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Burlington Northern Santa Fe 10-K 2010 Documents found in this filing: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: 1-11535
DOCUMENTS
INCORPORATED BY REFERENCE
i
Table
of Contents
Part
I
Item
1. Business
Burlington
Northern Santa Fe Corporation (BNSF, Registrant or Company) was incorporated in
the State of Delaware on December 16, 1994. 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 Burlington
Northern Railroad Company (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).
BNSF is a
holding company that conducts no operating activities and owns no significant
assets other than through its interests in its subsidiaries. Through its
subsidiaries, BNSF is engaged primarily in the freight rail transportation
business. At December 31, 2009, BNSF and its subsidiaries had approximately
35,000 employees. The rail operations of BNSF Railway Company (BNSF Railway),
the principal operating subsidiary, comprise one of the largest railroad systems
in North America.
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 the Company 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, the Company will merge with and into Merger Sub (the Merger) with
Merger Sub surviving as an indirect wholly owned subsidiary of Berkshire. The
Merger is subject to the approval of (i) the holders of at least 66-2/3% of
the issued and outstanding shares of Company 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 Company 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’s
internet address is www.bnsf.com. Through this internet Web site (under the
“Investors” link), BNSF 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). Filings on Forms 3, 4 and 5 are also available on
this Web site as is BNSF’s annual proxy statement. BNSF makes available on its
Web site other previously filed SEC reports, registration statements and
exhibits via a link to the SEC’s Web site at www.sec.gov. The following
documents are also made available on the Company’s Web site:
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 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 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 maintaining a
rail-controlled fleet. Certain prior period amounts have been adjusted to
conform to current year presentation.
Capital Expenditures and
Maintenance
Capital
Expenditures
The
extent of BNSF Railway’s replacement and capacity program is outlined in the
following table:
A
breakdown of the Company’s cash capital expenditures for the three years ended
December 31, 2009, is incorporated by reference from a table in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations under the heading “Liquidity and Capital Resources; Investing
Activities.”
BNSF’s
planned 2010 capital commitments are incorporated by reference from Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations under the heading “Executive Summary; Capital Commitment Outlook for
2010.”
Locomotive
Maintenance
As of
December 31, 2009, General Electric Company and Electro-Motive Diesel, Inc.
performed locomotive maintenance and overhauls for BNSF Railway at its
facilities under various maintenance agreements that covered approximately
4,000 locomotives.
Property and
Facilities
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. These facilities include 31 major intermodal
hubs located across the system. BNSF Railway’s largest intermodal facilities in
terms of 2009 volume were as follows:
BNSF
Railway owns 22 automotive distribution facilities and serves eight port
facilities where automobiles are loaded on or unloaded from multi-level rail
cars in the United States and Canada.
BNSF
Railway’s largest freight car classification yards based on the average daily
number of cars processed (excluding cars that do not change trains at the
terminal, intermodal and coal cars) are shown below:
As of
December 31, 2009, certain BNSF Railway properties and other assets were subject
to liens securing $94 million of mortgage debt. Certain locomotives,
rolling stock and facilities of BNSF Railway were subject to equipment leases
and financing obligations, as referred to in Notes 9 and 10 to the Consolidated
Financial Statements.
Productivity
Productivity,
as measured by thousand gross ton miles per employee, is shown in the table
below. Gross ton miles is defined as the product of the number of loaded and
empty miles traveled and the combined weight of the car and contents.
A
discussion of Employees and Labor Relations is incorporated by reference from
Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations, under the heading “Other Matters; Employee and Labor
Relations.”
Business
Mix
In
serving the Midwest, Pacific Northwest and the Western, Southwestern and
Southeastern regions and ports of the country, BNSF transports, through one
operating transportation services segment, a range of products and commodities
derived from manufacturing, agricultural and natural resource industries. 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’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 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 efficiently serves many smaller markets by working closely with
approximately 200 shortline partners. BNSF 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 and consisted of the following business sectors:
Coal:
In 2009,
the transportation of coal contributed about 26 percent of freight revenues.
BNSF is one of the largest transporters of low-sulfur coal in the United States.
More than 90 percent of all BNSF’s coal tons originated from the Powder River
Basin of Wyoming and Montana. These coal shipments were destined for coal-fired
electric generating stations located primarily in the North Central, South
Central, Southeast, Mountain and Pacific Northwest regions of the United States.
BNSF also transports coal from the Powder River Basin to markets in Canada, the
eastern United States and Asian markets. Demand for Powder River Basin coal has
increased substantially over time due to its relatively low sulfur content,
abundant reserves, relatively inexpensive mine production and
competitive-delivered cost to power plants.
Other
BNSF coal shipments originate principally in Colorado, New Mexico and North
Dakota. These shipments move to electrical generating stations and industrial
plants in the Mountain and North Central regions of the United States and to
Mexico.
Industrial
Products:
The
Industrial Products’ freight business provided approximately 21 percent of
BNSF’s freight revenues in 2009 and consisted of the following five business
areas:
Agricultural
Products:
The
transportation of Agricultural Products provided approximately 21 percent of
2009 freight revenues. These products include wheat, corn, bulk foods, soybeans,
oil seeds and meals, feeds, barley, oats and rye, flour and mill products, milo,
oils, specialty grains, malt, ethanol and fertilizer. The BNSF system is
strategically located to serve the grain-producing regions of the Midwest and
Great Plains. The Company continues to develop and operate a shuttle network for
grain and grain products, which allows more efficient use of equipment and
improved cycle times. In addition to serving most grain-producing areas, BNSF
serves a variety of terminal, storage, feeding and food-processing locations.
Furthermore, BNSF has direct access to major export markets via the Pacific
Northwest, western Great Lakes, Texas Gulf and Mexican gateways.
