacturing, agricultural, and natural resource
industries. Accordingly, its financial performance is influenced by, among
other things, general and industry economic conditions at the international,
national, and regional levels.
Major markets served directly by BNSF Railway include Albuquerque, Amarillo,
Billings, Birmingham, Bismarck/Mandan, Cheyenne, Chicago, Corpus Christi,
Council Bluffs, Dallas, Denver, Des Moines, Duluth/Superior, El Paso,
Eugene/Salem, Fargo/Moorhead, Fort Worth, Fresno/Bakersfield, Galesburg,
Galveston, Grand Forks, Helena, Houston, Kansas City, Lake Charles, Lincoln,
Little Rock/Pine Bluff, Los Angeles, Lubbock, Memphis, Minot, Mobile, New
Orleans, Oklahoma City, Olympia, Omaha, Peoria, Phoenix, Portland, the Quad
Cities, Reno/Sparks, Sacramento, Salt Lake City/Ogden, San Antonio, San Diego,
the San Francisco Bay area, the San Joaquin Valley area, St. Louis/East St.
Louis, St. Paul/Minneapolis, Seattle, Sioux City, Sioux Falls, Spokane,
Springfield (Missouri), Stockton, Tacoma, Topeka, Tulsa, Waco, Wichita,
Vancouver (British Columbia), Wenatchee, Winnipeg (Manitoba) and Yakima. BNSF
serves Cedar Rapids through a "Voluntary Coordination Agreement" with the Cedar
Rapids and Iowa City Railway Company and Iowa Interstate Railroad, and through
a haulage agreement with CN. Other major cities are served through Intermodal
Market Extension terminals located at various off-line points. Major ports
served include Beaumont, Bellingham, Brownsville, Corpus Christi, Everett,
Galveston, Houston, Kalama, Long Beach, Longview, Los Angeles, Mobile, New
Orleans, Portland, Richmond (Oakland), San Diego, Seattle, Duluth/Superior,
Tacoma, Vancouver (Washington), and Vancouver (British Columbia). Canadian
traffic is accessed through border crossings in Minnesota, North Dakota,
Montana, and Washington, as well as through interchange with
5
Canadian railroads at Chicago, Minneapolis/St. Paul, and other gateways. BNSF
Railway also accesses markets in Mexico through United States/Mexico crossings
at Brownsville, Eagle Pass and El Paso, Texas and San Diego, California and,
through an interline agreement with the Texas Mexican Railway Company, BNSF
Railway reaches Laredo, Texas, a major rail gateway between the U.S. and
Mexico.
Carload. The carload freight business provided approximately 28 percent of
revenues in 2000. Carload revenue comes from five types of business:
. Chemicals. The chemicals business is composed of fertilizer, petroleum,
plastics and chemical commodities. Industrial chemicals and plastics
resins are used by the automotive, housing, and packaging industries, as
well as for feedstocks to produce other chemical and plastic products.
Agricultural chemicals and minerals include sulphur that generally moves
to the Gulf Coast and from there via vessels to Florida and overseas
markets for use in making phosphatic fertilizers. Potash is transported
to domestic markets and to export points for markets in South America
and Asia.
. Forest Products. The primary forest product commodities transported are
lumber, plywood, oriented strand board, particle board, paper products,
pulpmill feedstocks, wood pulp and sawlogs. This diverse commodities
group primarily originates from the Pacific Northwest, Western Canada,
upper Midwest, and the Southeast for shipment mainly into domestic
markets. Industries served include construction, furniture, photography,
publishing, newspaper, and industrial packaging.
. Metals. The Metals business serves virtually all of the commodities
included in or resulting from the production of steel. Taconite, an iron
ore derivative produced in northern Minnesota, scrap steel, and coal
coke are BNSF Railway's primary input products, while finished steel
products range from structural beams and steel coils to wire and nails.
BNSF Railway links the integrated steel mills in the East with
fabricators in the West and Southwest. Service is also provided to
various mini-mills in the Southwest that produce rebar, beams, and
coiled rod to the construction industry. Various non-ferrous products
such as copper, lead, and aluminum are transported for the beverage,
automotive, and telecommunications industries.
. Minerals and Machinery. Mineral commodities include clays, sands,
cements, aggregates, sodium compounds, waste and other industrial
minerals. Both the oil and the construction industries are served.
Industrial minerals include various mined and processed commodities such
as cement and aggregates (construction sand, gravel and crushed stone)
that generally move to domestic markets for use in general construction
and public work projects, including highways. Borates and clays move to
domestic points as well as to export markets primarily through West
Coast ports. Sodium compounds, primarily soda ash, is moved to domestic
markets for use in the manufacturing of glass and other industrial
products. Sand is utilized in the manufacturing of glass and for use in
foundry and oil drilling applications. Shipments of waste, ranging from
municipal waste to contaminated soil, are transported to landfills and
reclamation centers across the country. Machinery includes aircraft
parts, agricultural and construction machinery, military equipment and
large industrial machinery.
. Consumer Goods (Perishables and Dry Boxcar). Beverages, canned goods,
and perishables are the principal food commodities moved by BNSF
Railway. Other consumer goods handled include cotton, salt, rubber and
tires, and miscellaneous boxcar shipments.
6
Intermodal. The intermodal freight business provided approximately 29
percent of revenues in 2000 and consists of the hauling of freight, usually in
containers or truck trailers, through a combination of different modes of
transportation such as rail, truck or water carriers. The intermodal business
is highly service-driven, and in many cases truck carriers and railroads work
jointly to provide intermodal service.
Intermodal 2000 results include revenue from four types of business:
. Direct Marketing. Direct marketing efforts resulted in approximately 32
percent of total intermodal revenue. These center around traffic
contracted from United Parcel Service and the United States Postal
Service, and service for nationwide LTL (Less-Than-Truckload) carriers
including Yellow Freight, Roadway Express, and Consolidated Freightways.
. International. International business consists primarily of traffic from
steamship companies and accounted for approximately 35 percent of
intermodal revenues.
. Intermodal Marketing Companies. Approximately 17 percent of total
intermodal revenue was generated through intermodal marketing companies,
primarily shipper agents and consolidators.
. Truckload. Truckload traffic represented approximately 16 percent of
total intermodal revenue. The joint service arrangement with J.B. Hunt,
referred to as Quantum, represented the largest truckload component,
while Schneider National was the next largest.
Coal. Based on carloadings and tons hauled, BNSF Railway is the largest
transporter of western low-sulfur coal in the United States, and the
transportation of coal contributed about 23 percent to 2000 revenues.
Approximately 90 percent of BNSF Railway's coal traffic originated in the
Powder River Basin of Wyoming and Montana during the three years ended December
31, 2000. These coal shipments were destined for coal-fired electric generating
stations located primarily in the North Central, South Central and Mountain
regions of the United States.
BNSF Railway also transports increasing amounts of low-sulfur coal from the
Powder River Basin for delivery to markets in the eastern and southeastern
portions of the United States. The low-sulfur coal from the Powder River Basin
is abundant, inexpensive to mine, clean-burning, and has a low delivered-cost
to power plants. Also, deregulation in the electric utility industry is
expected to cause utilities to seek lower cost fuel sources and boost demand
for Powder River Basin coal.
Other coal shipments originate principally in Colorado, Illinois, New
Mexico, and North Dakota and are moved to electrical generating stations and
industrial plants in the Mountain and North Central regions.
Agricultural Commodities. The transportation of agricultural commodities
provided approximately 14 percent of 2000 revenues and includes wheat, corn,
bulk foods, soybeans, oil seeds and meals, feeds, barley, oats and rye, flour
and mill products, milo, oils, specialty grains, and malt. The BNSF Railway
system is strategically located to serve the grain-producing regions of the
Midwest and Great Plains. In addition to serving most grain-producing areas,
BNSF Railway serves most major terminal, storage, feeding and food-processing
locations. Furthermore, BNSF Railway has access to major export markets in the
Pacific Northwest, western Great Lakes, and Texas Gulf regions, and in Mexico.
Automotive. The transportation of both assembled motor vehicles and
shipments of vehicle parts to numerous destinations throughout the Midwest,
Southwest, West and Pacific Northwest provided about five percent of 2000
revenues.
7
Freight Statistics. The following tables set forth certain freight
statistics relating to rail operations for the periods indicated. Certain
amounts have been reclassified to reflect changes in the business groups for
years prior to 2000 and to conform to current year presentation.
Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
Revenue ton miles (millions)......................... 491,959 493,207 469,045
Freight revenue per thousand revenue ton miles....... $18.52 $18.40 $19.08
Average haul per ton (miles)......................... 996 994 970
For revenue, cars/units and average revenue per unit information for the
three years ended December 31, 2000, see the revenue table included as part of
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations in this filing.
