Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2009
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE
TRANSITION PERIOD FROM ___________TO ___________
COMMISSION
FILE NUMBER: 1-6324
Exact
name of registrant as specified in its charter
BNSF
RAILWAY COMPANY
|
State
of Incorporation
Delaware
|
I.R.S.
Employer Identification No.
41-6034000
|
|
Address
of principal executive offices, including zip code
2650
Lou Menk Drive
Fort
Worth, Texas 76131-2830
|
Registrant’s
telephone number, including area code
(800)
795-2673
|
|
Securities
registered pursuant to Section 12(b) of the Act:
The
securities listed below are registered on the New York Stock
Exchange.
Title of
each class
|
|
|
Burlington
Northern Inc.
(Now
BNSF Railway Company)
Consolidated
Mortgage Bonds
6.55%,
Series K, due 2020
3.80%,
Series L, due 2020
3.20%,
Series M, due 2045
8.15%,
Series N, due 2020
6.55%,
Series O, due 2020
8.15%,
Series P, due 2020
Debenture,
8.75%, due 2022
|
Northern
Pacific Railway Company
General
Lien Railway and Land Grant 3% Bonds, due 2047
|
| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | Yes [ ] No [x] |
| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | Yes [ ] No [x] |
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
|
Yes [x] No [ ] |
|
Indicate
by check mark 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 [x] |
| Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company (as defined in Rule 12b-2 of the 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 Act). | Yes [ ] No [x] |
| Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: | |
| 1,000 shares of Outstanding Common Stock, $1.00 par value, as of February 11, 2010. | |
| *BNSF Railway Company is a wholly–owned subsidiary of Burlington Northern Santa Fe Corporation; as a result, there is no market data with respect to registrant’s shares. |
DOCUMENTS
INCORPORATED BY REFERENCE
None
REGISTRANT
MEETS THE CONDITIONS SET FORTH IN THE GENERAL INSTRUCTION (I)(1)(a) AND (b) OF
FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
i
Item
1. Business
BNSF
Railway Company (BNSF Railway, Registrant or Company), formerly known as The
Burlington Northern and Santa Fe Railway Company and the Burlington Northern
Railroad Company (BNRR) was incorporated in the State of Delaware on January 13,
1961, and is a wholly-owned subsidiary of Burlington Northern Santa Fe
Corporation (BNSF). On September 22, 1995, the shareholders of Burlington
Northern Inc. (BNI) and Santa Fe Pacific Corporation (SFP) became the
shareholders of BNSF pursuant to a business combination of the two
companies.
On
December 30, 1996, BNI merged with and into SFP. On December 31, 1996, The
Atchison, Topeka and Santa Fe Railway Company merged with and into BNRR, and
BNRR changed its name to The Burlington Northern and Santa Fe Railway Company.
On January 2, 1998, SFP merged with and into The Burlington Northern and Santa
Fe Railway Company. On January 20, 2005, The Burlington Northern and Santa Fe
Railway Company changed its name to BNSF Railway Company.
BNSF
Railway is a wholly-owned subsidiary of BNSF. Berkshire Hathaway Inc., a
Delaware corporation (Berkshire), R Acquisition Company, LLC, a Delaware limited
liability company and an indirect wholly owned subsidiary of Berkshire (Merger
Sub), and BNSF have entered into a definitive Agreement and Plan of Merger (the
Merger Agreement) dated as of November 2, 2009. Pursuant to the Merger
Agreement and subject to the conditions set forth therein, BNSF will merge with
and into Merger Sub (the Merger) with Merger Sub surviving as an indirect wholly
owned subsidiary of Berkshire. Merger Sub will change its name to Burlington
Northern Santa Fe, LLC upon completion of the Merger. After the
Merger is consummated, BNSF Railway will be a wholly-owned subsidiary of
Burlington Northern Santa Fe, LLC.
The
Merger is subject to the approval of (i) the holders of at least 66-2/3% of
the issued and outstanding shares of BNSF common stock not owned by Berkshire or
any of its affiliates or associates and (ii) the holders of a majority of
the issued and outstanding shares of BNSF common stock, as well as to the
satisfaction or waiver of other conditions as provided in the Merger Agreement.
The Merger is expected to be completed on February 12, 2010. Further information
on the proposed Merger is incorporated by reference from Note 1 to the
Consolidated Financial Statements.
BNSF
Railway’s internet address is www.bnsf.com. Through this internet Web site
(under the “Investors” link), BNSF Railway makes available, free of charge, its
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K, as well as all amendments to those reports, as soon as reasonably
practicable after these reports are electronically filed with or furnished to
the Securities and Exchange Commission (the SEC).
Further
discussion of the Company’s business, including equipment and business sectors,
is incorporated by reference from Item 2, “Properties.”
Item
1A. Risk Factors
Changes
in government policy could negatively impact demand for the Company’s services,
impair its ability to price its services or increase its costs or liability
exposure.
Changes
in United States and foreign government policies could change the economic
environment and affect demand for the Company’s services. For example, changes
in clean air laws or regulation of carbon dioxide emissions could reduce the
demand for coal and revenues from the coal transportation services provided by
BNSF Railway. Also, United States and foreign government agriculture tariffs or
subsidies could affect the demand for grain. Developments and changes in laws
and regulations as well as 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, services and
access to facilities could adversely impact the Company’s ability to determine
prices for rail services and significantly affect the revenues, costs and
profitability of the Company’s business. Additionally, because of the
significant costs to maintain its rail network, a reduction in profitability
could hinder the Company’s ability to maintain, improve or expand its rail
network, facilities and equipment. Federal or state spending on infrastructure
improvements or incentives that favor other modes of transportation could also
adversely affect the Company’s revenues.
The
Company’s success depends on its ability to continue to comply with the
significant federal, state and local governmental regulations to which it is
subject.
The
Company is subject to a significant amount of governmental laws and regulation
with respect to its rates and practices, railroad operations and a variety of
health, safety, labor, environmental and other matters. Failure to comply with
applicable laws and regulations could have a material adverse effect on the
Company. Governments may change the legislative and/or regulatory framework
within which the Company operates without providing the Company with any
recourse for any adverse effects that the change may have on its business.
Federal legislation enacted in 2008 mandates the implementation of positive
train control technology by December 31, 2015, on certain mainline track where
intercity and commuter passenger railroads operate and where toxic-by-inhalation
hazardous materials are transported. This type of technology is new and
deploying it across BNSF Railway’s system and other railroads may pose
significant operating and implementation risks and will require significant
capital expenditures.
As
part of its railroad operations, the Company frequently transports chemicals and
other hazardous materials, which could expose it to the risk of significant
claims, losses and penalties.
BNSF
Railway is required to transport these commodities to the extent of its common
carrier obligation. An accidental release of these commodities could result in a
significant loss of life and extensive property damage as well as environmental
remediation obligations. The associated costs could have an adverse effect on
the Company’s operating results, financial condition or liquidity as the Company
is not insured above a certain threshold. Further, the rates BNSF Railway
receives for transporting these commodities do not adequately compensate it
should there be some type of accident. In addition, insurance premiums charged
for some or all of the coverage currently maintained by the Company could
increase dramatically or certain coverage may not be available to the Company in
the future if there is a catastrophic event related to rail transportation of
these commodities.
The
Company faces intense competition from rail carriers and other transportation
providers, and its failure to compete effectively could adversely affect its
results of operations, financial condition or liquidity.
The
Company operates in a highly competitive business environment. Depending on the
specific market, the Company faces intermodal, intramodal, product and
geographic competition. This competition from other railroads and motor
carriers, as well as barges, ships and pipelines in certain markets, may be
reflected in pricing, market share, level of services, reliability and other
factors. For example, the Company believes that high service truck lines, due to
their ability to deliver non-bulk products on an expedited basis, have had and
will continue to have an adverse effect on the Company’s ability to compete for
deliveries of non-bulk, time-sensitive freight. While the Company must build or
acquire and maintain its rail system, trucks and barges are able to use public
rights-of-way maintained by public entities. Any material increase in the
capacity and quality of these alternative methods or the passage of legislation
granting greater latitude to motor carriers with respect to size and weight
restrictions could have an adverse effect on the Company’s results of
operations, financial condition or liquidity. In addition, a failure to provide
the level of service required by the Company’s customers could result in loss of
business to competitors. Changes in the ports used by ocean carriers or the use
of all-water routes from the Pacific Rim to the East Coast or other changes in
the supply chain could also have an adverse effect on the Company’s volumes and
revenues.
Downturns
in the economy could adversely affect demand for the Company’s
services.
Significant,
extended negative changes in domestic and global economic conditions that impact
the producers and consumers of the commodities transported by the Company may
have an adverse effect on the Company’s operating results, financial condition
or liquidity. Declines in or muted manufacturing activity, economic growth and
international trade all could result in reduced revenues in one or more business
units.
Negative
changes in general economic conditions could lead to disruptions in the credit
markets, increase credit risks and could adversely affect the Company’s
financial condition or liquidity.
Challenging
economic conditions may not only affect revenues due to reduced demand for many
goods and commodities, but could result in payment delays, increased credit risk
and possible bankruptcies of customers. Railroads are capital-intensive and must
finance a portion of the building and maintenance of infrastructure as well as
locomotives and other rail equipment. Economic slowdowns and related credit
market disruptions may adversely affect the Company’s cost structure, its timely
access to capital to meet financing needs and costs of its financings. The
Company could also face increased counterparty risk for its cash investments and
its hedge arrangements. Adverse economic conditions could also affect the
Company’s costs for insurance or its ability to acquire and maintain adequate
insurance coverage for risks associated with the railroad business if insurance
companies experience credit downgrades or bankruptcies. Declines in the
securities and credit markets could also affect the Company’s pension fund and
railroad retirement tax rates, which in turn could increase funding
requirements.
The
Company is subject to stringent environmental laws and regulations, which may
impose significant costs on its business operations.
The
Company’s operations are subject to extensive federal, state and local
environmental laws and regulations concerning, among other things, emissions to
the air; discharges to waters; the generation, handling, storage, transportation
and disposal of waste and hazardous materials; and the cleanup of hazardous
material or petroleum releases. Changes to or limits on carbon dioxide emissions
could result in significant capital expenditures to comply with these
regulations with respect to BNSF Railway’s diesel locomotives, equipment,
vehicles and machinery and its yards and intermodal facilities and the cranes
and trucks serving those facilities. Emission regulations could also adversely
affect fuel efficiency and increase operating costs. Further, local concerns on
emissions and other forms of pollution could inhibit the Company’s ability to
build facilities in strategic locations to facilitate growth and efficient
operations. In addition, many 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. Environmental liability can extend to previously owned or operated
properties, leased properties and properties owned by third parties, as well as
to properties currently owned and used by the Company’s subsidiaries.
Environmental liabilities have arisen and may continue to arise from claims
asserted by adjacent landowners or other third parties in toxic tort litigation.
The Company’s subsidiaries have been and may continue to be subject to
allegations or findings to the effect that they have violated, or are strictly
liable under, these laws or regulations. The Company’s operating results,
financial condition or liquidity could be adversely affected as a result of any
of the foregoing, and it may be required to incur significant expenses to
investigate and remediate environmental contamination. The Company records
liabilities for environmental cleanup when the amount of its liability is both
probable and reasonably estimable.
Fuel
supply availability and fuel prices may adversely affect the Company’s results
of operations, financial condition or liquidity.
Fuel
supply availability could be impacted as a result of limitations in refining
capacity, disruptions to the supply chain, rising global demand and
international political and economic factors. A significant reduction in fuel
availability could impact the Company’s ability to provide transportation
services at current levels, increase fuel costs and impact the economy. Each of
these factors could have an adverse effect on the Company’s operating results,
financial condition or liquidity. If the price of fuel increases substantially,
the Company expects to be able to offset a significant portion of these higher
fuel costs through its fuel surcharge program. However, to the extent that the
Company is unable to maintain and expand its existing fuel surcharge program,
increases in fuel prices could have an adverse effect on the Company’s operating
results, financial condition or liquidity.
Severe
weather and natural disasters could disrupt normal business operations, which
would result in increased costs and liabilities and decreases in
revenues.
The
Company’s success is dependent on its ability to operate its railroad system
efficiently. Severe weather and natural disasters, such as tornados, flooding
and earthquakes, could cause significant business interruptions and result in
increased costs and liabilities and decreased revenues. In addition, damages to
or loss of use of significant aspects of the Company’s infrastructure due to
natural or man-made disruptions could have an adverse effect on the Company’s
operating results, financial condition or liquidity for an extended period of
time until repairs or replacements could be made. Additionally, during natural
disasters, the Company’s workforce may be unavailable, which could result in
further delays. Extreme swings in weather could also negatively affect the
performance of locomotives and rolling stock.
The
Company’s operational dependencies may adversely affect results of operations,
financial condition or liquidity.
Due to
the integrated nature of the United States’ freight transportation
infrastructure, the Company’s operations may be negatively affected by service
disruptions of other entities such as ports and other railroads which
interchange with the Company. A significant prolonged service disruption of one
or more of these entities could have an adverse effect on the Company’s results
of operations, financial condition or liquidity.
Acts
of terrorism or war, as well as the threat of war, may cause significant
disruptions in the Company’s business operations.
Terrorist
attacks and any government response to those types of attacks and war or risk of
war may adversely affect the Company’s results of operations, financial
condition or liquidity. The Company’s rail lines and facilities could be direct
targets or indirect casualties of an act or acts of terror, which could cause
significant business interruption and result in increased costs and liabilities
and decreased revenues, which could have an adverse effect on operating results
and financial condition. Such effects could be magnified if releases of
hazardous materials are involved. Any act of terror, retaliatory strike,
sustained military campaign or war or risk of war may have an adverse impact on
the Company’s operating results and financial condition by causing unpredictable
operating or financial conditions, including disruptions of BNSF Railway or
connecting rail lines, loss of critical customers or partners, volatility or
sustained increase of fuel prices, fuel shortages, general economic decline and
instability or weakness of financial markets. In addition, insurance premiums
charged for some or all of the coverage currently maintained by the Company
could increase dramatically, the coverage available may not adequately
compensate it for certain types of incidents and certain coverages may not be
available to the Company in the future.
The
Company depends on the stability and availability of its information technology
systems.
The
Company relies on information technology in all aspects of its business. A
significant disruption or failure of its information technology systems could
result in service interruptions, safety failures, security violations,
regulatory compliance failures and the inability to protect corporate
information assets against intruders or other operational difficulties. Although
the Company has taken steps to mitigate these risks, including Business
Continuity Planning, Disaster Recovery Planning and Business Impact Analysis, a
significant disruption could adversely affect the Company’s results of
operations, financial condition or liquidity. Additionally, if the Company is
unable to acquire or implement new technology, it may suffer a competitive
disadvantage, which could also have an adverse effect on the Company’s results
of operations, financial condition or liquidity.
Personal
injury claims constitute a significant expense, and increases in the amount or
severity of these claims could adversely affect the Company’s operating results,
financial condition and liquidity.
The
Company is subject to various personal injury claims by third parties and
employees, including claims by employees who worked around asbestos until 1985,
when its use at BNSF Railway was substantially eliminated. Personal injury
claims by BNSF Railway employees are subject to the Federal Employees’ Liability
Act (FELA), rather than state workers’ compensation laws. The Company believes
that the FELA system, which includes unscheduled awards and a reliance on the
jury system, can contribute to increased expenses. Future events, such as
increases in the number of claims that are filed, developments in legislative
and judicial standards and the costs of settling claims, could result in an
adverse effect on the Company’s operating results, financial condition and
liquidity.
Most
of the Company’s employees are represented by unions, and failure to
successfully negotiate collective bargaining agreements may result in strikes,
work stoppages or substantially higher ongoing labor costs.
A
significant majority of BNSF Railway’s employees are union-represented. BNSF
Railway’s union employees work under collective bargaining agreements with
various labor organizations. Wages, health and welfare benefits, work rules and
other issues have traditionally been addressed through industry-wide
negotiations. These negotiations have generally taken place over an extended
period of time and have previously not resulted in any extended work stoppages.
The existing agreements have remained in effect and will continue to remain in
effect until new agreements are reached or the Railway Labor Act’s procedures
(which include mediation, cooling-off periods and the possibility of
Presidential intervention) are exhausted. While the negotiations have not yet
resulted in any extended work stoppages, if BNSF Railway is unable to negotiate
acceptable new agreements, it could result in strikes by the affected workers,
loss of business and increased operating costs as a result of higher wages or
benefits paid to union members, any of which could have an adverse effect on the
Company’s operating results, financial condition or liquidity.
The
unavailability of qualified personnel could adversely affect the Company’s
operations.
