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, 2004
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 |
76131 | |
| (Address of principal executive offices) | (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 x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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 November 1, 2004 | |
| 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).
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions)
(Unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenues |
$ | 2,769 | $ | 2,388 | $ | 7,909 | $ | 6,900 | ||||||||
| Operating expenses: |
||||||||||||||||
| Compensation and benefits |
850 | 762 | 2,452 | 2,178 | ||||||||||||
| Purchased services |
339 | 310 | 1,003 | 913 | ||||||||||||
| Depreciation and amortization |
254 | 232 | 754 | 682 | ||||||||||||
| Equipment rents |
210 | 180 | 594 | 529 | ||||||||||||
| Fuel |
332 | 265 | 938 | 812 | ||||||||||||
| Materials and other |
669 | 204 | 1,127 | 576 | ||||||||||||
| Total operating expenses |
2,654 | 1,953 | 6,868 | 5,690 | ||||||||||||
| Operating income |
115 | 435 | 1,041 | 1,210 | ||||||||||||
| Interest expense |
33 | 36 | 99 | 111 | ||||||||||||
| Interest income, related parties |
(8 | ) | (5 | ) | (20 | ) | (18 | ) | ||||||||
| Other income, net |
(6 | ) | (5 | ) | (5 | ) | — | |||||||||
| Income before income taxes and cumulative effect of accounting change |
96 | 409 | 967 | 1,117 | ||||||||||||
| Income tax expense |
36 | 156 | 367 | 409 | ||||||||||||
| Income before cumulative effect of accounting change |
$ | 60 | $ | 253 | $ | 600 | $ | 708 | ||||||||
| Cumulative effect of accounting change, net of tax |
— | — | — | 39 | ||||||||||||
| Net income |
$ | 60 | $ | 253 | $ | 600 | $ | 747 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
2
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
| September 30, 2004 |
December 31, 2003 |
||||||
| ASSETS |
|||||||
| Current assets: |
|||||||
| Cash and cash equivalents |
$ | 58 | $ | 18 | |||
| Accounts receivable, net |
244 | 129 | |||||
| Materials and supplies |
320 | 266 | |||||
| Current portion of deferred income taxes |
293 | 280 | |||||
| Other current assets |
549 | 145 | |||||
| Total current assets |
1,464 | 838 | |||||
| Property and equipment, net |
25,604 | 25,016 | |||||
| Other assets |
1,310 | 920 | |||||
| Intercompany notes receivable, net |
1,623 | 1,455 | |||||
| Total assets |
$ | 30,001 | $ | 28,229 | |||
| LIABILITIES AND STOCKHOLDER’S EQUITY |
|||||||
| Current liabilities: |
|||||||
| Accounts payable and other current liabilities |
$ | 2,053 | $ | 2,032 | |||
| Long-term debt due within one year |
307 | 244 | |||||
| Total current liabilities |
2,360 | 2,276 | |||||
| Long-term debt |
1,666 | 1,736 | |||||
| Deferred income taxes |
7,832 | 7,474 | |||||
| Casualty and environmental liabilities |
765 | 305 | |||||
| Minimum pension liability |
359 | 359 | |||||
| Employee separation costs |
127 | 144 | |||||
| Other liabilities |
1,376 | 1,250 | |||||
| Total liabilities |
14,485 | 13,544 | |||||
| Commitments and contingencies (see Notes 2, 4 and 5) |
|||||||
| 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 |
9,133 | 8,533 | |||||
| Accumulated other comprehensive income (loss) |
97 | (134 | ) | ||||
| Total stockholder’s equity |
15,516 | 14,685 | |||||
| Total liabilities and stockholder’s equity |
$ | 30,001 | $ | 28,229 | |||
See accompanying Notes to Consolidated Financial Statements.
3
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
| Nine Months Ended September 30, |
2004 |
2003 |
||||||
| OPERATING ACTIVITIES |
||||||||
| Net income |
$ | 600 | $ | 747 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
754 | 682 | ||||||
| Deferred income taxes |
203 | 375 | ||||||
| Employee separation costs paid |
(29 | ) | (37 | ) | ||||
| Cumulative effect of accounting change, net of tax |
— | (39 | ) | |||||
| Other, net |
354 | (140 | ) | |||||
| Changes in current assets and liabilities: |
||||||||
| Accounts receivable, net |
(115 | ) | (20 | ) | ||||
| Materials and supplies |
(54 | ) | 9 | |||||
| Other current assets |
(113 | ) | (28 | ) | ||||
| Accounts payable and other current liabilities |
127 | (6 | ) | |||||
| Net cash provided by operating activities |
1,727 | 1,543 | ||||||
| INVESTING ACTIVITIES |
||||||||
| Capital expenditures |
(1,163 | ) | (1,312 | ) | ||||
| Other, net |
(231 | ) | (83 | ) | ||||
| Net cash used for investing activities |
(1,394 | ) | (1,395 | ) | ||||
| FINANCING ACTIVITIES |
||||||||
| Payments on long-term debt, net |
(126 | ) | (144 | ) | ||||
| Net increase in intercompany notes receivable |
(168 | ) | (3 | ) | ||||
| Other, net |
1 | 1 | ||||||
| Net cash used for financing activities |
(293 | ) | (146 | ) | ||||
| Increase in cash and cash equivalents |
40 | 2 | ||||||
| Cash and cash equivalents: |
||||||||
| Beginning of period |
18 | 28 | ||||||
| End of period |
$ | 58 | $ | 30 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
| Interest paid, net of amounts capitalized |
$ | 101 | $ | 100 | ||||
| Income taxes paid, net of refunds |
$ | 204 | $ | 132 | ||||
| Non-cash asset financing |
$ | 74 | $ | 20 | ||||
See accompanying Notes to Consolidated Financial Statements.
