UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6324
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-6034000
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2650 Lou Menk Drive
Fort Worth, Texas 76131-2830
(Address of principal executive offices) (Zip Code)
(817) 352-6856
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes__X__ No_____
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares
Class Outstanding at October 31, 1998
----- -------------------------------
Common stock, $1.00 par value 1,000 shares
*The Burlington Northern and Santa Fe Railway Company is a wholly-owned
subsidiary of Burlington Northern Santa Fe Corporation (BNSF); as a result
there is no market data with respect to registrant's shares.
Registrant meets the conditions set forth in General Instruction H(1) (a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format permitted by General Instruction H(2).
<PAGE>
--
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------
1998 1997 1998 1997
-------------------- -----------------
Revenues $2,306 $ 2,137 $6,684 $6,223
------- --------- ------- -------
Operating expenses:
Compensation and benefits 694 660 2,086 2,004
Purchased services 243 217 707 644
Depreciation and amortization 211 195 617 574
Equipment rents 203 200 597 601
Fuel 178 173 541 555
Materials and other 164 151 548 517
------- --------- ------- -------
Total operating expenses 1,693 1,596 5,096 4,895
------- --------- ------- -------
Operating income 613 541 1,588 1,328
Interest expense 50 45 134 137
Interest expense, related parties 29 26 86 70
Other income (expense), net (9) (4) 76 4
------- --------- ------- -------
Income before income taxes 525 466 1,444 1,125
Income tax expense 195 175 545 423
------- --------- ------- -------
Net income $ 330 $ 291 $ 899 $ 702
======= ========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
September 30, December 31,
ASSETS 1998 1997
------------- -------------
Current assets:
Cash and cash equivalents $ 224 $ -
Accounts receivable, net 612 632
Materials and supplies 212 205
Current portion of deferred income taxes 327 333
Other current assets 43 27
------------ --------------
Total current assets 1,418 1,197
Property and equipment, net 20,208 19,152
Other assets 731 850
------------ --------------
Total assets $ 22,357 $ 21,199
============ ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 1,986 $ 1,981
Long-term debt due within one year 261 108
------------ --------------
Total current liabilities 2,247 2,089
Long-term debt 2,441 2,750
Intercompany notes payable 2,288 2,063
Deferred income taxes 5,493 5,172
Casualty and environmental reserves 418 448
Employee, merger and separation costs 420 469
Other liabilities 1,127 1,185
------------ --------------
Total liabilities 14,434 14,176
------------ --------------
Commitments and contingencies (See note 3)
Stockholder's equity:
Common stock, $1 par value, (1,000 shares
authorized, issued and outstanding) and
paid-in capital 4,706 4,706
Retained earnings 3,224 2,324
Accumulated other comprehensive deficit (7) (7)
------------ --------------
Total stockholder's equity 7,923 7,023
------------ --------------
Total liabilities and stockholder's equity $ 22,357 $ 21,199
============ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Nine Months Ended
September 30,
-------------------
1998 1997
-------------------
Operating Activities:
Net income $ 899 $ 702
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 617 574
Deferred income taxes 326 268
Employee, merger and separation costs paid (63) (86)
Other, net (128) (107)
Sale of accounts receivable 19 320
Other changes in working capital 21 (547)
--------- -------
Net cash provided by operating activities 1,691 1,124
--------- --------
Investing Activities:
Cash used for capital expenditures (1,558) (1,476)
Other, net (240) (123)
--------- --------
Net cash used for investing activities (1,798) (1,599)
--------- --------
Financing Activities:
Proceeds from issuance of long-term debt 207 179
Payments on long-term debt (92) (159)
Net increase in intercompany notes payable 225 458
Other, net (9) -
--------- --------
Net cash provided by financing activities 331 478
--------- --------
Increase in cash and cash equivalents 224 3
Cash and cash equivalents:
Beginning of period - 20
--------- --------
End of period $ 224 $ 23
========= ========
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 160 $ 155
Income taxes paid, net of refunds 98 170
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Accounting policies and interim results
The consolidated financial statements should be read in conjunction with The
Burlington Northern and Santa Fe Railway Company ("BNSF Railway" or "Company")
Annual Report on Form 10-K for the year ended December 31, 1997. BNSF Railway
is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation
("BNSF"). BNSF Railway was formerly known as Burlington Northern Railroad
Company ("BNRR"). On December 31, 1996, The Atchison, Topeka and Santa Fe
Railway Company ("ATSF") merged with and into BNRR and the name of the
surviving entity, BNRR, was changed to The Burlington Northern and Santa Fe
Railway Company. Additionally, on January 2, 1998, BNSF Railway's parent,
Santa Fe Pacific Corporation ("SFP"), merged with and into BNSF Railway. All
significant intercompany accounts and transactions have been eliminated.