Government Regulation and Legislation
Rail operations are subject to the regulatory jurisdiction of the STB of the
United States Department of Transportation (DOT), the Federal Railroad
Administration of DOT, the Occupational Safety and Health Administration
(OSHA), and state regulatory agencies. The STB, which is the successor to the
Interstate Commerce Commission (ICC), has jurisdiction over certain rates,
routes, and services, the extension, sale, or abandonment of rail lines, and
consolidation or merger with, or acquisition of control of, rail common
carriers. On October 3, 2000, the STB issued a Notice of Proposed Rulemaking
relating to standards to be used in evaluating applications for authority to
engage in certain railroad mergers, consolidations, and changes in control that
are deemed "major transactions" under STB regulations. The proposed new
standards are designed to increase the burden on applicants to demonstrate that
a proposed merger is in the public interest. The rulemaking is expected to be
completed in June 2001.
DOT and OSHA have jurisdiction under several federal statutes over a number
of safety and health aspects of rail operations. State agencies regulate some
aspects of rail operations with respect to health and safety in areas not
otherwise preempted by federal law.
BNSF Railway's rail operations, as well as those of its competitors, are
subject to extensive federal, state and local environmental regulation. These
laws cover discharges to waters, air emissions, toxic substances, and the
generation, handling, storage, transportation, and disposal of waste and
hazardous materials. This regulation has the effect of increasing the cost and
liabilities associated with rail operations. Environmental risks are also
inherent in rail operations which frequently involve transporting chemicals and
other hazardous materials.
Many of BNSF Railway's land holdings are and have been used for industrial
or transportation-related purposes or leased to commercial or industrial
companies whose activities may have resulted in discharges onto the property.
As a result, BNSF Railway is now subject and will from time to time continue to
be subject to environmental cleanup and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as the "Superfund" law, generally imposes joint and
several liability for cleanup and enforcement costs, without regard to fault or
the legality of the original conduct, on current and former owners and
operators of a site. Accordingly, BNSF Railway may be responsible under CERCLA
and other federal and state statutes for all or part of the costs to clean up
sites at which certain substances may have been released by BNSF Railway, its
current lessees, former owners or lessees of properties, or other third
parties. For further discussion, see Note 11 to the Consolidated Financial
Statements included in this filing.
Competition
The business environment in which BNSF Railway operates remains highly
competitive. Depending on the specific market, deregulated motor carriers,
other railroads and river barges may exert pressure on price and
8
service levels. The presence of advanced, high service truck lines with
expedited delivery, subsidized infrastructure and minimal empty mileage
continues to affect the market for non-bulk, time sensitive freight. The
potential expansion of longer combination vehicles could further encroach upon
markets traditionally served by railroads. In order to remain competitive, BNSF
Railway and other railroads strive to develop and implement operating
efficiencies to improve productivity.
As railroads streamline, rationalize and otherwise enhance their franchises,
competition among rail carriers intensifies. BNSF Railway's primary rail
competitor in the western region of the United States is Union Pacific Railroad
Company (UP). Other Class I railroads and numerous regional railroads and motor
carriers also operate in parts of the same territories served by BNSF Railway.
Coal, one of BNSF Railway's primary commodities, continues to be subject to
various types of competitive pressures.
As a condition to approval of the merger of rail carriers controlled by
Union Pacific and Southern Pacific, the STB in its 1996 decision required the
grant to BNSF Railway of trackage rights over approximately 4,000 miles of
UP/SP track. BNSF Railway also purchased over 335 miles of track from UP/SP as
a result of the STB's decision. BNSF Railway and Union Pacific compete head-to-
head in Gulf Coast, Intermountain and West Coast markets served by these lines.
In 1998, BNSF Railway and UP entered into an agreement to exchange half
interests in the two pieces of the former Southern Pacific Transportation
Company ("SP") rail line between Houston and New Orleans which are separately
owned by the two railroads. Both railroads now have access to all customers,
including chemical, steel, gas and other companies, along the entire line,
including on former SP branch lines.
The STB approved the carve-up of Consolidated Rail Corporation (Conrail)
between CSX Corporation and Norfolk Southern Corporation which was implemented
in 1999. CSX and Norfolk Southern operate the two largest rail systems in the
eastern United States. Also, in 1999, Canadian National Railway Company (CN)
acquired Illinois Central Corporation (IC). CN is Canada's largest railroad and
reaches the U.S. cities of Detroit and Chicago, while IC has operations
extending from Chicago to the Gulf of Mexico, and west through Iowa. In January
2001, CN announced its intention to acquire the Wisconsin Central, a regional
railroad with track and trackage rights in Illinois, Wisconsin, Minnesota,
Michigan, and the province of Ontario.
ITEM 3. Legal Proceedings
BNSF and its subsidiaries are parties to a number of legal actions and
claims, various governmental proceedings and private civil suits arising in the
ordinary course of business, including those related to environmental matters
and personal injury claims. While the final outcome of these matters cannot be
predicted with certainty, considering among other things the meritorious legal
defenses available, it is the opinion of BNSF management that none of these
items, when finally resolved, will have a material adverse effect on the
financial position or liquidity of BNSF, although an adverse resolution of a
number of these items could have a material adverse effect on the results of
operations in a particular quarter or fiscal year.
Reference is made to Note 4 to the Consolidated Financial Statements
included in this filing for information concerning certain pending
administrative appeals with the Internal Revenue Service.
ITEM 4. Submission Of Matters To a Vote Of Security Holders
No matters were submitted by BNSF to a vote of its securities holders during
the fourth quarter of 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the names, ages, and positions of all executive officers of
BNSF (excluding Robert D. Krebs and Matthew K. Rose, executive officers who are
also directors of BNSF, information as to whom will
9
be included in BNSF's Proxy Statement for its 2001 annual meeting of
shareholders which will be filed with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year) and their business
experience during the past five years. Executive officers hold office until
their successors are elected or appointed, or until their earlier death,
resignation, or removal.
Thomas N. Hund, 47
Executive Vice President and Chief Financial Officer since January 2001.
Prior to that, Senior Vice President and Chief Financial Officer and Treasurer
from August 1999, and Vice President and Controller from September 1995.
Carl R. Ice, 44
Executive Vice President and Chief Operations Officer since January 2001.
Prior to that, Senior Vice President-Operations from June 1999, Vice President-
Operations North from January 1999, Vice President-Chief Mechanical Officer
from December 1996, Vice President-Chief Mechanical Officer of ATSF from
January 1996 and Vice President-Executive of ATSF from May 1995.
Dennis R. Johnson, 39
Vice President and Controller since August 1999. Prior to that, Assistant
Vice President and Assistant Controller from January 1997, and Assistant Vice
President and Assistant Controller for ATSF from January 1992 to December 1996.
Jeffrey R. Moreland, 56
Executive Vice President-Law and Chief of Staff since January 2001. Prior to
that, Senior Vice President-Law and Chief of Staff since February 1998, and
Senior Vice President-Law and General Counsel from September 1995.
Charles L. Schultz, 53
Executive Vice President and Chief Marketing Officer since June 1999. Prior
to that, Senior Vice President-Intermodal and Automotive Business Unit since
February 1996, and Vice President-Intermodal of ATSF and BNRR from September
1995.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
BNSF's common stock is listed on the New York Stock Exchange under the
symbol "BNI." The common stock is also listed on the Chicago Stock Exchange and
Pacific Exchange. Information as to the high and low sales prices of such stock
for the two years ending December 31, 2000 and the frequency and amount of
dividends declared on such stock during such period, is set forth in Note 15 to
the Consolidated Financial Statements included in this filing. The approximate
number of record holders of the common stock at January 31, 2001 was 44,000.
10
ITEM 6. Selected Financial Data
The following table presents, as of and for the dates indicated, selected
historical financial information for the Company.
December 31,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(Dollars in millions, except per share
data)
FOR THE YEAR ENDED:
Revenues.......................... $ 9,205 $ 9,189 $ 9,054 $ 8,489 $ 8,192
Operating income.................. $ 2,108 $ 2,205 $ 2,158 $ 1,767 $ 1,748
Net income........................ $ 980 $ 1,137 $ 1,155 $ 885 $ 889
Basic earnings per share.......... $ 2.38 $ 2.46 $ 2.45 $ 1.91 $ 1.95
Average shares (in millions)...... 412.1 463.2 470.5 464.4 456.3
Diluted earnings per share........ $ 2.36 $ 2.44 $ 2.43 $ 1.88 $ 1.91
Average shares (in millions)...... 415.2 466.8 476.2 471.1 464.4
Dividends declared per common
share............................ $ 0.48 $ 0.48 $ 0.44 $ 0.40 $ 0.40
------- ------- ------- ------- -------
AT YEAR END:
Total assets...................... $24,375 $23,700 $22,646 $21,266 $19,693
Long-term debt and commercial
paper, including current portion. $ 6,846 $ 5,813 $ 5,456 $ 5,289 $ 4,711
Stockholders' equity.............. $ 7,480 $ 8,172 $ 7,784 $ 6,822 $ 5,994
Total debt to capital............. 47.8% 41.6% 41.2% 43.7% 44.0%
------- ------- ------- ------- -------
FOR THE YEAR ENDED:
Capital expenditures.............. $ 1,399 $ 1,788 $ 2,147 $ 2,182 $ 2,234
Depreciation and amortization..... $ 895 $ 897 $ 832 $ 773 $ 760
======= ======= ======= ======= =======
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis relates to the financial condition and
results of operations of Burlington Northern Santa Fe Corporation and its
majority-owned subsidiaries (collectively, BNSF or Company). The principal
subsidiary of BNSF is The Burlington Northern and Santa Fe Railway Company
(BNSF Railway). All earnings per share information is stated on a diluted
basis.