Changes
in demographics, training requirements and the unavailability of qualified
personnel, particularly engineers and trainmen, could negatively impact the
Company’s ability to meet demand for rail service. Recruiting and retaining
qualified personnel, particularly those with expertise in the railroad industry,
are vital to operations. Although the Company has adequate personnel for the
current business environment, unpredictable increases in demand for rail
services may exacerbate the risk of not having sufficient numbers of trained
personnel, which could have a negative impact on operational efficiency and
otherwise have a material adverse effect on the Company’s operating results,
financial condition or liquidity.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Track
Configuration
BNSF
Railway operates one of the largest railroad networks in North America with
approximately 32,000 route miles of track, excluding multiple main tracks, yard
tracks and sidings, approximately 23,000 miles of which are owned route miles,
including easements, in 28 states and two Canadian provinces as of December 31,
2009. Approximately 9,000 route miles of BNSF Railway’s system consist of
trackage rights that permit BNSF Railway to operate its trains with its crews
over other railroads’ tracks.
As of December 31, 2009, the total BNSF Railway system, including single and multiple main tracks, yard tracks and sidings, consisted of approximately 50,000 operated miles of track, all of which are owned by or held under easement by BNSF Railway except for approximately 10,000 route miles operated under trackage rights. At December 31, 2009, approximately 26,000 miles of BNSF Railway’s track consisted of 112-pound per yard or heavier rail, including approximately 20,000 track miles of 131-pound per yard or heavier rail.
Equipment
Configuration
BNSF
Railway owned or had under non-cancelable leases exceeding one year the
following units of railroad rolling stock and other equipment as of the dates
shown below. During 2009, BNSF Railway continued phasing out intermodal
equipment (domestic chassis, domestic containers and trailers) due to an
increase in customers providing their own equipment for services versus BNSF
Railway maintaining a rail-controlled fleet. Certain prior period amounts have
been adjusted to conform to current year presentation.
|
At
December 31,
|
2009
|
2008
|
2007
|
||||||
|
Locomotives
|
6,759
|
6,510
|
6,400
|
||||||
|
Freight
cars:
|
|||||||||
|
Covered hopper
|
33,878
|
35,381
|
36,439
|
||||||
|
Gondola
|
13,559
|
14,485
|
13,690
|
||||||
|
Open hopper
|
11,028
|
11,046
|
11,428
|
||||||
|
Flat
|
10,179
|
10,073
|
10,470
|
||||||
|
Box
|
5,493
|
6,145
|
7,948
|
||||||
|
Refrigerator
|
3,653
|
3,944
|
4,196
|
||||||
|
Auto rack
|
709
|
618
|
416
|
||||||
|
Tank
|
433
|
447
|
427
|
||||||
|
Other
|
397
|
416
|
324
|
||||||
|
Total freight
cars
|
79,329
|
82,555
|
85,338
|
||||||
|
Domestic
chassis
|
6,034
|
11,336
|
11,714
|
||||||
|
Domestic
containers
|
775
|
3,246
|
3,253
|
||||||
|
Trailers
|
−
|
1,195
|
1,200
|
||||||
|
Maintenance
of way and other
|
4,637
|
4,499
|
4,232
|
||||||
|
Commuter
passenger cars
|
164
|
163
|
163
|
||||||
|
Average
age from date of manufacture–locomotive fleet (years)a
|
16
|
15
|
15
|
||||||
|
Average
age from date of manufacture–freight car fleet (years)a
|
19
|
18
|
18
|
||||||
|
aThese averages are not weighted
to reflect the greater capacities of the newer
equipment.
|
|||||||||
BNSF
Railway operates various facilities and equipment to support its transportation
system, including its infrastructure and locomotives and freight cars. It also
owns or leases other equipment to support rail operations, including containers,
chassis and vehicles. Support facilities for rail operations include yards and
terminals throughout its rail network, system locomotive shops to perform
locomotive servicing and maintenance, a centralized network operations center
for train dispatching and network operations monitoring and management in Fort
Worth, Texas, regional dispatching centers, computers, telecommunications
equipment, signal systems and other support systems. Transfer facilities are
maintained for rail-to-rail as well as intermodal transfer of containers,
trailers and other freight traffic.
Business
Mix
In
serving the Midwest, Pacific Northwest and the Western, Southwestern and
Southeastern regions and ports of the country, BNSF Railway transports, through
one operating transportation services segment, a range of products and
commodities derived from manufacturing, agricultural and natural resource
industries. Based on weekly reporting by the Association of American Railroads,
BNSF Railway’s share of the western United States rail traffic in 2009 was
approximately 49 percent. Over half of the freight revenues of the Company are
covered by contractual agreements of varying durations, while the balance is
subject to common carrier, published prices or quotations offered by the
Company. BNSF Railway’s financial performance is influenced by, among other
things, general and industry economic conditions at the international, national
and regional levels. The following map illustrates the Company’s primary routes,
including trackage rights, which allow BNSF Railway to access major cities and
ports in the western and southern United States as well as Canadian and Mexican
traffic. In addition to major cities and ports, BNSF Railway efficiently serves
many smaller markets by working closely with approximately 200 shortline
partners. BNSF Railway has also entered into marketing agreements with CSX
Transportation, Canadian National Railway Company and Kansas City Southern
Railway Company, expanding the marketing reach for each railroad and their
customers.
Consumer
Products:
The
Consumer Products’ freight business provided approximately 32 percent of freight
revenues in 2009.
Coal:
In 2009,
the transportation of coal contributed about 26 percent of freight revenues.
Industrial
Products:
The
Industrial Products’ freight business provided approximately 21 percent of BNSF
Railway’s freight revenues in 2009.
Agricultural
Products:
The
transportation of Agricultural Products provided approximately 21 percent of
2009 freight revenues.
Railroad Retirement
Railroad
industry personnel are covered by the Railroad Retirement System instead of
Social Security. BNSF Railway’s contributions under the Railroad Retirement
System have been higher than those in industries covered by Social Security. The
Railroad Retirement System, funded primarily by payroll taxes on covered
employers and employees, includes a benefit roughly equivalent to Social
Security (Tier I), an additional benefit similar to that allowed in some private
defined-benefit plans (Tier II) and other benefits. For 2009, the Railroad
Retirement System required a 19.75 percent contribution by railroad employers on
eligible wages, while the Social Security and Medicare Acts only required a 7.65
percent contribution on similar wage bases.
Employee and Labor
Relations
A
significant majority of BNSF Railway’s employees are union-represented. Final
agreements have been reached in the most recent bargaining round covering 100
percent of BNSF Railway’s unionized workforce. These agreements resolved all
wage, work rule, and health and welfare issues through December 31, 2009, and
will remain in effect until new agreements are reached or the Railway Labor
Act’s procedures (which include mediation, cooling-off periods and the
possibility of U.S. presidential intervention) are exhausted. Negotiations for
the new bargaining round began November 1, 2009.
In the
new bargaining round, an agreement covering wage and work rules issues was
reached with the Brotherhood of Locomotive Engineers and Trainmen (BLET),
representing nearly 7,000 BNSF Railway engineers, which covers the period from
January 1, 2010 through December 31, 2014. Also in the new bargaining round,
BNSF Railway has joined industry-wide (or “national”) bargaining with all unions
on health and welfare issues and with all unions except BLET on wage and work
rule issues.
Item
3. Legal Proceedings
Beginning
May 14, 2007, some 30 similar class action complaints were filed in six federal
district courts around the country by rail shippers against BNSF Railway and
other Class I railroads alleging that they have conspired to fix fuel surcharges
with respect to unregulated freight transportation services in violation of the
antitrust laws and seeking injunctive relief and unspecified treble damages.
These cases have been consolidated and are currently pending in the federal
district court of the District of Columbia for coordinated or consolidated
pretrial proceedings. (In re:
Rail Freight Fuel Surcharge Antitrust Litigation, MDL No. 1869).
Consolidated amended class action complaints were filed against BNSF Railway and
three other Class I railroads in April 2008. The Company believes that these
claims are without merit and continues to defend against the allegations
vigorously. The Company does not believe that the outcome of these proceedings
will have a material effect on its financial condition, results of operations or
liquidity.
Information
concerning certain pending tax-related administrative or adjudicative state
proceedings or appeals is incorporated by reference from Note 5 to the
Consolidated Financial Statements, and information concerning other claims and
litigation is incorporated by reference from Note 10 to the Consolidated
Financial Statements.
Item
5. Market for Registrant’s Common Equity,
Related Stockholder
Matters and Issuer Purchases of Equity Securities
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. Certain prior
period amounts have been adjusted to conform to current year presentation.
Results of
Operations
Revenues
Summary
The
following table presents BNSF Railway’s revenue information by business group
for the years ended December 31, 2009 and 2008.
|
Revenues
(in
millions)
|
Cars
/ Units
(in
thousands)
|
Average
Revenue
Per
Car / Unit
|
||||||||||||||
|
Year
ended December 31,
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||
|
Consumer
Products
|
$
|
4,316
|
$
|
6,064
|
3,911
|
4,818
|
$
|
1,104
|
$
|
1,259
|
||||||
|
Coal
|
3,564
|
3,970
|
2,390
|
2,516
|
1,491
|
1,578
|
||||||||||
|
Industrial
Products
|
2,874
|
4,028
|
1,172
|
1,598
|
2,452
|
2,521
|
||||||||||
|
Agricultural
Products
|
2,834
|
3,441
|
945
|
1,062
|
2,999
|
3,240
|
||||||||||
|
Total
freight revenues
|
13,588
|
17,503
|
8,418
|
9,994
|
$
|
1,614
|
$
|
1,751
|
||||||||
|
Other
revenues
|
260
|
284
|
||||||||||||||
|
Total operating
revenues
|
$
|
13,848
|
$
|
17,787
|
||||||||||||
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
years ended December 31, 2009 and 2008 (in millions).
|
2009
|
2008
|
||||
|
Total
fuel expense a
|
$
|
2,372
|
$
|
4,640
|
|
|
BNSF
fuel surcharges
|
$
|
1,226
|
$
|
3,255
|
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.
Expense
Table
The
following table presents BNSF Railway’s expense information for the years ended
December 31, 2009 and 2008 (in millions):
|
Year
ended December 31,
|
2009
|
2008
|
|||||
|
Compensation
and benefits
|
$
|
3,458
|
$
|
3,859
|
|||
|
Fuel
|
2,372
|
4,640
|
|||||
|
Purchased
services
|
1,859
|
2,074
|
|||||
|
Depreciation
and amortization
|
1,534
|
1,395
|
|||||
|
Equipment
rents
|
777
|
901
|
|||||
|
Materials
and other
|
640
|
1,022
|
|||||
|
Total operating
expenses
|
$
|
10,640
|
$
|
13,891
|
|||
|
Interest
expense
|
$
|
124
|
$
|
97
|
|||
|
Interest
income, related parties
|
$
|
(3
|
)
|
$
|
(19
|
)
|
|
|
Other
expense, net
|
$
|
6
|
$
|
18
|
|||
|
Income
tax expense
|
$
|
1,067
|
$
|
1,438
|
Year
Ended December 31, 2009, Compared with Year Ended December 31, 2008
BNSF
Railway recorded net income for 2009 of $2,014 million. In comparison, net
income for 2008 was $2,362 million.
Revenues
Freight
Freight
revenues of $13,588 million for 2009 were $3,915 million, or 22 percent lower
than 2008. Freight revenues reflected a 16-percent decrease in unit volumes
resulting from the economic downturn. Freight revenues included a decrease of
$2,029 million in fuel surcharges compared with the same 2008
period. Decreased fuel surcharges were the primary driver of the
8-percent decrease in revenue per car/unit in 2009.
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 $4,316 million for 2009 were $1,748 million, or 29 percent
lower than 2008. The decrease in revenue was driven by lower international
intermodal, domestic intermodal and automotive volumes primarily due to the
economy and lower revenue per unit driven by decreased 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 $3,564 million for 2009 declined $406 million, or 10 percent, versus
a year ago, 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 10 to the
Consolidated Financial Statements under the heading “Coal Rate Case Decision.”)
These declines were partially offset by improved yields and approximately $30
million for contract settlements and adjustments with specific customers.
Industrial
Products
The
Industrial Products’ freight business consists of the following five business
areas: construction products, building products, petroleum products, chemicals
& plastic products and food & beverages.
Industrial
Products revenues of $2,874 million for 2009 decreased $1,154 million, or 29
percent, 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 $2,834 million for 2009 were $607 million, or 18 percent
lower than revenues for 2008. 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 $24 million, or 8 percent, to $260 million for 2009 compared
to 2008. This decrease was primarily due to a decrease in charges for storage
costs and demurrage.
Expenses
Total
operating expenses for 2009 were $10,640 million, a decrease of $3,251 million,
or 23 percent versus 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 $3,458 million were $401 million, or 10 percent lower
than 2008. This reduction was primarily the result of decreased unit volumes,
effective cost controls, as well as lower incentive compensation costs, which
cover nearly all non-union and about one quarter of union employees. The average
number of employees decreased 9 percent compared with 2008.
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 $2,372 million for 2009 were $2,268 million, or 49 percent lower
than 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 $1.27 to $1.89, or
$1,520 million. The decrease in the average all-in cost reflected a
decrease in the average purchase price per gallon of $1.43, or a $1,710 million
decrease in locomotive fuel expense, offset by an increase in the hedge loss of
16 cents per gallon, or $190 million (2009 loss of $195 million less 2008
loss of $5 million). Locomotive fuel consumption in 2009 decreased
217 million gallons to 1,198 million gallons when compared with
consumption in 2008, resulting in a $684 million decrease in fuel expense.
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; insurance costs;
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
services expenses of $1,859 million for 2009 were $215 million, or 10 percent
lower than 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 $1,534 million for 2009 were $139 million, or 10
percent higher than 2008. This increase in depreciation expense was primarily
due to capital expenditures.
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 for 2009 of $777 million were $124 million, or 14 percent lower
than 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 personal injury claims,
environmental remediation and derailments as well as utilities, 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 $640 million for 2009, were $382 million, or 37 percent
lower than 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 $124 million for
2009 was $27 million, or 28 percent higher than 2008. This was primarily due to the unfavorable
coal rate case decision, which increased interest expense by $8 million (see
Note 10 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 2009 and
2008.
Income Taxes
The
effective rate in 2009 was 34.6 percent compared with 37.8 percent for the prior
year. The decrease was primarily related to a tax benefit related to the
fourth-quarter donation of a portion of a line segment located in Washington
State. There were also favorable tax settlements for both 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 Item 1A, “Risk
Factors,” of this Annual Report on Form 10-K. 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.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
In the
ordinary course of business, BNSF Railway utilizes various financial instruments
that inherently have some degree of market risk. The following table summarizes
the impact of these hedging activities on the Company’s results of operations
(in millions):
|
Year
ended December 31,
|
2009
|
2008
|
|||||
|
Fuel-hedge
loss (including ineffective portion of unexpired hedges)
|
$
|
(195
|
)
|
$
|
(5
|
)
|
|
|
Tax
effect
|
75
|
2
|
|||||
|
Hedge
loss, net of tax
|
$
|
(120
|
)
|
$
|
(3
|
)
|
The
Company’s fuel-hedge loss is due to decreases in average fuel prices subsequent
to the initiation of various hedges and through their termination. The
information presented in Notes 3 and 9 to the Consolidated Financial Statements
describe significant aspects of BNSF Railway’s financial instrument activities
that have a material market risk. Additionally, the Company uses fuel
surcharges, which it believes substantially mitigates the risk of fuel price
volatility.
Commodity Price Sensitivity
BNSF
Railway engages in hedging activities to partially mitigate the risk of
fluctuations in the price of its diesel fuel purchases. Existing hedge
transactions as of December 31, 2009, are based on the front month settlement
prices of New York Mercantile Exchange (NYMEX) #2 heating oil (HO), West Texas
Intermediate (WTI) crude oil, or the HO refining spread (HO-WTI), which is the
difference between HO and WTI. A WTI hedge combined with a HO-WTI hedge will
result in the equivalent of a HO hedge. For swaps, BNSF Railway either pays or
receives the difference between the hedge price and the actual average price of
the hedge commodity during a specified determination period for a specified
number of gallons. For costless collars, if the average hedge commodity price
for a specified determination period is greater than the cap price, BNSF Railway
receives the difference for a specified number of gallons. If the average
commodity price is less than the floor price, BNSF Railway pays the difference
for a specified number of gallons. If the commodity price is between the floor
price and the cap price, BNSF Railway neither makes nor receives a payment.
Hedge transactions are generally settled with the counterparty in cash. Based on
historical information, BNSF Railway believes there is a significant correlation
between the market prices for diesel fuel, HO and WTI.
At
December 31, 2009, BNSF Railway had recorded a net fuel-hedging asset of $23
million for fuel hedges covering 2010 through 2012.
The
following table is an estimate of the impact to earnings that could result from
hypothetical price changes during the twelve-month period ending December 31,
2010, and the balance sheet impact from the hypothetical price changes on all
open hedges, both based on the Company’s hedge position at December 31,
2009:
|
Sensitivity
Analysis
|
||||
|
Hedged
Commodity Price Change
|
Fuel-Hedge
Annual Pre-Tax Earnings Impact
|
Balance
Sheet Impact of Change in Fuel-Hedge Fair Value
|
||
|
10-percent
increase
|
$54
million increase
|
$112
million increase
|
||
|
10-percent
decrease
|
$51
million decrease
|
$108
million decrease
|
||
Based on
locomotive fuel consumption during the twelve-month period ended December 31,
2009, of 1,198 million gallons and fuel prices during that same period,
excluding the impact of the Company’s hedging activities, a 10-percent increase
or decrease in the commodity price per gallon would result in an approximate
$199 million increase or decrease, respectively, in fuel expense (pre-tax) on an
annual basis. Additionally, the Company uses fuel surcharges, which it believes
substantially mitigates the risk of fuel price volatility.
