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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, 2001
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
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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 $10.639 billion on January 31, 2002. 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, 384,250,986 shares outstanding as of January 31,
2002.
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 .............................................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders ............................................ 8
EXECUTIVE OFFICERS OF THE REGISTRANT ................................................................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .......................... 9
Item 6. Selected Financial Data ........................................................................ 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................................... 22
Item 8. Financial Statements and Supplementary Data .................................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........... 49
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................ 50
Item 11. Executive Compensation ........................................................................ 50
Item 12. Security Ownership of Certain Beneficial Owners and Management ................................ 50
Item 13. Certain Relationships and Related Transactions ................................................ 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............................. 51
SIGNATURES ............................................................................................ S-1
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE ............................................................. F-1
EXHIBITS .............................................................................................. E-1
i
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, 2001, BNSF and its subsidiaries had approximately
39,000 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.
Track Configuration
As of December 31, 2001, BNSF Railway operates over a railroad system consisting
of approximately 33,000 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 8,000 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, 2001, the total BNSF Railway system, including first, second,
third and fourth main tracks, yard tracks, and sidings, consists of
approximately 50,000 operated miles of track, all of which are owned by or held
under easement by BNSF Railway except for approximately 8,300 miles operated
under trackage rights agreements with other parties. At December 31, 2001,
approximately 26,600 miles of BNSF Railway's track consists of 112-pound per
yard or heavier rail, including approximately 19,100 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, 2001 2000 1999
- ----------------------------------------------- ------ ------ ------
Diesel Locomotives 4,863 4,966 5,095
====== ====== ======
Locomotives Under Power Purchase Agreements 99 99 99
====== ====== ======
Freight Cars:
Box-general purpose 852 896 913
Box-specially equipped 8,720 9,785 10,111
Open Hopper 9,456 9,984 10,287
Covered Hopper 41,688 44,632 45,463
Gondola 12,158 12,415 12,753
Refrigerator 5,765 6,111 6,236
Autorack 4,673 4,775 4,799
Flat 6,143 6,389 6,468
Tank 477 480 482
Caboose 287 305 319
Other 480 727 728
------ ------ ------
Total Freight Cars 90,699 96,499 98,559
====== ====== ======
Domestic Containers 7,500 10,999 11,019
Trailers 2,200 2,201 2,213
Domestic Chassis 7,300 9,405 9,406
Company Service Cars 4,291 4,334 4,399
Commuter Passenger Cars 141 141 141
- ----------------------------------------------- ------ ------ ------
1
The average age from date of manufacture of the locomotive fleet at December 31,
2001 was 13 years; the average age from date of manufacture or remanufacture of
the freight car fleet at December 31, 2001 was 17 years. These averages are not
weighted to reflect the greater capacities of the newer equipment.
Capital Expenditures and Maintenance
BNSF Railway cash capital expenditures for the periods indicated were as
follows:
Year Ended December 31, 2001 2000 1999
- -------------------------------------------- ------- ------ ------
(in millions)
Maintenance of way
Rail $ 233 $ 210 $ 256
Ties 254 206 170
Surfacing 146 134 130
Other 335 285 254
- -------------------------------------------- ------- ------ ------
Total maintenance of way 968 835 810
Mechanical 183 221 240
Information services 69 66 74
Other 101 144 151
- -------------------------------------------- ------- ------ ------
Total maintenance of business 1,321 1,266 1,275
New locomotives and freight cars - - 261
Terminal and line expansion 126 99 233
Capitalized interest and other 12 34 19
------- ------ ------
Total cash capital expenditures $ 1,459 $1,399 $1,788
- -------------------------------------------- ======= ====== ======
The above table does not include expenditures for equipment financed through
operating leases (principally locomotives and rolling stock). BNSF's planned
2002 cash capital expenditures approximate $1.4 billion. Approximately $1.25
billion of the total planned capital expenditures 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 remainder to be spent on terminal and line expansions and
other projects.
As of December 31, 2001, General Electric Company and the Electro-Motive
Division of General Motors 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, 2001 2000 1999
- -------------------------------------------- ------- ------ ------
Track miles of rail laid (a) 891 738 942
Cross ties inserted (thousands) (a) 2,704 2,527 2,365
Track resurfaced (miles) 11,011 11,228 10,505
- -------------------------------------------- -------- ------ ------
(a) Includes expenditures for both maintenance of existing route system and
expansion projects. These expenditures are primarily capitalized.
BNSF Railway's planned 2002 track maintenance of way program, together with
expansion projects, will result in the installation of approximately 625 track
miles of rail, the replacement of about 2.2 million ties, and the resurfacing of
approximately 12,000 miles of track.
Property and Facilities
BNSF Railway operates various facilities and equipment to support its
transportation system, including its infrastructure and locomotives and freight
cars as described above. It also owns or leases other equipment to support rail
operations, including 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 36 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 2001 volume
were:
2
Intermodal Facilities Units
- -------------------------------------------------------------------
Hobart Yard (California) 1,041,000
Corwith Yard (Illinois) 739,000
Willow Springs (Illinois) 668,000
Chicago Hub Center (Illinois) 410,000
Alliance (Texas) 409,000
San Bernardino (California) 408,000
Argentine (Kansas) 257,000
- -------------------------------------------------------------------
BNSF Railway owns 26 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) 2,050
Galesburg (Illinois) 1,550
Pasco (Washington) 1,450
Barstow (California) 1,275
Memphis (Tennessee) 1,250
- -------------------------------------------------------------------
As of December 31, 2001, certain BNSF Railway properties and other assets are
subject to liens securing $425 million of mortgage debt. Certain locomotives and
rolling stock of BNSF Railway are subject to equipment obligations and leases,
as referred to in Notes 9 and 11 to the Consolidated Financial Statements.
Employees and Labor Relations
Productivity as measured by thousand revenue ton-miles per employee has risen
steadily in the last three years as shown in the table below.
Year Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------- ------ ------ ------
Thousand revenue ton-miles divided by average number of employees 12,796 12,342 11,564
Compensation and benefits expense per thousand revenue ton-miles $ 5.68 $ 5.55 $ 5.62
- ------------------------------------------------------------------- ------ ------ ------
Approximately 88 percent of BNSF Railway's employees are union-represented. BNSF
Railway's union employees 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 have remained in effect
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 (NCCC), BNSF's multi-employer
collective bargaining representative, reached a final agreement with the
Brotherhood of Maintenance of Way Employes (BMWE) resolving wage, work rule and
benefit issues through 2004 which was implemented in July 2001. BMWE represents
BNSF's track, bridge and building maintenance employees, or about one-fourth of
BNSF's unionized workforce. In June 2001, the NCCC reached a tentative agreement
with the International Brotherhood of Electrical Workers (IBEW), which
represents approximately 5 percent of BNSF's unionized workforce, addressing
wage and work rule issues through 2004, but leaving health and welfare benefit
issues for settlement in separate talks with other railroad unions. IBEW members
failed to ratify the tentative agreement. No new talks with IBEW are scheduled.
