<PAGE>
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, 1999
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
(Address of principal executive offices) (Zip Code)
(817) 333-2000
(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, 1999
----- -------------------------------
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
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 2,344 $ 2,293 $ 6,726 $ 6,643
------------ ------------ ------------ ------------
Operating expenses:
Compensation and benefits 701 694 2,069 2,086
Purchased services 232 230 704 666
Depreciation and amortization 227 211 667 617
Equipment rents 190 203 564 597
Fuel 170 177 504 539
Materials and other 195 165 624 550
Reorganization costs - - 48 -
Merger severance adjustment - - (54) -
------------ ------------ ------------ ------------
Total operating expenses 1,715 1,680 5,126 5,055
------------ ------------ ------------ ------------
Operating income 629 613 1,600 1,588
Interest expense 46 50 139 134
Interest expense, related parties 29 29 87 86
Other income (expense), net 36 (9) 31 76
------------ ------------ ------------ ------------
Income before income taxes 590 525 1,405 1,444
Income tax expense 221 195 527 545
------------ ------------ ------------ ------------
Net income $ 369 $ 330 $ 878 $ 899
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 81 $ 95
Accounts receivable, net 463 606
Materials and supplies 249 244
Current portion of deferred income taxes 328 335
Other current assets 42 33
------------- -------------
Total current assets 1,163 1,313
Property and equipment, net 21,400 20,604
Other assets 780 764
------------- -------------
Total assets $ 23,343 $ 22,681
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 1,980 $ 1,863
Long-term debt due within one year 164 268
------------- -------------
Total current liabilities 2,144 2,131
Long-term debt 2,561 2,500
Intercompany notes payable 1,793 2,288
Deferred income taxes 5,979 5,634
Casualty and environmental liabilities 419 389
Employee merger and separation costs 313 409
Other liabilities 1,018 1,102
------------- -------------
Total liabilities 14,227 14,453
------------- -------------
Commitments and contingencies (See notes 3 and 4)
Stockholder's equity:
Common stock, $1 par value (1,000 shares authorized,
issued and outstanding) and paid-in capital 4,715 4,706
Retained earnings 4,409 3,530
Accumulated other comprehensive deficit (8) (8)
------------- -------------
Total stockholder's equity 9,116 8,228
------------- -------------
Total liabilities and stockholder's equity $ 23,343 $ 22,681
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Operating Activities:
Net income $ 878 $ 899
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 667 617
Deferred income taxes 351 326
Employee merger and separation costs paid (80) (63)
Other, net (102) (128)
Changes in current assets and liabilities:
Accounts receivable 59 19
Materials and supplies (5) (7)
Other current assets (9) (36)
Accounts payable and other current liabilities 211 64
-------------- ---------------
Net cash provided by operating activities 1,970 1,691
-------------- ---------------
Investing Activities:
Capital expenditures (1,388) (1,558)
Other, net (47) (240)
-------------- ---------------
Net cash used for investing activities (1,435) (1,798)
-------------- ---------------
Financing Activities:
Proceeds from issuance of long-term debt 233 207
Payments on long-term debt (273) (92)
Net increase (decrease) in intercompany notes payable (495) 225
Other, net (14) (9)
-------------- ---------------
Net cash provided by (used in) financing activities (549) 331
-------------- ---------------
Increase (decrease) in cash and cash equivalents (14) 224
Cash and cash equivalents:
Beginning of period 95 -
-------------- ---------------
End of period $ 81 $ 224
============== ===============
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 210 $ 210
Income taxes paid, net of refunds 83 98
</TABLE>
See accompanying notes to consolidated financial statements.
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<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, 1998, as amended.
BNSF Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe
Corporation (BNSF). The consolidated financial statements include the accounts
of The Burlington Northern and Santa Fe Railway Company and its majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
The results of operations for any interim period are not necessarily indicative
of the results of operations to be expected for the entire year. In the opinion
of management, all adjustments (consisting of only normal recurring adjustments,
except as disclosed) necessary to present fairly BNSF Railway's consolidated
financial position as of September 30, 1999 and December 31, 1998 and the
consolidated results of operations for the three and nine month periods ended
September 30, 1999 and 1998 have been included. For the three and nine month
periods ended September 30, 1999 and 1998, 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 to the current year presentation.