At
December 31, 2009, BNSF Railway maintained fuel inventories for use in normal
operations, which were not material to BNSF Railway’s overall financial position
and, therefore, represent no significant market exposure. The frequency of BNSF
Railway’s fuel inventory turnover also reduces market exposure, should fuel
inventories become material to BNSF Railway’s overall financial position.
Further information on fuel hedges is incorporated by reference from Note 3 to
the Consolidated Financial Statements.
Interest Rate Sensitivity
At
December 31, 2009, the fair value of BNSF Railway’s debt, excluding capital
leases, was $936 million.
The
following table is an estimate of the impact to the fair value of total debt,
excluding capital leases, that could result from hypothetical interest rate
changes during the twelve-month period ending December 31, 2010, based on debt
levels as of December 31, 2009:
|
Sensitivity
Analysis
|
|||
|
Hypothetical
Change
in
Interest Rates
|
Change
in Fair Value
|
||
|
Total
Debt
|
|||
|
1-percent
decrease
|
$79
million increase
|
||
|
1-percent
increase
|
$70
million decrease
|
||
Information
on the Company’s debt, which may be sensitive to interest rate fluctuations, is
incorporated by reference from Note 9 to the Consolidated Financial
Statements.
Item
8. Financial Statements and Supplementary Data
The
Consolidated Financial Statements of BNSF Railway and subsidiary companies,
together with the report of the Company’s independent registered public
accounting firm, are included as part of this filing.
The
following documents are filed as a part of this report:
Consolidated
Financial Statements
Report of Independent
Registered Public Accounting Firm
To
the Shareholder and Board of Directors of BNSF Railway Company
In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of BNSF Railway
Company and its subsidiaries (the Company) at December 31, 2009 and 2008, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/
PricewaterhouseCoopers LLP
Fort
Worth, Texas
February
11, 2010
BNSF
Railway Company and Subsidiaries
Consolidated
Statements of Income
In
millions
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
Revenues
|
$
|
13,848
|
$
|
17,787
|
$
|
15,610
|
||||
|
Operating
expenses:
|
||||||||||
|
Compensation and
benefits
|
3,458
|
3,859
|
3,754
|
|||||||
|
Fuel
|
2,372
|
4,640
|
3,327
|
|||||||
|
Purchased
services
|
1,859
|
2,074
|
1,995
|
|||||||
|
Depreciation and
amortization
|
1,534
|
1,395
|
1,292
|
|||||||
|
Equipment rents
|
777
|
901
|
942
|
|||||||
|
Materials and other
|
640
|
1,022
|
790
|
|||||||
|
Total operating expenses
|
10,640
|
13,891
|
12,100
|
|||||||
|
Operating
income
|
3,208
|
3,896
|
3,510
|
|||||||
|
Interest
expense
|
124
|
97
|
87
|
|||||||
|
Interest
income, related parties
|
(3
|
)
|
(19
|
)
|
(191
|
)
|
||||
|
Other
expense, net
|
6
|
18
|
31
|
|||||||
|
Income before income taxes
|
3,081
|
3,800
|
3,583
|
|||||||
|
Income
tax expense
|
1,067
|
1,438
|
1,384
|
|||||||
|
Net income
|
$
|
2,014
|
$
|
2,362
|
$
|
2,199
|
||||
See
accompanying Notes to Consolidated Financial Statements.
BNSF
Railway Company and Subsidiaries
Consolidated
Balance Sheets
Dollars
in millions
|
December
31,
|
2009
|
2008
|
|||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash and cash
equivalents
|
$
|
20
|
$
|
209
|
|||
|
Accounts receivable,
net
|
810
|
873
|
|||||
|
Materials and
supplies
|
632
|
524
|
|||||
|
Current portion of deferred
income taxes
|
282
|
434
|
|||||
|
Other current
assets
|
375
|
337
|
|||||
|
Total current
assets
|
2,119
|
2,377
|
|||||
|
Property
and equipment, net of accumulated depreciation of $10,731 and $9,908,
respectively
|
32,278
|
30,838
|
|||||
|
Other
assets
|
3,193
|
2,910
|
|||||
|
Total assets
|
$
|
37,590
|
$
|
36,125
|
|||
|
Liabilities
and Stockholder’s Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts payable and other
current liabilities
|
$
|
2,548
|
$
|
3,114
|
|||
|
Long-term debt due within one
year
|
335
|
254
|
|||||
|
Total current liabilities
|
2,883
|
3,368
|
|||||
|
Long-term
debt
|
2,118
|
1,821
|
|||||
|
Deferred
income taxes
|
9,360
|
8,672
|
|||||
|
Casualty
and environmental liabilities
|
899
|
959
|
|||||
|
Pension
and retiree health and welfare liability
|
783
|
1,047
|
|||||
|
Other
liabilities
|
1,799
|
1,892
|
|||||
|
Total
liabilities
|
17,842
|
17,759
|
|||||
|
Commitments
and contingencies (see Notes 3, 9 and 10)
|
|||||||
|
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
|
14,866
|
12,852
|
|||||
|
Intercompany notes
receivable
|
(948
|
)
|
(6
|
)
|
|||
|
Accumulated other comprehensive
loss
|
(501
|
)
|
(811
|
)
|
|||
|
Total stockholder’s
equity
|
19,748
|
18,366
|
|||||
|
Total liabilities and
stockholder’s equity
|
$
|
37,590
|
$
|
36,125
|
See
accompanying Notes to Consolidated Financial Statements.
BNSF
Railway Company and Subsidiaries
Consolidated Statements of
Cash Flows
In
millions
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
Operating
Activities
|
||||||||||
|
Net
income
|
$
|
2,014
|
$
|
2,362
|
$
|
2,199
|
||||
|
Adjustments
to reconcile net income to net cash provided
by
operating activities:
|
||||||||||
|
Depreciation
and amortization
|
1,534
|
1,395
|
1,292
|
|||||||
|
Deferred
income taxes
|
610
|
420
|
302
|
|||||||
|
Long-term
casualty and environmental liabilities, net
|
(90
|
)
|
150
|
26
|
||||||
|
Other,
net
|
(261
|
)
|
11
|
80
|
||||||
|
Changes
in current assets and liabilities:
|
||||||||||
|
Accounts
receivable, net
|
120
|
176
|
(120
|
)
|
||||||
|
Change
in accounts receivable sales program
|
(50
|
)
|
(250
|
)
|
–
|
|||||
|
Materials
and supplies
|
(108
|
)
|
55
|
(91
|
)
|
|||||
|
Other
current assets
|
(36
|
)
|
(28
|
)
|
12
|
|||||
|
Accounts
payable and other current liabilities
|
(245
|
)
|
(49
|
)
|
(123
|
)
|
||||
|
Net
cash provided by operating activities
|
3,488
|
4,242
|
3,577
|
|||||||
|
Investing
Activities
|
||||||||||
|
Capital
expenditures excluding equipment
|
(1,988
|
)
|
(2,165
|
)
|
(2,248
|
)
|
||||
|
Acquisition
of equipment
|
(733
|
)
|
(949
|
)
|
(745
|
)
|
||||
|
Proceeds
from sale of equipment financed
|
368
|
348
|
778
|
|||||||
|
Construction
costs for facility financing obligation
|
(37
|
)
|
(64
|
)
|
(37
|
)
|
||||
|
Net
increase in intercompany notes receivable
|
−
|
−
|
(993
|
)
|
||||||
|
Other,
net
|
(238
|
)
|
(228
|
)
|
(147
|
)
|
||||
|
Net
cash used for investing activities
|
(2,628
|
)
|
(3,058
|
)
|
(3,392
|
)
|
||||
|
Financing
Activities
|
||||||||||
|
Proceeds
from issuance of long-term debt
|
75
|
−
|
−
|
|||||||
|
Payments
on long-term debt
|
(228
|
)
|
(216
|
)
|
(182
|
)
|
||||
|
Proceeds
from facility financing obligation
|
51
|
68
|
41
|
|||||||
|
Net
increase in intercompany notes receivable classified as
equity
|
(942
|
)
|
(850
|
)
|
−
|
|||||
|
Net
decrease in intercompany notes payable
|
−
|
−
|
(35
|
)
|
||||||
|
Other,
net
|
(5
|
)
|
(1
|
)
|
(4
|
)
|
||||
|
Net
cash used for financing activities
|
(1,049
|
)
|
(999
|
)
|
(180
|
)
|
||||
|
(Decrease)
increase in cash and cash equivalents
|
(189
|
)
|
185
|
5
|
||||||
|
Cash
and cash equivalents:
|
||||||||||
|
Beginning
of year
|
209
|
24
|
19
|
|||||||
|
End
of year
|
$
|
20
|
$
|
209
|
$
|
24
|
||||
|
Supplemental
Cash Flow Information
|
||||||||||
|
Interest
paid, net of amounts capitalized
|
$
|
113
|
$
|
112
|
$
|
75
|
||||
|
Income
taxes paid, net of refunds
|
$
|
626
|
$
|
1,052
|
$
|
930
|
||||
|
Non-cash
asset financing
|
$
|
514
|
$
|
258
|
$
|
461
|
||||
|
Non-cash
dividend
|
$
|
−
|
$
|
1,300
|
$
|
4,100
|
||||
See
accompanying Notes to Consolidated Financial Statements.
BNSF
Railway Company and Subsidiaries
Consolidated
Statements of Changes in Stockholder’s Equity
In
millions
|
Common
Stock and Paid-in-Capital
|
Retained
Earnings
|
Intercompany
Notes
Receivable
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
Stockholder’s
Equity
|
||||||||||||
|
Balance
at December 31, 2006
|
$
|
6,331
|
$
|
13,711
|
$
|
–
|
$
|
(286
|
)
|
$
|
19,756
|
|||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income
|
–
|
2,199
|
–
|
–
|
2,199
|
|||||||||||
|
Change
in unrecognized prior service credit and actuarial losses, net of tax
expense of $76
|
–
|
–
|
–
|
122
|
122
|
|||||||||||
|
Change
in fuel hedge mark-to-market, net of tax expense of $11
|
–
|
–
|
–
|
16
|
16
|
|||||||||||
|
Total comprehensive
income
|
–
|
2,199
|
–
|
138
|
2,337
|
|||||||||||
|
Adjustment
for the adoption of authoritative accounting guidance related to
accounting for uncertainty in income taxes
|
–
|
(13
|
)
|
–
|
–
|
(13
|
)
|
|||||||||
|
Non-cash
dividend ($4.1 per share)
|
–
|
(4,100
|
)
|
–
|
–
|
(4,100
|
)
|
|||||||||
|
Intercompany
notes receivable
|
–
|
–
|
(456
|
)
|
–
|
(456
|
)
|
|||||||||
|
Balance
at December 31, 2007
|
6,331
|
11,797
|
(456
|
)
|
(148
|
)
|
17,524
|
|||||||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income
|
–
|
2,362
|
–
|
–
|
2,362
|
|||||||||||
|
Change
in unrecognized prior service credit and actuarial losses, net of tax
benefit of $219
|
–
|
–
|
–
|
(353
|
)
|
(353
|
)
|
|||||||||
|
Change
in fuel hedge mark-to-market, net of tax benefit of $189
|
–
|
–
|
–
|
(305
|
)
|
(305
|
)
|
|||||||||
|
Change in other comprehensive income of equity method
investees
|
–
|
–
|
–
|
(5
|
)
|
(5
|
)
|
|||||||||
|
Total comprehensive
income
|
–
|
2,362
|
–
|
(663
|
)
|
1,699
|
||||||||||
|
Adjustment
to change the measurement date pursuant to adoption of authoritative
accounting guidance related to defined benefit pension and other
postretirement plans, net of tax benefit of $3
|
–
|
(7
|
)
|
–
|
2
|
(5
|
)
|
|||||||||
|
Adjustment
to initially apply authoritative accounting guidance related to defined
benefit pension and other postretirement plans to equity method
investees
|
–
|
–
|
–
|
(2
|
)
|
(2
|
)
|
|||||||||
|
Non-cash
dividend ($1.3 per share)
|
–
|
(1,300
|
)
|
–
|
–
|
(1,300
|
)
|
|||||||||
|
Intercompany
notes receivable
|
–
|
–
|
450
|
–
|
450
|
|||||||||||
|
Balance
at December 31, 2008
|
|
6,331
|
|
12,852
|
|
(6
|
)
|
|
(811
|
)
|
|
18,366
|
||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income
|
–
|
2,014
|
–
|
–
|
2,014
|
|||||||||||
|
Change
in unrecognized prior service credit and actuarial losses, net of tax
expense of $13
|
–
|
–
|
–
|
24
|
24
|
|||||||||||
|
Change
in fuel hedge mark-to-market, net of tax expense of $177
|
–
|
–
|
–
|
286
|
286
|
|||||||||||
|
Total comprehensive
income
|
–
|
2,014
|
–
|
310
|
2,324
|
|||||||||||
|
Intercompany
notes receivable
|
–
|
–
|
(942
|
)
|
–
|
(942
|
)
|
|||||||||
|
Balance
at December 31, 2009
|
$
|
6,331
|
$
|
14,866
|
$
|
(948
|
)
|
$
|
(501
|
)
|
$
|
19,748
|
||||
BNSF
Railway Company and Subsidiaries
1.
The Company
BNSF
Railway Company and its majority-owned subsidiaries, (collectively, BNSF Railway
or Company) operates one of the largest railroad networks in North America with
approximately 32,000 route miles in 28 states and two Canadian provinces.
Through one operating transportation services segment, BNSF Railway transports a
wide range of products and commodities including the transportation of Consumer
Products, Coal, Industrial Products and Agricultural Products, derived from
manufacturing, agricultural and natural resource industries, which constituted
32 percent, 26 percent, 21 percent and 21 percent, respectively, of total
freight revenues for the year ended December 31, 2009.
Proposed Merger of
Burlington Northern Santa Fe Corporation
BNSF
Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation
(BNSF). Berkshire Hathaway Inc., a Delaware corporation (Berkshire), R
Acquisition Company, LLC, a Delaware limited liability company and an indirect
wholly owned subsidiary of Berkshire (Merger Sub), and BNSF have entered into a
definitive Agreement and Plan of Merger (the Merger Agreement) dated as of
November 2, 2009. Pursuant to the Merger Agreement and subject to the
conditions set forth therein, BNSF will merge with and into Merger Sub (the
Merger) with Merger Sub surviving as an indirect wholly owned subsidiary of
Berkshire. Merger Sub will change its name to Burlington Northern Santa Fe, LLC
upon completion of the Merger. After the Merger is consummated, BNSF
Railway will be a wholly-owned subsidiary of Burlington Northern Santa Fe,
LLC.
On
February 11, 2010, the Merger Agreement was adopted by the necessary votes of
BNSF stockholders. The Merger is expected to close on February 12,
2010.
2.
Significant Accounting Policies
Adoption
of Accounting Standards Codification
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 on July 1, 2009, the adoption of which did not
have a material effect on the Company’s consolidated financial
statements.
Principles of
Consolidation
The
Consolidated Financial Statements include the accounts of BNSF Railway. All
significant intercompany accounts and transactions have been eliminated. The
Company evaluates its less than majority-owned investments for consolidation
pursuant to authoritative accounting guidance related to the consolidation of
variable interest entities.
Use of
Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the periods presented. These estimates and assumptions are periodically
reviewed by management. Actual results could differ from those
estimates.
Revenue
Recognition
Transportation
revenues are recognized based upon the proportion of service provided as of the
balance sheet date. Revenues from ancillary services are recognized when
performed. Customer incentives, which are primarily provided for shipping a
specified cumulative volume or shipping to/from specific locations, are recorded
as a reduction to revenue on a pro-rata basis based on actual or projected
future customer shipments. When using projected shipments, the Company relies on
historic trends as well as economic and other indicators to estimate the
liability for customer incentives.
Accounts Receivable,
Net
Accounts
receivable, net includes accounts receivable reduced by an allowance for bill
adjustments and uncollectible accounts. The allowance for bill adjustments and
uncollectible accounts is based on historical experience as well as any known
trends or uncertainties related to customer billing and account collectibility.
Additionally, accounts receivable, net is reduced by receivables sold under the
Accounts Receivable sales program (see Note 6 to the Consolidated Financial
Statements).
Cash and Cash
Equivalents
All
short-term investments with original maturities of 90 days or less are
considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value because of the short maturity of these
instruments.
Materials and
Supplies
Materials
and supplies, which consist mainly of rail, ties and other items for
construction and maintenance of property and equipment, as well as diesel fuel,
are valued at the lower of average cost or market.