During the third quarter of 2000, the NCCC 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. This agreement is also
subject to ratification by the UTU's membership. As in the tentative IBEW
agreement, health and welfare benefit issues were not resolved with UTU and
remain the subject of continuing negotiations.
3
Railroad industry personnel are covered by the Railroad Retirement System
instead of Social Security. BNSF Railway's contributions under the Railroad
Retirement System have been approximately triple those in industries covered by
Social Security. The Railroad Retirement System, funded primarily by payroll
taxes on covered employers and employees, includes a benefit roughly equivalent
to Social Security (Tier I), an additional benefit similar to that allowed in
some private defined-benefit plans (Tier II), and other benefits. Investment of
Tier II Railroad Retirement assets has until recently been limited to special
interest-bearing U. S. Treasury securities. The Railroad Retirement and
Survivors' Improvement Act of 2001 (Act) creates a new National Railroad
Retirement Investment Trust to hold Tier II Railroad Retirement assets and
empowers the trustees to invest these assets in the same types of investments
available to private sector retirement plans. In addition to liberalizing
certain retirement benefit requirements for rail employees, the Act reduces Tier
II railroad retirement tax rates on rail employers beginning in 2002 and
eliminates a supplemental annuity tax. The Company expects to realize savings of
approximately $20 million in 2002 and $50 million in 2003. Future adjustments in
the Tier II Railroad Retirement tax rates assessed on both rail employers and
rail employees will depend on Railroad Retirement fund levels, and annual
savings could be as much as $80 million by 2005.
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, the Los Angeles Basin, 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
Bernadino, 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 Canadian National Railway Company
(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, Montana, North Dakota, and Washington, as
well as through interchange with 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.
Consumer Products: The consumer freight business provided approximately 37
percent of freight revenues in 2001 and consisted of the following seven types
of business:
. International. International business consists primarily of container
traffic from steamship companies and accounted for approximately 29 percent
of total Consumer Products revenues.
. Direct Marketing. Direct marketing generated approximately 23 percent of
total Consumer Products revenue. These center around intermodal 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.
4
. Truckload. Truckload traffic represented approximately 14 percent of total
Consumer Products revenue. This traffic is comprised of business through
the joint service arrangement with J.B. Hunt, as well as business from
Schneider National and other truckload carriers.
. 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 13 percent of 2001
total Consumer Products revenue.
. Intermodal Marketing Companies. Approximately 12 percent of total Consumer
Products revenue was generated through intermodal marketing companies,
primarily shipper agents and consolidators.
. Perishables and Dry Boxcar. Perishables and Dry Boxcar represented
approximately 9 percent of total Consumer Products revenue. This group
consists of beverages, canned goods and perishable food items. Other
consumer goods handled include cotton, salt, rubber and tires, and
miscellaneous boxcar shipments.
Industrial Products: Industrial Products' freight business provided
approximately 23 percent of BNSF's freight revenues in 2001 and consists of the
following four business areas:
. Construction Products. The construction products sector represented
approximately 36 percent of total Industrial Products revenue in 2001. This
sector serves virtually all of the commodities included in or resulting
from the production of steel along with mineral commodities such as clays,
sands, cements, aggregates, sodium compounds and other industrial minerals.
Industrial taconite, an iron ore derivative produced in northern Minnesota,
scrap steel and coal coke are BNSF Railway's primary input products
transported, 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. 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, are 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.
. Building Products. This sector includes primary forest product commodities
such as lumber, plywood, oriented strand board, particleboard, paper
products, pulpmill feedstocks, wood pulp and sawlogs, which resulted in
approximately 35 percent of total 2001 Industrial Products revenue. Also,
included in this sector are government, machinery and waste traffic. 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. Shipments of
waste, ranging from municipal waste to contaminated soil, are transported
to landfills and reclamation centers across the country. Government and
machinery business includes aircraft parts, agricultural and construction
machinery, military equipment and large industrial machinery.
. Chemicals and Plastics. The chemicals and plastics sector represents
approximately 16 percent of total 2001 Industrial Products revenue. This
group is composed of industrial chemicals and plastics commodities. These
commodities include caustic soda, chlorine, industrial gases, acids,
polyethylene, polypropylene and polyvinyl chloride. 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. These commodities originate primarily in the Gulf Coast
region for shipment mainly into domestic markets.
. Petroleum. Commodities included in the petroleum sector are liquefied
petroleum gas (LPG), diesel fuels, asphalt, alcohol/solvents, petroleum
coke, lubes/oils/waxes and carbon black, which made up 13 percent of total
Industrial Products revenue for 2001. Product use varies based on
commodity, and includes the use of LPG for heating purposes, diesel fuel
and lubes to run heavy machinery, and asphalt for road projects and
roofing. Products within this group originate and terminate throughout the
BNSF network with the largest areas of activities being the Texas Gulf,
Pacific Northwest, California, Montana and Illinois.
Coal: Based on carloadings and tons hauled, BNSF Railway is the largest
transporter of low-sulfur coal in the United States. The transportation of coal
contributed about 23 percent of 2001 freight 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, 2001. 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.
5
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 causing
power generators 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 Products: The transportation of Agricultural Products provided
approximately 17 percent of 2001 total freight 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, malt, ethanol and
fertilizer. 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, Texas Gulf
and Mexico.
Freight Statistics. The following table sets forth certain freight statistics
relating to rail operations for the periods indicated. Certain prior period
amounts have been restated for current classification.
Year Ended December 31, 2001 2000 1999
- -------------------------------------------------- ------- ------- -------
Revenue ton-miles (millions) 501,829 491,959 493,207
Freight revenue per thousand revenue ton-miles $ 18.11 $ 18.52 $ 18.40
Average length of haul (miles) 992 996 994
- -------------------------------------------------- ------- ------- -------
For revenue, cars/units and average revenue per unit information for the three
years ended December 31, 2001, see the revenue table included as part of Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Government Regulation and Legislation
Rail operations are subject to the regulatory jurisdiction of the Surface
Transportation Board (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
disputes and complaints involving certain rates, routes and services, the sale
or abandonment of rail lines, applications for line extensions and construction,
and consolidation or merger with, or acquisition of control of, rail common
carriers. The outcome of STB proceedings can affect the costs and profitability
of BNSF's business.
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 cleanup 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.
6
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 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.
As a condition to approval of the merger (UP/SP)of rail carriers controlled by
UP and Southern Pacific Transportation Company (SP), 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 UP
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 SP rail line between
Houston and New Orleans which were 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 division 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, CN acquired Illinois Central Corporation (IC). CN
is Canada's largest railroad and reaches the U.S. cities of Detroit and Chicago,
while IC had operations extending from Chicago to the Gulf of Mexico and west
through Iowa. In 2001, CN acquired Wisconsin Central, a regional railroad with
track and trackage rights in Illinois, Wisconsin, Minnesota, Michigan and the
province of Ontario.
ITEM 3. Legal Proceedings
In September 2001, BNSF Railway was notified by the Nebraska Department of
Environmental Quality of alleged environmental violations in connection with a
November 4, 2000, derailment in Scottsbluff, Nebraska, that involved hazardous
commodities. If not resolved, this matter could result in litigation brought by
the Nebraska Attorney General and monetary sanctions exceeding $100 thousand.