Freight
Statistics
The
following table sets forth certain freight statistics relating to rail
operations for the periods indicated.
Revenues,
cars/units and average revenue per car/unit information for the three years
ended December 31, 2009, is incorporated by reference from a table in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, under the heading “Results of Operations; Revenue
Table.”
Government Regulation and
Legislation
The
Company is subject to federal, state and local laws and regulations generally
applicable to all businesses. Rail operations are subject to the regulatory
jurisdiction of the Surface Transportation Board (STB) of the United States
Department of Transportation (DOT), the Federal Railroad Administration of the
DOT, the Occupational Safety and Health Administration (OSHA), as well as other
federal and state regulatory agencies and Canadian regulatory agencies for
operations in Canada. The STB has jurisdiction over disputes and complaints
involving certain rates, routes and services, the sale or abandonment of rail
lines, applications for line extensions and construction and consolidation or
merger with, or acquisition of control of, rail common carriers. The outcome of
STB proceedings can affect the profitability of BNSF’s business.
DOT and
OSHA have jurisdiction under several federal statutes over a number of safety
and health aspects of rail operations, including the transportation of hazardous
materials. State agencies regulate some aspects of rail operations with respect
to health and safety in areas not otherwise preempted by federal
law.
BNSF
Railway’s rail operations, as well as those of its competitors, are also subject
to extensive federal, state and local environmental regulation. These laws cover
discharges to water, air emissions, toxic substances and the generation,
handling, storage, transportation and disposal of waste and hazardous materials.
This regulation has the effect of increasing the cost and liabilities associated
with rail operations. Environmental risks are also inherent in rail operations,
which frequently involve transporting chemicals and other hazardous
materials.
Many of
BNSF Railway’s land holdings are and have been used for industrial or
transportation-related purposes or leased to commercial or industrial companies
whose activities may have resulted in discharges onto the property. As a result,
BNSF Railway is now subject to, and will from time to time continue to be
subject to, environmental cleanup and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as the Superfund law, generally imposes joint and several
liability for cleanup and enforcement costs on current and former owners and
operators of a site, without regard to fault or the legality of the original
conduct. Accordingly, BNSF Railway may be responsible under CERCLA and other
federal and state statutes for all or part of the costs to clean up sites at
which certain substances may have been released by BNSF Railway, its current
lessees, former owners or lessees of properties, or other third parties. BNSF
Railway may also be subject to claims by third parties for investigation,
cleanup, restoration or other environmental costs under environmental statutes
or common law with respect to properties they own that have been impacted by
BNSF Railway operations. Further discussion is incorporated by reference from
Note 10 to the Consolidated Financial Statements.
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.
Competition
The
business environment in which BNSF Railway operates is highly competitive.
Depending on the specific market, deregulated motor carriers and other
railroads, as well as river barges, ships and pipelines in certain markets, may
exert pressure on price and service levels. The presence of advanced, high
service truck lines with expedited delivery, subsidized infrastructure and
minimal empty mileage continues to affect the market for non-bulk,
time-sensitive freight. The potential expansion of longer combination vehicles
could further encroach upon markets traditionally served by railroads. In order
to remain competitive, BNSF Railway and other railroads continue to develop and
implement operating efficiencies to improve productivity.
As
railroads streamline, rationalize and otherwise enhance their franchises,
competition among rail carriers intensifies. BNSF Railway’s primary rail
competitor in the Western region of the United States is the Union Pacific
Railroad Company. Other Class I railroads and numerous regional railroads and
motor carriers also operate in parts of the same territories served by BNSF
Railway.
Based on
weekly reporting by the Association of American Railroads, BNSF’s share of the
western United States rail traffic in 2009 was approximately 49
percent.
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’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 engineers, which covers the period from January
1, 2010 through December 31, 2014. Also in the new bargaining round, BNSF 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.
Burlington
Northern Santa Fe Corporation and its Board of Directors, and in some cases
Berkshire and R Acquisition Company, LLC, are named as defendants in putative
class action lawsuits brought by alleged Burlington Northern Santa Fe
Corporation stockholders challenging the merger described in Part 1, Item 1 of
this Form 10-K. Four stockholder actions were filed in Tarrant County, Texas
(the first of which was filed November 3, 2009), three actions were filed in
Dallas County, Texas (the first of which was filed November 4, 2009), and five
actions were filed in Delaware Chancery Court (the first of which was filed
November 5, 2009). The Tarrant County, Texas actions have been consolidated as
In re: Burlington Northern
Santa Fe Corporation Shareholder Class Action Litigation, Cause No.
348-241465-09. The Dallas County, Texas actions were consolidated under the
action styled Employees
Retirement System of the City of New Orleans v. Burlington Northern Santa Fe
Corporation, et al., Cause No. 09-14950 and have been abated. Plaintiffs
in the Dallas County actions have taken steps seeking to refile or transfer the
actions to Tarrant County. The Delaware actions have been consolidated as In re: Burlington Northern Santa Fe
Shareholders Litigation, C.A. No. 5043-VCL.
The
stockholder actions variously allege that Burlington Northern Santa Fe
Corporation’s directors have breached their fiduciary duties based on
allegations that (i) the consideration being offered is unfair and inadequate,
(ii) Burlington Northern Santa Fe Corporation’s directors did not adequately
seek to maximize stockholder value through open bidding or market check
mechanisms, (iii) the “no shop” clause and termination fee are onerous devices
designed to discourage a superior offer, (iv) Burlington Northern Santa Fe
Corporation’s earnings forecasts were manipulated to drive its stock price down
and thus make the proposed transaction appear more favorable to stockholders
than it truly is, and/or (v) Burlington Northern Santa Fe Corporation’s
disclosures relating to the proposed transaction have been, or will be,
inadequate and materially misleading. Certain of the stockholder actions also
allege that Berkshire aided and abetted the alleged breaches by Burlington
Northern Santa Fe Corporation’s directors. The stockholder actions seek various
remedies, including enjoining the transaction from being consummated in
accordance with the agreed-upon terms.