Property and Equipment,
Net
Property
and equipment are stated at cost and are depreciated and amortized on a
straight-line basis over their estimated useful lives. The Company uses the
group method of depreciation in which a single depreciation rate is applied to
the gross investment in a particular class of property, despite differences in
the service life or salvage value of individual property units within the same
class. The Company conducts studies of depreciation rates and the required
accumulated depreciation balance as required by the Surface Transportation Board
(STB), which is generally every three years for equipment property and every six
years for track structure and other roadway property. Changes in the estimated
service lives of the assets and their related depreciation rates are implemented
prospectively, and the difference between the calculated accumulated
depreciation and the amount recorded is amortized over the average remaining
service lives of the assets. Upon normal sale or retirement of certain
depreciable railroad property, cost less net salvage value is charged to
accumulated depreciation, and no gain or loss is recognized. The disposals of
land and non-rail property as well as significant premature retirements are
recorded as gains or losses at the time of their occurrence.
The
Company self-constructs portions of its track structure and rebuilds certain
classes of rolling stock. Expenditures that significantly increase asset values
or extend useful lives are capitalized. In addition to direct labor and
material, certain indirect costs, which relate to supportive functions, are
capitalized. Repair and maintenance expenditures are charged to operating
expense when the work is performed.
The
Company incurs certain direct labor, contract service and other costs associated
with the development and installation of internal-use computer software. Costs
for newly developed software or significant enhancements to existing software
are typically capitalized. Research, preliminary project, operations,
maintenance and training costs are charged to operating expense when the work is
performed.
Long-lived
assets are reviewed for impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If
impairment indicators are present and the estimated future undiscounted cash
flows are less than the carrying value of the long-lived assets, the carrying
value is reduced to the estimated fair value as measured by the discounted cash
flows.
Leasehold
improvements that meet capitalization criteria are capitalized and amortized on
a straight-line basis over the lesser of their estimated useful lives or the
remaining lease term. Cash flows for capitalized leasehold improvements are
reported in the investing activities other, net line of the Consolidated
Statements of Cash Flows.
Planned Major Maintenance
Activities
The
Company utilizes the deferral method of accounting for leased locomotive
overhauls, which includes the refurbishment of the engine and related
components. Accordingly, BNSF Railway has established an asset for overhauls
that have been performed. This asset, which is included in property and
equipment, net in the Consolidated Balance Sheets, is amortized to expense using
the straight-line method until the next overhaul is performed or the end of the
lease, whichever comes first, typically between six and eight
years.
Environmental
Liabilities
Liabilities
for environmental cleanup costs are initially recorded when BNSF Railway’s
liability for environmental cleanup is both probable and reasonably estimable.
Subsequent adjustments to initial estimates are recorded as necessary based upon
additional information developed in subsequent periods. Estimates for these
liabilities are undiscounted.
Personal Injury
Claims
Liabilities
for personal injury claims are initially recorded when the expected loss is both
probable and reasonably estimable. Subsequent adjustments to initial estimates
are recorded as necessary based upon additional information developed in
subsequent periods. Liabilities recorded for unasserted personal injury claims,
including those related to asbestos, are based on information currently
available. Estimates of liabilities for personal injury claims are
undiscounted.
Income
Taxes
Deferred
tax assets and liabilities are measured using the tax rates that apply to
taxable income in the period in which the deferred tax asset or liability is
expected to be realized or paid. Changes in the Company’s estimates regarding
the statutory tax rate to be applied to the reversal of deferred tax assets and
liabilities could materially affect the effective tax rate. Valuation allowances
are established to reduce deferred tax assets if it is more likely than not that
some or all of the deferred tax asset will not be realized. BNSF Railway has not
recorded a valuation allowance, as it believes that the deferred tax assets will
be fully realized in the future. Investment tax credits are accounted for using
the flow-through method.
The
Company recognizes the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement.
Stock-Based
Compensation
BNSF
granted options to BNSF Railway 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 also participated in BNSF’s other long-term incentive
plans including, among other things, restricted stock and a discounted stock
purchase program. BNSF Railway recognizes the compensation expense related to
the cost of employee services received in exchange for company equity interests
over the award’s vesting period based on the award’s fair value at the date of
grant.
Employment Benefit
Plans
BNSF
Railway estimates liabilities and expenses for the pension and retiree health
and welfare plans. Estimated amounts are based on historical information,
current information and estimates regarding future events and circumstances.
Significant assumptions used in the valuation of pension and/or retiree health
and welfare liabilities include the expected return on plan assets, discount
rate, rate of increase in compensation levels and the health care cost trend
rate.
Fair Value
Measurements
In
September 2006, the FASB issued authoritative accounting guidance which defines
fair value, establishes a framework for measuring fair value and expands
disclosure requirements around fair value measurements.
The
authoritative accounting guidance specifies a three-level hierarchy of valuation
inputs which was established to increase consistency, clarity and comparability
in fair value measurements and related disclosures.
|
·
|
Level
1–Quoted prices for identical assets or liabilities in active markets that
the Company has the ability to access at the measurement
date.
|
|
·
|
Level
2–Quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets
that are not active; and model-derived valuations in which all significant
inputs are observable market data.
|
|
·
|
Level
3–Valuations derived from valuation techniques in which one or more
significant inputs are unobservable.
|
The
authoritative accounting guidance requires companies to maximize the use of
observable inputs (Level 1 and Level 2), when available, and to minimize the use
of unobservable inputs (Level 3) when determining fair value.
The
Company adopted the authoritative accounting guidance for financial assets and
liabilities on January 1, 2008, and recorded no financial statement adjustments
as a result of adoption. The Company has applied the provisions of the standard
to its fuel and interest rate hedges (see Note 3 to the Consolidated Financial
Statements).
Beginning
January 1, 2009, the Company applied the provisions of the standard to its
property and equipment, goodwill and certain other assets, which are measured at
fair value for impairment assessment, and to any business combinations or asset
retirement obligations as required by authoritative accounting guidance. This
adoption did not have a material impact on the Company’s results of operations,
financial condition or liquidity.
Subsequent
Events
BNSF
Railway has evaluated subsequent events through February 11, 2010, which
represents the date the Consolidated Financial Statements were issued.
Proposed Merger of
BNSF
See Note
1 to the Consolidated Financial Statements for information related to the
proposed Merger with Berkshire.
Gain on Land
Sale
On
January 11, 2010, BNSF Railway transferred operations which completed the sale
of a line segment in the State of Washington, which will result in a gain of $74
million in the first quarter of 2010. The gain will be reported in the
Consolidated Statement of Income in materials and other.
Reclassifications
Certain
comparative prior year amounts in the Consolidated Financial Statements and
accompanying notes have been reclassified to conform to the current year
presentation. These reclassifications had no effect on previously reported
operating income or net income.
3.
Hedging Activities
The
Company uses derivative financial instruments to hedge against increases in
diesel fuel prices. The Company does not use 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.
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 December 31, 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 December 31, 2009, was $73 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 $59 million as of December 31, 2009. There was no
net exposure to counterparty credit risk at December 31, 2008 since all
financial instruments were in a net liability position at that
date.
Additional
disclosures related to derivative instruments are included in Note 8 and 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 $106 million of collateral
posted for certain fuel hedge contracts as of December 31, 2008.
|
Year
ended December 31,
|
2009
|
2008
|
|||||
|
Short-term
hedge asset
|
$
|
20
|
$
|
−
|
|||
|
Long-term
hedge asset
|
40
|
−
|
|||||
|
Short-term
hedge liability
|
(25
|
)
|
(279
|
)
|
|||
|
Long-term
hedge liability
|
(12
|
)
|
(193
|
)
|
|||
|
Total
derivatives
|
$
|
23
|
$
|
(472
|
)
|
||
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
|
||||||||
|
December
31,
|
2009
|
2008
|
Location
|
|||||
|
Derivatives
designated as hedging instruments under ASC 815-20
|
||||||||
|
Fuel
Contracts
|
$
|
20
|
$
|
−
|
Other
current assets
|
|||
|
Fuel
Contracts
|
40
|
−
|
Other
assets
|
|||||
|
Fuel
Contracts
|
10 |
−
|
Accounts
payable and other current liabilities
|
|||||
|
Fuel
Contracts
|
3 |
−
|
|
Other
liabilities
|
||||
|
Total
Asset Derivatives designated as hedging instruments under ASC
815-20
|
$
|
73
|
$
|
−
|
||||
|
Liability
Derivatives
|
||||||||
|
Balance
Sheet
|
||||||||
|
December
31,
|
2009
|
2008
|
Location
|
|||||
|
Derivatives
designated as hedging instruments under ASC 815-20
|
||||||||
| Fuel Contracts |
$
|
35
|
$
|
279
|
Accounts
payable and other current liabilities
|
|||
|
Fuel
Contracts
|
15
|
193
|
Other
liabilities
|
|||||
|
Total
Liability Derivatives designated as hedging instruments under ASC
815-20
|
$
|
50
|
$
|
472
|
||||
|
The
Effect of Derivative Instruments Gains and Losses
for
the Twelve Month Periods Ended December 31, 2009, 2008 and
2007
|
|
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
|
2007
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||
|
Fuel
Contracts
|
$
$
|
268
|
$
|
(499)
|
$
|
58
|
Fuel
expense
|
$
|
(227)
|
$
|
12
|
$
|
30
|
Fuel
expense
|
$
|
32
|
$
|
(17)
|
$
|
1
|
|||||||||||
|
Total
derivatives
|
$
$
|
268
|
$
|
(499)
|
$
|
58
|
$
|
(227)
|
$
|
12
|
$
|
30
|
$
|
32
|
$
|
(17)
|
$
|
1
|
|||||||||||||
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, 33 percent and 27 percent of total operating
expenses during 2009, 2008 and 2007, 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 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
December 31, 2009, BNSF Railway’s total fuel-hedging positions for 2010, 2011
and 2012 represent 21 percent, 17 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):
|
December
31,
|
2009
|
2008
|
|||||
|
Settled
fuel-hedging contracts payable
|
$
|
(23
|
)
|
$
|
(38
|
)
|
|
Certain
of the Company’s fuel-hedge instruments are covered by an agreement which
includes a provision such that the Company either receives or posts cash
collateral if the fair value of the instruments exceeds a certain net asset or
net liability threshold, respectively. The threshold is based on a sliding
scale, utilizing either the counterparty’s credit rating, if the instruments are
in a net asset position, or BNSF’s credit rating, if the instruments are in a
net liability position. If the applicable credit rating should fall below Ba3
(Moody’s) or BB- (S&P), the threshold would be eliminated and collateral
would be required for the entire fair value amount. All cash collateral paid is
held on deposit by the payee and earns interest to the benefit of the payor
based on the London Interbank Offered Rate (LIBOR). The aggregate fair value of
all open fuel-hedge instruments under these provisions was in a net liability
position on December 31, 2009, of $18 million, which was below the collateral
threshold. As such, there was no posted collateral outstanding at December 31,
2009. As of December 31, 2008, the aggregate fair value of all open fuel-hedge
instruments under these provisions was in a net liability position of $131
million for which the Company posted collateral of $106 million. Additional
collateral of $20 million was posted related to settled fuel-hedging contracts
payable at December 31, 2008. The collateral was reflected as a reduction to
either accounts payable and other current liabilities or other liabilities in
the Consolidated Balance Sheet, depending on the expiration date of the related
fuel hedges. The settled fuel-hedge liabilities presented in the table above do
not reflect a reduction for the posted collateral.
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
December 31, 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 December 31, 2009, the sum of all such costs averaged
approximately 9 cents per gallon.
During
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 tables provide fuel-hedge data based on
the quarter being hedged for all HO fuel hedges outstanding as of December 31,
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)
|
$
|
2
|
$
|
3
|
$
|
2
|
$
|
2
|
$
|
9
|
||||||
|
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)
|
$
|
3
|
$
|
3
|
$
|
3
|
$
|
3
|
$
|
12
|
||||||
|
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)
|
$
|
5
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
5
|
||||||
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 December 31, 2009, the
sum of all such costs averaged approximately 29 cents per gallon.
During
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 cap
price of $79.86 per barrel and an average floor price of $70.06 per barrel. The
following tables provide fuel-hedge data based on the quarter being hedged for
all WTI fuel hedges outstanding as of December 31, 2009.
|
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)
|
$
|
(6
|
)
|
$
|
(7
|
)
|
$
|
(5
|
)
|
$
|
(2
|
)
|
$
|
(20
|
)
|
|
|
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
|
$
|
2
|
$
|
2
|
$
|
1
|
$
|
6
|
||||||
|
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)
|
$
|
−
|
$
|
1
|
$
|
1
|
$
|
1
|
$
|
3
|
||||||
|
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)
|
$
|
2
|
$
|
2
|
$
|
−
|
$
|
−
|
$
|
4
|
||||||
NYMEX #2 Heating Oil
Refining Spread Hedges
During
2009, the Company entered into fuel swap agreements utilizing the HO refining
spread (HO-WTI) to hedge the equivalent of approximately 800 thousand barrels of
fuel with an average swap price of $8.92 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
December 31, 2009.
|
Quarter
Ending
|
||||||||||||||||
|
2010
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Annual
|
|||||||||||
|
HO-WTI
Swaps
|
||||||||||||||||
|
Barrels
hedged (in thousands)
|
215
|
180
|
135
|
100
|
630
|
|||||||||||
|
Equivalent
gallons hedged (in millions)
|
9.03
|
7.56
|
5.67
|
4.20
|
26.46
|
|||||||||||
|
Average
swap price (per barrel)
|
$
|
7.82
|
$
|
7.64
|
$
|
8.61
|
$
|
10.03
|
$
|
8.29
|
||||||
|
Fair
value (in millions)
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
−
|
||||||
|
Quarter
Ending
|
||||||||||||||||
|
2011
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
Annual
|
|||||||||||
|
HO-WTI
Swaps
|
||||||||||||||||
|
Barrels
hedged (in thousands)
|
−
|
−
|
85
|
85
|
170
|
|||||||||||
|
Equivalent
gallons hedged (in millions)
|
−
|
−
|
3.57
|
3.57
|
7.14
|
|||||||||||
|
Average
swap price (per barrel)
|
$
|
−
|
$
|
−
|
$
|
10.49
|
$
|
12.03
|
$
|
11.26
|
||||||
|
Fair
value (in millions)
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
−
|
||||||
Summarized Comparative Prior
Year Information
The
following table provides summarized comparative information for fuel-hedge
transactions outstanding as of December 31, 2008.
|
Year
ending December 31,
|
2009
|
2010
|
2011
|
|||||||
|
WTI
Swaps
|
||||||||||
|
Barrels
hedged (in thousands)
|
5,005
|
4,680
|
3,570
|
|||||||
|
Equivalent
gallons hedged (in millions)
|
210.21
|
196.56
|
149.94
|
|||||||
|
Average
swap price (per barrel)
|
$
|
74.71
|
$
|
86.71
|
$
|
86.88
|
||||
|
Fair
value (in millions)
|
$
|
(98
|
)
|
$
|
(104
|
)
|
$
|
(62
|
)
|
|
|
WTI
Costless Collars
|
||||||||||
|
Barrels
hedged (in thousands)
|
2,725
|
1,500
|
800
|
|||||||
|
Equivalent
gallons hedged (in millions)
|
114.45
|
63.00
|
33.60
|
|||||||
|
Average
cap price (per barrel)
|
$
|
129.95
|
$
|
80.43
|
$
|
85.05
|
||||
|
Average
floor price (per barrel)
|
$
|
119.82
|
$
|
74.57
|
$
|
78.73
|
||||
|
Fair
value (in millions)
|
$
|
(181
|
)
|
$
|
(19
|
)
|
$
|
(8
|
)
|
4.
Other Expense, Net
Other
expense, net includes the following (in millions):
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
||||||
|
Accounts
receivable sales fees
|
$
|
3
|
$
|
12
|
$
|
19
|
|||
|
Loss
from participation in synthetic fuel partnership
|
−
|
−
|
5
|
||||||
|
Miscellaneous,
net
|
3
|
6
|
7
|
||||||
|
Total
|
$
|
6
|
$
|
18
|
$
|
31
|
|||
The
decrease in other expense, net was predominantly due to lower accounts
receivable sales fees, (see Note 6 to the Consolidated Financial Statements for
additional information).
During
the fourth quarter of 2004, BNSF Railway indirectly purchased a 4.17 percent
ownership of a synthetic fuel partnership through a 50 percent interest in a
limited liability company with an unrelated entity. The synthetic fuel
partnership generated Section 29 synthetic fuel tax credits, which reduced the
Company’s effective tax rate (see Note 5 to the Consolidated Financial
Statements for additional information). In 2007, BNSF Railway received a tax
benefit from its participation in the partnership of approximately
$7 million related to the fuel tax credits and the deduction of partnership
operating losses. In 2007, the Company recorded approximately $5 million of
other expense, net related to the Company’s share of the partnership’s losses
under the equity method of accounting. The partnership did not qualify for
consolidation under authoritative accounting guidance related to the
consolidation of variable interest entities, as BNSF Railway was not the primary
beneficiary of the partnership. Under the tax law, the Section 29 synthetic fuel
tax credits terminated on December 31, 2007; under the BNSF Railway’s purchase
agreement, it did not have any additional exposure to loss from the
synthetic fuel partnership after that date.