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 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.
Reference is made to Note 5 to the Consolidated Financial Statements for
information concerning certain pending administrative appeals with the Internal
Revenue Service.
7
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 2001.
Executive Officers of the Registrant
Listed below are the names, ages, and positions of all executive officers of
BNSF 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.
Matthew K. Rose, 42
President and Chief Executive Officer of BNSF since December 2000. Also,
Chairman, President and Chief Executive Officer of BNSF Railway. Previously,
President and Chief Operating Officer of BNSF from June 1999 to December 2000;
Senior Vice President and Chief Operations Officer from August 1997 to June
1999, and Senior Vice President-Merchandise Business Unit from May 1996 to
August 1997.
Thomas N. Hund, 48
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, 45
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, and Vice President-Chief
Mechanical Officer from December 1996.
Dennis R. Johnson, 40
Vice President and Controller since August 1999. Prior to that, Assistant Vice
President and Assistant Controller from January 1997.
Jeffrey R. Moreland, 57
Executive Vice President Law & Government Affairs and Secretary since December
2001. Prior to that, Executive Vice President-Law and Chief of Staff since
January 2001, 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, 54
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.
8
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, 2001, and the frequency and amount of dividends
declared on such stock during such periods, is set forth in Note 16 to the
Consolidated Financial Statements. The approximate number of holders of record
of the common stock at January 31, 2002, was 41,000.
ITEM 6. Selected Financial Data
The following table presents, as of and for the dates indicated, selected
historical financial information for the Company.
(Dollars in millions, except per share data)
--------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
-------------------------------------------- ------- ------- ------- ------- -------
FOR THE YEAR ENDED:
Revenues $ 9,208 $ 9,207 $ 9,195 $ 9,057 $ 8,489
Operating income $ 1,755 $ 2,108 $ 2,205 $ 2,158 $ 1,767
Net income $ 731 $ 980 $ 1,137 $ 1,155 $ 885
Basic earnings per share $ 1.89 $ 2.38 $ 2.46 $ 2.45 $ 1.91
Average shares (in millions) 387.3 412.1 463.2 470.5 464.4
Diluted earnings per share $ 1.87 $ 2.36 $ 2.44 $ 2.43 $ 1.88
Average shares (in millions) 390.7 415.2 466.8 476.2 471.1
Dividends declared per common share $ 0.48 $ 0.48 $ 0.48 $ 0.44 $ 0.40
-------------------------------------------- ------- ------- ------- ------- -------
AT YEAR END:
Total assets $24,721 $24,375 $23,700 $22,646 $21,266
Long-term debt and commercial paper,
including current portion $ 6,651 $ 6,846 $ 5,813 $ 5,456 $ 5,289
Stockholders' equity $ 7,849 $ 7,480 $ 8,172 $ 7,784 $ 6,822
Total debt to capital 45.9% 47.8% 41.6% 41.2% 43.7%
-------------------------------------------- ------- ------- ------- ------- -------
FOR THE YEAR ENDED:
Total capital expenditures $ 1,459 $ 1,399 $ 1,788 $ 2,147 $ 2,182
Depreciation and amortization $ 909 $ 895 $ 897 $ 832 $ 773
-------------------------------------------- ------- ------- ------- ------- -------
Certain prior period amounts have been reclassified for current presentation.
Effective September 1, 1998, the Company split its common shares three-for-one
through a stock dividend of two additional shares for each share outstanding
or held in treasury. All share and per share data for periods prior to this
date were adjusted for the stock split.
9
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.
Results of Operations
- ---------------------
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
BNSF recorded net income for 2001 of $731 million, or $1.87 per share, after a
first-quarter extraordinary charge of $6 million, net of tax, related to the
early extinguishment of a debt obligation, compared with net income for 2000 of
$980 million, or $2.36 per share. The decrease in net income and earnings per
share is primarily due to a $353 million decrease in operating income and $75
million in losses related to non-rail investments. The decrease in operating
income reflects increased compensation and benefits costs, higher fuel expenses
and higher materials and other costs, which included a $66 million
fourth-quarter charge for workforce reduction related costs. The favorable
effect of the common stock repurchase program on earnings per share partially
offset lower earnings in 2001 (see Liquidity and Capital Resources: Common Stock
Repurchase Program).
Revenue Table
The following table presents BNSF's revenue information by commodity for the
years ended December 31, 2001, 2000 and 1999, and includes certain
reclassifications of prior year information to conform to current year
presentation.
Average Revenue
Revenues Cars / Units Per Car / Unit
------------------------ ------------------------ ----------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------ ------ ------ ----- ----- ----- ------ ------ -----
(in millions) (in thousands)
Consumer Products $3,356 $3,405 $3,197 3,752 3,850 3,597 $ 894 $ 884 $ 889
Coal 2,123 2,131 2,226 2,133 2,023 2,123 995 1,053 1,049
Industrial Products 2,080 2,114 2,108 1,442 1,501 1,508 1,442 1,408 1,398
Agricultural Products 1,531 1,462 1,543 828 793 836 1,849 1,844 1,846
------ ------ ------ ----- ----- ----- ------ ------ ------
Total Freight Revenues 9,090 9,112 9,074 8,155 8,167 8,064 $1,115 $1,116 $1,125
===== ===== ===== ====== ====== ======
Other Revenues 118 95 121
- ------------------------------- ------ ------ ------
Total Operating Revenues $9,208 $9,207 $9,195
====== ====== ======
Revenues
Total revenues of $9,208 million for 2001 were essentially flat compared with
2000. In 2001, the sluggish economy hampered BNSF's revenue growth; although,
based on reporting to the Association of American Railroads (AAR), BNSF's share
of the western United States rail traffic market remained essentially unchanged
at approximately 43 percent.
Consumer Products revenues of $3,356 million for 2001 were $49 million, or 1
percent, less than 2000 due to decreased loadings in the LTL sector and the loss
in late 2000 of some automotive contract business as well as decreases in the
automotive sector as a result of sluggish industry-wide sales. Additionally, a
significant automotive contract was lost at the end of the third quarter of 2001
and is expected to affect future automotive revenues. These declines were
partially offset by a ten percent growth in the intermodal truckload business,
increased international revenues, increases in dry boxcar business due to strong
beverage shipments, and a $32 million favorable transportation contract
settlement in automotive revenues.
Coal revenues of $2,123 million for 2001 decreased $8 million from 2000 revenues
of $2,131 million. The decrease in revenues was primarily a result of lower
revenue per car on certain contract renewals, partially offset by a 6 percent
increase in coal tons shipped due to colder weather, tight eastern coal supplies
and high natural gas prices.
Industrial Products revenues of $2,080 million for 2001 were $34 million, or 2
percent, lower than 2000, despite increased revenue per car as a result of
selected price increases and increased length of haul. Revenues for the year
fell due to continued production cutbacks affecting most sectors. These
decreases were partially offset by increases in the petroleum products sector
resulting from increases in LPG and asphalt shipments.
