Attached files
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, 2009
OR
o
|
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
BNSF
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)
76131-2830
(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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes [ ] No [
]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] Accelerated
filer [ ] Non-accelerated
filer [x ] Smaller reporting
company [ ]
Indicate
by check mark whether the registrant is a shell company (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
October
13, 2009
|
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
|
PAGE
|
|
||
PART
II
|
OTHER
INFORMATION
|
|
FINANCIAL
INFORMATION
BNSF
RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
millions)
(Unaudited)
|
Three
Months Ended
|
Nine
Months Ended
|
||||||
September
30,
|
September
30,
|
|||||||
2009
|
2008
|
2009
|
2008
|
|||||
Revenues
|
$
|
3,549
|
$
|
4,837
|
$
|
10,207
|
$
|
13,468
|
Operating
expenses:
|
||||||||
Compensation
and benefits
|
866
|
1,008
|
2,546
|
2,932
|
||||
Fuel
|
606
|
1,349
|
1,729
|
3,685
|
||||
Purchased
services
|
444
|
512
|
1,382
|
1,551
|
||||
Depreciation
and amortization
|
385
|
|
348
|
1,133
|
|
1,038
|
||
Equipment
rents
|
194
|
229
|
591
|
682
|
||||
Materials
and other
|
164
|
194
|
483
|
790
|
||||
Total
operating expenses
|
2,659
|
3,640
|
7,864
|
10,678
|
||||
Operating
income
|
890
|
1,197
|
2,343
|
2,790
|
||||
Interest
expense
|
15
|
13
|
92
|
70
|
||||
Interest
income, related parties
|
(1)
|
(7)
|
(1)
|
(14)
|
||||
Other
expense, net
|
1
|
7
|
4
|
16
|
||||
Income before income taxes |
875
|
1,184
|
2,248
|
2,718
|
||||
Income
tax expense
|
329
|
425
|
854
|
1,015
|
||||
Net
income
|
$
|
546
|
$
|
759
|
$
|
1,394
|
$
|
1,703
|
See
accompanying Notes to Consolidated Financial Statements.
BNSF
RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollars
in millions)
(Unaudited)
September
30,
|
|
December 31,
|
||
2009
|
2008
|
|||
ASSETS
|
||||
Current
assets:
|
||||
Cash
and cash equivalents
|
$
|
14
|
$
|
209
|
Accounts
receivable, net
|
873
|
873
|
||
Materials
and supplies
|
522
|
524
|
||
Current
portion of deferred income taxes
|
445
|
434
|
||
Other
current assets
|
402
|
337
|
||
Total
current assets
|
2,256
|
2,377
|
||
Property
and equipment, net of accumulated depreciation of $10,447
and $9,908,
respectively
|
32,122
|
30,838
|
||
Other
assets
|
3,205
|
2,910
|
||
Total
assets
|
$
|
37,583
|
$
|
36,125
|
LIABILITIES
AND STOCKHOLDER’S EQUITY
|
||||
Current
liabilities:
|
||||
Accounts
payable and other current liabilities
|
$
|
2,661
|
$
|
3,114
|
Long-term
debt due within one year
|
323
|
254
|
||
Total
current liabilities
|
2,984
|
3,368
|
||
Long-term
debt
|
2,165
|
1,821
|
||
Deferred
income taxes
|
9,357
|
8,672
|
||
Pension
and retiree health and welfare liability
|
1,020
|
1,047
|
||
Casualty
and environmental liabilities
|
963
|
959
|
||
Employee
separation costs
|
55
|
57
|
||
Other
liabilities
|
1,749
|
1,835
|
||
Total
liabilities
|
18,293
|
17,759
|
||
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
|
6,331
|
6,331
|
||
Retained
earnings
|
14,246
|
12,852
|
||
Intercompany
notes receivable
|
(694)
|
(6)
|
||
Accumulated
other comprehensive loss
|
(593)
|
(811)
|
||
Total
stockholder’s equity
|
19,290
|
18,366
|
||
Total
liabilities and stockholder’s equity
|
$
|
37,583
|
$
|
36,125
|
See
accompanying Notes to Consolidated Financial Statements.
BNSF
RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
millions)
(Unaudited)
Nine Months Ended September 30, | 2009 | 2008 | ||
OPERATING
ACTIVITIES
|
||||
Net
income
|
$ |
1,394
|
$ |
1,703
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||
Depreciation
and amortization
|
1,133
|
1,038
|
||
Deferred
income taxes
|
540
|
282
|
||
Employee
separation costs paid
|
(10)
|
(11)
|
||
Long-term
casualty and environmental liabilities, net
|
(31)
|
181
|
||
Other,
net
|
(43)
|
(17)
|
||
Changes
in current assets and liabilities:
|
||||
Accounts
receivable, net
|
57
|
(162)
|
||
Change
in accounts receivable sales program
|
(50)
|
278
|
||
Materials
and supplies
|
2
|
(46)
|
||
Other
current assets
|
(101)
|
(153)
|
||
Accounts
payable and other current liabilities
|
(233)
|
316
|
||
Net
cash provided by operating activities
|
2,658
|
3,409
|
||
INVESTING
ACTIVITIES
|
||||
Capital
expenditures excluding equipment
|
(1,665)
|
(1,703)
|
||
Acquisition
of equipment
|
(615)
|
(676)
|
||
Proceeds
from sale of equipment financed
|
368
|
190
|
||
Construction
costs for facility financing obligation
|
(36)
|
(38)
|
||
Net
increase in intercompany notes receivable
|
–
|
(4)
|
||
Other,
net
|
(164)
|
(141)
|
||
Net
cash used for investing activities
|
(2,112)
|
(2,372)
|
||
FINANCING
ACTIVITIES
|
||||
Proceeds
from issuance of long-term debt
|
75
|
–
|
||
Payments
on long-term debt
|
(172)
|
(174)
|
||
Proceeds
from facility financing obligation
|
51
|
50
|
||
Net
increase in intercompany notes receivable classified as
equity
|
(688)
|
(921)
|
||
Other,
net
|
(7)
|
–
|
||
Net
cash used for financing activities
|
(741)
|
(1,045)
|
||
Decrease
in cash and cash equivalents
|
(195)
|
(8)
|
||
Cash
and cash equivalents:
|
||||
Beginning
of period
|
209
|
24
|
||
End
of period
|
$
|
14
|
$
|
16
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
||||
Interest
paid, net of amounts capitalized
|
$
|
80
|
$
|
84
|
Income
taxes paid, net of refunds
|
$
|
443
|
$
|
699
|
Non-cash
asset financing
|
$
|
464
|
$
|
79
|
See
accompanying Notes to Consolidated Financial Statements.
BNSF
RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY
(In
millions)
(Unaudited)
Common
Stock and
Paid-in
Capital
|
Retained
Earnings
|
Intercompany
Notes
Receivable
|
Accumulated
Other Comprehensive Loss
|
Total
Stockholder’s
Equity
|
|||||||||||
Balance
at December 31, 2008
|
$
|
6,331
|
$
|
12,852
|
$
|
(6)
|
$
|
(811)
|
$
|
18,366
|
|||||
Change
in intercompany notes receivable
|
–
|
–
|
(688)
|
–
|
(688)
|
||||||||||
Comprehensive
income:
|
|||||||||||||||
Net
income
|
–
|
1,394
|
–
|
–
|
1,394
|
||||||||||
Change
in unrecognized prior service credit and actuarial losses, net of tax
expense of $6
|
–
|
–
|
–
|
9
|
9
|
||||||||||
Change
in fuel hedge mark-to-market and other items, net of tax expense of
$129
|
–
|
–
|
–
|
208
|
208
|
||||||||||
Change
in unrealized loss on securities held by equity method investees, net of
tax expense of $1
|
–
|
–
|
–
|
1 | 1 | ||||||||||
Total
comprehensive income
|
1,612
|
||||||||||||||
Balance
at September 30, 2009
|
$
|
6,331
|
$
|
14,246
|
$
|
(694)
|
$
|
(593)
|
$
|
19,290
|
|||||
See accompanying Notes to Consolidated Financial Statements.
6
BNSF
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 BNSF
Railway Company’s Annual Report on Form 10-K for the year ended December 31,
2008, including the financial statements and notes thereto. The Consolidated
Financial Statements include the accounts of BNSF Railway Company and its
majority-owned subsidiaries (collectively BNSF Railway or the Company). BNSF
Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation
(BNSF), and is the principal operating subsidiary of BNSF.
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, the unaudited financial statements reflect all adjustments
(consisting of only normal recurring adjustments, except as disclosed) necessary
for a fair statement of BNSF Railway’s consolidated financial position as of
September 30, 2009, and the results of operations for the three and nine month
periods ended September 30, 2009 and 2008.
BNSF
Railway has evaluated subsequent events through October 23, 2009, which
represents the date the Consolidated Financial Statements were
issued.
Certain
comparative prior period amounts in the Consolidated Financial Statements have
been reclassified to conform to the current period presentation. These
reclassifications had no effect on previously reported operating income or net
income.
Adoption of New Accounting
Pronouncement
In June
2009, the Financial Accounting
Standards Board (FASB) issued authoritative accounting guidance which
established the FASB Accounting Standards Codification (Codification or ASC) as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities and stated that all guidance contained in
the Codification carries an equal level of authority. The
authoritative accounting guidance recognized that rules and interpretive
releases of the Securities and Exchange Commission (SEC) under federal
securities laws are also sources of authoritative Generally Accepted Accounting
Principles (GAAP) for SEC registrants. The Company adopted the provisions of the
authoritative accounting guidance for the interim reporting period ended
September 30, 2009, the adoption of which did not have a material effect on the
Company’s consolidated financial statements.
2. Hedging
Activities
The Company
uses derivative financial instruments to hedge against increases in diesel fuel
prices. The Company does not hold or issue derivative financial instruments for
trading or speculative purposes. 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 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 thereafter, whether the derivative item
is effective in offsetting the changes in cash flows. Any change in fair value
resulting from ineffectiveness, as defined by authoritative accounting guidance
related to derivatives and hedging, 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 loss (AOCL) as a
separate component of stockholder’s equity and reclassified into earnings in the
period during which the hedge transaction affects earnings. Cash flows related
to fuel derivatives are classified as operating activities in the Consolidated
Statements of Cash Flows.
