SFP PIPELINE HOLDINGS INC, 10-Q, 1997-11-14

SFP PIPELINE HOLDINGS INC
10-Q, 1997-11-14
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<PAGE>

11/10/97 1:43 PM
================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-10595

SFP PIPELINE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 36-3713699
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

301 NUGGET AVENUE
SPARKS, NEVADA 89431
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(702) 358-6971
(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 [_]

NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ($0.01 PAR VALUE)
AS OF NOVEMBER 13, 1997: 1,000.

THE 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.

================================================================================
<PAGE>

SFP PIPELINE HOLDINGS, INC.

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheet at September 30, 1997 and December 31, 1996.. 1

Consolidated Statement of Operations for the three-month and nine-month
periods ended September 30, 1997 and 1996............................. 2

Consolidated Statement of Cash Flows for the three-month and nine-month
periods ended September 30, 1997 and 1996............................. 3

Notes to Consolidated Financial Statements.............................. 4

Item 2. Management's Narrative Analysis of the Results of Operations...... 6

Financial Information of Santa Fe Pacific Pipeline Partners, L.P........... *

Financial Information of Burlington Northern Santa Fe Corporation.......... **

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................................. 7

Item 5. Other Information................................................. 7

Item 6. Exhibits and Reports on Form 8-K.................................. 7

Signature.................................................................. 8
</TABLE>

* Incorporated by reference from Part I of the Form 10-Q of Santa Fe Pacific
Pipeline Partners, L.P. for the quarter ended September 30, 1997 (Commission
File Number 1-10066)

** Incorporated by reference from Part I of the Form 10-Q of Burlington
Northern Santa Fe Corporation for the quarter ended September 30, 1997
(Commission File Number 1-11535)
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
A S S E T S
Current assets
Cash and cash equivalents.............................. $ 8,866 $ 3,061
Interest receivable.................................... 1,135 1,047
Other current assets................................... 437 295
--------- ---------
Total current assets................................. 10,438 4,403
Investment in Santa Fe Pacific Pipeline Partners, L.P. .. 63,414 59,984
Notes receivable from Burlington Northern Santa Fe
Corporation............................................ 130,000 130,000
Debt issuance costs, net................................. 6,235 6,597
Other assets............................................. 2,938 2,701
--------- ---------
Total assets......................................... $ 213,025 $ 203,685
========= =========

LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Interest payable....................................... $ 6,111 $ 6,111
Income taxes currently payable......................... 3,147 848
Other current liabilities.............................. 7,102 4,981
--------- ---------
Total current liabilities............................ 16,360 11,940
Long-term debt, net of unamortized discount.............. 204,606 204,173
Deferred income taxes.................................... 57,435 58,042
Other liabilities........................................ 2,057 1,960
--------- ---------
Total liabilities.................................... 280,458 276,115
--------- ---------
Commitments and contingencies (Notes (e) and (f))........ - -
--------- ---------
Stockholder's deficit
Common stock........................................... 1 1
Additional paid-in capital............................. (33,388) (33,388)
Accumulated deficit.................................... (34,046) (39,043)
--------- ---------
Total stockholder's deficit.......................... (67,433) (72,430)
--------- ---------
Total liabilities and stockholder's deficit.......... $ 213,025 $ 203,685
========= =========
</TABLE>

See Notes to Consolidated Financial Statements.

-1-
<PAGE>

SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity in income of
Santa Fe Pacific Pipeline Partners, L.P. ......... $ 9,994 $ 5,536 $ 24,735 $ 22,400
General and administrative expenses (income)
and other, net of reimbursements.................. 125 (23) 399 276
-------- -------- -------- --------
Operating income.................................... 9,869 5,559 24,336 22,124
Interest income..................................... 2,276 2,212 6,605 6,595
Interest expense.................................... 6,380 6,368 19,132 19,095
-------- -------- -------- --------
Income before income taxes.......................... 5,765 1,403 11,809 9,624
Income taxes........................................ 2,349 572 4,812 3,921
-------- -------- -------- --------
Net income.......................................... 3,416 831 6,997 5,703

Accumulated deficit.................................
Beginning of period............................... (37,462) (35,614) (39,043) (36,486)
Cash dividends.................................... - (3,000) (2,000) (7,000)
-------- -------- -------- --------
End of period..................................... $(34,046) $(37,783) $(34,046) $(37,783)
======== ======== ======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

-2-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------------ ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 3,416 $ 831 $ 6,997 $ 5,703
------- ------- ------- -------
Adjustments to reconcile net income to net
cash provided by operating activities-
Equity in undistributed earnings of
Santa Fe Pacific Pipeline Partners, L.P............. (2,892) 1,565 (3,430) (1,095)
Deferred income taxes............................... (297) (72) (607) (495)
Amortization of debt issuance costs
and original issue discount....................... 269 256 795 758
Changes in:
Current assets..................................... (47) (165) (230) 84
Current assets..................................... 1,977 2,025 4,420 3,881
Other assets and other liabilities................. 16 (283) (140) (1,127)
------- ------- ------- -------
Total adjustments............................... (974) 3,326 808 2,006
------- ------- ------- -------
Net cash provided by operating activities....... 2,442 4,157 7,805 7,709

Cash flows from investing activities.................. -- -- -- --
Cash flows from financing activities:
Cash dividends....................................... -- (3,000) (2,000) (7,000)
------- ------- ------- -------
Increase in cash and cash equivalents................. 2,442 1,157 5,805 709

Cash and cash equivalents-
Beginning of period.................................. 6,424 7,442 3,061 7,890
------- ------- ------- -------

End of period........................................ $ 8,866 $ 8,599 $ 8,866 $ 8,599
======= ======= ======= =======
Income taxes paid..................................... $ -- $ -- $ 3,120 $ --
======= ======= ======= =======
Interest paid......................................... $ 6,111 $ 6,111 $18,336 $18,336
======= ======= ======= =======
</TABLE>

See Notes to Consolidated Financial Statements.

-3-

<PAGE>

SFP PIPELINE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(a) The accompanying consolidated financial statements include the accounts of
SFP Pipeline Holdings, Inc. ("Holdings") and its wholly owned subsidiary, Santa
Fe Pacific Pipelines, Inc. ("SFPPI") (collectively, the "Company"). Holdings is
a wholly owned subsidiary of Santa Fe Pacific Corporation ("Santa Fe") which,
subsequent to a business combination in September 1995, is a wholly owned
subsidiary of Burlington Northern Santa Fe Corporation ("BNSF"). The
accompanying consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements and notes thereto included
in its Annual Report on Form 10-K for the year ended December 31, 1996. In the
opinion of Company management, all adjustments necessary for a fair presentation
of the results of operations for the periods presented have been included in
these consolidated financial statements. Unless otherwise noted, all such
adjustments are of a normal recurring nature. The results of operations for any
interim period are not necessarily indicative of the results of operations to be
expected for the entire year.

(b) SFPPI received distributions aggregating $21,305,000 during both the nine-
month periods ended September 30, 1997 and 1996, by virtue of its general and
limited partner interests in Santa Fe Pacific Pipeline Partners, L.P. and its
operating partnership subsidiary (collectively, the "Partnership"). In October
1997, the Partnership declared third quarter 1997 distributions on SFPPI's
general and limited partner interests aggregating $7,102,000, payable in
November 1997. Financial information with respect to the Partnership is
incorporated herein by reference from Part I of the Partnership's Form 10-Q for
the quarter ended September 30, 1997.

(c) The notes receivable from Burlington Northern Santa Fe Corporation ("BNSF")
are due and payable upon the maturity of the Company's Variable Rate
Exchangeable Debentures (the "Debentures"), but are payable at any time prior to
that date to the extent, and only to the extent, that Holdings' board of
directors determines in good faith that payment is needed, after taking into
account all other available funds, for Holdings to meet its obligations with
respect to the Debentures. BNSF assumed the obligations associated with these
notes from Santa Fe in January 1997. Financial information with respect to BNSF
is incorporated herein by reference from BNSF's Form 10-Q for the quarter ended
September 30, 1997.

(d) The Debentures bear interest at a variable rate, payable quarterly in
arrears. Interest expense for each quarter is generally recorded in an amount
equal to the aggregate amount of distributions declared by the Partnership for
that quarter on the 8,148,130 common units for which the Debentures would be
exchangeable. The Partnership declared cash distributions of $0.75 per unit for
the third quarter of 1997, and, accordingly, the Company accrued interest
expense of $6,111,000 for the three months ended September 30, 1997. Interest
expense reflected in the consolidated statement of operations also includes
amortization of the original issue discount and debt issuance costs for the
Debentures.

See Part II, Item 5 of this Report concerning a pending business combination
involving the Partnership which would, if consummated, cause the Debentures to
become exchangeable.

-4-
<PAGE>

(e) As discussed in Note 5 to the Company's consolidated financial statements
for the year ended December 31, 1996, certain of the Partnership's shippers,
beginning in 1992, filed civil suits and initiated two Federal Energy Regulatory
Commission ("FERC") complaint proceedings against the Partnership, and the
Partnership has established reserves for costs related to the resolution of
these matters.. In addition, on October 1, 1997, complainants in a separate rate
proceeding before the California Public Utilities Commission ("CPUC") filed
testimony seeking prospective rate reductions aggregating approximately $15
million per year.

On September 25, 1997, the presiding Administrative Law Judge ("ALJ") in the
FERC proceeding challenging the Partnership's rates on its East and West Lines
issued an initial decision (the "Initial Decision"). Virtually all of the
Partnership's West Line interstate rates were deemed to be "just and reasonable"
by virtue of the "grandfathering" provisions of the Energy Policy Act of 1992
("EPACT") and are not subject to challenge, either for the past or
prospectively, in that proceeding. The ALJ ruled adversely, however, to the
Partnership's position on several cost of service issues that would affect East
Line, and non-grandfathered West Line, rates and on certain other regulatory
issues. The Initial Decision is subject to review by the FERC commissioners, who
could reach different conclusions, either favorable or unfavorable, on these and
other matters in their final decision. If the Initial Decision was affirmed in
its current form by FERC, management estimates that the total reparations and
interest that would be payable as of September 30, 1997 would approximate the
$28 million in reserves that had been recorded as of that date. Partnership
management also estimates that the Initial Decision, in its current form, would
reduce revenues prospectively in the range of $8 million to $10 million
annually.