Revenue Table
The following table presents BNSF's revenue information by commodity for the
years ended December 31, 2000, 1999 and 1998 and includes certain
reclassifications of prior year information to conform to current year
presentation.
Average Revenue
Revenues Cars/Units Per Car/Unit
-------------------- ----------------- --------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ----- ----- ----- ------ ------ ------
(In Millions) (In Thousands)
Intermodal.............. $2,654 $2,507 $2,451 3,441 3,203 3,086 $ 771 $ 783 $ 794
Carload................. 2,577 2,561 2,593 1,774 1,773 1,801 1,453 1,444 1,440
Coal.................... 2,131 2,226 2,239 2,023 2,123 2,078 1,053 1,049 1,077
Agricultural
Commodities............ 1,257 1,337 1,280 680 715 689 1,849 1,870 1,858
Automotive.............. 493 443 388 249 250 230 1,980 1,772 1,687
------ ------ ------ ----- ----- ----- ------ ------ ------
Total Freight Revenues.. 9,112 9,074 8,951 8,167 8,064 7,884 $1,116 $1,125 $1,135
====== ====== ====== ===== ===== ===== ====== ====== ======
Other Revenues.......... 93 115 103
------ ------ ------
Total Revenues.......... $9,205 $9,189 $9,054
====== ====== ======
11
Results of Operations
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Net income in 2000 was $980 million ($2.36 per share) compared with $1,137
million ($2.44 per share) for 1999. The decrease in earnings per share is
primarily due to the effect on net income of a $232 million increase in fuel
expenses and recognition in 1999 of a gain of $50 million (pre-tax) in
connection with prior period line sales, less costs of $13 million (pre-tax)
related to those sales, partially offset by the favorable effect of the common
stock repurchase program (see Liquidity and Capital Resources: Common Stock
Repurchase Program).
Revenues
Total revenues for 2000 were $9,205 million or $16 million higher than 1999
revenues of $9,189 million. The $16 million increase primarily reflects
increases in the intermodal, carload and automotive sectors, partially offset
by lower coal and agricultural revenues. Average revenue per car/unit decreased
in 2000 to $1,116 from $1,125 in 1999. Volumes increased for the year but
experienced a general slowing late in 2000 based on economic conditions which
have continued in January 2001. During 2000, based on reporting to the
Association of American Railroads (AAR), BNSF's share of the western United
States rail traffic market decreased 0.4 points to 43.1 percent.
Intermodal revenues of $2,654 million improved $147 million, or 6 percent,
compared with 1999 reflecting increases in the international and truckload
sectors, partially offset by decreases in the intermodal marketing companies
(IMC) and direct marketing sectors. International revenues were up due to high
levels of Trans-Pacific trade as well as market share gains with Mitsui, Yang
Ming and Hapag Lloyd. Truckload revenues benefited from strong Schneider
National loadings. These revenue increases were partially offset by decreases
in the direct marketing sector due to decreased loadings within the less than
truckload segment and in the IMC sector due to pricing pressures, and strong
over the road competition.
Carload revenues, which include revenues from the chemicals, forest
products, metals, minerals and machinery, perishable and dry boxcar sectors, of
$2,577 million for 2000 were $16 million, or 1 percent, higher than 1999 due to
increases from the metals, perishables, and minerals sectors, partially offset
by decreased chemicals, forest products, and machinery revenues. The metals
increases were a result of a strong market for steel; the growth in perishables
was from the success of new service offerings and a partial recapture of the
truck market; and increases in minerals were due to higher demand for clay and
sand used in domestic oil production. These increases were partially offset by
decreased shipments of industrial chemicals, softness in the forest products
sector, and lower shipments of heavy machinery.
Coal revenues of $2,131 million for 2000 decreased $95 million, or 4
percent, as a result of volume decreases due to a decrease in demand as a
result of milder weather and high customer inventories that affected shipments
for most of the year, while 1999 benefited from an inventory build up in
preparation for possible Year 2000 outages.
Agricultural commodities revenues of $1,257 million for 2000 were $80
million, or 6 percent, lower than 1999 due primarily to weaker corn export
shipments to the Pacific Northwest and Mexico, and decreased shipments of Gulf
and Pacific Northwest wheat, both caused by worldwide crop competition.
Revenues were also lower as a result of decreased shipments of bulk foods due
to an oversupply of sugar and supplier price competition in the syrup market
which resulted in less traffic.
Automotive revenues of $493 million for 2000 were $50 million, or 11
percent, higher than 1999 reflecting increased industry-wide automobile
production for most of the year and more profitable longer haul traffic despite
essentially flat volumes year-over-year.
12
Expenses
Total operating expenses for 2000 were $7,097 million, an increase of $113
million or 2 percent, compared with operating expenses for 1999 of $6,984
million, despite a $232 million increase in fuel expenses.
Compensation and benefits expenses of $2,729 million were $43 million, or 2
percent, lower than 1999 primarily due to lower employment levels and reduced
incentive expense partially offset by increased base wages.
Purchased services of $1,022 million for 2000 were $23 million, or 2
percent, lower than 1999 primarily as a result of decreased joint facility and
contract switching charges as well as recoveries related to prior periods. This
decrease was partially offset by increased contract equipment maintenance costs
due to an increase in the number of locomotives under maintenance contracts and
volume-related increases in ramping expenses.
Equipment rents expenses of $742 million were $10 million, or 1 percent,
lower than 1999 as a result of lower lease rates on rail cars as well as a
decrease in the number of leased agricultural commodity and coal cars,
partially offset by increased locomotive rental expense.
Fuel expenses of $932 million for 2000 were $232 million, or 33 percent,
higher than 1999, as a result of a 20 cent, or 35 percent, increase in the
average all-in cost per gallon of diesel fuel, partially offset by a 1 percent
decrease in consumption from 1,187 million gallons to 1,173 million gallons.
The increase in the average all-in cost per gallon of diesel fuel includes a 34
cent increase in the average purchase price, partially offset by the favorable
impact in 2000 from the Company's fuel hedging program of 13 cents per gallon
compared with additional expense from hedging of 1 cent per gallon in 1999.
Materials and other expenses of $777 million for 2000 were $41 million, or 5
percent, lower than 1999 principally reflecting: (i) reorganization costs of
$48 million incurred in the second quarter of 1999 for severance, pension,
medical and other benefit costs for approximately 325 involuntarily terminated
salaried employees (see Other Matters: Employee Merger and Separation Costs);
(ii) lower current year environmental expenses and other materials costs
compared with 1999; and (iii) higher current year gains from easement sales.
Offsetting these decreases were: (i) $22 million of employee-related severance,
medical and other benefit costs recorded in the second quarter of 2000 (see
Other Matters: Employee Merger and Separation Costs) for approximately 150
involuntarily terminated employees, primarily material handlers in mechanical
shops and trainmen reserve boards; (ii) $54 million credit for the reversal of
certain liabilities associated with the consolidation of clerical functions in
the second quarter 1999 (see Other Matters: Employee Merger and Separation
Costs); (iii) the loss of previously earned state tax incentives in the second
quarter 2000; and (iv) higher costs in 2000 related to the maintenance of
leased equipment.
Interest expense for 2000 of $453 million increased $66 million, or 17
percent, principally reflecting higher debt levels resulting from the Company's
share repurchase program and higher interest rates. Total debt increased to
$6,846 million at December 31, 2000, from $5,813 million at December 31, 1999.
Other income (expense), net was unfavorable by $71 million compared with
1999 primarily due to a $50 million (pre-tax) deferred gain recognized during
1999 in connection with the sale of rail lines in Southern California in 1992
and 1993, and the recognition in 2000 of $20 million (pre-tax) of expenses
related to the termination of the proposed combination with Canadian National
Railway Company (see Note 3 to the Company's consolidated financial
statements).
13
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Earnings per share increased to $2.44 per share for 1999 from $2.43 per
share for 1998, although net income was slightly lower for 1999 at $1,137
million compared with 1998 net income of $1,155 million. The slight decrease in
net income is primarily due to a 1998 gain of $67 million on the sale of
substantially all of the Company's interest in Santa Fe Pacific Pipeline
Partners, L.P., along with 1998 gains on real estate portfolio sales and higher
interest expense in 1999 incurred on borrowings to fund the share repurchase
program (see Liquidity and Capital Resources: Common Stock Repurchase Program),
and increased 1999 environmental expenses. These decreases in net income were
partially offset by increased operating revenues in 1999 due to volume gains in
most sectors.
