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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2002
 
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 1-6324
 
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
  
41-6034000
(State or other jurisdiction
of incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
2650 Lou Menk Drive
Fort Worth, Texas
(Address of principal executive offices)
 
76131
(Zip Code)
 
(800) 795-2673
(Registrant’s telephone number, including area code)
 
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 requirements for the past 90 days. Yes     ü      No             
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
     
Shares
Outstanding at
October 31, 2002
Common stock, $1.00 par value
     
1,000 shares
 
Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format permitted by General Instruction H (2).

1

 
PART I
FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
(Unaudited)
 
    
Three Months Ended September 30,
   
Nine Months Ended September 30,
    
2002
   
2001
   
2002
     
2001
Revenues
   
$
2,304
   
$
2,341
   
$
6,670
 
   
$
6,902
    
  
  
  
Operating expenses:
                              
Compensation and benefits
   
 
730
   
 
714
   
 
2,140
 
   
 
2,137
Purchased services
   
 
295
   
 
275
   
 
848
 
   
 
811
Depreciation and amortization
   
 
235
   
 
222
   
 
695
 
   
 
680
Equipment rents
   
 
182
   
 
185
   
 
537
 
   
 
562
Fuel
   
 
215
   
 
240
   
 
606
 
   
 
743
Materials and other
   
 
228
   
 
205
   
 
655
 
   
 
625
    
  
  
  
Total operating expenses
   
 
1,885
   
 
1,841
   
 
5,481
 
   
 
5,558
    
  
  
  
Operating income
   
 
419
   
 
500
   
 
1,189
 
   
 
1,344
Interest expense
   
 
37
   
 
43
   
 
116
 
   
 
130
Interest income, related parties
   
 
5
   
 
5
   
 
14
 
   
 
16
Other (income) expense, net
   
 
—  
   
 
12
   
 
(38
)
   
 
45
    
  
  
  
Income before income taxes
   
 
387
   
 
450
   
 
1,125
 
   
 
1,185
Income tax expense
   
 
142
   
 
169
   
 
422
 
   
 
442
    
  
  
  
Net income
   
$
245
   
$
281
   
$
703
 
   
$
743
    
  
  
  
 
 
See accompanying notes to consolidated financial statements.

2

 
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
(Unaudited)
 
      
September 30, 2002
     
December 31, 2001
  
ASSETS
                    
Current assets:
                    
Cash and cash equivalents
     
$
132
     
$
78
 
Accounts receivable, net
     
 
208
     
 
227
 
Materials and supplies
     
 
200
     
 
191
 
Current portion of deferred income taxes
     
 
333
     
 
306
 
Other current assets
     
 
129
     
 
21
 
      
    
Total current assets
     
 
1,002
     
 
823
 
Property and equipment, net
     
 
23,773
     
 
23,056
 
Other assets
     
 
842
     
 
853
 
Intercompany notes receivable, net
     
 
779
     
 
708
 
      
    
Total assets
     
$
26,396
     
$
25,440
 
      
    
LIABILITIES AND STOCKHOLDER’S EQUITY
                    
Current liabilities:
                    
Accounts payable and other current liabilities
     
$
1,851
     
$
1,857
 
Long-term debt due within one year
     
 
143
     
 
288
 
      
    
Total current liabilities
     
 
1,994
     
 
2,145
 
Long-term debt
     
 
2,104
     
 
2,076
 
Deferred income taxes
     
 
7,127
     
 
6,723
 
Casualty and environmental liabilities
     
 
356
     
 
423
 
Employee merger and separation costs
     
 
178
     
 
216
 
Other liabilities
     
 
1,081
     
 
1,032
 
      
    
Total liabilities
     
 
12,840
     
 
12,615
 
      
    
Commitments and contingencies (see notes 2, 6, and 8)
                    
Stockholder’s equity:
                    
Common stock, $1 par value (1,000 shares authorized, issued and outstanding) and paid-in capital
     
 
6,286
     
 
6,286
 
Retained earnings
     
 
7,252
     
 
6,549
 
Accumulated other comprehensive income (deficit)
     
 
18
     
 
(10
)
      
    
Total stockholder’s equity
     
 
13,556
     
 
12,825
 
      
    
Total liabilities and stockholder’s equity
     
$
26,396
     
$
25,440
 
      
    
 
See accompanying notes to consolidated financial statements.