2. EMPLOYEE MERGER AND SEPARATION COSTS
During the second quarter of 1999, the Company incurred $48 million of
reorganization costs for severance, pension, medical and other benefit costs for
approximately 325 involuntarily terminated salaried employees that were part of
the program announced in May 1999 to reduce operating expenses. Components of
the charge include approximately $29 million relating to estimated severance
costs for salaried employees, approximately $16 million for special termination
benefits to be received under the Company's retirement and medical plans, and
approximately $3 million of costs incurred for relocating approximately 60
salaried employees as a result of the reorganization. The program sought to
eliminate approximately 400 salaried and 1,000 scheduled (union) positions
through employee severances, normal attrition, and the elimination of
contractors. Substantially all of the planned position reductions were made by
September 30, 1999. No significant costs were incurred as a result of
eliminating the 1,000 scheduled positions.
Additionally, in the second quarter the Company recorded a $54 million credit
for the reversal of certain liabilities associated with its clerical
consolidation plan. These liabilities were related to planned work-force
reductions that are no longer anticipated due to the Company's ability to
utilize a series of job swaps between certain locations to achieve the
advantages of functional work consolidation. This change in the clerical
consolidation plan was communicated to Company employees in May 1999.
Current and long-term employee merger and separation liabilities totaling $369
million are included in the consolidated balance sheet at September 30, 1999,
and principally represent: (i) employee-related severance costs for the
consolidation of clerical functions; (ii) deferred benefits payable upon
separation or retirement to certain active conductors, trainmen and locomotive
engineers; and (iii) certain salaried employee severance costs. During the
first nine months of 1999, the Company made employee merger and separation
payments of $80 million.
Liabilities related to the consolidation of clerical functions are paid to
affected union employees in the form of a lump-sum payment or payments made over
five to ten years, or in some cases, through retirement. Liabilities related to
deferred benefits payable to certain active conductors, trainmen and locomotive
engineers are paid upon the employee's separation or retirement. Liabilities
principally related to certain remaining salaried employee severances will be
paid in the form of a lump sum payment or over the next several years based on
deferral elections made by affected employees. At September 30, 1999, $56
million of the remaining liabilities are included within current liabilities for
anticipated costs to be paid over the next twelve months.
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<PAGE>
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 risks
inherent in railroad operations, which include transporting chemicals and other
hazardous materials. Additionally, many of BNSF Railway's land holdings are and
have been used for industrial or transportation-related purposes or leased to
commercial or industrial companies whose activities may have resulted in
discharges onto the property. As a result, BNSF Railway is subject to
environmental cleanup and enforcement actions. In particular, the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), also known as the "Superfund" law, as well as similar state laws
generally impose joint and several liability for cleanup and enforcement costs
without regard to fault or the legality of the original conduct on current and
former owners and operators of a site. BNSF Railway has been notified that it is
a potentially responsible party (PRP) for study and cleanup costs at
approximately 33 Superfund sites for which investigation and remediation
payments are or will be made or are yet to be determined (the Superfund sites)
and, in many instances, is one of several PRPs. In addition, BNSF Railway may be
considered a PRP under certain other laws. Accordingly, under CERCLA and other
federal and state statutes, BNSF Railway may be held jointly and severally
liable for all environmental costs associated with a particular site. If there
are other PRPs, BNSF Railway generally participates in the cleanup of these
sites through cost-sharing agreements with terms that vary from site to site.
Costs are typically allocated based on 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.
Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and restoration
of sites determined to be contaminated. Liabilities for environmental cleanup
costs are initially recorded when BNSF Railway's liability for environmental
cleanup is probable and a reasonable estimate of associated costs can be made.
Adjustments to initial estimates are recorded as necessary based upon additional
information developed in subsequent periods. BNSF Railway conducts an ongoing
environmental contingency analysis, which considers a combination of factors
including independent consulting reports, site visits, legal reviews, analysis
of the likelihood of participation in and the ability of other PRPs to pay for
cleanup, and historical trend analyses. During the first nine months of 1999,
BNSF Railway recorded total environmental expense of $79 million. This includes
$37 million of additional expense as a result of significant second quarter
developments at certain existing sites, primarily related to new information on
the extent of contamination and other related developments.
