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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10595
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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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
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VARIABLE RATE EXCHANGEABLE DEBENTURES NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: All voting stock of the registrant is held by an affiliate,
The Burlington Northern and Santa Fe Railway Company.
Number of shares outstanding of the registrant's common stock ($0.01 par value)
as of March 27, 1998: 1,000.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT PERMITTED BY GENERAL INSTRUCTION I.
List hereunder the documents from which parts thereof have been incorporated by
reference and the Part of the Form 10-K into which such information is
incorporated:
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1997 Financial Information of Burlington Northern Santa Fe Corporation........ Parts II and IV
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................................... 1
Item 2. Properties.................................................................. 4
Item 3. Legal Proceedings........................................................... 4
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........ 10
Item 7. Management's Discussion and Analysis of the Results of Operations........... 11
Item 8. Financial Statements and Supplementary Data................................. 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................................... 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 12
Signatures.......................................................................... 15
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SFP PIPELINE HOLDINGS, INC.
PART I
ITEM 1. BUSINESS.
General
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SFP Pipeline Holdings, Inc. ("Holdings") commenced operations in September 1990,
at which time it acquired 100% of the outstanding capital stock of Santa Fe
Pacific Pipelines, Inc. ("SFPPI" or the "General Partner") and issued Variable
Rate Exchangeable Debentures Due 2010 (the "Debentures") in the aggregate
principal amount of $219.0 million. Holdings and Santa Fe Pacific Pipelines,
Inc. are both wholly owned indirect subsidiaries of Burlington Northern Santa Fe
Corporation ("BNSF") and are collectively referred to herein as the "Company"
unless the context requires otherwise. In September 1995, Santa Fe Pacific
Corporation ("Santa Fe") and Burlington Northern Inc. consummated a business
transaction pursuant to which Santa Fe became a subsidiary of BNSF.
Prior to the closing on March 6, 1998 of the KM Transaction described below,
SFPPI served as the general partner of Santa Fe Pacific Pipeline Partners, L.P.
(the "Trading Partnership"), a Delaware limited partnership formed in December
1988 to acquire and operate, through SFPP, L.P. ("SFPP"), the refined petroleum
products pipeline business of Santa Fe. Collectively, the Trading Partnership
and SFPP are referred to herein as the "Partnership." Santa Fe's pipeline
business was previously owned by two indirect wholly owned subsidiaries (the
"Predecessor Companies") and, in December 1988, SFPPI acquired 8,148,148 common
limited partner interests in the Trading Partnership (the "SFP Common Units") in
return for its contribution to the Partnership of a portion of the assets of the
Predecessor Companies. SFPPI also directly owned a 1% general partner interest
in the Operating Partnership. The common units and the general partner interests
owned by the General Partner represented approximately 42% and 2% interests in
the Partnership, respectively. The remaining approximate 56% limited partner
ownership in the Trading Partnership was represented by 11,000,000 publicly
traded SFP Common Units.
SFPP is one of the largest independent pipeline common carriers of refined
petroleum products ("products") in the United States, and the largest in the
western United States, in terms of product deliveries, barrel miles, and
pipeline mileage, with approximately 3,300 miles of pipeline serving six states.
SFPP transports products, including gasoline, diesel fuel and commercial and
military jet fuels, primarily for integrated petroleum companies, independent
refiners, the United States military, and marketers and distributors of such
products. SFPP also operates 13 truck loading terminals and provides pipeline
service to 44 customer-owned terminals, three commercial airports, and 12
military bases. SFPP's pipelines are: (1) the South Line, which is composed of
two segments, the West Line, which transports products from Los Angeles to
Phoenix and Tucson, Arizona and various intermediate points, and the East Line,
which transports products from El Paso, Texas to Tucson, Phoenix and various
intermediate points; (2) the North Line, which transports products primarily
from the San Francisco Bay area to various cities in northern California and
western Nevada; (3) the Oregon Line, which transports products between Portland
and Eugene, Oregon; and (4) the San Diego Line, which transports products from
Los Angeles to San Diego, California and various intermediate points.
KM Transaction; Impact on Debentures
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In October 1997, the Trading Partnership, SFPPI and Holdings entered into a
Purchase Agreement, dated as of October 18, 1997, with Kinder Morgan Energy
Partners, L.P. ("KMEP") and Kinder Morgan G.P., Inc., the general partner of
KMEP ("KMGP"). The Purchase Agreement and the transactions provided for therein
(collectively, the "KM Transaction") were approved by the respective unitholders
of the Trading Partnership and KMEP on March 6, 1998, and the KM Transaction was
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completed later that day. Pursuant to the Purchase Agreement, KMEP acquired
substantially all of the assets of the Trading Partnership for approximately
26.6 million common units of limited partner interests in KMEP ("KMEP Common
Units") and purchased the general partner interest in the Trading Partnership
for $84.4 million in cash. Immediately thereafter, the Trading Partnership was
liquidated and each SFP Common Unit then outstanding was converted into 1.39
KMEP Common Units. In connection with the KM Transaction, SFPPI retained a 1%
special (non-voting) limited partner interest in SFPP. Immediately following the
completion of the KM Transaction, SFPP redeemed approximately one-half of the
special limited partnership interest retained by SFPPI for $5.8 million in cash,
which amount the parties agreed represented the fair market value of such
interest on the date of the Purchase Agreement. In connection with the
redemption, SFPPI retained a contingent liability for up to $190 million of
SFPP's indebtedness. Apart from that, KMEP has agreed to pay and perform all
obligations of Holdings related to the Debentures and has agreed to indemnify
and hold harmless BNSF and its subsidiaries, including Holdings and SFPPI, from
and against any and all losses, costs, damages, expenses, liabilities and claims
arising from or relating to, among other things, the Trading Partnership, SFPP
or the Debentures.
The terms of the Debentures as originally issued provided that the Debentures
would become exchangeable upon the occurrence of certain events ("Exchange
Events") for an aggregate of 8,148,130 of SFP Common Units. Such terms provided
generally that each $1,000 original principal amount of Debenture would be
exchangeable, at the option of the respective holders thereof, for 37.2093 SFP
Common Units during a specified period following the first to occur of the
following: (i) May 17, 2010 (90 days prior to final maturity); (ii) the
liquidation of the Partnership; (iii) the sale or other disposition by the
Partnership of all or substantially all of its assets or any merger,
consolidation or recapitalization of the Partnership (other than any such
transaction in which the Partnership survives and its only outstanding equity
securities are preference and common units); and (iv) the occurrence of an Event
of Default under the indenture relating to the Debentures and the acceleration
of all amounts due and owing under the Debentures. In lieu of delivering SFP
Common Units to Debentureholders at such time, the Company is permitted, under
the terms of the Debentures, to elect to pay cash to the holders of Debentures
in an amount equal to the market price of the Debentures.
The KM Transaction constituted an Exchange Event under the above-described terms
of the Debentures. KMEP agreed in the Purchase Agreement to cause one of its
affiliates, Kinder Morgan Operating L.P. "D", a Delaware limited partnership, to
perform all of Holdings' obligations relating to the Debentures, including the
obligation to offer to exchange Debentures as described above (the "Exchange
Offer"). Pursuant to the Purchase Agreement, the parties agreed that as a result
of the KM Transaction, each $1,000 principal amount of Debentures would, under
their original terms, become exchangeable for 51.720927 KMEP Common Units (which
is equal to the Debentures existing conversion ratio of 37.2093 SFP Common Units
per $1,000 principal amount of Debentures, multiplied by the 1.39 ratio at which
KMEP Common Units were exchanged for outstanding SFP Common Units in the KM
Transaction). SFPPI further agreed in the Purchase Agreement to place the
certificates representing the former 8,148,148 SFP Common Units owned by it, and
the right to receive 11,325,925 KMEP Common Units to which such SFP Common Units
become convertible upon completion of the KM Transaction, into escrow for
issuance to holders of Debentures who accept the Exchange Offer.
Under the terms of the Debentures, holders of Debentures will have the right to
exchange Debentures for KMEP Common Units for a period of at least 30
consecutive days (the "Exchange Period") selected by KMEP and beginning between
45 and 50 days after the closing of the KM Transaction. To the extent that
Debentures are not delivered for exchange, the KMEP Common Units into which they
are exchangeable will be cancelled and any Debentures not delivered for exchange
during the Exchange Period will become due and payable at par, plus accrued and
unpaid interest from the date that is 90 days after the completion of the KM
Transaction.
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KMEP has filed a registration statement on Form S-4 under the Securities Act of
1933 with the Securities and Exchange Commission (File No. 333-46709) for the
purpose of making the Exchange Offer, which registration has not yet been
declared effective by the Commission. Further detailed information concerning
the terms and conditions of the Exchange Offer and information and financial
statements relating to KMEP will be set forth or incorporated by reference in
such registration statement, including the Prospectus forming a part thereof and
the exhibits to such registration statement.
KMEP, a Delaware limited partnership, was organized in August 1992 to acquire
and operate the natural gas liquids pipelines of Enron Corp. The current
management of KMEP acquired the stock of KMGP from Enron Corp. in February 1997.
KMEP's management states that its business strategy is to operate KMEP as a
growth-oriented publicly traded limited partnership by reducing operating costs,
better utilizing and expanding its asset base, and making selective, strategic
acquisitions that are accretive to KMEP Common Unit holders.
Through its operating limited partnerships, KMEP manages a diversified portfolio
of midstream energy assets. At March 6, 1998, KMEP was the sole owner and
operator of three pipeline systems (the "KMEP Pipeline System"), which
transports Natural Gas Liquids ("NGLs"), refined petroleum products, and carbon
dioxide ("CO2"), and two modern, high-speed coal terminaling facilities (the
"Coal Terminals"). The KMEP Pipeline System consists of (i) the North System,
which transports petroleum products from South Central Kansas to the Chicago
area and various intermediate points, (ii) the Cypress Pipeline, which
transports purity ethane from the NGL hub in Mont Belvieu, Texas to a major
petrochemical producer in Lake Charles, Louisiana, and (iii) upon completion of
the KM Transaction, SFPP. KMEP also owns an indirect 25% interest in a Y-grade
fractionation facility. On March 5, 1998, KMEP entered into a transaction with
affiliates of Shell Oil Company ("Shell") to form Shell CO2 Company, Ltd., as a
Delaware limited partnership ("Shell CO2 Company"), which will explore, produce,
market and transport CO2 for enhanced oil recovery throughout the continental
United States. KMEP received a 20% interest in Shell CO2 Company by contributing
its Central Basin Pipeline (a West Texas CO2 pipeline) and approximately $25
million in cash.
As a result of the KM Transaction, KMEP is one of the largest common carrier
pipeline systems in terms of volume of deliveries, barrel miles and pipeline
mileage in the United States, with over 5,000 miles of trunk pipeline serving 15
states.
Other Information
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BNSF is a holding company that presently owns subsidiaries engaged primarily in
railroad transportation operations, conducted principally by The Burlington
Northern and Santa Fe Railway Company, serving the western, central, midwestern
and southeastern regions of the United States.
KMEP, BNSF and The Burlington Northern and Santa Fe Railway Company are all
subject to the informational requirements of the Securities Exchange Act of
1934, and in accordance therewith file reports and other information with the
Securities and Exchange Commission, to which reference is made for detailed
financial and other information regarding their respective businesses. Prior to
its liquidation in March 1998, the Partnership was also subject to such
informational requirements.
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ITEM 2. PROPERTIES.
As discussed above, the Company, through SFPPI, owned an approximate 44%
interest in the Partnership until March 6, 1998. The net book value of the
Partnership's pipeline system, truck loading terminals and other properties
aggregated approximately $630 million at December 31, 1997. The Company itself
does not own any significant properties or facilities.
ITEM 3. LEGAL PROCEEDINGS.
Substantially all of the Partnership's pipeline operations were common carrier
operations subject to federal or state rate regulation. The Partnership's
interstate common carrier pipeline operations were subject to rate regulation by
the Federal Energy Regulatory Commission ("FERC") under the Interstate Commerce
Act which requires, among other things, that petroleum product pipeline rates be
"just and reasonable" and nondiscriminatory. The FERC methodology is subject to
clarification and reconsideration in individual cases and leaves many issues for
determination on a case-by-case basis. Alternatively, pipelines that can
demonstrate that they operate in competitive markets may be allowed to establish
tariffs under a less stringent form of "light-handed" rate regulation.
Intrastate common carrier operations of the Pipeline System in California are
subject to regulation by the California Public Utilities Commission ("CPUC")
under a "depreciated book plant" methodology, which is based on an original cost
measure of investment.
The Partnership's operations were also subject to federal, state and local laws
and regulations relating to protection of the environment, including laws and
regulations relating to water, air, solid waste and hazardous substances. The
discharge of, or contamination of property by, hazardous materials may arise
from the transportation and storage of such materials in the ordinary course of
operations and may give rise to claims and potential liability for injuries to
employees, other persons, property, and the environment.
Set forth below are descriptions of litigation and administrative proceedings to
which the Partnership was subject at the date of the completion of the KM
Transaction described herein. Such litigation and proceedings, to which Holdings
is not a party, except as noted below, were not terminated by the completion of
the KM Transaction.
SFPP EAST LINE CIVIL LITIGATION AND FERC PROCEEDINGS
In August 1992, two East Line refiners, Navajo Refining Company ("Navajo") and
El Paso Refinery, L.P. ("El Paso"), filed separate, though similar, civil
lawsuits (the "East Line Civil Litigation") against SFPP arising from SFPP's
alleged failure to provide additional pipeline capacity from El Paso, Texas to
Tucson and Phoenix, Arizona. In addition, El Paso filed a protest/complaint with
the FERC in September 1992 seeking to block the reversal of the direction of
flow of the six-inch pipeline between Phoenix and Tucson and challenging SFPP's
proration policy, as well as SFPP's existing East Line rates.
FERC PROCEEDINGS - At various dates following El Paso's September 1992 filing,
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other shippers on SFPP's South System, including Chevron U.S.A. Products Company
("Chevron"), Navajo, ARCO Products Company ("ARCO"), Texaco Refining and
Marketing Inc. ("Texaco"), Refinery Holding Company, L.P. (a partnership formed
by El Paso's long-term secured creditors that purchased El Paso's refinery in
May 1993), Mobil Oil Corporation ("Mobil") and Tosco Corporation, filed separate
complaints, and/or motions to intervene in the FERC proceeding, challenging
SFPP's rates on its East and West Lines. Certain of these parties also claimed
that a gathering enhancement charge at SFPP's
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Watson origin pump station in Carson, California was in violation of the
Interstate Commerce Act. In subsequent procedural rulings, the FERC has
consolidated these challenges (Docket Nos. OR92-8-000, et al.) and ruled that
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they must proceed as a complaint proceeding, with the burden of proof being
placed on the complaining parties. Such parties must show that SFPP's rates and
practices at issue violate the requirements of the Interstate Commerce Act.
The Energy Policy Act of 1992 ("EPACT") provided that existing oil pipeline
rates that were in effect without challenge for 365 days prior to the bill's
enactment in October 1992 are deemed to be "just and reasonable" under EPACT
(i.e., are "grandfathered") and could only be challenged upon a showing of a
substantial change in the economic circumstances which were the basis for the
rate ("changed circumstances").
Hearings in the FERC proceeding commenced on April 9, 1996 and concluded on July
19, 1996. An initial decision by the FERC Administrative Law Judge was issued on
September 25, 1997 (the "Initial Decision"). The Initial Decision upheld SFPP's
position that "changed circumstances" were not shown to exist on the West Line,
thereby retaining the just and reasonable status of all West Line rates that
were "grandfathered" under EPACT. The Administrative Law Judge's decision
specifically excepted from that ruling SFPP's Tariff No. 18 for movement of jet
fuel from Los Angeles to Tucson, which was initiated subsequent to the enactment
of EPACT.
The Initial Decision also included rulings that were generally adverse to SFPP
on such cost of service issues as the capital structure to be used in computing
SFPP's 1985 starting rate base under FERC Opinion 154-B, the level of income tax
allowance, and the recoverability of civil and regulatory litigation expense and
certain pipeline reconditioning costs. The Administrative Law Judge also ruled
that the gathering enhancement service at SFPP's Watson origin pump station in
Carson, California was 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.
Briefs on exceptions were filed on November 25, 1997, and briefs opposing
exceptions were filed on January 23, 1998. The matters at issue will be
submitted to the FERC commissioners for a final decision, which decision is not
expected before late-1998. Unless the FERC's final decision is substantially
more favorable to SFPP's position on the above-described methodological issues
than the Initial Decision, payment of reparations and the filing of reduced
tariff rates will be required, primarily on the East Line.
The complainants in FERC Docket Nos. OR92-8-000 et al. are seeking reparations,
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aggregating approximately $35 million, for shipments between 1990 and 1994 as
well as rate reductions of between 30% and 40% for shipments in 1995 and
thereafter. If the complainants were to prevail on all claims, it has been
estimated by Partnership management that reparations resulting from such rate
reductions for shipment in 1995, 1996, and 1997 would aggregate approximately an
additional $80 million, resulting in total reparations for the period 1990 to
1997 of approximately $115 million, plus interest of approximately $30 million.
If the Initial Decision were affirmed in its current form by the FERC,
Partnership management estimated that the total reparations and interest that
would have been payable as of December 31, 1997 would approximate the $30
million in reserves that had been recorded as of that date. Partnership
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management also estimated that the Initial Decision, in its current form and if
applied to the Sepulveda Lines (as defined herein) rate at issue in Docket No.
IS98-1-000, would reduce prospective revenues in the range of $8 million to $10
million annually. Under the rulings in the Initial Decision, reparations and
interest would continue to accrue at approximately $8 million per annum until
new prospective rates become effective.
If SFPP were to lose its "grandfathered" rates due to a finding of "changed
circumstances," the losses to the Partnership (KMEP after the consummation of
the KM Transaction) could be substantially larger than the amounts currently
reserved. As a result, the loss of SFPP's "grandfathered" rates could have a
material adverse effect on the Partnership's or KMEP's ability to make
distributions to unitholders.