Partnership management does not believe that the Initial Decision, if affirmed
in its current form by FERC, would have a material adverse effect on the
Partnership's financial condition, liquidity or ability to maintain its
quarterly cash distribution at the current level. Management cannot predict with
certainty, however, whether the ALJ's conclusions in the Initial Decision will
be affirmed by the FERC or whether the FERC's final decision will be more or
less favorable to the Partnership's rate structure than the Initial Decision. In
addition, as discussed in Item 1 of this Report, certain of the complainants in
the ongoing FERC proceedings filed a new complaint at FERC in October 1997
challenging all of the Partnership's interstate rates, and the outcome of this
new proceeding is also impossible to predict with certainty. Furthermore, the
Partnership is not able to predict whether any prospective California intrastate
rate reductions will be required upon the resolution of the CPUC proceeding. As
additional information becomes available, it may be necessary for the
Partnership to record additional charges to earnings to maintain its applicable
reserves at a level deemed adequate at that time, and the costs associated with
the ultimate resolution of these matters could have a material adverse effect on
the Partnership's results of operations, financial condition, liquidity and
ability to maintain its quarterly cash distribution at the current level.

In the remaining civil action, brought by El Paso Refinery, L.P. ("El Paso") and
its general partner, the settlement agreement resolving this matter was approved
by the bankruptcy court in April 1997 and the orders of the bankruptcy court
became final in July 1997. As the amount of the settlement exceeded the amount
that had previously been reserved for this matter, the Partnership recorded a
provision of $6 million to reflect this settlement during the first quarter of
1997. Under the terms of the settlement agreement, two equal installments of $8
million are payable by the Partnership in October 1997 and June 1998.

-5-
<PAGE>

(f) As discussed in Note 5 to the Company's consolidated financial statements
for the year ended December 31, 1996, the Partnership's transportation and
terminal operations are subject to extensive regulation under federal, state and
local environmental laws concerning, among other things, the generation,
handling, transportation and disposal of hazardous materials and, the
Partnership is, from time to time, subject to environmental cleanup and
enforcement actions. The discussion of environmental matters appearing at Note
(e) to the Partnership's consolidated financial statements for the quarter ended
September 30, 1997 is incorporated herein by reference from the Partnership's
Form 10-Q for that quarter.

ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS

As the principal assets of the Company are its investment in the Partnership and
its notes receivable from BNSF, the following analysis should be read in
conjunction with the Part I financial information filed by the Partnership and
BNSF in their respective Quarterly Reports on Form 10-Q for the quarter ended
September 30, 1997, both of which are incorporated herein by reference.

For the nine months ended September 30, 1997, the Company's equity in income of
the Partnership of $24.7 million was $2.3 million, or approximately 10%, higher
than in the 1996 period. The Partnership's results of operations included
provisions for litigation costs of $6.0 million and $8.0 million recorded in
1997 and 1996, respectively. Excluding the provisions, the Partnership's
adjusted net income for the nine months ended September 30, 1997 was $57.6
million compared to adjusted net income of $54.6 million in the 1996 period.
Total Partnership revenues of $182.6 million were $2.9 million, or approximately
2%, above the 1996 period, primarily due to an increase in total volumes
transported. Partnership operating expenses of $104.4 million were $0.7 million
lower than in the first nine months of 1996. Excluding the provisions described
above, operating expenses would have been $98.4 million, 1% higher than in 1996,
with higher field operating expenses being partially offset by lower general and
administrative expenses and facilities costs. The Partnership's other income,
net increased by $1.0 million as compared with the 1996 period primarily due to
interest income received from property tax refunds and higher interest income,
which resulted from higher interest rates and cash balances.

The Company's interest income is earned on its notes receivable from BNSF
bearing interest at rates tied to the Federal Funds rate. Interest expense is
accrued based on the quarterly distribution paid on the 8,148,130 Partnership
units for which the Company's Debentures are, under certain specified
conditions, exchangeable.

-6-
<PAGE>

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.
Reference is made to the discussion of the current status of certain litigation
appearing at "Part II, Item 1. Legal Proceedings" in the Partnership's Form 10-Q
for the quarter ended September 30, 1997, which is incorporated herein by
reference.

Item 5. Other Information
On October 18, 1997, Holdings, the General Partner and Santa Fe Pacific Pipeline
Partners, L.P. (the "Trading Partnership") entered into a definitive Purchase
Agreement with Kinder Morgan Energy Partners, L.P. ("KMEP") and Kinder Morgan
G.P., Inc. (collectively, "Kinder Morgan") pursuant to which Kinder Morgan and
its affiliates would acquire the Trading Partnership's limited partner interest
in the Trading Partnership's operating partnership subsidiary, SFPP, L.P. Upon
completion of the transaction, the Trading Partnership would liquidate and the
Trading Partnership's unitholders would receive 1.39 KMEP units in respect of
each of the Trading Partnership's common units. In addition, Kinder Morgan would
pay the General Partner $84.4 million for its general partner interest in the
Trading Partnership, and SFPP, L.P. would redeem approximately one-half of the
General Partner's interest in such subsidiary for an additional $5.8 million.

The transaction has been approved by the boards of directors of the General
Partner and Kinder Morgan G.P., Inc., but completion of the transaction is
subject to a number of conditions, including approval by the unitholders of both
the Trading Partnership and KMEP, receipt of certain third party consents and
approval by certain regulatory agencies. Management anticipates closing the
transaction (the "Closing") in the first quarter of 1998.

Under the terms of the indenture relating to the Debentures, the Closing of the
transaction would constitute an Exchange Event, that would, in general, result
in each $1,000 principal amount of Debentures becoming exchangable for a thirty-
day period for 37.2093 Trading Partnership common units or, at the issuer's
option, cash in an amount equal to the current market price of such principal
amount of Debentures. Under the Purchase Agreement, Kinder Morgan is to use its
reasonable best efforts to negotiate agreements with the holders of Holdings'
Debentures prior to the Closing such that, at the time of the Closing, all of
the Debentures shall be satisfied and discharged by the payment of cash,
exchange for common units of either the Trading Partnership or KMEP, delivery of
some other Kinder Morgan security, or otherwise.

Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:

Exhibit 13.1 Form 10-Q of Santa Fe Pacific Pipeline Partners, L.P. for the
quarter ended September 30, 1997.

Exhibit 13.2 Form 10-Q of Burlington Northern Santa Fe Corporation for the
quarter ended September 30, 1997.

Exhibit 27 Financial Data Schedule as of and for the nine months ended
September 30, 1997.

(b) Reports on Form 8-K filed during the quarter ended September 30, 1997:
None.

-7-
<PAGE>

SIGNATURE

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.

SFP PIPELINE HOLDINGS, INC.
(Registrant)

Date: November 13, 1997 By: /s/ BARRY R. PEARL
--------------------------------
Barry R. Pearl
Senior Vice President, Treasurer
And Chief Financial Officer
(On behalf of the Registrant)

-8-

<PAGE>

EXHIBIT 13.1

===============================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

COMMISSION FILE NUMBER 1-10066

SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-4191066
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

1100 TOWN & COUNTRY ROAD
ORANGE, CALIFORNIA 92868
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(714) 560-4400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

===============================================================================

<PAGE>

SANTA FE PACIFIC PIPELINE PARTNERS, L.P.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 1997 and December 31, 1996.................... 1

Consolidated Statement of Income
for the three-month and nine-month periods ended September 30, 1997 and 1996........... 2

Consolidated Statement of Cash Flows
for the three-month and nine-month periods ended September 30, 1997 and 1996........... 3

Notes to Consolidated Financial Statements................................................ 4

Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations..................................... 6

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................................................... 8

Item 6. Exhibits and Reports on Form 8-K.................................................... 11

Signature.................................................................................... 11
</TABLE>

<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands)

<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
A S S E T S
Current assets
Cash and cash equivalents....................... $ 53,121 $ 42,122
Short-term investments.......................... 4,696 --
Accounts receivable, net........................ 32,539 33,563
Other current assets............................ 4,328 2,224
-------- --------
Total current assets.......................... 94,684 77,909
-------- --------
Properties, plant and equipment................... 737,434 738,395
Less accumulated depreciation................... 112,344 109,701
-------- --------
Net properties, plant and equipment........... 625,090 628,694
Other assets...................................... 18,820 19,215
-------- --------
Total assets.................................. $738,594 $725,818
======== ========

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable................................ $ 2,624 $ 3,212
Accrued liabilities............................. 53,457 32,333
-------- --------
Total current liabilities..................... 56,081 35,545
Long-term debt.................................... 355,000 355,000
Other long-term liabilities....................... 56,175 71,351
-------- --------
Total liabilities............................. 467,256 461,896
-------- --------
Minority interest................................. 1,247 1,007
-------- --------
Commitments and contingencies (Notes (d) and (e)). -- --
-------- --------
Partners' capital
General partner................................. 1,247 1,007
Limited partners................................ 268,844 261,908
-------- --------
Total partners' capital....................... 270,091 262,915
-------- --------
Total liabilities and partners' capital....... $738,594 $725,818
======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

-1-
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per unit amounts)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
----------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues
Trunk revenues........................... $ 49,711 $ 49,289 $ 143,695 $ 141,689
Storage and terminaling revenues......... 10,078 9,977 29,119 28,652
Other revenues........................... 3,383 3,057 9,807 9,373
--------- --------- --------- ---------
Total operating revenues............... 63,172 62,323 182,621 179,714
--------- --------- --------- ---------
Operating expenses
Field operating expenses................. 10,751 9,229 34,134 26,722
General and administrative expenses...... 6,608 7,734 19,234 23,092
Depreciation and amortization............ 5,382 5,196 16,092 15,838
Power costs.............................. 5,940 5,859 15,389 15,556
Facilities costs......................... 4,634 5,550 13,581 15,937
Provision for litigation costs (Note (d)) - 8,000 6,000 8,000
--------- --------- --------- ---------
Total operating expenses............... 33,315 41,568 104,430 105,145
--------- --------- --------- ---------
Operating income........................... 29,857 20,755 78,191 74,569
Interest expense........................... 9,072 9,212 26,923 27,374
Other income, net.......................... 818 422 2,202 1,227
--------- --------- --------- ---------
Net income before minority interest........ 21,603 11,965 53,470 48,422
Less minority interest in net income....... (697) (386) (1,725) (1,562)
--------- --------- --------- ---------
Net income................................. $ 20,906 $ 11,579 $ 51,745 $ 46,860
========= ========= ========= =========
Income per unit............................ $ 1.06 $ 0.58 $ 2.61 $ 2.37
========= ========= ========= =========
</TABLE>

See Notes to Consolidated Financial Statements.