10
Agricultural Products revenues of $1,531 million for 2001 were $69 million, or 5
percent, higher than revenues for 2000 primarily due to an increased demand for
corn, soybean and oilseed/meals, partially offset by a decline in fertilizer
shipments. Additionally, average revenue per car increased due to increases in
length of haul.
Expenses
Year Ended December 31, 2001 2000 1999
- ---------------------------------- -------- -------- --------
(in millions)
Compensation and benefits $ 2,850 $ 2,729 $ 2,772
Purchased services 1,084 1,024 1,051
Depreciation and amortization 909 895 897
Equipment rents 740 742 752
Fuel 973 932 700
Materials and other 897 777 818
- ---------------------------------- -------- -------- --------
Total operating expenses $ 7,453 $ 7,099 $ 6,990
- ---------------------------------- -------- -------- --------
Interest expense $ 463 $ 453 $ 387
- ---------------------------------- -------- -------- --------
Other expense (income), net $ 110 $ 70 $ (1)
- ---------------------------------- -------- -------- --------
Total operating expenses for 2001 were $7,453 million, an increase of $354
million, or 5 percent, over 2000 primarily due to: (i) increased compensation
and benefits of $121 million related to higher wages and increased health and
welfare costs offset by efficiency gains as measured by gross ton-miles (GTM)
per employee and reduced headcounts; (ii) workforce reduction related costs of
$66 million; (iii) higher fuel prices; and (iv) flooding in the upper Midwest
and more severe winter weather conditions early in 2001 which increased expenses
compared to 2000.
Compensation and benefits expenses of $2,850 million were $121 million, or 4
percent, higher than 2000 primarily due to wage rate increases and higher
benefit rates. In addition, scheduled wages were significantly higher in the
first and second quarters as a result of more severe weather conditions
requiring increased maintenance and additional crews. These increases were
partially offset by lower employment levels.
Purchased services of $1,084 million for 2001 were $60 million, or 6 percent,
higher than 2000 due to higher ramping expenses incurred as a result of new
services added which improve efficiency and safety at the intermodal ramp
facilities, decreased recoveries as compared with the prior year, increased
legal expense primarily related to coal rate disputes, higher contract equipment
maintenance costs due to more locomotives under maintenance contracts, increased
haulage expense, and increased other expenses as a result of flooding in the
upper Midwest in the early part of the year.
Depreciation and amortization expenses of $909 million for 2001 were $14
million, or 2 percent, higher than 2000 primarily due to a higher capital base.
Equipment rents expenses for 2001 of $740 million were $2 million lower than
2000 reflecting reduced equipment levels, including cars, trailers, containers
and automotive equipment.
Fuel expenses of $973 million for 2001 were $41 million, or 4 percent, higher
than 2000 primarily as a result of a 3-cent increase in the average all-in cost
per gallon of diesel fuel. Consumption in 2001 was 1,177 million gallons
compared with 1,173 million gallons in 2000. However, GTM per gallon increased
to 762 from 746, or 2 percent, compared with 2000, attributable to newer
locomotive fleet, fuel economy initiatives during the year, and commodity mix.
The 3-cent increase in the average all-in cost per gallon of diesel fuel is net
of a 6-cent decrease in the average purchase price more than offset by a 9-cent
decrease in the hedge benefit per gallon as compared with a 13-cent hedge
benefit in 2000.
Materials and other expenses of $897 million for 2001 were $120 million, or 15
percent, higher than 2000 principally reflecting: (i) workforce reduction costs
of $66 million incurred in the fourth quarter of 2001 for severance, pension,
medical, benefit and other related costs for approximately 400 positions (see
Other Matters: Employee Merger and Separation Costs); (ii) increases in
environmental and casualty expenses compared with 2000; (iii) lower income from
easements; and (iv) increased costs caused by flooding in the upper Midwest and
higher utilities as a result of higher rates and increased consumption due to
more severe winter weather conditions early in 2001. Additionally, during 2000
the Company incurred $42 million of charges due to employee related severance,
medical and other benefit costs and the loss of previously earned state tax
incentives.
Interest expense of $463 million for 2001 was $10 million, or 2 percent, higher
than 2000 reflecting higher average debt levels, partially offset by lower
interest rates.
11
Other expense was $40 million higher compared with 2000 primarily due to $75
million in losses recognized related to non-rail investments and fewer land
sales in 2001. The non-rail investments consisted of FreightWise, Inc., an
Internet transportation exchange; Pathnet Telecommunications, Inc., a
telecommunications venture; a portfolio of other non-core real-estate
investments; and a decline in the cash surrender value of company owned life
insurance policies. Offsetting the above were $20 million of 2000 expenses
related to the termination of the proposed BNSF business combination with
Canadian National Railway Company (CN).
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Net income in 2000 was $980 million, or $2.36 per share, compared with $1,137
million, or $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 pretax in connection
with prior period line sales, less costs of $13 million pretax 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 $9,207 million or $12 million higher than 1999
revenues of $9,195 million. The $12 million increase primarily reflects
increases in the Consumer and Industrial Products sectors partially offset by
lower Coal and Agricultural Products 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 continued into 2001. During 2000, based on reporting to the AAR, BNSF's
share of the western United States rail traffic market decreased 0.4 point to
43.1 percent.
Consumer Products revenues of $3,405 million improved $208 million, or 7
percent, compared with 1999 reflecting increases in the automotive,
international, truckload, and perishable 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. The growth in perishables was from the success of new
service offerings and a partial recapture of the truck market. Automotive
revenues increases were reflected by industry-wide automobile production for
most of the year and more profitable longer haul traffic despite essentially
flat volumes year-over-year. Increases in truckload revenues were partially
offset by decreases in the direct marketing sector due to decreased loadings
within the LTL sector and in the IMC sector due to pricing pressures and strong
over the road competition.
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.
Industrial Products revenues of $2,114 million for 2000 were $6 million higher
than 1999 due to increases from the metals and minerals sectors, partially
offset by decreased chemicals, forest products and machinery revenues. The
metals sector increases were a result of a strong market for steel 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.
Agricultural Products revenues of $1,462 million for 2000 were $81 million, or 5
percent, lower than 1999 primarily due 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.
Expenses
Total operating expenses for 2000 were $7,099 million, an increase of $109
million, or 2 percent, compared with operating expenses for 1999 of $6,990
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 $1,024 million for 2000 were $27 million, or 3 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.
12
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 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 increase in hedge benefit 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 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 expense was $71 million higher compared with 1999 primarily due to a $50
million pretax 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 pretax of expenses related to the termination of the
proposed combination with CN.
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, through the leasing of assets, and through the sale
of a portion of its accounts receivable.
OPERATING ACTIVITIES
Net cash provided by operating activities was $2,197 million during 2001
compared with $2,317 million during 2000. The decrease in cash from operations
was primarily due to a decrease in net income and deferred income taxes, and the
receipt of a non-recurring $43 million special dividend from the Company's
equity investment in TTX Company in the first quarter 2000. The decrease was
partially offset by a $105 million increase in cash from operations resulting
from changes in working capital. During 2001, the Company sold an additional $25
million of its accounts receivable under the accounts receivable sales program
(A/R sales program).