In June 1996, SFPP entered into an agreement with the El Paso bankruptcy trustee
to settle El Paso's claims in the FERC Proceeding with a payment by SFPP of
$1,250,000. The agreement subsequently was approved by the bankruptcy court, and
the presiding FERC Administrative Law Judge permitted El Paso to withdraw its
complaint. In September 1996, SFPP and Navajo reached an agreement whereby
Navajo agreed to withdraw its complaint against SFPP's West Line rates in
exchange for a cash payment of $1,000,000. Navajo's request to withdraw its West
Line complaint was submitted to the FERC for approval in November 1996 and was
subsequently approved. This settlement does not affect Navajo's remaining
complaint against SFPP's East Line rates. In addition, prior to issuance of the
Initial Decision, SFPP announced that it had reached tentative agreements with
two other complainants in Docket Nos. OR92-8-000 et al., resolving those
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parties' claims in that proceeding; however, it is not currently anticipated
that those agreements will be finalized in accordance with their tentative
terms.
In December 1995, Texaco filed an additional FERC complaint, which involves the
question of whether a tariff filing is required for movements on certain of
SFPP's lines upstream of its Watson, California station origin point (the
"Sepulveda Lines") and, if so, whether those rates may be set in that proceeding
and what those rates should be. Texaco's initial complaint was followed by
several other West Line shippers filing similar complaints and/or motions to
intervene, all of which have been consolidated into Docket Nos. OR96-2-000 et
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al.
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On August 5, 1997, the FERC found the Sepulveda Lines to be subject to the
jurisdiction of the FERC. SFPP was ordered to make a tariff filing within 60
days to establish an initial rate for these facilities. The FERC reserved
decision on reparations until it rules on the newly-filed rates. On October 6,
1997, SFPP filed a tariff establishing the initial interstate rate for movements
on the Sepulveda Lines 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 that rate. On October 27, 1997, SFPP made a
responsive filing at the FERC, requesting that these protests be held in
abeyance until the FERC ruled on SFPP's request for rehearing of the August 5,
1997 order, and also indicating that SFPP intended 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 the new rate effective November 6,
1997, subject to refund. On December 24, 1997, FERC denied SFPP's request for
rehearing of the August 5, 1997 decision. On December 31, 1997, SFPP filed an
application for a market power determination which has been designated Docket
No. OR98-11-000 and which, if granted, will enable it to charge market-based
rates for this service. In early March 1998, protests and motions to intervene
in the market power determination were filed by ARCO, Texaco, Tosco Corporation
and a late motion to intervene was filed by GATX Terminals Corporation, which
motions are currently pending.
On October 22, 1997, ARCO, Mobil and Texaco filed a new complaint at the FERC
(Docket No. OR98-1-000) challenging the justness and reasonableness of all of
SFPP's interstate rates. The new complaint again challenges SFPP'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
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Docket Nos. OR92-8-000, et al. The new complaint asserts that the KM Transaction
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and the cost savings anticipated to result from the transaction constitute
"changed circumstances" that provide a basis for terminating the "grandfathered"
status of SFPP's otherwise protected rates. The complaint further seeks to
establish that SFPP'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. On November 21, 1997, Ultramar Diamond Shamrock Corporation filed
a similar complaint at the FERC (Docket No. OR98-2-000) and Chevron, Navajo and
Refinery Holding Company, L.P. filed motions to intervene in Docket No. OR98-1-
000. Both reparations and prospective rate reductions are sought for movements
on all of the lines.
The Partnership filed answers to these complaints on November 21, 1997 and
December 22, 1997, respectively. On January 20, 1998, the FERC issued an order
accepting the complaints and consolidating both complaints into one proceeding,
but holding them in abeyance pending a Commission decision on review of the
Initial Decision in Docket Nos. OR92-8-000 et al. The FERC stated that it would,
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at that time, afford the complainants the opportunity to amend their complaints
in light of any findings of the FERC in Docket Nos. OR92-8-000 et al. The FERC
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also stated that the complainants should identify more specifically the specific
services at issue and the rates and charges upon which they are basing their
claims for relief.
Applicable rules and regulations in this field are vague, relevant factual
issues are complex and there is little precedent available regarding the factors
to be considered or the method of analysis to be employed in making a
determination of "changed circumstances," which is the showing necessary to make
"grandfathered" rates subject to challenge. Partnership and KMEP management
stated in the KM Transaction Proxy Statement that they believe, after
consultation with FERC counsel, that the KM Transaction, standing alone, should
not be found to constitute "changed circumstances;" however, the realization of
the cost savings anticipated to arise from the KM Transaction may increase the
risk of a finding of "changed circumstances." If "changed circumstances" are
found, SFPP rates previously "grandfathered" under EPACT may lose their
"grandfathered" status and, if such rates are found to be unjust and
unreasonable, shippers may be entitled to a prospective rate reduction together
with reparations for periods from the date of the complaint to the date of the
implementation of the new rates.
Although there can be no assurance regarding the ultimate resolution of the FERC
proceedings, Partnership and KMEP management stated in the KM Transaction Proxy
Statement that they believe (in light of numerous factors, including the
existing limited precedent, the Initial Decision of the Administrative Law Judge
in the current proceeding, existing risks of litigation unrelated to the KM
Transaction, and policies of the FERC that favor and encourage cost reductions
by pipelines) that consummation of the KM Transaction and realization of the
anticipated cost savings should not have a material adverse effect on their
current ability to resolve the FERC cases. KMEP further stated that it believes
that the final resolution of the FERC proceedings should not have a material
adverse effect on KMEP's results of operations, financial condition, liquidity
and ability to maintain distribution levels following the closing of the KM
Transaction. No reliable prediction can be made whether settlement agreements
will be completed with some or all of the complainants, the final terms of any
such settlement agreements that may be consummated, or the final outcome of the
FERC proceedings should they be carried through to their conclusion, and it is
possible that current or future proceedings could be resolved in a manner
adverse to KMEP. An adverse resolution could have a material adverse effect on
KMEP.
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EAST LINE CIVIL LITIGATION - The civil actions brought by Navajo and El Paso
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were filed in New Mexico and Texas, respectively, seeking actual, punitive and
consequential damages alleged to have been caused by SFPP's failure to provide
additional pipeline capacity from El Paso to Tucson and Phoenix.
In July 1993, SFPP reached a settlement with Navajo whereby Navajo agreed to
dismiss its civil litigation in New Mexico and SFPP agreed to make certain cash
payments to Navajo over three years and to undertake and complete an additional
pipeline capacity expansion between El Paso and Phoenix if certain events
related to volume levels and proration of pipeline capacity should occur within
five years of the date of the agreement.
El Paso's August 1992 civil action, as amended, claimed unspecified actual
damages, which appeared to include the alleged $190 million cost of its refinery
expansion, plus punitive and consequential damages. In addition, in October
1995, El Paso's general partner, El Paso Refining, Inc. ("EPRI"), filed a Second
Amended Petition seeking unspecified damages arising from alleged unfulfilled
representations of Partnership management with respect to future East Line
capacity, alleging that such representations had been relied upon in negotiating
the terms by which EPRI exchanged its refinery assets for ownership interests in
El Paso in 1989. In October 1992, El Paso filed a petition for reorganization
under Chapter 11 of the federal bankruptcy laws and halted refinery operations
and, in November 1993, the bankruptcy was converted to a Chapter 7 liquidation
proceeding.
On February 25, 1997, SFPP entered into an agreement with the El Paso bankruptcy
trustee, which, subject to the approval of the bankruptcy court, would settle
all claims raised by El Paso and EPRI in exchange for the payment of $16 million
by SFPP in two equal installments. On July 27, 1997, the time for any further
appeals expired, and the settlement became final. Under the terms of the
settlement agreement, SFPP paid $8 million to the El Paso estate in October 1997
and the remaining $8 million is payable by SFPP in June 1998.
SFPP CALIFORNIA PUBLIC UTILITIES COMMISSION PROCEEDING
A complaint was filed with the CPUC 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 SFPP for intrastate
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. On November 26, 1997, SFPP filed
responsive testimony defending the justness and reasonableness of its rates and
rebuttal testimony was filed on December 12, 1997. Hearings and oral arguments
before the Administrative Law Judge were completed on January 15 and March 17,
1998, respectively. A CPUC decision is expected in the third quarter of 1998.
SFPP ENVIRONMENTAL MATTERS
The federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund" law) generally imposes joint and several liability for
cleanup and enforcement costs, without regard to fault or the legality of the
original conduct, on current or predecessor owners and operators of a site.
Since August 1991, SFPP, along with several other respondents, has been involved
in a cleanup project ordered by the United States Environmental Protection
Agency ("EPA") relating to ground water contamination in the vicinity of SFPP's
storage facilities and truck loading terminal at Sparks, Nevada. The EPA
approved the respondents' remediation plan in September 1992 and the remediation
system began operations in September 1995. As of March 6, 1998, SFPP was also
-8-
<PAGE>
involved in 15 ground water hydrocarbon remediation efforts under administrative
orders issued by the California Regional Water Quality Control Board and three
other state agencies.
In January 1996, the Partnership and the General Partner initiated two legal
actions against a total of 34 past and present insurance carriers (SFPP, L.P.,
Santa Fe Pacific Pipeline Partners, L.P. and Santa Fe Pacific Pipelines, Inc.
vs. Agricultural Insurance Company, et al. and SFPP, L.P., Santa Fe Pacific
------
Pipeline Partners, L.P. and Santa Fe Pacific Pipelines, Inc. vs. Associated
International Insurance Company, et al., Superior Court of the State of
------
California for the County of San Mateo, Docket Nos. 395109 and 395121,
respectively). These actions seek a judicial determination that the insurance
policies issued by the defendant insurers provide coverage to SFPP and the
General Partner for certain costs, liabilities and settlements relating to
approximately 30 environmental sites, including Sparks, Nevada. The defendant
insurers have filed initial responsive pleadings in these actions, and discovery
is in progress.
PARTNERSHIP UNITHOLDER LAWSUITS
Four purported unitholder class actions have been filed arising out of the KM
Transaction. On October 23, 1997, shortly after the announcement of the KM
Transaction, a purported SFP Common Unit holder 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 SFP Common Unit holder 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 SFP Common Unit holder
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 foregoing causes of action are referred to as the
"Unitholder Suits."
The actions name as defendants SFPP, the General Partner, and the individual
members of the General Partner's Board of Directors. In addition, Vogel and
Ruderman name KMEP as a defendant and Beck and Hocheiser name Holdings as a
defendant. In general, the actions variously allege that the individual
defendants suffered from a conflict of interest in the negotiation of the KM
Transaction, that despite this conflict they did not appoint or retain
independent representation for the SFP Common Unit holders, 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 SFP Common Unit holders and that the defendants failed to fully inform
themselves about the value of the SFP Common Units (including allegedly failing
to obtain valid appraisals of the value of the General Partner's interests in
SFPP, failing to conduct an auction process or active market check, and failing
to examine the fairness of the KM Transaction). Beck, Hocheiser and Vogel allege
that the terms of the KM Transaction are intrinsically unfair and inadequate
from the SFP Common Unit holders' 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 SFP Common Units to be capped, depriving plaintiffs of the opportunity to
realize an increase in the value of the SFP Common 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 SFP Common Unit holders to approve the KM Transaction based on
incomplete or inadequate information. The three actions filed in Delaware have
been consolidated into one action.
-9-
<PAGE>
The actions seek certification of a class action on behalf of the SFP Common
Unit holders. The actions seek preliminary and permanent injunctions of the KM
Transaction, rescission of the KM Transaction if it is consummated, an award of
rescissory damages and other damages including attorneys' fees, an accounting by
defendants of any special benefits obtained from the KM 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 have
opposed them vigorously. On February 23, 1998, the parties entered into a
Memorandum of Understanding (the "MOU") contemplating a settlement of these
lawsuits. Under the terms of the MOU, defendants agreed, among other things, to
distribute to holders of record of SFP Common Units and KMEP Common Units
preliminary, unaudited fourth quarter and full year 1997 financial results, and
a statement that the Special Committee (defined below) had reviewed and
considered those preliminary results in rendering its February 4, 1998 fairness
opinion concerning the KM Transaction. The Special Committee was a committee of
directors deemed by the General Partner's Board of Directors to be independent
of the interests of the General Partner in the KM Transaction. In the MOU, the
defendants also agreed not to oppose an award of attorneys' fees up to $325,000
and plaintiffs' expenses up to $25,000. Pursuant to the MOU, a stipulation of
settlement is to be negotiated, executed and filed with the California court
within 60 days of the signing of the MOU. Upon final judgement in California,
the parties have agreed in the MOU to seek dismissal with prejudice of the
Delaware action on res judicata grounds.
OTHER
SFPP and Southern Pacific Transportation Company ("SPTC") have been engaged in a
judicial reference proceeding to determine the extent, if any, to which the rent
payable by SFPP for the use of pipeline easements on rights-of-way held by SPTC
should be adjusted pursuant to existing contractual arrangements (Southern
Pacific Transportation Company vs. Santa Fe Pacific Corporation, SFP Properties,
Inc., Santa Fe Pacific Pipelines, Inc., SFPP, L.P., et al., Superior Court of
-- ---
the State of California for the County of San Francisco, filed August 31, 1994).
Under an agreement entered into among the parties in 1994, the amount of annual
rent for such easements for the first year of the ten-year period that began
January 1, 1994 is to be based on the fair market value of the easements, with
the rent for subsequent years to be subject to annual inflation adjustments.
This matter was tried in the latter part of 1996 and the court issued its
Statement of Tentative Decision in January 1997. The Statement of Tentative
Decision indicated that the court intended to establish a new base annual rental
for the subject rights-of-way at a level, subject to inflation adjustments, that
is adequately provided for by the amounts that had been accrued by SFPP. On May
7, 1997, the judge issued a Statement of Decision and Judgment that reaffirmed
the conclusions set forth in his January 1997 Statement of Tentative Decision.
Motions of appeal were filed by SPTC and SFPP in July and August, 1997,
respectively, and such appeals remain pending as of the date hereof.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
All 1,000 shares of Holdings' authorized and outstanding $0.01 par value common
stock are owned by The Burlington Northern and Santa Fe Railway Company
("Railway"). On January 2, 1998, Santa Fe merged with and into Railway. The
Company declared and paid cash dividends to Santa Fe aggregating $2,000,000 and
$7,000,000 in 1997 and 1996, respectively. No dividends were paid in 1995.
-10-
<PAGE>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS.
Holders of the Company's outstanding Debentures will be able to exchange those
Debentures for KMEP Common Units pursuant to the Exchange Offer described in
Item 1 hereof. The following narrative analysis should be read in conjunction
with the financial information included in KMEP's 1997 Form 10-K. In addition,
as one of the Company's principal assets is its notes receivable from BNSF, this
narrative analysis should also be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations of
BNSF, filed as Exhibit 99.2 to this Form 10-K.
The Company's equity in income of the Partnership for the year ended December
31, 1997 of $33.2 million was $8.2 million, or approximately 33%, higher than in
1996 primarily due to higher environmental and litigation costs recorded by the
Partnership in 1996. The Partnership's results of operations include provisions
for litigation costs aggregating $8.0 million and KM Transaction costs of $2.3
million in 1997. Provisions for environmental and litigation costs aggregated
$23.0 million in 1996. Excluding these provisions, the Company's adjusted equity
in income of the Partnership would have been $38.0 million in 1997, compared to
the adjusted equity income balance of $35.6 million in 1996. Full year
Partnership revenues of $244.4 million were $4.3 million, or approximately 2%,
higher than in 1996, with trunk revenues being approximately 2% higher due,
primarily, to growth in total volumes transported. Other Partnership revenues
increased $1.5 million due to the higher volumes delivered.
Partnership operating expenses in 1997 of $138.1 million were $13.9 million
lower than in 1996. Excluding the provisions described above, 1997 operating
expenses would have been $1.1 million, or about 1%, higher than in 1996, with
higher field operating expenses ($7.5 million) and depreciation and amortization
($0.3 million), being partially offset by lower facilities costs ($2.6 million),
general and administrative expenses ($3.8 million) and power costs ($0.4
million). The Partnership's other income, net increased by $1.3 million compared
to 1996, primarily due to higher interest income, which was attributable to
higher cash balances.
Interest income is earned on the Company's notes receivable from BNSF, with the
interest rates being tied to the Federal Funds rate. Through the year ended
December 31, 1997, interest expense was accrued based on the quarterly
distribution paid on the 8,148,130 SFP Common Units for which the Debentures
were, under certain specified conditions, exchangeable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements, together with the report
thereon of Price Waterhouse LLP dated January 30, 1998, appear on pages F-1
through F-15 of this Report.
The consolidated financial statements of BNSF, together with the report thereon
of Price Waterhouse LLP dated February 6, 1998, are filed as Exhibit 99.1 to
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-11-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
(1) Financial Statements of SFP Pipeline Holdings, Inc.:
Report of Independent Accountants......................................................... F-1
Consolidated Balance Sheet as of December 31, 1997 and 1996............................... F-2
Consolidated Statement of Operations for the three years ended December 31, 1997.......... F-3
Consolidated Statement of Cash Flows for the three years ended December 31, 1997.......... F-4
Notes to Consolidated Financial Statements................................................ F-5
Financial Statements of Burlington Northern Santa Fe Corporation (a):
Report of Independent Accountants......................................................... 21
Consolidated Statement of Income for the three years ended December 31, 1997.............. 22
Consolidated Balance Sheet as of December 31, 1997 and 1996............................... 23
Consolidated Statement of Cash Flows for the three years ended December 31, 1997.......... 24
Consolidated Statement of Changes in Stockholders' Equity
for the three years ended December 31, 1997............................................. 25
Notes to Consolidated Financial Statements................................................ 26
</TABLE>
(a) Incorporated by reference from the indicated pages of BNSF's 1997
Annual Report to Stockholders and filed as Exhibit 99.1 to this Report.
(2) Financial Statement Schedules: None
(3) Exhibits: The following exhibits are filed as a part of this Report:
Exhibit
Number Description
- -------- ---------------------------------------------------------------------
2.1 Purchase Agreement dated October 18, 1997 by and among Kinder Morgan
Energy Partners, L.P. and Kinder Morgan G.P., Inc. and Santa Fe
Pacific Pipeline Partners, L.P., Santa Fe Pacific Pipelines, Inc. and
SFP Pipeline Holdings, Inc. Incorporated by reference to Exhibit 2.1
to the Partnership's Report on Form 8-K dated October 18, 1997 (date
of earliest event reported) and filed on October 29, 1997.