On
January 18, 2010, the parties to the litigation entered into a memorandum of
understanding (the memorandum of understanding) providing for a settlement of
the litigation, subject to the approval of the Delaware Chancery Court. Pursuant
to the memorandum of understanding, the plaintiffs have withdrawn their
application for preliminary injunctive relief, which was previously scheduled to
be heard in the Delaware Chancery Court on February 3, 2010, and the defendants,
while denying all allegations of wrongdoing and denying that the disclosures in
the proxy statement/prospectus were inadequate, provided the supplemental
disclosures set forth in the Current Report on Form 8-K that was filed on
January 20, 2010.
The
Company believes these claims are without merit and, if the proposed settlement
is not approved, will vigorously defend any further proceedings seeking to
prosecute these claims. 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
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted by BNSF to a vote of its securities holders during the
fourth quarter of 2009.
Executive Officers of the Registrant
Listed
below are the names, ages and positions of all executive officers of BNSF and
their business experience during the past five years. Executive officers hold
office until their successors are elected or appointed, or until their earlier
death, retirement, resignation or removal.
Matthew
K. Rose, 50
Chairman,
President and Chief Executive Officer of BNSF since March 2002.
Thomas
N. Hund, 56
Executive
Vice President and Chief Financial Officer since January 2001.
Carl
R. Ice, 53
Executive
Vice President and Chief Operations Officer since January 2001.
John
P. Lanigan, Jr., 54
Executive
Vice President and Chief Marketing Officer since January 2003.
Linda
Longo-Kazanova, 57
Vice
President–Human Resources and Medical since May 2007. Prior to that, Senior Vice
President, Human Resources and Business Optimization for Bell & Howell
Company, later named ProQuest Company, from 2000.
Roger
Nober, 45
Executive
Vice President Law and Secretary since January 2007. Prior to that, partner of
Steptoe & Johnson LLP, Washington, DC (law firm) from March 2006 and
Chairman of the United States Surface Transportation Board from November 2002 –
January 2006.
Part II Item
5. Market for Registrant’s Common Equity,
Related Stockholder
Matters and Issuer Purchases of Equity Securities
BNSF’s
common stock is listed on the New York Stock Exchange under the symbol “BNI.”
Information as to the high and low sales prices of such stock for the two years
ended December 31, 2009, and the frequency and amount of dividends declared on
such stock during such periods, is set forth in Note 18 to the Consolidated
Financial Statements. The approximate number of holders of record of the common
stock at February 1, 2010, was 29,000.
Common Stock
Repurchases
The
following table presents repurchases by the Company of its common stock for each
of the three months for the quarter ended December 31, 2009, (shares in
thousands):
Item
6. Selected Financial Data
The
following financial data should be read in conjunction with Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Item 8, “Financial Statements and Supplementary Data.” The table
below presents, as of and for the dates indicated, selected historical financial
information for the Company (in millions, except per share data).
Item
7. Management’s Discussion and Analysis of
Financial
Condition and Results of Operations
Management’s
discussion and analysis relates to the financial condition and results of
operations of Burlington Northern Santa Fe Corporation and its
majority-owned subsidiaries (collectively BNSF, Registrant or Company). The
principal operating subsidiary of BNSF is the BNSF Railway Company (BNSF
Railway) through which BNSF derives substantially all of its revenues. All
earnings per share information is stated on a diluted basis. Certain prior
period amounts have been adjusted to conform to current year
presentation.
Company
Overview
Through
its subsidiaries, BNSF is engaged primarily in the freight rail transportation
business. BNSF’s primary operating subsidiary, BNSF Railway, operates one of the
largest North American rail networks with about 32,000 route miles in 28 states
and two Canadian provinces. Through its one operating transportation segment,
BNSF Railway transports a wide range of products and commodities including
Consumer Products, Coal, Industrial Products and Agricultural
Products.
Additional
operational information, including weekly intermodal and carload unit reports as
submitted to the Association of American Railroads (AAR) and annual reports
submitted to the Surface Transportation Board (STB), are available on the
Company’s Web site at www.bnsf.com/investors.
Executive
Summary
Fiscal
Year 2009 — Financial Overview
Capital
Commitment Outlook for 2010
Proposed
Merger with Berkshire Hathaway Inc.
Results of
Operations
Revenues
Summary
The
following table presents BNSF’s revenue information by business group for the
years ended December 31, 2009, 2008 and 2007.
Fuel Surcharges> Freight
revenues include both revenue for transportation services and fuel surcharges.
BNSF’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, 2008 and 2007 (in millions).
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’s expense information for the years ended December
31, 2009, 2008 and 2007 (in millions):
Year
Ended December 31, 2009, Compared with Year Ended December 31, 2008
BNSF
recorded net income for 2009 of $1,721 million, or $5.01 per share. In
comparison, net income for 2008 was $2,115 million, or $6.06 per
share.
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 is
one of the largest transporters of low-sulfur coal in the United States. More
than 90 percent of all BNSF’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 $87 million, or 17 percent, to $428 million for 2009 compared
to 2008. This decrease was primarily due to a decrease in BNSF Logistics
volume-related revenues, which is a wholly-owned, third-party logistics company,
and a decrease in charges for storage costs and demurrage.
Expenses
Total
operating expenses for 2009 were $10,754 million, a decrease of $3,352 million,
or 24 percent versus 2008.