-2-

<PAGE>

SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 20,906 $ 11,579 $ 51,745 $ 46,860
-------- -------- -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization............. 5,382 5,196 16,092 15,838
Minority interest in net income........... 697 386 1,725 1,562
Net additions to (payments against)
environmental and litigation reserves... (3,369) 8,602 (2,938) 584
Other, net................................ 2,722 183 3,508 (1,743)
Changes in:
Short-term investments.................. - - (4,696) -
Accounts receivable..................... 5,304 (1,358) 1,024 (4,246)
Accounts payable and accrued liabilities 5,962 10,486 7,534 10,450
Other current assets.................... 1,178 2,353 (2,104) (484)
-------- -------- -------- --------
Total adjustments..................... 17,876 25,848 20,145 21,961
-------- -------- -------- --------
Net cash provided by operating
activities.......................... 38,782 37,427 71,890 68,821
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures........................ (7,790) (5,572) (14,835) (20,210)

Cash flows from financing activities:
Cash distributions.......................... (15,352) (15,352) (46,056) (46,056)
-------- -------- -------- --------
Increase in cash and cash equivalents......... 15,640 16,503 10,999 2,555

Cash and cash equivalents--
Beginning of period......................... 37,481 27,271 42,122 41,219
-------- -------- -------- --------
End of period............................... $ 53,121 $ 43,774 $ 53,121 $ 43,774
======== ======== ======== ========
Interest paid................................. $ 811 $ 436 $ 18,534 $ 18,586
======== ======== ======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

-3-
<PAGE>

SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(a) The accompanying consolidated financial statements should be read in
conjunction with the Annual Report on Form 10-K of Santa Fe Pacific Pipeline
Partners, L.P. (the "Partnership") for the year ended December 31, 1996. In the
opinion of Partnership management, all adjustments necessary for a fair
presentation of the results of operations for the periods presented have been
included in these consolidated financial statements. Unless otherwise noted, all
such adjustments are of a normal recurring nature. During the quarter ended
September 30, 1996, the Partnership recorded an $8 million provision for
litigation costs to increase its existing FERC proceeding reserves (see Note
(d)) to reflect the total amount that would have been payable under the
settlement offers that had been extended as of that date. The results of
operations for any interim period are not necessarily indicative of the results
of operations to be expected for the entire year.

(b) Income per unit is computed based upon consolidated net income of the
Partnership less an allocation of income to the General Partner in accordance
with the partnership agreement, and is based upon the 19,148,148 units
outstanding. The quarterly allocation of income to the General Partner, which
was 3.23% of net income before minority interest for the three-month and nine-
month periods ended September 30, 1997 and 1996, is based on its percentage of
cash distributions from available cash at the end of each quarter.

(c) On October 9, 1997 the Partnership declared a cash distribution of $0.75 per
unit for the third quarter of 1997, to be paid on November 14, 1997 to
unitholders of record on October 31, 1997.

(d) As discussed in Note 4 to the Partnership's consolidated financial
statements for the year ended December 31, 1996, certain of the Partnership's
shippers, beginning in 1992, filed civil suits and initiated two Federal Energy
Regulatory Commission ("FERC") complaint proceedings against the Partnership.
The civil suits alleged, among other things, that the shippers were damaged by
the Partnership's failure to fulfill alleged promises to expand the East Line's
capacity between El Paso, Texas and Phoenix, Arizona to meet shipper demand. The
FERC proceedings involve claims, among other things, that certain of the
Partnership's rates and charges on its East and West Lines are excessive. The
complainants have filed testimony seeking reparations for shipments between 1990
and 1994 aggregating approximately $35 million, as well as rate reductions of
between 30% and 40% for shipments in 1995 and thereafter. In addition, on
October 1, 1997, complainants in a separate rate proceeding before the
California Public Utilities Commission ("CPUC") filed testimony seeking
prospective rate reductions aggregating approximately $15 million per year.

-4-
<PAGE>

was affirmed in its current form by FERC, management estimates that the total
reparations and interest that would be payable as of September 30, 1997 would
approximate the $28 million in reserves that had been recorded as of that date.
Partnership management also estimates that the Initial Decision, in its current
form, would reduce revenues prospectively in the range of $8 million to $10
million annually.

Partnership management does not believe that the Initial Decision, if affirmed
in its current form by FERC, would have a material adverse effect on the
Partnership's financial condition, liquidity or ability to maintain its
quarterly cash distribution at the current level. Management cannot predict with
certainty, however, whether the ALJ's conclusions in the Initial Decision will
be affirmed by the FERC or whether the FERC's final decision will be more or
less favorable to the Partnership's rate structure than the Initial Decision. In
addition, as discussed in Item 1 of this Report, certain of the complainants in
the ongoing FERC proceedings filed a new complaint at FERC in October 1997
challenging all of the Partnership's interstate rates, and the outcome of this
new proceeding is also impossible to predict with certainty. Furthermore the
Partnership is not able to predict whether any prospective California intrastate
rate reductions will be required upon the resolution of the CPUC proceeding. As
additional information becomes available, it may be necessary for the
Partnership to record additional charges to earnings to maintain its applicable
reserves at a level deemed adequate at that time, and the costs associated with
the ultimate resolution of these matters could have a material adverse effect on
the Partnership's results of operations, financial condition, liquidity and
ability to maintain its quarterly cash distribution at the current level.

(e) As discussed in Note 4 to the Partnership's consolidated financial
statements for the year ended December 31, 1996, the Partnership's
transportation and terminal operations are subject to extensive regulation under
federal, state and local environmental laws concerning, among other things, the
generation, handling, transportation and disposal of hazardous materials, and
the Partnership is, from time to time, subject to environmental cleanup and
enforcement actions.

The Partnership's accompanying balance sheet includes reserves for environmental
costs that relate to existing conditions caused by past operations. Estimates of
the Partnership's ultimate liabilities associated with environmental costs are
particularly difficult to make with certainty due to the number of variables
involved, including the early stage of investigation at certain sites, the
lengthy time frames required to complete remediation at most locations, the
number of parties involved, the number of remediation alternatives available,
the uncertainty of potential recoveries from third parties and the evolving
nature of environmental laws and regulations.

Based on the information presently available, it is the opinion of management
that the Partnership's environmental costs, to the extent they exceed recorded
liabilities, will not have a material adverse

-5-
<PAGE>

effect on the Partnership's financial condition. It is, nevertheless, possible
that the Partnership's results of operations in particular quarterly or annual
periods could be materially affected as additional information becomes
available.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On October 18, 1997, the Partnership, together with its general partner, Santa
Fe Pacific Pipelines, Inc. (the "General Partner"), and SFP Pipeline Holdings,
Inc. entered into a definitive Purchase Agreement with Kinder Morgan Energy
Partners, L.P. and Kinder Morgan G.P., Inc. (collectively, "Kinder Morgan")
pursuant to which Kinder Morgan and its affiliates would acquire the
Partnership's limited partner interest in the Partnership's operating
partnership subsidiary. Upon completion of the transaction, the Partnership
would liquidate and the Partnership's unitholders would receive 1.39 Kinder
Morgan Energy Partners, L.P. units in respect of each of the Partnership's
common units. In addition, Kinder Morgan would pay the General Partner $84.4
million for its general partner interest in the Partnership, and the
Partnership's operating partnership subsidiary would redeem approximately one-
half of the General Partner's interest in such subsidiary for an additional $5.8
million. The General Partner is a wholly-owned subsidiary of SFP Pipeline
Holdings, Inc.

The transaction has been approved by the boards of directors of the General
Partner and Kinder Morgan G.P., Inc., but completion of the transaction is
subject to a number of conditions, including approval by the unitholders of both
the Partnership and Kinder Morgan Energy Partners, L.P., receipt of certain
third party consents and approval by certain regulatory agencies. Management
anticipates closing the transaction in the first quarter of 1998.

Results of Operations

Three Months Ended September 30, 1997 Compared to 1996 Period
The Partnership reported net income for the three months ended September 30,
1997 of $20.9 million compared to net income of $11.6 million in the 1996
quarter, when an $8.0 million provision for FERC litigation costs was recorded.
Revenues for the third quarter of 1997 of $63.2 million were $0.8 million, or
1%, above the corresponding 1996 quarter's level. Trunk revenues were $0.4
million higher than in the 1996 period due to higher volumes. Total volumes
transported increased 1% compared to the 1996 period. Commercial volumes, which
were 2% higher than in the 1996 quarter, were negatively affected by Phoenix
inventory reductions in preparation for gasoline specification changes in
October 1997. Military volumes were 22% below the 1996 quarter primarily due to
a change in the military's supply source for certain bases.

Operating expenses of $33.3 million were $8.3 million lower than in the 1996
quarter, due largely to the 1996 provision for FERC litigation costs. Excluding
the provision, operating expenses would have been $0.3 million, or approximately
1%, lower than in 1996, with lower general and administrative expenses ($1.1
million) and facilities costs ($0.9 million) being partially offset by higher
field operating expenses ($1.5 million), depreciation and amortization ($0.2
million) and power costs ($0.1 million). The increase in field operating
expenses is primarily attributable to higher environmental costs and pipeline
and tank maintenance costs, partially offset by reductions in certain

-6-
<PAGE>

other field costs. The increase in depreciation and amortization resulted from
higher software cost amortization. General and administrative expenses decreased
largely due to lower outside legal costs, partially offset by higher employee-
related costs. Facilities costs decreased due primarily to property tax refunds.

Other income, net increased by $0.4 million compared to the 1996 period
primarily due to interest income received from property tax refunds.

Nine Months Ended September 30, 1997 Compared to 1996 Period
The Partnership reported net income for the nine months ended September 30, 1997
of $51.7 million compared to net income of $46.9 million in the 1996 period.
Results of operations included provisions for litigation costs of $6.0 million
and $8.0 million recorded in the 1997 and 1996 periods, respectively. Excluding
those provisions, adjusted net income for the nine months ended September 30,
1997 was $57.6 million compared to adjusted net income of $54.6 million in the
1996 period. Revenues of $182.6 million were $2.9 million, or approximately 2%,
above the 1996 period. Trunk revenues were $2.0 million higher than in 1996 due
to higher volumes. Total volumes transported increased approximately 2% compared
to the 1996 period, with commercial volumes being 3% higher, and military
volumes being about 20% lower, than in 1996. The military decline is primarily
due to a change in the military's supply source for certain bases.