Revenues
Total revenues for 1999 were $9,189 million, or 1 percent, higher compared
with revenues of $9,054 million for 1998. The $135 million increase primarily
reflects increases in the intermodal, agricultural commodities and automotive
sectors, partially offset by lower carload and coal revenues. Average revenue
per car/unit decreased slightly in 1999 to $1,125 from $1,135 in 1998. During
1999, BNSF's share of the Western United States rail traffic market, based on
reporting to the AAR, decreased 0.8 points to 43.5 percent. This decrease in
market share was primarily due to Union Pacific regaining market share as a
result of its recovery from operating difficulties experienced in the prior
year.
Carload revenues of $2,561 million for 1999 were $32 million, or 1 percent,
lower than 1998 due to decreases in the chemicals, minerals and machinery, and
metals sectors, partially offset by increased forest product revenues. The
decreases were a result of weaknesses in the chemicals sector due to soft
fertilizer markets, weaknesses in the metals sector due to increased steel
imports, and a decrease in dedicated train movements of heavy machinery. These
decreases were partially offset by increased inland shipments of forest
products.
Intermodal revenues of $2,507 million improved $56 million, or 2 percent,
compared with 1998 reflecting increases in the direct marketing, international
and truckload sectors, partially offset by decreases in the intermodal
marketing companies (IMC) sector. Direct marketing revenues benefited from
year-over-year growth of units shipped for UPS and Roadway Express.
International revenues were up due to market share gains and new business with
Sealand, NYK, Maersk and K-Line. Truckload revenues were driven primarily by
year-over-year growth in J.B. Hunt, Swift and Triple Crown loadings. These
revenue increases were partially offset by decreases in the IMC sector due to
competitive pricing pressures, an overall softening in the IMC market, and
increased trucking capacity.
Coal revenues of $2,226 million for 1999 decreased $13 million, or 1
percent, as a result of a decrease in average revenue per car due to a decline
in coal shipping rates on contracts renewed beginning in late 1998 at the lower
1998 and 1999 market based rates. Operating difficulties early in the year at
the Powder River Basin mines, and a decrease in the demand for coal due to
milder weather for most of the year, contributed to the year-over-year
decrease, which was partially offset by an inventory build-up in 1999 to
prepare for possible Year 2000 outages. The total number of rail cars shipped
increased by 45,000, or 2 percent, over 1998 volumes.
Agricultural commodities revenues of $1,337 million for 1999 were $57
million, or 4 percent, higher than 1998 due primarily to increased demand for
soybean exports and Pacific Northwest corn. The increase in soybean revenue was
fueled by favorable pricing and an increased supply of soybeans that was
sufficient to meet the higher demand. Increases in revenue were slightly offset
by lower wheat revenue per car and fewer soybean oil shipments in 1999 compared
with 1998.
Automotive revenues of $443 million for 1999 were $55 million, or 14
percent, higher than 1998 reflecting growth in vehicle shipments due to both a
record year of new vehicle production coupled with an increase in revenue per
unit as a result of a favorable change in the mix of vehicles transported.
Expenses
Total operating expenses for 1999 were $6,984 million, an increase of $88
million or 1 percent, compared with operating expenses for 1998 of $6,896
million.
14
Compensation and benefits expenses of $2,772 million were $40 million, or 1
percent, lower than 1998 primarily due to lower employment levels resulting
from the second quarter 1999 reorganization discussed in Other Matters:
Employee Merger and Separation Costs partially offset by increased base wage
rates.
Purchased services of $1,045 million for 1999 were $25 million, or 2
percent, higher than 1998 due primarily to increased contract equipment
maintenance costs as well as ramping and other transportation service
contracts, partially offset by lower haulage expenses.
Equipment rents expenses of $752 million were $52 million, or 6 percent,
lower than 1998 as a result of lower intermodal equipment costs due to a
reduction in time and mileage, and trailer and container expenses. Lower
agricultural leased car expense due to improved cycle times also contributed to
the decrease.
Fuel expenses of $700 million for 1999 were $21 million, or 3 percent, lower
than 1998, as a result of a 3 cent, or 6 percent, decrease in the average all-
in cost per gallon of diesel fuel, partially offset by a 3 percent volume-
driven increase in consumption from 1,155 million gallons to 1,187 million
gallons. The average all-in cost per gallon of diesel fuel decreased year-over-
year due to current year fuel hedge losses of 1 cent per gallon compared to 7
cents per gallon in the prior year, which were partially offset by a 3 cent
increase in the average purchase price.
Materials and other expenses of $818 million for 1999 were $111 million, or
16 percent, higher than 1998 principally reflecting higher environmental,
personal injury, property and other tax expenses. As discussed in Other
Matters: Employee Merger and Separation Costs, reorganization costs of $45
million were incurred during the second quarter of 1999 for severance, pension,
medical and other benefit costs for approximately 325 involuntarily terminated
salaried employees that were part of a reorganization program announced in May
1999 to reduce operating expenses and an additional $3 million of costs
incurred for relocating approximately 60 non-union employees as a result of the
reorganization. In addition, the Company also reversed during the second
quarter certain merger severance liabilities of $54 million associated with the
Company's clerical consolidation plan. These liabilities related to planned
work-force reductions which were no longer needed due to the Company's ability
to utilize a series of job swaps between certain locations to achieve the
advantages of functional work consolidation.
Interest expense for 1999 of $387 million increased $33 million, or 9
percent, principally reflecting higher debt levels resulting from the Company's
share repurchase program. Total debt increased to $5,813 million at December
31, 1999, from $5,456 million at December 31, 1998.
Other income (expense), net was unfavorable by $44 million compared with
1998 primarily due to the $67 million gain (pre-tax) on the sale of
substantially all of the Company's interest in Santa Fe Pacific Pipeline
Partners, L.P. in 1998 and gains of $26 million (pre-tax) from the sale of a
real estate portfolio in 1998. This was partially offset by the recognition in
1999 of a $50 million (pre-tax) deferred gain in connection with the sale of
rail lines in Southern California in 1992 and 1993.
Liquidity and Capital Resources
Cash generated from operations is BNSF's principal source of liquidity. BNSF
generally funds any additional liquidity requirements through debt issuance,
including commercial paper or leasing of assets.
During 2000, BNSF generated free cash flow after dividends paid (calculated
as cash flow from operations less capital expenditures, other investing
activities and dividends paid) of $431 million, an improvement of $171 million
from free cash flow of $260 million in 1999. This increase was due primarily to
reduced capital spending partially offset by reduced cash flow from operating
activities.
15
Operating Activities
Net cash provided by operating activities was $2,317 million during 2000
compared with $2,424 million during 1999. The decrease in cash from operations
was primarily due to a decrease in net income and lower deferred taxes
partially offset by the receipt of a $43 million dividend from the Company's
equity investment in TTX Company in March 2000 as well as lower merger,
separation and environmental clean-up payments.
Investing Activities
Net cash used for investing activities during 2000 was $1,680 million
consisting of $1,399 million in capital expenditures as described below, and
$281 million of other investing activities which primarily include retired
track structure removal costs, participation in joint investment projects and
advances for future investment transactions. The increase in other investing
activities compared to 1999 was principally due to an increase in joint
investment projects and advances for future investment transactions.
A breakdown of cash capital expenditures is set forth in the following table
(in millions):
Year ended December 31, 2000 1999 1998
----------------------- ------ ------ ------
Maintenance of way..................................... $ 835 $ 810 $ 799
Mechanical............................................. 221 240 243
Information services................................... 66 74 76
Other.................................................. 144 151 185
------ ------ ------
Total maintenance of business.......................... 1,266 1,275 1,303
New locomotives and freight cars....................... -- 261 340
Expansion and other.................................... 133 252 504
------ ------ ------
Total.................................................. $1,399 $1,788 $2,147
====== ====== ======
BNSF reduced 2000 cash capital expenditures compared with 1999 by
approximately $389 million to $1,399 million. Cash used for new locomotives was
lower in 2000 reflecting a decrease in the number of locomotives purchased. In
2000, 246 new locomotives were delivered to BNSF under long-term operating
leases compared with 476 locomotives in 1999. Expansion projects, principally
main line track and major facility construction, decreased due a reduced
capital program in 2000.
BNSF has entered into commitments to acquire 100 locomotives in 2001. The
locomotives will be financed from one or a combination of sources including,
but not limited to, cash from operations, capital or operating leases, and debt
issuances. The decision on the method used will depend upon then current market
conditions and other factors.
Financing Activities
Net cash used for financing activities during 2000 was $648 million,
principally consisting of share repurchases of $1,496 million and dividend
payments of $206 million partially offset by net debt borrowings of $1,034
million.
