<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 MARCH 31, 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 April 30, 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
March 31,
-----------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Revenues $2,189 $2,147
----------------- ------------------
Operating expenses:
Compensation and benefits 689 702
Purchased services 236 217
Depreciation and amortization 219 202
Equipment rents 193 191
Fuel 165 181
Materials and other 207 207
----------------- ------------------
Total operating expenses 1,709 1,700
----------------- ------------------
Operating income 480 447
Interest expense 47 45
Interest expense, related parties 29 28
Other income (expense), net (1) 84
----------------- ------------------
Income before income taxes 403 458
Income tax expense 151 180
----------------- ------------------
Net income $ 252 $ 278
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31 December 31,
ASSETS 1999 1998
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 103 $ 95
Accounts receivable, net 552 676
Materials and supplies 247 244
Current portion of deferred income taxes 306 335
Other current assets 32 33
----------------- -----------------
Total current assets 1,240 1,383
Property and equipment, net 20,772 20,604
Other assets 968 764
----------------- -----------------
Total assets $ 22,980 $ 22,751
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 1,941 $ 1,933
Long-term debt due within one year 302 268
----------------- -----------------
Total current liabilities 2,243 2,201
Long-term debt 2,438 2,500
Intercompany notes payable 2,288 2,288
Deferred income taxes 5,684 5,634
Casualty and environmental liabilities 390 389
Employee merger and separation costs 387 409
Other liabilities 1,060 1,102
----------------- -----------------
Total liabilities 14,490 14,523
----------------- -----------------
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 4,716 4,706
Retained earnings 3,782 3,530
Accumulated other comprehensive deficit (8) (8)
----------------- -----------------
Total stockholder's equity 8,490 8,228
----------------- -----------------
Total liabilities and stockholder's equity $ 22,980 $ 22,751
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Operating Activities:
Net income $ 252 $ 278
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 219 202
Deferred income taxes 79 31
Employee merger and separation costs paid (24) (30)
Other, net (54) (45)
Changes in current assets and liabilities:
Accounts receivable 38 45
Materials and supplies (3) (8)
Other current assets 1 (15)
Accounts payable and other current liabilities 96 37
-------------- --------------
Net cash provided by operating activities 604 495
-------------- --------------
Investing Activities:
Capital expenditures (373) (366)
Other, net (196) (82)
-------------- --------------
Net cash used for investing activities (569) (448)
-------------- --------------
Financing Activities:
Proceeds from issuance of long-term debt 4 27
Payments on long-term debt (31) (26)
Net increase in intercompany notes payable - 225
-------------- --------------
Net cash provided by (used for) financing activities (27) 226
-------------- --------------
Increase in cash and cash equivalents 8 273
Cash and cash equivalents:
Beginning of period 95 -
-------------- --------------
End of period $ 103 $ 273
============== ==============
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 54 $ 58
Income taxes paid (refunded), net 45 (31)
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<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 March 31, 1999 and
December 31, 1998 and the consolidated results of operations for the three
month periods ended March 31, 1999 and 1998 have been included. For the
three month periods ended March 31, 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
Current and long-term employee merger and separation liabilities totaling
$450 million are included in the consolidated balance sheet at March 31,
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 non-union employee severance costs.
During the first three months of 1999, the Company made employee merger and
separation payments of $24 million.
Liabilities related to the consolidation of clerical functions are paid to
affected 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 employees' separation or
retirement. Liabilities principally related to certain remaining non-union
employee severances will be paid over the next several years based on
deferral elections made by affected employees. At March 31, 1999, $63
million of the remaining liabilities are included within current
liabilities for anticipated costs to be paid over the next twelve months.
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 clean-up
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 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 has been notified
that it is a potentially responsible party (PRP) for study and clean-up
costs at approximately 32 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
-4-
<PAGE>
Railway generally participates in the clean-up 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 clean-up costs are initially recorded when BNSF Railway's
liability for environmental clean-up is both 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
clean-up, and historical trend analyses.