7
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
BNSF Railway
monitors its hedging positions and credit ratings of its counterparties and does
not anticipate any losses due to counterparty nonperformance. All counterparties
were financial institutions with credit ratings of A2/A or higher as of
September 30, 2009. The maximum amount of loss the Company could incur from
credit risk based on the gross fair value of derivative instruments in asset
positions as of September 30, 2009 was $18 million. There were no financial
instruments in asset positions as of December 31, 2008. Other than as disclosed
under the heading “Fuel; Total Fuel-Hedging Activities,” the Company’s hedge
agreements do not include provisions requiring collateral. Certain of the
Company’s hedge instruments are covered by master netting arrangements whereby,
in the event of a default, the non-defaulting party has the right to setoff any
amounts payable against any obligation of the defaulting party under the same
counterparty agreement. As such, the Company’s net asset exposure to
counterparty credit risk was $6 million as of September 30, 2009. There was no
net exposure to counterparty credit risk at December 31, 2008 since all
financial instruments were in a net liability position.
Additional disclosure related to derivative instruments is included in Note 9 to the Consolidated Financial Statements.
Additional disclosure related to derivative instruments is included in Note 9 to the Consolidated Financial Statements.
The amounts
recorded in the Consolidated Balance Sheets for derivative transactions were as
follows (in millions). These amounts exclude $8 million and $106 million of
collateral posted for certain fuel hedge contracts as of September 30, 2009 and
December 31, 2008, respectively.
September
30,
2009
|
December
31,
2008
|
||||||
Short-term
hedge asset
|
$
|
2
|
$
|
−
|
|||
Long-term
hedge asset
|
6
|
−
|
|||||
Short-term
hedge liability
|
(79
|
)
|
(279
|
)
|
|||
Long-term
hedge liability
|
(45
|
)
|
(193
|
)
|
|||
Total
derivatives
|
$
|
(116
|
)
|
$
|
(472
|
)
|
8
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
The
tables below contain summaries of all derivative positions reported in the
Consolidated Financial Statements, presented gross of any master netting
arrangements (in millions).
Fair
Value of Derivative Instruments
|
|||||||||
Asset
Derivatives
|
|||||||||
Balance
Sheet
|
September
30,
|
December
31,
|
|||||||
Location
|
2009
|
2008
|
|||||||
Derivatives
designated as hedging
instruments
under ASC 815-20
|
|||||||||
Fuel
Contracts
|
Other
current assets
|
$ | 4 | $ | − | ||||
Fuel
Contracts
|
Other
assets
|
12 | − | ||||||
Fuel
Contracts
|
Accounts
payable and other current liabilities
|
2 | − | ||||||
Total
Asset Derivatives designated as
hedging
instruments under ASC 815-20
|
$ | 18 | $ | − |
Liability
Derivatives
|
|||||||||
Balance
Sheet
|
September
30,
|
December
31,
|
|||||||
Location
|
2009
|
2008
|
|||||||
Derivatives
designated as hedging
instruments
under ASC 815-20
|
|||||||||
Fuel
Contracts
|
Other
current assets
|
$ | 2 | $ | − | ||||
Fuel
Contracts
|
Other
assets
|
6 | − | ||||||
Fuel
Contracts
|
Accounts
payable and other current liabilities
|
81 | 279 | ||||||
Fuel
Contracts
|
Other
liabilities
|
45 | 193 | ||||||
Total
Liability Derivatives designated as
hedging
instruments under ASC 815-20
|
$ | 134 | $ | 472 |
The
Effect of Derivative Instruments Gains and Losses
for
the Three Month Periods Ended September 30, 2009 and
2008
|
Derivatives
in
ASC 815-20
Cash Flow
Hedging
Relationships
|
Amount
of Gain or (Loss) Recognized in OCI on Derivatives
(Effective
Portion)
|
Location of Gain or
(Loss) Recognized
from AOCL into
Income
|
Amount
of Gain or (Loss) Recognized from AOCL into
Income
(Effective
Portion)
|
Location
of Gain or
(Loss)
Recognized in
Income
on Derivatives
|
Amount
of Gain or (Loss) Recognized in Income on Derivatives
(Ineffective
Portion and Amount
Excluded
from
Effectiveness
Testing)a
|
|||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||
Fuel
Contracts
|
$ |
(20)
|
$
|
(136)
|
Fuel
expense
|
$
|
(38)
|
$
|
17
|
Fuel
expense
|
$
|
3
|
$
|
(6)
|
||
Total
derivatives
|
$ |
(20)
|
$
|
(136)
|
$
|
(38)
|
$
|
17
|
$
|
3
|
$
|
(6)
|
||||
a
No portion of the gain or (loss) was excluded from the assessment of hedge
effectiveness for the periods then ended.
9
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
The
Effect of Derivative Instruments Gains and Losses
for
the Nine Month Periods Ended September 30, 2009 and
2008
|
Derivatives
in
ASC 815-20
Cash Flow
Hedging
Relationships
|
Amount
of Gain or (Loss) Recognized in OCI on Derivatives
(Effective
Portion)
|
Location of Gain or
(Loss) Recognized
from AOCL into
Income
|
Amount
of Gain or (Loss) Recognized from AOCL into
Income
(Effective
Portion)
|
Location
of Gain or (Loss) Recognized in
Income
on Derivatives
|
Amount
of Gain or (Loss) Recognized in Income on Derivatives
(Ineffective
Portion and Amount
Excluded
from
Effectiveness
Testing)a
|
|||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||
Fuel
Contracts
|
$
|
152
|
$
|
(16)
|
Fuel
expense
|
$
|
(204)
|
$
|
50
|
Fuel
expense
|
$
|
19
|
$
|
(6)
|
||
Total
derivatives
|
$
|
152
|
$
|
(16)
|
$
|
(204)
|
$
|
50
|
$
|
19
|
$
|
(6)
|
||||
a
No portion of the gain or (loss) was excluded from the assessment of hedge
effectiveness for the periods then ended.
Fuel
Fuel costs
represented 22 percent and 35 percent of total operating expenses during the
nine month periods ended September 30, 2009 and 2008, respectively. Due to the
significance of diesel fuel expenses to the operations of BNSF Railway and the
historical volatility of fuel prices, the Company has entered into hedges to
partially mitigate the risk of fluctuations in the price of its diesel fuel
purchases. The fuel hedges include the use of derivatives that are accounted for
as cash flow hedges. The hedging is intended 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 locomotive fuel consumption (which represents substantially all fuel
consumption) during the twelve-month period ended September 30, 2009, and
excluding the impact of the hedges, each one-cent increase in the price of fuel
per gallon would result in approximately $12 million of additional fuel expense
on an annual basis. However, BNSF Railway believes any fuel price increase would
be substantially offset by the Company’s fuel surcharge program.
Total
Fuel-Hedging Activities
As of
September 30, 2009, BNSF Railway’s total fuel-hedging positions for the
remainder of 2009, 2010, 2011, and 2012 covered approximately 22 percent, 20
percent, 16 percent, and 3 percent, respectively, of the average annual
locomotive fuel consumption over the past three years. Hedge positions are
closely monitored to ensure that they will not exceed actual fuel requirements
in any period.
The
amounts recorded in the Consolidated Balance Sheets for settled fuel-hedge
transactions were as follows (in millions):
September
30,
|
December
31,
|
|||||
2009
|
2008
|
|||||
Settled
fuel-hedging contracts payable
|
$$
|
(38)
|
$$
|
(38)
|
10
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
The Company
uses the forward commodity price for the periods hedged to value its fuel-hedge
swaps and costless collars. This methodology is a market approach, which under
authoritative accounting guidance related to fair value
measurements utilizes Level 2 inputs as it uses market data for similar
instruments in active markets.
New York Mercantile Exchange
(NYMEX) #2 Heating Oil (HO) Hedges
As of
September 30, 2009, BNSF Railway had entered into fuel swap agreements utilizing
NYMEX #2 HO. The hedge prices do not include taxes, transportation costs,
certain other fuel handling costs and any differences that may occur between the
prices of HO and the purchase price of BNSF Railway’s diesel fuel. Over the
twelve months ended September 30, 2009, the sum of all such costs averaged
approximately 17 cents per gallon.
During the
first nine months of 2009, the Company entered into fuel swap agreements
utilizing HO to hedge the equivalent of approximately 77.35 million gallons of
fuel with an average swap price of $1.95 per gallon. The following table
provides fuel-hedge data based on the quarter being hedged for all HO fuel
hedges outstanding as of September 30, 2009.
Quarter
Ending
|
||||||||||||||||
2010
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Annual
|
|||||||||||
HO
Swaps
|
||||||||||||||||
Gallons
hedged (in millions)
|
5.60
|
8.35
|
6.10
|
6.50
|
26.55
|
|||||||||||
Average
swap price (per gallon)
|
$
|
1.79
|
$
|
1.81
|
$
|
1.87
|
$
|
1.93
|
$
|
1.85
|
||||||
Fair
value (in millions)
|
$
|
−
|
$
|
1
|
$
|
1
|
$
|
1
|
$
|
3
|
Quarter
Ending
|
||||||||||||||||
2011
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Annual
|
|||||||||||
HO
Swaps
|
||||||||||||||||
Gallons
hedged (in millions)
|
8.30
|
8.30
|
7.50
|
7.50
|
31.60
|
|||||||||||
Average
swap price (per gallon)
|
$
|
1.91
|
$
|
1.89
|
$
|
1.95
|
$
|
2.01
|
$
|
1.94
|
||||||
Fair
value (in millions)
|
$
|
2
|
$
|
2
|
$
|
1
|
$
|
1
|
$
|
6
|
Quarter
Ending
|
||||||||||||||||
2012
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Annual
|
|||||||||||
HO
Swaps
|
||||||||||||||||
Gallons
hedged (in millions)
|
17.20
|
2.00
|
−
|
−
|
19.20
|
|||||||||||
Average
swap price (per gallon)
|
$
|
2.08
|
$
|
2.18
|
$
|
−
|
$
|
−
|
$
|
2.09
|
||||||
Fair
value (in millions)
|
$
|
2
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
2
|
11
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
West Texas Intermediate
(WTI) Crude Oil Hedges
In addition,
BNSF Railway enters into fuel swap and costless collar agreements utilizing WTI
crude oil. The hedge prices do not include 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, including refining
costs. Over the twelve months ended September 30, 2009, the sum of all such
costs averaged approximately 43 cents per gallon.
During the
first nine months of 2009, the Company entered into fuel swap agreements
utilizing WTI to hedge the equivalent of approximately 890 thousand barrels of
fuel with an average swap price of $76.44 per barrel and costless collar
agreements utilizing WTI to hedge the equivalent of approximately 80 thousand
barrels of fuel with an average call price of $79.86 per barrel and an average
put price of $70.06 per barrel. The following table provides fuel-hedge data
based on the quarter being hedged for all WTI fuel hedges outstanding as of
September 30, 2009.