4
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY
(Dollars in millions)
(Unaudited)
| Common Stock and Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholder’s Equity | ||||||||||
| Balance at December 31, 2003 |
$ | 6,286 | $ | 8,533 | $ | (134 | ) | $ | 14,685 | ||||
| Comprehensive income: |
|||||||||||||
| Net income |
600 | 600 | |||||||||||
| Gain on derivative instruments net of tax expense of $141 |
231 | 231 | |||||||||||
| Total comprehensive income |
831 | ||||||||||||
| Balance at September 30, 2004 |
$ | 6,286 | $ | 9,133 | $ | 97 | $ | 15,516 | |||||
See accompanying Notes to Consolidated Financial Statements.
5
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’s Annual Report on Form 10-K for the year ended December 31, 2003, including the financial statements and notes thereto. The Consolidated Financial Statements include the accounts of BNSF Railway, its majority-owned subsidiaries and a variable interest entity for which BNSF Railway is the primary beneficiary (collectively, BNSF Railway or Company). BNSF Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation (BNSF), and is the principal operating subsidiary of BNSF. 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, 2004, and the results of operations for the three and nine month periods ended September 30, 2004 and 2003, have been included.
Certain comparative prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the current year presentation.
Implementation of FIN 46R
In 2001, BNSF Railway entered into the San Jacinto Rail Limited partnership (the Partnership) with subsidiaries of three chemical manufacturing companies that ship their products on BNSF Railway’s rail lines. The purpose of this Partnership is to construct and operate a 13-mile railroad, which will service several chemical and plastics manufacturing facilities in the Houston, Texas area. BNSF Railway owns a 48 percent limited partnership interest and a one percent general partnership interest in the Partnership and acts as the general partner and operator of this facility. The Company has determined that San Jacinto Rail Limited, a previously unconsolidated subsidiary, was required to be consolidated pursuant to Financial Accounting Standards Board (FASB) Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities, on March 31, 2004, as the Partnership qualifies as a variable interest entity and the Company is the primary beneficiary. This consolidation had a minimal impact on the Consolidated Statements of Income due to the fact that the Company accounted for this investment prior to the adoption of FIN 46R under the equity method of accounting and the Partnership’s losses to date have been minimal. The consolidation resulted in an increase in assets of $54 million, which includes $26 million and $23 million in cash and land, respectively, an increase in liabilities of $55 million, including $50 million of short-term debt, and a decrease in equity of $1 million.
Cumulative Effect of Accounting Change, Net
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, on January 1, 2003. This statement requires BNSF Railway to recognize a liability for legally obligated asset retirement costs associated with tangible long-lived assets. SFAS No. 143 also disallows the accrual of retirement costs that are not legal obligations. As a result, BNSF Railway and other railroads were required to change their accounting policies for certain track structure assets to exclude removal costs as a component of depreciation expense where the inclusion of such costs would result in accumulated depreciation balances exceeding the historical basis of the assets. This change will result in lower depreciation and amortization expense primarily offset by higher compensation and benefits and purchased services expenses in the period in which removal costs are incurred.
6
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
The net cumulative effect of adopting SFAS No. 143 for years prior to 2003 was an increase to net income of $39 million, net of tax, for the nine months ended September 30, 2003, which is reflected in the cumulative effect adjustment recorded in the first quarter of 2003. The Company’s liability for legally obligated asset retirement costs was $5 million and $4 million at September 30, 2004 and December 31, 2003, respectively.
| 2. | Hedging Activities |
The Company uses derivatives to hedge against increases in diesel fuel prices and interest rates as well as to convert a portion of its fixed-rate 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 sheets, 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, Accounting for Derivative Instruments and Hedging Activities, as amended, 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 accumulated other comprehensive income (AOCI) as a separate component of stockholder’s 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 anticipate losses due to counterparty nonperformance.
Fuel
Fuel costs represented 14 percent of total operating expenses during the nine month periods ended September 30, 2004 and 2003. Due to the significance of diesel fuel expenses to the operations of BNSF Railway and the historical vo