BNSF Railway is involved in a number of administrative and judicial proceedings
and other cleanup efforts at approximately 400 sites, including the Superfund
sites, at which it is participating in the study or cleanup, or both, of alleged
environmental contamination. BNSF Railway paid approximately $52 million during
the first nine months of 1999 for mandatory and unasserted cleanup efforts,
including amounts expended under federal and state voluntary cleanup programs.
BNSF Railway has accruals of approximately $212 million for remediation and
restoration of all known sites. BNSF Railway anticipates that the majority of
the accrued costs at September 30, 1999, 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 cleanup costs at these sites
cannot be predicted with certainty due to various factors such as the extent of
corrective actions that may be required, evolving environmental laws and
regulations, advances in environmental technology, the extent of other parties'
participation in cleanup efforts, developments in ongoing environmental analyses
related to sites determined to be contaminated, and developments in
environmental surveys and studies of 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, 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.
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<PAGE>
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 in a single period could have a
material adverse effect on the results of operations in a particular quarter or
fiscal year.
4. HEDGING ACTIVITIES AND OTHER COMMITMENTS FUEL
During the current year, fuel expense is approximately 10 percent of total
operating expenses. Due to the significance of diesel fuel expenses to the
operations of BNSF Railway and the historical volatility of fuel prices, the
Company has established a program to hedge against fluctuations in the price of
its diesel fuel purchases. The intent of the program is to protect the Company's
operating margins and overall profitability from adverse fuel price changes.
However, to the extent the Company hedges portions of its fuel purchases, it may
not realize the impact of decreases in fuel prices. The fuel-hedging program
includes the use of commodity swap transactions that are accounted for as
hedges. Any gains or losses associated with changes in the market value of the
fuel swaps are deferred and recognized as a component of fuel expense in the
period in which the fuel is purchased and used. Based on an annualization of
fuel consumption during the first nine months of 1999 and excluding the impact
of the hedging program, each one-cent increase in the price of fuel would result
in approximately $12 million of additional fuel expense on an annual basis.
As of September 30, 1999, BNSF Railway had entered into fuel swaps for
approximately 1,096 million gallons at an average price of approximately 49
cents per gallon. The above price does not include taxes, transportation costs,
certain other fuel handling costs, and 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.
Currently, BNSF Railway's fuel hedging program covers approximately 76 percent
of estimated fuel purchases for the remaining three months of 1999, and
approximately 40 percent, 22 percent and 7 percent of estimated annual and
quarterly fuel purchases for 2000, 2001, and 2002, respectively. Hedge positions
are closely monitored to ensure that they will not exceed actual fuel
requirements in any period. Unrecognized gains from BNSF Railway's fuel swap
transactions were approximately $34 million as of September 30, 1999, of which
$25 million relates to swap transactions that will expire in 1999. BNSF Railway
also monitors its hedging positions and credit ratings of its counterparties and
does not anticipate losses due to counterparty nonperformance.
5. RELATED PARTY TRANSACTIONS
BNSF Railway is involved with BNSF and certain of its subsidiaries in related
party transactions in the ordinary course of business, which include payments
made on each other's behalf and performance of services. Under the terms of a
tax allocation agreement with BNSF, BNSF Railway made federal and state income
tax payments of $83 million and $98 million, net of refunds, during the first
nine months of 1999 and 1998, respectively, which are reflected in changes in
working capital in the consolidated statement of cash flows.
BNSF Railway had a net intercompany payable balance of $109 million at September
30, 1999, which is reflected in accounts payable and other current liabilities
in the consolidated balance sheet. BNSF Railway had a net intercompany
receivable balance of $86 million at December 31, 1998, which is reflected in
accounts receivable, net in the consolidated balance sheet. Net intercompany
receivable or payable balances are settled in the ordinary course of business.
Additionally, other liabilities in the consolidated balance sheet include
intercompany liabilities of $33 million and $27 million at September 30, 1999
and December 31, 1998, respectively.