Quarter
Ending
|
||||
2009
|
December
31,
|
|||
WTI
Swaps
|
||||
Barrels
hedged (in thousands)
|
1,425
|
|||
Equivalent
gallons hedged (in millions)
|
59.85
|
|||
Average
swap price (per barrel)
|
$
|
75.72
|
||
Fair
value (in millions)
|
$
|
(7
|
)
|
|
WTI
Costless Collars
|
||||
Barrels
hedged (in thousands)
|
475
|
|||
Equivalent
gallons hedged (in millions)
|
19.95
|
|||
Average
cap price (per barrel)
|
$
|
135.46
|
||
Average
floor price (per barrel)
|
$
|
125.38
|
||
Fair
value (in millions)
|
$
|
(25
|
)
|
Quarter
Ending
|
||||||||||||||||
2010
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Annual
|
|||||||||||
WTI
Swaps
|
||||||||||||||||
Barrels
hedged (in thousands)
|
1,210
|
1,110
|
1,125
|
1,235
|
4,680
|
|||||||||||
Equivalent
gallons hedged (in millions)
|
50.82
|
46.62
|
47.25
|
51.87
|
196.56
|
|||||||||||
Average
swap price (per barrel)
|
$
|
85.05
|
$
|
87.89
|
$
|
87.82
|
$
|
86.27
|
$
|
86.71
|
||||||
Fair
value (in millions)
|
$
|
(15
|
)
|
$
|
(15
|
)
|
$
|
(14
|
)
|
$
|
(12
|
)
|
$
|
(56
|
)
|
|
WTI
Costless Collars
|
||||||||||||||||
Barrels
hedged (in thousands)
|
420
|
420
|
420
|
320
|
1,580
|
|||||||||||
Equivalent
gallons hedged (in millions)
|
17.64
|
17.64
|
17.64
|
13.44
|
66.36
|
|||||||||||
Average
cap price (per barrel)
|
$
|
78.23
|
$
|
79.79
|
$
|
81.33
|
$
|
82.84
|
$
|
80.40
|
||||||
Average
floor price (per barrel)
|
$
|
72.35
|
$
|
73.84
|
$
|
75.15
|
$
|
76.54
|
$
|
74.34
|
||||||
Fair
value (in millions)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(4
|
)
|
12
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Quarter
Ending
|
||||||||||||||||
2011
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Annual
|
|||||||||||
WTI
Swaps
|
||||||||||||||||
Barrels
hedged (in thousands)
|
995
|
1,000
|
1,005
|
1,055
|
4,055
|
|||||||||||
Equivalent
gallons hedged (in millions)
|
41.79
|
42.00
|
42.21
|
44.31
|
170.31
|
|||||||||||
Average
swap price (per barrel)
|
$
|
85.59
|
$
|
85.20
|
$
|
85.52
|
$
|
85.88
|
$
|
85.55
|
||||||
Fair
value (in millions)
|
$
|
(8
|
)
|
$
|
(8
|
)
|
$
|
(7
|
)
|
$
|
(8
|
)
|
$
|
(31
|
)
|
|
WTI
Costless Collars
|
||||||||||||||||
Barrels
hedged (in thousands)
|
200
|
200
|
200
|
200
|
800
|
|||||||||||
Equivalent
gallons hedged (in millions)
|
8.40
|
8.40
|
8.40
|
8.40
|
33.60
|
|||||||||||
Average
cap price (per barrel)
|
$
|
84.00
|
$
|
84.70
|
$
|
85.39
|
$
|
86.10
|
$
|
85.05
|
||||||
Average
floor price (per barrel)
|
$
|
77.75
|
$
|
78.40
|
$
|
79.05
|
$
|
79.70
|
$
|
78.73
|
||||||
Fair
value (in millions)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(4
|
)
|
Quarter
Ending
|
||||||||||||||||
2012
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Annual
|
|||||||||||
WTI
Swaps
|
||||||||||||||||
Barrels
hedged (in thousands)
|
205
|
200
|
−
|
−
|
405
|
|||||||||||
Equivalent
gallons hedged (in millions)
|
8.61
|
8.40
|
−
|
−
|
17.01
|
|||||||||||
Average
swap price (per barrel)
|
$
|
76.95
|
$
|
77.52
|
$
|
−
|
$
|
−
|
$
|
77.23
|
||||||
Fair
value (in millions)
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
−
|
NYMEX #2 Heating Oil
Refining Spread Hedges
During the
first nine months of 2009, the Company entered into fuel swap agreements
utilizing the HO refining spread (HO-WTI) to hedge the equivalent of
approximately 250 thousand barrels of fuel with an average swap price of $8.06
per barrel. HO-WTI is the difference in price between HO and WTI; therefore, a
HO-WTI swap in combination with a WTI swap is equivalent to a HO swap. The
following table provides fuel-hedge data based upon the quarter being hedged for
all HO-WTI fuel hedges outstanding as of September 30,
2009.
Quarter
Ending
|
||||||||||||||||
2010
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Annual
|
|||||||||||
HO-WTI
Swaps
|
||||||||||||||||
Barrels
hedged (in thousands)
|
115
|
90
|
45
|
−
|
250
|
|||||||||||
Equivalent
gallons hedged (in millions)
|
4.83
|
3.78
|
1.89
|
−
|
10.50
|
|||||||||||
Average
swap price (per barrel)
|
$
|
7.70
|
$
|
7.95
|
$
|
9.20
|
$
|
−
|
$
|
8.06
|
||||||
Fair
value (in millions)
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
−
|
13
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
BNSF Railway
sells a portion of its accounts receivable to Santa Fe Receivables Corporation
(SFRC), a special purpose subsidiary. The sole purpose and activity of SFRC is
to purchase receivables from BNSF Railway. SFRC transfers an undivided interest
in such receivables, with limited exceptions, to a master trust and causes the
trust to issue an undivided interest in the receivables to investors (the A/R
sales program). The undivided interests in the master trust may be in the form
of certificates or purchased interests and are isolated from BNSF Railway which
eliminates all of BNSF Railway’s control over the undivided interest. SFRC
periodically incurs minor legal fees that are paid by BNSF Railway and are
financed through short-term intercompany payables.
BNSF
Railway’s total capacity to sell undivided interests to investors under the A/R
sales program was $700 million at September 30, 2009, which was comprised of two
$175 million, 364-day accounts receivable facilities and two $175 million,
3-year accounts receivable facilities. Both 364-day facilities will mature in
November 2009 and are expected to be renewed. The two 3-year facilities will
mature in November 2010. Each of the financial institutions providing credit for
the facilities is rated Aa3/A+ or higher. There was no outstanding interest held
by investors under the A/R sales program at September 30, 2009. Outstanding
undivided interests held by investors under the A/R sales program were $50
million at December 31, 2008, with $12.5 million outstanding under each of the
four facilities. These undivided interests in receivables are excluded from
accounts receivable by BNSF Railway in connection with the sale of undivided
interests under the A/R sales program. As of September 30, 2009 and December 31,
2008, an interest in $864 million and $878 million, respectively, of
receivables had been transferred by SFRC to the master trust. When SFRC
transfers the interest in these receivables to the master trust, it retains an
undivided interest in the receivables, which is included in accounts receivable
in the Company’s Consolidated Financial Statements. The interest that continues
to be held by SFRC of $864 million and $828 million at September 30, 2009 and
December 31, 2008, respectively, less an allowance for uncollectible accounts,
reflected the total accounts receivable transferred by SFRC to the master trust
less $50 million of outstanding undivided interests held by investors at
December 31, 2008. Due to a relatively short collection cycle, the fair value of
the undivided interest transferred to investors in the A/R sales program
approximated book value, and there was no gain or loss from the
transaction.
BNSF Railway
retains the collection responsibility with respect to the accounts receivable.
Proceeds from collections reinvested in the A/R sales program were approximately
$11.2 billion and $14.5 billion for the nine months ended September 30, 2009 and
2008, respectively. No servicing asset or liability has been recorded because
the fees BNSF Railway receives for servicing the receivables approximate the
related costs. SFRC’s costs of the sale of receivables are included in other
expense, net and were $2 million and $9 million for the nine months ended
September 30, 2009 and 2008, respectively. These costs fluctuate monthly with
changes in prevailing interest rates as well as unused available commitments and
include interest, discounts associated with transferring the receivables under
the A/R sales program to SFRC, program fees paid to banks, incidental commercial
paper issuing costs and fees for unused commitment availability.
The amount of
accounts receivable sold by BNSF Railway fluctuates based on borrowing needs and
upon the availability of receivables and is directly affected by changing
business volumes and credit risks, including dilution and delinquencies. In
order for there to be an impact on the amount of receivables BNSF Railway could
sell, the combined dilution and delinquency percentages would have to exceed an
established threshold. BNSF Railway has historically experienced very low levels
of dilution or delinquency and was below the established reserve threshold at
September 30, 2009. Based on the current levels, if dilution or delinquency
percentages were to increase by one percentage point, there would be no impact
to the amount of receivables BNSF Railway could sell.
Receivables eligible under the A/R sales program do not include receivables over 90 days past due or concentrations over certain limits with any one customer and certain other receivables. At September 30, 2009 and December 31, 2008, $15 million and $9 million, respectively, of such accounts receivable were greater than 90 days old.
BNSF Railway
maintains an allowance for bill adjustments and uncollectible accounts based
upon the expected collectibility of accounts receivable, including receivables
transferred to the master trust. At September 30, 2009 and December 31, 2008,
$31 million and $43 million, respectively, of such allowances had been recorded,
of which $31 million and $42 million, respectively, had been recorded as a
reduction to accounts receivable, net. The remaining $1 million at December 31,
2008 had been recorded in other current liabilities because it related to the
outstanding undivided interests held by investors. During the nine months ended
September 30, 2009 and 2008, $6 million and $5 million, respectively, of
accounts receivable were written off, net of recoveries. Credit losses are based
on specific identification of uncollectible accounts and application of
historical collection percentages by aging category.
14
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
The investors
in the master trust have no recourse to BNSF Railway's other assets except for
customary warranty and indemnity claims. Creditors of BNSF Railway have no
recourse to the assets of the master trust or SFRC unless and until all claims
of their respective creditors have been paid. The A/R sales program includes
thresholds for dilution, delinquency, and write-off ratios that, if exceeded,
allow the investors participating in this program, at their option, to cancel
the program. At September 30, 2009, BNSF Railway was in compliance with these
provisions.
See Note
10 to the Consolidated Financial Statements for information about recent
accounting pronouncements that will have an impact on the A/R sales program upon
adoption.
4. Debt
Financing
Obligation
In 2005, the
Company commenced the construction of an intermodal facility that it intended to
sell to a third party and subsequently lease back. As of September 30, 2009,
construction of the facility was completed for a cost of approximately $160
million. All improvements have been sold to the third party and BNSF Railway
leased the facility from the third party for 20 years. This sale leaseback
transaction was accounted for as a financing obligation due to continuing
involvement. The outflows from the construction of the facility were classified
as investing activities, and the inflows from the associated financing proceeds
were classified as financing activities in the Company’s Consolidated Statements
of Cash Flows.