For accounting purposes, the merger of ATSF into BNRR and the subsequent
merger of SFP into BNSF Railway were treated as a combination of subsidiaries
for the periods they were under common control. The consolidated balance
sheets at September 30, 1998 and December 31, 1997 and the consolidated
statements of income and cash flows for the three and nine month periods ended
September 30, 1998 and 1997 have been adjusted to include the results of SFP.
As a result, the amounts reported in the consolidated financial statements of
BNSF Railway will differ from amounts reported in BNSF Railway's Form 10-Q for
the three and nine month periods ended September 30, 1997.
The results of operations for any interim period are not necessarily
indicative of the results of operations to be expected for the entire year.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments, except as disclosed) necessary to present fairly BNSF
Railway's consolidated financial position as of September 30, 1998 and
December 31, 1997 and the consolidated results of operations for the three and
nine month periods ended September 30, 1998 and 1997 have been included.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" on January 1, 1998. SFAS No. 130 requires
the presentation of comprehensive income and its components in a full set of
financial statements, including the restatement of prior periods. For the
three and nine month periods ended September 30, 1998 and 1997, the Company's
comprehensive income was equal to net income.
Certain comparative prior year amounts in the consolidated financial
statements and notes have been reclassified to conform with the current year
presentation.
2. Employee, merger and separation costs
Current and long-term employee, merger and separation liabilities totaling
$488 million are included in the consolidated balance sheet at September 30,
1998. During the first nine months of 1998, the Company paid $63 million of
employee, merger and separation costs.
At September 30, 1998, $68 million of the total liability is included within
current liabilities for anticipated costs to be paid over the next twelve
months. The remaining costs are anticipated to be paid over the next five
years, except for certain costs related to conductors, trainmen and locomotive
engineers which will be paid upon the employees' separation or retirement, as
well as certain benefits for clerical employees which may be paid on an
installment basis, generally over five to ten years or in some cases through
retirement.
3. Environmental and other contingencies
The Company's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNSF Railway's
operating procedures include practices to protect the environment from the
environmental risks inherent in railroad operations, which frequently involve
transporting chemicals and other hazardous materials. Additionally, many of
BNSF Railway's land holdings are and have been used for industrial or
transportation-related purposes or leased to commercial or industrial
companies whose activities may have resulted in discharges onto the property.
As a result, BNSF Railway is subject to environmental clean-up and enforcement
actions. In particular, the Federal Comprehensive Environmental Response
Compensation and Liability Act of 1980, also known as the "Superfund" law, as
well as similar state laws generally impose joint and several liability for
clean-up and enforcement costs without regard to fault or the legality of the
original conduct on current and former owners and operators of a site.
BNSF Railway is involved in a number of administrative and judicial
proceedings and other mandatory clean-up efforts at 354 sites, at which it is
being asked to participate in the study or clean-up, or both, of alleged
environmental contamination. BNSF Railway paid approximately $36 million
during the first nine months of 1998 for mandatory clean-up efforts, including
amounts expended under federal and state voluntary clean-up programs. BNSF
Railway has accruals of approximately $192 million for remediation and
restoration of all known sites. BNSF Railway anticipates that the majority of
the accrued costs at September 30, 1998, will be paid over the next five
years. No individual site is considered to be material.