BNSF Railway is involved in a number of administrative and judicial
proceedings and other clean-up efforts at approximately 400 sites,
including the Superfund sites, at which it is participating in the study or
clean-up, or both, of alleged environmental contamination. BNSF Railway
paid approximately $8 million during the first three months of 1999 for
mandatory and unasserted clean-up efforts, including amounts expended under
federal and state voluntary clean-up programs. BNSF Railway has accruals of
approximately $191 million for remediation and restoration of all known
sites. BNSF Railway anticipates that the majority of the accrued costs at
March 31, 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 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, 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. 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.
-5-
<PAGE>
4. HEDGING ACTIVITIES AND OTHER COMMITMENTS
FUEL
During the past three years, fuel expenses approximated 11 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 will 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 annualized fuel consumption during the first three
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 March 31, 1999, BNSF Railway had entered into fuel swaps for
approximately 1,550 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 nine 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 losses from BNSF Railway's
fuel swap transactions were approximately $129 million as of March 31,
1999, of which $58 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 $45 million, net of refunds,
during the first three months of 1999 and received federal and state
refunds of $31 million, net of taxes paid, during the first three months of
1998, which are reflected in changes in working capital in the consolidated
statement of cash flows.
BNSF Railway had a net intercompany payable balance of $123 million at
March 31, 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.
BNSF Railway had intercompany notes payable to BNSF of $2,288 million at
March 31, 1999 and December 31, 1998, included in the consolidated balance
sheet. At March 31, 1999, $1,579 million of the intercompany notes payable
had a fixed interest rate of 6.9 percent and $709 million had a variable
interest rate of 1.0 percent above the monthly average of the daily
effective Federal Funds rate. During 1999, BNSF Railway has not had any
borrowings from BNSF. 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.
-6-
<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).
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
BNSF Railway recorded net income for the first quarter of 1999 of $252 million,
compared with first quarter 1998 net income of $278 million. The decrease in
net income is primarily due to a $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. recorded in the first quarter of 1998.
Excluding the after-tax gain on the pipelines sale, BNSF Railway's net income
increased $6 million from 1998.
REVENUES
The following table presents BNSF Railway's revenue information by commodity for
the three months ended March 31, 1999 and 1998 and includes certain
reclassifications of prior year information to conform to 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>
Intermodal $ 583 $ 562 745 703 $ 783 $ 799
Coal 566 559 527 510 1,074 1,096
Commercial Products 280 275 176 171 1,591 1,608
Agricultural Commodities 262 279 141 148 1,858 1,885
Chemicals 208 201 123 122 1,691 1,648
Industrial Products 174 180 151 150 1,152 1,200
Automotive 108 92 63 58 1,714 1,586
----------- ----------- ------------- ----------- ------------- ------------
Total Freight Revenues 2,181 2,148 1,926 1,862 $ 1,132 $ 1,154
============= =========== ============= ============
Other Revenues 8 (1)
----------- -----------
Total Operating Revenues $ 2,189 $ 2,147
=========== ===========
</TABLE>
Total revenues for first quarter of 1999 were $2,189 million or 2 percent higher
compared with revenues of $2,147 million for the first quarter of 1998. The
increase primarily reflects increases in the intermodal, coal, chemicals,
commercial products, and automotive sectors, partially offset by lower
agricultural commodities and industrial products revenues. Average revenue per
car/unit decreased in the first quarter of 1999 to $1,132 from $1,154 in the
first quarter of 1998.
Intermodal revenues of $583 million for the first quarter of 1999 increased $21
million or 4 percent reflecting increases in the direct marketing and
international sectors. 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.
Coal revenues of $566 million for the first quarter of 1999 increased $7 million
or 1 percent primarily due to continued strong demand for Powder River Basin
coal and favorable weather conditions.
Commercial products revenues of $280 million for the first quarter of 1999 were
$5 million or 2 percent higher than the first quarter of 1998 primarily due to
increased inland lumber shipments and volume increases in bulk foods due to an
increase in beet and corn syrup shipments.
-7-
<PAGE>
Agricultural commodities revenues of $262 million for the first quarter of 1999
were $17 million or 6 percent lower than revenues for the first quarter of 1998
due to poor northern wheat exports, partially offset by increased Pacific
Northwest corn exports.