Operating expenses of $104.4 million were $0.7 million lower than in the 1996
period. Excluding the provisions described above, operating expenses would have
been $1.3 million, or 1%, higher than in 1996, with higher field operating
expenses ($7.4 million) being partially offset by lower general and
administrative expenses ($3.9 million) and facilities costs ($2.4 million). The
increase in field operating expenses is primarily attributable to higher
environmental costs and pipeline and tank maintenance costs, partially offset by
reductions in certain other field costs. General and administrative expenses
decreased largely due to lower outside legal costs, partially offset by higher
employee-related costs. The decrease in facilities costs is largely attributable
to property tax refunds and lower right-of-way rental costs.

Other income, net increased by $1.0 million compared to the 1996 period
primarily due to interest income received from property tax refunds and higher
interest income, which resulted from higher interest rates and cash balances.

Financial Condition
For the nine months ended September 30, 1997, cash and cash equivalents
increased by $11.0 million. Cash flow from operations before working capital
changes totaled $70.1 million for the nine months, an increase of $7.0 million
from the prior year period. Working capital cash requirements increased by $4.0
million from the corresponding 1996 period, primarily due to the purchase of
noncash short-term investments of $4.7 million, timing differences in the
collection of trade and nontrade receivables, and payment of accrued
obligations.

Significant uses of cash included cash distributions of $46.1 million and
capital expenditures of $14.8 million. Total capital expenditures for 1997 are
projected at approximately $28 million. Total cash and cash equivalents of $53.1
million at September 30, 1997 included $15.4 million for the third quarter 1997
distribution to be paid to unitholders in November 1997 and $8.0 million to be
paid to the El Paso bankruptcy estate in October 1997 in accordance with the
terms of the settlement agreement.

-7-
<PAGE>

Long-term debt aggregated $355 million at September 30, 1997 and consisted of
$305 million of First Mortgage Notes (the "Notes") and a $50 million borrowing
under the Partnership's bank term credit facility. The Partnership intends to
refinance some or all of the remaining Notes as the various series become
payable. To facilitate such refinancing and provide for additional financial
flexibility, in August 1997, the Partnership extended and expanded its multi-
year credit facility to an aggregate borrowing limit of $175 million, of which
$25 million is available for working capital purposes.

Other Matters
Reference is made to Notes (d) and (e) to the Partnership's notes to
consolidated financial statements, beginning on page 4 of this Report, and to
Part II, Item 1 of this Report, for discussions of the status of the FERC and
CPUC proceedings, El Paso civil litigation and certain environmental matters.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to Item 3 in the Partnership's 1996 Annual Report on Form 10-
K, and to Item 1 in the Partnership's two Forms 10-Q filed previously during
1997, for background information on certain litigation.

FERC Proceedings
On September 25, 1997, the presiding Administrative Law Judge ("ALJ") in the
proceeding principally concerning the Partnership's rates on its East and West
Lines (Docket Nos. OR92-8-000, et al.) issued an initial decision (the "Initial
-- ---
Decision"). The Initial Decision upheld the Partnership's position that "changed
circumstances" had not been shown to exist on the West Line, thereby retaining
the just and reasonable status of all West Line rates that were "grandfathered"
under EPACT. Accordingly, such rates are not subject to challenge, either for
the past or prospectively, in that proceeding. The ALJ's decision specifically
excepted from that ruling the Partnership's Tariff No. 18 for movement of jet
fuel from Los Angeles to Tucson, which was initiated subsequent to the enactment
of EPACT.

As discussed in the Partnership's 1996 Form 10-K, in 1995 and 1996, the FERC
issued decisions in an unrelated rate proceeding involving Lakehead Pipe Line
Company, Limited Partnership ("Lakehead"), ruling that Lakehead could not
include an income tax allowance in its cost of service with respect to (1)
partnership income attributable to limited partner interests held by
individuals, or (2) curative allocations of income to Lakehead's general partner
under Section 704 (c) of the Internal Revenue Code. In the above-described
Initial Decision, the ALJ upheld the Lakehead rulings and further ruled that the
Partnership is not entitled to include in its income tax allowance any taxes on
income attributable to (1) non-corporate limited partners, such as mutual funds,
or (2) the General Partner's limited partnership interest (under the reasoning
that the cash distributions on those interests are ultimately paid as tax-
deductible interest expense on debentures issued by the General Partner's
parent, SFP Pipeline Holdings, Inc.).

The Initial Decision also included rulings that were generally adverse to the
Partnership on such cost of service issues as the capital structure to be used
in computing the Partnership's 1985 starting rate base under FERC Opinion 154-B,
and the recoverability of civil and regulatory litigation expense and

-8-
<PAGE>

certain pipeline reconditioning costs. The ALJ also ruled that a gathering
enhancement service at the Partnership's Watson origin pump station in Carson,
California is subject to FERC jurisdiction and ordered that a tariff for that
service and supporting cost of service documentation be filed no later than 60
days after a final FERC order on this matter.

The present procedural schedule calls for all the parties to file briefs on
exception by November 25, 1997 and briefs opposing exceptions by the end of
January 1998. The matters at issue will then be submitted to the FERC
commissioners for a decision, which decision is not expected before late-1998.
Unless the FERC's final decision is substantially more favorable to the
Partnership's position on the above-described methodological issues than the
Initial Decision, the Partnership will be required to pay reparations and file
reduced tariff rates, primarily on the East Line, within approximately 60 days
of the issuance of that final decision. If the Initial Decision was affirmed in
its current form by the FERC, management estimates that the total reparations
and interest that would be payable as of September 30, 1997 would approximate
the $28 million in reserves that had been recorded as of that date. Management
also estimates that the Initial Decision, in its current form, would reduce
prospective revenues in the range of $8 million to $10 million annually.

On October 22, 1997, ARCO Products Company, Mobil Oil Corporation and Texaco
Refining and Marketing Inc. filed a new complaint at the FERC (Docket No. OR98-
1-000) challenging the justness and reasonableness of all of the Partnership's
interstate rates. The new complaint again challenges the Partnership's East and
West Line rates and raises many of the same issues, including a renewed
challenge to the grandfathered status of West Line rates that have been at issue
in Docket Nos. OR92-8-000, et al.. The new complaint includes an assertion that
-- --
the Partnership's above-described proposed transaction with Kinder Morgan
constitutes a "changed circumstance" that provides a basis for terminating the
grandfathered status of the Partnership's otherwise protected rates. The
complaint also seeks to establish that the Partnership's grandfathered
interstate rates from the San Francisco Bay area to Reno, Nevada and from
Portland to Eugene, Oregon are also subject to "changed circumstances" and,
therefore, can be challenged as unjust and unreasonable. Both reparations and
prospective rate reductions are sought for movements on all of the lines.
Partnership management reviewed the filing and it is their position that none of
the matters raised in the new complaint constitute "changed circumstances"
within the meaning of EPACT. The Partnership intends to vigorously defend all of
the challenged rates.

In a decision issued on August 5, 1997, in a separate proceeding at the FERC
involving the issue of the FERC's jurisdiction over the Partnership's pipeline
from Sepulveda Junction to its Watson, California station origin point (Docket
Nos. OR96-2-000 et al.), the FERC found the two pipelines at issue to be subject
-- --
to the jurisdiction of the FERC and ordered the Partnership to make a tariff
filing within 60 days. On October 6, 1997, the Partnership filed a tariff
establishing the initial interstate rate for movements from Sepulveda Junction
to Watson Station at the preexisting rate of five cents per barrel, along with
supporting cost of service documentation. Subsequently, several shippers filed
protests and motions to intervene at the FERC challenging the published rate. On
October 27, 1997, the Partnership made a responsive filing at the FERC,
requesting that these protests be held in abeyance until the Commission rules on
the Partnership's request for rehearing of the August 5, 1997 order, and also
indicating that the Partnership intends to defend the new tariff both on the
basis of its cost of service and as a market-based rate. On November 5, 1997,
the FERC issued an order accepting and suspending the new rate effective
November 6, 1997, subject to refund, and referred the proceeding to a settlement
judge.

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<PAGE>

California Public Utilities Commission Proceeding
A complaint was filed with the California Public Utilities Commission on April
7, 1997 entitled ARCO Products Company, Mobil Oil Corporation and Texaco
Refining and Marketing Inc. vs. SFPP, L.P. The complaint challenges rates
charged by the Partnership for transportation of refined petroleum products
through its pipeline system in the State of California and requests prospective
rate adjustments. On October 1, 1997, the complainants filed testimony seeking
prospective rate reductions aggregating approximately $15 million per year. The
procedural schedule presently calls for the Partnership to file responsive
testimony on November 26, 1997 and for hearings before the Administrative Law
Judge to begin in mid-January 1998. Management believes the Partnership has
substantial defenses against the claims raised in the complaint and intends to
vigorously defend its California rates.

Unitholder Lawsuits
Four purported unitholder class actions have been filed arising out of the
proposed business transaction between Kinder Morgan Energy Partners, L.P. and
the Partnership and the General Partner. On October 23, 1997, shortly after the
announcement of the proposed transaction, a purported unitholder class action
was filed in the Court of Chancery of the State of Delaware (Ruderman v. Santa
Fe Pacific Pipeline Partners, L.P., C.A. No. 16002NC). Later on the same day,
another purported unitholder class action was filed in the Superior Court of the
State of California, County of Orange (Vogel v. Santa Fe Pacific Pipeline
Partners, L.P., Case No. 785816). Additional purported unitholder class actions
were filed in the Court of Chancery of the State of Delaware on October 24, 1997
(Beck v. Santa Fe Pacific Pipeline Partners, L.P., C.A. No. 16005), and on
November 6, 1997 (Hocheiser v. Santa Fe Pacific Pipeline Partners, L.P., C.A.
No. 16023NC).