In February 2000, a put option on $100 million of medium-term notes paying a
coupon of 6.10 percent was exercised by the holders and the Company repaid the
holders primarily with proceeds from the issuance of commercial paper.
In April 2000, BNSF issued $300 million of 7.875 percent notes due April
2007 and $200 million of 8.125 percent debentures due April 2020. The net
proceeds of the debt issuance were used for general corporate purposes
including the repayment of outstanding commercial paper which increased
primarily as a result of higher share repurchases. At the time of issuing the
$300 million of 7.875 percent notes and the $200 million of 8.125 percent
debentures discussed above, the Company closed out two treasury lock
transactions, each in an amount of $100 million, at gains of approximately $9
million and $13 million, respectively, which have been deferred and are being
amortized to interest expense over the lives of the notes and the debentures,
respectively. Subsequent to this debt issuance, the Company had no remaining
capacity under the February 1999 shelf registration statement.
16
In April 2000, BNSF Railway issued $50 million of privately placed debt
collateralized by locomotives that were acquired in 1999. This debt carries an
interest rate of 7.77 percent and matures from April 2001 to 2015.
In May 2000, the Company filed a new shelf registration statement that
became effective during May 2000 for the issuance of debt securities which may
be issued in one or more series at an aggregate offering price not to exceed $1
billion.
In August 2000, BNSF issued $275 million of 7.95 percent debentures due
August 2030 under the May 2000 shelf registration statement. The net proceeds
were used for general corporate purposes including the repayment of outstanding
commercial paper which increased primarily as a result of higher share
repurchases. At the time of issuing these debentures, the Company closed out a
treasury lock transaction in the amount of $100 million at a gain of
approximately $8 million which has been deferred and is being amortized to
interest expense over the 30-year life of the debentures. Subsequent to this
issuance, the Company had $725 million available for borrowing under the May
2000 registration statement.
In December 2000, BNSF issued $300 million of 7.125 percent notes due
December 2010 under the May 2000 shelf registration statement. The net proceeds
were used for general corporate purposes including the repayment of outstanding
commercial paper which increased primarily as a result of higher share
repurchases. At the time of issuing these debentures, the Company closed out a
treasury lock transaction in the amount of $100 million at a gain of
approximately $5 million which has been deferred and is being amortized to
interest expense over the 10-year life of the notes. Subsequent to this
issuance, the Company had $425 million available for borrowing under the May
2000 registration statement.
In March 1999, BNSF issued $200 million of 6.125 percent notes due March
2009 and $200 million of 6.750 percent debentures due March 2029 under the
February 1999 shelf registration statement. The net proceeds were used for
general corporate purposes including the repayment of commercial paper. At the
time of issuing the $200 million of 6.125 percent notes discussed above, the
Company closed out a $100 million treasury lock transaction at a gain of
approximately $8 million which has been deferred and is being amortized to
interest expense over the 10-year life of the notes.
In April 1999, the holder of a call option on $200 million of the Company's
puttable reset debentures due 2029 exercised the call option. As a result, on
May 13, 1999, the holder repurchased the debentures which were subsequently
resold to investors. The interest rate on the debentures was reset to a fixed
interest rate of 7.082 percent. The Company did not receive any proceeds from
the resale of these debentures.
Aggregate long-term debt scheduled to mature in 2001 is $232 million. BNSF's
ratio of total debt to total capital was 47.8 percent at the end of 2000, 41.6
percent at the end of 1999, and 41.2 percent at the end of 1998. The increase
in 2000 over the prior year is attributable to the increase in debt and lower
equity due primarily to higher share repurchases, as discussed below.
Credit Agreements
BNSF issues commercial paper from time to time which is supported by bank
revolving credit agreements. Outstanding commercial paper balances are
considered as reducing the amount of borrowings available under these
agreements. The bank revolving credit agreements, which were renewed and
extended effective June 21, 2000, allow borrowings of up to $1.0 billion on a
short-term basis (an increase of $250 million over the prior agreement) and
$750 million on a long-term basis. Annual facility fees are currently 0.1
percent and 0.125 percent, respectively, and are subject to change based upon
changes in BNSF's senior unsecured debt ratings. Borrowing rates are based upon
i) LIBOR plus a spread determined by BNSF's senior unsecured debt ratings, ii)
money market rates offered at the option of the lenders, or iii) an alternate
base rate. The Company generally classifies commercial paper as long-term to
the extent of its commitments available under the revolving credit agreements.
The commitments of the lenders under the short-term agreement are scheduled to
17
expire in June 2001, with the ability for any amounts then outstanding to
mature as late as June 2002. The commitments of the lenders under the long-term
agreement are scheduled to expire in June 2005.
BNSF also had outstanding bank borrowings at December 31, 2000, with
maturity values of $75 million and interest rates similar to commercial paper
which, upon maturity, may be replaced with commercial paper or other bank
borrowings. There were no bank borrowings outstanding at December 31, 1999.
At December 31, 2000 there were no borrowings against the revolving credit
agreements and the maturity value of commercial paper outstanding was $573
million, leaving a total capacity of $1,177 million available under the
revolving credit agreements. BNSF must maintain compliance with certain
financial covenants under its revolving credit agreements and at December 31,
2000, the Company was in compliance.
Common Stock Repurchase Program
In July 1997, the Board of Directors of BNSF authorized the repurchase of up
to 30 million shares of the Company's common stock from time to time in the
open market. In December 1999, April 2000 and September 2000, the Board of
Directors authorized extensions of the BNSF share repurchase program, adding 30
million shares at each date to the total shares previously authorized. During
2000, 1999 and 1998, the Company repurchased approximately 65 million, 22
million, and 5 million shares, respectively, of its common stock at average
prices of $23.16 per share, $31.08 per share, and $30.75 per share,
respectively. There were no repurchases under this program in 1997. Total
repurchases through January 31, 2001, were 92 million shares at a total average
cost of $25.51 per share, leaving 28 million shares available for repurchase
out of the 120 million shares authorized.
In connection with its share repurchase program, in April 1999, BNSF sold
equity put options for 0.1 million shares of common stock to an independent
third party and received cash proceeds of $0.1 million. The third party
exercised the options on October 12, 1999, which resulted in the Company
purchasing 0.1 million shares of its common stock at $29 per share. The Company
accounts for the effects of equity put option transactions within stockholders'
equity. During 2000, there were no sales of equity put options.
An equity put option is a financial instrument whereby BNSF receives an
upfront cash premium for granting another party the option to sell a defined
number of BNSF shares to the Company at a fixed price on a specified future
date. The Company considers the sale of equity put options as a method to
acquire its common stock at a share price consistent with its share repurchase
strategy and potentially reduce the all-in cost of the program. The Company's
risk is that it may be required to purchase shares at a specified price that is
higher than the common stock price at the exercise date of the equity put
option. The Company has the ability to settle its equity put option
transactions on a net share or net cash basis and accounts for the effects of
these transactions within stockholders' equity. The number of shares subject to
outstanding put options sold by the Company cannot exceed the amount of
remaining shares the Board of Directors has authorized for repurchase. As of
January 31, 2001, there were no equity put options outstanding.
Common Stock Split
On July 16, 1998, the Board of Directors approved a three-for-one common
stock split, which was effected in the form of a stock dividend of two
additional shares of BNSF common stock payable for each share outstanding or
held in treasury on September 1, 1998, to stockholders of record on August 17,
1998. All equity-based benefit plans reflect the issuance of additional shares
or options due to the declaration of the stock split. All share and per share
data were restated to reflect the stock split.
Dividends
Common stock dividends declared were $0.48 per share annually for 2000 and
1999 and $0.44 per share annually in 1998. Dividends paid on common stock were
$206 million, $224 million and $197 million during
18
2000, 1999 and 1998, respectively. On January 18, 2001, the Board of Directors
declared a quarterly dividend of 12 cents per share upon outstanding shares of
common stock, $.01 par value, payable April 2, 2001, to stockholders of record
on March 12, 2001.
Other Matters
Casualty and Environmental
Personal injury claims, including work-related injuries to employees, are a
significant expense for the railroad industry. Employees of BNSF are
compensated for work-related injuries according to the provisions of the
Federal Employers' Liability Act (FELA). FELA's system of requiring the finding
of fault, coupled with unscheduled awards and reliance on the jury system,
contributed to significant increases in expense in past years. BNSF has
implemented a number of safety programs to reduce the number of personal
injuries as well as the associated claims and personal injury expense. BNSF
made payments for personal injuries of approximately $178 million, $179
million, and $193 million in 2000, 1999 and 1998, respectively. At December 31,
2000 and 1999, the Company had recorded liabilities of $436 million and $446
million related to both asserted and unasserted personal injury claims.