5.
Income Taxes
Income
tax expense was as follows (in millions):
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
||||||
|
Current:
|
|||||||||
|
Federal
|
$
|
420
|
$
|
866
|
$
|
950
|
|||
|
State
|
38
|
152
|
132
|
||||||
|
Total current
|
458
|
1,018
|
1,082
|
||||||
|
Deferred:
|
|||||||||
|
Federal
|
554
|
382
|
248
|
||||||
|
State
|
55
|
38
|
54
|
||||||
|
Total deferred
|
609
|
420
|
302
|
||||||
|
Total
|
$
|
1,067
|
$
|
1,438
|
$
|
1,384
|
|||
Reconciliation
of the federal statutory income tax rate to the effective tax rate was as
follows:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
||||
|
Federal
statutory income tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
|
|
State
income taxes, net of federal tax benefit
|
2.0
|
3.2
|
3.4
|
||||
|
Property
donations
|
(2.6
|
)
|
–
|
–
|
|||
|
Synthetic
fuel credits
|
–
|
–
|
(0.1
|
)
|
|||
|
Other,
net
|
0.2
|
(0.4
|
)
|
0.3
|
|||
|
Effective tax
rate
|
34.6
|
%
|
37.8
|
%
|
38.6
|
%
|
The
components of deferred tax assets and liabilities were as follows (in
millions):
|
December
31,
|
2009
|
2008
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Depreciation
and amortization
|
$
|
(9,938
|
)
|
$
|
(9,503
|
)
|
|
|
Hedging
|
(10
|
)
|
−
|
||||
|
Other
|
(182
|
)
|
(174
|
)
|
|||
|
Total deferred tax
liabilities
|
(10,130
|
)
|
(9,677
|
)
|
|||
|
Deferred
tax assets:
|
|||||||
|
Casualty
and environmental
|
382
|
409
|
|||||
|
Pension
and retiree health and welfare benefits
|
328
|
431
|
|||||
|
Compensation
and benefits
|
139
|
178
|
|||||
|
Hedging
|
−
|
167
|
|||||
|
Other
|
203
|
254
|
|||||
|
Total deferred tax
assets
|
1,052
|
1,439
|
|||||
|
Net deferred tax
liability
|
$
|
(9,078
|
)
|
$
|
(8,238
|
)
|
|
|
Non-current
deferred income tax liability
|
$
|
(9,360
|
)
|
$
|
(8,672
|
)
|
|
|
Current
portion of deferred income taxes
|
282
|
434
|
|||||
|
Net deferred tax
liability
|
$
|
(9,078
|
)
|
$
|
(8,238
|
)
|
|
BNSF
Railway is included in the consolidated federal income tax return of
BNSF. In accordance with the income tax allocation agreement between
BNSF and BNSF Railway, the Company makes payments to or receives refunds from
BNSF based on its separate consolidated tax liabilities.
All
federal income tax returns of BNSF are closed through 1999. Internal Revenue
Service (IRS) examination of the years 2000 through 2007 for BNSF is completed,
and the un-agreed issues for 2000 through 2007 are pending before IRS Appeals.
It is anticipated that a settlement with the IRS for the years 2000 through 2005
may be reached within the next twelve months. BNSF is currently under
examination for year 2008.
BNSF
Railway and its subsidiaries have various state income tax returns in the
process of examination, administrative appeal or litigation. State income tax
returns are generally subject to examination for a period of three to five years
after filing of the respective return. The state impact of any federal changes
remains subject to examination by various states for a period of up to one year
after formal notification to the states.
A
significant portion of the audit issues relate to state income tax issues with
various taxing authorities and with the IRS related to whether certain
valuations of donated property are appropriate. A provision for taxes resulting
from ongoing and future federal and state audits is based on an estimation of
aggregate adjustments that may be required as a result of the audits. The
Company believes that adequate provision has been made for any adjustment that
might be assessed for open years through 2009.
Uncertain Tax
Positions
The
amount of unrecognized tax benefits at December 31, 2009, 2008 and 2007, was
$166 million, $150 million and $125 million, respectively. The amount of
unrecognized tax benefits at December 31, 2009, that would affect the Company’s
effective tax rate if recognized was $97 million. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (in
millions):
|
2009
|
2008
|
2007
|
||||||||
|
Beginning
balance
|
$
|
150
|
$
|
125
|
$
|
87
|
||||
|
Additions
for tax positions related to current year
|
49
|
19
|
29
|
|||||||
|
(Reductions)
additions for tax positions taken in prior years
|
(8
|
)
|
9
|
12
|
||||||
|
(Reductions)
additions for tax positions as a result of:
|
||||||||||
|
Settlements
|
(13
|
)
|
2
|
−
|
||||||
|
Lapse
of statute of limitations
|
(12
|
)
|
(5
|
)
|
(3
|
)
|
||||
|
Ending
balance
|
$
|
166
|
$
|
150
|
$
|
125
|
||||
It is
expected that the amount of unrecognized tax benefits will change in the next
twelve months; however, BNSF Railway does not expect the change to have a
significant impact on the results of operations or the financial position of the
Company.
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in income tax expense in the Consolidated
Statements of Income, which is consistent with the recognition of these items in
prior reporting periods. The Company had recorded a liability of approximately
$23 million and $33 million for the payment of interest and penalties for the
years ended December 31, 2009 and 2008, respectively. For the years ended
December 31, 2009, 2008 and 2007, the Company recognized a reduction of
approximately $8 million, $18 million and $7 million in interest and penalty
expense, respectively.
6.
Accounts Receivable, Net
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.
BNSF
Railway’s total capacity to sell undivided interests to investors under the A/R
sales program was $700 million at December 31, 2009, which was comprised of
two $175 million, 364-day accounts receivable facilities and two $175 million,
3-year accounts receivable facilities. In November 2009, BNSF Railway extended
the commitment termination date of the two 364-day facilities to November 2010.
The two 3-year facilities were entered into in November 2007 and have a
commitment termination date in November 2010. Each of the financial institutions
providing credit for the facilities is rated Aa3/A+ or higher. There was no
outstanding undivided interest held by investors at December 31, 2009.
Outstanding undivided interests held by investors under the A/R sales program
were $50 million at December 31, 2008, with $12.5 million allocated to each
facility. The undivided interests in receivables held by investors are excluded
from accounts receivable by BNSF Railway in connection with the sale of
undivided interests under the A/R sales program. As of December 31, 2009 and
2008, an interest in $801 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 Balance Sheets. The interest that continued to be held by
SFRC of $801 million and $828 million at December 31, 2009 and 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 $15.2 billion, $19.5 billion and $16.8 billion in
2009, 2008 and 2007, 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 $3 million, $12 million and
$19 million for the years ended December 31, 2009, 2008 and 2007,
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 undivided interests in the accounts receivable sold by BNSF Railway to
investors fluctuates based on borrowing needs and upon the availability of
receivables and is directly affected by changing business volumes and credit
risks, which may, from time to time, reduce the effective capacity of the
program to less than the $700 million. At December 31, 2009, the effective
capacity under the A/R sales program was $611 million. Additionally, if the
combined dilution and delinquency percentages exceed an established threshold,
there would be an impact on the amount of undivided interest that BNSF Railway
could sell. BNSF Railway has historically experienced very low levels of
dilution or delinquency and was below the established reserve threshold at
December 31, 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 undivided interests 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
December 31, 2009 and 2008, $11 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 December 31, 2009 and 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 accounts payable and other current
liabilities because it relates to the outstanding undivided interests held by
investors. During the years ended December 31, 2009 and 2008, $16 million
and $15 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.
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 until after the
creditors have been paid and SFRC and the master trust have been terminated. 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 December 31, 2009, BNSF Railway was in
compliance with these provisions.
See Note
15 to the Consolidated Financial Statements for information about recent
accounting pronouncements that will have an impact on the A/R sales program upon
adoption.
7. Property and Equipment,
Net
Property
and equipment, net (in millions), and the weighted average annual depreciation
rates (%) were as follows:
|
December
31,
|
2009
|
2008
|
2009
Depreciation
Rates
|
||||||
|
Land
|
$
|
1,803
|
$
|
1,751
|
–
|
%
|
|||
|
Track
structure
|
20,281
|
19,108
|
3.5
|
%
|
|||||
|
Other
roadway
|
13,245
|
12,922
|
2.6
|
%
|
|||||
|
Locomotives
|
4,759
|
4,210
|
7.2
|
%
|
|||||
|
Freight
cars and other equipment
|
2,246
|
2,140
|
5.1
|
%
|
|||||
|
Computer
hardware and software
|
675
|
615
|
11.8
|
%
|
|||||
|
Total cost
|
43,009
|
40,746
|
|||||||
|
Less
accumulated depreciation and amortization
|
(10,731
|
)
|
(9,908
|
)
|
|||||
|
Property and equipment,
net
|
$
|
32,278
|
$
|
30,838
|
|||||
The
Consolidated Balance Sheets at December 31, 2009 and 2008, included $1,876
million, net of $772 million of amortization and $1,648 million, net of $572
million of amortization, respectively, for property and equipment under capital
leases, primarily for rolling stock.
The
Company capitalized $18 million, $17 million and $17 million of interest for the
years ended December 31, 2009, 2008 and 2007, respectively.
A
depreciation rate study completed and implemented in April 2008 resulted in the
Company adopting new depreciation rates for other roadway property, which
includes items such as bridges, office buildings and facilities,
telecommunication and information technology systems and machinery, that
resulted in a net increase in 2008 depreciation expense of approximately $13
million and approximately $18 million on an ongoing annual basis. A study
conducted in 2007 resulted in the Company adopting new depreciation rates for
locomotives that resulted in a net increase in 2007 depreciation expense of
$17 million and approximately $22 million on an ongoing annual basis,
as calculated using the asset base at the time of the rate change. All rate
studies are current under the STB’s requirements.
8.
Accounts Payable and Other Current Liabilities
Accounts
payable and other current liabilities consisted of the following (in
millions):
|
December
31,
|
2009
|
2008
|
||||
|
Compensation
and benefits payable
|
$
|
510
|
$
|
609
|
||
|
Accounts
payable
|
305
|
346
|
||||
|
Rents
and leases
|
283
|
276
|
||||
|
Casualty
and environmental liabilities
|
250
|
280
|
||||
|
Property
tax liabilities
|
177
|
157
|
||||
|
Customer
incentives
|
125
|
141
|
||||
|
Income
tax liabilities
|
106
|
286
|
||||
|
Hedge
liabilitiesa
|
48
|
225
|
||||
|
Other
|
744
|
794
|
||||
|
Total
|
$
|
2,548
|
$
|
3,114
|
||
|
|
a
2008 hedge liabilities include a reduction of $92 million for collateral
paid (see Note 3 to the Consolidated Financial Statements for additional
information).
|
9.
Debt
Debt
outstanding was as follows (in millions):
|
December
31,
|
2009a
|
2008a
|
|||||||||
|
Notes
and debentures, due 2022
|
$
|
200
|
8.8
|
%
|
$
|
200
|
8.8
|
%
|
|||
|
Equipment
obligations, due 2010 to 2027
|
271
|
6.2
|
244
|
6.7
|
|||||||
|
Capitalized
lease obligations, due 2010 to 2028
|
1,589
|
5.5
|
1,281
|
5.3
|
|||||||
|
Mortgage
bonds, due 2010 to 2047
|
94
|
5.9
|
97
|
6.0
|
|||||||
|
Financing
obligations, due 2010 to 2028
|
323
|
6.2
|
278
|
6.2
|
|||||||
|
Unamortized
discount and other, net
|
(24
|
)
|
(25
|
)
|
|||||||
|
Total
|
2,453
|
2,075
|
|||||||||
|
Less
current portion of long-term debt
|
(335
|
)
|
6.2
|
%
|
(254
|
)
|
6.7
|
%
|
|||
|
Long-term debt
|
$
|
2,118
|
$
|
1,821
|
|||||||
|
a Amounts represent debt outstanding and weighted
average effective interest rates for 2009 and 2008, respectively.
Maturities are as of December 31, 2009.
|
|||||||||||
As of
December 31, 2009, certain BNSF Railway properties and other assets were subject
to liens securing $94 million of mortgage debt. Certain locomotives and rolling
stock of BNSF Railway were subject to equipment obligations and capital
leases.
The
following table provides fair value information for the Company’s debt
obligations including principal cash flows and related weighted average interest
rates by contractual maturity dates.
|
December
31, 2009
|
|||||||||||||||||||||||||||
|
Total
Including Capital Leases
|
Total
Excluding Capital Leases
|
Fair
Value Excluding Capital Leases
|
|||||||||||||||||||||||||
|
Maturity
Date
|
|||||||||||||||||||||||||||
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
||||||||||||||||||||||
|
Fixed-rate
debt (in millions)
|
$
|
335
|
$
|
273
|
$
|
209
|
$
|
196
|
$
|
138
|
$
|
1,302
|
$
|
2,453
|
$
|
864
|
$
|
936
|
|||||||||
|
Average
interest rate
|
6.2
|
%
|
5.9
|
%
|
6.0
|
%
|
6.2
|
%
|
5.9
|
%
|
6.4
|
%
|
6.2
|
%
|
|||||||||||||
As of
December 31, 2008, the fair value excluding capital leases of fixed-rate debt
was $805 million.
The fair
value of BNSF Railway’s long-term debt is primarily based on quoted market
prices for the same or similar issues, or on the current rates that would be
offered to BNSF Railway for debt of the same remaining maturities. Capital
leases have been excluded from the calculation of fair value.
During
2007, BNSF Railway made net repayments of $35 million of variable rate notes.
Interest expense on intercompany notes payable is reflected in interest income,
related parties in the Consolidated Statements of Income. No intercompany notes
payable were outstanding at December 31, 2009 or 2008.
Equipment
Obligation
2009
In July
2009, BNSF Railway entered into an 18-year equipment obligation totaling $75
million to finance locomotives and railcars.
Capital
Leases
2009
In 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 $146 million to finance maintenance of way and other vehicles
and equipment with lease terms of three to seven years.
2008
In 2008,
BNSF Railway entered into a capital lease for approximately $158 million to
finance locomotives and freight cars. The term of the lease is 20 years.
Additionally, BNSF Railway entered into capital leases totaling $100 million to
finance maintenance of way and other vehicles and equipment with lease terms of
three to seven years.
2007
In 2007,
BNSF Railway entered into several capital leases totaling approximately $325
million to finance locomotives and freight cars. The terms of the leases are
between 15 and 20 years. Additionally, BNSF Railway entered into capital leases
totaling $119 million to finance maintenance of way and other vehicles and
equipment with lease terms of three to seven
years.
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. In 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.
Guarantees
As of
December 31, 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.
Debt and
other obligations of non-consolidated entities guaranteed by the Company as of
December 31, 2009, were as follows (dollars in millions):
|
Guarantees
|
|||||||||||||||||
|
BNSF
Railway
Ownership
Percentage
|
Principal
Amount
Guaranteed
|
Maximum
Future
Payments
|
Maximum
Recourse
Amount
a
|
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
|
$
|
54
|
$
|
–
|
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/A
|
d
|
N/A
|
d
|
N/A
|
d
|
8
|
$
|
11
|
c
|
|||||
|
Various
lessors (Residual
value guarantees)
|
0.0
|
%
|
N/A
|
$
|
270
|
$
|
270
|
Various
|
$
|
68
|
c
|
||||||
|
All
other
|
0.0
|
%
|
$
|
3
|
$
|
4
|
$
|
1
|
Various
|
$
|
–
|
||||||
|
aReflects the maximum amount the
Company could recover from a third party other than the
counterparty.
bReflects capitalized obligations
that are recorded on the Company’s Consolidated Balance Sheet.
cReflects 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 Railway for BNSF
Railway’s negligence or the negligence of the indemnified
party. However, BNSF Railway 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.
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 BNSF Railway 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. As of December 31, 2009, BNSF
Railway does not anticipate such a large reduction in the fair market value of
the leased equipment. As of December 31, 2009, the Company had recorded a $68
million asset and corresponding liability for the fair value of RVG.
All
Other
As of
December 31, 2009, BNSF Railway guaranteed $3 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 $3 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.
10.
Commitments and Contingencies
Lease
Commitments
BNSF
Railway has substantial lease commitments for locomotives, freight cars,
trailers and containers, office buildings, operating facilities and other
property, and many of these leases provide the option to purchase the leased
item at fair market value at the end of the lease. However, some provide fixed
price purchase options. Future minimum lease payments as of December 31, 2009,
are summarized as follows (in millions):
|
December
31,
|
Capital
Leases
|
Operating
Leases
|
a
|
||||
|
2010
|
$
|
349
|
$
|
613
|
|||
|
2011
|
285
|
601
|
|||||
|
2012
|
215
|
541
|
|||||
|
2013
|
169
|
516
|
|||||
|
2014
|
138
|
499
|
|||||
|
Thereafter
|
922
|
3,553
|
|||||
|
Total
|
2,078
|
$
|
6,323
|
||||
|
Less
amount representing interest
|
(489
|
)
|
|||||
|
Present
value of minimum lease payments
|
$
|
1,589
|
|||||
|
aExcludes leases having
non-cancelable lease terms of less than one year and per diem
leases.
|
|||||||
Lease
rental expense for all operating leases, excluding per diem leases, was $643
million, $689 million and $706 million for the years ended December 31, 2009,
2008 and 2007, respectively. When rental payments are not made on a
straight-line basis, the Company recognizes rental expense on a straight-line
basis over the lease term. Contingent rentals and sublease rentals were not
significant.