3.1 Certificate of Incorporation of the Registrant, dated as of June 26,
1990. Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-35638) filed
on June 29, 1990 ("Registrant's Form S-1").
3.2 By-Laws of the Registrant. Incorporated by reference to Exhibit 3.2
to Registrant's Form S-1.
4.1 Indenture dated September 13, 1990, between the Registrant and
Security Pacific National Bank, National Association, as Trustee,
relating to the Variable Rate Exchangeable Debentures Due 2010 (the
"Debentures"). Incorporated by reference to Exhibit 4.1 to the
Registrant's 1990 Form 10-K.
4.2 First Supplemental Indenture dated March 6, 1998, between the
Registrant and First Trust of California, National Association
(successor Trustee to Bank of America, N.T. & S.A., successor by
merger to Security Pacific National Bank), Trustee, relating to the
Debentures.
-12-
<PAGE>
Exhibit
Number Description
- --------- ---------------------------------------------------------------------
4.3 Amended and Restated Agreement of Limited Partnership of Santa Fe
Pacific Pipeline Partners, L.P., dated as of December 19, 1988, as
amended by Amendment No. 1 thereto, dated as of December 7, 1989.
Incorporated by reference to Exhibit 4.2 to Registrant's Form S-1.
4.4 First Mortgage Note Agreement, dated December 8, 1988 (a conformed
composite of 54 separate note agreements, identical except for
signatures), executed by the Operating Partnership, relating to $355
million aggregate principal amount of First Mortgage Notes.
Incorporated by reference to Exhibit 4.3 to Registrant's Form S-1.
10.1 Santa Fe's Supplemental Retirement Plan. Incorporated by reference to
Exhibit 10(d) to Santa Fe's 1984 Form 10-K. The Plan, as amended as
of October 1, 1989, and a Plan amendment dated February 27, 1990 are
incorporated by reference to Exhibit 10(d) to Santa Fe's 1989 Form
10-K.**
10.2 Santa Fe's Incentive Stock Compensation Plan. Incorporated by
reference to Exhibit 10(e) to Santa Fe's 1985 Form 10-K. Plan
amendments dated May 28, 1987 and October 29, 1987 are incorporated
by reference to Exhibit 10(e) to Santa Fe's 1987 Form 10-K.
Amendments dated March 8, 1989, June 8, 1989 and February 27, 1990
are incorporated by reference to Exhibit 10(e) to Santa Fe's 1989
Form 10-K. A Plan amendment dated July 24, 1990 is incorporated by
reference to Santa Fe's June 30, 1990 Form 10-Q. A Plan amendment
dated December 4, 1990 is incorporated by reference to Santa Fe's
1990 Form 10-K.**
10.3 Trust Agreement, dated July 6, 1987, between Santa Fe and Harris
Trust and Savings Bank as Trustee, as amended on October 28, 1987 and
November 2, 1987. Incorporated by reference to Exhibit 10(k) of Santa
Fe's 1987 Form 10-K. Amendment to Trust Agreement, dated September 1,
1988, is incorporated by reference to Exhibit 10(i) to Santa Fe's
1988 Form 10-K.**
10.4 The Santa Fe Pacific Pipelines, Inc. Incentive Compensation Plan is
incorporated by reference to Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1. A Plan amendment dated January
12, 1994 is incorporated by reference to Exhibit 10.5 to the
Registrant's 1993 Form 10-K.**
10.5 The MLP Incentive Plan is incorporated by reference to Exhibit 10.9
to Registrant's Form S-1.**
10.6 The MLP Phantom Unit Incentive Plan is incorporated by reference to
Exhibit 10 to the Registrant's June 30, 1993 Form 10-Q.**
10.7 Form of Employment Agreement, effective June 1, 1990, between Santa
Fe Pacific Pipelines, Inc. and I. Toole, Jr., J. M. Abboud, B. R.
Pearl, R. G. Cunningham and L. B. Boarts, and, effective December 1,
1991, between Santa Fe Pacific Pipelines, Inc. and R. L. Edwards.
Incorporated by reference to Exhibit 10.16 to Amendment No. 1 to
Registrant's Form S-1.**
-13-
<PAGE>
Exhibit
Number Description
- --------- ---------------------------------------------------------------------
10.8 Agreement for the Allocation of the Consolidated Federal Income Tax
Liability Among the Members of the Santa Fe Southern Pacific
Corporation Affiliated Group, effective January 1, 1987. Incorporated
by reference to Exhibit 10.12 to Registrant's Form S-1.
10.9 Form of Promissory Note issued by Santa Fe to the Company in exchange
for one-half of the net proceeds from the sale of the Debentures.
Incorporated by reference to Exhibit 21 to Registrant's Form S-1.
27* Financial Data Schedule as of and for the year ended December 31,
1997.
99.1* BNSF's consolidated financial statements as of December 31, 1997 and
1996 and for the three years in the period ended December 31, 1997,
together with the report thereon of Price Waterhouse LLP dated
February 6, 1998.
99.2* BNSF's 1997 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
* Filed herewith.
** Management contract or compensatory plan or arrangement.
Note: Santa Fe was identified as Commission File No. 1-8627.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997: None.
-14-
<PAGE>
SIGNATURE
SFP Pipeline Holdings, Inc., pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SFP PIPELINE HOLDINGS, INC.
Dated: April 2, 1998 By: /s/ THOMAS N. HUND
---------------------------------
Thomas N. Hund
Vice President and Controller
-15-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of SFP Pipeline Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of SFP Pipeline Holdings, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As explained in Note 8, on March 6, 1998, the unitholders of both Santa Fe
Pacific Pipeline Partners, L.P. and Kinder Morgan Energy Partners, L.P. approved
the terms of the Purchase Agreement referred to in Note 1 and the transactions
described therein were completed later that day.
/s/ PRICE WATERHOUSE LLP
Los Angeles, California
January 30, 1998, except as to Note 9, which is as of March 6, 1998
F-1
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
A S S E T S
Current assets
Cash and cash equivalents ................................................................... $ 9,073 $ 3,061
Interest receivable ......................................................................... 1,126 1,047
Other current assets ........................................................................ 2,093 295
--------- ---------
Total current assets .................................................................... 12,292 4,403
Investment in Santa Fe Pacific Pipeline Partners, L.P. ........................................... 64,775 59,984
Notes receivable from Burlington Northern Santa Fe Corporation ................................... 130,000 130,000
Debt issuance costs, net ......................................................................... 6,114 6,597
Other assets ..................................................................................... 2,961 2,701
--------- ---------
Total assets ............................................................................ $ 216,142 $ 203,685
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Interest payable ............................................................................ $ 6,111 $ 6,111
Income taxes currently payable ............................................................. 1,253 848
Other current liabilities .................................................................. 7,889 4,981
--------- ---------
Total current liabilities ............................................................... 15,253 11,940
Long-term debt, net of unamortized discount ...................................................... 204,756 204,173
Deferred income taxes ............................................................................ 59,082 58,042
Other liabilities ................................................................................ 2,090 1,960
--------- ---------
Total liabilities ....................................................................... 281,181 276,115
--------- ---------
Commitments and contingencies (Note 5) ........................................................... -- --
--------- ---------
Stockholder's deficit
Common stock ................................................................................ 1 1
Additional paid-in capital .................................................................. (33,388) (33,388)
Accumulated deficit ......................................................................... (31,652) (39,043)
--------- ---------
Total stockholder's deficit ............................................................. (65,039) (72,430)
--------- ---------
Total liabilities and stockholder's deficit ............................................. $ 216,142 $ 203,685
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Equity in income of
Santa Fe Pacific Pipeline Partners, L.P.................................... $ 33,198 $ 24,989 $ 19,296
General and administrative expenses
and other, net of reimbursements............................................ 628 477 784
----------- ----------- ----------
Operating income................................................................. 32,570 24,512 18,512
Interest income.................................................................. 8,896 8,835 9,512
Interest expense................................................................. 25,515 25,465 25,434
----------- ----------- ----------
Income before income taxes....................................................... 15,951 7,882 2,590
Income taxes..................................................................... 6,560 3,439 1,069
----------- ----------- ----------
Net income....................................................................... 9,391 4,443 1,521
Accumulated deficit
Beginning of year.......................................................... (39,043) (36,486) (38,007)
Cash dividends............................................................. (2,000) (7,000) --
----------- ----------- ----------
End of year................................................................ $(31,652) $(39,043) $(36,486)
=========== =========== ==========
Administrative expenses reimbursed by
Santa Fe Pacific Pipeline Partners, L.P
and not reflected above (Note 6).............................................. $ 51,385 $ 50,425 $ 45,845
=========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 9,391 $ 4,443 $ 1,521
--------- --------- ---------
Adjustments to reconcile net income to net
cash provided (used) by operating activities--
Equity in undistributed earnings of
Santa Fe Pacific Pipeline Partners, L.P.................................. (4,791) 3,418 8,293
Deferred income taxes........................................................ 1,040 (5,873) (4,568)
Changes in:
Current assets............................................................. (1,877) 256 (389)
Current liabilities........................................................ 3,313 (914) 2,390
Other assets and other liabilities........................................ (130) (177) (473)
--------- --------- ---------
Total adjustments....................................................... (2,445) (3,290) 5,253
--------- --------- ---------
Net cash provided by operating activities............................... 6,946 1,153 6,774
--------- --------- ---------
Cash flows from investing activities............................................. -- -- --
Cash flows from financing activities:
Cash dividends.................................................................. (2,000) (7,000) --
Amortization of debt costs and discount.................................... 1,066 1,018 973
--------- --------- ---------
Net cash provided (used) by financing activities........................ (934) (5,982) 973
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............................. 6,012 (4,829) 7,747
Cash and cash equivalents--
Beginning of year............................................................... 3,061 7,890 143
--------- --------- ---------
End of year..................................................................... $ 9,073 $ 3,061 $ 7,890
========= ========= =========
Income taxes paid.................................................................. $ 5,115 $ 8,945 $ 5,175
========= ========= =========
Interest paid...................................................................... $ 24,445 $ 24,445 $ 24,050
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
SFP PIPELINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - 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"). At December 31, 1997, Holdings was a wholly owned subsidiary of
Santa Fe Pacific Corporation ("Santa Fe"). Through a business combination in
September 1995, Santa Fe became a wholly owned subsidiary of Burlington Northern
Santa Fe Corporation ("BNSF"), and on January 2, 1998, merged with and into The
Burlington Northern and Santa Fe Railway Company.
Holdings was incorporated in June 1990 by a $1,000 capital contribution from
Santa Fe and commenced operations in September 1990, at which time Santa Fe
contributed 100% of the outstanding capital stock of SFPPI to Holdings and, as
discussed in Note 4, Holdings issued debentures (the "Debentures") in a
principal amount of $219 million. Santa Fe Pacific Pipelines, Inc. ("SFPPI" or
the "General Partner") serves as the general partner of Santa Fe Pacific
Pipeline Partners, L.P. (the "Partnership"), a publicly traded Delaware limited
partnership formed in December 1988 to acquire and operate the refined petroleum
products pipeline business of Santa Fe. Such business was previously owned by
Southern Pacific Pipe Lines, Inc. and San Diego Pipeline Company, two indirect
wholly owned subsidiaries of Santa Fe (the "Predecessor Companies").
PENDING PARTNERSHIP TRANSACTION AND EXCHANGE EVENT - In October 1997, Holdings,
the General Partner and the 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 Partnership's limited partner interest in its
operating partnership subsidiary, SFPP, L.P.. Upon completion of the
transactions provided for in the Purchase Agreement (collectively, the "KM
Transaction"), the Partnership would liquidate and the Partnership's unitholders
would receive 1.39 common units of limited partner interests in KMEP ("KMEP
Common Units") in respect of each of the Partnership's 19,148,148 common units.
In addition, Kinder Morgan would pay the General Partner $84.4 million for its
general partner interest in the 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 KM 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 KMEP, receipt of certain third party consents and approval
by certain regulatory agencies. Management anticipates closing the KM
Transaction in the first quarter of 1998.
Under the terms of the Debentures, the completion of the KM 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 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.
Pursuant to the Purchase Agreement, the parties agreed that, upon closing of the
KM Transaction, each $1,000 principal amount of Debentures would become
exchangeable for 51.720927 KMEP Common Units (which is equal to the Debentures
existing conversion ratio of 37.2093 Partnership common units
F-5
<PAGE>
per $1,000 principal amount of Debentures, multiplied by the 1.39 ratio at which
KMEP Common Units would be exchangeable for outstanding Partnership common units
in the KM Transaction).
USE OF ESTIMATES - The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. Actual results could differ from those estimates.
REVENUE RECOGNITION - The Company has recorded its 2% general partner interest
and approximate 41.7% limited partner interest, represented by its ownership of
8,148,148 Partnership common units, in the Partnership under the equity method
of accounting. Interest income is recognized as earned.
CASH EQUIVALENT - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
RECLASSIFICATIONS - Certain comparative prior year amounts have been
reclassified to conform with the current year presentation.
NOTE 2: INVESTMENT IN SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
The following table sets forth selected financial data for the Partnership, in
which SFPPI holds an approximate 44% interest (in thousands, except per unit
data):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Total operating revenues............................... $244,415 $240,142 $233,677
Operating expenses, excluding provisions............... 130,105 129,021 123,696
Provisions for environmental and litigation costs...... 8,000 23,000 34,000
Operating income....................................... 106,310 88,121 75,981
Interest expense....................................... 35,922 36,518 37,247
Net income............................................. $ 69,447 $ 52,275 $ 40,367
PER UNIT DATA
Basic income per unit.................................. $ 3.51 $ 2.64 $ 2.04
Cash distributions declared per unit................... 3.00 3.00 3.00
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA
Total current assets................................... $ 78,054 $ 77,909
Net properties, plant and equipment.................... 629,365 628,694
Total assets........................................... 726,722 725,818
Total current liabilities.............................. 38,675 35,545
Long-term debt......................................... 355,000 355,000
Total partners' capital................................ 272,937 262,915
Common units outstanding................................. 19,148 19,148
Closing unit price (New York Stock Exchange)............. $ 45.75 $ 38.00
</TABLE>
F-6
<PAGE>
CASH DISTRIBUTIONS - The Partnership makes quarterly cash distributions of
substantially all of its available cash, generally defined as consolidated cash
receipts less consolidated cash expenditures and such retentions for working
capital, anticipated capital expenditures and contingencies as the General
Partner deems appropriate or as are required by the terms of the Partnership's
long-term debt. Distributions are made 98% to the limited partners (the
"unitholders") and 2% to the General Partner, subject to the payment of
incentive distributions to the General Partner which increase as quarterly
distributions to unitholders exceed certain specified target levels. The
incremental incentive distributions payable to the General Partner are 8%, 18%
and 28% of all quarterly distributions of available cash that exceed,
respectively, $0.60, $0.65 and $0.70 per unit.
As the general partner and a limited partner in the Partnership, SFPPI received
distributions aggregating $28,407,000, $28,407,000 and $27,589,000, including
incentive distributions of $2,734,000, $2,734,000 and $2,351,000, in 1997, 1996
and 1995, respectively. In January 1998, the Partnership declared fourth quarter
1997 distributions on SFPPI's general and limited partner interests aggregating
$7,102,000, payable in February 1998. SFPPI's cumulative equity in undistributed
earnings of the Partnership was $18,872,000 as of December 31, 1997.
OTHER - SFPPI's recorded investment in the Partnership exceeds the sum of the
capital attributed to its interests in the Partnership's financial statements by
approximately $6.7 million at December 31, 1997 primarily due to the gain
recognized by SFPPI on the sale of the underwriters' over-allotment of
preference units in 1989.
Prior to the formation of the Partnership in December 1988, the balance of
additional paid-in capital of SFPPI was approximately $286.6 million. As a
result of the assumption by SFPPI, prior to the formation of the Partnership, of
$350.0 million of indebtedness of Santa Fe associated with the Predecessor
Companies' pipeline business and the contribution by Santa Fe to SFPPI's capital
of a $25.0 million promissory note (see Note 3), SFPPI's additional paid-in
capital was reduced to a deficit balance of $38.4 million as of December 31,
1988. Due to the change in the Company's consolidated capital structure upon
Holdings' 1990 acquisition of SFPPI's capital stock, which had been carried at
$5.0 million, the deficit balance of additional paid-in capital was subsequently
reduced to $33.4 million as of December 31, 1990.
NOTE 3: NOTES RECEIVABLE FROM BURLINGTON NORTHERN SANTA FE CORPORATION
The notes receivable from BNSF consist of a $105 million note issued by Santa Fe
in September 1990 in exchange for a portion of the proceeds of the Company's
debenture offering (see Note 4) and a $25 million note originally issued by
Santa Fe in December 1988. The $105 million note is an unsecured promissory note
that will mature and be due and payable in full in August 2010, upon the
maturity of the Debentures, and is payable at any time prior to August 2010 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 the Company to meet its obligations under the Debentures.
In June 1990, the $25 million note was exchanged for a substitute promissory
note from Santa Fe, also in the principal amount of $25 million, with a maturity
and other terms similar to those of the $105 million note. In January 1997, BNSF
assumed the obligations associated with the Company's $130 million of notes
receivable from Santa Fe. Such promissory notes bear interest at a floating
rate, payable quarterly in arrears, equal to one percent above the monthly
average effective Federal Funds rate (6.49% in December 1997).