Compensation
and Benefits
Compensation
and benefits includes expenses for BNSF 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 $3,481 million were $403 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; professional services;
and other contract services provided to BNSF. Purchased services expense also
includes purchased transportation costs for BNSF Logistics. The expenses are
driven by the rates established in the related contracts and the volume of
services required.
Purchased
services expenses of $1,873 million for 2009 were $260 million, or 12 percent
lower than 2008. Variable expenses on lower volumes led to decreased costs in
ramping, drayage, car repairs and other volume-related costs, including those of
BNSF Logistics.
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’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 $1,537 million for 2009 were $140 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 $714 million for 2009 were $437 million, or 38 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 $613 million for 2009 was $80 million, or 15 percent higher than
2008. This increase was primarily attributable to a net $32 million loss for
terminated treasury locks (see Note 3 to the Consolidated Financial Statements).
The unfavorable coal rate case decision further 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 34.8 percent compared with 37.2 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.
Year
Ended December 31, 2008, Compared with Year Ended December 31, 2007
BNSF
recorded net income for 2008 of $2,115 million, or $6.06 per share. In
comparison, net income for 2007 was $1,829 million, or $5.06 per
share.
Revenues
Freight
Freight
revenues of $17,503 million for 2008 were $2,154 million, or 14 percent higher
than 2007. Freight revenues reflected a 3-percent decrease in unit volumes.
Freight revenues included an increase of $1,469 million in fuel surcharges
compared with the same 2007 period. Growth in prices and fuel surcharges drove
average revenue per car/unit up 18 percent in 2008 to $1,751 from $1,488 in
2007.
Consumer Products
Consumer
Products revenues of $6,064 million for 2008 were $400 million, or 7 percent
greater than 2007. Revenue gains were driven by higher revenue per unit due to
increased fuel surcharges and improved yields along with slightly higher
domestic traffic, partially offset by lower international and automotive volumes
caused by economic softness.
Coal
Coal
revenues of $3,970 million for 2008 rose $691 million, or 21 percent, versus a
year ago, due to improved yields, contractual inflation escalators, increased
fuel surcharges and higher unit volumes. Despite the flooding impact in the
Powder River Basin and Midwest during May and June, 2008 was a record year for
coal as volumes grew 2 percent. This was driven by continued strong demand for
Powder River Basin coal, leading to organic growth of existing customers and new
eastern U.S. conversions of power plants to burn Powder River Basin
coal.
Industrial Products
Industrial
Products revenues increased $344 million, or 9 percent, to $4,028 million for
2008. The 14-percent increase in average revenue per car was mainly the result
of higher fuel surcharges and improved yields. Units decreased 4 percent
primarily due to a decline in building products resulting from weakness in the
housing market, partially offset by increased construction product
volumes.
Agricultural Products
Agricultural
Products revenues of $3,441 million for 2008 were $719 million, or 26 percent
higher than revenues for 2007. This increase was primarily due to improved
yields, higher fuel surcharges and strong unit volume growth in ethanol, corn
and soybeans.
Other
Revenues
Other
revenues increased $62 million, or 14 percent, to $515 million for 2008 compared
to 2007. This increase was primarily due to an increase in BNSF Logistics
revenues and an increase in demurrage charges. The increase in BNSF Logistics
revenues was primarily driven by acquisition activities.
Expenses
Total
operating expenses for 2008 were $14,106 million, an increase of $1,790 million,
or 15 percent over 2007.
Compensation
and Benefits
Compensation
and benefits expenses of $3,884 million, were $111 million, or 3 percent higher
than 2007. Wage inflation and increased incentive compensation costs, which
cover all non-union and about one quarter of union employees, were partially
offset by improved productivity and lower pension costs. The average number of
employees decreased 1 percent compared with 2007.
Fuel
Fuel
expenses of $4,640 million for 2008 were $1,313 million, or 39 percent higher
than 2007. The increase in fuel expense was primarily due to an increase in the
average all-in cost per gallon of locomotive diesel fuel, partially offset by a
decline in consumption related to improved fuel efficiency and lower volumes.
The average all-in cost per gallon of locomotive diesel fuel increased by 94
cents to $3.16, or $1,330 million, which is comprised of an increase in the
average purchase price of 91 cents, or $1,294 million, and a decrease in
the hedge benefit of 3 cents, or $36 million (2008 loss of $5 million
less 2007 benefit of $31 million). Locomotive fuel consumption in 2008
decreased 27 million gallons to 1,415 million gallons when compared
with consumption in 2007, resulting in a $60 million decrease in fuel
expense. The remainder of the increase was primarily due to higher
non-locomotive fuel prices.
Purchased
Services
Purchased
services expenses of $2,133 million for 2008 were $110 million, or 5 percent
higher than 2007. Approximately 30 percent of the increase was due to purchased
transportation costs for BNSF Logistics. An increase of approximately $30
million in freight car and locomotive contract maintenance expense as well as an
increase of approximately $15 million in haulage payments for transportation
over other railroads also contributed to the increase.
Depreciation
and Amortization
Depreciation
and amortization expenses of $1,397 million for 2008 were $104 million, or 8
percent higher than 2007. This increase was due to capital expenditures and
updated depreciation studies (see discussion under the heading “Critical
Accounting Estimates; Depreciation”).
Equipment
Rents
Equipment
rents expenses for 2008 of $901 million were $41 million, or 4 percent lower
than 2007, due to lower volumes and improved car
velocity.
Materials
and Other
Materials
and other expenses of $1,151 million for 2008, which consisted of approximately
$330 million of materials expense with the remainder consisting of numerous
other items, were $193 million, or 20 percent higher than 2007. The increase was
primarily due to (i) $125 million in higher environmental costs; (ii) a
reduction in gains on land sales of about $20 million; (iii) higher derailment
costs of about $20 million; and (iv) about $20 million higher property and other
miscellaneous taxes.