Other
Commitments
In the
normal course of business, the Company enters into long-term contractual
requirements for future goods and services needed for the operations of the
business. Such commitments are not in excess of expected requirements and are
not reasonably likely to result in performance penalties or payments that would
have a material adverse effect on the Company’s liquidity.
Personal Injury and
Environmental Costs
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.
Key
elements of the assessment include:
|
|
•Because
BNSF Railway did not have detailed employment records in order to compute
the population of potentially exposed employees, it computed an estimate
using Company employee data from 1970 forward and estimated the BNSF
Railway employee base from 1938-1969 using railroad industry historical
census data and estimating BNSF Railway’s representation in the total
railroad population.
|
|
|
•The
projected incidence of disease was estimated based on epidemiological
studies using employees’ age, duration and intensity of exposure while
employed.
|
|
|
•An
estimate of the future anticipated claims filing rate by type of disease
(non-malignant, cancer and mesothelioma) was computed using the Company’s
average historical claim filing rates for the period 2004-2006.
|
|
|
•An
estimate of the future anticipated dismissal rate by type of claim was
computed using the Company’s historical average dismissal rates observed
in 2005-2007.
|
|
|
•An
estimate of the future anticipated settlement by type of disease was
computed using the Company’s historical average of dollars paid per claim
for pending and future claims using the average settlement by type of
incidence observed during
2005-2007.
|
From
these assumptions, BNSF Railway projected the incidence of each type of disease
to the estimated population to arrive at an estimate of the total number of
employees that could potentially assert a claim. Historical claim filing rates
were applied for each type of disease to the total number of employees that
could potentially assert a claim to determine the total number of anticipated
claim filings by disease type. Historical dismissal rates, which represent
claims that are closed without payment, were then applied to calculate the
number of future claims by disease type that would likely require payment by the
Company. Finally, the number of such claims was multiplied by the average
settlement value to estimate BNSF Railway’s future liability for unasserted
asbestos claims.
The most
sensitive assumptions for this accrual are the estimated future filing rates and
estimated average claim values. Asbestos claim filings are typically sporadic
and may include large batches of claims solicited by law firms. To reflect these
factors, BNSF Railway used a multi-year calibration period (i.e., the average
historical filing rate for the period 2004-2006) because it believed it would be
most representative of its future claim experience. In addition, for
non-malignant claims, the number of future claims to be filed against BNSF
Railway declines at a rate consistent with both mortality and age as there is a
decreasing propensity to file a claim as the population ages. BNSF Railway
believes the average claim values by type of disease from the historical period
2005-2007 are most representative of future claim values. Non-malignant claims,
which represent approximately 90 percent of the total number and 75 percent of
the cost of estimated future asbestos claims, were priced by age of the
projected claimants. Historically, the ultimate settlement value of these types
of claims is most sensitive to the age of the claimant.
During
the third quarters of 2009, 2008 and 2007, 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 2007, management recorded a
decrease in expense of $17 million due to a statistically significant
reduction in filing rate experience for non-malignant claims. In 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):
|
2009
|
2008
|
2007
|
||||||||
|
Beginning
balance
|
$
|
251
|
$
|
270
|
$
|
306
|
||||
|
Accruals
|
–
|
–
|
(17
|
)
|
||||||
|
Payments
|
(15
|
)
|
(19
|
)
|
(19
|
)
|
||||
|
Ending balance at December
31,
|
$
|
236
|
$
|
251
|
$
|
270
|
||||
Of the
obligation at December 31, 2009, $198 million was related to unasserted claims
while $38 million was related to asserted claims. At December 31, 2009 and 2008,
$16 million and $17 million was included in current liabilities, respectively.
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:
|
2009
|
2008
|
||||||
|
Claims
unresolved at January 1,
|
1,833
|
1,781
|
|||||
|
Claims
filed
|
290
|
494
|
|||||
|
Claims
settled, dismissed or otherwise resolved
|
(512
|
)
|
(442
|
)
|
|||
|
Claims unresolved at December
31,
|
1,611
|
1,833
|
|||||
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 90 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 $212 million to $257 million. However, BNSF Railway believes that
the $236 million recorded at December 31, 2009, 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.
Key
elements of the actuarial assessment include:
|
|
•Size
and demographics (employee age and craft) of the
workforce.
|
|
|
•Activity
levels (manhours by employee craft and
carloadings).
|
|
|
•Expected
claim frequency rates by type of claim (employee FELA or third-party
liability) based on historical claim frequency
trends.
|
|
|
•Expected
dismissal rates by type of claim based on historical dismissal
rates.
|
|
|
•Expected
average paid amounts by type of claim for open and incurred but not
reported claims that eventually close with
payment.
|
From
these assumptions, BNSF Railway estimates the number of open claims by accident
year that will likely require payment by the Company. The projected number of
open claims by accident year that will require payment is multiplied by the
expected average cost per claim by accident year and type to determine BNSF
Railway’s estimated liability for all asserted claims. Additionally, BNSF
Railway estimates the number of its incurred but not reported claims that will
likely result in payment based upon historical emergence patterns by type of
claim. The estimated number of projected claims by accident year requiring
payment is multiplied by the expected average cost per claim by accident year
and type to determine BNSF Railway’s estimated liability for incurred but not
reported claims.
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.
The
following table summarizes the activity in the Company’s accrued obligations for
other personal injury matters (in millions):
|
2009
|
2008
|
2007
|
||||||||
|
Beginning
balance
|
$
|
442
|
$
|
439
|
$
|
439
|
||||
|
Accruals
|
73
|
159
|
190
|
|||||||
|
Payments
|
(119
|
)
|
(156
|
)
|
(190
|
)
|
||||
|
Ending balance at December
31,
|
$
|
396
|
$
|
442
|
$
|
439
|
||||
At
December 31, 2009 and 2008, $144 million and $183 million were included in
current liabilities, respectively. 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:
|
2009
|
2008
|
||||||
|
Claims
unresolved at January 1,
|
3,349
|
3,322
|
|||||
|
Claims
filed
|
3,460
|
4,313
|
|||||
|
Claims
settled, dismissed or otherwise resolved
|
(3,437
|
)
|
(4,286
|
)
|
|||
|
Claims unresolved at December
31,
|
3,372
|
3,349
|
|||||
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 $345 million to $495 million.
However, BNSF Railway believes that the $396 million recorded at December 31,
2009, 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 years ended
December 31, 2009, 2008 and 2007, BNSF IC wrote insurance coverage with premiums
totaling $155 million, $168 million and $165 million, respectively, for BNSF
Railway, net of reimbursements from third parties. During this same time, BNSF
Railway recognized $155 million, $168 million, and $165 million, respectively in
expense related to those premiums, which is classified as purchased services in
the Consolidated Statements of Income. During 2009, 2008 and 2007, BNSF IC made
claim payments totaling $111 million, $118 million and $150 million,
respectively, for settlement of covered claims. At December 31, 2009 and 2008,
receivables from BNSF IC for claims paid were $6 million and $23 million,
respectively.
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 necessary based 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. The most significant assumptions are as follows: (i) historical
payment patterns of site development and (ii) variance from benchmark
costs.
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 quarter of 2009, 2008 and 2007, 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
quarter of 2009, 2008 and 2007, management recorded additional expense of
approximately $25 million, $13 million and $20 million as of the
June 30 measurement date, respectively. 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 December 31, 2009, is approximately
$13 million.
BNSF
Railway is involved in a number of administrative and judicial proceedings and
other mandatory cleanup efforts for 320 sites, including 19 Superfund sites, at
which it is participating in the study or cleanup, or both, of alleged
environmental contamination.
The
following table summarizes the activity in the Company’s accrued obligations for
environmental matters (in millions):
|
2009
|
2008
|
2007
|
||||||||
|
Beginning
balance
|
$
|
546
|
$
|
380
|
$
|
318
|
||||
|
Accruals
|
64
|
251
|
126
|
|||||||
|
Payments
|
(93
|
)
|
(85
|
)
|
(64
|
)
|
||||
|
Ending balance at December
31,
|
$
|
517
|
$
|
546
|
$
|
380
|
||||
At
December 31, 2009 and 2008, $90 million and $80 million were included in current
liabilities, respectively.
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.
In the
first quarter of 2007, the Company recorded additional pre-tax environmental
expenses of $65 million due to an increase in environmental costs primarily
related to a final resolution with the State of Washington and its Department of
Ecology on clean-up of an existing environmental site at Skykomish and an
adverse reversal of a trial court decision on appeal regarding a site at Arvin,
California.
BNSF
Railway’s environmental liabilities are not discounted. BNSF Railway anticipates
that the majority of the accrued costs at December 31, 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:
|
BNSF
Railway Sites
|
|||||||
|
2009
|
2008
|
||||||
|
Number
of sites at January 1,
|
336
|
346
|
|||||
|
Sites
added during the period
|
13
|
19
|
|||||
|
Sites
closed during the period
|
(29
|
)
|
(29
|
)
|
|||
|
Number of sites at December
31,
|
320
|
336
|
|||||
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 $370
million to $830 million. However, BNSF Railway believes that the $517 million
recorded at December 31, 2009, is the best estimate of the Company’s future
obligation for environmental costs.
Although
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.
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. BNSF Railway paid the reparations
during the fourth quarter of 2009.
The net
impact in 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.
11.
Employee Separation Costs
Employee
separation costs activity was as follows (in millions):
|
2009
|
2008
|
2007
|
||||||||
|
Beginning
balance at January 1,
|
$
|
79
|
$
|
91
|
$
|
107
|
||||
|
Accruals
|
15
|
3
|
5
|
|||||||
|
Payments
|
(17
|
)
|
(15
|
)
|
(21
|
)
|
||||
|
Ending balance at December
31,
|
$
|
77
|
$
|
79
|
$
|
91
|
||||
Employee
separation liabilities of $77 million were included in the Consolidated
Balance Sheet at December 31, 2009, and principally represent the following: (i)
$75 million for deferred benefits payable upon separation or retirement to
certain active conductors, trainmen and locomotive engineers; and (ii)
$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 December 31, 2009, $27 million of the remaining
liabilities were 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 2010 and 2020. As of December 31, 2009, the Company had updated
its estimate and recorded an additional liability of $15 million related to
deferred benefits (see (i) above). The remaining costs for the non-union
employee severance costs (ii) are expected to be paid out between 2010 and
approximately 2021 based on deferral elections made by the affected
employees.
12.
Employment Benefit Plans
BNSF
sponsors a funded, noncontributory qualified pension plan, the BNSF Retirement
Plan, which covers most non-union employees, and an unfunded non-tax-qualified
pension plan, the BNSF Supplemental Retirement Plan, which covers certain
officers and other employees. The benefits under these pension plans are based
on years of credited service and the highest consecutive sixty months of
compensation for the last ten years of salaried employment with BNSF Railway.
BNSF’s funding policy is to contribute annually not less than the regulatory
minimum and not more than the maximum amount deductible for income tax purposes
with respect to the funded plan.
Certain
salaried employees of BNSF Railway that have met age and years of service
requirements are eligible for life insurance coverage and medical benefits,
including prescription drug coverage, during retirement. This postretirement
benefit plan, referred to as the retiree health and welfare plan, is
contributory and provides benefits to retirees, their covered dependents and
beneficiaries. Retiree contributions are adjusted annually. The plan also
contains fixed deductibles, coinsurance and out-of-pocket limitations. The basic
life insurance plan is noncontributory and covers retirees only. Optional life
insurance coverage is available for some retirees; however, the retiree is
responsible for the full cost. BNSF’s policy is to fund benefits payable under
the medical and life insurance plans as they come due. Generally, employees
beginning salaried employment with BNSF Railway subsequent to September 22,
1995, are not eligible for medical benefits during retirement.
In
September 2006, the FASB issued authoritative accounting guidance related to
employers’ accounting for defined benefit pension and other postretirement
plans, which requires
the recognition of the overfunded or underfunded status of a defined benefit
postretirement plan in the Company’s Consolidated Balance Sheets. This portion
of the new guidance was adopted by the Company on December 31, 2006.
Additionally, the pronouncement eliminates the option for the Company to use a
measurement date prior to the Company’s fiscal year-end effective December 31,
2008. This authoritative accounting guidance provides two approaches to
transition to a fiscal year-end measurement date, both of which are to be
applied prospectively. BNSF Railway elected to apply the transition option under
which a 15-month measurement was determined as of September 30, 2007, that
covered the period until the fiscal year-end measurement was required on
December 31, 2008. As a result, the Company recorded a $7 million decrease to
retained earnings in January 2008.
Components
of the net cost for these plans were as follows (in millions):
|
Pension
Benefits
|
Retiree
Health and Welfare Benefits
|
||||||||||||||||||
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||
|
Service
cost
|
$
|
28
|
$
|
25
|
$
|
25
|
$
|
3
|
$
|
2
|
$
|
2
|
|||||||
|
Interest
cost
|
102
|
102
|
97
|
15
|
18
|
17
|
|||||||||||||
|
Expected
return on plan assets
|
(107
|
)
|
(112
|
)
|
(105
|
)
|
–
|
–
|
–
|
||||||||||
|
Amortization
of net loss
|
24
|
16
|
35
|
1
|
5
|
6
|
|||||||||||||
|
Amortization
of prior service credit
|
–
|
–
|
–
|
(6
|
)
|
(8
|
)
|
(8
|
)
|
||||||||||
|
Net cost
recognized
|
$
|
47
|
$
|
31
|
$
|
52
|
$
|
13
|
$
|
17
|
$
|
17
|
|||||||
The
projected benefit obligation is the present value of benefit earned to date by
plan participants, including the effect of assumed future salary increases and
expected healthcare cost trend rate increases. The following table shows the
change in projected benefit obligation based on the respective measurement dates
(in millions):
|
Pension
Benefits
|
Retiree
Health and
Welfare
Benefits
|
||||||||||||
|
Change
in Benefit Obligation
|
2009
|
2008
|
a
|
2009
|
2008
|
a
|
|||||||
|
Benefit
obligation at beginning of period
|
$
|
1,840
|
$
|
1,763
|
$
|
269
|
$
|
304
|
|||||
|
Service
cost
|
28
|
32
|
3
|
3
|
|||||||||
|
Interest
cost
|
102
|
127
|
15
|
22
|
|||||||||
|
Plan
participants’ contributions
|
–
|
–
|
9
|
11
|
|||||||||
|
Actuarial
loss (gain)
|
35
|
86
|
–
|
(36
|
)
|
||||||||
|
Medicare
subsidy
|
–
|
–
|
2
|
2
|
|||||||||
|
Benefits
paid
|
(141
|
)
|
(168
|
)
|
(32
|
)
|
(37
|
)
|
|||||
|
Projected benefit obligation at
end of period
|
1,864
|
1,840
|
266
|
269
|
|||||||||
|
Component representing future
salary increases
|
(53
|
)
|
(82
|
)
|
–
|
–
|
|||||||
|
Accumulated benefit obligation at
end of period
|
$
|
1,811
|
$
|
1,758
|
$
|
266
|
$
|
269
|
|||||
|
a In accordance with the
transition to new authoritative accounting guidance, the beginning balance
in 2009 and 2008 was December 31, 2008, and September 30, 2007,
respectively; therefore, 2008 includes 15 months of
activity.
|
|||||||||||||
Both the
BNSF Retirement Plan and the BNSF Supplemental Retirement Plan had accumulated
and projected benefit obligations in excess of plan assets at December 31, 2009
and 2008.
The
following table shows the change in plan assets of the plans based on the
respective measurement dates (in millions):
|
Pension
Benefits
|
Retiree
Health and
Welfare
Benefits
|
||||||||||||
|
Change
in Plan Assets
|
2009
|
2008
|
a
|
2009
|
2008
|
a
|
|||||||
|
Fair
value of plan assets at beginning of period
|
$
|
1,034
|
$
|
1,588
|
$
|
–
|
$
|
–
|
|||||
|
Actual
return on plan assets
|
160
|
(395
|
)
|
–
|
–
|
||||||||
|
Employer
contributionsb
|
266
|
9
|
21
|
24
|
|||||||||
|
Plan
participants’ contributions
|
–
|
–
|
9
|
11
|
|||||||||
|
Medicare
subsidy
|
–
|
–
|
2
|
2
|
|||||||||
|
Benefits
paid
|
(141
|
)
|
(168
|
)
|
(32
|
)
|
(37
|
)
|
|||||
|
Fair value of plan assets at
measurement date
|
$
|
1,319
|
$
|
1,034
|
$
|
–
|
$
|
–
|
|||||
|
a In accordance with
the transition to new authoritative accounting guidance, the beginning
balance in 2009 and 2008 was December 31, 2008, and September 30, 2007,
respectively; therefore, 2008 includes 15 months of
activity.
|
|||||||||||||
|
b Employer
contributions were classified as Other, Net under Operating Activities in
the Company’s Consolidated Statements of Cash Flows.
|
|||||||||||||
The
following table shows the funded status, defined as plan assets less the
projected benefit obligation, as of December 31 (in millions):
|
Pension
Benefits
|
Retiree
Health and
Welfare
Benefits
|
||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||
|
Funded
status (plan assets less projected benefit obligations)
|
$
|
(545
|
)
|
$
|
(806
|
)
|
$
|
(266
|
)
|
$
|
(269
|
)
|
|
Of the
combined pension and retiree health and welfare benefits liability of $811
million and $1,075 million recognized as of December 31, 2009 and 2008,
respectively, $28 million was included in other current liabilities as of both
dates.