As discussed in more detail in Note 11 to the Company's consolidated
financial statements, the Company's operations, as well as those of its
competitors, are subject to extensive federal, state and local environmental
regulation. BNSF's operating procedures include practices to protect the
environment from the risks inherent in railroad operations, which frequently
involve transporting chemicals and other hazardous materials. Additionally,
many of BNSF's land holdings are and have been used for industrial or
transportation-related purposes or leased to commercial or industrial companies
whose activities may have resulted in discharges onto the property. As a
result, BNSF is subject to environmental clean-up and enforcement actions. In
particular, the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well as
similar state laws generally impose joint and several liability for clean-up
and enforcement costs on current and former owners and operators of a site
without regard to fault or the legality of the original conduct. BNSF has been
notified that it is a potentially responsible party (PRP) for study and clean-
up costs at approximately 31 Superfund sites for which investigation and
remediation payments are or will be made or are yet to be determined (the
Superfund sites) and, in many instances, is one of several PRPs. In addition,
BNSF may be considered a PRP under certain other laws. Accordingly, under
CERCLA and other federal and state statutes, BNSF may be held jointly and
severally liable for all environmental costs associated with a particular site.
If there are other PRPs, BNSF generally participates in the clean-up of these
sites through cost-sharing agreements with terms that vary from site to site.
Costs are typically allocated based on relative volumetric contribution of
material, the amount of time the site was owned or operated, and/or the portion
of the total site owned or operated by each PRP.
Environmental costs include initial site surveys and environmental studies
of potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when BNSF's liability for
environmental clean-up is both probable and a reasonable estimate of associated
costs can be made. Adjustments to initial estimates are recorded as necessary
based upon additional information developed in subsequent periods. BNSF
conducts an ongoing environmental contingency analysis, which considers a
combination of factors including independent consulting reports, site visits,
legal reviews, analysis of the likelihood of participation in and the ability
of other PRPs to pay for clean-up, and historical trend analyses.
BNSF is involved in a number of administrative and judicial proceedings and
other mandatory clean-up efforts at approximately 385 sites, including the
Superfund sites, at which it is participating in the study or clean-up, or
both, of alleged environmental contamination. BNSF paid approximately $49
million, $67 million and $64 million during 2000, 1999 and 1998, respectively,
for mandatory and unasserted clean-up efforts, including amounts expended under
federal and state voluntary clean-up programs. The Company had recorded
19
liabilities for remediation and restoration of all known sites of approximately
$223 million at December 31, 2000, compared with $232 million at December 31,
1999. BNSF anticipates that the majority of the accrued costs at December 31,
2000, will be paid over the next five years. No individual site is considered
to be material.
Liabilities recorded for environmental costs represent BNSF's best estimates
for remediation and restoration of these sites and include both asserted and
unasserted claims. Unasserted claims are not considered to be a material
component of the liability. Although recorded liabilities include BNSF's best
estimates of all costs, without reduction for anticipated recoveries from third
parties, BNSF's total clean-up costs at these sites cannot be predicted with
certainty due to various factors such as the extent of corrective actions that
may be required, evolving environmental laws and regulations, advances in
environmental technology, the extent of other parties' participation in clean-
up efforts, developments in ongoing environmental analyses related to sites
determined to be contaminated, and developments in environmental surveys and
studies of potentially contaminated sites. As a result, future charges to
income for environmental liabilities could have a significant effect on results
of operations in a particular quarter or fiscal year as individual site studies
and remediation and restoration efforts proceed or as new sites arise. However,
management believes that it is unlikely that any identified matters, either
individually or in the aggregate, will have a material adverse effect on BNSF's
consolidated results of operations, financial position or liquidity.
Other Claims and Litigation
BNSF and its subsidiaries are parties to a number of legal actions and
claims, various governmental proceedings and private civil suits arising in the
ordinary course of business, including those related to environmental matters
and personal injury claims. While the final outcome of these items cannot be
predicted with certainty, considering among other things the meritorious legal
defenses available, it is the opinion of management that none of these items,
when finally resolved, will have a material adverse effect on the results of
operations, financial position or liquidity of BNSF, although an adverse
resolution of a number of these items could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.
Employee Merger and Separation Costs
Employee merger and separation liabilities of $310 million and $356 million
are included in the consolidated balance sheet at December 31, 2000 and 1999,
respectively, and principally represent: (i) employee-related severance costs
for the consolidation of clerical functions; (ii) deferred benefits payable
upon separation or retirement to certain active conductors, trainmen and
locomotive engineers; and (iii) certain non-union employee severance costs.
Employee merger and separation expenses are recorded to Materials and Other in
the Company's consolidated income statement.
Consolidation of Clerical Functions
Liabilities related to the consolidation of clerical functions were $96
million and $119 million at December 31, 2000 and 1999, respectively, and
primarily provide for severance costs associated with the clerical
consolidation plan adopted in 1995 upon consummation of the business
combination of BNSF's predecessor companies Burlington Northern, Inc. and Santa
Fe Pacific Corporation (the Merger). The consolidation plan resulted in the
elimination of approximately 1,500 permanent positions and was substantially
completed during 1999.
In the fourth quarter of 2000 and the second quarter of 1999, the Company
recorded a $10 million and $54 million, respectively, reversal of certain
liabilities associated with the consolidation plan. These liabilities related
to planned work force reductions that are no longer required due to the
Company's ability to place certain identified employees in alternate positions.
The remaining liability balance at December 31, 2000 represents benefits to be
paid to affected employees who did not receive lump-sum payments, but instead
will be paid over five to ten years or in some cases through retirement.
20
In the second quarter of 2000, the Company recorded a charge of $17 million
for severance, medical and other benefit costs related to approximately 140
material handlers in mechanical shops. Liabilities remaining at December 31,
2000 related to this program reflect elections to receive payments over the
next several years rather than lump sum payments.
Conductors, Trainmen and Locomotive Engineers
Liabilities related to deferred benefits payable upon separation or
retirement to certain active conductors, trainmen and locomotive engineers were
$183 million and $193 million at December 31, 2000 and 1999, respectively.
These costs were primarily incurred in connection with labor agreements reached
prior to the Merger which, among other things, reduced train crew sizes and
allowed for more flexible work rules.
In the second quarter of 2000, the Company incurred $3 million of costs for
severance, medical and other benefit costs for approximately 50 trainmen on
reserve boards. The remaining reserve of less than $1 million at December 31,
2000 will be paid over the next two years to severed employees who elected to
receive their payments over time.
Non-Union Employee Severance
Liabilities principally related to certain remaining non-union employee
severances resulting from the May 1999 reorganization and from the Merger were
$30 million and $44 million at December 31, 2000 and 1999, respectively. These
costs will be paid over the next several years based on deferral elections made
by the employees.
In the second quarter of 2000, the Company incurred $2 million of costs for
severance, medical and other benefit costs for ten involuntarily terminated
non-union positions. All of these planned reductions were completed at December
31, 2000.
In the second quarter of 1999, the Company incurred $45 million of
reorganization costs for severance, pension, medical and other benefit costs
for approximately 325 involuntarily terminated non-union employees that were
part of the program announced in May 1999 that sought to reduce operating
expenses by eliminating approximately 400 non-union and 1,000 scheduled (union)
positions through severances, normal attrition and the elimination of
contractors. Components of the charge include approximately $29 million
relating to severance costs for non-union employees, and approximately $16
million for special termination benefits to be received under the Company's
retirement and medical plans. Substantially all of the planned reductions were
made by September 30, 1999. No significant costs were incurred as a result of
eliminating the 1,000 scheduled positions.
During 2000, 1999 and 1998, BNSF made employee merger and separation
payments of $58 million, $93 million and $77 million, respectively. At December
31, 2000, $49 million of the remaining liabilities are included within current
liabilities for anticipated costs to be paid in 2001.
Hedging Activities
Fuel
Historically, fuel expenses have approximated 10 percent of total operating
expenses; however, fuel costs during 2000 represented 13 percent of total
operating expenses due to significantly higher than historical fuel prices
which have continued to date into 2001. Due to the significance of diesel fuel
expenses to the operations of BNSF and the historical volatility of fuel
prices, the Company maintains a program to hedge against fluctuations in the
price of its diesel fuel purchases. The intent of the program is to protect the
Company's operating margins and overall profitability from adverse fuel price
changes by entering into fuel hedge instruments based on management's
evaluation of current and expected diesel fuel price trends. However, to
21
the extent the Company hedges portions of its fuel purchases, it may not
realize the impact of decreases in fuel prices. Conversely, to the extent the
Company does not hedge portions of its fuel purchases, it may be adversely
affected by increases in fuel prices. The fuel-hedging program includes the use
of commodity swap transactions that are accounted for as hedges. Any gains or
losses associated with changes in the market value of the fuel swaps are
deferred and recognized as a component of fuel expense in the period in which
the fuel is purchased and used. Based on 2000 fuel consumption and excluding
the impact of the hedging program, each one-cent increase in the price of fuel
would result in approximately $12 million of additional fuel expense on an
annual basis.
As of January 31, 2001, BNSF had entered into fuel swaps for approximately
378 million gallons at an average price of approximately 50 cents per gallon.