INVESTING ACTIVITIES
Net cash used for investing activities was $1,564 million during 2001 compared
with $1,680 million during 2000. The decrease in cash used primarily reflects
the temporary acquisition of equipment in 2000 that the company ultimately sold
and leased back through operating leases in 2001 and 2000 expenditures relating
to FreightWise, Inc. These reductions are partially offset by an increase in
cash capital expenditures.
13
A breakdown of cash capital expenditures during 2001, 2000 and 1999 is set forth
in the following table:
Year Ended December 31, 2001 2000 1999
- ------------------------------------- ------- ------- -------
(in millions)
Maintenance of way $ 968 $ 835 $ 810
Mechanical 183 221 240
Information services 69 66 74
Other 101 144 151
- ------------------------------------- ------- ------- -------
Total maintenance of business $ 1,321 $ 1,266 $ 1,275
New locomotives and freight cars - - 261
Expansion and other 138 133 252
- ------------------------------------- ------- ------- -------
Total $ 1,459 $ 1,399 $ 1,788
- ------------------------------------- ======= ======= =======
BNSF acquired all of the 100 locomotives it committed to acquire in 2001 through
operating leases.
FINANCING ACTIVITIES
Net cash used for financing activities during 2001 was $618 million primarily
related to common stock repurchases of $317 million, a net reduction in
borrowings of $206 million and dividend payments of $190 million, partially
offset by proceeds of $113 million resulting from the exercise of 5.3 million
stock options.
In March 2001, $100 million of 33-year remarketable bonds issued in 1998 were
called by the holder of the call option. BNSF subsequently purchased the option
from the holder and retired the bonds and incurred an extraordinary loss of $6
million, net of tax, due to early retirement. Additionally, in March 2001, BNSF
issued a $12 million, 5.96 percent note due April 2004.
In May 2001, the Company increased the amount of debt securities under its shelf
registration, enabling it to issue debt securities in one or more series at an
aggregate offering price not to exceed $1 billion, and issued $400 million of
6.75 percent notes due July 15, 2011. The net proceeds of the debt issuance were
used for general corporate purposes including the repayment of outstanding
commercial paper. Subsequent to this debt issuance, the Company had $600 million
of capacity under the May 2001 shelf registration statement.
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 7.88 percent notes due April 2007 and
$200 million of 8.13 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 7.88 percent notes
and the $200 million of 8.13 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.
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 has annual maturities through 2015.
In August 2000, BNSF issued $275 million of 7.95 percent debentures due August
2030. 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.
In December 2000, BNSF issued $300 million of 7.13 percent notes due December
2010. 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 notes, 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.
14
Aggregate long-term debt to mature in 2002 is $288 million. BNSF's ratio of
total debt to total capital was 45.9 percent at December 31, 2001, compared with
47.8 percent at December 31, 2000, and 41.6 percent at December 31, 1999.
FREE CASH FLOW
BNSF generated free cash flow (calculated as cash flow from operations less
capital expenditures, other investing activities and dividends paid) of $443
million, $431 million and $260 million during 2001, 2000 and 1999, respectively.
DIVIDENDS
Common stock dividends declared were $0.48 per share annually for 2001, 2000 and
1999. Dividends paid on common stock were $190 million, $206 million and $224
million during 2001, 2000 and 1999, respectively. On January 17, 2002, the Board
of Directors (the Board) declared a quarterly dividend of 12 cents per share on
outstanding shares of common stock, $0.01 par value, payable April 1, 2002, to
stockholders of record on March 11, 2002.
COMMON STOCK REPURCHASE PROGRAM
In July 1997, the Board 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 authorized extensions of the BNSF
share-repurchase program, adding 30 million shares at each date to the total
shares previously authorized bringing BNSF's share-repurchase program to 120
million shares. During 2001, 2000 and 1999, the Company repurchased
approximately 11 million, 65 million, and 22 million shares, respectively, of
its common stock at average prices of $27.76 per share, $23.16 per share, and
$31.08 per share, respectively. Total repurchases through December 31, 2001,
were 103 million shares at a total average cost of $25.74 per share, leaving 17
million shares available for repurchase out of the 120 million shares
authorized.
LONG TERM DEBT AND LEASE OBLIGATIONS
The Company's business is capital intensive. BNSF has historically generated a
significant amount of cash from operating activities which it uses to fund
capital additions, service debt and pay dividends. Additionally, the Company
relies on access to the debt and leasing markets to finance a portion of capital
additions on a long-term basis. Free cash flow has also been used in recent
years to repurchase common stock.
The Company utilizes a commercial paper program backed by bank revolving credit
agreements to manage liquidity needs. The information below summarizes the more
significant obligations of the Company at December 31, 2001. For 2002 and the
foreseeable future, the Company expects that cash flow from operating
activities, access to capital markets and bank revolving credit agreements will
be sufficient to enable the Company to meet its obligations when due. The
Company believes these sources of funds will also be sufficient to fund capital
additions that are necessary to maintain its competitiveness and position the
Company for future revenue growth.
The Company's ratio of earnings to fixed charges was 2.73 times for the year
ended December 31, 2001. Additionally, the Company's ratio of net cash flow
provided by operating activities divided by total average debt was 33 percent
for the year ended December 31, 2001.
The following table summarizes the Company's obligations under long-term debt
and lease obligations at December 31, 2001:
Payments Due By Period
---------------------------------------------------
1 Year 2 - 3 4 - 5
Total or Less Years Years Thereafter
-------- ------- ------- ------- ----------
(in millions)
Long-term debt(a) $ 5,979 $ 221 $ 248 $ 1,132 $ 4,378
Capital lease obligations(b) 856 107 214 205 330
Operating leases(b) 5,187 404 769 668 3,346
-------- ------- ------- ------- ----------
Total $ 12,022 $ 732 $ 1,231 $ 2,005 $ 8,054
======== ======= ======= ======= ==========
(a) Excluding capital lease obligations
(b) Gross payments due which include an interest component
In addition to the obligations described above, the Company acts as guarantor
for certain debt and lease obligations of others. BNSF does not expect to
perform under these guarantees in the foreseeable future. See Notes 9 and 11 to
the Consolidated Financial Statements.
15
In the normal course of business, the Company enters into long-term contractual
requirements for future goods and services needed for the operations of the
business. Such commitments are not in excess of expected requirements and are
not reasonably likely to result in performance penalties or payments that would
have a material adverse affect on the Company's liquidity.
CREDIT AGREEMENTS
BNSF issues commercial paper from time to time which is supported by revolving
credit agreements. At December 31, 2001 and 2000, there were no bank borrowings
against the revolving credit agreements. Outstanding commercial paper balances
are considered as reducing the amount of borrowings available under these
agreements. The bank revolving credit agreements allow borrowings of up to $1.75
billion. 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 borrowing capacity
under these facilities. The commitments of the lenders under the short-term
agreement allow borrowings of up to $1.0 billion and are scheduled to expire in
June 2002. The Company has the ability to have any amounts then outstanding
mature as late as June 2003. The remaining $750 million of commitments of the
lenders under the long-term agreement are scheduled to expire in June 2005.