3

 
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
 
    
Nine Months Ended September 30,
  
    
2002
     
2001
  
Operating Activities:
                  
Net income
   
$
703
 
   
$
743
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
695
 
   
 
680
 
Deferred income taxes
   
 
360
 
   
 
254
 
Employee merger and separation costs paid
   
 
(48
)
   
 
(38
)
Other, net
   
 
(136
)
   
 
45
 
Changes in current assets and liabilities:
                  
Accounts receivable, net
   
 
19
 
   
 
15
 
Materials and supplies
   
 
1
 
   
 
13
 
Other current assets
   
 
(72
)
   
 
22
 
Accounts payable and other current liabilities
   
 
15
 
   
 
(74
)
    
  
Net cash provided by operating activities
   
 
1,537
 
   
 
1,660
 
    
  
Investing Activities:
                  
Capital expenditures
   
 
(1,016
)
   
 
(1,061
)
Other, net
   
 
(129
)
   
 
(7
)
    
  
Net cash used for investing activities
   
 
(1,145
)
   
 
(1,068
)
    
  
Financing Activities:
                  
Payments on long-term debt
   
 
(268
)
   
 
(151
)
Net (increase) decrease in intercompany notes receivables, net
   
 
(71
)
   
 
59
 
Cash dividends paid
   
 
—  
 
   
 
(358
)
Other, net
   
 
1
 
   
 
2
 
    
  
Net cash used for financing activities
   
 
(338
)
   
 
(448
)
    
  
Increase in cash and cash equivalents
   
 
54
 
   
 
144
 
Cash and cash equivalents:
                  
Beginning of period
   
 
78
 
   
 
123
 
    
  
End of period
   
$
132
 
   
$
267
 
    
  
Supplemental cash flow information:
                  
Interest paid, net of amounts capitalized
   
$
115
 
   
$
134
 
Income taxes paid, net of refunds
   
 
165
 
   
 
162
 
 
See accompanying notes to consolidated financial statements.

4

 
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1.    Accounting Policies and Interim Results
 
The consolidated financial statements should be read in conjunction with The Burlington Northern and Santa Fe Railway Company (BNSF Railway or Company) Annual Report on Form 10-K for the year ended December 31, 2001, including the financial statements and notes thereto. BNSF Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation (BNSF), and is the principal operating subsidiary of BNSF. The consolidated financial statements include the accounts of BNSF Railway and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
 
The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the entire year. In the opinion of management, all adjustments (consisting of only normal recurring adjustments, except as disclosed) necessary to present fairly BNSF Railway’s consolidated financial position as of September 30, 2002 and the results of operations for the three and nine month periods ended September 30, 2002 and 2001 have been included.
 
In December 2001, a wholly-owned subsidiary of BNSF, Burlington Northern Santa Fe British Columbia, Ltd. (BNSF BC) was transferred to BNSF Railway. For accounting purposes, the transfer of BNSF BC to BNSF Railway was treated as a combination of subsidiaries for the periods BNSF Railway and BNSF BC were under common control. Accordingly, the consolidated statements of income and cash flows for the quarter and nine months ended September 30, 2001 have been adjusted to include the results of BNSF BC.
 
2.    Hedging Activities
 
On January 1, 2001, BNSF Railway adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, and recorded a cumulative transition benefit of $56 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 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 Railway monitors its hedging positions and credit ratings of its counterparties and does not expect losses due to counterparty nonperformance.
 
Fuel
 
Fuel costs for the first nine months of 2002 and 2001 represented 11 percent and 13 percent, respectively, of total operating expenses. Due to the significance of diesel fuel expenses to the operations of BNSF Railway 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

5

THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

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 the first nine months of 2002 and excluding the impact of the hedging program, each one-cent increase in the price of fuel would result in approximately $11 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 September 30, 2002, BNSF Railway had entered into fuel swap and costless collar agreements utilizing Gulf Coast #2 heating oil (GCHO). The hedge prices do not include taxes, transportation costs, certain other fuel handling costs, and any differences which may occur between the prices of GCHO and the purchase price of BNSF Railway’s diesel fuel, which typically range between 10 and 20 cents per gallon. The supporting table below provides fuel hedge data for the GCHO fuel hedges.
 
      
Quarter Ended
2002
     
December 31,
GCHO Swaps
       
Gallons hedged (in millions)
     
154.35
Average swap price (per gallon)
     
$     0.58
GCHO Collars
       
Gallons hedged (in millions)
     
15.75
Average cap price (per gallon)
     
$     0.64
Average floor price (per gallon)
     
$     0.56
 
In addition, the Company entered into fuel swap and costless collar agreements utilizing West Texas Intermediate (WTI) crude oil. The hedge prices do not include refining, taxes, transportation costs, certain other fuel handling costs, and any differences which may occur between the prices of WTI and the purchase price of BNSF Railway’s diesel fuel, which typically range between 12 and 30 cents per gallon. The supporting tables below provide fuel hedge data for the WTI fuel hedges.
 
    
Quarter Ended
     
2003
   
March 31,
   
June 30,
     
September 30,
     
December 31,
   
Annual
WTI Swaps
                                       
Barrels hedged (in thousands)
   
 
600
   
 
600
     
 
600
     
 
600
   
 
2,400
Equivalent gallons hedged (in millions)