F-7
<PAGE>
The September 22, 1995 merger of Santa Fe and Burlington Northern Inc. to create
BNSF (the "Merger") was accounted for as a purchase and Santa Fe's assets and
liabilities were adjusted to their fair value based on the purchase price;
purchase accounting adjustments associated with the Company's assets and
liabilities were recorded in Santa Fe's books and records and were not reflected
in (or "pushed down to") the accompanying consolidated financial statements of
the Company. Financial information for BNSF includes Santa Fe's results of
operations subsequent to the Merger; data for periods prior to the Merger
reflects only the operations of Burlington Northern Inc. The following table
sets forth selected financial data for BNSF (in millions, except per share
data):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Total operating revenues............................... $8,413 $8,141 $6,163
Total operating expenses............................... 6,646 6,393 5,637
Operating income....................................... 1,767 1,748 526
Interest expense....................................... 344 301 220
Income before income taxes............................. 1,404 1,440 334
Income before extraordinary charge and
cumulative effect of change in accounting............. 885 889 198
Net income............................................. $ 885 $ 889 $ 92
DILUTED EARNINGS PER COMMON SHARE
Income before extraordinary charge and
cumulative effect of change in accounting............. $ 5.64 $ 5.74 $ 1.67
Net income............................................. 5.64 5.74 0.67
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA
Total current assets................................... $ 1,234 $ 1,248
Net properties, plant and equipment.................... 19,211 17,633
Total assets........................................... 21,336 19,763
Total current liabilities.............................. 2,060 2,228
Long-term debt and commercial paper.................... 5,181 4,546
Deferred income taxes.................................. 5,175 4,729
Other long-term liabilities............................ 2,108 2,279
Total liabilities...................................... 14,524 13,782
Total stockholders' equity............................. 6,812 5,981
</TABLE>
BNSF's consolidated financial statements as of December 31, 1997 and 1996 and
for the three years in the period ended December 31, 1997, as well as
management's discussion and analysis of financial condition and results of
operations, are filed as exhibits to this Form 10-K (see Index to Exhibits
beginning at page 12 of this Report).
F-8
<PAGE>
NOTE 4: LONG-TERM DEBT
In September 1990, Holdings issued $218,981,000 aggregate principal amount of
Variable Rate Exchangeable Debentures Due 2010 (the "Debentures"). The Company
advanced $105 million of the proceeds of the September 1990 offering to Santa Fe
in exchange for an unsecured promissory note, with a maturity and terms as
described in Note 3, and used essentially all of the remaining net proceeds of
the debenture offering to pay an $86.5 million dividend to Santa Fe.
The Debentures bear interest at a variable rate, payable quarterly in arrears.
The Debentures are exchangeable under certain circumstances at the option of the
holders upon the first to occur of certain specified events or final maturity
for an aggregate of 8,148,130 Partnership common units presently owned by the
Company. Each $1,000 original principal amount of the Debentures is subject to
exchange for 37.2093 common units, subject to adjustment and the Company's right
to pay cash on the date of exchange in an amount equal to the market price of
the Debentures. As discussed in Note 1, the closing of the pending KM
Transaction would constitute an Exchange Event and, if completed, each $1,000
principal amount of Debentures would be exchangeable for 51.720927 KMEP Common
Units rather than Partnership common units.
The interest payable with respect to a debenture for a particular quarter is
equal to the greater of (i) the cash distributions declared by the Partnership
for that quarter on that number of common units for which such debenture would
then be exchangeable and (ii) 2% of the weighted average principal balance of
such debenture outstanding during that quarter (i.e., a minimum of 8% per year),
provided that in no event shall the amount of interest payable by the Company on
a debenture for any quarter exceed the amount that would, when added to the sum
of all prior interest payments made since the Debentures were issued, result in
the payment of interest at an average annual rate of 16% since the Debentures
were issued. Because the Debentures were issued with an original issue discount
equivalent to 8% of the principal amount, the minimum effective interest rate of
the Debentures will approximate 8.85% through maturity, based on the 8% per
annum minimum interest rate.
The original issue discount is being amortized on an effective interest basis
over the 20-year estimated period the Debentures will be outstanding. During
1997, 1996 and 1995, interest expense included $585,000, $535,000 and $490,000,
respectively, of amortization of the original issue discount; the balance of the
discount at December 31, 1997 was approximately $14,225,000. Debt issuance costs
are being amortized on a straight-line basis over 20 years; during each of the
years 1997, 1996 and 1995, interest expense included approximately $485,000 of
amortization of debt issuance costs.
In January 1998, the Partnership declared a cash distribution of $0.75 per
common unit for the fourth quarter of 1997; accordingly, the Company accrued
interest expense of $6,111,000 (equivalent to the distributions on the 8,148,130
units for which the Debentures would be exchangeable) as of December 31, 1997.
The Debentures are general unsecured obligations of the Company. The indenture
restricts the Company from incurring any other additional indebtedness other
than up to $5.0 million relating to temporary borrowings from Santa Fe or its
affiliates. In addition, the Company has agreed that it will not engage in any
other business activities other than as a partner of the Partnership.
The fair value of the Debentures is estimated, based on bid and asked
quotations, to be approximately $280 million at December 31, 1997.
F-9
<PAGE>
NOTE 5: CONTINGENT LIABILITIES
As general partner of the Partnership, SFPPI is contingently liable for the
Partnership's $355 million in long-term debt and any other Partnership
obligations in the event of default by the Partnership.
PARTNERSHIP'S EAST LINE CIVIL LITIGATION AND FERC PROCEEDINGS - Beginning in
1992, certain of the Partnership's shippers have filed civil suits and initiated
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 original FERC proceedings involve claims, among other things, that
certain of the Partnership's rates and charges on its East and West Lines are
excessive, however, in October 1997, certain shippers filed a new complaint at
FERC challenging all of the Partnership's interstate rates. The complainants
have filed testimony in the original FERC proceeding seeking reparations for
East and West Line 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. If the complainants were to prevail on all of their claims, it
is estimated that reparations resulting from such rate reductions for shipments
in 1995, 1996 and 1997 would aggregate approximately $80 million, resulting in
total reparations for the period 1990 to 1997 of approximately $115 million,
plus interest of approximately $30 million. Also in October 1997, complainants
in a separate rate proceeding before the California Public Utilities Commission
("CPUC") filed testimony seeking prospective intrastate rate reductions
aggregating approximately $15 million per year.
On September 25, 1997, the presiding Administrative Law Judge ("ALJ") in the
original 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 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, Partnership management estimates that the total
reparations and interest that would be payable as of December 31, 1997 would
approximate the $30 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. During the quarter ended December 31, 1997, the Partnership
recorded a $2 million provision for litigation costs to reflect the revenue
recorded during that quarter that would be subject to refund under the Initial
Decision rate methodology.
During 1996, the Partnership pursued settlement efforts to resolve the claims
raised in the FERC proceedings. Accordingly, during the quarter ended September
30, 1996, the Partnership recorded an $8 million provision for litigation costs
to increase its existing reserves to reflect the total amount that would have
been payable under the settlement offers that had been extended as of that date,
and, during the quarter ended December 31, 1996, recorded an additional $15
million provision to increase its reserves to reflect management's then current
estimate of the ultimate costs of resolution of the FERC proceedings.
Previously, during the quarter ended December 31, 1995, the Partnership recorded
a $10 million provision to increase its existing reserves relating to the FERC
proceedings, the El Paso action and certain other matters.
F-10
<PAGE>
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. Partnership 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, nor can management predict with certainty the outcome of the complaint
proceedings filed at FERC in October 1997 challenging all of the Partnership's
interstate rates. 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, the Partnership paid $8
million to the El Paso estate in October 1997 and the remaining $8 million is
payable in June 1998.
PARTNERSHIP ENVIRONMENTAL MATTERS - 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.
In particular, the federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA" or "Superfund" law) generally imposes joint and
several liability for cleanup and enforcement costs, without regard to fault or
the legality of the original conduct, on current or predecessor owners and
operators of a site.
Along with several other respondents, the Partnership is presently involved in a
cleanup ordered by the United States Environmental Protection Agency related to
soil and groundwater contamination in the vicinity of the Partnership's storage
facilities and truck loading terminal at Sparks, Nevada. In addition, the
Partnership is presently involved in 15 groundwater hydrocarbon remediation
efforts under administrative orders issued by the California Regional Water
Quality Control Board and three other state agencies and, from time to time, may
be involved in groundwater investigations or remediations at the direction of
other governmental agencies. The Partnership is also involved in soil and
groundwater remediation projects, at and adjacent to various other terminal and
pipeline locations, that have not been mandated by government agencies but are
conducted in the ordinary course of business. In a number of remediation
projects, the Partnership is participating with other entities ranging from
large integrated petroleum companies to certain less financially sound parties.
The Partnership accrues for environmental costs that relate to existing
conditions caused by past operations. Environmental costs include initial site
surveys and environmental studies of potentially contaminated sites, costs for
remediation and restoration of sites determined to be contaminated and ongoing
monitoring costs, as well as fines, damages and other costs, when estimable. The
Partnership's
F-11
<PAGE>
environmental reserves are monitored on a regular basis by management.
Liabilities for environmental costs at a specific site are initially recorded
when the Partnership's liability for such costs is probable and a reasonable
estimate of the associated costs can be made. Adjustments to initial estimates
are recorded, from time to time, to reflect changing circumstances and estimates
based upon additional information developed in subsequent periods. 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.
During 1995 and 1996, the Partnership, as a member of a defendant group, settled
all of the claims for penalties and damages that had been asserted by several
governmental agencies and property owners in lawsuits associated with the soil
and groundwater contamination present in the vicinity of the Sparks, Nevada
environmental site. The Partnership recorded provisions for environmental costs
aggregating $24 million during 1995 largely to reflect its share of all of these
settlement costs.
The Partnership's balance sheet at December 31, 1997 and 1996 includes reserves
for environmental costs aggregating $15.9 million and $25.1 million,
respectively, which reflect the estimated cost of completing all remediation
projects presently known to be required, either by government mandate or in the
ordinary course of business, and the cost of performing preliminary
environmental investigations at several locations, as well as environmental
damage claims, primarily associated with the Sparks environmental site.
Approximately $16.2 million in environmental costs were paid and charged against
these reserves during 1997. With respect to the costs accrued at December 31,
1997, the Partnership estimates that approximately $6.5 million, $3 million and
$2 million will be paid in 1998, 1999 and 2000, respectively, approximately $1
million will be paid per year over the following two years, and less than $1
million will be paid per year over the subsequent five years.
Based on the information presently available, it is the opinion of Partnership
management that the Partnership's environmental costs, to the extent they exceed
recorded liabilities, will not have a material adverse effect on the
Partnership's financial condition, liquidity or ability to maintain its
quarterly cash distribution at the current level; nevertheless, it is possible
that the Partnership's results of operations in particular quarterly or annual
periods could be materially affected as additional information becomes
available.
OTHER CLAIMS AND LITIGATION - The Company and the Partnership are also parties
to a number of other legal actions arising in the ordinary course of business.
While the final outcome of these other matters cannot be predicted with
certainty, it is the opinion of management that none of these other legal
actions, either individually or in the aggregate, when finally resolved, will
have a material adverse effect on the annual results of operations, financial
condition or liquidity of the Company or the Partnership, or on the
Partnership's ability to maintain its quarterly cash distribution at the current
level.
LEASE COMMITMENTS - The Partnership and the General Partner lease space in
office buildings and certain computer equipment. Total lease commitments not
subject to cancellation at December 31, 1997 are as follows: $1,125,000 in 1998,
$1,235,000 in 1999, $1,230,000 in 2000, $1,360,000 in 2001, $1,555,000 in 2002
and $14,675,000 thereafter. The Partnership also leases certain rights-of-way
and land under agreements that can be canceled at any time should they not be
required for operations.
F-12
<PAGE>
Rental expense recorded for all operating leases was $8,300,000 in 1997,
$8,975,000 in 1996 and $8,850,000 in 1995.
NOTE 6: RELATED PARTY TRANSACTIONS AND POSTRETIREMENT PLANS
The Partnership is managed by the General Partner. Under certain partnership and
management agreements, the General Partner, Santa Fe and BNSF are entitled to
reimbursement of direct and indirect costs related to the business activities of
the Partnership. These costs, which totaled $51.4 million, $50.4 million and
$45.8 million in 1997, 1996 and 1995, respectively, include compensation and
benefits payable to officers and employees of the General Partner, payroll
taxes, corporate office building rentals, general and administrative costs, tax
information and reporting costs and legal and other professional service fees.
Such reimbursed expenses are not reflected as expenses of the General Partner or
the Company in the accompanying financial statements.
The Company is included with certain other affiliates in the Burlington Northern
Santa Fe Retirement Plan, a noncontributory defined benefit pension plan
established October 1, 1996 (the "Plan") to effect the consolidation of the
Santa Fe Pacific Retirement Plan and the Burlington Northern Inc. Pension Plan.
The Plan covers substantially all officers and employees of BNSF and its
subsidiaries not covered by collective bargaining agreements. Benefits payable
under the Plan are based on years of credited service and the highest five-year
average compensation levels. BNSF's funding policy is to contribute annually at
a rate not less than the regulatory minimum, and not more than the maximum
amount deductible for income tax purposes. Since the Company is included with
certain other affiliates, detailed Plan information is not available in all
cases; however, as of September 30, 1997, the fair value of Plan assets
allocated to employees associated with the Partnership's operations was $58.2
million, and the actuarial present value of projected Plan obligations,
discounted at 7.75%, was $50.0 million. The expected return on the market value
of Plan assets was 9.5% and compensation levels were assumed to increase at 4.0%
per year. The Plan assets and obligations associated with former employees of
prior affiliates of SFPPI have been assumed by BNSF.
Salaried employees who have rendered ten years of service after attaining age 45
are eligible for both medical benefits and life insurance coverage during
retirement. The retiree medical plan is contributory and provides benefits to
retirees, their covered dependents and beneficiaries. Retiree contributions are
adjusted annually. The plan also contains fixed deductibles, coinsurance and
out-of-pocket limitations. The life insurance plan is non-contributory and
covers retirees only.
The Company's net periodic postretirement benefit cost for approximately 30
former employees of prior affiliates of SFPPI, which was entirely interest cost,
was approximately $100,000 in each of the years 1997, 1996 and 1995. The
Company's accumulated postretirement benefit obligation for these former
employees was approximately $1,950,000 and $1,860,000 at December 31, 1997 and
1996, respectively.
F-13
<PAGE>
The Company's policy is to fund benefits payable under the medical and life
insurance plans as they come due. For employees associated with the
Partnership's operations, the following table shows the reconciliation of the
plans' obligations to amounts accrued at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Medical Plan Life Insurance Plan
--------------------------- ----------------------------
(In thousands) 1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees............................................... $ 3,695 $ 3,435 $2,290 $2,205
Fully eligible active plan participants................ 1,475 1,365 40 30
Other active plan participants......................... 5,000 5,030 540 665
------------ ------------ ------------ ------------
10,170 9,830 2,870 2,900
Unrecognized prior service credit........................ 2,765 3,255 -- --
Unrecognized net gain (loss)............................. 2,845 2,260 (280) (525)
------------ ------------ ------------ ------------
Accrued postretirement liability......................... $15,780 $15,345 $2,590 $2,375
============ ============ ============ ============
</TABLE>
The unrecognized prior service credit will be amortized straight-line over the
average future service to full eligibility of the active population. For 1997,
the assumed health care cost trend rate for medical costs is 10% and is assumed
to decrease gradually to 5% by 2007 and remain constant thereafter. Increasing
the assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation for the medical
plan by $1.3 million and the combined service and interest components of net
periodic postretirement benefit cost recognized in 1997 by $200,000. For 1997
and 1996, the weighted-average discount rate assumed in determining the
accumulated postretirement benefit obligation was 7.5% and 7.75%, respectively,
and the assumed weighted-average salary increase was 4.0%.
NOTE 7: INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
(In thousands) 1997 1996 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal............................................... $ 5,434 $ 7,549 $ 4,700
State................................................. 86 1,763 937
------------ ----------- -----------
Total current provision............................... 5,520 9,312 5,637
------------ ----------- -----------
Deferred:
Federal............................................... (239) (4,859) (3,767)
State................................................. 1,279 (1,014) (801)
------------ ----------- -----------
Total deferred provision (benefit).................... 1,040 (5,873) (4,568)
------------ ----------- -----------
Total provision....................................... $ 6,560 $ 3,439 $ 1,069
============ =========== ===========
</TABLE>
F-14
<PAGE>
Total income taxes as reflected in the Company's statement of operations differs
from the amounts computed by applying the statutory federal corporate tax rate
to income before income taxes as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
at statutory rates.......... $ 5,582 35.0% $ 2,758 35.0% $ 907 35.0%
Increase in taxes
resulting from:
State income taxes,
net of federal benefit... 887 5.6 487 6.2 88 3.4
Other...................... 91 0.5 194 2.4 74 2.9
----------- -------- ---------- -------- ----------- --------
Total provision for
income taxes................ $ 6,560 41.1% $ 3,439 43.6% $ 1,069 41.3%
=========== ======== ========== ======== =========== ========
</TABLE>
Deferred income taxes are determined based on temporary differences between the
financial reporting and tax basis of the Company's assets and liabilities, using
enacted tax rates in effect during the years in which the differences are
expected to reverse. Principal temporary differences that gave rise to the net
deferred tax liability are largely attributable to differences between the
financial reporting and tax basis of Partnership properties acquired from the
Predecessor Companies and may be summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
(In thousands) 1997 1996
------------- -------------
<S> <C> <C>
Deferred tax debits:
Postretirement and postemployment benefit accruals....... $ 4,195 $ 4,105
Partnership environmental remediation provision.......... 2,515 4,250
Partnership litigation provision......................... 7,160 7,365
Other.................................................... 4,630 4,245
------------- ----------
18,500 19,965
------------- ----------
Deferred tax credits:
Remaining cost basis differences of depreciable assets... (66,160) (67,915)
Other differences in cost basis.......................... (6,160) (6,160)
Other.................................................... (5,262) (3,932)
------------- ----------
(77,582) (78,007)
------------- ----------
Net deferred tax liability.................................. $ (59,082) $ (58,042)
============= ==========
</TABLE>
The Company is included in the consolidated federal income tax return of BNSF.