Liabilities recorded for environmental costs represent BNSF Railway's best
estimates for remediation and restoration of these sites and include both
asserted and unasserted claims. Unasserted claims are not considered to be a
material component of the liability. Although recorded liabilities include
BNSF Railway's best estimates of all costs, without reduction for anticipated
recoveries from third parties, BNSF Railway's total clean-up costs at these
sites cannot be predicted with certainty due to various factors such as the
extent of corrective actions that may be required, evolving environmental laws
and regulations, advances in environmental technology, the extent of other
parties' participation in clean-up efforts, developments in ongoing
environmental analyses related to sites determined to be contaminated, and
developments in environmental surveys and studies of potentially contaminated
sites. As a result, future charges to income for environmental liabilities
could have a significant effect on results of operations in a particular
quarter or fiscal year as individual site studies and remediation and
restoration efforts proceed or as new sites arise. However, expenditures
associated with such liabilities are typically paid out over a long period;
therefore, management believes that it is unlikely that any identified
matters, either individually or in the aggregate, will have a material adverse
effect on BNSF Railway's consolidated financial position or liquidity.
The railroad industry, including BNSF Railway, is subject to future
requirements regulating air emissions from diesel locomotives that will
increase their operating costs. Final regulations applicable to new and
rebuilt locomotive engines were promulgated by the United States Environmental
Protection Agency ("EPA") and became effective June 15, 1998. The new
standards will be phased in between 2000 and 2005. BNSF Railway has
evaluated compliance requirements and associated costs and believes the costs
will not be material in any given year. BNSF Railway has also entered into
agreements with the California State Air Resources Board and the EPA regarding
a program to reduce emissions in Southern California through accelerated
deployment of locomotives which comply with the federal standards.
Other claims and litigation
BNSF Railway and its subsidiaries are parties to a number of legal actions and
claims, various governmental proceedings and private civil suits arising in
the ordinary course of business, including those related to environmental
matters and personal injury claims. While the final outcome of these items
cannot be predicted with certainty, considering among other things the
meritorious legal defenses available, it is the opinion of management that
none of these items, when finally resolved, will have a material adverse
effect on the annual results of operations, financial position or liquidity of
BNSF Railway, although an adverse resolution of a number of these items could
have a material adverse effect on the results of operations in a particular
quarter or fiscal year.
4. Hedging activities
Fuel
BNSF Railway has a program to hedge against fluctuations in the price of its
diesel fuel purchases. This program includes forward purchases for delivery
at fueling facilities, and various commodity swap transactions which are
accounted for as hedges. Any gains or losses associated with changes in
market value of these hedges are deferred and recognized as a component of
fuel expense in the period in which the hedged fuel is purchased and used. To
the extent BNSF Railway hedges portions of its fuel purchases, it may not
fully benefit from decreases in fuel prices.
As of September 30, 1998, BNSF Railway had entered into fuel swaps for
approximately 1.9 billion gallons at an average price of approximately 49
cents per gallon and forward purchases for approximately 100 million gallons
at an average price of approximately 53 cents per gallon.
The above prices do not include taxes, transportation costs, certain other
fuel handling costs and, except for forward purchases, any differences which
may occur from time to time between the prices of commodities hedged and the
purchase price of BNSF Railway's diesel fuel.
BNSF Railway's fuel hedging program covers approximately 82 percent of
estimated fuel purchases for the remaining three months of 1998, and
approximately 75 percent, 40 percent, 22 percent and 7 percent of estimated
fuel purchases for 1999, 2000, 2001 and 2002, respectively. Hedge positions
are closely monitored to ensure that they will not exceed actual fuel
requirements in any period. Unrecognized losses from BNSF Railway's fuel
hedging transactions were approximately $70 million based on Gulf Coast #2
heating oil as of September 30, 1998. BNSF Railway also monitors its hedging
positions and credit ratings of its counterparties and does not anticipate
losses due to counterparty nonperformance.
5. Sale of Investment in Pipeline Partnerships
Santa Fe Pacific Pipelines, Inc. ("SFP Pipelines"), an indirect, wholly-owned
subsidiary of BNSF Railway, served as the general partner of Santa Fe Pacific
Pipeline Partners, L.P. (the "Partnership") and of its operating partnership
subsidiary, SFPP, L.P. SFP Pipelines owned a two percent interest as the
Partnership's and SFPP, L.P.'s general partner and an approximate 42 percent
interest as limited partner of the Partnership. As general partner, SFP
Pipelines received two percent of all amounts available for distribution by
the Partnership and an additional incentive depending upon the level of cash
distributions paid to holders of limited partner interests in the Partnership
("Partnership Units"). SFP Pipeline Holdings, Inc., an indirect, wholly-owned
subsidiary of BNSF Railway ("SFP Holdings"), had outstanding $219 million
principal amount of Variable Rate Exchangeable Debentures due 2010 (the
"VREDs") at December 31, 1997.