Equipment
Obligation
In July 2009,
BNSF Railway entered into an 18-year equipment obligation totaling $75 million
to finance locomotives and railcars.
Capital
Leases
During the
first nine months of 2009, BNSF Railway entered into a 12-year capital lease to
finance $368 million of locomotives and freight cars. Additionally, BNSF Railway
entered into capital leases totaling $96 million to finance maintenance of way
and other vehicles and equipment with lease terms of three to seven
years.
Fair Value of Debt
Instruments
At
September 30, 2009 and December 31, 2008, the fair value of BNSF Railway’s debt,
excluding capital leases, was $964 million and $805 million, respectively, while
the book value was $875 million and $794 million, respectively. The fair value
of BNSF Railway’s 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 Railway
for debt of the same remaining maturities.
Guarantees
As of
September 30, 2009, BNSF Railway has not been called upon to perform under the
guarantees specifically disclosed in this footnote and does not anticipate a
significant performance risk in the foreseeable
future.
15
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Debt and
other obligations of non-consolidated entities guaranteed by the Company as of
September 30, 2009, were as follows (dollars in millions):
Guarantees
|
|||||||||||||||||
BNSF
Ownership Percentage
|
Principal
Amount
Guaranteed
|
Maximum
Future
Payments
|
Maximum
Recourse
Amounta
|
Remaining
Term
(in
years)
|
Capitalized
Obligations
|
||||||||||||
Kinder
Morgan Energy Partners, L.P.
|
0.5%
|
$
|
190
|
$
|
190
|
$
|
–
|
Termination
of Ownership
|
$
|
–
|
|||||||
Kansas
City Terminal Intermodal Transportation Corporation
|
0.0%
|
$
|
48
|
$
|
67
|
$
|
67
|
9
|
$
|
27
|
b
|
||||||
Westside
Intermodal Transportation Corporation
|
0.0%
|
$
|
37
|
$
|
55
|
$
|
–
|
14
|
$
|
29
|
b
|
||||||
The
Unified Government of Wyandotte County/Kansas City, Kansas
|
0.0%
|
$
|
12
|
$
|
17
|
$
|
–
|
14
|
$
|
9
|
b
|
||||||
Chevron
Phillips Chemical Company, LP
|
0.0%
|
N/Ad
|
N/Ad
|
N/Ad
|
8
|
$
|
11
|
c
|
|||||||||
Various
lessors
(Residual
value guarantees)
|
0.0%
|
N/A
|
$
|
270
|
$
|
270
|
Various
|
$
|
68
|
c
|
|||||||
All
other
|
0.0%
|
$
|
4
|
$
|
4
|
$
|
1
|
Various
|
$
|
–
|
|||||||
a
Reflects the maximum amount the Company could recover from a third party
other than the counterparty.
b
Reflects capitalized obligations that are recorded on the Company’s
Consolidated Balance Sheet.
c
Reflects the asset and corresponding liability for the fair value of these
guarantees required by authoritative accounting guidance related to
guarantees.
d
There is no cap to the liability that can be sought from BNSF for BNSF’s
negligence or the negligence of the indemnified party. However, BNSF could
receive reimbursement from certain insurance policies if the liability
exceeds a certain amount.
|
Kinder
Morgan Energy Partners, L.P.
Santa Fe
Pacific Pipelines, Inc., an indirect, wholly-owned subsidiary of BNSF Railway,
has a guarantee in connection with its remaining special limited partnership
interest in Santa Fe Pacific Pipelines Partners, L.P. (SFPP), a subsidiary of
Kinder Morgan Energy Partners, L.P., to be paid only upon default by the
partnership. All obligations with respect to the guarantee will cease upon
termination of ownership rights, which would occur upon a put notice issued by
BNSF Railway or the exercise of the call rights by the general partners of
SFPP.
Kansas
City Terminal Intermodal Transportation Corporation
BNSF Railway
and another major railroad jointly and severally guarantee $48 million of debt
of Kansas City Terminal Intermodal Transportation Corporation, the proceeds of
which were used to finance construction of a double track grade separation
bridge in Kansas City, Missouri, which is operated and used by Kansas City
Terminal Railway Company (KCTRC). BNSF Railway has a 25 percent ownership in
KCTRC, accounts for its interest using the equity method of accounting and would
be required to fund a portion of the remaining obligation upon default by the
original debtor.
Westside
Intermodal Transportation Corporation and The Unified Government of
Wyandotte
County/Kansas City, Kansas
BNSF Railway
has outstanding guarantees of $49 million of debt, the proceeds of which were
used to finance construction of a bridge that connects BNSF Railway’s Argentine
Yard in Kansas City, Kansas, with the KCTRC mainline tracks in Kansas City,
Missouri. The bridge is operated by KCTRC, and payments related to BNSF
Railway’s guarantee of this obligation would only be called for upon default by
the original debtor.
16
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Chevron
Phillips Chemical Company, LP
In the third
quarter of 2007, BNSF Railway entered into an indemnity agreement with Chevron
Phillips Chemical Company, LP (Chevron Phillips), granting certain rights of
indemnity from BNSF Railway, in order to facilitate access to a new storage
facility. Under certain circumstances, payment under this obligation may be
required in the event Chevron Phillips were to incur certain liabilities or
other incremental costs resulting from trackage access.
Residual
Value Guarantees (RVG)
In the normal
course of business, the Company enters into leases in which it guarantees the
residual value of certain leased equipment. Some of these leases have renewal or
purchase options, or both, that the Company may exercise at the end of the lease
term. If the Company elects not to exercise these options, it may be required to
pay the lessor an amount not exceeding the RVG. The amount of any payment is
contingent upon the actual residual value of the leased equipment. Some of these
leases also require the lessor to pay the Company any surplus if the actual
residual value of the leased equipment is over the RVG. These guarantees will
expire between 2010 and 2011.
The maximum
future payments, as disclosed in the Guarantees table above, represent the
undiscounted maximum amount that the Company could be required to pay in the
event the Company did not exercise its renewal option and the fair market value
of the equipment had significantly declined. BNSF Railway does not anticipate
such a large reduction in the fair market value of the leased equipment. As of
September 30, 2009, the Company had recorded a $68 million asset and
corresponding liability for the fair value of RVG.
All
Other
As of
September 30, 2009, BNSF Railway guaranteed $4 million of other debt and leases.
BNSF Railway holds a performance bond and has the option to sub-lease property
to recover up to $1 million of the $4 million of guarantees. These guarantees
expire between 2011 and 2013.
Other than as
discussed above, there is no collateral held by a third party that the Company
could obtain and liquidate to recover any amounts paid under the above
guarantees.
Other than as
discussed above, none of the guarantees are recorded in the Consolidated
Financial Statements of the Company. The Company does not expect performance
under these guarantees to have a material effect on the Company in the
foreseeable future.
Indemnities
In the
ordinary course of business, BNSF Railway enters into agreements with third
parties that include indemnification clauses. In general, these clauses are
customary for the types of agreements in which they are included. At times,
these clauses may involve indemnification for the acts of the Company, its
employees and agents, indemnification for another party’s acts, indemnification
for future events, indemnification based upon a certain standard of performance,
indemnification for liabilities arising out of the Company’s use of leased
equipment or other property, or other types of indemnification. Due to the
uncertainty of whether events which would trigger the indemnification
obligations would ever occur, the Company does not believe that these indemnity
agreements will have a material adverse effect on the Company’s results of
operations, financial position or liquidity. Additionally, the Company believes
that, due to lack of historical payment experience, the fair value of
indemnities cannot be estimated with any amount of certainty and that the fair
value of any such amount would be immaterial to the Consolidated Financial
Statements. Agreements that contain unique circumstances, particularly
agreements that contain guarantees that indemnify for another party’s acts are
disclosed separately if appropriate. Unless separately disclosed above, no fair
value liability related to indemnities has been recorded in the Consolidated
Financial Statements.
17
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
5.
Commitments and Contingencies
Personal
Injury
Personal
injury claims, including asbestos claims and employee work-related injuries and
third-party injuries (collectively, other personal injury), are a significant
expense for the railroad industry. Personal injury claims by BNSF Railway
employees are subject to the provisions of the Federal Employers’ Liability Act
(FELA) rather than state workers’ compensation laws. FELA’s system of requiring
the finding of fault, coupled with unscheduled awards and reliance on the jury
system, contributed to increased expenses in past years. Other proceedings
include claims by non-employees for punitive as well as compensatory damages. A
few proceedings purport to be class actions. The variability present in settling
these claims, including non-employee personal injury and matters in which
punitive damages are alleged, could result in increased expenses in future
years. BNSF Railway has implemented a number of safety programs designed to
reduce the number of personal injuries as well as the associated claims and
personal injury expense.
BNSF Railway
records a liability for personal injury claims when the expected loss is both
probable and reasonably estimable. The liability and ultimate expense
projections are estimated using standard actuarial methodologies. Liabilities
recorded for unasserted personal injury claims are based on information
currently available. Due to the inherent uncertainty involved in projecting
future events such as the number of claims filed each year, developments in
judicial and legislative standards and the average costs to settle projected
claims, actual costs may differ from amounts recorded. BNSF Railway has obtained
insurance coverage for certain claims, as discussed under the heading “BNSF
Insurance Company.” Expense accruals and any required adjustments are classified
as materials and other in the Consolidated Statements of Income.
Asbestos
The Company
is party to a number of personal injury claims by employees and non-employees
who may have been exposed to asbestos. The heaviest exposure for BNSF Railway
employees was due to work conducted in and around the use of steam locomotive
engines that were phased out between the years of 1950 and 1967. However, other
types of exposures, including exposure from locomotive component parts and
building materials, continued after 1967 until they were substantially
eliminated at BNSF Railway by 1985.
BNSF Railway
assesses its unasserted liability exposure on an annual basis during the third
quarter. BNSF Railway determines its asbestos liability by estimating its
exposed population, the number of claims likely to be filed, the number of
claims that will likely require payment, and the estimated cost per claim.
Estimated filing and dismissal rates and average cost per claim are determined
utilizing recent claim data and trends.
During the
third quarter of 2009 and 2008, the Company analyzed recent filing and payment
trends to ensure the assumptions used by BNSF Railway to estimate its future
asbestos liability were reasonable. In the third quarters of 2009 and 2008,
management determined that the liability remained appropriate and no change was
recorded. The Company plans to update its study again in the third quarter of
2010.
Throughout
the year, BNSF Railway monitors actual experience against the number of
forecasted claims and expected claim payments and will record adjustments to the
Company’s estimates as necessary.