The provision for federal income taxes reflected in these financial statements
is based on the amount the Company would have been required to pay if it filed a
separate return. Pursuant to a tax agreement between Santa Fe and its
subsidiaries, the Company has agreed to pay to Santa Fe an amount based on the
federal income tax liability it would have paid if it filed a separate return,
regardless of whether Santa Fe or BNSF, as a whole, have any current federal tax
liability. In determining amounts payable to Santa Fe, the Company may only take
into account its own carryforwards of losses and credits to reduce amounts it
would otherwise owe. Accordingly, there are circumstances in which the Company
may receive no compensation for the current use of carryforwards of losses or
credits by other members of the Santa Fe
F-15
<PAGE>
or BNSF consolidated groups. Similarly, pursuant to agreements for the
allocation of the combined tax liability among the members of the Santa Fe
affiliated group for the state income, franchise or excise tax (as applicable)
of Arizona, California, New Mexico and Oregon, the Company has agreed to pay to
Santa Fe an amount approximating the state tax liability it would have paid if
it filed separate returns in these states.
NOTE 8: QUARTERLY RESULTS (UNAUDITED)
Quarterly results of operations are summarized below:
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1997
Operating revenues......................... $4,894 $9,847 $9,994 $ 8,463
Operating income........................... 4,768 9,699 9,869 8,234
Net income................................. 303 3,278 3,416 2,394
1996
Operating revenues......................... $7,385 $9,479 $5,536 $ 2,589
Operating income........................... 7,217 9,348 5,559 2,388
Net income (loss).......................... 1,808 3,064 831 (1,260)
</TABLE>
Note: The Partnership recorded provisions for litigation costs aggregating $6
million and $2 million in the first and fourth quarters of 1997, respectively,
and $8 million and $15 million in the third and fourth quarters of 1996,
respectively.
NOTE 9 SUBSEQUENT EVENT
- ------------------------
On March 6, 1998, the unitholders of both the Trading Partnership and Kinder
Morgan Energy Partners, L.P. approved the terms of the Purchase Agreement
referred to in Note 1 to these financial statements, and the transactions
described therein were completed later that day.
Under the terms of the Debentures, holders of Debentures will have the right to
exchange Debentures for KMEP Common Units for a period of at least 30
consecutive days (the "Exchange Period") selected by KMEP and beginning between
45 and 50 days after the closing of the KM Transaction. To the extent that
Debentures are not delivered for exchange, the KMEP Common Units into which they
are exchangeable will be cancelled and any Debentures not delivered for exchange
during the Exchange Period will become due and payable at par, plus accrued and
unpaid interest from the date that is 90 days after the completion of the KM
Transaction.
F-16
<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF
DIRECTORS OF BURLINGTON NORTHERN
SANTA FE CORPORATION AND SUBSIDIARIES
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity present fairly, in all material respects, the financial position of
Burlington Northern Santa Fe Corporation and subsidiary companies at December
31, 1997 and 1996, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. The
consolidated financial statements of Burlington Northern Santa Fe Corporation
and subsidiary companies for the year ended December 31, 1995 were audited by
other independent accountants whose report dated February 15, 1996, except as to
the information presented in Note 8 for which the date is February 6, 1998,
expressed an unqualified opinion on those statements and included an explanatory
paragraph that described the change in the Company's method of accounting for
periodic major locomotive overhauls in 1995 discussed in Note 7 to the financial
statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
February 6, 1998
BURLINGTON NORTHERN SANTA FE CORPORATION 21
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
Burlington Northern Santa Fe Corporation and Subsidiaries
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Revenues $8,413 $8,141 $6,117
------ ------ ------
Operating expenses:
Compensation and benefits 2,675 2,561 2,067
Purchased services 866 832 547
Equipment rents 820 736 540
Depreciation and amortization 773 760 520
Fuel 747 727 480
Materials and other 675 777 702
Special charges 90 -- 735
------ ------ ------
Total operating expenses 6,646 6,393 5,591
- --------------------------------------------------------------- ------ ------ ------
Operating income 1,767 1,748 526
Interest expense 344 301 220
Other income (expense), net (19) (7) 28
------ ------ ------
Income before income taxes 1,404 1,440 334
Income tax expense 519 551 136
------ ------ ------
Income before extraordinary item and cumulative effect
of change in accounting method 885 889 198
Extraordinary item, loss on early retirement of debt, net of tax -- -- (6)
------ ------ ------
Income before cumulative effect of change in accounting method 885 889 192
Cumulative effect of change in accounting method, net of tax -- -- (100)
------ ------ ------
Net income $ 885 $ 889 $ 92
=============================================================== ====== ====== ======
Basic earnings per common share:
Income before extraordinary item and change in accounting method $ 5.72 $ 5.84 $ 1.70
Extraordinary item -- -- (.06)
Change in accounting method -- -- (.96)
------ ------ ------
Basic earnings per common share $ 5.72 $ 5.84 $ 0.68
=============================================================== ====== ====== ======
Diluted earnings per common share:
Income before extraordinary item and change in accounting method $ 5.64 $ 5.74 $ 1.67
Extraordinary item -- -- (.05)
Change in accounting method -- -- (.95)
------ ------ ------
Diluted earnings per common share $ 5.64 $ 5.74 $ 0.67
=============================================================== ====== ====== ======
Average shares (in millions):
Basic 154.8 152.1 104.4
Diluted 157.0 154.8 105.9
</TABLE>
See accompanying notes to consolidated financial statements.
22 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
CONSOLIDATED BALANCE SHEET
Burlington Northern Santa Fe Corporation and Subsidiaries
(Dollars in millions)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------ ------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31 $ 47
Accounts receivable, net 635 628
Materials and supplies 205 222
Current portion of deferred income taxes 333 307
Other current assets 30 44
------- -------
Total current assets 1,234 1,248
Property and equipment, net 19,211 17,633
Other assets 891 882
------- -------
Total assets $21,336 $19,763
======================================================================== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 1,952 $ 2,063
Long-term debt due within one year 108 165
------- -------
Total current liabilities 2,060 2,228
Long-term debt and commercial paper 5,181 4,546
Deferred income taxes 5,175 4,729
Casualty and environmental reserves 448 543
Employee merger and separation costs 469 466
Other liabilities 1,191 1,270
------- -------
Total liabilities 14,524 13,782
======================================================================== ------- -------
Commitments and contingencies (see Notes 14 and 15)
Stockholders' equity:
Common stock, $.01 par value, 300,000,000 shares authorized;
156,746,601 shares and 154,198,088 shares issued, respectively 2 2
Additional paid-in capital 4,995 4,838
Retained earnings 1,863 1,165
Treasury stock, at cost, 442,816 shares and 196,122 shares, respectively (39) (16)
Other (9) (8)
------- -------
Total stockholders' equity 6,812 5,981
------- -------
Total liabilities and stockholders' equity $21,336 $19,763
======================================================================== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
BURLINGTON NORTHERN SANTA FE CORPORATION 23
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Burlington Northern Santa Fe Corporation and Subsidiaries
(Dollars in millions)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 885 $ 889 $ 92
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting method -- -- 100
Depreciation and amortization 773 760 520
Deferred income taxes 433 453 (112)
Special charges 90 -- 735
Employee merger and separation costs paid (116) (183) (118)
Other, net (221) (62) 51
Changes in current assets and liabilities, excluding SFP assets/liabilities acquired:
Accounts receivable:
Sale of accounts receivable 301 40 --
Other changes (333) (140) 63
Materials and supplies 17 (2) (42)
Other current assets 4 (6) (5)
Accounts payable and other current liabilities (19) 122 132
------- ----- -----
Net cash provided by operating activities 1,814 1,871 1,416
- ----------------------------------------------------------------------------------- ------- ------- -------
INVESTING ACTIVITIES
Cash used for capital expenditures (2,182) (2,234) (890)
Purchase of SFP, net of cash acquired -- -- (488)
Other, net (147) (10) 12
------- ------- -------
Net cash used for investing activities (2,329) (2,244) (1,366)
- ----------------------------------------------------------------------------------- ------- ------- -------
FINANCING ACTIVITIES
Net increase (decrease) in commercial paper (239) (78) 895
Proceeds from issuance of long-term debt 1,002 626 1,294
Payments on long-term debt (173) (103) (2,071)
Dividends paid (185) (184) (129)
Proceeds from stock options exercised 102 118 25
Other, net (8) (9) (41)
------- ------- -------
Net cash provided by (used for) financing activities 499 370 (27)
------- ------- -------
Increase (decrease) in cash and cash equivalents (16) (3) 23
Cash and cash equivalents:
Beginning of year 47 50 27
------- ------- -------
End of year $ 31 $ 47 $ 50
- ----------------------------------------------------------------------------------- ------- ------- -------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized $ 346 $ 306 $ 228
Income taxes paid, net of refunds 32 69 250
Directly financed asset acquisitions -- 43 140
Noncash consideration for purchase of SFP:
Net assets acquired $ 3,319
Cash paid (532)
Cash acquired 26
-------
Noncash consideration $ 2,813
- ----------------------------------------------------------------------------------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
24 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Burlington Northern Santa Fe Corporation and Subsidiaries
(Shares in thousands. Dollars in millions, except per share data.)
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Convertible
Preferred Common
Stock and Stock and
Outstanding Additional Additional
Common Paid-in Paid-in Retained Treasury
Shares Capital Capital Earnings Stock Other Total
- ---------------------------------------------------------------- ----------- --------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 89,224 $ 337 $1,444 $ 485 $ (5) $ (24) $2,237
Net income 92 92
Purchase of SFP:
Common stock issued 52,004 2,652 2,652
Value of outstanding SFP stock options 119 119
Conversion and redemption of convertible
preferred stock for common stock 7,313 (337) 335 (2)
Dividends:
Common stock, $1.20 per share (123) (123)
Convertible preferred stock, $3.125 per share (21) (21)
Adjustments associated with unearned
compensation, restricted stock 243 13 2 16 31
Exercise of stock options and related tax benefit 778 39 (3) 36
Equity adjustment from minimum pension
liability (18) (18)
Cost to equity investment adjustment 26 26
Other 43 5 3 8
- ---------------------------------------------------------------- ----------- --------- -------- -------- ------ ------
Balance at December 31, 1995 149,605 -- 4,607 459 (3) (26) 5,037
Net income 889 889
Common stock dividends, $1.20 per share (183) (183)
Adjustments associated with unearned
compensation, restricted stock 539 8 (2) 3 9
Exercise of stock options and related tax benefit 3,454 191 (11) 180
Equity adjustment from minimum pension
liability 15 15
Acquisition of a subsidiary 363 31 31
Other 41 3 3
- ---------------------------------------------------------------- ----------- --------- -------- -------- ------ ------
Balance at December 31, 1996 154,002 -- 4,840 1,165 (16) (8) 5,981
Net income 885 885
Common stock dividends, $1.20 per share (187) (187)
Adjustments associated with unearned
compensation, restricted stock 83 13 (4) 2 11
Exercise of stock options and related tax benefit 2,191 140 (19) 121
Equity adjustment from minimum pension
liability (3) (3)
Other 28 4 4
- ---------------------------------------------------------------- ----------- --------- -------- -------- ------ ------
Balance at December 31, 1997 156,304 $ -- $4,997 $1,863 $(39) $ (9) $6,812
- ---------------------------------------------------------------- ----------- --------- -------- -------- ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
BURLINGTON NORTHERN SANTA FE CORPORATION 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BURLINGTON NORTHERN SANTA FE
CORPORATION AND SUBSIDIARIES
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
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 principal subsidiary of BNSF is The Burlington Northern and Santa
Fe Railway Company (BNSF Railway). BNSF Railway was formed in December 1996,
when The Atchison, Topeka and Santa Fe Railway Company (ATSF) merged with and
into Burlington Northern Railroad Company (BNRR). The accompanying BNSF
consolidated statements of income and cash flows for the years ended December
31, 1997, 1996 and 1995 include BNSF's results and cash flows for the years
ended December 31, 1997 and 1996, BNI's results and cash flows for the year
ended December 31, 1995, and SFP's results and cash flows from September 22,
1995 through December 31, 1995. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented.
RECLASSIFICATIONS
Certain comparative prior year amounts in the consolidated financial statements
and notes have been reclassified to conform with the current year presentation.
CASH AND CASH EQUIVALENTS
All short-term investments with original maturities of less than 90 days are
considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value.
MATERIALS AND SUPPLIES
Materials and supplies consist mainly of diesel fuel and repair parts for
equipment and other railroad property and are valued at the lower of average
cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated and amortized on a straight-line basis
over their estimated useful lives. Upon normal sale or retirement of depreciable
railroad property, cost less net salvage is charged to accumulated depreciation
and no gain or loss is recognized. Significant premature retirements are
recorded as gains or losses at the time of their occurrence. Expenditures which
significantly increase asset values or extend useful lives are capitalized.
Repair and maintenance expenditures are charged to operating expense when the
work is performed. Property and equipment are stated at cost including property
values of SFP, which were adjusted in applying purchase accounting.
Additionally, the Company incurs certain direct labor, contract service and
other costs associated with the development and installation of computer
software. Costs for newly developed software or significant enhancements to
existing software are typically capitalized. Research, operations and
maintenance costs are charged to operating expense when the work is performed.
REVENUE RECOGNITION
Transportation revenues are recognized based upon the proportion of service
provided.
2. ACQUISITION OF SFP
On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger
(as amended, the Merger Agreement) pursuant to which SFP would merge with BNI in
the manner set forth below (the Merger). Stockholders of BNI and SFP approved
the Merger Agreement at special stockholders' meetings held on February 7, 1995.
On August 23, 1995, the Interstate Commerce Commission issued a written decision
approving the Merger and on September 22, 1995 the Merger was consummated.
Pursuant to the Merger Agreement, BNI and SFP commenced tender offers
(together, the Tender Offer) to acquire 25 million and 38 million shares of SFP
common stock, respectively, at $20 per share in cash. During 1995, SFP borrowed
$1.0 billion under a credit facility of which $760 million of the proceeds were
used to purchase the 38 million shares pursuant to the Tender Offer. In
addition, BNI borrowed $500 million under a credit facility to finance BNI's
purchase of SFP common stock in the Tender Offer. The Tender Offer was completed
on February 21, 1995.
To ensure that the transaction contemplated by the Merger Agreement qualified
as a tax-free transaction for federal income tax purposes, the parties utilized
the holding company structure. Under the holding company structure, BNSF created
two subsidiaries. One subsidiary merged with and into BNI, and the other
subsidiary merged with and into SFP.
26 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
The 1995 business combination with SFP was accounted for by the purchase
method. As such, the accompanying consolidated financial statements include
assets, liabilities and financial results of SFP after Merger consummation. The
following summarizes the purchase price (dollars in millions, except per share
data, and shares in thousands):
<TABLE>
- ------------------------------------------- -------- --------
<S> <C> <C>
BNI investment in SFP at September 22, 1995 $ 516
Shares of SFP common stock outstanding
at September 22, 1995 151,396
Less SFP shares held by BNI (25,000)
--------
Remaining SFP shares outstanding 126,396
Exchange ratio .4114
--------
Shares of BNSF common stock issued 52,000
Per share value of BNSF common stock $ 51
--------
Total value of BNSF common stock issued 2,652
Value of outstanding SFP stock options 119
BNI direct acquisition costs 32
- ------------------------------------------- --------
Purchase price $ 3,319
- ------------------------------------------- --------
</TABLE>
The purchase price was calculated based on an estimated fair value of BNSF
common stock of $51 per share. The fair value was determined from the average of
the daily closing prices of BNI common stock for the five trading days
immediately preceding and the five trading days immediately following approval
of the Merger by BNI and SFP shareholders which occurred on February 7, 1995.
The effects of the acquisition on the consolidated balance sheet, including the
fair value adjustments, were as follows (in millions):
<TABLE>
<S> <C>
- ---------------------------- -------
Property and equipment, net $ 9,409
Other assets 886
Deferred income taxes (2,936)
Long-term debt (2,034)
Other liabilities (2,006)
- ---------------------------- -------
Net assets acquired $ 3,319
- ---------------------------- -------
</TABLE>
The purchase price allocation included $138 million for anticipated
nonrecurring costs and expenses for severance and relocation of prior SFP
employees and the planned disposition of excess SFP office space and other SFP
assets.
The consolidated pro forma results presented below were prepared as if the
Merger had occurred on January 1, 1995 and include the historical results of BNI
and SFP, excluding the after tax effect of $309 million for merger-related
charges recorded by BNI in 1995. Additionally, the consolidated pro forma
results include the effects of purchase accounting adjustments and the Tender
Offer. Pro forma adjustments reflecting merger benefits are not included. This
unaudited consolidated pro forma information is not necessarily indicative of
the results of operations that might have occurred had the Merger actually taken
place on January 1, 1995 or of future results of operations of the combined
entities (dollars in millions, except per share data):
<TABLE>
Year ended December 31, 1995
- ---------------------------------- ------
<S> <C>
Revenues $8,097
Operating expenses 6,771
Income before extraordinary items 605
Net income(1) 499
Basic earnings per share:
Income before extraordinary items $ 4.19
Net income 3.46
Diluted earnings per share:
Income before extraordinary items $ 3.98
Net income 3.29
</TABLE>
(1) Pro forma results include approximately $230 million (pre-tax) related to
the merger severance and asset charge which are not considered directly
attributable to the Merger. Additionally, pro forma net income includes the $100
million cumulative effect for the change in accounting for locomotive overhauls
for years prior to 1995 and a $25 million reduction for the effect of the change
on 1995. Also, pro forma net income includes the $6 million extraordinary charge
for retirement of debt.
- -------------------------------------------------------------------------------
3. SPECIAL CHARGES
Included in the Consolidated Statement of Income for 1997 and 1995 are
operating expenses of $90 million and $735 million, respectively, related to
special charges.
1995 SPECIAL CHARGE
Significant components of the 1995 charge are as follows:
Employee-related costs of $287 million were recorded for anticipated
involuntary separations related to BNSF's plan to centralize its union clerical
functions. The clerical consolidation plan was approved by management in 1995
and implementation of the plan began in 1996. The Company and union entered into
an implementation agreement in 1995 which allows BNSF to abolish positions and
provide separation benefits to affected employees. Benefits paid to affected
employees are in the form of lump-sum payments or payments made over several
years depending upon seniority level and election of the employee.
Costs of $254 million were recorded for salaried employees and reflect
severance, pension and other employee benefits, and costs for employee
relocations incurred during the period. Severance, pension and other employee
benefit costs of $231 million reflect the elimination of approximately 1,000
former BNI employees. Most of these positions were eliminated in 1995 and 1996.