Interest
Expense
Interest
expense of $533 million for 2008 was $22 million, or 4 percent higher than 2007.
This increase was primarily the result of a higher average debt balance,
partially offset by the interest associated with a favorable tax settlement.
Income
Taxes
The
effective rate in 2008 was 37.2 percent compared with 38.2 percent for the prior
year. The decrease in the effective tax rate primarily reflects a favorable tax
settlement.
Liquidity and Capital
Resources
Liquidity
is a company’s ability to generate cash flows to satisfy current and future
obligations. Cash generated from operations is BNSF’s principal source of
liquidity. BNSF generally funds any additional liquidity requirements through
debt issuance, including commercial paper, through leasing of assets and through
the sale of a portion of its accounts receivable.
Operating
Activities
2009
Net cash
provided by operating activities was $3,413 million during 2009 compared
with $3,977 million during 2008. The decrease was primarily the result of
an increase in contributions to the pension plans of $257 million (see Note 13
to the Consolidated Financial Statements for further information) and payment of
reparations in the amount of $120 million related to the unfavorable coal rate
case decision during 2009 (see Note 10 to the Consolidated Financial Statements
under the heading “Coal Rate Case Decision.”)
2008
Net cash
provided by operating activities was $3,977 million during 2008 compared
with $3,492 million during 2007. The increase was primarily the result of
an increase in earnings before depreciation and amortization expense.
Investing
Activities
2009
Net cash
used for investing activities was $2,637 million during 2009 compared with
$3,073 million during 2008. The decrease in cash used for investing
activities was principally due to decreased acquisition of equipment of $216
million and a $176 million decrease in capital expenditures excluding
equipment.
2008
Net cash
used for investing activities was $3,073 million during 2008 compared with
$2,415 million during 2007. The increase in cash used for investing
activities primarily reflects an increase in equipment acquired in 2008 that was
not sold and leased back in the same year. This was partially offset by a
decrease in capital expenditures excluding equipment.
A
breakdown of capital expenditures during 2009, 2008 and 2007 is set forth in the
following table (in millions):
a Other
primarily includes signals, bridges, structures and other right of way
improvements.
Acquisition
of equipment includes the acquisition of locomotives, freight cars and other
equipment, some or all of which may be sold and leased back by the Company
through either an operating or capital lease. The cash received from any such
sale-leaseback transaction is included in proceeds from sale of equipment
financed in the Consolidated Statements of Cash Flows.
Financing
Activities
2009
Net cash
used for financing activities during 2009 was $140 million, primarily
related to dividend payments of $546 million and common stock repurchases to
satisfy tax withholding obligations for stock option exercises of $16 million,
partially offset by net debt borrowings of $296 million, proceeds from stock
options exercised of $59 million, proceeds from a facility financing obligation
of $51 million and excess tax benefits from equity compensation plans of $29
million.
Aggregate
debt to mature in 2010 is $644 million. BNSF’s ratio of net debt to total
capitalization was 41.5 percent at December 31, 2009, compared with 44.5 percent
at December 31, 2008. The Company’s adjusted net debt to total capitalization
was 50.5 percent at December 31, 2009, compared with 54.7 percent at December
31, 2008. BNSF’s adjusted net debt to total capitalization is a non-GAAP measure
and should be considered in addition to, but not as a substitute or preferable
to, the information prepared in accordance with GAAP. However, management
believes that adjusted net debt to total capitalization provides meaningful
additional information about the ability of BNSF to service long-term debt and
other fixed obligations and to fund future growth.
The
following table presents a reconciliation of the calculation of adjusted net
debt to total capitalization percentage:
In
September 2009, BNSF issued $750 million of 4.70 percent notes due October 1,
2019. The net proceeds from the sale of the notes were used for general
corporate purposes including, but not limited to, working capital, capital
expenditures and repayment of outstanding indebtedness.
At
December 31, 2009, $750 million remained authorized to be issued by the Board of
Directors (the Board) through the Securities and Exchange Commission (SEC) debt
shelf registration process.
In July
2009, BNSF Railway entered into an 18-year equipment obligation totaling $75
million to finance locomotives and railcars.
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.
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 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.
2008
Net cash
used for financing activities during 2008 was $601 million, primarily
related to common stock repurchases of $1,147 million, including
$60 million to satisfy tax withholding obligations for stock option
exercises, and dividend payments of $471 million, which were partially
offset by net debt borrowings of $772 million, excess tax benefits from
equity compensation plans of $96 million, proceeds from stock options exercised
of $91 million and proceeds from a facility financing obligation of $68 million.
In
November 2008, BNSF issued $500 million of 7.00 percent notes due February 1,
2014. The net proceeds from the sale of the notes were used for general
corporate purposes including, but are not limited to, working capital, capital
expenditures, repurchase of common stock pursuant to the share repurchase
program and repayment of short-term borrowings.
In March
2008, BNSF issued $650 million of 5.75 percent notes due March 15, 2018. The net
proceeds from the sale of the notes were used for general corporate purposes
including, but not limited to, working capital, capital expenditures, funding
debt which matured in 2008, repurchase of common stock pursuant to the share
repurchase program and repayment of short-term borrowings.
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
Net cash
used for financing activities during 2007 was $1,122 million, primarily
related to common stock repurchases of $1,265 million, including
$43 million to satisfy tax withholding obligations for stock option
exercises, and dividend payments of $380 million, which were partially
offset by net debt borrowings of $234 million, proceeds from stock options
exercised of $142 million, excess tax benefits from equity compensation
plans of $121 million and proceeds from a facility financing obligation of
$41 million.