In October 1997, SFP Pipelines and SFP Holdings entered into an agreement with
Kinder Morgan Energy Partners, L.P. ("Kinder Morgan") pursuant to which Kinder
Morgan acquired substantially all of SFP Pipelines' interests in the
Partnership and SFPP, L.P. for approximately $84 million in cash on March 6,
1998. The Partnership was liquidated as part of the transaction and each
Partnership Unit was converted into the right to receive 1.39 Kinder Morgan
common units. SFP Pipelines' 8,148,148 Partnership Units were converted into
the right to receive 11,325,925 Kinder Morgan common units. In addition, the
agreement called for the interest of SFP Pipelines in SFPP, L.P. to be
partially redeemed for a cash distribution of $5.8 million, with SFP Pipelines
retaining only a 0.5 percent special limited partnership interest in SFPP,
L.P. The Company recognized a $67 million one-time pre-tax gain ($32 million
after-tax) at the time of the sale.
Consummation of the transaction caused an "Exchange Event" under the VRED
agreement and in June 1998 all VRED holders received either partnership units
of Kinder Morgan or cash equal to the par value of the VREDs. As a result of
this transaction, substantially all of the Company's investment in the
Partnership and SFPP, L.P. and the VREDs were removed from the consolidated
balance sheet.
6. Related party transactions
BNSF Railway is involved with BNSF and certain of its subsidiaries in related
party transactions in the ordinary course of business which include payments
made on each other's behalf and performance of services. During the first
nine months of 1998, BNSF Railway paid BNSF $98 million for state and federal
income taxes, which are reflected in changes in working capital in the
consolidated statement of cash flows.
Additionally, during the first nine months of 1998, BNSF Railway had net
borrowings from BNSF of $225 million used to fund capital expenditures and
other investing activities. Interest is paid on intercompany notes payable at
a rate of 1.0% above the monthly average of the daily effective Federal Funds
rate. Interest expense is reflected in interest expense, related parties.
The notes are due on demand.
<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Management's narrative analysis relates to the financial condition and results
of operations of The Burlington Northern and Santa Fe Railway Company and its
majority-owned subsidiaries (collectively "BNSF Railway", "Registrant" or
"Company"). BNSF Railway was formerly known as Burlington Northern Railroad
Company ("BNRR"). On December 31, 1996, The Atchison, Topeka and Santa Fe
Railway Company merged with and into BNRR and the name of the surviving
entity, BNRR, was changed to The Burlington Northern and Santa Fe Railway
Company. Additionally, on January 2, 1998, BNSF Railway's parent, Santa Fe
Pacific Corporation ("SFP"), merged with and into BNSF Railway.
For accounting purposes, the merger of ATSF into BNRR and the subsequent
merger of SFP into BNSF Railway were treated as a combination of subsidiaries
for the periods they were under common control. The consolidated balance
sheets at September 30, 1998 and December 31, 1997 and the consolidated
statements of income and cash flows for the three and nine month periods ended
September 30, 1998 and 1997 have been adjusted to include the results of SFP.
As a result, the amounts reported in the consolidated financial statements of
BNSF Railway will differ from amounts reported in BNSF Railway's Form 10-Q for
the three and nine month periods ended September 30, 1997.
RESULTS OF OPERATIONS
- ---------------------
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997.
BNSF Railway recorded net income for the nine months of 1998 of $899 million
compared with first nine months 1997 net income of $702 million. The increase
in net income is a result of increased revenue in intermodal, coal and other
sectors, partially offset by only a 4 percent increase in operating expense
despite a 8 percent increase in units handled. More moderate winter weather
in the first quarter of 1998 relative to 1997 and gains on real estate
portfolio sales contributed to the improvement. Additionally, as discussed in
Note 5 to the consolidated financial statements, the increase in net income
was partially due to a first quarter $67 million pre-tax gain ($32 million
after-tax) on the sale of substantially all of the Company's interest in Santa
Fe Pacific Pipeline Partners, L.P. Excluding the after-tax gain on the
pipelines sale, BNSF Railway's adjusted net income was $867 million for the
first nine months of 1998.