The above price does not include taxes, transportation costs, certain other
fuel handling costs, and any differences which may occur from time to time
between the prices of commodities hedged and the purchase price of BNSF's
diesel fuel. Currently, BNSF's fuel hedging program covers approximately 24
percent and 8 percent of estimated annual fuel purchases for 2001 and 2002,
respectively. Hedge positions are closely monitored to ensure that they will
not exceed actual fuel requirements in any period. Unrecognized gains from
BNSF's fuel swap transactions were approximately $74 million as of December 31,
2000, of which $60 million relates to swap transactions that will expire in
2001. BNSF also monitors its hedging positions and credit ratings of its
counterparties and does not anticipate losses due to counterparty
nonperformance. Receivables from fuel hedging activities of $50 million and $29
million at December 31, 2000 and 1999, respectively, are recorded in the
Company's consolidated balance sheet as part of Other Current Assets and
represent settled fuel hedging contracts.
Interest Rate
From time to time, the Company enters into various interest rate hedging
transactions for the purpose of managing exposure to fluctuations in interest
rates and establishing rates in anticipation of future debt issuances. Swaps
totaling $125 million which were used to fix the interest rate on commercial
paper debt expired in December 1999. While the swaps were outstanding, BNSF
recognized, on an accrual basis, a fixed rate of interest on the principal
amount of commercial paper hedged over the term of the swap agreements. As of
January 31, 2001, BNSF had no interest rate swap instruments in place.
At the time of issuing the $300 million of 7.875 percent notes and the $200
million of 8.125 percent debentures in April 2000, the Company closed out two
treasury lock transactions with expiration dates in 2000, each in an amount of
$100 million (one based on the 10-year and one based on the 30-year rates), at
gains of approximately $9 million and $13 million, respectively, which have
been deferred and are being amortized to interest expense over the 30-year and
10-year lives of the notes and the debentures, respectively.
At the time of issuing the $275 million of 7.95 percent debentures in August
2000 and the $300 million of 7.125 percent notes in December 2000, the Company
closed out two treasury lock transactions, each in an amount of $100 million
(one based on the 30-year and one based on the 10-year rates and both with
expiration dates in June 2001), at gains of $8 million and $5 million,
respectively, which have been deferred and are being amortized to interest
expense over the 30-year and 10-year lives of the debentures and notes,
respectively.
In 1999, at the time of issuing $200 million of debt, the Company closed out
$100 million of treasury lock transactions at a gain of $8 million. During
1998, at the time of issuing $400 million of debt, the Company closed out $400
million of treasury lock transactions at a loss of approximately $18 million.
In each case, the gain or loss has been deferred and is being amortized to
interest expense over the life of the debt.
As of December 31, 2000, the Company had no outstanding treasury lock
transactions.
22
Labor
Labor unions represent approximately 89 percent of BNSF Railway's employees
under collective bargaining agreements with 13 different labor organizations.
The negotiating process for new, major collective bargaining agreements
covering all of BNSF Railway's union employees has been underway since the
bargaining round was initiated November 1, 1999. Wages, health and welfare
benefits, work rules, and other issues have traditionally been addressed
through industry-wide negotiations. These negotiations have generally taken
place over a number of months and have previously not resulted in any extended
work stoppages. The existing agreements remained in effect through the end of
the year, and will continue to remain in effect until new agreements are
reached or the Railway Labor Act's procedures (which include mediation,
cooling-off periods, and the possibility of Presidential intervention) are
exhausted. The current agreements provide for periodic wage increases until new
agreements are reached. The National Carriers' Conference Committee, BNSF's
multi-employer collective bargaining representative, during the third quarter
of 2000 reached a tentative agreement with the United Transportation Union
(UTU) covering wage and work rule issues through the year 2004 for conductors,
brakemen, yardmen, yardmasters and firemen (approximately one third of BNSF's
unionized workforce). The agreement is subject to ratification by the UTU's
membership. Health and welfare benefit issues were not resolved by this
agreement, and will remain the subject of continuing negotiations.
Inflation
Due to the capital intensive nature of BNSF's business, the full effect of
inflation is not reflected in operating expenses because depreciation is based
on historical cost. An assumption that all operating assets were depreciated at
current price levels would result in substantially greater expense than
historically reported amounts.
Accounting Pronouncements
BNSF adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 138, beginning January 1, 2001. SFAS No. 133, as amended, requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated and qualifies for hedge accounting and, if it does, the type of
hedge transaction.
For qualifying cash-flow hedge transactions in which the Company is hedging
the variability of cash flows related to a variable rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income to the extent it offsets changes
in the cash flows related to the variable rate asset, liability or forecasted
transaction, with the difference reported in current period earnings. The gains
and losses on the derivative instrument that are reported in other
comprehensive income will be reclassified in earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all hedges will be recognized in current-period
earnings.
Based on fuel hedging instruments outstanding at January 1, 2001 and
previously deferred net gains from past interest rate hedging transactions, all
of which are cash-flow hedge transactions, the Company will record a net-of-tax
cumulative-effect benefit to accumulated other comprehensive deficit in the
Company's consolidated balance sheet of approximately $58 million on adoption
in the first quarter 2001. Because the Company's derivative instruments
historically have been highly effective in hedging the exposure to changes in
cash flows associated with forecasted purchases of diesel fuel and changes in
the risk-free rate of interest on anticipated issuances of long-term debt, we
do not expect the adoption of SFAS 133, as amended, to have a material impact
on our future results of operations.
23
Although BNSF expects the derivative instruments it currently uses to hedge
to continue to be highly effective, if they are determined not to be highly
effective in the future, or if the Company uses derivative instruments that do
not meet the stringent requirements for hedge accounting under SFAS 133, as
amended, then future earnings could reflect greater volatility. Additionally,
if a cash flow hedge is discontinued because the forecasted transaction is no
longer expected to occur, any gain or loss in accumulated comprehensive income
associated with the hedged transaction will be immediately recognized in net
income.
Forward-Looking Information
To the extent that the statements made by the Company in this annual report
or otherwise relate to the Company's future economic performance or business
outlook, predictions or expectations of financial or operational results, or
refer to matters which are not historical facts, such statements are "forward-
looking" statements within the meaning of the federal securities laws. These
forward-looking statements involve a number of risks and uncertainties, and
actual results may differ materially. Factors that could cause actual results
to differ materially include, but are not limited to, economic and industry
conditions: material adverse changes in economic or industry conditions,
customer demand, effects of adverse economic conditions affecting shippers,
adverse economic conditions in the industries and geographic areas that produce
and consume freight, changes in fuel prices, and labor difficulties including
strikes; legal and regulatory factors: change in laws and regulations and the
ultimate outcome of shipper claims, environmental investigations or proceedings
and other types of claims and litigation; and operating factors: technical
difficulties, changes in operating conditions and costs, competition and
commodity concentrations as well as natural events such as severe weather,
floods and earthquakes. The factors noted, individually or in combination
could, among other things, limit demand and pricing, affect costs and the
feasibility of certain operations, or affect traffic and pricing levels.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
In the ordinary course of business, BNSF utilizes various financial
instruments, which inherently have some degree of market risk. The quantitative
information presented below and the additional qualitative information
presented in the Management's Discussion and Analysis of Financial Condition
and Results of Operations section and Notes 8, 10, and 14 of the Consolidated
Financial Statements included in this filing describe significant aspects of
BNSFs financial instrument programs which have a material market risk.
Interest Rate Sensitivity
The tables below provide information about BNSF's derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates as of December 31, 2000 and 1999. For debt obligations, the
tables present principal cash flows and related weighted average interest rates
by contractual maturity dates. Weighted average variable rates are based on
implied forward rates in the yield curve at the reporting date.
Current and Long-term Debt
December 31, 2000
-------------------------------------------------------
Maturity Date
---------------------------------------- Fair
2001 2002 2003 2004 2005 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ------ ------
Fixed Rate Debt (in
millions).............. $232 $288 $145 $244 $440 $4,856 $6,205 $6,163
Average Interest Rate... 7.7% 7.1% 7.2% 7.7% 6.6% 7.2% 7.2% --
Variable Rate Debt (in
millions).............. -- -- -- -- $641 -- $ 641 $ 641
Average Interest Rate... -- -- -- -- 6.0% -- 6.0% --
24
December 31, 1999
-------------------------------------------------------
Maturity Date
---------------------------------------- Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ------ ------
Fixed Rate Debt (in
millions).............. $158 $233 $285 $141 $241 $4,282 $5,340 $5,159
Average Interest Rate... 6.5% 7.7% 7.1% 7.2% 7.7% 7.0% 7.1% --
Variable Rate Debt (in
millions).............. -- -- -- -- $473 -- $ 473 $ 473
Average Interest Rate... -- -- -- -- 7.0% -- 7.0% --
BNSF has included $641 million in 2005 maturities and $473 million in 2004
maturities of commercial paper and bank borrowings in the 2000 and 1999 tables,
respectively. The commercial paper program is supported by bank revolving
credit agreements. Outstanding commercial paper balances are considered as
reducing the amount of borrowings available under these agreements. The bank
revolving credit agreements which were renewed and extended effective June 21,
2000, allow borrowings of up to $1.0 billion on a short-term basis and $750
million on a long-term basis. The commitments of the lenders under the short-
term agreement are scheduled to expire in June 2001 with the ability for any
amounts then outstanding to mature as late as June 2002. The commitments of the
lenders under the long-term agreement are scheduled to expire in June 2005.