Actuarial
gains and losses and prior service credits are recognized in the Consolidated
Balance Sheets through an adjustment to AOCL. Beginning in 2007, the Company
recognized actuarial gains and losses and prior service credits in AOCL as they
arose. The following table shows the pre-tax change in AOCL attributable to the
components of the net cost and the change in benefit obligation (in
millions):
|
Pension
Benefits
|
Retiree
Health and
Welfare
Benefits
|
||||||||||||||||||
|
Change
in AOCL
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||
|
Balance
at January 1,
|
$
|
834
|
$
|
233
|
$
|
429
|
$
|
14
|
$
|
46
|
$
|
48
|
|||||||
|
Measurement
date adjustment pursuant to adoption of authoritative accounting guidance
issued September 2006
|
–
|
(4
|
)
|
–
|
–
|
1
|
–
|
||||||||||||
|
Amortization
of actuarial loss
|
(24
|
)
|
(16
|
)
|
(35
|
)
|
(1
|
)
|
(5
|
)
|
(6
|
)
|
|||||||
|
Amortization
of prior service credit
|
–
|
–
|
–
|
6
|
8
|
8
|
|||||||||||||
|
Actuarial
(gain) loss
|
(18
|
)
|
621
|
(161
|
)
|
–
|
(36
|
)
|
(4
|
)
|
|||||||||
|
Balance at December
31,
|
$
|
792
|
$
|
834
|
$
|
233
|
$
|
19
|
$
|
14
|
$
|
46
|
|||||||
The
estimated net actuarial loss for these defined benefit pension plans that will
be amortized from AOCL into net periodic benefit cost over the next fiscal year
is expected to be $32 million. The estimated net actuarial loss and prior
service credit for the retiree health and welfare benefit plans that will be
amortized from AOCL into net periodic benefit cost over the next fiscal year is
expected to be $1 million and $4 million, respectively. Pre-tax amounts
currently recognized in AOCL consist of the following (in
millions):
|
Pension
Benefits
|
Retiree
Health and
Welfare
Benefits
|
||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||
|
Net
actuarial loss
|
$
|
792
|
$
|
834
|
$
|
25
|
$
|
26
|
|||||
|
Prior
service credit
|
−
|
−
|
(6
|
)
|
(12
|
)
|
|||||||
|
Pre-tax amount recognized in
AOCL at December 31,
|
792
|
834
|
19
|
14
|
|||||||||
|
After-tax amount recognized in
AOCL at December 31,
|
$
|
489
|
$
|
515
|
$
|
11
|
$
|
9
|
|||||
The
assumptions used in accounting for the BNSF plans were as follows:
|
Assumptions
Used to Determine Net Cost
for
Fiscal Years Ended December 31,
|
Pension
Benefits
|
Retiree
Health and
Welfare
Benefits
|
|||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||
|
Discount
rate
|
5.75
|
%
|
6.00
|
%
|
5.50
|
%
|
5.75
|
%
|
6.00
|
%
|
5.50
|
%
|
|
|
Expected
long-term rate of return on plan assets
|
8.00
|
%
|
8.00
|
%
|
8.00
|
%
|
–
|
%
|
–
|
%
|
–
|
%
|
|
|
Rate
of compensation increase
|
3.80
|
%
|
3.80
|
%
|
3.90
|
%
|
3.80
|
%
|
3.80
|
%
|
3.90
|
%
|
|
|
Assumptions
Used to Determine Benefit
Obligations
at December 31,
|
Pension
Benefits
|
Retiree
Health and
Welfare
Benefits
|
|||||||
|
2009
|
2008
|
2009
|
2008
|
||||||
|
Discount
rate
|
5.75
|
%
|
5.75
|
%
|
5.75
|
%
|
5.75
|
%
|
|
|
Rate
of compensation increase
|
3.80
|
%
|
3.80
|
%
|
3.80
|
%
|
3.80
|
%
|
|
At December 31, 2009, the Company determined the discount rate by utilizing the Mercer Yield Curve applied to the future estimated cash flows of the Company’s pension and retiree health and welfare plans. At December 31, 2008, the Company determined the discount rate by averaging the Mercer Yield Curve and the Moody’s Aa Corporate bond yield, with the latter measure adjusted to reflect the future estimated cash flows of the Company’s pension and retiree health and welfare plans. The Company believes the Mercer Yield Curve is, in general, a better model to determine discount rates as it utilizes a much larger and more diverse population of highly rated bonds than the Moody’s Aa Corporate bond yield. However, given the volatility experienced in late 2008, the Company was concerned that some of the bonds included in the Mercer Yield Curve, such as financial institutions, may have higher yields because their market risk had not yet fully been reflected in their credit rating. Therefore, the Company decided it most appropriate to average the Mercer Yield Curve with the Moody’s Aa Corporate bond yield, which had no financial institutions in its population. The discount rate used for the 2010 calculation of net benefit cost remained at 5.75 percent which reflects market conditions at the December 31, 2009, measurement date.
The
expected long-term rate of return is the return the Company anticipates earning,
net of plan expenses, over the period that benefits are paid. It reflects the
rate of return on present investments and on expected contributions. In
determining the expected long-term rate of return, BNSF considered the
following: (i) forward looking capital market forecasts; (ii) historical returns
for individual asset classes; and (iii) the impact of active portfolio
management. The expected rate of return on plan assets remained consistent from
2009 to 2010, and the Company does not expect any near-term significant changes
to the current investment allocation of assets. However, unforeseen changes in
the investment markets or other external factors could prompt changes in these
estimates in future years.
The
following table is an estimate of the impact on future net benefit cost that
could result from hypothetical changes to the most sensitive assumptions, the
discount rate and rate of return on plan assets:
|
Sensitivity
Analysis
|
||||
|
Change
in Net Benefit Cost
|
||||
|
Hypothetical
Discount Rate Change
|
Pension
|
Retiree
Health and Welfare
|
||
|
50
basis point decrease
|
$6
million increase
|
$200
thousand decrease
|
||
|
50
basis point increase
|
$6
million decrease
|
$100
thousand increase
|
||
|
Hypothetical
Rate of Return
on
Plan Assets Change
|
Pension
|
|||
|
50
basis point decrease
|
$7
million increase
|
|||
|
50
basis point increase
|
$7
million decrease
|
|||
The
following table presents assumed health care cost trend rates:
|
December
31,
|
2009
|
2008
|
2007
|
|||||||
|
Assumed
health care cost trend rate for next year
|
9.00
|
%
|
9.75
|
%
|
10.50
|
%
|
||||
|
Rate
to which health care cost trend rate is expected to decline and remain
|
5.00
|
%
|
5.00
|
%
|
5.00
|
%
|
||||
|
Year
that the rate reaches the ultimate trend rate
|
2016
|
2016
|
2016
|
|||||||
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one percentage point change in assumed health care
cost trend rates would have the following effects (in millions):
|
One
Percentage-Point Increase
|
One
Percentage-Point Decrease
|
||||||
|
Effect
on total service and interest cost
|
$
|
1
|
$
|
(1
|
)
|
||
|
Effect
on postretirement benefit obligation
|
$
|
20
|
$
|
(17
|
)
|
||
The BNSF
Retirement Plan asset allocation at December 31, 2009 and 2008, and the target
allocation for 2009 by asset category are as follows:
|
Target
Allocation
|
Percentage
of Pension Plan Assets
|
||||||
|
Plan
Asset Allocation
|
2009
|
2009
|
2008
|
||||
|
Equity
Securities
|
45
– 75
|
%
|
62
|
%
|
55
|
%
|
|
|
Fixed
Income Securities
|
20
– 40
|
%
|
30
|
30
|
|||
|
Real
Estate
|
5
– 15
|
%
|
8
|
15
|
|||
|
Total
|
100
|
%
|
100
|
%
|
|||
The general investment objective of the BNSF Retirement Plan is to grow the plan assets in relation to the plan liabilities while prudently managing the risk of a decrease in the plan’s assets relative to those liabilities. To meet this objective, the Company’s management has adopted the above asset allocation ranges. This allows flexibility to accommodate market changes in the asset classes within defined parameters.
Assets
are primarily managed by external Investment Managers each with a specific asset
class mandate as directed by management. There are currently at least two
Investment Managers in each of the above asset classes.
Concentration
in a single security or credit issuer is generally limited to 5% of each
Investment Manager’s portfolio (excluding U.S. government and agencies,
authorized commingled funds, and other manager specific exceptions as authorized
by management). Real estate investment trust investments may not exceed 10% of
any equity manager’s portfolio.
The Fixed
Income allocation may include Core, Core “Plus”, and/or Long Duration
portfolios. “Plus” strategies (higher risk investments such as high
yield, emerging markets, and non-dollar denominated securities) are limited to
30% of the Core Plus portfolio value.
Real
Estate is generally accessed through direct investment in one or more commingled
funds with reasonable diversification by property type and geographic
location.
Derivative
investments are permitted under certain circumstances.
Investments
are stated at fair value. The various types of investments are valued as
follows: (i) Equity securities are valued at the last trade price at primary
exchange close time on the last business day of the year (Level 1 input). If the
last trade price is not available, values are based on bid, ask/offer quotes
from contracted pricing vendors, brokers, or investment managers (Level 3
input). (ii) Corporate debt securities, government debt securities, and
collateralized obligations and mortgage backed securities are valued based on
institutional bid evaluations from contracted vendors. Where available, vendors
use observable market-based data to evaluate prices (Level 2 input). This also
applies to U.S. Treasury securities included in cash and cash equivalents. If
observable market-based data is not available, unobservable inputs such as
extrapolated data, proprietary models, and indicative quotes are used to arrive
at estimated prices representing the price a dealer would pay for the security
(Level 3 input). (iii) Shares of real estate commingled funds are valued at the
quarterly net asset value of units held at year end. Net asset value is based on
independent appraisals obtained at least annually for each property and is
considered a Level 3 input as the funds impose ongoing limitations on the
availability of share redemptions. (iv) Registered investment companies are
valued at the daily net asset value of shares held at year end. Net asset value
is considered a Level 1 input if redemptions at this value are available to all
shareholders without restriction. Net asset value is considered a Level 2 input
if the fund may restrict share redemptions under limited circumstances. Net
asset value is considered a Level 3 input if shares could not be redeemed on the
reporting date and net asset value can not be corroborated by trading
activity.
The
following table summarizes the Plan’s investments as of December 31, 2009, based
on the inputs used to value them (in millions):
|
Asset
Category
|
Total
as of December 31, 2009
|
Level
1 Inputs
a
|
Level
2 Inputs
a
|
Level
3 Inputs
a
|
||||||||
|
Equity
securities:
|
||||||||||||
|
U.
S.
|
$
|
443
|
$
|
443
|
$
|
−
|
$
|
−
|
||||
|
International
|
336
|
336
|
−
|
−
|
||||||||
|
Corporate
debt securities
|
157
|
−
|
157
|
−
|
||||||||
|
Government
debt securities
|
114
|
−
|
114
|
−
|
||||||||
|
Real
estate
|
103
|
−
|
−
|
103
|
||||||||
|
Collateralized
obligations and mortgage backed securities (MBS)
|
78
|
−
|
77
|
1
|
||||||||
|
Cash
and cash equivalents
|
48
|
38
|
10
|
−
|
||||||||
|
Registered
investment companies
|
34
|
23
|
11
|
−
|
||||||||
|
Total
b
|
$
|
1,313
|
$
|
840
|
$
|
369
|
$
|
104
|
||||
|
a See
Note 2 to the Consolidated Financial Statements under the heading “Fair
Value Measurements” for a definition of each of these levels of
inputs.
b Excludes
$6 million accrued for dividend and interest
receivable.
|
||||||||||||
The table
below sets forth a summary of changes in the fair value of the Plan’s Level 3
assets for the year ended December 31, 2009 (in millions):
|
Level
3 Inputs
|
Total
|
U.S.
Equity Securities
|
Corporate
Debt Securities
|
Real
Estate
|
Collateralized
Obligations & MBS
|
Cash
and Cash Equivalentsa
|
Registered
Investment Companies
|
|||||||||||||||
|
Balance
as of December 31, 2008
|
$
|
162
|
$
|
1
|
$
|
6
|
$
|
151
|
$
|
4
|
$
|
(2
|
)
|
$
|
2
|
|||||||
|
Actual
return on plan assets:
|
||||||||||||||||||||||
|
Relating
to assets still held at reporting date
|
(399
|
)
|
−
|
2
|
(42
|
)
|
(1
|
)
|
2
|
−
|
||||||||||||
|
Relating
to assets sold during the period
|
(5
|
)
|
(1
|
)
|
−
|
(2
|
)
|
−
|
(2
|
)
|
−
|
|||||||||||
|
Purchases,
sales and settlements
|
(8
|
)
|
−
|
(3
|
)
|
(4
|
)
|
(1
|
)
|
2
|
(2
|
)
|
||||||||||
|
Transfers
out of Level 3
|
(6
|
)
|
−
|
(5
|
)
|
−
|
(1
|
)
|
−
|
−
|
||||||||||||
|
Balance
as of December 31, 2009
|
$
|
104
|
$
|
−
|
$
|
−
|
$
|
103
|
$
|
1
|
$
|
−
|
$
|
−
|
||||||||
|
a Balance
at December 31, 2008, represents a temporary deficit in a securities
lending program. As of December 31, 2009, the Company no longer
participates in the program.
|
||||||||||||||||||||||
The
Company is not required to make contributions to the BNSF Retirement Plan in
2010. The Company expects to make benefit payments in 2010 of $8 million from
its non-qualified defined benefit plan.
The
following table shows expected benefit payments from its defined benefit pension
plans and expected claim payments and Medicare Part D subsidy receipts for the
retiree health and welfare plan for the next five fiscal years and the aggregate
five years thereafter (in millions):
|
Fiscal
year
|
Expected
Pension
Plan
Benefit Payments
|
a
|
Expected
Retiree
Health
and
Welfare Payments
|
Expected
Medicare
Subsidy
|
||||||
|
2010
|
$
|
137
|
$
|
23
|
$
|
(2
|
)
|
|||
|
2011
|
138
|
24
|
(3
|
)
|
||||||
|
2012
|
139
|
24
|
(3
|
)
|
||||||
|
2013
|
139
|
24
|
(3
|
)
|
||||||
|
2014
|
141
|
24
|
(3
|
)
|
||||||
|
2015–2019
|
702
|
118
|
(17
|
)
|
||||||
|
aPrimarily consists of the BNSF
Retirement Plan payments, which are made from the plan trust and do not
represent an immediate cash outflow to the Company.
|
||||||||||
Defined Contribution
Plans
BNSF and
BNSF Railway sponsor qualified 401(k) plans that cover substantially all
employees and a non-qualified defined contribution plan that covers certain
officers and other employees. The Company matches 50 percent of the first six
percent of non-union employees’ contributions and matches 25 percent on the
first four percent of a limited number of union employees’ contributions, which
are subject to certain percentage limits of the employees’ earnings, at each pay
period. Non-union employees are eligible to receive an annual discretionary
matching contribution of up to 30 percent of the first six percent of their
contributions. Employer contributions for all non-union employees are subject to
a five-year length of service vesting schedule. The Company’s 401(k) matching
expense was $22 million, $29 million and $21 million in 2009, 2008 and 2007,
respectively.
Other
Under
collective bargaining agreements, BNSF Railway participates in multi-employer
benefit plans that provide certain postretirement health care and life insurance
benefits for eligible union employees. Insurance premiums paid attributable to
retirees, which are generally expensed as incurred, were $54 million, $54
million and $46 million, in 2009, 2008 and 2007, respectively (see Note 11 to
the Consolidated Financial Statements for other deferred benefits payable to
certain conductors, trainmen and locomotive engineers).
13.
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 $626 million, $1,052 million and $930 million
during 2009, 2008 and 2007, respectively, which are reflected in changes in
working capital in the Consolidated Statement of Cash Flows.
During
2008 and 2007, BNSF Railway declared in-kind dividends of $1.3 billion, or $1.3
million per share, and $4.1 billion, or $4.1 million per share, to BNSF,
respectively. The in-kind dividend declared in 2008 reduced notes receivable.