<PAGE>
<TABLE>
<CAPTION>
REVENUES
The following table presents BNSF Railway's revenue information by commodity
for the nine months ended September 30, 1998 and 1997:
<S> <C> <C> <C> <C> <C> <C>
Average Revenue
Revenues Cars/Units Per Car/Unit
---------------- ------------ ------------
1998 1997 1998 1997 1998 1997
(In Millions) (In Thousands)
Intermodal $ 1,825 $ 1,660 2,307 2,069 $ 791 $ 802
Coal 1,678 1,471 1,542 1,375 1,088 1,070
Agricultural Commodities 771 800 422 427 1,827 1,874
Chemicals 632 614 379 360 1,668 1,706
Metals and Minerals 606 559 503 461 1,205 1,213
Forest Products 464 428 262 251 1,771 1,705
Consumer Goods 420 377 272 255 1,544 1,478
Automotive 278 315 164 195 1,695 1,615
------- ------ ------- ----- ------ ------
Total Freight Revenues 6,674 6,224 5,851 5,393 $1,141 $1,154
------- ----- ------ ------
Other Revenues 10 (1)
------- ------
Total Operating Revenues $ 6,684 $6,223
------- ------
</TABLE>
Total revenues for the first nine months of 1998 were $6,684 million or 7
percent higher compared with revenues of $6,223 million for the first nine
months of 1997.
Intermodal revenues of $1,825 million for the first nine months of 1998
increased $165 million or 10 percent reflecting increases in the direct
marketing, international and truckload sectors. Direct marketing revenues
benefited from increased units shipped for Yellow Freight, Roadway, ABF and
the United States Postal Service. International revenues were up due to
volume gains associated with diversion of traffic from UP to BNSF and due to
new business established with Sealand, NYK, Maersk and K-Line. Truckload
revenues increased due to volume growth from J.B. Hunt and Schneider.
Coal revenues of $1,678 million for the first nine months of 1998 increased
$207 million or 14 percent primarily due to favorable operating conditions as
a result of a more moderate winter in 1998, strong demand and volume gains
associated with the diversion of business from UP to BNSF.
Agricultural commodities revenues of $771 million for the first nine months of
1998 were $29 million or 4 percent lower than revenues for the first nine
months of 1997 due to poor Pacific Northwest corn and wheat exports as well as
soft barley exports.
Chemicals revenues of $632 million for the first nine months of 1998 were $18
million or 3 percent higher than the first nine months of 1997. Increases in
petroleum and plastics were partially offset by weak fertilizer markets.
Metals and minerals revenues $606 million for the first nine months of 1998
were $47 million or 8 percent higher than the first nine months of 1997 and
were led primarily by volume increases in steel products. Strength in
aluminum, cement and rock and specialty minerals also contributed to the
increase in revenues.
Forest products revenues of $464 million for the first nine months of 1998
were $36 million or 8 percent higher than the first nine months of 1997
primarily due to printing paper volume gains as 1997 was impacted by severe
winter weather, increased Canadian newsprint imports and pulpboard volume
gains as a result of the diversion of traffic from UP to BNSF. Additionally,
lumber volumes increased due to higher construction activity.
Consumer goods revenues of $420 million for the first nine months of 1998 were
$43 million or 11 percent higher than the first nine months of 1997 primarily
due to volume increases in corn syrup traffic to Mexico, Texas and California
and increased sugar traffic as 1997 was impacted by severe winter weather.
Additionally, government and machinery revenues increased as a result of
increased Boeing traffic.
Automotive revenues of $278 million for the first nine months of 1998 were $37
million or 12 percent lower than the first nine months of 1997 reflecting
decreases in volumes due to the loss of Ford's Southwestern United States
business, the General Motors strike and a rail industry shortage of equipment.
EXPENSES
Total operating expenses for the first nine months of 1998 were $5,096
million, an increase of $201 million or 4 percent, compared with operating
expenses for the first nine months of 1997 of $4,895 million. The operating
ratio improved significantly to 76.2 percent for the first nine months of
1998, compared with a 78.7 percent operating ratio for the first nine months
1997.