In April
2007, BNSF issued $650 million of 5.65 percent debentures and
$650 million of 6.15 percent debentures due May 1, 2017 and May 1, 2037,
respectively. The net proceeds from the sale of the debentures were used for
general corporate purposes including, but not limited to, working capital,
capital expenditures, funding the maturity of debt which matured in 2007, the
repayment of commercial paper and the repurchase of common stock.
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.
Dividends
Common
stock dividends declared were $1.60, $1.44 and $1.14 per share annually for
2009, 2008 and 2007, respectively. Dividends paid on common stock were $546
million, $471 million and $380 million during 2009, 2008 and 2007,
respectively. On October 22, 2009, the Board declared a quarterly dividend of
$0.40 per share on outstanding shares of common stock, payable January 4, 2010
to shareholders of record on December 14, 2009. On January 25, 2010, the Board
declared a conditional cash dividend on outstanding shares of common stock to
shareholders of record on February 4, 2010. The dividend is expected to be paid
on the closing date of the Merger and is contingent upon and subject to the
satisfaction or waiver of all closing conditions set for in the Merger Agreement
executed in connection with the Merger. If all of the closing conditions to the
Merger are satisfied or waived, the dividend will be paid in an amount per share
equal to (1) the number of calendar days between (and including) December 15,
2009 and the closing date of the Merger multiplied by (2) $0.0044, rounded to
the nearest $0.01 per share. See Note 1 to the Consolidated Financial Statements
for additional information related to the Merger.
Share
Repurchase Program
BNSF did
not repurchase shares related to its share repurchase program during 2009.
During 2008 and 2007, the Company repurchased approximately 12 million and
15 million, respectively, of its common stock at average prices of $92.96
per share and $83.96 per share, respectively. Further information on this
repurchase program is incorporated by reference from Note 15 to the Consolidated
Financial Statements.
In
February 2007, the Board authorized the extension of the current BNSF share
repurchase program, adding 30 million shares to the total of
180 million shares previously authorized in equal amounts in July 1997,
December 1999, April 2000, September 2000, January 2003 and December
2005.
Long-Term
Debt and Other Obligations
The
Company’s business is capital intensive. BNSF has historically generated a
significant amount of cash from operating activities, which it uses to fund
capital additions, service debt, repurchase shares and pay dividends.
Additionally, the Company relies on access to the debt and leasing markets to
finance a portion of capital additions on a long-term basis.
In 2009
BNSF took delivery of 331 locomotives under a long-term commitment. At December
31, 2009, BNSF’s remaining commitment was to acquire 537 locomotives by
2013.
In
connection with a transaction entered into in 2006, as amended, BNSF has
remaining railcar purchase obligations for 837 covered hopper cars through
2010.
The
locomotives and freight cars under these agreements have been or are expected to
be financed from one or a combination of sources including, but not limited to,
cash from operations, capital or operating leases and debt issuances. The
decision on the method used for a particular acquisition financing will depend
on market conditions and other factors at that time.
The
Company’s ratio of earnings to fixed charges was 3.91 and 5.04 times for the
years ended December 31, 2009 and 2008, respectively. Additionally, the
Company’s ratio of net cash provided by operating activities divided by total
average debt was 34 percent and 46 percent for the years ended December 31, 2009
and 2008, respectively. The decrease in the ratio of net cash provided by
operating activities divided by total average debt was primarily due to
decreased earnings and a higher average debt balance.
The
following table summarizes the Company’s obligations under long-term debt and
other contractual commitments at December 31, 2009 (in millions):
In the
normal course of business, the Company enters into long-term contracts 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.
Credit
Agreement
Commercial
paper and the revolving credit agreement are discussed in Note 9 to the
Consolidated Financial Statements. The $1.2 billion revolving credit agreement
includes covenants and events of default typical for this type of facility,
including a maximum debt-to-capital test and a $75 million cross-default
provision. At December 31, 2009, there were no bank borrowings against the
revolving credit agreements, and the Company was in compliance with its debt
covenants. BNSF’s maximum debt-to-capital test provides approximately $8 billion
of debt capacity above BNSF’s outstanding debt as of December 31, 2009, before
an event of default would occur under these covenants. With the exception of a
voluntary bankruptcy or insolvency, any event of default has either or both a
cure period or notice requirement before termination of the agreement. A
voluntary bankruptcy or insolvency would be considered an immediate termination
event.
Off-Balance Sheet
Arrangements
Sale
of Accounts Receivable
The
accounts receivable sales program of Santa Fe Receivables Corporation, as
described in Note 6 to the Consolidated Financial Statements, 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. These provisions include a maximum debt-to-capital test, which is
the same as in the BNSF revolving credit agreements described above. BNSF’s
maximum debt-to-capital test provides approximately $8 billion of debt capacity
above BNSF’s outstanding debt as of December 31, 2009. At December 31, 2009, the
Company’s capacity to sell undivided interests to investors under the accounts
receivable sales program was $700 million, 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 of November 2010. There was no outstanding undivided
interest held by investors as of December 31, 2009. Outstanding undivided
interests held by investors under the accounts receivable sales program were $50
million at December 31, 2008.
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 accounts receivable sales program was $611 million.
The
accounts receivable sales program provides efficient financing at a competitive
interest rate as compared with traditional borrowing arrangements and provides
diversification of funding sources. See Note 6 to the Consolidated Financial
Statements for additional information and Note 16 to the Consolidated Financial
Statements for information about recent accounting pronouncements that will have
an impact on the accounts receivable sales program upon adoption.
Guarantees
The
Company acts as guarantor for certain debt and lease obligations. During the
past several years, the Company has primarily utilized guarantees to allow
third-party entities to obtain favorable terms to finance the construction of
assets that will benefit the Company. Additionally, in the ordinary course of
business, BNSF enters into agreements with third parties that include
indemnification clauses. The Company does not expect performance under these
guarantees or indemnities to have a material adverse effect on the Company’s
liquidity in the foreseeable future (see Note 9 to the Consolidated Financial
Statements for additional information).