Annual facility fees for the short-term and long-term facilities 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.
The maturity value of commercial paper outstanding at December 31, 2001, was
$416 million, reducing the total capacity available under the revolving credit
agreements to $1,334 million. BNSF must maintain compliance with certain
financial covenants under its revolving credit agreements.
The revolving credit agreements include covenants and events of default typical
for this type of facility, including a minimum consolidated tangible net worth
test, a maximum debt/capital test, and a $75 million cross-default provision. At
December 31, 2001, the Company was in compliance with its debt covenants. BNSF's
tangible net worth is $3.4 billion greater than the minimum consolidated
tangible net worth required under the agreement, and the maximum debt/capital
test provides approximately $4.6 billion of debt capacity above BNSF's
outstanding debt as of December 31, 2001, before an event of default would occur
under these covenants. With the exception of a voluntary bankruptcy or
insolvency, any event of default has either or both, a cure period or notice
requirement before termination of the agreements. A voluntary bankruptcy or
insolvency would be considered an immediate termination event.
SALE OF ACCOUNTS RECEIVABLE
BNSF's A/R sales program, as described in Note 6 of the Consolidated Financial
Statements, includes a provision that allows the institutions participating in
this program, at their option, to cancel the program if BNSF Railway's senior
unsecured credit rating falls below investment grade. Upon cancellation, BNSF
would not be able to sell additional receivables under this program. If such
event were to occur, BNSF would expect to have sufficient liquidity remaining
under its revolving credit agreements to fund the full amount of securities
outstanding under the sales program. The receivable facility expires in 2002 and
the Company intends to renew this facility under similar terms.
The Company is not aware of any pending significant adverse changes to its
credit rating that would cause it or BNSF Railway to fall below investment
grade.
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 $173 million, $178 million and $179 million in 2001,
2000 and 1999, respectively. At December 31, 2001 and 2000, the Company had
recorded liabilities of $458 million and $436 million, respectively, related to
both asserted and unasserted personal injury claims.
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
16
leased to commercial or industrial companies whose activities may have resulted
in discharges onto the property. As a result, BNSF is subject to environmental
cleanup 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 cleanup 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 cleanup costs at approximately 30 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
cleanup 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 cleanup
costs are initially recorded when BNSF's liability for environmental cleanup 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
cleanup, and historical trend analyses.
BNSF is involved in a number of administrative and judicial proceedings and
other mandatory cleanup efforts at approximately 390 sites, including the
Superfund sites, at which it is participating in the study or cleanup, or both,
of alleged environmental contamination. BNSF paid approximately $72 million, $49
million and $67 million during 2001, 2000 and 1999, respectively, for mandatory
and unasserted cleanup efforts, including amounts expended under federal and
state voluntary cleanup programs. BNSF has recorded liabilities for remediation
and restoration of all known sites of $202 million at December 31, 2001,
compared with $223 million at December 31, 2000. BNSF anticipates that the
majority of the accrued costs at December 31, 2001, 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 cleanup 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 cleanup
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 it is unlikely any identified matters, either individually
or in the aggregate, will have a material adverse effect on BNSF's 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.
17
EMPLOYEE MERGER AND SEPARATION COSTS
Employee merger and separation costs activity was as follows (in millions):
2001 2000 1999
- ------------------------------------------- ------ ------ ------
Beginning balance at January 1, $ 310 $ 356 $ 474
Accruals 30 22 29
Payments (55) (58) (93)
Other (11) (10) (54)
- ------------------------------------------- ------ ------ ------
Ending balance at December 31, $ 274 $ 310 $ 356
- ------------------------------------------- ====== ====== ======
Employee merger and separation liabilities of $274 million and $310 million are
included in the consolidated balance sheets at December 31, 2001 and 2000,
respectively, and principally represent: (i) employee-related severance costs
for the consolidation of clerical functions, material handlers in mechanical
shops and trainmen on reserve boards; (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 in Materials and Other in the consolidated
income statements. At December 31, 2001, $58 million of the remaining
liabilities are included in current liabilities for anticipated costs to be paid
in 2002.
During the fourth quarter of 2001, the Company recorded a $66 million charge
including $61 million for workforce reduction related costs. Of the $61 million,
$30 million was recorded in Employee Merger and Separation Costs and $31 million
was recorded for benefits to be received under the Company's retirement and
medical plans.
Consolidation of Clerical Functions
Liabilities related to the consolidation of clerical functions were $69 million
and $96 million at December 31, 2001 and 2000, 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 2001, 2000 and 1999, the Company recorded $6 million, $10 million and $54
million, respectively, of reversals for certain liabilities associated with the
consolidation plan. These liabilities related to planned workforce 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, 2001, 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.
In the fourth quarter of 2001, the Company recorded a charge of $9 million of
costs related to the reduction of approximately 40 material handlers and other
clerical positions. 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, 2001, 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 $170
million and $183 million at December 31, 2001 and 2000, 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 2001, the Company recorded a $5 million
reversal of certain deferred benefits payable to reflect a change in estimates.
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 $100 thousand at December 31,
2001, will be paid during the next year 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 fourth quarter 2001 workforce reduction, the
second quarter 1999 reorganization, and the Merger were $35 million and $30
million at December 31, 2001 and 2000, respectively. These costs will be paid
over the next several years based on deferral elections made by the employees.
During the fourth quarter of 2001, the Company reduced 400 positions through
severance, normal attrition and the elimination of contractors. The Company
recorded $21 million of expenses for severance, medical and other benefits
associated with the costs of terminating 360 employees and approximately $31
million for benefits to be received under
18
the Company's retirement and medical plans. Substantially all of these planned
reductions were completed at December 31, 2001.
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. 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. Components of
the costs include approximately $29 million relating to severance costs for
non-union employees and approximately $16 million for benefits to be received
under the Company's retirement and medical plans. Substantially all of the
planned reductions were made by September 30, 1999.
HEDGING ACTIVITIES
On January 1, 2001, BNSF adopted Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,
and recorded a cumulative transition benefit of $58 million, net of tax, to
Accumulated Other Comprehensive Income (AOCI). The standard requires that all
derivatives be recorded on the balance sheet at fair value and establishes
criteria for documentation and measurement of hedging activities.
The Company currently uses derivatives to hedge against increases in diesel fuel
prices and interest rates as well as to convert a portion of its fixed-rate
long-term debt to floating-rate debt. The Company formally documents the
relationship between the hedging instrument and the hedged item, as well as the
risk management objective and strategy for the use of the hedging instrument.
This documentation includes linking the derivatives that are designated as fair
value or cash flow hedges to specific assets or liabilities on the balance
sheet, commitments or forecasted transactions. The Company assesses at the time
a derivative contract is entered into, and at least quarterly, whether the
derivative item is effective in offsetting the changes in fair value or cash
flows. Any change in fair value resulting from ineffectiveness, as defined by
SFAS No. 133, is recognized in current period earnings. For derivative
instruments that are designated and qualify as cash flow hedges, the effective
portion of the gain or loss on the derivative instrument is recorded in AOCI as
a separate component of Stockholders' Equity and reclassified into earnings in
the period during which the hedge transaction affects earnings.