Chemicals revenues of $208 million for the first quarter of 1999 were $7 million
or 3 percent higher than the first quarter of 1998 primarily due to increases in
fertilizer, petroleum products and plastics revenues.
Industrial products revenues of $174 million for the first quarter of 1999 were
$6 million or 3 percent lower than the first quarter of 1998. Weaknesses in
steel products, resulting from increased steel imports, and weaknesses in clay
markets, due to reductions in clay used in oil and gas drilling as a result of
the continued decline in oil prices and U.S. rig counts, contributed to the
decrease. These decreases were partially offset by strength in cement and
sodium compounds.
Automotive revenues of $108 million for the first quarter of 1999 were $16
million or 17 percent higher than the first quarter of 1998 reflecting increases
in vehicle volumes for GM, Ford and Nissan, and increases in parts revenues due
to strength in Ford loadings.
EXPENSES
Total operating expenses for the first quarter of 1999 were $1,709 million, an
increase of $9 million or 1 percent, over 1998 despite a 3 percent increase in
cars and units handled. The operating ratio improved to 78.1 percent for the
first quarter of 1999, compared with a 79.2 percent operating ratio for the
first quarter 1998.
Compensation and benefits expenses of $689 million were $13 million or 2 percent
lower than the first quarter of 1998 primarily due to lower employment levels
and lower incentive compensation expense.
Purchased services of $236 million for the first quarter of 1999 were $19
million or 9 percent higher than the first quarter of 1998 principally due to
increased equipment maintenance costs and higher ramping costs related to
increased intermodal volumes.
Equipment rents expenses for the first quarter of 1999 of $193 million were $2
million or 1 percent higher than the first quarter of 1998 reflecting higher
leased equipment expense.
Fuel expenses of $165 million for the first quarter of 1999 were $16 million or
9 percent lower than the first quarter of 1998, as a result of a 7 cent or 11
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 288 million to
293 million gallons. The decrease in the average all-in cost per gallon of
diesel fuel includes a 15 cent decrease in the average purchase price, partially
offset by losses related to the Company's fuel hedging.
Materials and other expenses of $207 million for the first quarter of 1999 were
slightly lower than the first quarter of 1998 principally reflecting lower
maintenance of way expenses and locomotive overhaul expenses, partially offset
by higher personal injury and casualties expenses.
Interest expense with external and related parties increased $3 million to $76
million for the first quarter of 1999, reflecting higher interest rates.
Other income (expense), net was unfavorable $85 million compared to first
quarter 1998 primarily due to the $67 million pre-tax gain on the pipeline
partnership sale in the first quarter of 1998, and the first quarter 1998
included gains of $18 million from the sale of a real estate portfolio.
-8-
<PAGE>
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 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.
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 90 percent complete. Remediation includes
converting source code and replacing or upgrading purchased software and
hardware. Remediation is substantially complete for ISS technologies and is
expected to be completed 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 began in
November 1998, with critical applications receiving priority, and is 50 percent
complete; testing for all applications is scheduled for completion by the end of
September 1999. Certification testing of all critical Enterprise technologies
began in May 1998 and is scheduled for completion in May 1999; testing for non-
critical Enterprise technologies is scheduled for completion by July 1999.
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. In addition, spending on Year 2000 activities approximates
$11 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.
-9-
<PAGE>
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. The AAR
expects that these systems will be compliant and pilot tested by specific
carriers by July 1999, with open carrier testing conducted promptly thereafter.
BNSF Railway has developed contingency plans for critical business processes
supported by AAR systems.
Certain BNSF Railway routes and resulting revenues are dependent on the use of
trackage rights over other railroads, including UP, 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. At present, the Company is in the process of
determining which of its larger 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 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 continues to
develop 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.
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 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.
-10-
<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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of business, BNSF Railway utilizes various financial
instruments which inherently have some degree of market risk. The qualitative
and quantitative information presented in Item 7A of the Company's Annual Report
on Form 10-K for the year ended December 31, 1998, as amended, describes
significant aspects of BNSF Railway's financial instrument programs which have
material market risk. Presented below is updated quantitative information for
those programs that have changed significantly from the information reported in
BNSF Railway's amended Form 10-K for the year ended December 31, 1998.