The actions name the Partnership, the General Partner, and the individual
members of the General Partner's Board of Directors as defendants. In addition,
Vogel and Ruderman name Kinder Morgan Energy Partners, L.P. as a defendant and
Beck and Hocheiser name SFP Pipeline Holdings, Inc., the parent company of the
General Partner, as a defendant. In general, the actions variously allege that
the individual defendants suffered from a conflict of interest in the
negotiation of the proposed transaction, that despite this conflict they did not
appoint or retain independent representation for the unitholders, and that this
conflict resulted in an excessive payment to the General Partner. The actions
further allege that the defendants breached their duties of loyalty and due care
to the unitholders and that the defendants failed to fully inform themselves
about the value of the units, including allegedly failing to obtain valid
appraisals of the value of the General Partner's interests in the Partnership,
failing to conduct an auction process or active market check, and failing to
examine the fairness of the transaction. Beck, Hocheiser and Vogel allege that
the terms of the proposed transaction are intrinsically unfair and inadequate
from the unitholders' perspective. Ruderman alleges that the payment to the
General Partner "constitutes an unlawful payoff, kickback, or conversion of
Partnership assets." Vogel alleges that the defendants allowed the price of the
limited partnership units to be capped, depriving plaintiffs of the opportunity
to realize an increase in the value of their units. Beck and Hocheiser allege
that the defendants intended to take advantage of the disparity between the
knowledge and information possessed by the defendants compared to the class by
inducing the unitholders to approve the proposed transaction based on incomplete
or inadequate information.

The actions seek certification of a class action on behalf of the public
unitholders of the Partnership. The actions seek preliminary and permanent
injunctions of the proposed transaction, rescission of the transaction if it is
consummated, an award of rescissory damages and other damages including

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<PAGE>

attorneys' fees, an accounting by defendants of any special benefits obtained
from the transaction, imposition of a constructive trust for any consideration
received by the defendants, and any other relief the court finds appropriate.
The defendants believe that all of these lawsuits are without merit and intend
to oppose them vigorously.

Other
With respect to the judicial reference proceeding to determine the rent payable
by the Partnership for the use of pipeline easements on rights-of-way held by
Southern Pacific Transportation Company ("SPTC"), Motions of Appeal were filed
by SPTC and the Partnership in July and August, 1997, respectively.

Item 6. Exhibits and Reports on Form 8-K.

(a) The following document is filed as part of this report:
Exhibit 27 Financial Data Schedule as of and for the nine months ended
September 30, 1997.

(b) Reports on Form 8-K filed during the quarter ended September 30, 1997:

The Registrant filed a Current Report on Form 8-K dated October 18, 1997
(date of earliest event reported) and filed on October 29, 1997. The Form
8-K reported, under Item 1 (b), Changes in Control of Registrant, that the
Registrant, its general partner, Santa Fe Pacific Pipelines, Inc. (the
"General Partner"), and SFP Pipeline Holdings, Inc. had entered into a
definitive Purchase Agreement with Kinder Morgan Energy Partners, L.P. and
Kinder Morgan G.P., Inc. The Report also included, under Item 7, the
Purchase Agreement dated October 18, 1997 and a press release dated
October 20, 1997 announcing the proposed transaction.

SIGNATURE

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.

SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
(Registrant)

By: Santa Fe Pacific Pipelines, Inc., as General Partner

November 13, 1997 By: /s/ BARRY R. PEARL
-------------------------------------------------
Barry R. Pearl
Senior Vice President, Treasurer
and Chief Financial Officer
(On behalf of the Registrant)

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<PAGE>

EXHIBIT 13.2
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, 1997

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-11535

BURLINGTON NORTHERN SANTA FE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 41-1804964
(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 to registrant (1) has filed all reports be
filed by Section 13 or 15(d) the required of the Securities Exchange preceding
12 months (or for Act of 1934 during such shorter required to file such
reports), period that the registrant was and requirements for the past 90 days.
(2) has been subject to such filing 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, 1997
----- -------------------------------
Common stock, $0.1 par value 156,189,507 shares
<PAGE>

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Dollars In Millions, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>

Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues................................ $2,146 $2,044 $6,255 $6,095

Operating expenses:
Compensation and benefits.............. 661 633 2,006 1,939
Purchased services..................... 225 214 673 653
Equipment rents........................ 200 184 601 545
Depreciation and amortization.......... 195 191 574 565
Fuel................................... 173 173 555 525
Materials and other.................... 151 173 517 589
------ ------ ------ ------
Total operating expenses.............. 1,605 1,568 4,926 4,816
------ ------ ------ ------
Operating income........................ 541 476 1,329 1,279
Interest expense........................ 86 76 255 224
Other income (expense), net............. (10) 4 (13) (1)
------ ------ ------ ------
Income before income taxes.............. 445 404 1,061 1,054
Income tax expense...................... 162 157 393 409
------ ------ ------ ------
Net income.............................. $ 283 $ 247 $ 668 $ 645
====== ====== ====== ======
Net income per common share............. $ 1.79 $ 1.58 $ 4.24 $ 4.14
====== ====== ====== ======
Average shares outstanding.............. 158.3 156.3 157.6 155.8
====== ====== ====== ======
Dividends declared per common share..... $ 0.30 $ 0.30 $ 0.90 $ 0.90

</TABLE>

See accompanying notes to consolidated financial statements.

-1-
<PAGE>

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
(Unaudited)

<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 45 $ 47
Accounts receivable, net.......................... 775 628
Materials and supplies............................ 219 222
Current portion of deferred income taxes.......... 328 307
Other current assets.............................. 60 44
------- -------
Total current assets............................. 1,427 1,248

Property and equipment, net........................ 18,653 17,633
Other assets....................................... 901 882
------- -------
Total assets.................................. $20,981 $19,763
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and other current liabilities.. $ 1,941 $ 2,063
Long-term debt due within one year.............. 98 165
------- -------
Total current liabilities................... 2,039 2,228

Long-term debt and commercial paper................ 5,146 4,546
Deferred income taxes.............................. 5,022 4,729
Casualty and environmental reserves................ 491 543
Employee, merger and separation costs.............. 423 466
Other liabilities.................................. 1,235 1,270
------- -------
Total liabilities............................ 14,356 13,782
------- -------

Commitments and contingencies (See note 4)

Stockholders' equity:
Common stock, $.01 par value, 300,000,000
shares authorized; 155,962,745 shares and
154,198,088 shares issued, respectively........ 2 0
Additional paid-in capital...................... 4,970 4,838
Retained earnings............................... 1,694 1,165
Other........................................... (41) (24)
------- -------
Total stockholders' equity.................. 6,625 5,981
------- -------
Total liabilities and stockholders'
equity.................................... $20,981 $19,763
======= =======

</TABLE>

See accompanying notes to consolidated financial statements.

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<PAGE>

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
-------- --------
<S> <C> <C>

Operating Activities:
Net income............................................. $ 668 $ 645
Ad]ustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 574 565
Deferred income taxes............................. 272 259
Employee, merger and separation costs paid........ (86) (153)
Other, net........................................ (106) (36)
Sale of accounts receivable....................... 320 5
Other changes in working capital.................. (532) (52)
-------- --------
Net cash provided by operating activities............... 1,110 1,233
-------- --------

Investing Activities:
Cash used for capital expenditures.................... (1,476) (1,353)
Other, net............................................ (123) 3
-------- --------
Net cash used for investing activities.................. (1,599) (1,350)
-------- --------

Financing Activities:
Net increase (decrease) in commercial paper and
bank loans.......................................... 46 (301)
Proceeds from issuance of long-term debt.............. 654 513
Payments on long-term debt............................ (158) (69)
Dividends paid........................................ (139) (138)
Proceeds from stock options exercised................. 87 101
Other, net............................................ (3) (5)
-------- --------
Net cash provided by financing activities............... 487 101
-------- --------

Decrease in cash and cash equivalents................... (2) (16)
Cash and cash equivalents:
Beginning of period.................................... 47 50
-------- --------
End of period.......................................... $ 45 $ 34
======== ========

Supplemental cash flow information:
Interest paid, net of amounts capitalized............ 239 218
Income taxes paid, net of refunds.................... 14 64
Assets financed through capital lease obligations.... 1 38

</TABLE>

See accompanying notes to consolidated financial statements.

-3-
<PAGE>

BURLINGTON NORTHERN SANTA FE CORPORATION 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 Santa Fe Corporation Annual Report on Form 10-K for the
year ended December 31, 1996, including the financial statements and notes
thereto incorporated by reference from the Registrant's 1996 Annual Report to
Shareholders. The consolidated financial statements include the accounts of
Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries
(collectively, "BNSF" or "Company") . BNSF was incorporated in Delaware on
December 16, 1994, for the purpose of effecting a business combination
between Burlington Northern Inc. ("BNI") and Santa Fe Pacific Corporation
("SFP") which was consummated on September 22, 1995. The Company's principal
operating subsidiary is The Burlington Northern and Santa Fe Railway Company
("BNSF Railway") . 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 ad]ustments (consisting of only normal
recurring ad]ustments, except as disclosed) necessary to present fairly
BNSF's consolidated financial position as of September 30, 1997 and December
31, 1996 and the consolidated results of operations for the three and nine
month periods ended September 30, 1997 and 1996 have been included.

Certain comparative prior year amounts in the consolidated financial
statements have been reclassified to conform with the current year
presentation.

2. Employee, merger and separation costs

Current and long-term employee merger and separation liabilities totaling
$497 million are included in the consolidated balance sheet at September 30,
1997. During the first nine months of 1997, the Company paid $86 million of
employee, merger and separation costs.

At September 30, 1997, approximately $74 million of the total liability is
included within current liabilities for anticipated costs to be paid over the
next twelve months. The remaining costs are anticipated to be paid over the
next five years, except for certain costs related to conductors, trainmen and
locomotive engineers which will be paid upon the employees' separation or
retirement, as well as certain benefits for clerical employees which may be
paid on an installment basis, generally over five to ten years. In addition,
certain merger related costs, including relocation costs for clerical
employees, have been recorded as operating expenses.

The Company anticipates recording additional charges to operating expense in
the near future principally related to voluntary separations of clerical
employees. The magnitude and exact timing of such future expenses is
presently unknown; however, it is possible that this additional charge could
be taken as early as the fourth quarter of 1997.

3. Accounts receivable, net

As discussed in Note 7 to the consolidated financial statements included in
the 1996 Annual Report to Shareholders, the Company had an accounts
receivable sale agreement effective through 1999 which allowed the sale of up
to $300 million in receivables. In June 1997, this agreement was replaced by
an amended and restated agreement which allows BNSF Railway, through a
special purpose subsidiary, to sell up to $600 million of variable rate

-4-
<PAGE>

certificates which mature in 2002 evidencing undivided interests in an
accounts receivable master trust. The master trust's assets include an
ownership interest in a revolving portfolio of BNSF Railway's accounts
receivable which are used to support the certificates. At September 30,
1997, the maximum of $600 million of certificates sold were outstanding and
were supported by receivables of approximately $1.3 billion in the master
trust. BNSF Railway has retained the collection responsibility with respect
to the accounts receivable held in trust. BNSF Railway is exposed to credit
loss related to collection of accounts receivable to the extent that the
amount of receivables in the master trust exceeds the amount of certificates
sold. Costs related to such agreements vary on a monthly basis and are
generally related to certain interest rates. These costs are included in
Other income (expense), net.