Inflation
Due to
the capital-intensive nature of BNSF’s business, the full effect of inflation is
not reflected in operating expenses because depreciation is based on historical
cost. An assumption that all operating assets were depreciated at current price
levels would result in substantially greater expense than historically reported
amounts.
Other
Matters
Hedging
Activities
The
Company uses derivatives to hedge against increases in diesel fuel prices and
interest rates as well as to convert a portion of its fixed-rate long-term debt
to floating-rate debt. 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 fair
value or cash flow hedges to specific assets or liabilities on the balance
sheet, commitments or forecasted transactions. The Company assesses at the time
a derivative contract is entered into, and at least quarterly thereafter,
whether the derivative item is effective in offsetting the changes in fair value
or cash flows. Any change in fair value resulting from ineffectiveness, as
defined by 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 stockholders’ equity and reclassified into earnings
in the period during which the hedge transaction affects earnings. Cash flows
related to fuel and interest rate hedges are classified as operating activities
in the Consolidated Statements of Cash Flows.
BNSF
monitors its hedging positions and credit ratings of its counterparties and does
not anticipate losses due to counterparty nonperformance. As of December 31,
2009, BNSF’s counterparties have credit ratings of A2/A or
higher.
Fuel
BNSF
measures the fair value of fuel hedges from data provided by various external
counterparties. 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. 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 collateral if the position of the instruments exceeds a
certain net asset or net liability threshold, respectively. Further information
on BNSF’s fuel hedging program is incorporated by reference from Note 3 to the
Consolidated Financial Statements.
From
January 1, 2010, through February 11, 2010, the Company entered into additional
swaps utilizing New York Mercantile Exchange (NYMEX) #2 Heating Oil (HO). The
supporting tables below provide fuel hedge data for hedges entered into
subsequent to December 31, 2009.
From
January 1, 2010, through February 11, 2010, the Company entered into additional
costless collar agreements utilizing West Texas Intermediate (WTI) crude oil.
The supporting table below provides fuel hedge data for hedges entered into
subsequent to December 31, 2009.
From
January 1, 2010, through February 11, 2010, the Company entered into additional
swaps utilizing the HO refining spread (HO-WTI). The supporting tables below
provide fuel hedge data for hedges entered into subsequent to December 31,
2009.
Interest
Rate
From time
to time, the Company enters into various interest rate hedging transactions for
the purpose of managing exposure to fluctuations in interest rates by
establishing rates in anticipation of both future debt issuances and the
refinancing of leveraged leases, as well as converting a portion of its
fixed-rate long-term debt to floating-rate debt. The Company uses interest rate
swaps and treasury locks as part of its interest rate risk management strategy.
BNSF’s
measurement of the fair value of interest rate derivatives is based on estimates
of the mid-market values for the transactions which are provided by the
counterparties to these agreements. BNSF reviews these estimates for
reasonableness. 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. Further
information on BNSF’s interest hedging program is incorporated by reference from
Note 3 to the Consolidated Financial Statements.
Seattle
Sound Transit
In
December 2003, BNSF Railway entered into several agreements with Central Puget
Sound Regional Transit Authority (Sound Transit), a government authority
established by King, Pierce and Snohomish counties within the State of
Washington. BNSF has agreed to sell to Sound Transit, under the threat of
condemnation, four easements enabling Sound Transit to offer commuter rail
service over existing BNSF track from Seattle to Everett. Sound Transit agreed
to pay BNSF approximately $260 million for four commuter easements to
operate trains on the segment between Seattle and Everett and entered into
agreements both for service on the commuter easements and joint use of track for
commuter and freight purposes. The sale proceeds were received between 2003 and
2007 and will be recognized in income over the average life of the associated
track structure (approximately 37 years).
New
Mexico Department of Transportation
In the
fourth quarter of 2005, BNSF Railway Company entered into agreements with the
New Mexico Department of Transportation to sell the Company’s rail line and
certain adjacent property between Belen, New Mexico and Trinidad, Colorado for
$75 million, through a series of sales agreements, while retaining freight
easement rights on the line. The Company recognized an impairment charge in 2005
related to this agreement of $71 million. To date, the Company has received
all funds and closed on two line segments, recognizing gains of $22 million. The
impairment charge and the gains were recorded as a component of materials and
other expense.
Donation
In the
fourth quarter of 2009, BNSF Railway donated a portion of a line segment located
in the State of Washington, resulting in a tax benefit of $0.25 per diluted
share.
Gain
on Land Sale
On
January 11, 2010, BNSF 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.
Critical Accounting
Estimates
In the
ordinary course of business, the Company makes a number of estimates and
assumptions related to the reporting of results of operations and financial
position in the preparation of its financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ significantly from those estimates under different
assumptions and conditions. The following discussion addresses the Company’s
most critical accounting estimates.
Management
has discussed the development and selection of the critical accounting estimates
described below with the Audit Committee of the Board of Directors, and the
Audit Committee has reviewed the Company’s disclosure relating to them in this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Legal
The most
significant estimates using management’s judgment for legal claims are made with
respect to personal injury claims and environmental matters. These matters are
discussed in more detail below.
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 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
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. 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 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 by 1985.
BNSF
assesses its unasserted liability exposure on an annual basis during the third
quarter. BNSF 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:
From
these assumptions, BNSF 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’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 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 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 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. A 10-percent increase or decrease in either the forecasted
number of unasserted claims or the average claim values would result in an
approximate $20 million increase or decrease in the liability recorded for
unasserted asbestos claims.
Further
discussion on asbestos is incorporated by reference from Note 10 to the
Consolidated Financial Statements.