Additional components of salaried employee costs include special termination
benefits to be received under the Company's retirement plan and expenses related
to restricted stock which vested upon approval of the Merger. Relocation
expenses of $23 million reflect costs incurred in 1995 for relocating
approximately 300 former BNI employees.
Costs of $105 million were included for branch line dispositions reflecting
the write-off of the net book value of the lines at the anticipated disposition
date, less estimated net proceeds. Approximately 75 line segments, covering
3,300 miles of former BNI lines were included, of which
BURLINGTON NORTHERN SANTA FE CORPORATION 27
<PAGE>
approximately 2,800 miles were disposed of through 1997. Remaining costs of $89
million included in the $735 million charge related to obligations at leased
facilities, a majority of which have been vacated, and the write-off of
duplicate and excess assets including computer hardware and software and certain
facilities.
Additional accruals of $138 million were recorded through purchase accounting
related to former SFP employees and assets. Approximately $105 million of these
costs related to termination of approximately 500 salaried employees for
severance payments and special termination benefits to be received under the
Company's retirement and health and welfare plans. Salaried employee costs also
include amounts to relocate approximately 500 former SFP employees. The
remaining $33 million of costs relate to the sale or abandonment of 500 miles of
branch lines, rents on vacated leased facilities and the write-off of excess
assets.
1997 SPECIAL CHARGE
In the fourth quarter of 1997, the Company recorded a $90 million pre-tax
special charge. Approximately $65 million of the charge related to the
consolidation of union clerical employees and the remainder of the charge
related to severance and other costs for exempt employees. As discussed above,
BNSF recorded an initial charge of $287 million in 1995 for the consolidation of
clerical functions. However, the 1995 charge excluded costs associated with
voluntary severances for employees who were given the opportunity to relocate
and follow their work, but elected severance. During the fourth quarter of 1997,
the Company completed substantially all of the consolidation from field
locations. All voluntary severances associated with the plan have now been
completed. Remaining clerical positions to be eliminated by the Company will be
at central locations and will result in involuntary separations. The Company
anticipates that completion of the plan will result in the elimination of 1,800
employees including 1,600 permanent positions. Approximately 1,250 positions
have been eliminated through 1997 and the remaining position eliminations are
anticipated to occur in 1998 and early 1999. The costs to complete the
consolidation, including future involuntary severances, have now been provided
for by the 1995 and 1997 charges. Additionally, the Company has relocated
approximately 350 clerical employees from field to central locations. Relocation
costs have been charged to operating expense in the period incurred.
LIABILITY BALANCE AND ACTIVITY
Current and long-term employee merger and separation liabilities totaling $551
million are included in the consolidated balance sheet at December 31, 1997 and
principally represent employee-related costs for the centralization of clerical
functions, as well as remaining liabilities for actions taken by ATSF in prior
periods. The majority of these prior ATSF costs are associated with deferred
benefits payable upon separation or retirement to certain active conductors and
trainmen incurred in connection with an agreement which, among other things,
reduced crew sizes. Additionally, certain locomotive engineers are eligible for
a deferred benefit payable, upon separation or retirement, associated with an
agreement with ATSF which allowed for more flexible work rules.
During 1997, BNSF made $116 million of employee merger and separation payments
principally related to the reduction of approximately 750 clerical employees,
payments of salaried employee separations, and deferred benefits for ATSF
conductors, trainmen and locomotive engineers. At December 31, 1997, $82 million
of the remaining accrual is included within current liabilities for anticipated
costs to be paid in 1998. The remaining costs are expected to be paid over the
next several years, except for certain costs related to conductors, trainmen and
locomotive engineers of the former ATSF which will be paid upon the employees'
separation or retirement, as well as certain benefits for clerical employees
which will be paid on an installment basis, generally over five to ten years or
in some cases through retirement.
4. POTENTIAL SALE OF INVESTMENT IN PIPELINE PARTNERSHIPS
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.
and its operating subsidiary (Pipeline Partnerships). The interests in Pipeline
Partnerships are 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 Partnerships at December 31, 1997 was
approximately $286 million and is included in Other assets in the consolidated
balance sheet. On October 18, 1997, Pipelines entered into an agreement with
Kinder Morgan Energy Partners L.P. (Kinder Morgan) whereby Kinder Morgan will
acquire substantially all of Pipelines' interests in the Pipeline Partnerships.
Total cash consideration to be received by Pipelines will be approximately $90
million. Pipelines' limited partnership interest is represented by 8,148,148
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 Pipeline 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 December 31, 1997. The VREDs are exchangeable for
Pipelines' 8,148,148 common units. Consummation of
28 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
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 results of operations is not anticipated to be
significant as Pipelines' equity income from its interests in Pipeline
Partnerships is largely offset by interest expense related to the VREDs.
5. OTHER INCOME (EXPENSE), NET
Other income (expense), net includes the following (in millions):
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Equity in earnings of Pipeline Partnerships $ 30 $ 24 $ 9
Gain on property dispositions 14 23 12
Interest income 3 2 8
Accounts receivable sale fees (27) (14) (4)
BNI's equity in earnings of SFP prior
to consummation of the Merger -- -- 16
Miscellaneous, net (39) (42) (13)
- ------------------------------------------ ----- ----- -----
Total $ (19) $ (7) $ 28
========================================== ===== ===== =====
</TABLE>
6. INCOME TAXES
Income tax expense, excluding the 1995 cumulative effect of change in
accounting method and extraordinary item, was as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------- ----- ----- -----
<S> <C> <C> <C>
Current:
Federal $ 72 $ 81 $ 216
State 14 17 32
- ------------------------------------------- ----- ----- -----
86 98 248
- ------------------------------------------- ----- ----- -----
Deferred:
Federal 372 396 (101)
State 61 57 (11)
- ------------------------------------------- ----- ----- -----
433 453 (112)
- ------------------------------------------- ----- ----- -----
Total $ 519 $ 551 $ 136
=========================================== ===== ===== =====
</TABLE>
Reconciliation of the federal statutory income tax rate to the effective tax
rate, excluding the cumulative effect of change in accounting method and
extraordinary item, was as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal tax benefit 3.5 3.4 4.0%
Other, net (1.5) (0.1) 1.7%
- ------------------------------------------- ------ ------ ------
Effective tax rate 37.0% 38.3% 40.7%
=========================================== ====== ====== ======
</TABLE>
The components of deferred tax assets and liabilities were as follows (in
millions):
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------- ------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $(5,677) $(5,110)
Other (331) (397)
- ------------------------------------------- ------- -------
Total deferred tax liabilities (6,008) (5,507)
- ------------------------------------------- ------- -------
Deferred tax assets:
Casualty and environmental liabilities 270 300
Employee merger and separation costs 213 214
Postretirement benefits 86 96
Non-expiring AMT credit carryforwards 36 44
Other 561 431
- ------------------------------------------- ------- -------
Total deferred tax assets 1,166 1,085
- ------------------------------------------- ------- -------
Net deferred tax liability $(4,842) $(4,422)
=========================================== ======= =======
Noncurrent deferred income tax liability $(5,175) $(4,729)
Current deferred income tax asset 333 307
- ------------------------------------------- ------- -------
Net deferred tax liability $(4,842) $(4,422)
=========================================== ======= =======
</TABLE>
In 1997 and 1995, tax benefits of $2 million and $11 million, respectively,
related to the adjustment to recognize the minimum pension liability were
allocated directly to stockholders' equity. In 1996, tax expense of $9 million
related to the adjustment to reduce the minimum pension liability was allocated
directly to stockholders' equity.
BNSF filed its first federal consolidated income tax return for 1995. BNI's
and SFP's federal income tax returns have been examined through 1991 and 1992,
respectively. All years prior to 1986 are closed for SFP and all years prior to
1989 are closed for BNI. Issues relating to the years 1986-1992 for SFP and for
the years 1989-1991 for BNI are being contested through various stages of
administrative appeal. In addition, BNSF and its subsidiaries have various state
income tax returns in the process of examination, administrative appeal or
litigation. Management believes that adequate provision has been made for any
adjustment that might be assessed for open years through 1997.
7. ACCOUNTING CHANGE
Effective January 1, 1995, BNSF changed its method of accounting for periodic
major locomotive overhauls. Under the new method, costs of owned locomotives
relating to components requiring major overhaul are depreciated, on a straight-
line basis, to the first major overhaul date. The remaining cost of the owned
locomotive is depreciated, on a straight-line basis, over the estimated economic
life of the locomotive. The cost of overhauls on owned units are then
capitalized when incurred and depreciated, on a straight-line basis, until the
next anticipated overhaul. In addition, estimated costs for major overhauls on
leased units are accrued on a straight-line basis over the life of the leases.
BNSF previously expensed locomotive overhauls when the costs were incurred.
BURLINGTON NORTHERN SANTA FE CORPORATION 29
<PAGE>
BNSF believes that this change is preferable because it improves the matching of
expenses incurred to revenues earned. The cumulative effect of this change on
years prior to 1995 was a reduction in net income of $100 million (net of a $63
million income tax benefit), or $.96 and $.95 for basic earnings per share and
diluted earnings per share, respectively. The effect of this change for the year
ended December 31, 1995, was to reduce income before extraordinary item and
cumulative effect of change in accounting method by $25 million or $.24 per
share.
8. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128 "Earnings Per Share" in the fourth quarter of 1997. SFAS No. 128 requires
the presentation of basic and diluted earnings per share, including the
restatement of prior periods. A summary of the calculation of basic and diluted
earnings per share for the years ended December 31, 1997, 1996 and 1995, is
presented below (in millions, except per share data):
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- ---------------------------------- ------ ------ ------
<S> <C> <C> <C>
Income before extraordinary item
and accounting change $ 885 $ 889 $ 198
Less: Preferred stock dividends -- -- (21)
- ---------------------------------- ------ ------ ------
Income available to
common stockholders $ 885 $ 889 $ 177
================================== ====== ====== ======
Weighted average common shares 154.8 152.1 104.4
Effect of common stock options 2.2 2.7 1.5
- ---------------------------------- ------ ------ ------
Weighted average diluted shares 157.0 154.8 105.9
================================== ====== ====== ======
Basic earnings per common share $ 5.72 $ 5.84 $ 1.70
- ---------------------------------- ------ ------ ------
Diluted earnings per common share $ 5.64 $ 5.74 $ 1.67
================================== ====== ====== ======
</TABLE>
For the year ended December 31, 1995, the computation of diluted earnings per
share excluded the effects of conversion of preferred stock because it was anti-
dilutive.
9. ACCOUNTS RECEIVABLE, NET
Effective June 1997, an accounts receivable sale agreement which allowed the
sale of up to $300 million in receivables effective through 1999, 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
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 December 31, 1997, $581 million of certificates
were outstanding and were supported by receivables of approximately $1.1 billion
in the master trust. Certificates outstanding were $280 million at December 31,
1996. 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.
During 1997, BNSF Railway installed a new revenue management system, replacing
separate BNRR and ATSF systems. Primarily as a result of this integration,
accounts receivable balances have risen above historical levels. BNSF maintains
an allowance for corrections to and collectibility of freight and other
billings. At December 31, 1997 and 1996, $70 million and $57 million of such
allowances had been recorded, respectively. BNSF believes the allowance is
adequate to cover disputed and uncollectible receivables at December 31, 1997.
10. PROPERTY AND EQUIPMENT, NET
Property and equipment, net (in millions), and the weighted average annual
depreciation rate (%) were as follows:
<TABLE>
<CAPTION>
1997
Depreciation
December 31, 1997 1996 Rate
- ------------------------------ ------- ------------ ------------
<S> <C> <C> <C>
Land $ 1,416 $ 1,418 --
Track structure 10,527 9,668 3.9%
Other roadway 7,856 7,231 2.5
Locomotives 1,874 1,525 4.5
Freight cars and
other equipment 1,870 1,879 4.0
Computer hardware
and software 412 402 15.6
- ------------------------------ ------- ------------
Total cost 23,955 22,123
Less accumulated depreciation
and amortization (4,744) (4,490)
- ------------------------------ ------- ------------
Property and equipment, net $19,211 $17,633
============================== ======= ============
</TABLE>
The consolidated balance sheet at December 31, 1997 and 1996 included $875
million and $471 million, respectively, for property and equipment under capital
leases.
11. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of the following
(in millions):
<TABLE>
<CAPTION>
December 31, 1997 1996
<S> <C> <C>
- ------------------------------------------------ ------ ------
Compensation and benefits payable $ 399 $ 393
Casualty and environmental reserves 291 309
Accounts payable 222 218
Rents and leases 144 206
Tax liabilities 132 78
Employee merger and separation costs 82 114
Other 682 745
- ------------------------------------------------ ------ ------
Total $1,952 $2,063
================================================ ====== ======
</TABLE>
30 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
12. DEBT
Debt outstanding was as follows
(in millions):
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------- ------ ------
<S> <C> <C>
Notes and Debentures
7% debentures, due 2025 $ 350 $ 350
6 3/8% notes, due 2005 300 300
Pipeline exchangeable debentures,
11.2% (variable), due 2010 219 219
8 3/4% debentures, due 2022 200 200
6 7/8% debentures, due 2027 200 --
7.29% debentures, due 2036 200 200
7.25% debentures, due 2097 200 --
6 7/8% debentures, due 2016 175 175
6.53% notes, due 2037 175 --
7.40% notes, due 1999 150 150
7% notes, due 2002 150 150
7 1/2% debentures, due 2023 150 150
8 3/8% notes, due 2001 100 100
8 5/8% notes, due 2004 100 100
6.1% notes, due 2027 100 --
Other 25 28
Mortgage Bonds
Consolidated mortgage bonds,
3 1/5% to 9 1/4%, due 2006 to 2045 321 321
General mortgage bonds, 3 1/8% and 2 5/8%,
due 2000 and 2010, respectively 62 62
Prior lien railway and land grant bonds, 4% -- 57
General lien railway and land grant bonds,
3%, due 2047 35 35
Mortgage notes, 10.325%, due 1998 to 2014 31 31
First mortgage bonds, series A, 4% -- 20
Mortgage notes, 8 5/8%, due serially to 2009 18 18
Commercial Paper and Bank Borrowings
Commercial paper, 6.0% (variable) 668 907
Bank borrowings, 5.98% (variable) 70 65
Equipment Obligations
Equipment obligations, weighted average
rate of 7.98%, due 1998 to 2013 565 629
Capitalized lease obligations, weighted average
rate of 6.84% expiring 1998 to 2010 695 400
Unamortized purchase accounting adjustment 89 101
Unamortized discount (59) (57)
- ----------------------------------------------------- ------ ------
Total 5,289 4,711
Less: Current portion of long-term debt (108) (165)
- ----------------------------------------------------- ------ ------
Long-term debt $5,181 $4,546
===================================================== ====== ======
</TABLE>
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 December 31, 1997, there were no borrowings against the long-term revolving
credit agreement and the maturity value of commercial paper outstanding was $673
million, leaving a total remaining capacity of $827 million under the long-term
revolving credit agreement available and $500 million under the short-term
credit agreement available. A portion of commercial paper has been hedged to
fixed interest rates through interest rate swap transactions (see Note 14:
Hedging activities, leases and other commitments).
The financial covenants of the bank revolving credit agreements require that
BNSF's consolidated tangible net worth, as defined in the agreements, be at
least $4.4 billion, and that its debt cannot exceed 55 percent of its
consolidated total capital as defined in the agreements. BNSF was in compliance
with these financial covenants at December 31, 1997.
In February 1997, BNSF issued $100 million of 6.1% 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% notes due
July 15, 2037 and $200 million of 7.25% debentures due August 1, 2097. The $175
million 6.53% notes may be redeemed on July 15, 2003, at the option of the
holder. In August 1997, BNSF filed a 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. In December 1997, the
Company issued $200 million of 6 7/8% debentures, due December 1, 2027 under the
August 1997 registration which has $350 million remaining. The net proceeds of
these debt issues were used for general corporate purposes including the
repayment of commercial paper.
In February 1996, BNSF issued $175 million of 6 7/8% debentures due February
15, 2016. In June 1996, BNSF issued $200 million of 7.29% debentures due June 1,
2036. In December 1995, BNSF issued $300 million of 6 3/8% notes due December
15, 2005 and $350 million of 7% debentures due December 15, 2025. The net
proceeds from the sale of the notes and debentures were used for general
corporate purposes, including the repayment of commercial paper and short-term
bank loans.
BURLINGTON NORTHERN SANTA FE CORPORATION 31
<PAGE>
Additionally, in December 1995, BNSF defeased its 9% debentures by placing
$166 million of U.S. government securities into an irrevocable trust for the
purpose of repaying the debentures in April 1996. The defeasance of debt
resulted in an extraordinary charge of $6 million, net of applicable income tax
benefits of $3 million, principally reflecting the call premium on the debt.
BNSF Railway and its predecessors, BNRR and ATSF, completed cross-border
leveraged leases of equipment for a total amount of $411 million, $311 million
and $136 million in 1997, 1996 and 1995, respectively, which were recorded as
capital lease obligations. These transactions included the issuance of $326
million, $242 million, and $108 million of equipment secured debt in 1997, 1996
and 1995, respectively.
Aggregate long-term debt scheduled maturities are $108 million, $256 million,
$138 million, $204 million and $996 million for 1998 through 2002, respectively.
Commercial paper of $668 million is included in maturities for 2002. Payments
in 2000 exclude the $100 million 6.1% notes, due 2027, which may be redeemed in
2000 at the option of the holder.
Substantially all BNSF Railway properties and certain other assets are pledged
as collateral to, or are otherwise restricted under, the various BNSF Railway
long-term debt agreements. Equipment obligations and capital leases are secured
by the underlying equipment.
In addition, an indirect wholly-owned subsidiary of BNSF is contingently
liable as general partner for $355 million of long-term debt issued by Santa Fe
Pacific Pipeline Partners, L.P. This contingent liability would be reduced to
$190 million upon the consummation of the transaction discussed in Note 4:
Potential sale of investment in pipeline partnerships.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of BNSF's financial instruments at December 31, 1997
and 1996 and the methods and assumptions used to estimate the fair value of each
class of financial instruments held by BNSF, were as follows:
CASH AND CASH EQUIVALENTS
The carrying amount approximated fair value because of the short maturity of
these instruments.