4. 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's operating
procedures include practices to protect the environment from the
environmental risks inherent in railroad operations, which frequently involve
transporting chemicals and other hazardous materials. Additionally, many of
BNSF's land holdings are and have been used for industrial or transportation-
related purposes or leased to commercial or industrial companies whose
activities may have resulted in discharges onto the property. As a result,
BNSF is sub]ect to environmental clean-up and enforcement actions. In
particular, the Federal Comprehensive Environmental Response Compensation and
Liability Act of 1980, also known as the "Superfund" law, as well as similar
state laws generally impose Joint and several liability for clean-up and
enforcement costs without regard to fault or the legality of the original
conduct on current and former owners and operators of a site.

BNSF is involved in a number of administrative and judicial proceedings and
other mandatory clean-up efforts at approximately 340 sites, at which it is
being asked to participate in the study or clean-up, or both, of alleged
environmental contamination. BNSF paid approximately $36 million during the
first nine months of 1997 for mandatory clean-up efforts, including amounts
expended under federal and state voluntary clean-up programs. BNSF has
accruals of approximately $206 million for remediation and restoration of all
known sites. BNSF anticipates that the majority of the accrued costs at
September 30, 1997, will be paid over the next five years. No individual site
is considered to be material.

Liabilities recorded for environmental costs represent BNSF'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's best
estimates of all costs, without reduction for anticipated recoveries from
third parties, BNSF's total clean-up costs at these sites cannot be predicted
with certainty due to various factors such as the extent of corrective
actions that may be required, evolving environmental laws and regulations,
advances in environmental technology, the extent of other parties'
participation in clean-up efforts, developments in ongoing environmental
analyses related to sites determined to be contaminated, and developments in
environmental surveys and studies of potentially contaminated sites. As a
result, future charges to income for environmental liabilities could have a
significant effect on results of operations in a particular quarter or fiscal
year as individual site studies and remediation and restoration efforts
proceed or as new sites arise. However, expenditures associated with such
liabilities are typically paid out over a long period; therefore, management
believes that it is unlikely that any identified matters, either individually
or in the aggregate, will have a material adverse effect on BNSF's
consolidated financial position or liquidity.

-5-
<PAGE>

The railroad industry, including BNSF Railway, will become subject to future
requirements regulating air emissions from diesel locomotives that may
increase their operating costs. Proposed regulations applicable to new
locomotive engines were issued by the Environmental Protection Agency in
early 1997, with final regulations to be promulgated by the end of the year.
It is anticipated that these regulations will be effective for new locomotive
engines installed after 1999 and through 2010 and will preempt state
regulation of locomotive emission standards. Under some interpretations of
federal law, older locomotive engines may be regulated by states based on
standards and procedures which the State of California ultimately adopts. At
this time, the State of California has indicated to the Environmental
Protection Agency that it will support the proposed federal rule subject to
slight technical modifications.

Other claims and litigation

BNSF 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, 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. Hedging activities

Fuel

BNSF has a program to hedge against fluctuations in the price of its diesel
fuel purchases. This program includes forward purchases for delivery at
fueling facilities, and various commodity swap and collar transactions which
are accounted for as hedges. Any gains or losses associated with changes in
market value of these hedges are deferred and recognized as a component of
fuel expense in the period in which the hedged fuel is purchased and used. To
the extent BNSF hedges portions of its fuel purchases, it may not fully
benefit from decreases in fuel prices.

As of September 30, 1997, BNSF had entered into forward purchases for
approximately 57 million gallons at an average price of approximately 57
cents per gallon, and fuel swaps for approximately 649 million gallons at an
average price of approximately 54 cents per gallon.

The above prices do not include taxes, fuel handling costs, certain
transportation costs and, except for forward contracts, any differences which
may occur from time to time between the prices of commodities hedged and the
purchase price of BNSF's diesel fuel.

These contracts have expiration dates ranging from December 1997 to December
1999, with 189 million gallons expiring in 1997, 454 million gallons expiring
in 1998 and 63 million gallons expiring in 1999. BNSF's current fuel hedging
program covers approximately 70 percent of projected fuel purchases for the
fourth quarter of 1997, approximately 40 percent of estimated 1998 fuel
purchases and approximately 5 percent of estimated 1999 fuel purchases. Hedge
positions are closely monitored to ensure that they will not exceed actual
fuel requirements in any period. Unrecognized gains from BNSF's fuel hedging
transactions were approximately $12 million as of September 30, 1997. BNSF
also monitors its hedging positions and credit ratings of its counterparties
and does not anticipate losses due to counterparty nonperformance.

-6-
<PAGE>

Interest rate

BNSF has interest rate swap transactions, which fix the interest rate on the
total principal amount of $625 million of its commercial paper debt. The
interest rate swap transactions require payment of a weighted average fixed
interest rate of approximately 6.0 percent, and the receipt of a variable
interest rate based on a commercial paper composite rate and mature from
December 1997 through December 1999. Any gains and losses associated with
changes in market value of these hedges are deferred and recognized as a
component of interest expense in the period that corresponds with interest
expense for the related outstanding debt. Unrecognized losses from BNSF's
swap transactions were not material as of September 30, 1997.

6. Potential Sale of Investment in Pipeline Partnership

Santa Fe Pacific Pipelines, Inc., ("Pipelines") an indirect wholly-owned
subsidiary of BNSF, has a 2 percent general partnership interest and a 42
percent limited partnership interest in Santa Fe Pacific Pipeline Partners,
L.P. ("Pipeline Partnership"). The interest in the Pipeline Partnership is
accounted for under the equity method by BNSF and results are included in
Other income (expense), net in the consolidated statement of income. BNSF's
investment in the Pipeline Partnership at September 30, 1997 was
approximately $284 million and is included in other assets in the
consolidated balance sheet. On October 18, 1997, Pipelines entered into a
Purchase Agreement to sell substantially all of its interests in the
Pipeline Partnership to Kinder Morgan Energy Partners, L.P. ("Kinder
Morgan"). Total cash consideration to be received by Pipelines for its
general partner interest will be approximately $90 million. Pipelines'
limited partnership interest is represented by 8,148,148 of common units held
by Pipelines and upon consummation, 1.39 Kinder Morgan partnership units will
be received in exchange for each Pipelines common unit held.

Additionally, through its subsidiary, SFP Pipelines Holdings Inc., the
Company has variable rate exchangeable debentures ("VREDs") with a par value
of $219 million which are reflected in long-term debt at $268 million in the
consolidated balance sheet at September 30, 1997. The VREDs are exchangeable
for Pipelines' 8,148,148 common units. Consummation of the Kinder Morgan
transaction will cause an "Exchange Event" under the VRED agreement, and
accordingly, VRED holders will be eligible to receive cash equal to the par
value of the VREDs or the Kinder Morgan units received by Pipelines for its
limited partnership interest. The current market value of the Kinder Morgan
units is substantially higher than the par value of the VREDs.

The transaction is subject to a number of conditions, including the approval
by the unitholders of both parties and certain regulatory agencies. The
transaction is expected to be consummated in the first quarter of 1998 and is
anticipated to result in a one-time after-tax gain of approximately $30
million. The ongoing effect on BNSF's financial statements is not anticipated
to be significant as Pipelines' equity income from its interest in the
Pipeline Partnership is largely offset by interest expense related to the
VREDs.

7. Share Repurchase Program

On July 17, 1997, the Board of Directors of BNSF authorized the repurchase of
up to 10 million shares of the Company's common stock from time to time in
the open market. Repurchased shares will be available to satisfy future
requirements of various stock-based employee compensation programs. To date,
no shares have been repurchased under the program.

In November 1997, the Company sold equity put options to an independent third
party and received cash proceeds of approximately $1 million. These options
entitle the holder to sell 500,000 shares of BNSF common stock to the Company
on May 5, 1998 at a price of $88 per share. The option contract is for

-7-
<PAGE>

physical settlement; however, it permits a net-share or net-cash settlement
method at the Company's election. If the market price is below the option
price on May 5, 1998, it is possible that BNSF would purchase the 500,000
shares at a price of $88 per share resulting in cash outflows of $44 million.
However, as noted above, BNSF can also elect to settle on a net-share or net-
cash basis for the difference between the market price and option price on
that date. The Company will account for the effects of this transaction
within shareholders' equity.

-8-
<PAGE>

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Management's discussion and analysis relates to the financial condition and
results of operations of Burlington Northern Santa Fe Corporation and its
majority-owned subsidiaries (collectively "BNSF", "Registrant" or "Company" ) .
The Company's principal operating subsidiary is The Burlington Northern and
Santa Fe Railway Company ("BNSF Railway").

Results of Operations
- ---------------------

Three months ended September 30, 1997 compared with three months ended September
30, 1996

BNSF recorded net income for the third quarter of 1997 of $283 million or $1.79
per common share, compared with third quarter 1996 net income of $247 million or
$1.58 per common share.

Revenues

The following table presents BNSF's revenue information by commodity for the
three months ended September 30, 1997 and 1996 and includes certain
reclassifications of prior year information to conform to current year
presentation .