COMMODITY PRICE SENSITIVITY
As discussed in Note 4 to the Company's consolidated financial statements, BNSF
Railway has a program to hedge against fluctuations in the price of its diesel
fuel purchases. The table below provides information about BNSF Railway's
diesel fuel hedging instruments that are sensitive to changes in diesel fuel
prices. The table presents notional amounts in gallons and the weighted average
contract price by contractual maturity date as of March 31, 1999. The prices
included in the table below do 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.
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------------------------------------
Maturity Date Fair
-------------------------------------------------
1999 2000 2001 2002 Total Value (1)
---------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Diesel Fuel Swaps:
Gallons (in millions) 681 491 277 101 1,550 $(129)
Weighted average price per
gallon $0.48 $0.50 $0.49 $0.50 $ 0.49 -
</TABLE>
(1) Represents unrecognized loss (in millions) based on the price of Gulf Coast
#2 heating oil.
-11-
<PAGE>
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the discussion in the Company's Form 10-K for the
year ended December 31, 1998, as amended, of the environmental
proceeding with respect to former railcar cleaning activities conducted
by independent contractors hired by BNSF Railway's predecessors at a
rail siding near Cherryville, Missouri. The consent judgment in the
State of Missouri was entered on April 28, 1999, by the Crawford County
Circuit Court (State of Missouri v. The Burlington Northern and Santa
Fe Railway Company, C.V.199-191-C), and this matter is now considered
terminated.
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 for the year ended December
31, 1998, as amended.
-12-
<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
May 14, 1999
-13-
<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 March 31, 1999.
27.2 Restated Financial Data Schedule for the year ended December 31, 1998.
<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>
Three Months Ended
March 31,
-----------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Earnings:
Pre-tax income $ 403 $ 458
Add:
Interest and fixed charges,
excluding capitalized interest 76 73
Portion of rent under long-term
operating leases representative
of an interest factor 49 45
Amortization of capitalized interest 1 1
Less: Undistributed equity in earnings
of investments accounted for
under the equity method 3 3
------------- --------------
Total earnings available for fixed charges $ 526 $ 574
============= ==============
Fixed charges:
Interest and fixed charges $ 79 $ 76
Portion of rent under long-term operating
leases representative of an interest factor 49 45
------------- --------------
Total fixed charges $ 128 $ 121
============= ==============
Ratio of earnings to fixed charges 4.11x 4.74x (1)
</TABLE>
(1) Earnings for the three months ended March 31, 1998 include a pre-tax gain
on the pipeline partnerships sale of $67 million. Excluding this gain, the
ratio for the three months ended March 31, 1998 would have been 4.19x.
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 103
<SECURITIES> 0
<RECEIVABLES> 631
<ALLOWANCES> 79
<INVENTORY> 247
<CURRENT-ASSETS> 1,240
<PP&E> 25,946
<DEPRECIATION> 5,174
<TOTAL-ASSETS> 22,980
<CURRENT-LIABILITIES> 2,243
<BONDS> 4,726
0
0
<COMMON> 0
<OTHER-SE> 8,490
<TOTAL-LIABILITY-AND-EQUITY> 22,980
<SALES> 0
<TOTAL-REVENUES> 2,189
<CGS> 0
<TOTAL-COSTS> 1,709
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> 403
<INCOME-TAX> 151
<INCOME-CONTINUING> 252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252
<EPS-PRIMARY> 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 to such
financial statements.
</LEGEND>
<RESTATED>
<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> 760
<ALLOWANCES> 84
<INVENTORY> 244
<CURRENT-ASSETS> 1,383<F1>
<PP&E> 25,641
<DEPRECIATION> 5,037
<TOTAL-ASSETS> 22,751<F1>
<CURRENT-LIABILITIES> 2,201<F1>
<BONDS> 4,788
0
0
<COMMON> 0
<OTHER-SE> 8,228
<TOTAL-LIABILITY-AND-EQUITY> 22,751<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-PRIMARY> 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>