Other
Personal Injury
BNSF
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 has not experienced any significant adverse
trends related to these types of claims in recent years.
Key
elements of the actuarial assessment include:
From
these assumptions, BNSF 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’s estimated
liability for all asserted claims. Additionally, BNSF 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’s
estimated liability for incurred but not reported claims.
The most
sensitive assumptions for this accrual are the expected average cost per claim
and the projected frequency rates for the number of claims that will ultimately
result in payment. A 10-percent increase or decrease in either the expected
average cost per claim or the frequency rate for claims with payment would
result in an approximate $37 million increase or decrease in BNSF’s
recorded other personal injury reserves.
Further
discussion on other personal injury is incorporated by reference from Note 10 to
the Consolidated Financial Statements.
Environmental
The
Company’s operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNSF’s operating
procedures include practices to protect the environment from the risks inherent
in railroad operations, which frequently involve transporting chemicals and
other hazardous materials. Additionally, many of BNSF’s land holdings are and
have been used for industrial or transportation-related purposes or leased to
commercial or industrial companies whose activities may have resulted in
discharges onto the property. As a result, BNSF is subject to environmental
cleanup and enforcement actions. In particular, the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also
known as the Superfund law, as well as similar state laws, generally impose
joint and several liability for cleanup and enforcement costs on current and
former owners and operators of a site without regard to fault or the legality of
the original conduct. BNSF has been notified that it is a potentially
responsible party (PRP) for study and cleanup costs at Superfund sites for which
investigation and remediation payments are or will be made or are yet to be
determined (the Superfund sites) and, in many instances, is one of several PRPs.
In addition, BNSF may be considered a PRP under certain other laws. Accordingly,
under CERCLA and other federal and state statutes, BNSF may be held jointly and
severally liable for all environmental costs associated with a particular site.
If there are other PRPs, BNSF generally participates in the cleanup of these
sites through cost-sharing agreements with terms that vary from site to site.
Costs are typically allocated based on 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’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
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
experience gained from cleanup efforts at other similar sites into the estimates
for which remediation and restoration efforts are still in progress. The most
significant assumptions are as follows: (i) historical payment patterns of site
development and (ii) variance from benchmark costs. A 10 percent change in any
of these individual assumptions could result in an approximate increase or
decrease of approximately $25 million in BNSF’s estimated environmental
liability.
Further
discussion on environmental is incorporated by reference from Note 10 to the
Consolidated Financial Statements.
Other Claims and Litigation
In
addition to asbestos, other personal injury and environmental matters discussed
above, BNSF and its subsidiaries are also parties to a number of other legal
actions and claims, governmental proceedings and private civil lawsuits 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 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.
Further
discussion on other claims and litigation is incorporated by reference from Note
10 to the Consolidated Financial Statements.
Income
Taxes
BNSF is
subject to various federal, state and local income taxes in the taxing
jurisdictions where the Company operates. BNSF accounts for income taxes by
providing for taxes payable or refundable in the current year and for deferred
tax assets and liabilities for future tax consequences of events that have been
recognized in financial statements or tax returns.
BNSF
recorded total income tax expense, including federal, state and other income
taxes, of $920 million, $1,253 million and $1,128 million for the
years ended December 31, 2009, 2008 and 2007, respectively. BNSF’s Consolidated
Balance Sheets reflect $290 million and $442 million of net current
deferred tax assets at December 31, 2009 and 2008, respectively. Also included
in BNSF’s Consolidated Balance Sheets are $9,322 million and $8,590 million
of net non-current deferred tax liabilities at December 31, 2009 and 2008,
respectively. Classification of deferred tax assets and liabilities as current
or non-current is determined by the financial statement classification of the
asset or liability to which the temporary difference is related. If a temporary
difference is not related to an asset or liability for financial reporting, it
is classified according to the expected reversal date of the temporary
difference.
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
has not recorded a valuation allowance, as it believes that the deferred tax
assets will be fully realized in the future.
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 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.
BNSF
makes estimates of the potential liability based on its assessment of all
potential tax exposures. In addition, the Company uses factors such as
applicable tax laws and regulations, current information and past experience
with similar issues to make these judgments.
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.
The
Company has not significantly changed its methodology for calculating income tax
expense for the years presented, and there are currently no known trends,
demands, commitments, events or uncertainties that are reasonably likely to
occur and materially affect the methodology or assumptions described above.
Further information on federal and state income taxes and uncertain tax
positions is incorporated by reference from Notes 2 and 5 to the Consolidated
Financial Statements.
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. 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 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 subsequent to September 22, 1995, are not eligible for
medical benefits during retirement.
The
amounts recorded in the Consolidated Statements of Income for the pension and
the retiree health and welfare plans were as follows (in millions):
At
December 31, 2009, BNSF had net losses, excluding prior service credits, of $792
million and $25 million related to the pension and retiree health and welfare
benefits plans, respectively, which had been recognized as a component of AOCL
under authoritative accounting guidance, as described in Note 13 to the
Consolidated Financial Statements. These losses were comprised of gains and
losses from changes in discount rates, actuarial assumptions and census data as
well as market gains and losses and will be recognized as a component of net
pension and retiree health and welfare costs over the next 17 and 14 years,
respectively. The expected amortization of deferred losses is as
follows:
The
Company estimates liabilities and expenses for the pension and retiree health
and welfare plans. Estimated amounts are based on historical information,
current information and estimates about future events and circumstances.
Significant assumptions used in the valuation of the pension or retiree health
and welfare obligations include expected return on plan assets, discount rate,
rate of increase in compensation levels and the health care cost trend rate.
From time
to time, the Company will change pension and retiree health and welfare
assumptions in response to current conditions and expected future experience.
Significant assumptions for the past three years are as follows:
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