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<PAGE>
BNSF Railway had intercompany notes payable to BNSF of $1,793 million and $2,288
million at September 30, 1999 and December 31, 1998, respectively, included in
the consolidated balance sheet. At September 30, 1999, $1,684 million of the
intercompany notes payable had a fixed interest rate of 6.9 percent and $109
million had a variable interest rate of 1.0 percent above the monthly average of
the daily effective Federal Funds rate. During the third quarter, BNSF Railway
made payments of $600 million on its intercompany notes payable, partially
offset by additional borrowings of $105 million. The proceeds were primarily
used to fund capital expenditures and other investing activities. Interest is
paid semi-annually on all intercompany notes payable. Interest expense on
intercompany notes payable is reflected in interest expense, related parties in
the consolidated income statement. The intercompany notes are due on demand;
however, it is not anticipated that BNSF Railway will be required to pay these
obligations in the next twelve months.
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).
Results of Operations
- ---------------------
Nine months ended September 30, 1999 compared with nine months ended September
30, 1998
BNSF Railway recorded net income for the first nine months of 1999 of $878
million, compared with the first nine months of 1998 net income of $899 million.
The decrease in net income is primarily the result of a decrease in other income
(expense), net of $45 million and an increase in interest expense of $6 million
partially offset by a $12 million increase in operating income and lower income
tax expense.
Revenues
The following table presents BNSF Railway's revenue information by commodity for
the nine months ended September 30, 1999 and 1998 and includes certain
reclassifications of prior year information to conform to the current year
presentation:
<TABLE>
<CAPTION>
Average
Revenue
Revenues Cars/Units Per
Car/Unit
----------------------- ------------------------- ----------------------
1999 1998 1999 1998 1999 1998
---------- --------- ------------ --------- ---------- ---------
(In Millions) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Carload $ 1,908 $ 1,960 1,327 1,364 $ 1,438 $ 1,437
Intermodal 1,839 1,800 2,338 2,276 787 791
Coal 1,673 1,679 1,578 1,542 1,060 1,089
Agricultural Commodities 968 917 522 500 1,854 1,834
Automotive 319 279 183 169 1,743 1,651
---------- --------- ------------ --------- ---------- ---------
Total Freight Revenues 6,707 6,635 5,948 5,851 $ 1,128 $ 1,134
19 8 ============ ========= ========== =========
Other Revenues ---------- ---------
Total Operating Revenues $ 6,726 $ 6,643
========== =========
</TABLE>
Total revenues for the first nine months of 1999 were $6,726 million or 1
percent higher compared with revenues of $6,643 million for the first nine
months of 1998. The increase primarily reflects increases in the agricultural
commodities, intermodal and automotive sectors, partially offset by lower
carload and coal revenues. Average revenue per car/unit decreased in the first
nine months of 1999 to $1,128 from $1,134 in the first nine months of 1998.
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<PAGE>
Carload revenues of $1,908 million for the first nine months of 1999 were $52
million or 3 percent lower than the first nine months of 1998 due to decreases
in the chemicals, minerals and machinery, metals, and perishable sectors,
partially offset by increased forest product revenues. The decreases were a
result of weaknesses in the chemicals sector due to soft fertilizer markets, a
decrease in special train movements of heavy machinery, weaknesses in the metals
sector due to increased steel imports, and decreased shipments of perishables.
These decreases were partially offset by increased inland shipments of forest
products.
Intermodal revenues of $1,839 million for the first nine months of 1999
increased $39 million or 2 percent compared with the first nine months of 1998
reflecting increases in the direct marketing, international and truckload
sectors, partially offset by decreases in the IMC sector. Direct marketing
revenues benefited from increased units shipped for UPS, less than truckload
(LTL) customers and the United States Postal Service. International revenues
were up due to new business established with Sealand, NYK, Maersk and K-Line.
Truckload revenues were driven primarily by year over year growth in J.B Hunt,
Swift and Triple Crown loadings. These revenue increases were partially offset
by decreases in the IMC sector due to UP pricing pressures, an overall softening
in the IMC market, and increased over the road capacity.