The following
table summarizes the activity in the Company’s accrued obligations for both
asserted and unasserted asbestos matters (in millions):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||
Beginning
balance
|
$
|
244
|
$
|
261
|
$
|
251
|
$
|
270
|
||||
Accruals
|
–
|
–
|
–
|
–
|
||||||||
Payments
|
(3)
|
(5)
|
(10)
|
(14)
|
||||||||
Ending
balance at September 30,
|
$
|
241
|
$
|
256
|
$
|
241
|
$
|
256
|
18
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Of the
September 30, 2009 obligation, $199 million was related to unasserted claims
while $42 million was related to asserted claims. At September 30, 2009, $17
million was included in current liabilities. The recorded liability was not
discounted. In addition, defense and processing costs, which are recorded on an
as-reported basis, were not included in the recorded liability. The Company is
primarily self-insured for asbestos-related claims.
The following
table summarizes information regarding the number of asserted asbestos claims
filed against BNSF Railway:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||
2009
|
2008
|
2009
|
2008
|
|||||
Claims
unresolved at beginning of period
|
1,750
|
1,800
|
1,833
|
1,781
|
||||
Claims
filed
|
89
|
143
|
236
|
415
|
||||
Claims
settled, dismissed or otherwise resolved
|
(96)
|
(83)
|
(326)
|
(336)
|
||||
Claims
unresolved at September 30,
|
1,743
|
1,860
|
1,743
|
1,860
|
Based on BNSF
Railway’s estimate of the potentially exposed employees and related mortality
assumptions, it is anticipated that unasserted claims will continue to be filed
through the year 2050. The Company recorded an amount for the full estimated
filing period through 2050 because it had a relatively finite exposed population
(former and current employees hired prior to 1985), which it was able to
identify and reasonably estimate and about which it had obtained reliable
demographic data (including age, hire date and occupation) derived from industry
or BNSF Railway specific data that was the basis for the study. BNSF Railway
projects that approximately 55, 75 and 95 percent of the future unasserted
asbestos claims will be filed within the next 10, 15 and 25 years,
respectively.
Because of
the uncertainty surrounding the factors used in the study, it is reasonably
possible that future costs to settle asbestos claims may range from
approximately $217 million to $262 million. However, BNSF Railway believes that
the $241 million recorded is the best estimate of the Company’s future
obligation for the settlement of asbestos claims.
The amounts
recorded by BNSF Railway for the asbestos-related liability were based upon
currently known facts. Future events, such as the number of new claims to be
filed each year, the average cost of disposing of claims, as well as the
numerous uncertainties surrounding asbestos litigation in the United States,
could cause the actual costs to be higher or lower than projected.
While the
final outcome of asbestos-related matters cannot be predicted with certainty,
considering among other things the meritorious legal defenses available and
liabilities that have been recorded, it is the opinion of BNSF Railway that none
of these items, when finally resolved, will have a material adverse effect on
the Company’s financial position or liquidity. However, the occurrence of a
number of these items in the same period could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.
Other
Personal Injury
BNSF Railway
estimates its other personal injury liability claims and expense quarterly based
on the covered population, activity levels and trends in frequency and the costs
of covered injuries. Estimates include unasserted claims except for certain
repetitive stress and other occupational trauma claims that allegedly result
from prolonged repeated events or exposure. Such claims are estimated on an
as-reported basis because the Company cannot estimate the range of reasonably
possible loss due to other non-work related contributing causes of such injuries
and the fact that continued exposure is required for the potential injury to
manifest itself as a claim. BNSF Railway has not experienced any significant
adverse trends related to these types of claims in recent years.
BNSF Railway
monitors quarterly actual experience against the number of forecasted claims to
be received, the forecasted number of claims closing with payment and expected
claims payments. Adjustments to the Company’s estimates are recorded quarterly
as necessary or more frequently as new events or revised estimates
develop.
19
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
The following
table summarizes the activity in the Company’s accrued obligations for other
personal injury matters (in millions):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||
Beginning
balance
|
$
|
436
|
$
|
474
|
$
|
442
|
$
|
439
|
||||
Accruals
|
22
|
34
|
76
|
136
|
||||||||
Payments
|
(28)
|
(37)
|
(88)
|
(104)
|
||||||||
Ending
balance at September 30,
|
$
|
430
|
$
|
471
|
$
|
430
|
$
|
471
|
At September
30, 2009, $153 million was included in current liabilities. BNSF Railway’s
liabilities for other personal injury claims are undiscounted. In addition,
defense and processing costs, which are recorded on an as-reported basis, were
not included in the recorded liability. The Company is substantially
self-insured for other personal injury claims.
The following
table summarizes information regarding the number of personal injury claims,
other than asbestos, filed against BNSF Railway:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||
2009
|
2008
|
2009
|
2008
|
|||||
Claims
unresolved at beginning of period
|
3,155
|
3,941
|
3,349
|
3,322
|
||||
Claims
filed
|
1,175
|
994
|
2,632
|
3,441
|
||||
Claims
settled, dismissed or otherwise resolved
|
(834)
|
(861)
|
(2,485)
|
(2,689)
|
||||
Claims
unresolved at September 30,
|
3,496
|
4,074
|
3,496
|
4,074
|
Because of
the uncertainty surrounding the ultimate outcome of other personal injury
claims, it is reasonably possible that future costs to settle other personal
injury claims may range from approximately $375 million to $530 million.
However, BNSF Railway believes that the $430 million recorded is the best
estimate of the Company’s future obligation for the settlement of other personal
injury claims.
The amounts
recorded by BNSF Railway for other personal injury claims were based upon
currently known facts. Future events, such as the number of new claims to be
filed each year, the average cost of disposing of claims, as well as the
numerous uncertainties surrounding personal injury litigation in the United
States, could cause the actual costs to be higher or lower than
projected.
While the
final outcome of these other personal injury matters cannot be predicted with
certainty, considering among other things the meritorious legal defenses
available and liabilities that have been recorded, it is the opinion of BNSF
Railway that none of these items, when finally resolved, will have a material
adverse effect on the Company’s financial position or liquidity. However, the
occurrence of a number of these items in the same period could have a material
adverse effect on the results of operations in a particular quarter or fiscal
year.
BNSF
Insurance Company
Burlington
Northern Santa Fe Insurance Company, Ltd. (BNSF IC), a wholly owned subsidiary
of BNSF, provides insurance coverage for certain risks incurred after April 1,
1998, FELA claims, railroad protective, force account insurance claims and
certain excess general liability coverage incurred after January 1, 2002, and
certain other claims which are subject to reinsurance. During the nine months
ended September 30, 2009 and 2008, BNSF IC wrote insurance coverage with
premiums totaling $154 million and $167 million, respectively, for BNSF Railway,
net of reimbursements from third parties. During this same time, BNSF Railway
recognized $116 million and $126 million, respectively, in expense related to
those premiums, which is classified as purchased services in the Consolidated
Statements of Income. During both the nine months ended September 30, 2009 and
2008, BNSF IC made claim payments totaling $87 million and $88 million,
respectively, for settlement of covered claims. At September 30, 2009 and
December 31, 2008, receivables from BNSF IC for claims paid were $7 million and
$23 million, respectively.
20
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Environmental
The Company’s
operations, as well as those of its competitors, are subject to extensive
federal, state and local environmental regulation. BNSF Railway’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 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 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 Railway has been notified that it is
a potentially responsible party (PRP) for study and cleanup costs at 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 Railway may be considered a PRP under certain
other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF
Railway may be held jointly and severally liable for all environmental costs
associated with a particular site. If there are other PRPs, BNSF Railway
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 such factors as 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.
Liabilities
for environmental cleanup costs are recorded when BNSF Railway’s liability for
environmental cleanup is probable and reasonably estimable. Subsequent
adjustments to initial estimates are recorded as necessarybased upon additional
information developed in subsequent periods. Environmental costs include initial
site surveys and environmental studies as well as costs for remediation of sites
determined to be contaminated.
BNSF Railway
estimates the ultimate cost of cleanup efforts at its known environmental sites
on an annual basis during the third quarter. Ultimate cost estimates for
environmental sites are based on historical payment patterns, current estimated
percentage to closure ratios and benchmark patterns developed from data
accumulated from industry and public sources, including the Environmental
Protection Agency and other governmental agencies. These factors incorporate
into the estimates experience gained from cleanup efforts at other similar
sites.
On a
quarterly basis, BNSF Railway monitors actual experience against the forecasted
remediation and related payments made on existing sites and conducts ongoing
environmental contingency analyses, which consider a combination of factors
including independent consulting reports, site visits, legal reviews and
analysis of the likelihood of participation in, and the ability to pay for,
cleanup of other PRPs. Adjustments to the Company’s estimates will continue to
be recorded as necessary based on developments in subsequent periods.
Additionally, environmental accruals, which are classified as materials and
other in the Consolidated Statements of Income, include amounts for newly
identified sites or contaminants, third-party claims and legal fees incurred for
defense of third-party claims and recovery efforts.
During the
third quarters of 2009 and 2008, the Company analyzed recent data and trends to
ensure the assumptions used by BNSF Railway to estimate its future environmental
liability were reasonable. As a result of this study, in the third quarters of
2009 and 2008, management recorded additional expense of approximately $25
million and $13 million as of the respective June 30 measurement dates. The
Company plans to update its study again in the third quarter of
2010.
Annual
studies do not include (i) contaminated sites of which the Company is not aware;
(ii) additional amounts for third-party tort claims, which arise out of
contaminants allegedly migrating from BNSF Railway property, due to a limited
number of sites; or (iii) natural resource damage claims. BNSF Railway continues
to estimate third-party tort claims on a site by site basis when the liability
for such claims is probable and reasonably estimable. BNSF Railway’s recorded
liability for third-party tort claims as of September 30, 2009, was
approximately $14 million.
BNSF Railway
is involved in a number of administrative and judicial proceedings and other
mandatory cleanup efforts for 316 sites, including 19 Superfund sites, at which
it is participating in the study or cleanup, or both, of alleged environmental
contamination.
21
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||
Beginning
balance
|
$
|
529
|
$
|
545
|
$
|
546
|
$
|
380
|
||||
Accruals
|
32
|
26
|
60
|
223
|
||||||||
Payments
|
(24)
|
(28)
|
(69)
|
(60)
|
||||||||
Ending
balance at September 30,
|
$
|
537
|
$
|
543
|
$
|
537
|
$
|
543
|
At
September 30, 2009, $75 million was included in current
liabilities.
In the second quarter of 2008, the Company completed an analysis of its Montana sites to determine its legal exposure related to the potential effect of a Montana Supreme Court decision. The decision, which did not involve BNSF Railway, held that restoration damages (damages equating to clean-up costs which are intended to return property to its original condition) may be awarded under certain circumstances even where such damages may exceed the property’s actual value. The legal situation in Montana, the increase in the number of claims against BNSF Railway and others resulting from this decision, and the completion of the analysis caused BNSF Railway to record additional pre-tax environmental expenses of $175 million in the second quarter of 2008 for environmental liabilities primarily related to the effect of the aforementioned Montana Supreme Court decision on certain of BNSF Railway’s Montana sites.