<TABLE>
<CAPTION>
Revenue
Revenues Per Thousand
Revenues Ton Miles Ton Miles
--------------- ----------------- ----------------
1997 1996 1997 1996 1997 1996
------ ------ ------- ------- ------ ------
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C> <C>
Intermodal............................. $ 597 $ 534 20,092 18,183 $29.71 $29.37
Coal................................... 500 520 43,017 44,833 11.62 11.60
Agricultural Commodities............... 269 238 13,384 10,756 20.10 22.13
Chemicals.............................. 196 192 7,446 7,113 26.32 26.99
Forest Products........................ 145 146 6,381 7,001 22.72 20.85
Consumer Goods......................... 131 116 5,108 4,989 25.65 23.25
Automotive............................. 102 92 1,737 1,355 58.72 67.90
Metals................................. 108 108 5,182 5,757 20.84 18.76
Minerals............................... 95 84 3,782 3,547 25.12 23.68
------ ------ ------- ------- ------ ------
Total Freight Revenues................. 2,143 2,030 106,129 103,534 20.19 19.61
Other Revenues......................... 3 14 - - - -
------ ------ ------- ------- ------ ------
Total Operating Revenues............... $2,146 $2,044 106,129 103,534 $20.19 $19.61
====== ====== ======= ======= ====== ======
</TABLE><>

Intermodal revenues of $597 million for the third quarter of 1997 increased $63
million or 12 percent reflecting increases in all segments. The direct segment
benefited from increased units shipped for Yellow Freight, Consolidated
Freightways and Roadway slightly offset by approximately $10 million of lost
revenue due to the United Parcel Service ("UPS") strike in August 1997.
Intermodal marketing companies revenues were up due to increased volume from HUB
City, Mark VII and Alliance Shippers. International revenues were up due to
volume gains for OOCL, Hyundai, and Cosco. Truckload units increased due to
volume growth from J.B. Hunt and Schneider.

Coal revenues of $500 million for the 1997 third quarter decreased $20 million
compared to revenues for the 1996 third quarter primarily due to general system
congestion .

Agricultural Commodities revenues of $269 million for the 1997 third quarter
were $31 million or 13 percent higher than revenues for the 1996 third quarter
led by higher corn export shipments through the Pacific Northwest ("PNW") and an
increase in market share for a record Southern Plains wheat crop.

-9-
<PAGE>

Consumer Goods revenues of $131 million for the 1997 third quarter were $15
million or 13 percent higher than the 1996 third quarter primarily due to
increases in volume in the government and machinery and bulk food segments.

Automotive revenues of $102 million for the 1997 third quarter were $10 million
or 11 percent higher than the 1996 third quarter primarily due to increases in
shipments for Honda. Revenue per thousand ton miles for the third quarter of
$58.72 decreased 14 percent compared to the third quarter of 1996 primarily due
to a shift in traffic mix and average length of haul.

Minerals revenues of $95 million for the 1997 third quarter were $11 million
higher than the third quarter of 1996 reflecting increases in all segments.

Expenses

Total operating expenses for the third quarter of 1997 were $1,605 million, an
increase of $37 million or 2 percent, compared with operating expenses for the
1996 third quarter of $1,568 million. The operating ratio was 74.8 percent for
the third quarter of 1997, compared with an 76.7 percent operating ratio for the
third quarter 1996.

Compensation and benefits expenses of $661 million were $28 million or 4 percent
higher than the third quarter of 1996. A majority of the increase was due to
scheduled wages related to volume driven increases in train crews costs and
maintenance activities. Additionally, wages were higher because of 1997 wage
increases to both salaried and union employees.

Purchased services of $225 million for the 1997 third quarter were $11 million
or 5 percent higher than the 1996 third quarter due principally to increases in
volume.

Equipment rents expenses for the third quarter of 1997 of $200 million were $16
million or 9 percent higher than the 1996 third quarter reflecting higher
locomotive rents and higher time and mileage payments for freight cars.

Fuel expenses for the third quarter of 1997 were $173 million, equal to the
third quarter of 1996, as a 2 percent increase in consumption was offset by a 2
percent decrease in the average price paid per gallon of diesel fuel.

Materials and other expenses of $151 million for the 1997 third quarter were $22
million or 13 percent lower than the 1996 third quarter principally reflecting
lower material costs and employee relocation expenses as well as certain
easement sales and tax benefits.

Interest expense for the third quarter of 1997 increased by $10 million to $86
million reflecting higher debt levels.

Other income (expense), net was $14 million lower than the 1996 third quarter
due to lower gains on land sales and higher accounts receivable sale fees due to
the increase in receivables sold.

During the first half of 1997, the Company recorded income tax expense at an
effective tax rate of 37.5 percent. During the third quarter of 1997, BNSF
completed an updated analysis of the rate which resulted in an estimated full
year 1997 effective tax rate of 37.0 percent. Tax expense was recorded during
the third quarter to reflect year to date tax expense at a rate of 37.0 percent
of taxable income, resulting in a 36.4 percent effective rate for the third
quarter .

-10-
<PAGE>

Results of Operations
- ---------------------

Nine months ended September 30, 1997 compared with nine months ended September
30, 1996

BNSF net income for the nine-months ended September 30, 1997, was $668 million,
or $4.24 per share, compared with 1996 net income for the same period of $645
million, or $4.14 per share. The increase in net income is primarily due to
improved operating results in the second and third quarters of 1997 largely
offset by lower operating results in the first quarter as a result of severe
weather conditions throughout the Northern Plains and the PNW. The financial
impact of recurring and protracted outages on many parts of the system, the cost
of repairing track, signals and equipment, and the operating inefficiencies
caused by the weather is virtually impossible to measure with precision.
However, the Company estimates that the severe weather in the first quarter of
1997 resulted in lost revenue opportunities of approximately $100 million and
increased operating expenses of at least $50 million.

Revenues

The following table presents BNSF's revenue information by commodity for the
nine-months ended September 30, 1997 and 1996 and includes certain
reclassifications of prior year information to conform to current year
presentation .

<TABLE>
<CAPTION>
Revenue
Revenues Per Thousand
Revenues Ton Miles Ton Miles
--------------- ----------------- ----------------
1997 1996 1997 1996 1997 1996
------ ------ ------- ------- ------ ------
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C> <C>
Intermodal............................. $1,687 $1,528 57,994 52,370 $29.09 $29.18
Coal................................... 1,471 1,488 124,724 127,529 11.79 11.67
Agricultural Commodities............... 800 845 41,205 42,528 19.42 19.87
Chemicals.............................. 599 578 22,412 21,568 26.73 26.80
Forest Products........................ 428 419 19,040 19,181 22.48 21.84
Consumer Goods......................... 377 353 14,434 13,822 26.12 25.54
Automotive............................. 317 300 5,059 4,492 62.66 66.79
Metals................................. 314 316 14,420 15,795 21.78 20.01
Minerals............................... 260 238 10,270 9,308 25.32 25.57
------ ------ ------- ------- ------ ------
Total Freight Revenues................. 6,253 6,065 309,558 306,593 20.20 19.78
Other Revenues......................... 2 30 - - -
------ ------ ------- ------- ------ ------
Total Operating Revenues............... $6,255 $6,095 309,558 306,593 $20.20 $19.78
------ ------ ------- ------- ------ ------
</TABLE>

Intermodal revenues of $1,687 million for the first nine months of 1997
increased by $159 million or 10 percent compared to revenues for the same period
of 1996 due to improved results in all segments. The direct segment benefited
from an increase in units shipped for Yellow Freight, Consolidated Freightways
and Roadway slightly offset by the UPS strike in August 1997. Truckload revenue
increased due to volume growth from J.B. Hunt and Schneider. International
revenues were up due to volume gains for OOCL, Hyundai, and Cosco.

Agricultural Commodities revenues of $800 million for the first nine months of
1997 were $45 million or 5 percent lower than revenues for the same 1996 period.
This decrease was due primarily to a decrease in shipments of wheat for export
in the first and second quarter due to United States uncompetitiveness in the
world market and first quarter weather related service problems in the Northern
Plains and PNW. Those decreases were partially offset by a strong third
quarter, led by an increase in export corn shipments through the PNW.

Consumer Goods revenues of $377 for the first nine months of 1997 were $24
million or 7 percent higher than the first nine months of 1996 led primarily by
growth in volumes for the government and machinery, bulk food and waste product
segments.

-11-
<PAGE>

Automotive revenues of $317 million for the nine months ended September 30, 1997
increased $17 million or 6 percent compared to the same period of 1996. The
increase was due to higher volume in the motor vehicles segment led by increased
traffic from Honda.

Minerals revenues of $260 for the first nine months of 1997 were $22 million or
9 percent higher than the first nine months of 1996 led primarily by increased
revenues in the clay and aggregates, rock and specialty minerals and sodium
compounds segments.

Expenses

Total operating expenses for the first nine months of 1997 were $4,926 increase
of $110 million or 2 the million, percent, compared with first nine months of
1996 of percent operating expenses for $4,816 for the first nine months
operating million. The operating ratio was ratio for the same 1996 78.8 of 1997,
compared with an 79.0 percent operating ratio for the same 1996 period.

Compensation and benefit expenses of $2,006 million were $67 million or 3
percent higher than the first nine months of 1996. A majority of the increase
was due to higher costs associated with weather-related repairs to track and
equipment and slower operations. Additionally, wages were higher due to volume
related increases in train crew costs and because of 1997 wage increases to both
salaried and union employees. These increases were partially offset by lower
salaried employee incentive compensation expense due to the Company's first
quarter 1997 performance relative to certain goals.

Purchased services expenses of $673 million increased $20 million or 3 percent
from the first nine months of 1996 due to volume related increases in various
categories.

Equipment rents expenses for the first nine months of 1997 of $601 million were
$56 million or 10 percent higher than the first nine months of 1996. The
increase is due to lower rail equipment utilization, higher leased railcar
expense and increased locomotive rents.

Fuel expenses of $555 million for the first nine months of 1997 were $30 million
higher than the first nine months of 1996 due to a 5 percent increase in the
average price paid per gallon of diesel fuel.

Materials and other expenses of $517 million for the first nine months of 1997
were $72 million or 12 percent lower than the first nine months of 1996. The
decrease was primarily due to lower derailment and personal injury expenses
reflecting the continuing benefits of employee safety programs.

Interest expense for the first nine months of 1997 was $255 million compared
with interest expense of $224 million for the first nine months of 1996. The
increase is primarily due to higher debt levels.

Capital Resources and Liquidity
- -------------------------------

Cash from operations

Cash generated from operations is BNSF's principal source of liquidity. BNSF
generally funds any additional requirements through debt issuance, including
commercial paper, or leasing of assets.

Operating activities provided cash of $1,110 million for the nine months, ended
September 30, 1997 compared with $1,233 million for the nine months ended
September 30, 1996. The decrease in cash from operations was in part caused by
a $480 million increase in cash used for working capital. This variance was
primarily attributable to a higher accounts receivable balance due to
integration issues arising from the implementation of an updated system-wide
customer billing and collection system. The Company expects to reduce the

-12-
<PAGE>

accounts receivable balance throughout the remainder of 1997 and early 1998. The
sale of an additional $300 million of accounts receivable in June as discussed
below partially offset the impact of the changes in working capital. BNSF's cash
outflows from investing activities for the nine months ended September 30, 1997
principally relate to capital expenditures of $1,476 million while net sources
of cash from financing activities of $487 million principally reflect net
proceeds from borrowings used to fund capital expenditures, both of which are
further discussed below.