Compensation and benefits expenses of $2,086 million were $82 million or 4
percent higher than the first nine months of 1997. The increase was primarily
due to higher scheduled wages related to volume driven increases as well as
higher incentive compensation expenses (1997 incentive compensation expense
was lower due to the impact of the severe winter weather). Additionally, wages
were higher because of wage increases to both salaried and union employees.
Purchased services of $707 million for the first nine months of 1998 were $63
million or 10 percent higher than the first nine month of 1997 due principally
to volume driven increases in ramping, distribution services and other
contracted expenses. Joint facility costs were also higher due to increased
operations over trackage rights gained from UP.
Equipment rents expenses for the first nine months of 1998 of $597 million
were slightly lower than the first nine months of 1997 reflecting lower
private railcar expense, partially offset by higher leased equipment expense.
Fuel expenses of $541 million for the first nine months of 1998 were $14
million or 3 percent lower than the first nine months of 1997, as a result of
a 6 cent or 8 percent decrease in the average price (including the hedge
effect) paid per gallon of diesel fuel partially offset by a 7 percent volume
driven increase in consumption.
Materials and other expenses of $548 million for the first nine months of 1998
were $31 million or 6 percent higher than the first nine months of 1997
principally reflecting a decrease in credits from joint facility billings due
to lower UP traffic levels and a decrease in credits from the sale of easements.
Interest expense with external and related parties of $220 million for the
first nine months of 1998 was $13 million or 6 percent higher than the first
nine months of 1997 principally reflecting higher debt levels partially offset
by lower interest rates.
Other income (expense), net was $72 million higher than the first nine months
of 1997 due primarily to the $67 million pre-tax gain on the pipeline
partnership sale in the first quarter of 1998. Excluding the gain on the
pipeline partnership sale, other income (expense), net for the first nine
months of 1998 was $5 million higher than 1997 reflecting gains on real
estate portfolio sales, partially offset by higher accounts receivable sale
fees and lower equity in earnings of pipelines due to the first quarter 1998
sale of this investment.
OTHER MATTERS
- -------------
YEAR 2000
Background. The Company has established a committee of managers and
employees, chaired by the Company's Chief Information Officer, to evaluate and
manage the costs and risks associated with becoming Year 2000 compliant and to
minimize the impact of the Year 2000 problem on the Company. Because many
existing computer programs and microprocessors recognize only the last two
digits of years (and not the century designation), they may be unable to
accurately recognize and process dates beyond December 31, 1999, and
consequently may fail or produce erroneous data. The Year 2000 problem may
adversely affect the Company's operations and financial performance if its
remedial efforts are not successfully implemented or if the railroad industry
association or railroads with which the Company connects or critical customers
or suppliers fail to become Year 2000 compliant.
State of Readiness. Year 2000 issues were reviewed in September 1995
allowing the approval of the merger of the two railroads that now constitute
BNSF Railway. The core mainframe systems for the merged railroad were
selected in part because they were substantially Year 2000 compliant. These
systems integrate all transportation-related activities and computer systems
that support BNSF's transportation network, including operations, customer
information, and revenue data. This merger-related information systems
integration and upgrade activity was substantially completed by July 1997.
Following this systems integration, BNSF adopted a three-phase approach to
Year 2000: Inventory and Assessment; Remediation; and Certification Testing.
Separate teams address technologies administered or maintained by the
Information Systems Services department ("ISS technologies") and other
enterprise-wide products and technologies used by the Company, including
embedded microprocessor technology ("Enterprise technologies"). BNSF has
substantially completed the Inventory and Assessment phase for both ISS and
Enterprise technologies. During this phase, BNSF inventoried all
ISS-administered source code, hardware, software and communications equipment
that could be affected by the Year 2000 problem, and identified items
potentially needing remediation. Additionally, the Enterprise team completed
a company-wide audit of Enterprise technologies and associated suppliers and
service providers for potential Year 2000 problems.
The Remediation phase is more than two-thirds complete. Remediation includes
converting source code and replacing or upgrading purchased software and
hardware. Remediation is expected to be completed by year-end 1998 for ISS
technologies and by July 1999 for Enterprise technologies.