BNSF classified commercial paper and bank borrowings as long-term debt in the
consolidated balance sheet at December 31, 2000 and 1999. The bank borrowings
have maturities and interest rates similar to commercial paper, which upon
maturity, may be replaced with commercial paper or other bank borrowings.
In addition, maturities in 2001 included in the 2000 table exclude $100
million of 6.050 percent notes due 2031 which will either be remarketed by the
holder of a call option on the debt and mature in 2031 or will otherwise be
repurchased by the Company in March 2001. Maturities in 2003 exclude $175
million of 6.530 percent notes due 2037, which may be redeemed in 2003 at the
option of the holder.
In February 2000, a put option on $100 million of medium-term notes paying a
coupon of 6.10 percent was exercised by the holders and the Company repaid the
holders primarily with proceeds from the issuance of commercial paper.
In April 2000, BNSF issued $300 million of 7.875 percent notes due April
2007 and $200 million of 8.125 percent debentures due April 2020. The net
proceeds of the debt issuance were used for general corporate purposes
including the repayment of outstanding commercial paper which increased
primarily as a result of higher share repurchases, as discussed above. At the
time of issuing the $300 million of 7.875 percent notes and the $200 million of
8.125 percent debentures discussed above, the Company closed out two treasury
lock transactions, each in an amount of $100 million, at gains of approximately
$9 million and $13 million, respectively, which have been deferred and are
being amortized to interest expense over the lives of the notes and the
debentures, respectively. Subsequent to this debt issuance, the Company had no
remaining capacity under the February 1999 shelf registration statement.
In April 2000, BNSF Railway issued $50 million of privately placed debt
collateralized by locomotives that were acquired in 1999. This debt carries an
interest rate of 7.77 percent and matures from April 2001 to 2015.
In May 2000, the Company filed a new shelf registration statement that
became effective during May 2000 for the issuance of debt securities which may
be issued in one or more series at an aggregate offering price not to exceed
$1 billion.
25
In August 2000, BNSF issued $275 million of 7.950 percent debentures due
August 2030 under the May 2000 shelf registration statement. The net proceeds
were used for general corporate purposes including the repayment of outstanding
commercial paper which increased primarily as a result of higher share
repurchases. At the time of issuing these debentures, the Company closed out a
treasury lock transaction in the amount of $100 million at a gain of
approximately $8 million which has been deferred and is being amortized to
interest expense over the life of the debentures. Subsequent to this issuance,
the Company had $725 million available for borrowing under the May 2000
registration statement.
In December 2000, BNSF issued $300 million of 7.125 percent notes due
December 2010 under the May 2000 shelf registration statement. The net proceeds
were used for general corporate purposes including the repayment of outstanding
commercial paper which increased primarily as a result of higher share
repurchases. At the time of issuing these debentures, the Company closed out a
treasury lock transaction in the amount of $100 million at a gain of
approximately $5 million which has been deferred and is being amortized to
interest expense over the life of the notes. Subsequent to this issuance, the
Company had $425 million available for borrowing under the May 2000
registration statement.
Treasury Locks
In anticipation of future debt issuances, BNSF entered into treasury lock
transactions, based on the 10-year and 30-year U.S. treasury rates. Treasury
locks outstanding as of December 31, 1999, are summarized in the table below.
There were no treasury locks outstanding at December 31, 2000. Additionally, as
discussed above, at the time of the debt issuances in April, August, and
December of 2000, BNSF closed out the $400 million of treasury lock
transactions scheduled to expire in 2000 and 2001 at a total gain of
approximately $35 million.
Maturity
December 31, 1999 Date
----------------- ---------- Fair
2000 2001 Total Value(1)
---- ---- ----- --------
Fixed Rate Treasury Locks (in millions).......... $200 $200 $400 $62
Average Pay Rate................................. 4.80% 4.84% 4.82% --
- --------
(1) Represents unrecognized gains in millions.
Commodity Price Sensitivity
Historically, fuel expenses have approximated 10 percent of total operating
expenses; however, fuel costs during 2000 represent 13 percent of total
operating expenses due to significantly higher fuel prices. Due to the
significance of diesel fuel expenses to the operations of BNSF and the
historical volatility of fuel prices, the Company maintains a program to hedge
against fluctuations in the price of its diesel fuel purchases. The intent of
the program is to protect the Company's operating margins and overall
profitability from adverse fuel price changes by entering into fuel hedge
instruments based on management's evaluation of current and expected diesel
fuel price trends. However, to the extent the Company hedges portions of its
fuel purchases, it may not realize the impact of decreases in fuel prices.
Conversely, to the extent the Company does not hedge portions of its fuel
purchases, it may be adversely affected by increases in fuel prices. The fuel-
hedging program includes the use of commodity swap transactions that are
accounted for as hedges. Any gains or losses associated with changes in the
market value of the fuel swaps are deferred and recognized as a component of
fuel expense in the period in which the fuel is purchased and used.
Swap transactions are typically based on the price of pipeline delivery of
Gulf Coast #2 heating oil and require BNSF to purchase a defined quantity at a
defined price. Swap transactions are generally settled with the counterparty in
cash. Based on historical information, BNSF believes there is a significant
correlation between the market prices of diesel fuel and Gulf Coast #2 heating
oil.
26
The tables below provide information about BNSF's diesel fuel hedging
instruments that are sensitive to changes in commodity prices. The tables
present notional amounts in gallons and the weighted average contract price by
contractual maturity date. The prices included in the tables do not include
taxes, transportation costs, certain other fuel handling costs and any
differences which may occur from time to time between the prices of commodities
hedged and the purchase price of BNSF's diesel fuel.
Maturity
December 31, 2000 Date
----------------- ----------- Fair
2001 2002 Total Value(1)
----- ----- ----- --------
Diesel Fuel Swaps:
Gallons (in millions)........................... 277 101 378 $74
Weighted average price per gallon............... $0.49 $0.50 $0.50 --
December 31, 1999 Maturity Date
----------------- ----------------- Fair
2000 2001 2002 Total Value(1)
----- ----- ----- ----- --------
Diesel Fuel Swaps:
Gallons (in millions)..................... 491 277 101 869 $37
Weighted average price per gallon......... $0.50 $0.49 $0.50 $0.50 --
- --------
(1) Represents unrecognized gains (in millions) based on the price of Gulf
Coast #2 heating oil.
Additionally, at December 31, 2000 and 1999, BNSF maintained fuel
inventories for use in normal operations which were not material to BNSFs
overall financial position and therefore represent no significant market
exposure.
Equity Price Sensitivity
In April 1999, BNSF sold equity put options for 0.1 million shares of BNSF
common stock to an independent third party and received cash proceeds of $0.1
million. The third party exercised the options on October 12, 1999, which
resulted in the Company purchasing 0.1 million shares of its common stock at
$29 per share. As of December 31, 2000 there were no equity put options
outstanding.
An equity put option is a financial instrument whereby BNSF receives an
upfront cash premium for granting another party the option to sell a defined
number of BNSF shares to the Company at a fixed price on a specified future
date. The Company considers the sale of equity put options as a method to
acquire its common stock at a share price consistent with its share repurchase
strategy and potentially reduce the all-in cost of the program. The Company's
risk is that it may be required to purchase shares at a specified price that is
higher than the common stock price at the exercise date of the equity put
option. The Company has the ability to settle its equity put option
transactions on a net share or net cash basis and accounts for the effects of
these transactions within stockholders' equity. The number of shares subject to
outstanding put options sold by the Company cannot exceed the amount of
remaining shares the Board of Directors has authorized for repurchase.
27
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements of BNSF and subsidiary companies,
together with the report thereon, are included as part of this filing.
(a) The following documents are filed as a part of this report:
Page
-------
1. Consolidated Financial Statements:
Report of PricewaterhouseCoopers LLP................................. [29]
Consolidated Statement of Income for the three years ended December
31, 2000............................................................ [30]
Consolidated Balance Sheet at December 31, 2000 and 1999............. [31]
Consolidated Statement of Cash Flows for the three years ended
December 31, 2000................................................... [32]
Consolidated Statement of Changes In Stockholders' Equity for the
three years ended December 31, 2000................................. [33]
Notes to Consolidated Financial Statements........................... [34-53]
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Directors of Burlington
Northern Santa Fe Corporation
and Subsidiaries
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Burlington Northern Santa Fe Corporation and subsidiary companies
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
appearing under Item 14 (a)(2) on page 54 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require