Other capital resources

BNSF issues commercial paper from time to time. These borrowings are supported
by bank revolving credit agreements. Outstanding commercial paper balances are
considered as reducing the amount of borrowings available under these
agreements. The bank revolving credit agreements allow borrowings of up to $500
million on a short-term basis and $1.5 billion on a long-term basis. Annual
facility fees are currently 0.075 percent and 0.11 percent, respectively, and
are subject to change based upon changes in BNSF's senior unsecured debt
ratings. Borrowing rates are based upon i) LIBOR plus a spread based upon
BNSF's senior unsecured debt ratings, ii) money market rates offered at the
option of the lenders, or iii) an alternate base rate. The commitments of the
lenders under the short-term and long-term agreements were extended on November
12, 1997, and are currently scheduled to expire on November 11, 1998 and
November 12, 2002, respectively.

At September 30, credit agreement 1997, there were no borrowings million,
leaving revolving credit against the long-term revolving credit agreement and
the maturity value of commercial paper outstanding was $933 a total remaining
capacity of $567 million under the long-term agreement available and $500
million under the short-term available.

In February 1997, BNSF issued $100 million of 6.1% Medium-Term Notes, due
February 27, 2027. These notes may be redeemed on February 27, 2000, 2003 or
2007, at the option of the holder. In July 1997, BNSF issued $175 million of
6.53% Medium-Term Notes due July 15, 2037 ("Medium-Term Notes") and $200 million
of 7.25% Debentures due August 1, 2097. The Medium-Term Notes may be redeemed
on July 15, 2003, at the option of the holder. The net proceeds were used for
general corporate purposes including the repayment of commercial paper. The
notes and the debentures were issued under a BNSF shelf registration.
Additionally, in August 1997 BNSF filed a new shelf registration of debt
securities, including medium-term notes, that may be issued in one or more
series at an aggregate offering price not to exceed $550 million. No borrowings
have occurred under this new shelf registration.

As discussed in Note 3 to the financial statements, the Company completed a new
accounts receivable sales agreement in June 1997 to sell up to $600 million of
accounts receivable. This agreement replaced an existing accounts receivable
sale agreement which allowed the sale of up to $300 million of accounts
receivable. In June 1997, the Company sold an additional $300 million of
accounts receivable which was used to reduce its outstanding commercial paper.

-13-
<PAGE>

Capital expenditures

A breakdown of cash capital expenditures is set forth in the following table (in
millions):
<TABLE>
<CAPTION>
Nine Months Ended
September, 30
1997 1996
------ ------
<S> <C> <C>
Maintenance of Way............................. $ 694 $ 591
Equipment Projects............................. 389 344
Expansion ProJects............................. 257 256
Other.......................................... 137 200
------ ------
Total.......................................... $1,477 $1,391
====== ======
</TABLE>

The increase in Maintenance of Way expenditures principally reflects an increase
in spending for rail programs. For the nine months ended September 30, 1997,
BNSF Railway laid a total of 617 track miles of new and secondhand rail compared
to 522 track miles for the nine months ended September 30, 1996. Equipment
expenditures were $45 million above 1996 reflecting an increase in locomotive
purchases and locomotive overhauls.

Dividends

Common stock dividends declared for the nine months ended September 30, 1997 and
1996 were $0.90 per common share. Dividends paid on common stock during the
first nine months of 1997 were $139 million. Dividends paid during the first
nine months of 1996 were $133 million on common stock and $5 million on
preferred stock. On September 18, BNSF's Board of Directors declared a regular
quarterly common stock dividend of $0.30 per share to stockholders of record on
December 5, 1997 to be paid on January 2, 1998.

Capital structure

BNSF's ratio of total debt to total capital was 44 percent at September 30, 1997
which was unchanged from December 31, 1996.

Other Matters
- -------------

Potential Sale of Investment in Pipeline Partnership

As discussed in note 6 to the financial statements, Santa Fe Pacific Pipelines,
Inc., ("Pipelines") an indirect wholly-owned subsidiary of BNSF, entered into a
Purchase Agreement to sell substantially all of its interests in Santa Fe
Pacific Pipeline Partners, L.P. ("Pipeline Partnership") to Kinder Morgan Energy
Partners, L.P. Total cash consideration to be received by Pipelines for its
general partner interest will be approximately $90 million. Pipelines will
receive Kinder Morgan units for its 42 percent limited partnership interests;
however, the Company has debt outstanding, through a subsidiary, which is
exchangeable for common units represented by its limited partnership interest
and will become exchangeable for the Kinder Morgan units to be received by it in
the exchange. The transaction is expected to be consummated in the first
quarter of 1998 and is anticipated to result in a one-time after-tax gain of
approximately $30 million. The ongoing effect on BNSF's financial statements
is not anticipated to be significant as Pipelines equity income from its
interest in the Pipeline Partnership is largely offset by interest expense
related to outstanding debt of the Company.

Share Repurchase Program

-14-
<PAGE>

various stock-based employee compensation programs. To date, no shares have
been repurchased under the program. As discussed in note 7 to the financial
statements, in November 1997, the Company sold 500,000 equity put options as
part of its share repurchase program.

Other claims and litigation

BNSF 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, 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.

Recent Accounting Pronouncements
- --------------------------------

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" which specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock. The statement is effective for periods ending after December 15,
1997 and early adoption is prohibited. SFAS No. 128 requires the presentation
of basic and diluted EPS calculated pursuant to the requirements of the
standard. Had the Company adopted SFAS No. 128 in the third quarter of 1997,
basic EPS would have been $1.82 and $1.62 for the three months ended September
30, 1997 and 1996, respectively and $4.32 and $4.25 for the nine months ended
September 30, 1997 and 1996, respectively. Diluted EPS per share would have
approximated net income per common share included in the accompanying
consolidated statement of income.

In June 1997, the FASE issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." The Statements are effective for fiscal years beginning after
December 15, 1997; however, earlier adoption is permitted. SFAS No. 130
requires the presentation of comprehensive income and its components in a full
set of financial statements. SFAS No. 131 requires the disclosure of financial
and descriptive information about reportable operating segments. Both SFAS No.
130 and 131 are modifications of disclosure requirements which will have no
effect on the results of operations or financial condition of the Company. The
Company is currently evaluating the standards, their potential impact on
disclosures and whether it will adopt these pronouncements prior to the required
effective date.

-15-
<PAGE>

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Crow Reservation Crossing Accident Case

Reference is made to the discussion in Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1996 and in its Current Reports on Form
10-Q for the quarter ended March 31, 1997 and June 30, 1997 of the lawsuit
filed in Crow Tribal Court (Estates of Red Wolf, Red Horse and Bull Tail v.
Burlington Northern Railroad Company, Case No. 94-31) arising out of a 1993
accident at a BNSF Railway crossing located within the boundaries of the
Crow reservation in which three members of the Crow tribe were killed. The
lawsuit was filed on behalf of the estates of the driver of the vehicle and
the two passengers in the vehicle involved. One of the passenger cases was
severed and has yet to go to trial. The other two cases proceeded to trial
in January 1996. On February 6, 1996, a Crow Tribal Court Jury rendered a
verdict against BNSF Railway for compensatory damages in the total amount of
$250 million. On August 19, 1997, the Tribal Court entered an amended
Judgment reducing the total amount of the judgment to $25 million. BNSF
Railway's appeal from the amended judgment is pending before the Tribal
Appellate Court.

On February 26, 1996, the Federal District Court for the District of Montana
entered an order enjoining any action by the Tribal Court plaintiffs to
enforce the judgment pending appeal through the tribal court and federal
court systems. Upon appeal of that decision by the Tribal Court
plaintiffs to the United States Court of Appeals for the Ninth Circuit,
the Ninth Circuit on January 29, 1997, issued an opinion which reversed
the district court and remanded the matter to the trial court with
instructions to dissolve the injunction. The basis for the appellate
court's decision was that BNSF Railway had failed to exhaust its
remedies in the tribal court. On April 10, 1997, the Ninth Circuit
denied BNSF Railway's petition for rehearing and, on April 17, 1997,
issued an order granting a stay of its mandate to the district court.
BNSF Railway petitioned the United States Supreme Court for a writ of
certiorari on May 16, 1997 with respect to the Ninth Circuit's decision.
On October 6, 1997, the Supreme Court issued an order in which it
granted BNSF Railway's petition, vacated the Ninth Circuit's Judgment
and remanded the case to the Ninth Circuit for further consideration in
light of the Supreme Court's recent decision in Strate v A-i
------------
Contractors, 117 S. Ct. 1404 (1997).

Wheat and Barley Transportation Rates

Reference is made to the discussion in Registrant's Report on Form 10-K
for the year ended December 31, 1996 of the class action lawsuit filed
against BNSF Railway in the United States District Court for
the District of Montana challenging the reasonableness of
single-line transportation rates assessed from 1978 onward for
transporting export wheat and barley from origins in Montana to
ocean ports in the Pacific Northwest. In McCarty Farms, Inc.,
et al. v. Burlington Northern Inc., No. 37808 (August 14,
1997), a proceeding before the Interstate Commerce Commission
("ICC") reopened upon appellate court remand and transferred to
the Surface Transportation Board ("STE"), successor to the ICC,
the STE found that the challenged rates of BNSF Railway for
export wheat and barley were not shown to be unreasonably high.
The STE dismissed the proceeding in its entirety. Plaintiffs
have appealed the decision to the United States Court of
Appeals for the District of Columbia.

-16-
<PAGE>

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
on its Quarterly Report on Form 10-Q for the second quarter of 1997.

-17-
<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.

BURLINGTON NORTHERN SANTA FE CORPORATION
(Registrant )

By: /s/ T N. HUND
----------------------------------
Thomas N. Hund
Vice President and Controller
(On behalf the Registrant and as
principal accounting officer)

Schaumburg, Illinois
November 13, 1997

-18-

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SFP PIPELINE HOLDINGS, INC. AS OF AND FOR
THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,866
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,438
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 213,025
<CURRENT-LIABILITIES> 16,360
<BONDS> 204,606
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0
<COMMON> 1
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<SALES> 0
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<CGS> 0
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<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 19,132
<INCOME-PRETAX> 11,809
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