The Certification Testing phase includes validating the performance of ISS and
Enterprise technologies in a Year 2000 test environment. The Certification
Testing phase also includes validating Year 2000 compliance for critical third
party suppliers and service providers. This phase, which is ongoing, overlaps
with the Remediation phase. Certification testing for ISS technologies is
beginning in November 1998, with critical applications receiving priority;
testing for all applications is scheduled for completion in September 1999.
Certification testing of all critical Enterprise technologies began in May
1998 and is scheduled for completion during December 1998, with non-critical
Enterprise technologies to be certification tested by July 1999.
Costs. As a result of its merger-related systems integration that was
completed in 1997, BNSF achieved substantial Year 2000 compliance on its core
mainframe systems. In addition, spending on Year 2000 activities approximates
$4 million to date. Currently, the total cost of achieving Year 2000
compliance for the Company's ISS and Enterprise technologies is estimated to
be approximately $20 million.
Year 2000 Risks and Contingency Plans. Certain BNSF business processes rely
on third parties for the efficient functioning of its transportation network.
The Association of American Railroads (AAR) administers systems that benefit
all North American railroads and their customers, including interline
settlement, shipment tracing, and waybill processing. BNSF and other
AAR-member railroads are participating in a process to test and certify these
systems for Year 2000 compliance. The AAR expects that these systems will be
compliant by March 1999 with certification testing conducted promptly
thereafter. BNSF plans to develop contingency plans for the business
processes supported by AAR systems.
Certain BNSF routes and resulting revenues are dependent on the use of
trackage rights over other railroads, including Union Pacific Railroad,
Montana Rail Link and the Arizona and California Railroad. Other BNSF traffic
may originate or terminate on other carriers' lines or may otherwise involve
use of a foreign connection en route. Approximately 60 percent of units
handled by BNSF run over BNSF facilities only. BNSF's traffic levels and
revenues could be significantly reduced and/or its operational network
significantly impaired through congestion and other factors if other railroads
are not able to accommodate BNSF trains or interchange traffic for any
extended period of time due to Year 2000 problems. As a result of its work
with other railroads to address Year 2000 problems on an industry-wide basis,
however, management believes that the possibility of extended failures on
other railroads is not significant. At present, the Company generally has not
determined which of its customers may have Year 2000 problems that could
result in reduced traffic for the Company.
It is the opinion of management that Year 2000 problems in BNSF's internal
information systems and technology infrastructure will not have a materially
adverse effect on the results of operations, liquidity or financial position
of the Company. However, there can be no assurance that the systems or
equipment of other parties which interact with BNSF's systems will be
compliant on a timely basis. BNSF believes that the failure of systems or
equipment of one or more of key third parties (and of customers) is the most
reasonably likely worst case Year 2000 scenario, and that an extended failure
could have a material adverse effect on the results of operations, liquidity
or financial position of the Company. Where appropriate, BNSF is developing
contingency plans in the event that BNSF key third parties do not become Year
2000 compliant on a timely basis, which effort includes the formalization of
existing disaster recovery plans. Contingency plans are expected to be in
place by the end of the first quarter 1999.
***
The preceding Year 2000 discussion contains forward-looking statements,
including those concerning the Company's plans and estimated completion dates,
cost estimates, assessments of Year 2000 readiness of BNSF and third parties,
and possible consequences of any failure on the part of the Company or third
parties to be Year 2000 compliant on a timely basis. Forward-looking
statements involve a number of risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, the following:
continued availability of qualified personnel to assess, remediate, and test
ISS and Enterprise technologies at current estimated costs; emergence of
unforeseen software or hardware problems, including where applications
interact with each other in ways not anticipated, which could delay or hinder
commercial transactions or other operations; the ability to locate and
remediate Year 2000 problems with software source code and embedded computer
chips in equipment; the failure, in whole or in part, of other railroads or
AAR-supported systems to be Year 2000 compliant; the Year 2000 compliance of
its business partners and customers and reduced traffic levels due to their
failure, in whole or part, to be Year 2000 compliant; business interruption
due to delays in obtaining supplies, parts, or equipment from key vendors or
suppliers that are affected by Year 2000 problems; the ripple effect of Year
2000-related failures in industries supporting the nation's basic
infrastructure, including fuel vendors and pipelines, gas, electric, and water
utilities, communications companies, banks and financial institutions, and
highway, water, and air transportation systems; and any significant downturn
in the general economy, and adverse industry-specific economic conditions at
the international, national, and regional levels, wholly or partially caused
by Year 2000 problems.