BNSF
Railway’s environmental liabilities are not discounted. BNSF Railway anticipates
that the majority of the accrued costs at September 30, 2009, will be paid over
the next ten years, and no individual site is considered to be
material.
The following
table summarizes the environmental sites:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||
BNSF
Railway Sites
|
2009
|
2008
|
2009
|
2008
|
||||
Number
of sites at beginning of period
|
318
|
350
|
336
|
346
|
||||
Sites
added during the period
|
−
|
4
|
9
|
16
|
||||
Sites
closed during the period
|
(2)
|
(14)
|
(29)
|
(22)
|
||||
Number
of sites at September 30,
|
316
|
340
|
316
|
340
|
Liabilities
recorded for environmental costs represent BNSF Railway’s best estimate of its
probable future obligation for the remediation and settlement of these sites and
include both asserted and unasserted claims. Although recorded liabilities
include BNSF Railway’s best estimate of all probable costs, without reduction
for anticipated recoveries from third parties, BNSF Railway’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 contaminated
sites.
Because of
the uncertainty surrounding these factors, it is reasonably possible that future
costs for environmental liabilities may range from approximately $390 million to
$850 million. However, BNSF Railway believes that the $537 million recorded at
September 30, 2009, is the best estimate of the Company’s future obligation for
environmental costs.
While the
final outcome of these environmental matters cannot be predicted with certainty,
it is the opinion of BNSF Railway that none of these items, when finally
resolved, will have a material adverse effect on the Company’s financial
position or liquidity. However, the occurrence of a number of these items in the
same period could have a material adverse effect on the results of operations in
a particular quarter or fiscal year.
22
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Other
Claims and Litigation
In addition
to asbestos, other personal injury and environmental matters discussed above,
BNSF Railway and its subsidiaries are also parties to a number of other legal
actions and claims, governmental proceedings and private civil suits arising in
the ordinary course of business, including those related to disputes and
complaints involving certain transportation rates and charges (including
complaints seeking refunds of prior charges paid for coal transportation and the
prescription of future rates for such movements and claims relating to service
under contract provisions or otherwise). Some of the legal proceedings include
claims for punitive as well as compensatory damages, and a few proceedings
purport to be class actions. Although the final outcome of these matters cannot
be predicted with certainty, considering among other things the meritorious
legal defenses available and liabilities that have been recorded along with
applicable insurance, it is the opinion of BNSF Railway that none of these
items, when finally resolved, will have a material adverse effect on the
Company’s financial position or liquidity. However, an unexpected adverse
resolution of one or more of these items could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.
Coal
Rate Case Decision
On
February 17, 2009, the United States Surface Transportation Board (STB) issued a
new decision in a rate dispute between Western Fuels Association, Inc. and Basin
Electric Power Cooperative, Inc. (collectively, WFA) and BNSF Railway Company
(BNSF Railway). (Western Fuels
Association, Inc. and Basin Electric Power Cooperative v. BNSF Railway
Company, STB Docket No. 42088). The dispute relates to the reasonableness
of rates BNSF Railway charges to WFA for the transportation of approximately 8
million tons of coal a year from Powder River Basin mines in Wyoming to the
Laramie River Station Plant at Moba Junction, Wyoming. The STB previously ruled
in this matter in 2007 that the challenged rates were not shown unreasonable.
During the pendency of the case, the STB issued new guidelines for reviewing the
reasonableness of rates in cases such as this and then permitted WFA to submit
new evidence. In its new 2009 decision, the STB found that these same challenged
rates were not commercially reasonable. The STB ordered BNSF Railway to
reimburse WFA for amounts previously collected above the new levels
prescribed for prior periods. The STB also prescribed maximum rates through
2024 at levels substantially below the rates previously set by BNSF
Railway. In compliance with the STB’s decision, BNSF Railway published new
rates to the Laramie River Station effective March 20, 2009. WFA
challenged BNSF Railway’s methodology for implementing those rates before the
STB and on July 27, 2009, the STB issued a decision that largely adopted
the methodology advocated for by BNSF Railway. The final amount of
approximately $120 million in reparations, which includes interest, was
submitted by WFA to the STB with BNSF Railway’s concurrence. The STB
approved the final amount of reparations on October 22, 2009, with the Company
to pay the reparations within 30 days. On March 4, 2009, BNSF Railway filed
a petition for judicial review of the 2009 decision of the STB to the United
States Court of Appeals for the District of Columbia Circuit (Western Fuels Association, Inc. and
Basin Electric Power Cooperative v. Surface Transportation Board and United
States of America, Consolidated Docket Nos. 08-1167 and 09-1092), and
briefing is underway.
In accordance
with the final amount of reparations, during the third quarter of 2009 BNSF
Railway recorded an adjustment to amounts previously accrued in the first
quarter of 2009, resulting in a gain of $31 million, of which $30 million and $1
million were recorded as an increase to freight revenues and a reduction to
interest expense, respectively. As such, the net impact in the first nine months
of 2009 resulting from the STB’s decision was a loss of $74 million in excess of
amounts previously accrued. Of the total loss, $66 million and $8 million were
recorded as a reduction to freight revenues and an increase to interest expense,
respectively.
6. Employee
Separation Costs
Employee
separation costs activity was as follows (in millions):
Nine
Months Ended September 30,
|
2009
|
2008
|
||||
Beginning
balance at January 1,
|
$
|
79
|
$
|
91
|
||
Accruals
|
12
|
3
|
||||
Payments
|
(10)
|
(11)
|
||||
Ending
balance at September 30,
|
$ |
81
|
$
|
83
|
23
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Employee
separation liabilities of $81 million were included in the Consolidated
Balance Sheet at September 30, 2009, and principally represent the following:
(i) $79 million for deferred benefits payable upon separation or retirement
to certain active conductors, trainmen and locomotive engineers; (ii) less than
$1 million for employee-related severance costs for the consolidation of
clerical functions, material handlers in mechanical shops and trainmen on
reserve boards; and (iii) $2 million for certain non-union employee
severance costs. Employee separation expenses are recorded in materials and
other in the Consolidated Statements of Income. At September 30, 2009,
$26 million of the remaining liabilities was included in current
liabilities.
The deferred
benefits payable upon separation or retirement to certain active conductors,
trainmen and locomotive engineers were primarily incurred in connection with
labor agreements reached prior to the business combination of BNSF’s predecessor
companies, Burlington Northern Inc. and Santa Fe Pacific Corporation. These
agreements, among other things, reduced train crew sizes and allowed for more
flexible work rules. The majority of the remaining costs will be paid between
2009 and 2020. As of September 30, 2009, the Company had updated its estimate
and recorded an additional liability of $12 million related to deferred
benefits. The remaining costs for (ii) above are expected to be paid out between
2009 and approximately 2011, and the costs for (iii) above are expected be paid
out between 2009 and 2021 based on deferral elections made by the affected
employees.
7. Employment
Benefit Plans
Components
of the net cost were as follows (in millions):
Pension
Benefits
|
||||||||||||
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||
Net
Cost
|
2009
|
2008
|
2009
|
2008
|
||||||||
Service
cost
|
$
|
7
|
$
|
7
|
$
|
21
|
$
|
19
|
||||
Interest
cost
|
25
|
25
|
76
|
76
|
||||||||
Expected
return on plan assets
|
(27)
|
(28)
|
(80)
|
(84)
|
||||||||
Amortization
of net loss
|
7
|
4
|
19
|
12
|
||||||||
Net
cost recognized
|
$
|
12
|
$
|
8
|
$
|
36
|
$
|
23
|
Retiree
Health and Welfare Benefits
|
||||||||||||
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||
Net
Cost
|
2009
|
2008
|
2009
|
2008
|
||||||||
Service
cost
|
$
|
1
|
$
|
1
|
$
|
2
|
$
|
2
|
||||
Interest
cost
|
4
|
4
|
11
|
13
|
||||||||
Amortization
of net loss
|
−
|
1
|
1
|
3
|
||||||||
Amortization
of prior service credit
|
(1)
|
(1)
|
(4)
|
(5)
|
||||||||
Net
cost recognized
|
$
|
4
|
$
|
5
|
$
|
10
|
$
|
13
|
In the second quarter of 2009, the
Company made a voluntary contribution of $33 million to BNSF’s qualified pension
plan. The Company is not required to make any additional contributions to BNSF’s
qualified pension plan in 2009.
8. Related
Party Transactions
BNSF Railway
is involved with BNSF and certain of its subsidiaries in related party
transactions in the ordinary course of business, which include payments made on
each other’s behalf and performance of services. Under the terms of a tax
allocation agreement with BNSF, BNSF Railway made federal and state income tax
payments, net of refunds, of $443 million and $699 million during the first nine
months of 2009 and 2008, respectively, which are reflected in changes in working
capital in the Consolidated Statement of Cash Flows.
24
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
At September
30, 2009 and December 31, 2008, BNSF Railway had $43 million and $53 million,
respectively, of intercompany receivables which are reflected in accounts
receivable in the respective Consolidated Balance Sheets. At September 30, 2009
and December 31, 2008, BNSF Railway had $78 million and $60 million of
intercompany payables, respectively, which are reflected in accounts payable in
the respective Consolidated Balance Sheets. Net intercompany balances are
settled in the ordinary course of business.
At September
30, 2009 and December 31, 2008, BNSF Railway had $694 million and $6 million,
respectively, of intercompany notes receivable from BNSF. The $688 million
increase in intercompany notes receivable is due to $842 million of loans to
BNSF, partially offset by repayments of $154 million during the first nine
months of 2009. All intercompany notes have a variable interest rate of 1.0
percent above the monthly average of the daily effective Federal Funds rate.
Interest is collected semi-annually on all intercompany notes receivable.
Interest income from intercompany notes receivable is presented in interest
income, related parties in the Consolidated Statements of Income.
BNSF Railway
earned revenues of $25 million and $31 million for the nine months ended
September 30, 2009 and 2008, respectively, for transportation services provided
to BNSF Logistics by BNSF Railway. Additionally, BNSF Railway purchased truck
transportation services for the Company’s materials and supplies from BNSF
Logistics of $18 million and $29 million for the nine month periods ended
September 30, 2009 and 2008.
Under various
stock incentive plans, BNSF has granted options to employees to purchase its
common stock at a price not less than the fair market value at the date of
grant. Certain employees of BNSF Railway participate in these plans. In
addition, under these plans BNSF has other long-term incentive plans to certain
BNSF Railway employees, including, among other things, restricted stock and a
discounted stock purchase program.