Coal revenues of $1,673 million for the first nine months of 1999 were $6
million or less than 1 percent lower than the first nine months of 1998
primarily due to lower revenue per car.
Agricultural commodities revenues of $968 million for the first nine months of
1999 were $51 million or 6 percent higher than revenues for the first nine
months of 1998 due to the increase in volume of corn and soybeans exports,
partially offset by fewer shipments of oils.
Automotive revenues of $319 million for the first nine months of 1999 were $40
million or 14 percent higher than the first nine months of 1998 reflecting
growth in both vehicle and parts shipments.
Expenses
Total operating expenses for the first nine months of 1999 were $5,126 million,
an increase of $71 million or slightly over 1 percent, over the first nine
months of 1998.
Compensation and benefits expenses of $2,069 million were $17 million or 1
percent lower than the first nine months of 1998 primarily caused by lower
employment levels due in part to the second quarter reorganization discussed in
Note 2 to the Company's consolidated financial statements.
Purchased services of $704 million for the first nine months of 1999 were $38
million or 6 percent higher than the first nine months of 1998 principally due
to increased contract equipment maintenance, ramping, and other costs.
Equipment rents expenses for the first nine months of 1999 of $564 million were
$35 million or 6 percent lower than the first nine months of 1998 reflecting
lower intermodal equipment expenses due to a reduction in time and mileage,
private lease car, and container expenses.
Fuel expenses of $504 million for the first nine months of 1999 were $35 million
or 6 percent lower than the first nine months of 1998, due to a 5 cent or 9
percent decrease in the average all-in cost per gallon of diesel fuel, partially
offset by a 2 percent volume driven increase in consumption from 857 million to
877 million gallons. The decrease in the average all-in cost per gallon of
diesel fuel includes a 4-cent decrease in the average purchase price and a
1-cent per gallon favorable effect from the Company's fuel hedging program.
Materials and other expenses of $624 million for the first nine months of 1999
were $74 million or 13 percent higher than the first nine months of 1998
principally reflecting additional environmental expense accruals of $37 million,
as discussed in Note 3 to the Company's consolidated financial statements, and
higher personal injury and property and other tax expenses.
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<PAGE>
As discussed in Note 2 to the Company's consolidated financial statements,
reorganization costs of $48 million were incurred during the second quarter of
1999 for severance, pension, medical and other benefit costs for approximately
325 involuntarily terminated salaried employees that were part of the program
announced in May 1999 to reduce operating expenses.
Merger severance adjustment of $54 million (credit) was recorded during the
second quarter of 1999 to reverse certain liabilities associated with the
Company's clerical consolidation plan. These liabilities were related to planned
work-force reductions that are no longer anticipated due to the Company's
ability to utilize a series of job swaps between certain locations to achieve
the advantages of functional work consolidation.
Interest expense with external and related parties of $226 million for the first
nine months of 1999 was $6 million or 3 percent higher than in the first nine
months of 1998, primarily reflecting higher debt levels and higher interest
rates in 1999.
Other income (expense), net was unfavorable by $45 million compared to the first
nine months of 1998 primarily due to the $67 million pre-tax gain on the sale of
substantially all of the Company's interest in Santa Fe Pacific Pipeline
Partners, L.P. in the first quarter of 1998 and gains of $26 million from the
sale of a real estate portfolio during the first nine months of 1998. This was
partially offset by the recognition in the third quarter of 1999 of the gain of
$50 million (pre-tax) in connection with the sale of rail lines in Southern
California in 1992 and 1993.
Other Matters
- --------------
Reorganization Costs
As discussed in Note 2 to the Company's consolidated financial statements,
reorganization costs of $48 million were incurred during the second quarter of
1999 for severance, pension, medical and other benefit costs for approximately
325 involuntarily terminated salaried employees that were part of the program
announced in May 1999 to reduce operating expenses. The program sought to
eliminate approximately 400 salaried and 1,000 scheduled (union) positions
through employee severances, normal attrition, and the elimination of
contractors. Substantially all of the planned position reductions were made by
September 30, 1999. No significant costs have been or are anticipated to be
incurred as a result of eliminating the 1,000 scheduled positions. Total savings
related to the reorganization are expected to be approximately $40 million in
1999 and to approximate $100 million on an annual basis.