LONG-TERM DEBT AND COMMERCIAL PAPER
The fair value of BNSF's long-term debt was primarily based on quoted market
prices for the same or similar issues, or on the current rates that would be
offered to BNSF for debt of the same remaining maturities. The carrying amount
of commercial paper approximated fair value because of the short maturity of
these instruments. The carrying amounts of BNSF's long-term debt and commercial
paper at December 31, 1997 and 1996 were $5,289 million and $4,711 million,
respectively, while the estimated fair values at December 31, 1997 and 1996 were
$5,472 million and $4,721 million, respectively.
14. HEDGING ACTIVITIES, LEASES AND OTHER COMMITMENTS 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 will not realize the impact of
increases or decreases in fuel prices.
As of February 6, 1998, BNSF had entered into forward purchases for
approximately 353 million gallons at an average price of approximately 53 cents
per gallon, and fuel swaps for approximately 1,046 million gallons at an average
price of approximately 53 cents per gallon.
The above prices do not include taxes, transportation costs, certain other
fuel handling costs and, except for forward 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.
BNSF's fuel hedging program covers approximately 72 percent, 29 percent and 18
percent of estimated fuel purchases for 1998, 1999, and 2000, respectively.
Quarterly hedges in 1998 range from 64 percent to 82 percent of anticipated fuel
purchases. Hedges for 1999 and 2000 approximate 29 percent and 18 percent of
estimated consumption for each quarter, respectively. Hedge positions are
closely monitored to ensure that they will not exceed actual fuel requirements
in any period. Unrecognized losses from BNSF's fuel hedging transactions were
approximately $24 million as of December 31, 1997 and unrecognized gains as of
December 31, 1996 were approximately $17 million. BNSF also monitors its hedging
positions and credit ratings of its counterparties and does not anticipate
losses due to counterparty nonperformance.
32 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
INTEREST RATE
From time to time, the Company enters into various interest rate hedging
transactions for the purpose of managing exposure to fluctuations in interest
rates and establishing rates in anticipation of future debt issuances. As of
February 6, 1998, BNSF had interest rate swap transactions which fixed the
interest rate on the total principal amount of $375 million of its commercial
paper debt. The interest rate swap transactions require payment of a weighted
average fixed interest rate of approximately 6.1 percent, and the receipt of a
variable interest rate based on a commercial paper composite rate. Swap
transactions of $250 million will expire in December 1998, and $125 million will
expire in December 1999. Any gains and losses associated with changes in market
value of these swaps are not recognized. BNSF recognizes, on an accrual basis, a
fixed rate of interest on the principal amount of commercial paper hedged over
the term of the swap agreements. Unrecognized losses from BNSF's interest rate
swap transactions were not material as of December 31, 1997.
In anticipation of a future debt issuance, BNSF has entered into treasury lock
transactions totaling $200 million at an average interest rate of 5.875 percent.
The treasury lock transactions are based on a 30-year U.S. treasury rate and can
be closed by BNSF anytime up to expiration in June 1998. The unrecognized gain
on the treasury lock transactions were not material as of December 31, 1997.
LEASES
BNSF has substantial lease commitments for locomotives, freight cars, trailers,
office buildings and other property. Most of these leases provide the option to
purchase the equipment at fair market value at the end of the lease. However,
some provide fixed price purchase options. Future minimum lease payments (which
reflect leases having non-cancelable lease terms in excess of one year) as of
December 31, 1997 are summarized as follows (in millions):
<TABLE>
<CAPTION>
Capital Operating
Year ended December 31 Leases Leases
- --------------------------------------- ------- ---------
<S> <C> <C>
1998 $ 95 $ 313
1999 95 233
2000 91 177
2001 90 146
2002 90 121
Thereafter 544 1,210
- ---------------------------------------- ------ ------
Total 1,005 $2,200
======
Less amount representing interest 310
- ---------------------------------------- ------
Present value of minimum lease payments $ 695
======================================== ======
</TABLE>
Lease rental expense for all operating leases was $456 million, $446 million
and $352 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Contingent rentals and sublease rentals were not significant.
OTHER COMMITMENTS
BNSF has entered into commitments to acquire 380 locomotives in 1998. The
locomotives will be financed from one or a combination of sources including, but
not limited to, cash from operations, capital or operating leases, and debt
issuances. The decision on the method used will depend upon then current market
conditions and other factors. Additionally, BNSF has committed to acquire 325,
76 and 50 locomotives in each of 1999, 2000, and 2001, respectively.
In connection with the closing of the sale of rail lines in Southern
California in 1992 and 1993, BNSF has entered into various shared use agreements
with the agencies, which require BNSF to pay the agencies approximately $6
million annually to maintain track structure and facilities. Additionally, BNSF
recorded a $50 million liability in 1993 for an obligation retained by BNSF
which under certain conditions requires a repurchase of a portion of the
properties sold.
15. ENVIRONMENTAL AND OTHER CONTINGENCIES
ENVIRONMENTAL
BNSF'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 subject to environmental
clean-up and enforcement actions. In particular, the Federal Comprehensive
Environmental Response Compensation and Liability Act of 1980 (CERCLA), also
known as the "Superfund" law, as well as similar state laws generally impose
joint and several liability for clean-up and enforcement costs without regard to
fault or the legality of the original conduct on current and former owners and
operators of a site. BNSF has been notified that it is a potentially responsible
party (PRP) for study and clean-up costs at approximately 34 Superfund sites for
which investigation and remediation payments are or will be made or are yet to
be determined (the Superfund sites) and, in many instances, is one of several
PRPs. In addition, BNSF may be considered a PRP under certain other laws.
Accordingly, under CERCLA and other federal and state statutes, BNSF may be held
jointly and severally liable for all environmental costs associated with a
particular site. If there are other PRPs, BNSF generally participates in the
clean-up of these sites through cost-sharing agreements with terms that vary
from site to site. Costs are typically allocated based on relative
BURLINGTON NORTHERN SANTA FE CORPORATION 33
<PAGE>
volumetric contribution of material, the amount of time the site was owned or
operated, and/or the portion of the total site owned or operated by each PRP.
Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and restoration
of sites determined to be contaminated. Liabilities for environmental clean-up
costs are initially recorded when BNSF's liability for environmental clean-up is
both probable and a reasonable estimate of associated costs can be made.
Adjustments to initial estimates are recorded as necessary based upon additional
information developed in subsequent periods. BNSF conducts an ongoing
environmental contingency analysis, which considers a combination of factors
including independent consulting reports, site visits, legal reviews, analysis
of the likelihood of participation in and the ability of other PRPs to pay for
clean-up, and historical trend analyses.
BNSF is involved in a number of administrative and judicial proceedings and
other mandatory clean-up efforts at 353 sites, including the Superfund sites, at
which it is being asked to participate in the study or clean-up, or both, of
alleged environmental contamination. BNSF paid approximately $51 million, $47
million and $31 million during 1997, 1996 and 1995 respectively, for mandatory
clean-up efforts, including amounts expended under federal and state voluntary
clean-up programs. BNSF has accruals of approximately $202 million for
remediation and restoration of all known sites. BNSF anticipates that the
majority of the accrued costs at December 31, 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,
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.
The railroad industry, including BNSF Railway, will become subject to future
requirements regulating air emissions from diesel locomotives that will increase
their operating costs. Regulations applicable to new and rebuilt locomotive
engines were issued by the Environmental Protection Agency in December 1997.
These regulations, which are not yet effective, will be phased in between 2000
and 2010. 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. The State of California has previously indicated
to the Environmental Protection Agency that it will support the federal rule as
proposed subject to slight technical modifications. Presently, the magnitude of
any future expense is unknown.
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.
16. RETIREMENT PLANS
Prior to October 1, 1996, BNSF sponsored noncontributory defined benefit
pension plans through its subsidiaries, BNI and SFP, covering substantially all
non-union employees. Additionally, BNI and SFP sponsored nonqualified defined
benefit plans for certain officers and other employees. On October 1, 1996, the
respective BNI and SFP qualified defined benefit pension plans were merged,
creating the qualified BNSF Retirement Plan. The corresponding nonqualified
defined benefit plans were merged on October 1, 1996, creating the nonqualified
BNSF
34 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
Supplemental Retirement Plan. The benefits under BNSF's plans are based on
years of credited service and the highest five-year average compensation levels.
BNSF's funding policy is to contribute annually not less than the regulatory
minimum, and not more than the maximum amount deductible for income tax
purposes.
Components of the net pension cost for BNSF plans, including the prior BNI and
SFP plans, were as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995(1)
- ------------------------------------- ----- ----- -------
<S> <C> <C> <C>
Service cost, benefits earned
during the period $ 14 $ 17 $ 11
Interest cost on projected obligation 100 97 65
Actual return on plan assets (329) (148) (114)
Net amortization and deferred amounts 221 43 61
Curtailment costs -- -- 10
Cost of special termination benefits -- -- 32
- ------------------------------------- ----- ----- -----
Net pension cost $ 6 $ 9 $ 65
===================================== ===== ===== =====
</TABLE>
(1) Represents full year BNI combined with SFP for the period from September 22,
1995 through December 31, 1995.
The following table shows the reconciliation of BNSF's funded status of the
qualified plans with amounts recorded in the consolidated balance sheet (in
millions):
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------ ------- -------
<S> <C> <C>
Vested benefit obligation $(1,221) $(1,081)
========================================== ======= =======
Accumulated benefit obligation $(1,269) $(1,161)
========================================== ======= =======
Projected benefit obligation $(1,357) $(1,247)
Plan assets at fair value, primarily
marketable equity and debt securities 1,540 1,320
- ------------------------------------------ ------- -------
Plan assets in excess of projected
benefit obligation 183 73
Unrecognized net gain (169) (63)
Unrecognized prior service cost (10) (10)
Unamortized net transition obligation 13 15
- ------------------------------------------ ------- -------
Prepaid pension asset $ 17 $ 15
========================================== ======= =======
</TABLE>
BNSF uses a September 30 measurement date. The prior BNI and SFP plans used
measurement dates of December 31 and September 30, respectively. The assumptions
used in accounting for the BNSF, BNI and SFP qualified and nonqualified plans
were as follows:
<TABLE>
<CAPTION>
BNSF BNSF BNI SFP
1997 1996 1995 1995
- ----------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 7.5% 7.75% 7.0% 7.5%
Rate of increase in
compensation levels 4.0% 4.0% 4.0% 4.0%
Expected long-term rate
of return on plan assets 9.5% 9.5% 9.5% 9.75%
- ----------------------------- ---- ---- ---- ----
</TABLE>
The following table shows the reconciliation of the BNSF funded status of the
nonqualified supplemental plan with amounts recorded in the consolidated balance
sheet (in millions):
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------- ----- -----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ (38) $ (31)
=============================================== ===== =====
Accumulated benefit obligation $ (39) $ (32)
=============================================== ===== =====
Projected benefit obligation $ (47) $ (39)
- ----------------------------------------------- ----- -----
Unrecognized net loss 19 14
Unrecognized prior service cost 1 1
Unamortized net transition obligation 1 1
Adjustment required to recognize minimum liability (13) (9)
- ----------------------------------------------- ----- -----
Accrued pension liability $ (39) $ (32)
=============================================== ===== =====
</TABLE>
BNSF sponsors 401(k) thrift and profit sharing plans which cover substantially
all non-union employees and certain union employees. BNSF matches 50 percent of
the first 6 percent of non-union employees' contributions, which are subject to
certain percentage limits of the employees' earnings, at each pay period.
Depending on BNSF's performance, an additional matching contribution of up to 30
percent of the first 6 percent can be made at the end of the year. Prior to
December 31, 1996, BNSF sponsored 401(k) thrift and profit sharing plans through
its subsidiaries, BNI and SFP, which covered substantially all non-union
employees and certain union employees. The plans covering non-union employees
were merged on December 31, 1996. Under the prior plans, BNI employees were
immediately fully vested in the employer match, while SFP employees became
vested on a five year schedule based on length of service. As part of the
transition to the BNSF plan, former SFP employees became fully vested in the
employer match made through December 31, 1996. Employer contributions made
subsequent to December 31, 1996, for all non-union employees, are subject to the
five year length of service vesting schedule. BNSF's 401(k) matching expense was
$14 million in 1997 and $13 million in 1996 and 1995.
17. OTHER POSTEMPLOYMENT BENEFIT PLANS
BNSF provides life insurance benefits to eligible, former BNI non-union
employees. The life insurance plan is noncontributory and covers retirees only.
The postretirement benefit costs related to former BNI employees were $1 million
in each of the three years ended December 31, 1997, 1996 and 1995, respectively.
BNSF's policy is to fund benefits payable under the life insurance plan as
they come due. The accumulated postretirement benefit obligation related to the
former BNI plan was approximately $17 million at December 31, 1997 and 1996.
BURLINGTON NORTHERN SANTA FE CORPORATION 35
<PAGE>
Salaried employees of the former SFP who have rendered 10 years of service
after attaining age 45 are eligible for both medical benefits and life insurance
coverage during retirement. The retiree medical plan is contributory and
provides benefits to retirees, their covered dependents and beneficiaries.
Retiree contributions are adjusted annually. The plan also contains fixed
deductibles, coinsurance and out-of-pocket limitations. The life insurance plan
is noncontributory and covers retirees only. The combined components of SFP's
postretirement benefit cost related to former SFP employees relating to its
medical and life insurance plans were as follows (in millions):
<TABLE>
<CAPTION>
Life Insurance
and Medical Plan
-------------------------
1997 1996 1995(1)
- ------------------------------------- ------- ------ -------
<S> <C> <C> <C>
Service cost $ 4 $ 5 $ 1
Interest cost 14 16 4
Net amortization and deferred amounts (1) -- (2)
- ------------------------------------- ------ ------ ------
Net postretirement benefit cost $ 17 $ 21 $ 3
===================================== ====== ====== ======
</TABLE>
(1) Includes only the components of postretirement benefit cost from September
22, 1995 to December 31, 1995.
BNSF's policy is to fund benefits payable under the medical and life insurance
plans as they become due. The following table shows the reconciliation of the
plans' obligations to amounts accrued at December 31, 1997 and 1996 (in
millions). The former SFP plan uses a September 30 measurement date.
<TABLE>
<CAPTION>
Life Insurance Medical
Plan Plan
---------------------------------
1997 1996 1997 1996
- ----------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 44 $ 43 $ 111 $ 119
Fully eligible active participants -- -- 6 11
Other active participants 3 4 26 33
- ----------------------------------- ----- ----- ----- -----
47 47 143 163
Unrecognized net gain (loss) (2) (1) 18 (3)
- ----------------------------------- ----- ----- ----- -----
Accrued postretirement
benefit cost $ 45 $ 46 $ 161 $ 160
=================================== ===== ===== ===== =====
</TABLE>
For purposes of the above calculations, the assumed health care cost trend
rate for both managed care and non-managed care medical costs is 10 percent in
1997 and is assumed to decrease gradually to 5 percent by 2006 and remain
constant thereafter. Increasing the assumed health care cost trend rates by one
percentage point would increase the accumulated postretirement benefit
obligation for the medical plan by $15 million and the combined service and
interest components of net periodic postretirement benefit cost recognized in
1997 by $2 million.
For 1997 and 1996, the weighted-average discount rate assumed in determining
the accumulated postretirement benefit obligation was 7.5 percent and 7.75
percent, respectively, and the assumed weighted-average salary increase was 4
percent for both 1997 and 1996.
OTHER PLANS
Under collective bargaining agreements, BNSF participates in multiemployer
benefit plans which provide certain postretirement health care and life
insurance benefits for eligible union employees. Insurance premiums paid
attributable to retirees, which are generally expensed as incurred, were $15
million, $14 million and $11 million, in 1997, 1996 and 1995, respectively.
18. STOCK OPTIONS, OTHER INCENTIVE PLANS AND OTHER STOCKHOLDERS' EQUITY
STOCK OPTIONS
Under BNSF's stock option plan, options may be granted to officers and salaried
employees at the fair market value of the Company's common stock on the date of
grant. Approximately 4.3 million common shares were available for future grant
at December 31, 1997. All options expire within 10 years after the date of
grant. Shares issued upon exercise of options may be issued from treasury shares
or from authorized but unissued shares.
The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for its fixed stock option plans as the
exercise price equals the stock price on the date of grant. Had compensation
expense been determined for stock options granted in 1997, 1996, and 1995 based
on the fair value at grant dates consistent with SFAS No. 123 "Accounting for
Stock Based Compensation," the Company's pro forma net income and earnings per
share would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------- -------- ------- ------
<S> <C> <C> <C>
Net income (in millions) $ 857 $ 871 $ 84
Basic earnings per share $ 5.54 $ 5.73 $ .60
Diluted earnings per share $ 5.46 $ 5.63 $ .59
- -------------------------------------- -------- ------- ------
The pro forma amounts were estimated using the Black-Scholes option pricing model with the
following assumptions:
1997 1996 1995
- -------------------------------------- -------- ------- ------
Weighted average expected
life (years) 3.0 3.0 3.0
Expected volatility 20% 20% 20%
Annual dividend per share $ 1.20 $ 1.20 $1.20
Risk free interest rate 5.81% 6.11% 6.11%
Weighted average fair value
of options granted $15.45 $13.34 $9.41
- -------------------------------------- -------- ------- ------
</TABLE>
A summary of the status of the stock option plans as of December 31, 1997,
1996 and 1995, and changes during the years then ended, is presented below:
36 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------ ---------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Prices Options Exercise Prices Options Exercise Prices
- ------------------------------- ----------- ---------------- ----------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year 8,255,285 $49.46 9,598,653 $37.44 4,119,731 $41.16
Granted 2,926,012 88.21 2,439,380 75.77 1,026,414 58.20
Conversion of SFP options -- -- -- -- 5,342,024 29.86
Exercised (2,364,230) 46.37 (3,582,964) 34.37 (821,769) 31.27
Cancelled (229,944) 70.75 (199,784) 64.01 (67,747) 55.29
--------- ------ --------- ------ --------- ------
Balance at end of year 8,587,123 62.95 8,255,285 49.46 9,598,653 37.44
========= ====== ========= ====== ========= ======
Options exercisable at
year end 5,473,286 5,934,124 7,465,135
</TABLE>
- ------------------------------------------------------------------------------
The following table summarizes information regarding stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Range of Options Options Weighted Average Weighted Average
Exercise prices Outstanding Exercisable Remaining Life Exercise Prices
- ------------------------------------------------------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
$09.04 to $49.66 2,109,315 2,109,315 4.2 years $24.34
$50.88 to $73.88 1,896,323 1,882,323 6.4 years $56.03/(1)/
$74.50 to $74.50 1,407,661 1,407,661 8.1 years $74.50
$80.19 to $87.25 522,419 70,759 8.3 years $83.00/(1)/
$88.31 to $98.88 2,651,405 3,228 9.0 years $88.43/(1)/
--------- --------- --------- ------
$09.04 to $98.88 8,587,123 5,473,286 7.1 years $48.93
========= ========= ========= ======
</TABLE>
(1) The weighted average exercise price of options outstanding approximates the
weighted average exercise price of options exercisable.