9. Comprehensive
Income
Other
comprehensive income refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income, a
component of Stockholder’s Equity within the Consolidated Balance Sheets, rather
than net income on the Consolidated Statements of Income. Under existing
accounting standards, other comprehensive income may include, among other
things, unrecognized gains and losses and prior service credit related to
pension and other postretirement benefit plans and accounting for derivative
financial instruments, which qualify for cash flow hedge
accounting.
The
following table provides a reconciliation of net income reported in the
Consolidated Statements of Income to total comprehensive income (in
millions):
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||
2009
|
2008
|
2009
|
2008
|
|||||
Net
income
|
$
|
546
|
$
|
759
|
$
|
1,394
|
$
|
1,703
|
Other
comprehensive income:
|
||||||||
Change
in unrecognized prior service credit and actuarial losses, net of tax (see
Note 7)
|
3
|
2
|
9
|
6
|
||||
Change
in fuel hedge mark-to-market and other items, net of tax (see Note
2)
|
8
|
(89)
|
208
|
(36)
|
||||
Change
in unrealized loss on securities held by equity method investees, net of
tax
|
1
|
(1)
|
1
|
(1)
|
||||
Total
comprehensive income
|
$
|
558
|
$
|
671
|
$
|
1,612
|
$
|
1,672
|
25
BNSF
RAILWAY COMPANY and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
The following
table provides the components of accumulated other comprehensive loss (in
millions):
September
30, 2009
|
December
31, 2008
|
|||
Unrecognized
prior service credit and actuarial losses, net of tax (see Note
7)
|
$
|
(514)
|
$
|
(523)
|
Fuel/interest
hedge mark-to-market and other items, net of tax (see Note
2)
|
(73)
|
(281)
|
||
Unrealized
loss on securities held by equity method investees, net of
tax
|
(6)
|
(7)
|
||
Total
Accumulated other comprehensive loss
|
$
|
(593)
|
$
|
(811)
|
10. Accounting
Pronouncements
In June 2009, the FASB issued Statement
of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140. SFAS 166
limits the circumstances in which financial assets can be derecognized and
requires enhanced disclosures regarding transfers of financial assets and a
transferor’s continuing involvement with transferred financial assets. SFAS No.
166 also eliminates the concept of a qualifying special-purpose entity (QSPE),
which will require companies to evaluate former QSPEs for
consolidation.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends existing guidance used to determine whether or not a company is required to consolidate a variable interest entity (VIE) and requires enhanced disclosures. SFAS No. 167 eliminates quantitative-based assessments and will require companies to perform ongoing qualitative assessments to determine whether or not the VIE should be consolidated.
Both SFAS
166 and SFAS 167 are effective for the Company on January 1, 2010.
As discussed
in Note 3, the Company’s A/R sales program involves a master trust that issues
an undivided interest in receivables to investors. The A/R sales
master trust is not currently consolidated in the Company’s financial statements
and the undivided interest in receivables that have been sold to investors is
derecognized. These new pronouncements will require the Company to
consolidate the A/R sales master trust and to no longer derecognize the
undivided interest sold to investors effective January 1, 2010. As a
result, the Company’s Consolidated Balance Sheets will reflect an increase in
accounts receivable, net and an increase in current liabilities for the amount
of undivided interest sold to investors and any related cash flow impacts will
be included in Financing Activities rather than Operating Activities in the
Consolidated Statements of Cash Flows. There was no outstanding interest held by
investors under the A/R sales program at September 30, 2009. Outstanding
undivided interests held by investors under the A/R sales program was $50
million at December 31, 2008.
11. Report
of Independent Registered Public Accounting Firm
PricewaterhouseCoopers
LLP’s review report is included in this quarterly report; however,
PricewaterhouseCoopers LLP does not express an opinion on the unaudited
financial information. Accordingly, such report is not a “report” or “part of a
registration statement” within the meaning of Sections 7 and 11 of the
Securities Act of 1933 and PricewaterhouseCoopers LLP is not subject to the
liability provisions of Section 11 of such Act with respect to the review
report.
Report
of Independent Registered Public Accounting Firm
To the
Shareholder and Board of Directors of
BNSF
Railway Company:
We have
reviewed the accompanying consolidated balance sheet of BNSF Railway Company and
its subsidiaries ("the Company") as of September 30, 2009, and the related
consolidated statements of income for the three-month and nine-month periods
ended September 30, 2009 and 2008, consolidated statements of cash flows for the
nine-month periods ended September 30, 2009 and 2008 and consolidated statement
of changes in stockholder's equity for the nine-month period ended September 30,
2009. These interim financial statements are the responsibility of
the Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2008, and the related consolidated statements of income, of changes
in stockholder's equity, and of cash flows for the year then ended (not
presented herein), and in our report dated February 12, 2009 we expressed an
unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet information as of December 31, 2008, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
/s/
PricewaterhouseCoopers LLP
Fort
Worth, Texas
October
23, 2009
Management’s
narrative analysis relates to the results of operations of BNSF Railway Company
and its majority-owned subsidiaries (collectively BNSF Railway, Registrant or
Company). The following narrative analysis should be read in conjunction with
the Consolidated Financial Statements and the accompanying notes.
Results of
Operations
Nine
Months Ended September 30, 2009, Compared with Nine Months Ended September 30,
2008
Revenues
Summary
The
following table presents BNSF Railway’s revenue information by business group
for the nine months ended September 30, 2009 and 2008.
Revenues
(in
millions)
|
Cars
/ Units
(in
thousands)
|
Average
Revenue
Per
Car / Unit
|
|||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||
Consumer
Products
|
$
|
3,176
|
$
|
4,643
|
2,912
|
3,655
|
|
$ |
1,091
|
$
|
1,270
|
||
Coal
|
2,678
|
2,903
|
1,820
|
1,868
|
1,471
|
1,554
|
|||||||
Industrial
Products
|
2,152
|
3,109
|
888
|
1,245
|
2,423
|
2,497
|
|||||||
Agricultural
Products
|
2,012
|
2,603
|
686
|
817
|
2,933
|
3,186
|
|||||||
Total
Freight Revenues
|
10,018
|
13,258
|
6,306
|
7,585
|
|
$ |
1,589
|
$
|
1,748
|
||||
Other
Revenues
|
189
|
210
|
|||||||||||
Total
Operating Revenues
|
$
|
10,207
|
$
|
13,468
|
Fuel
Surcharges
Freight
revenues include both revenue for transportation services and fuel surcharges.
BNSF Railway’s fuel surcharge program is intended to recover its incremental
fuel costs when fuel prices exceed a threshold fuel price. Fuel surcharges are
calculated differently depending on the type of commodity transported. In
certain commodities, fuel surcharge is calculated using a fuel price from a
time period that can be up to 60 days earlier. In a period of volatile
fuel prices or changing customer business mix, changes in fuel expense and fuel
surcharge may significantly differ.
The
following table presents fuel surcharge and fuel expense information for the
nine months ended September 30, 2009 and 2008 (in millions).
2009
|
2008
|
|||
Total
fuel expense a
|
$
|
1,729
|
$
|
3,685
|
BNSF
fuel surcharges
|
$
|
859
|
$
|
2,500
|
a Total
fuel expense includes locomotive and non-locomotive fuel as well as gains and
losses from fuel hedges, which do not impact the fuel surcharge
program.
Revenues
Freight
revenues for the first nine months of 2009 were $10,018 million, 24 percent
lower than the same 2008 period, on a 17-percent decline in unit volumes
resulting from the economic downturn. Average revenue per car/unit was 9 percent
lower in the first nine months of 2009 than the first nine months of 2008
primarily due to a decrease in fuel surcharges.
Consumer
Products
The Consumer
Products’ freight business includes a significant intermodal component and
consists of the following three business areas: international intermodal,
domestic intermodal and automotive.
Consumer
Products revenues of $3,176 million for the first nine months of 2009 were
$1,467 million, or 32 percent less than the first nine months of 2008. This
reflects lower international intermodal, domestic intermodal and automotive
volumes due to the economy and a reduction in average revenue per unit due
primarily to lower fuel surcharges.
Coal
BNSF Railway is one of the largest transporters of low-sulfur coal in the United States. More than 90 percent of all BNSF Railway’s coal tons originate from the Powder River Basin of Wyoming and Montana.
Coal revenues
of $2,678 million for the first nine months of 2009 declined $225 million, or 8
percent, compared with the same 2008 period. The decline was due to decreased
fuel surcharges, lower unit volumes and a $66 million loss in excess of amounts
previously accrued related to the unfavorable coal rate case decision during the
first quarter of 2009 (see Note 5 to the Consolidated Financial Statements under
the heading “Coal Rate Case Decision.”) These declines were partially offset by
improved yields from renewed contracts and a $22 million favorable coal rate
case decision during the second quarter of 2009.
Industrial
Products
The
Industrial Products’ freight business consists of five business areas:
construction products, building products, petroleum products, chemicals &
plastic products and food & beverages.
Industrial
Products revenues of $2,152 million for the first nine months of 2009 were $957
million, or 31 percent less than the first nine months of 2008 due to lower unit
volumes, driven primarily by decreased demand for construction and building
products, and lower fuel surcharges, partially offset by improved
yields.
Agricultural
Products
The
Agricultural Products’ freight business transports agricultural products
including corn, wheat, soybeans, bulk foods, ethanol, fertilizer and other
products.
Agricultural
Products revenues of $2,012 for the first nine months of 2009 decreased $591
million, or 23 percent. This decrease was due mainly to lower fuel surcharges,
as well as lower unit volumes predominately due to reduced domestic loadings and
international grain shipments, partially offset by improved yields.
Other
Revenues
Other
revenues decreased $21 million, or 10 percent, to $189 million for the first
nine months of 2009. This was primarily due to a decrease in charges for storage
costs.
Expenses
Total
operating expenses for the first nine months of 2009 were $7,864 million, a
decrease of $2,814 million, or 26 percent, from the same period in
2008.
Compensation
and benefits
Compensation
and benefits includes expenses for BNSF Railway employee wages, health and
welfare, payroll taxes and other related items. The primary factors influencing
the expenses recorded are volume, headcount, utilization, wage rates, incentives
earned during the period, benefit plan participation and pension
expenses.
Compensation
and benefits expenses of $2,546 million in the first nine months of 2009 were
$386 million, or 13 percent lower than the same prior year period. This
reduction was primarily the result of decreased volumes, effective cost
controls, as well as lower incentive compensation costs, which cover all
non-union and about one quarter of union employees. The average number of
employees decreased 8 percent compared to the same 2008 period.