BNSF monitors its hedging positions and credit ratings of its counterparties and
does not anticipate losses due to counterparty nonperformance.
Fuel
Fuel costs represented 13 percent of total operating expenses during 2001 and
2000. 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. Based on
annualized fuel consumption during 2001 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.
The fuel-hedging program includes the use of derivatives that are accounted for
as cash flow hedges. As of December 31, 2001, BNSF had entered into fuel swap
agreements utilizing Gulf Coast #2 heating oil to hedge the equivalent of
approximately 296 million gallons of diesel fuel at an average price of
approximately 57 cents per gallon. Additionally, as of December 31, 2001, BNSF
had entered into costless collar agreements effective through 2002 for the
equivalent of approximately 50 million gallons of diesel fuel at an average call
price of approximately 65 cents per gallon and an average put price of
approximately 57 cents per gallon. The above prices 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. At December 31, 2001, BNSF's
fuel-hedging program covered an average of 31 percent of estimated fuel
purchases for 2002. Hedge positions are closely monitored to ensure that they
will not exceed actual fuel requirements in any period.
As a result of adopting SFAS No. 133, the Company recorded a cumulative
transition benefit of $56 million, net of tax, to AOCI related to deferred gains
on transactions as of January 1, 2001. Subsequent changes in fair value for the
effective portion of derivatives qualifying as hedges are recognized in Other
Comprehensive Income (OCI) until the purchase of the related hedged item is
recognized in earnings, at which time changes in fair value previously recorded
in OCI are reclassified to earnings and recognized in fuel expense. During 2001,
the Company recognized a loss of approximately
19
$100 thousand related to the ineffective portion of derivatives in fuel expense.
At December 31, 2001, AOCI includes a pretax loss of $4 million, all of which
relates to derivative transactions that will expire throughout 2002. Settled
fuel hedging contracts are a $3 million payable and a $50 million receivable at
December 31, 2001 and 2000, respectively, and are recorded in working capital.
BNSF measures the fair value of fuel swaps from daily forward price data
provided by various external counterparties. To value a fuel swap, the Company
uses a 3-month average of forward Gulf Coast #2 heating oil prices for the
period hedged. The fair value of fuel costless collars is calculated and
provided by the corresponding counterparty.
Between December 31, 2001 and January 31, 2002, the Company entered into
additional fuel hedge transactions to hedge the equivalent of approximately 54
million gallons of diesel fuel in 2002 at an average price of 55 cents per
gallon. At January 31, 2002, BNSF's fuel hedging program covered approximately
35 percent of estimated fuel purchases for 2002.
In addition, between December 31, 2001 and January 31, 2002, the Company entered
into fuel swap agreements utilizing West Texas Intermediate (WTI) crude oil to
hedge the equivalent of approximately 101 million and 50 million gallons of
diesel fuel for 2003 and 2004, respectively, at an average price of $20.58 per
barrel.
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 as well as
to convert a portion of its fixed-rate long-term debt to floating-rate debt. The
Company uses interest rate swaps as part of its interest rate risk management
strategy.
The cumulative transition benefit of adopting SFAS No. 133 as of January 1,
2001, included $2 million, net of tax, related to deferred gains on closed-out
derivatives which were used to lock the treasury rate on anticipated borrowings.
The deferred gains for cash flow hedges in AOCI are being amortized to interest
expense over the amount remaining in AOCI.
Cash Flow Hedges
- ----------------
The Company uses interest rate swaps to fix the LIBOR component of commercial
paper. These swaps are accounted for as cash flow hedges under SFAS No. 133 and
qualify for the short cut method of recognition. As of December 31, 2001, BNSF
had entered into five separate interest rate swaps to fix the LIBOR component of
$200 million of commercial paper at an average rate of 3.86 percent. The average
floating rate BNSF received on the swaps, which fluctuates monthly, was 1.95
percent as of December 31, 2001. These swaps will expire in 2002 and 2003. As of
December 31, 2001, AOCI included a pretax loss of $2 million related to the fair
value of these interest rate swaps.
Fair Value Hedges
- -----------------
The Company also enters into interest rate swaps to convert fixed-rate debt to
floating-rate debt. These swaps are accounted for as fair value hedges under
SFAS No. 133. These fair value hedges qualify for the short cut method of
recognition and, therefore, no portion of these swaps is treated as ineffective.
As of December 31, 2001, BNSF had entered into five separate swaps on a notional
amount of $500 million in which it pays an average floating rate, which
fluctuates quarterly, based on LIBOR. The average floating rate to be paid by
BNSF as of December 31, 2001, was 4.16 percent and the average fixed rate BNSF
is to receive is 7.13 percent. These swaps expire in 2004, 2005 and 2007. As of
December 31, 2001, BNSF recorded an asset of $2 million in Other Current Assets
for the fair value of these swaps.
BNSF's measurement of the fair value of interest rate swaps is based on
estimates of the mid-market values for the transactions provided by the
counterparties to these agreements.
LABOR
Approximately 88 percent of BNSF Railway's employees are union-represented. BNSF
Railway's union employees 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 have remained in effect
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 (NCCC), BNSF's multi-employer
collective bargaining representative, reached a final agreement with the
Brotherhood of Maintenance of Way Employes (BMWE) resolving wage, work rule and
benefit issues through 2004 which was implemented in July 2001. BMWE represents
BNSF's track, bridge and building maintenance employees, about one-fourth of
BNSF's unionized workforce. In June 2001, the NCCC reached a tentative agreement
20
with the International Brotherhood of Electrical Workers (IBEW), which
represents approximately five percent of BNSF's unionized workforce, addressing
wage and work rule issues through 2004, but leaving health and welfare benefit
issues for settlement in separate talks with other railroad unions. IBEW members
failed to ratify the tentative agreement. No new talks with IBEW are scheduled.
During the third quarter of 2000, the NCCC 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. This agreement is also
subject to ratification by the UTU's membership. As in the tentative IBEW
agreement, health and welfare benefit issues were not resolved with UTU and
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 have been approximately triple those in industries covered by
Social Security. The Railroad Retirement System, funded primarily by payroll
taxes on covered employers and employees, includes a benefit roughly equivalent
to Social Security (Tier I), an additional benefit similar to that allowed in
some private defined-benefit plans (Tier II), and other benefits. Investment of
Tier II Railroad Retirement assets has until recently been limited to special
interest-bearing U. S. Treasury securities. The Railroad Retirement and
Survivors' Improvement Act (Act) of 2001 creates a new National Railroad
Retirement Investment Trust to hold Tier II Railroad Retirement assets and
empowers the trustees to invest these assets in the same types of investments
available to private sector retirement plans. In addition to liberalizing
certain retirement benefit requirements for rail employees, the Act reduces Tier
II railroad retirement tax rates on rail employers beginning in 2002 and
eliminates a supplemental annuity tax. The Company expects to realize savings of
approximately $20 million in 2002 and $50 million in 2003. Future adjustments in
the Tier II Railroad Retirement tax rates assessed on both rail employers and
rail employees will depend on Railroad Retirement fund levels and annual savings
could be as much as $80 million by 2005.