<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WHEAT AND BARLEY TRANSPORTATION RATES
Reference is made to the discussion in Registrant's Report on Form 10-K
for the year ended December 31, 1997, of the challenge to the reasonableness
of BNSF Railway export wheat and barley rates that were the subject of the
August 14, 1997, decision of the Surface Transportation Board ("STB") in
McCarty Farms, Inc. et al. v. Burlington Northern Inc. (Docket No. 37809).
The STB ruled that the plaintiffs had failed to demonstrate that the rates
charged to transport wheat and barley from Montana to Pacific Coast ports were
unreasonable, and it dismissed the proceeding. Plaintiffs filed petitions to
review the STB decision before the United States Court of Appeals for the
District of Columbia Circuit ("D.C. Circuit") and the United States District
Court for the District of Montana ("Montana District Court"). In an October
20, 1998, decision, McCarty Farms, Inc. et al. v. Surface Transportation Board
(No. 97-1632), the D.C. Circuit affirmed the STB's decision in all respects
for those claims as to which it had jurisdiction (i.e., all claims except
those relating to single-car wheat shipments moving before September 12,
1980). The appeal of the STB decision as to single-car wheat shipments moving
before September 12, 1980, remains stayed in the Montana District Court at
this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
See Index to Exhibits on page E-1 for a description of the exhibits filed as
part of this report.
B. Reports on Form 8-K
On November 12, 1998, the Registrant filed a Current Report on Form 8-K, in
which it included as exhibits, under Item 7, Financial Statements and
Exhibits, consolidated financial statements, notes to consolidated financial
statements and a computation of ratio of earnings to fixed charges.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BURLINGTON NORTHERN
AND SANTA FE RAILWAY COMPANY
(Registrant)
By: /s/ THOMAS N. HUND
-----------------------
Thomas N. Hund
Vice President and Controller
(On behalf of the Registrant and as
principal accounting officer)
Fort Worth, Texas
November 13, 1998
<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
12 Computation of ratio of earnings to fixed charges.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Nine Months Ended
September 30,
-------------------
1998 1997
------- -----
Earnings:
Pre-tax income $1,444 $1,125
Add:
Interest and fixed charges,
excluding capitalized interest 220 207
Portion of rent under long-term
operating leases representative
of an interest factor 144 139
Amortization of capitalized interest 3 3
Less: Undistributed equity in earnings
of investments accounted for
under the equity method (12) (8)
--------- -------
Total earnings available for fixed charges $1,799 $1,466
========= =======
Fixed charges:
Interest and fixed charges $ 232 $ 220
Portion of rent under long-term operating
leases representative of an interest
factor 144 139
--------- -------
Total fixed charges $ 376 $ 359
========= =======
Ratio of earnings to fixed charges 4.78x (1) 4.08x
<FN>
(1)Earnings for the nine months ended September 30, 1998 include a pre-tax gain
on the pipeline partnerships sale of $67 million. Excluding this gain, the
ratio for the nine months ended September 30, 1998 would have been 4.61x.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Burlington Northern Santa Fe Railway Company's Consolidated Financial
Statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 224
<SECURITIES> 0
<RECEIVABLES> 696
<ALLOWANCES> 84
<INVENTORY> 212
<CURRENT-ASSETS> 1418
<PP&E> 25104
<DEPRECIATION> 4896
<TOTAL-ASSETS> 22357
<CURRENT-LIABILITIES> 2247
<BONDS> 4729
<COMMON> 0
0
0
<OTHER-SE> 7923
<TOTAL-LIABILITY-AND-EQUITY> 22357
<SALES> 0
<TOTAL-REVENUES> 6684
<CGS> 0
<TOTAL-COSTS> 5096
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220
<INCOME-PRETAX> 1444
<INCOME-TAX> 545
<INCOME-CONTINUING> 899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 899
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