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 remediation efforts are not successfully
implemented or if the railroads with which the Company connects, critical
customers or suppliers fail to become Year 2000 compliant.
STATE OF READINESS
Year 2000 issues were reviewed in September 1995 following 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 Railway'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.
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<PAGE>
Following this systems integration, BNSF Railway 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 Railway has completed
the Inventory and Assessment phase for both ISS and Enterprise technologies.
During this phase, BNSF Railway 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. In
addition, 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 99 percent complete. Remediation includes
converting source code and replacing or upgrading purchased software and
hardware. Remediation is complete for ISS technologies and all critical
Enterprise technologies. Remediation for all non-critical Enterprise
technologies will continue through November 1999.
The Certification Testing phase addresses 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 began in
November 1998, with critical applications receiving priority. Certification
testing for existing ISS critical applications was completed in July 1999.
Testing for all ISS applications was completed by the end of September 1999.
Certification testing of all critical and non-critical Enterprise technologies
began in May 1998. Testing for all critical Enterprise technologies is
complete. Testing for all non-critical Enterprise technologies is scheduled for
completion in November 1999. Certification of new systems and recent
enhancements to existing systems, as well as the re-certification of all ISS
critical systems is underway and will continue through December 3, 1999, which
is the end of the last planned testing cycle.
Beginning in late September 1999, BNSF Railway along with the other three major
US railroads underwent a Federal Railroad Association sponsored Year 2000
readiness review, conducted by a firm called CACI. Through this assessment,
BNSF Railway received a weighted numeric rating placing the Company in the "very
low risk" category.
COSTS
As a result of its merger-related systems integration that was completed in
1997, BNSF Railway achieved substantial Year 2000 compliance on its core
mainframe systems. Additionally, spending on Year 2000 activities approximates
$13 million to date. The current estimate of the total cost of achieving Year
2000 compliance for the Company's ISS and Enterprise technologies is estimated
to be approximately $16 million.
YEAR 2000 RISKS AND CONTINGENCY PLANS
Certain BNSF Railway 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 Railway and other AAR-member railroads are participating in a
process to test and certify these systems for Year 2000 compliance. Pilot
testing for these systems is complete. Open carrier testing will continue
through November 1999. BNSF Railway has developed contingency plans for
critical business processes supported by AAR systems.
-10-
<PAGE>
Certain BNSF Railway routes and resulting revenues are dependent on the use of
trackage rights over other railroads, including Union Pacific Corporation,
Montana Rail Link and the Arizona and California Railroad. Other BNSF Railway
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 Railway run over BNSF Railway facilities only. BNSF Railway'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 Railway trains or
interchange traffic for any extended period of time due to Year 2000 problems.
However, as a result of its work with other railroads to address Year 2000
problems on an industry-wide basis, management believes that the possibility of
extended failures on other railroads is not significant. During the third
quarter, the Company completed an initial evaluation to determine if any of its
larger customers have potential Year 2000 problems that could result in reduced
traffic for BNSF. Although the initial evaluation did not uncover any material
issues, the Company is in the process of reevaluating its larger customers to
provide further assurance of their Year 2000 compliance. This process is
scheduled for completion in early December 1999.
It is the opinion of management that Year 2000 problems in BNSF Railway'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 Railway's systems will be
compliant on a timely basis. BNSF Railway believes that the failure of systems
or equipment of one or more of its key third parties or 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 Railway has developed
contingency plans in the event that BNSF Railway's key third parties do not
become Year 2000 compliant on a timely basis, which effort includes the
formalization of existing disaster recovery plans.
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 in a single period could have a
material adverse effect on the results of operations in a particular quarter or
fiscal year.
Labor
The negotiating process for new, major collective bargaining agreements covering
all of BNSF Railway's union employees has begun. As before, wages, health and
welfare benefits, work rules, and other issues have traditionally been addressed
through industry-wide negotiations. These negotiations have traditionally taken
place over a number of months and have previously not resulted in any extended
work stoppages. The existing agreements are not amendable until January 1,
2000, and will remain in effect until new agreements are reached or the Railway
Labor Act's procedures are exhausted.