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
The Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business
Combinations, which was effective for all business combinations initiated after
June 30, 2001, and SFAS No. 142, Goodwill and Other Intangible Assets, which was
effective for fiscal years beginning after December 15, 2001. SFAS No. 141
eliminates the pooling method of accounting for a business combination and
requires that all combinations be accounted for using the purchase method. SFAS
No. 142 addresses accounting for identifiable intangible assets, eliminates the
amortization of goodwill, and provides specific steps for testing the impairment
of goodwill. The Company's historical consolidated financial statements will be
unaffected by these new standards.
The FASB also issued SFAS No. 143, Accounting for Asset Retirement Obligations,
and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 143, which is effective for fiscal years beginning after June
15, 2002, addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The Company has not yet completed its analysis of SFAS
No. 143, although it does not currently expect implementation to have a
significant effect on its results of operations or financial condition.
SFAS No. 144 addresses financial accounting and reporting for the impairment of
long-lived assets, excluding goodwill and intangible assets, to be held and used
or disposed of. The adoption of SFAS No. 144 during the fourth quarter of 2001
did not have an impact on the consolidated financial statements.
FORWARD-LOOKING INFORMATION
To the extent that statements made by the Company 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. 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, both within the United States and globally, customer
demand, effects of adverse economic conditions affecting shippers, adverse
economic conditions in the industries and geographic areas that produce and
consume freight, competition and consolidation within the transportation
industry, the extent to which the Company is successful in gaining new long-term
relationships or retaining existing ones, changes in fuel prices, and changes in
labor costs and labor difficulties including stoppages; legal and regulatory
factors: developments and changes
21
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, the Company's
ability to achieve its operational and financial initiatives and to contain
costs, as well as natural events such as severe weather, floods, earthquakes and
other disruptions involving the Company's infrastructure, operating systems, and
equipment.
The Company cautions against placing undue reliance on forward-looking
statements, which reflect its current beliefs and are based on information
currently available to it on the date a forward-looking statement is made. The
Company undertakes no obligation to revise forward-looking statements to reflect
future events, changes in circumstances or changes in beliefs.
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 qualitative and
quantitative information presented in the Management's Discussion and Analysis
of Financial Condition and Results of Operations section and Notes 3 and 9 of
the Consolidated Financial Statements describe significant aspects of BNSF's
financial instrument programs, which have a material market risk.
Interest Rate Sensitivity
From time to time, BNSF enters into various interest rate-hedging transactions
for purposes of managing exposure to fluctuations in interest rates and
establishing rates in anticipation of future debt issuances as well as to
convert a portion of its fixed-rate long-term debt to floating-rate debt to
manage its ratio of fixed-rate debt to floating-rate debt. BNSF's measurement of
fair value of interest rate swaps is based on estimates of the mid-market values
for the transactions provided by the counterparties to these agreements.
As discussed in Note 3 in the Consolidated Financial Statements, the Company
uses several types of interest rate swaps to minimize exposure to risk. These
swaps are accounted for as cash flow or fair value hedges under SFAS No. 133.
All swap transactions outstanding with an interest rate component are reflected
in the table below.
December 31, 2001
-----------------------------------------------------------------------------
Maturity Date
-------------------------------------------------------
There- Fair
2002 2003 2004 2005 2006 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Cash Flow Hedges
- ----------------
Variable to Fixed LIBOR swaps
(in millions) $100 $100 - - - - $200 $(2)
Average Fixed Rate 4.59% 3.14% - - - - 3.86%
Average Floating Rate 1.92% 1.98% - - - - 1.95%
Fair Value Hedges
- -----------------
Fixed to Variable swaps (in
millions) - - $100 $300 - $100 $500 $2
Average Fixed Rate - - 8.63% 6.38% - 7.88% 7.13%
Average Floating Rate - - 6.18% 3.37% - 4.51% 4.16%
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, 2001 and 2000. 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 December 31, 2001. The fair values
presented in the table below do not include the fair value of the swaps.
22
December 31, 2001
---------------------------------------------------------------------------------
Maturity Date
--------------------------------------------------------------
There- Fair
2002 2003 2004 2005 2006 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Fixed-Rate Debt (in millions) $288 $144 $152 $144 $430 $4,577 $5,735 $5,928
Average Interest Rate 7.09% 7.19% 7.02% 7.12% 8.43% 7.07% 7.18%
Variable-Rate Debt (in millions) - - $100 $716 - $100 $916 $ 943
Average Interest Rate - - 8.47% 5.36% - 7.73% 5.96%
December 31, 2000
----------------------------------------------------------------------------------
Maturity Date
-------------------------------------------------------------
There- Fair
2001 2002 2003 2004 2005 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Fixed-Rate Debt (in millions) $232 $288 $145 $244 $440 $4,856 $6,205 $6,163
Average Interest Rate 7.69% 7.09% 7.18% 7.70% 6.61% 7.22% 7.19% -
Variable-Rate Debt (in millions) - - - - $641 - $641 $641
Average Interest Rate - - - - 5.99% - 5.99% -
BNSF has included $416 million in 2005 maturities and $641 million in 2005
maturities of commercial paper and bank borrowings in the 2001 and 2000 tables,
respectively.
In addition, maturities in 2003 included in the 2001 and 2000 tables exclude
$175 million of 6.53 percent notes due 2037, which may be redeemed in 2003 at
the option of the holder. Maturities in 2001 included in the 2000 table exclude
$100 million of 6.05 percent notes due 2031 called by the holder of the call
option in March of 2001. BNSF subsequently purchased the option from the holder
and retired the bonds.
The fair value of BNSF's long-term debt is primarily based on quoted market
prices for the same or similar issues, or on the current rates that would be
offered to BNSF for debt of the same remaining maturities. The carrying amount
of commercial paper and bank debt approximates fair value because of the short
maturity of these instruments.
Commodity Price Sensitivity
BNSF has a program to hedge against fluctuations in the price of its diesel fuel
purchases. Swap transactions are typically based on the price of pipeline
delivery of Gulf Coast #2 heating oil. BNSF either pays or receives the
difference between the hedge price and the actual average price of Gulf Coast #2
heating oil during a specified determination period for a specified number of
gallons. 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.
BNSF measures the fair value of Gulf Coast #2 heating oil swaps from daily
forward price data provided by various external counterparties. To value a swap,
the Company uses a 3-month average of forward Gulf Coast #2 heating oil prices
for the period hedged. The fair value of fuel costless collars is calculated and
provided by the corresponding counterparty. The tables below provide information
about BNSF's diesel fuel hedging instruments that are sensitive to changes in
diesel fuel prices. The tables present notional amounts in gallons and the
weighted average contract prices by contractual maturity date. The prices
included in the tables below 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.
23
December 31, 2001
--------------------------
2002
Maturity Fair
Date Value
------------ ----------
Diesel Fuel Swaps:
Gallons (in millions) 296 $ (1)
Weighted average price per gallon $0.57 -
Diesel Fuel Costless Collars:
Gallons (in millions) 50 $ (3)
Weighted average price per gallon - calls $0.65 -