Fuel
Fuel expense
is driven by market price, the level of locomotive consumption of diesel fuel
and the effects of hedging activities. Substantially all fuel expense consists
of fuel used in locomotives for transportation services. Fuel expense also
includes non-locomotive fuel-related costs such as, fuel used in vehicles
(maintenance of way and other vehicles/equipment), fuel used in refrigerated
cars, intermodal facilities’ fuel, and fuel-based products used in servicing
locomotives.
Fuel expenses
of $1,729 million for the first nine months of 2009 were $1,956 million, or 53
percent lower than the first nine months of 2008. The decrease in fuel expense
was primarily due to a decrease in the average all-in cost per gallon of
locomotive diesel fuel. The average all-in cost per gallon of locomotive diesel
fuel decreased by $1.50 to $1.83, resulting in a $1,340 million decrease in
expense. The decrease in the average all-in cost reflected a decrease in the
average purchase price per gallon of $1.75, or a $1,569 million decrease in
locomotive fuel expense, offset by an increase in the hedge loss of 25 cents per
gallon, or $229 million (first nine months 2009 loss of $185 million less first
nine months 2008 benefit of $44 million). Locomotive fuel consumption for the
first nine months of 2009 decreased by 168 million gallons to 900 million
gallons, when compared with consumption in the same 2008 period, resulting in a
decrease in expense of $566 million. The remainder of the decrease was primarily
due to lower non-locomotive fuel prices.
Purchased
services
Purchased
services expense includes the following: ramping (lifting of containers onto and
off of rail cars); drayage (highway movements to and from railway facilities);
maintenance of locomotives, freight cars and equipment; transportation costs
over other railroads; technology services outsourcing; professional services;
and other contract services provided to BNSF Railway. The expenses are driven by
the rates established in the related contracts and the volume of services
required.
Purchased
service expenses of $1,382 million for the first nine months of 2009 were $169
million, or 11 percent lower than the first nine months of 2008. Variable
expenses on lower volumes led to decreased costs in ramping, drayage, car
repairs and other volume related costs.
Depreciation
and amortization
Depreciation
and amortization expenses for the period are determined by using the group
method of depreciation, which applies a single rate to the gross investment in a
particular class of property. Due to the capital-intensive nature of BNSF
Railway’s operations, depreciation expense is a significant component of the
Company’s operating expenses. The full effect of inflation is not reflected in
operating expenses because depreciation is based on historical
cost.
Depreciation
and amortization expenses of $1,133 million for the first nine months of 2009
were $95 million, or 9 percent higher than the same period in 2008. This
increase in depreciation expense was primarily due to capital expenditures and
due to updated depreciation rates that went into effect in April 2008 for other
roadway property, which includes items such as bridges, office buildings and
facilities, telecommunication and information technology systems and
machinery.
Equipment
rents
Equipment
rents expense includes long-term and short-term payments primarily for
locomotives, freight cars, containers and trailers. The expense is driven
primarily by volume, lease and rental rates, utilization of equipment and
changes in business mix resulting in equipment usage variances.
Equipment
rents expenses of $591 million for the first nine months of 2009 were $91
million, or 13 percent lower than the first nine months of 2008. Improved car
velocity, lower volumes and the return of leased equipment all contributed to
the decrease.
Materials
and other
Material
expenses consist mainly of the costs involved to purchase mechanical and
engineering materials, in addition to other items for maintenance of property
and equipment. Other expenses principally include environmental remediation and
derailments as well as utilities, impairments of long-lived assets, locomotive
overhauls, property and miscellaneous taxes and employee separation costs. The
total is offset by gains on land sales and insurance recoveries.
Materials and
other expenses of $483 million for the first nine months of 2009 were $307
million or 39 percent lower than the first nine months of 2008 due largely to
expenses in connection with environmental matters in Montana during the second
quarter of 2008, lower derailment and personal injury costs, reduced volumes and
effective cost controls.
Interest
expense
Interest expense of $92 million for the first nine months of 2009 was $22 million, or 31 percent higher than the first nine months of 2008. This was primarily due to the unfavorable coal rate case decision, which increased interest expense by $8 million (see Note 5 to the Consolidated Financial Statements under the heading “Coal Rate Case Decision”). The remainder of the increase was primarily due to a higher average debt balance. Favorable tax settlements impacted interest expense for both of the nine month periods ended September 30, 2009 and 2008.
Income
taxes
The effective
tax rate for the nine months ended September 30, 2009, was 38.0 percent compared
with 37.3 percent for the same prior year period. Favorable tax settlements
impacted both of the nine month periods ended September 30, 2009 and
2008.
Forward-Looking
Information
To the extent
that statements made by the Company relate to the Company’s future economic
performance or business outlook, projections or expectations of financial or
operational results, or refer to matters that are not historical facts, such
statements are “forward-looking” statements within the meaning of the federal
securities laws. These forward-looking statements include, but are not limited
to, statements regarding:
• | Expectations as to operating results, such as revenues and earnings; |
• | Expectations as to the effect on the Company’s financial condition of claims, litigation, environmental and personal injury costs, |
commitments, contingent liabilities, U.S. Surface Transportation Board and other governmental and regulatory investigations and | |
proceedings, and changes in the economic laws and regulations applicable to the rail industry; | |
• | Plans and goals for future operational improvements and capital commitments; and |
• | Current or future volatility in the credit market and future market conditions or economic performance. |
Forward-looking
statements involve a number of risks and uncertainties, and actual performance
or results may differ materially. For a discussion of material risks and
uncertainties that the Company faces, see the discussion in the Annual Report on
Form 10-K titled “Risk Factors.” Important factors that could cause actual
results to differ materially include, but are not limited to, the
following:
•
Economic and industry
conditions: material adverse changes in economic or industry conditions,
both in the United States and globally, volatility in the capital or credit
markets including changes affecting the timely availability and cost of capital,
changes in customer demand, effects of adverse economic conditions affecting
shippers or BNSF Railway’s supplier base and in the industries and geographic
areas that produce and consume freight, changes in demand due to more stringent
regulatory policies such as the regulation of carbon dioxide emissions that
could reduce the demand for coal or governmental tariffs or subsidies that could
affect the demand for grain, competition and consolidation within the
transportation industry, the extent to which BNSF Railway is successful in
gaining new long-term relationships with customers or retaining existing ones,
level of service failures that could lead customers to use competitors'
services, changes in fuel prices and other key materials and disruptions in
supply chains for these materials, increased customer bankruptcies, closures or
slowdowns, and changes in crew availability, labor costs and labor difficulties,
including stoppages affecting either BNSF Railway’s operations or customers’
abilities to deliver goods to BNSF Railway for shipment;
• Legal, legislative and regulatory
factors: developments and changes in laws and regulations, including
those affecting train operations or the marketing of services, the ultimate
outcome of shipper and rate claims subject to adjudication or claims,
investigations or litigation alleging violations of the antitrust laws,
increased economic regulation of the rail industry through legislative action
and revised rules and standards applied by the U.S. Surface Transportation Board
in various areas including rates and services, other more general legislative
actions, developments in environmental investigations or proceedings with
respect to rail operations or current or past ownership or control of real
property or properties owned by others impacted by BNSF Railway operations, and
developments in and losses resulting from other types of claims and litigation,
including those relating to personal injuries, asbestos and other occupational
diseases, the release of hazardous materials, environmental contamination and
damage to property; the availability of adequate insurance to cover the risks
associated with operations; and
• Operating factors: technical difficulties, changes in operating conditions and costs, changes in business mix, the availability of equipment and human resources to meet changes in demand, the extent of the Company’s ability to achieve its operational and financial initiatives and to contain costs in response to changes in demand and other factors, the effectiveness of steps taken to maintain and improve operations and velocity and network fluidity, operational and other difficulties in implementing positive train control technology, restrictions on development and expansion plans due to environmental concerns, constraints due to the nation’s aging infrastructure, disruptions to BNSF Railway’s technology network including computer systems and software, as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of BNSF Railway’s operating systems, structures, or equipment including the effects of acts of terrorism on the Company’s system or other railroads’ systems or other links in the transportation chain.
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 as of 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. In the event the Company does
update any forward-looking statement, no inference should be made that the
Company will make additional updates with respect to that statement, related
matters, or any other forward-looking statements. Any corrections or revisions
and other important assumptions and factors that could cause actual results to
differ materially from forward-looking statements made by the Company may appear
in the Company’s public filings with the SEC, which are accessible at
www.sec.gov, and on the Company’s Web site at www.bnsf.com, and which investors
are advised to consult.
Based on
their evaluation as of the end of the period covered by this quarterly report on
Form 10-Q, BNSF Railway’s principal executive officer and principal financial
officer have concluded that BNSF Railway’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934) are effective to ensure that information required to be disclosed by BNSF
Railway in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in Securities and Exchange Commission rules and forms and that
such information is accumulated and communicated to BNSF Railway’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. As
discussed below, management effected changes in BNSF Railway’s internal control
over financial reporting that occurred during BNSF Railway’s third fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, BNSF Railway’s internal control over financial reporting. There were no
other changes in BNSF Railway's internal control over financial reporting that
occurred during BNSF Railway’s third fiscal quarter that have materially
affected, or are reasonably likely to materially affect, BNSF Railway's internal
control over financial reporting.
In July
2009, the Company implemented a new Enterprise Resource Planning (ERP) system.
The implementation of this new ERP system involved changes to the Company’s
procedures for internal control over financial reporting. The Company followed a
system implementation life cycle process that required pre-implementation
planning, design and testing. The Company conducted post-implementation
monitoring, testing and process modifications to ensure the effectiveness of
internal control over financial reporting. The Company does not believe that
this ERP system implementation had an adverse effect on the Company’s internal
control over financial reporting.
PART
II OTHER INFORMATION
Item
1. Legal Proceedings
Reference is
made to the Company’s Form 10-Q for the quarter ending March 31, 2009, with
respect to the February 17, 2009 decision of the United States
Surface Transportation Board (STB) in Western Fuels Association, Inc. and
Basin Electric Power Cooperative v. BNSF Railway Company, STB Docket No.
42088), and BNSF Railway Company’s appeal of this STB decision to the United
States Court of Appeals for the District of Columbia Circuit (Western Fuels Association, Inc. and
Basin Electric Power Cooperative v. Surface Transportation Board and United
States of America, Consolidated Docket Nos. 08-1167 and 09-1092). For
information relating to these matters, see Note 5, Commitments and Contingencies
under Part I, Item 1 of this Quarterly Report on Form 10-Q.
See Index to Exhibits on page E-1 for a description of the exhibits filed as part of this report.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
BNSF
Railway Company
(Registrant)
|
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By: |
/s/ Thomas
N. Hund
|
||
Thomas
N. Hund
Executive
Vice President and Chief Financial Officer
(On
behalf of the Registrant and
as
principal financial officer)
|
Dated: October
23, 2009
|
Exhibit
Index
__________________
*Filed
herewith