Forward Looking Information
The Year 2000 discussion above contains forward-looking statements, including
those concerning the Company's plans and estimated completion dates, cost
estimates, assessments of Year 2000 readiness of BNSF Railway 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
-11-
<PAGE>
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.
To the extent that all other statements made by the Company relate to the
Company's future economic performance or business outlook, predictions or
expectations of financial or operational results, or refer to matters which are
not historical facts, such statements are "forward-looking" statements within
the meaning of the federal securities laws. Forward-looking statements involve
a number of risks and uncertainties, and actual results may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to, general economic downturns, which may limit demand and pricing;
labor matters and stoppages, which may affect the costs and feasibility of
certain operations; competition and commodity concentrations, which may affect
traffic and pricing levels; and severe weather conditions and natural
occurrences such as floods and earthquakes.
-12-
<PAGE>
The BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
PART II OTHER INFORMATION
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
The Registrant has filed no Current Reports on Form 8-K since those
reported in the Annual Report on Form 10-K, as amended, for the year
ended December 31, 1998.
-13-
<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/ Dennis R. Johnson
----------------------
Dennis R. Johnson
Vice President and Controller
(On behalf of the Registrant and as principal
accounting officer)
Fort Worth, Texas
November 15, 1999
-14-
<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
Exhibit Index
12 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule for the quarter ended September 30, 1999
27.2 Restated Financial Data Schedule for the year ended December 31, 1998
E-1
<PAGE>
EXHIBIT 12
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions, Except Ratio Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Earnings:
Pre-tax income $ 1,405 $ 1,444
Add:
Interest and fixed charges,
excluding capitalized interest 226 220
Portion of rent under long-term
operating leases representative
of an interest factor 139 144
Amortization of capitalized interest 4 3
Less: Undistributed equity in earnings
of investments accounted for
under the equity method 9 12
-------- --------
Total earnings available for fixed charges $ 1,765 $ 1,799
======== ========
Fixed charges:
Interest and fixed charges $ 236 $ 232
Portion of rent under long-term operating
leases representative of an interest factor 139 144
-------- --------
Total fixed charges $ 375 $ 376
======== ========
Ratio of earnings to fixed charges 4.71x 4.78x
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000015511
<NAME> THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 81
<SECURITIES> 0
<RECEIVABLES> 530
<ALLOWANCES> 67
<INVENTORY> 249
<CURRENT-ASSETS> 1,163
<PP&E> 26,848
<DEPRECIATION> 5,448
<TOTAL-ASSETS> 23,343
<CURRENT-LIABILITIES> 2,144
<BONDS> 4,354
0
0
<COMMON> 0
<OTHER-SE> 9,116
<TOTAL-LIABILITY-AND-EQUITY> 23,343
<SALES> 0
<TOTAL-REVENUES> 6,726
<CGS> 0
<TOTAL-COSTS> 5,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 226
<INCOME-PRETAX> 1,405
<INCOME-TAX> 527
<INCOME-CONTINUING> 878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 878
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000015511
<NAME> The Burlington Northern and Santa Fe Railway Company
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 95
<SECURITIES> 0
<RECEIVABLES> 677<F1>
<ALLOWANCES> 71<F1>
<INVENTORY> 244
<CURRENT-ASSETS> 1,313<F1>
<PP&E> 25,641
<DEPRECIATION> 5,037
<TOTAL-ASSETS> 22,681<F1>
<CURRENT-LIABILITIES> 2,131<F1>
<BONDS> 4,788
0
0
<COMMON> 0
<OTHER-SE> 8,228
<TOTAL-LIABILITY-AND-EQUITY> 22,681<F1>
<SALES> 0
<TOTAL-REVENUES> 8,936
<CGS> 0
<TOTAL-COSTS> 6,781
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 293
<INCOME-PRETAX> 1,939
<INCOME-TAX> 733
<INCOME-CONTINUING> 1,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,206
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Restatement reflected herein is the result of reclassifications to prior
periods' financial statements to conform to the current period presentation.
</FN>
</TABLE>