The in-kind dividend declared in 2007 reduced notes receivable and accounts
receivable by $3,854 million and $246 million, respectively.
At
December 31, 2009 and 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 December 31, 2009
and 2008, BNSF Railway had $66 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
December 31, 2009 and 2008, BNSF Railway had $948 million and $6 million,
respectively, of intercompany notes receivable from BNSF. The $942 million
increase in intercompany notes receivable is due to loans to BNSF of $1,147
million, partially offset by repayments of $205 million. During 2008 and 2007,
additional borrowings were $1,296 million and $1,708 million, respectively, and
repayments were $446 million and $715 million, respectively. Additionally,
during 2008, BNSF Logistics, a wholly-owned subsidiary of BNSF that specializes
in third-party logistics services, borrowed and repaid $12 million on an
intercompany note with BNSF Railway. 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 $34 million, $43 million and $28 million for the
years ended December 31, 2009, 2008 and 2007, 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 $23 million, $42 million and $30 million for the years
ended December 31, 2009, 2008 and 2007, which are classified as purchased
services in the Consolidated Statements of Income.
Under
various stock incentive plans, BNSF granted options to BNSF Railway 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 also participated in BNSF’s
other long-term incentive plans including, among other things, restricted stock
and a discounted stock purchase program. See
Notes 2 and 14 to the Consolidated Financial Statements for additional
information regarding compensation expense recorded for stock incentive
plans.
14.
Stock-Based Compensation
On April
15, 1999, BNSF shareholders approved the Burlington Northern Santa Fe 1999 Stock
Incentive Plan and authorized 20 million shares of BNSF common stock to be
issued in connection with stock options, restricted stock, restricted stock
units and performance stock. On April 18, 2001, April 17, 2002, April 21, 2004
and April 19, 2006, BNSF shareholders approved the amendments to the Burlington
Northern Santa Fe 1999 Stock Incentive Plan, which authorized additional awards
of 9 million, 6 million, 7 million and 11 million shares, respectively, of BNSF
common stock to be issued in connection with stock options, restricted stock,
restricted stock units and performance stock. Approximately 5 million common
shares were available for future grant at December 31, 2009.
Additionally,
on April 18, 1996, BNSF shareholders approved the non-employee directors’ stock
plan and authorized 900,000 shares of BNSF common stock to be issued in
connection with this plan. Approximately 403,000 common shares were available
for future grant at December 31, 2009.
Upon
completion of the proposed Merger, no further grants of BNSF stock will be
made under the BNSF stock-based compensation plans. See Note 1 to the
Consolidated Financial Statements for information related to the proposed
Merger.
Stock
Options
Under
BNSF’s stock plans, options were granted to directors, officers and salaried
employees of BNSF Railway at the fair market value of BNSF’s common stock on the
date of grant. Stock option grants generally vest ratably over three years and
expire within ten years after the date of grant. Shares issued upon exercise of
options may be issued from treasury shares or from authorized but unissued
shares.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model. The following assumptions apply to the
options granted for the periods presented:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
Weighted
average expected life (years)
|
4.8
|
4.7
|
4.6
|
|||||||
|
Weighted
average expected volatility
|
29.6
|
%
|
24.0
|
%
|
24.0
|
%
|
||||
|
Weighted
average expected dividend yield
|
1.96
|
%
|
1.50
|
%
|
1.15
|
%
|
||||
|
Weighted
average risk free interest rate
|
2.15
|
%
|
3.09
|
%
|
4.31
|
%
|
||||
|
Weighted
average fair value per share at date of grant
|
$
|
15.09
|
$
|
22.92
|
$
|
21.91
|
||||
Expected
volatilities are based on historical volatility of BNSF’s stock, implied
volatilities from traded options on BNSF’s stock and other factors. The Company
uses historical experience with exercise and post-vesting employment termination
behavior to determine the options’ expected life. The expected life represents
the period of time that options granted are expected to be outstanding. The
risk-free rate is based on the U.S. Treasury rate with a maturity date
corresponding to the options’ expected life.
A summary
of the status of stock options as of, and for the year ended December 31, 2009,
is presented below (options in thousands, aggregate intrinsic value in
millions):
|
Year
ended December 31, 2009
|
Options
|
Weighted
Average Exercise Prices
|
Weighted
Average Remaining
Contractual
Term
(in
years)
|
Aggregate
Intrinsic Value
|
||||||||
|
Balance
at beginning of year
|
9,668
|
$
|
62.95
|
|||||||||
|
Granted
|
2,556
|
64.63
|
||||||||||
|
Exercised
|
(2,027
|
)
|
37.27
|
|||||||||
|
Cancelled
|
(177
|
)
|
81.54
|
|||||||||
|
Balance at end of
year
|
10,020
|
$
|
68.24
|
6.16
|
$
|
316
|
||||||
|
Options
exercisable at year end
|
6,334
|
$
|
62.35
|
4.65
|
$
|
235
|
||||||
The total
intrinsic value of options exercised was $87 million, $207 million and $281
million for the years ended December 31, 2009, 2008 and 2007, respectively.
Other Incentive
Programs
BNSF had
other long-term incentive programs that utilize restricted shares/units. A
summary of the status of restricted shares/units and the weighted average grant
date fair values as of, and for the year ended December 31, 2009, is presented
below (shares in thousands):
|
Year
ended December
31, 2009
|
Time
Based
|
Performance
Based
Units
|
Performance
Stock
|
BNSF
Incentive Bonus Stock Program
|
BNSF
Discounted Stock Purchase Program
|
Total
|
||||||||||||||||||||||||
|
Balance
at beginning
of year
|
457
|
$
|
76.49
|
1,056
|
$
|
92.48
|
612
|
$
|
89.24
|
64
|
$
|
81.31
|
20
|
$
|
81.34
|
2,209
|
$
|
87.84
|
||||||||||||
|
Granted
|
58
|
66.67
|
558
|
64.97
|
279
|
59.75
|
−
|
−
|
23
|
66.25
|
918
|
63.52
|
||||||||||||||||||
|
Vested
|
(233
|
)
|
75.74
|
(209
|
)
|
80.17
|
(54
|
)
|
80.17
|
(64
|
)
|
81.31
|
(12
|
)
|
81.32
|
(572
|
)
|
78.52
|
||||||||||||
|
Forfeited
|
(6
|
)
|
84.77
|
(40
|
)
|
88.18
|
(171
|
)
|
81.26
|
−
|
−
|
−
|
−
|
(217
|
)
|
82.62
|
||||||||||||||
|
Balance at end of
year
|
276
|
$
|
74.89
|
1,365
|
$
|
83.24
|
666
|
$
|
79.67
|
−
|
$
|
−
|
31
|
$
|
70.41
|
2,338
|
$
|
81.06
|
||||||||||||
A summary
of the weighted average grant date fair market values of the restricted
share/units as of, and for the years ended December 31, 2008 and 2007, is
presented below:
|
Grant
Date Fair Market Value of Awards Granted
|
Time
Based
|
Performance
Based
Units
|
Performance
Stock
|
BNSF
Incentive Bonus Stock Program
|
BNSF
Discounted Stock Purchase Program
|
||||||||||
|
Year
ended December 31, 2008
|
$
|
102.06
|
$
|
105.23
|
$
|
100.13
|
$
|
−
|
$
|
86.56
|
|||||
|
Year
ended December 31, 2007
|
$
|
86.38
|
$
|
88.80
|
$
|
88.77
|
$
|
−
|
$
|
79.28
|
|||||
A summary
of the fair value of the restricted share/units vested during the years ended
December 31, 2009, 2008 and 2007 is presented below:
|
Total
Fair Value of Shares Vested
(in
millions)
|
Time
Based
|
Performance
Based
Units
|
Performance
Stock
|
BNSF
Incentive Bonus Stock Program
|
BNSF
Discounted Stock Purchase Program
|
Total
|
||||||||||||
|
Year
ended December 31, 2009
|
$
|
15
|
$
|
14
|
$
|
4
|
$
|
4
|
$
|
1
|
$
|
38
|
||||||
|
Year
ended December 31, 2008
|
$
|
31
|
$
|
30
|
$
|
15
|
$
|
51
|
$
|
1
|
$
|
128
|
||||||
|
Year
ended December 31, 2007
|
$
|
49
|
$
|
21
|
$
|
–
|
$
|
18
|
$
|
1
|
$
|
89
|
||||||
Time-based awards were granted to senior managers within BNSF Railway primarily as a retention tool and to encourage ownership in BNSF. They generally vest over three years, although in some cases up to five years, and are contingent on continued salaried employment.
Performance-based
units were granted to senior managers within BNSF Railway to encourage ownership
in BNSF and to align management’s interest with those of its shareholders.
Performance-based units generally vest over three years and are contingent on
the achievement of certain predetermined corporate performance goals (e.g.,
return on invested capital (ROIC)) and continued salaried employment.
Additionally,
eligible employees could earn performance stock contingent upon achievement of
higher ROIC goals and continued salaried employment.
Certain
employees were eligible to exchange through the Burlington Northern Santa Fe
Incentive Bonus Stock Program the cash payment of their bonus for grants of
restricted stock. In September 2005, the program was amended so that exchanges
of cash bonus payments for awards of restricted stock were no longer permitted
after February 2006.
Certain
other salaried employees were eligible to participate in the BNSF Discounted
Stock Purchase Program and use their bonus to purchase shares of BNSF common
stock at a discount from the market price. These shares immediately vest but are
restricted for a three-year period. This program was terminated in December
2009.
Shares
awarded under each of the plans may not be sold or used as collateral and are
generally not transferable by the holder until the shares awarded become free of
restrictions. Compensation cost, net of tax, recorded under the BNSF Stock
Incentive Plans is shown in the following table (in millions):
|
2009
|
2008
|
2007
|
||||||||
|
Compensation
cost
|
$
|
41
|
$
|
69
|
$
|
66
|
||||
|
Income
tax benefit
|
(15
|
)
|
(25
|
)
|
(23
|
)
|
||||
|
Total
|
$
|
26
|
$
|
44
|
$
|
43
|
||||
|
Compensation
cost capitalized
|
$
|
6
|
$
|
6
|
$
|
7
|
||||
At
December 31, 2009, there was $89 million of total unrecognized compensation cost
related to unvested share-based compensation arrangements. That cost is expected
to be recognized over a weighted-average period of 1.58 years.
Upon
completion of the proposed Merger, each outstanding stock option or share
award of BNSF common stock was converted into an option or restricted stock unit
of Berkshire Class B Common Stock, in accordance with a formula to convert such
awards.
15.
Accounting Pronouncements
In June
2009, the FASB amended authoritative accounting guidance related to transfers of
financial assets which updates existing guidance. The amended authoritative
accounting guidance 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. The amended authoritative accounting guidance 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 amended authoritative accounting guidance related to the
consolidation of variable interest entities (VIEs). The amended authoritative
accounting guidance updates existing guidance used to determine whether or not a
company is required to consolidate a VIE and requires enhanced disclosures. The
amended authoritative accounting guidance also eliminates quantitative-based
assessments and will require companies to perform ongoing qualitative
assessments to determine whether or not the VIE should be
consolidated.
The
Company adopted the amended authoritative accounting guidance on January 1,
2010.
As
discussed in Note 6, 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. The amended authoritative accounting guidance 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. The Company
intends to apply this guidance prospectively. 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 interests
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 were no outstanding undivided interests held by
investors under the A/R sales program at December 31, 2009. Outstanding
undivided interests held by investors under the A/R sales program were $50
million at December 31, 2008.
The
Company did not record any additional financial statement adjustments as a
result of the adoption of the amended authoritative accounting
guidance.
16.
Accumulated Other Comprehensive Loss
The
following table provides the components of accumulated other comprehensive loss
(in millions):
|
As
of December 31,
|
2009
|
2008
|
|||||
|
Unrecognized
prior service credit and actuarial losses, net of tax (see Note
12)
|
$
|
(500
|
)
|
$
|
(524
|
)
|
|
|
Fuel/interest
hedge mark-to-market, net of tax (see Note 3)
|
5
|
(281
|
)
|
||||
|
Accumulated
other comprehensive income of equity method investees, net of tax
|
(6
|
)
|
(6
|
)
|
|||
|
Total
Accumulated other comprehensive loss
|
$
|
(501
|
)
|
$
|
(811
|
)
|
17.
Quarterly Financial Data—Unaudited
|
Dollars
in millions
|
Fourth
|
Third
|
Second
|
First
|
||||||||
|
2009
|
||||||||||||
|
Revenues
|
$
|
3,641
|
$
|
3,549
|
$
|
3,275
|
$
|
3,383
|
||||
|
Operating
income
|
$
|
865
|
$
|
890
|
$
|
792
|
$
|
661
|
||||
|
Net
income
|
$
|
620
|
$
|
546
|
$
|
464
|
$
|
384
|
||||
|
2008
|
||||||||||||
|
Revenues
|
$
|
4,319
|
$
|
4,837
|
$
|
4,420
|
$
|
4,211
|
||||
|
Operating
income
|
$
|
1,106
|
$
|
1,197
|
$
|
711
|
$
|
882
|
||||
|
Net
income
|
$
|
659
|
$
|
759
|
$
|
417
|
$
|
527
|
||||
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item
9A(T). Controls and Procedures
Disclosure Controls and
Procedures
Based on
their evaluation as of the end of the period covered by this annual report on
Form 10-K, 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.
Management’s Report on
Internal Control Over Financial Reporting
The
management of BNSF Railway is responsible for establishing and maintaining
adequate internal control over financial reporting. BNSF Railway’s internal
control over financial reporting was designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of BNSF
Railway’s financial statements for external reporting purposes in accordance
with generally accepted accounting principles in the United States of
America.
Management
assessed the effectiveness of the BNSF Railway’s internal control over financial
reporting as of December 31, 2009. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control – Integrated
Framework. Based on management’s assessment, management concluded that as
of December 31, 2009, BNSF Railway’s internal control over financial reporting
was effective based on those criteria.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
Changes in Internal Control
Over Financial Reporting
As of the
period covered by this report, the Company has concluded that there have been no
changes in BNSF Railway's internal control over financial reporting that
occurred during BNSF Railway’s fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, BNSF Railway's internal
control over financial reporting.
Item
9B. Other Information
None.
Part
III
Item
14. Principal Accountant Fees and Services
BNSF
Railway is a wholly owned subsidiary of Burlington Northern Santa Fe Corporation
(BNSF) and does not have an audit committee of its Board of Directors. Services
provided by the registrant's principal accountant and all fees are subject to
pre-approval policies and procedures of the Audit Committee of the Board of
Directors of BNSF. Information concerning principal accountant fees and services
for BNSF including its wholly-owned subsidiary, BNSF Railway, will be provided
under the heading "Item 2: Appointment of Independent Auditor; Independent
Auditor Fees" in BNSF's proxy statement for its 2010 annual meeting of
shareholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after the end of the fiscal year, and the information under
that heading is hereby incorporated by reference.
Item 15. Exhibits and
Financial Statement Schedules
| (a) |
The
following documents are filed as part of this report:
|
|
| 1. | Consolidated Financial Statements—see Item 8. | |
| Schedules are omitted because they are not required or applicable, or the required information is included in the Consolidated Financial Statements or related notes. | ||
| 2. | Exhibits: | |
| See Index to Exhibits beginning on page E-1 for a description of the exhibits filed as a part of this Report on Form 10-K. | ||
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, BNSF Railway Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
BNSF
Railway Company
|
||||
|
By:
|
/s/
Matthew K. Rose
|
|||
|
Dated:
February 11, 2010
|
Matthew
K. Rose
|
|||
|
Chairman,
President and Chief
|
||||
|
Executive
Officer
|
||||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of BNSF Railway Company and in
the capacities and on the date indicated.
| Signature | Title |
| /s/ Matthew K. Rose | Chairman, President and Chief Executive Officer |
| Matthew K. Rose | (Principal Executive Officer), and Director |
| /s/ Thomas N. Hund | Executive Vice President and Chief Financial Officer |
| Thomas N. Hund | (Principal Financial Officer), and Director |
| /s/ Julie A. Piggott | Vice President - Planning & Studies and Controller |
| Julie A. Piggott | (Principal Accounting Officer) |
| /s/ Carl R. Ice | Director |
| Carl R. Ice | |
| /s/ John P. Lanigan, Jr. | Director |
| John P. Lanigan, Jr. | |
| /s/ Roger Nober | Director |
| Roger Nober |
Dated: February
11, 2010
BNSF
Railway Company and Subsidiaries
|
Exhibit
Number and Description
|
Incorporated
by Reference
(if
applicable)
|
||||||
|
Form
|
File
Date
|
File
No.
|
Exhibit
|
||||
|
3.1
|
Restated
Certificate of Incorporation of BNSF Railway Company, dated January 17,
2005.
|
10-Q
|
7/26/2005
|
001-06324
|
3.1
|
||
|
3.2
|
By-Laws
of BNSF Railway Company, as amended August 30, 2005.
|
10-Q
|
10/25/2005
|
001-06324
|
3.1
|
||
*Filed
herewith
E-1