- --------------------------------------------------------------------------------
Options to purchase approximately three million shares of common stock at
$87.31 per share were granted to exempt employees on January 14, 1998. These
options will vest and become exercisable on January 14, 1999 and will expire on
January 14, 2008.
OTHER INCENTIVE PLANS
BNSF has other long-term incentive programs in addition to stock options which
are administered separately on behalf of employees.
Under the BNSF 1996 Stock Incentive Plan and the Non-Employee Directors' Stock
Plan (NEDS), up to 10,000,000 and 300,000 shares of BNSF common stock,
respectively, have been authorized to be issued in the form of stock options,
restricted stock, performance shares and performance units.
During 1996, BNSF awarded a total of approximately 400,000 shares of
restricted stock to eligible employees and directors. No cash payment is
required by the individual. Shares awarded under the plans may not be sold,
transferred or used as collateral by the holder until the shares awarded become
free of restrictions. The restrictions will be lifted in thirds over three years
beginning on the third anniversary of the grant date if certain stock price
based performance goals are met. If, however, the performance goals are not met,
the restricted shares will be forfeited. All shares still subject to
restrictions are generally forfeited and returned to the plan if the employee's
or director's relationship is terminated. A total of 334,000 restricted shares
related to this award were outstanding as of December 31, 1997. Additionally, in
December 1997, BNSF issued 30,000 restricted shares of stock at $94.44. The
shares are time-vesting and vest ratably over the five year period ending
December 31, 2002.
Additionally, under the BNSF 1996 Stock Incentive Plan certain eligible
employees may defer the cash payment of their bonus paid under the Incentive
Compensation Plan (ICP) and will receive restricted stock which restrictions
lapse in three years or in two years if certain performance goals are met. The
number of restricted shares awarded are based on the amount of bonus deferred,
plus incremental shares, using the market price of BNSF common stock on the date
of grant. Restricted awards granted under this program totaled 119,972 shares in
1997. A total of 195,088 awards were outstanding under this and prior programs
on December 31, 1997.
In addition, all regularly-assigned salaried employees not eligible to
participate in deferrals of ICP are eligible to participate in the BNSF
Discounted Stock Purchase Program. This program allows employees to use their
bonus earned under the ICP to purchase BNSF common stock at a discount from the
market price and requires that the stock be restricted for a three year period.
During the years ended December 31, 1997, 1996 and 1995, 28,000, 29,000 and
39,000 shares, respectively, were purchased under this plan.
Compensation expense is recorded under the BNSF Stock Incentive Plan in
accordance with APB Opinion 25 and was not material in 1997, 1996 or 1995.
BURLINGTON NORTHERN SANTA FE CORPORATION 37
<PAGE>
OTHER STOCKHOLDERS' EQUITY
As a result of the Merger, certain investments in third parties held by both BNI
and SFP, which were previously recorded on the cost method, were converted to
the equity method due to BNSF's combined ownership position and ability to
exercise significant influence. As such, $26 million, which is net of deferred
taxes of $17 million, was recorded in 1995 as an increase to retained earnings
to reflect BNI's undistributed equity in earnings since initial investment.
SFP's investments were adjusted to fair value upon the application of purchase
accounting.
19. COMMON STOCK AND PREFERRED CAPITAL STOCK
COMMON STOCK
BNSF is authorized to issue 300,000,000 shares of common stock, $.01 Par Value.
At December 31, 1997, there were 156,303,785 shares of common stock outstanding.
Each holder of common stock is entitled to one vote per share in the election of
directors and on all matters submitted to a vote of stockholders. Subject to the
rights and preferences of any future issuance of preferred stock, each share of
common stock is entitled to receive dividends as may be declared by the Board of
Directors out of funds legally available and to share ratably in all assets
available for distribution to stockholders upon dissolution or liquidation. No
holder of common stock has any preemptive right to subscribe for any securities
of BNSF.
PREFERRED STOCK, SERIES A, $.01 PAR VALUE, AUTHORIZED 25,000,000 SHARES
In 1992, BNI issued 6,900,000 shares of 6 1/4% Cumulative Convertible Preferred
Stock, Series A, No Par Value. The convertible preferred stock was not
redeemable prior to December 1995. In September 1995, the outstanding BNI shares
were converted to 6,878,607 shares of BNSF 6 1/4% Cumulative Convertible
Preferred Stock, Series A, $.01 par value. In October 1995, the Board of
Directors voted to redeem BNSF's 6 1/4% Cumulative Convertible Preferred Stock,
Series A, $.01 par value, effective December 26, 1995, at the redemption price
of $52.1875 per share. The majority of the holders of this preferred stock
elected to convert their shares into BNSF common stock as BNSF's common stock
price was higher than the redemption price. As a result, the cash payment for
shares redeemed was not significant.
CLASS A PREFERRED STOCK, $.01 PAR VALUE, AUTHORIZED 50,000,000 SHARES -- ZERO
SHARES ISSUED
At December 31, 1997, BNSF had available for issuance 50,000,000 shares of Class
A Preferred Stock, $.01 Par Value. The Board of Directors has the authority to
issue such stock in one or more series, to fix the number of shares and to fix
the designations and the powers, rights, and qualifications and restrictions of
each series.
20. 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. Through February 6, 1998,
65,100 shares at a total cost of $84.98 per share 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 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
accounts for the effects of this transaction within stockholders' equity.
38 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
<TABLE>
<CAPTION>
21. QUARTERLY FINANCIAL DATA -- UNAUDITED
(Dollars in millions, except per share data) Fourth Third Second First
- ------------------------------------------------------ -------- -------- ------- -------
<S> <C> <C> <C> <C>
1997
Revenues/(1)/ $ 2,187 $ 2,138 $ 2,064 $ 2,024
Operating income/(2)/ 438 541 459 329
- ------------------------------------------------------ -------- -------- ------- -------
Net income/(2)/ $ 217 $ 283 $ 235 $ 150
- ------------------------------------------------------ -------- -------- ------- -------
Basic earnings per common share/(3)/ $ 1.40 $ 1.82 $ 1.53 $ .97
Diluted earnings per common share/(3)/ $ 1.38 $ 1.80 $ 1.50 $ .96
Dividends declared per common share $ .30 $ .30 $ .30 $ .30
Common stock price:
High $100 3/8 $ 98 $91 1/2 $89 1/2
Low 91 5/16 90 9/16 70 7/8 74
1996
Revenues/(1)/ $ 2,080 $ 2,032 $ 2,013 $ 2,016
- ------------------------------------------------------ -------- -------- ------- -------
Operating income 469 476 418 385
- ------------------------------------------------------ -------- -------- ------- -------
Net income $ 244 $ 247 $ 211 $ 187
- ------------------------------------------------------ -------- -------- ------- -------
Basic earnings per common share/(3)/ $ 1.59 $ 1.62 $ 1.38 $ 1.25
Diluted earnings per common share/(3)/ $ 1.57 $ 1.59 $ 1.36 $ 1.22
Dividends declared per common share $ .30 $ .30 $ .30 $ .30
Common stock price:
High $ 90 1/8 $ 86 3/4 $88 3/4 $87 1/8
Low 77 7/8 76 1/4 77 7/8 73 1/2
- ------------------------------------------------------ -------- -------- ------- -------
</TABLE>
(1) Amounts do not agree to previously reported amounts due to certain
reclassifications between revenues and expenses which were not significant.
(2) Fourth quarter 1997 results include a $90 million pre-tax charge ($57
million after tax) as discussed in Note 3.
(3) Earnings per share information has been restated to reflect adoption of SFAS
No. 128.
BURLINGTON NORTHERN SANTA FE CORPORATION 39
<PAGE>
EXHIBIT 99.2
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 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 principal
subsidiary of BNSF is The Burlington Northern and Santa Fe Railway Company (BNSF
Railway). BNSF Railway was formed in December 1996, when The Atchison, Topeka
and Santa Fe Railway Company (ATSF) merged with and into Burlington Northern
Railroad Company (BNRR).
RESULTS OF OPERATIONS
The results of operations discussed below include BNSF results for the year
ended December 31, 1997 and 1996, BNI results for the year ended December 31,
1995 and SFP results from the merger date, September 22, 1995, through December
31, 1995. All earnings per share information is stated on a diluted basis.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
BNSF recorded net income for 1997 of $885 million ($5.64 per common share),
compared with net income of $889 million ($5.74 per common share) for 1996. The
decrease in net income is primarily due to a fourth quarter special charge of
$90 million ($57 million after tax) or $.36 per common share principally related
to the consolidation of union clerical functions. This was largely offset by
improved operating results in 1997 despite severe weather conditions in the
first quarter of 1997 throughout the Northern Plains and the Pacific Northwest
(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 by at least $50
million.
Excluding the fourth quarter special charge, net income for 1997 was $942
million ($6.00 per common share) compared with 1996 net income of $889 million
($5.74 per common share).
- --------------------------------------------------------------------------------
REVENUE TABLE
The following table presents BNSF's revenue information by commodity for the
years ended December 31, 1997, 1996 and 1995 and includes certain
reclassifications of prior year information to conform to current year
presentation.
<TABLE>
<CAPTION>
Revenues Revenue Ton Miles (RTM) Revenue Per Thousand RTM
---------------------------- ------------------------------- ----------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
------ ------ ------ ------- ------- ------- ------ ------ ------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intermodal $2,282 $2,039 $1,076 79,964 71,262 38,516 $28.54 $28.61 $27.94
Coal 1,972 1,973 1,821 169,776 169,380 153,169 11.62 11.65 11.89
Agricultural Commodities 1,087 1,171 1,143 57,039 59,601 55,356 19.06 19.65 20.65
Chemicals 793 765 443 30,750 28,896 17,155 25.79 26.47 25.82
Forest Products 573 556 471 25,876 25,140 19,828 22.14 22.12 23.75
Consumer Goods 505 470 365 19,814 18,201 12,332 25.49 25.82 29.60
Metals 424 413 320 19,958 20,199 13,804 21.24 20.45 23.18
Automotive 422 396 211 7,102 6,062 3,158 59.42 65.32 66.81
Minerals 352 319 260 14,309 12,318 10,119 26.60 25.90 25.69
Other 3 39 7 - - - - - -
- ------------------------ ------ ------ ------ ------- ------- ------- ------ ------ ------
Total $8,413 $8,141 $6,117 424,588 411,059 323,437 $19.81 $19.71 $18.91
======================== ====== ====== ====== ======= ======= ======= ====== ====== ======
</TABLE>
BURLINGTON NORTHERN SANTA FE CORPORATION 13
<PAGE>
REVENUES
Total revenues for 1997 were $8,413 million or 3 percent higher compared with
revenues of $8,141 million for 1996. The $272 million increase primarily
reflects increases in the intermodal, consumer goods, minerals, chemicals,
automotive, forest products and metals segments partially offset by lower
agricultural commodities revenues. Revenue per revenue ton mile, a key
performance statistic, increased slightly in 1997 to $19.81 from $19.71 in 1996.
During 1997, BNSF's share of the Western United States (U.S.) rail traffic
market, based on reporting to the Association of American Railroads, increased
1.8 points to 41.4 percent.
Intermodal revenues improved $243 million or 12 percent compared with 1996,
due to increased volume growth in the Direct, International, Truckload, and IMC
segments. The Direct segment experienced a 14 percent growth in revenues
primarily due to an 18 percent gain in loadings. Direct segment growth was due
to volume increases from less than truckload (LTL) shipments led by Yellow
Freight, Consolidated Freightways and Roadway. LTL volume from Yellow Freight,
Consolidated Freightways, and Roadway has grown substantially all year with
growth accelerating in the 2nd, 3rd, and 4th quarters in particular due to
Yellow Freight's change of operations completed in April 1997. International
revenues increased 10 percent from 1996 due to an 8 percent increase in units
moved. International growth has been the result of a strong import economy and
increased market share by steamship lines such as Hyundai, OOCL, and Cosco that
utilize BNSF. Truckload revenues increased 21 percent due to a 20 percent
increase in loadings, primarily attributable to strength in the Company's
Chicago to California and Southeast to California corridors.
Agricultural Commodities revenues were $84 million lower, or 7 percent, than
1996, due primarily to a decrease in shipments of wheat for export in the first
and second quarters due to the U.S. uncompetitiveness in the world market and
severe weather conditions in the Northern Plains and PNW in the first quarter.
Some of the volume losses were offset by shorter haul, lower revenue movements
from the southern U.S. plains wheat region. Agricultural commodities revenues
were also unfavorably impacted by lower revenue per car for corn movements and
volume declines in barley traffic.
Chemicals revenues increased $28 million, or 4 percent, primarily due to
higher demand for petroleum and plastic products. Chemicals carloadings
increased 4 percent due to additional traffic from Texas Gulf Coast shippers.
Rate increases in petroleum products offset average revenue per car decreases in
agricultural minerals and industrial products.
Consumer Goods revenues were $35 million higher, or 7 percent, as compared
with 1996 primarily due to growth in the government and machinery and bulk foods
segments. Overall consumer goods carloadings increased 13 percent. Volume gains
in bulk foods were the result of strong corn syrup and sugar loadings, while
gains in government and machinery was the result of special moves for Boeing and
additional military movements.
Metals revenues increased $11 million, or 3 percent, due to a 4 percent
increase in revenue per revenue ton mile. Revenue per car gains were realized in
steel due to a shift in traffic mix away from scrap to sheet steel and
structural products.
Automotive revenues increased $26 million, or 7 percent, due to a 5 percent
volume gain in motor vehicle and vehicle parts traffic. BNSF experienced gains
in units moved for Honda and General Motors which were partially offset by
reduced Ford shipments. Revenue per revenue ton mile decreased 9 percent due to
changes in the traffic mix.
Minerals revenues increased $33 million, or 10 percent, compared with 1996 due
primarily to a 6 percent increase in shipments. Volume gains in clay and
aggregates, sand, rock and specialty minerals and sodium compounds were
partially offset by a decrease in shipments of cement, gypsum and lime. Clay and
aggregates revenue increases were due to increased movements from Wyoming
producers. Rock and specialty minerals volume gains were led by improvements in
crushed stone from Texas origins. Additional loadings in the sodium compounds
were the result of specific business initiatives to increase the Company's
participation in the market.
EXPENSES
Total operating expenses for 1997 were $6,646 million or $253 million higher
compared with expenses of $6,393 million for 1996. As discussed in Note 3:
Special charges, the Company recorded a $90 million ($57 million after-tax)
special charge in the fourth quarter of 1997 primarily related to the
consolidation of union clerical functions. Excluding the special charge,
operating expenses for 1997 were $6,556 million, $163 million or 3 percent
higher than 1996. The adjusted operating ratio for 1997 was 77.9 percent,
compared with an operating ratio of 78.5 percent for 1996.
Compensation and benefit expenses of $2,675 million were $114 million or 4
percent higher than 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.
14 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
Purchased services expenses of $866 million increased $34 million, or 4
percent, compared with 1996 due to higher ramping and drayage costs related to
increased intermodal volumes. Joint facility costs were also higher due to
operations over trackage rights gained as a condition of the merger of UP-SP.
The above were partially offset by lower professional service expenses.
Equipment rents expenses of $820 million were $84 million, or 11 percent,
higher than 1996. Lower equipment utilization and higher volumes resulted in
increased locomotive rents and higher time and mileage expenses for rail car and
intermodal trailers and flat cars. Additionally, equipment-related performance
penalties for grain increased $19 million from 1996.
Fuel expenses of $747 million were $20 million higher than in 1996 due to a 1
percent increase in the average price paid per gallon of diesel fuel as well as
a 2 percent increase in consumption due to volume. Gross ton miles per gallon of
fuel increased by 2 percent to 711 gross ton miles per gallon due to additional
new, fuel-efficient locomotives and the adoption of more fuel efficient
operating practices.
Materials and other expenses of $675 million were $102 million lower than 1996
partially due to lower derailment and personal injury expenses reflecting the
continuing benefits of employee safety programs. Additionally, other expenses
were reduced by income from the sale of signboard easements and tax incentives
from the state of Nebraska related to investment and employment levels in the
state.
Interest expense of $344 million was $43 million higher than in 1996,
primarily due to higher debt levels, which increased from $4,711 million at
December 31, 1996 to $5,289 million at December 31, 1997.
Other income (expense), net was $12 million below 1996. The increase in
expense is due to higher fees from the sale of accounts receivable reflecting an
increase in receivables sold and lower profits from land sales.
Income tax expense of $519 million was $32 million lower in 1997 due to lower
pre-tax income and a lower effective tax rate due to adjustments to prior years'
tax estimates.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
BNSF recorded net income for 1996 of $889 million ($5.74 per common share),
compared with net income of $92 million ($.67 per common share) for 1995.
Results for 1995 include a $735 million special charge, which reduced net income
by approximately $453 million. Results for 1995 were further reduced by $100
million (after tax), or $.95 per common share, for the cumulative effect of an
accounting change for locomotive overhauls and $6 million (after tax), or $.05
per common share, for an extraordinary loss on early retirement of debt.
Excluding the above items, net income for 1995 would have been $651 million.
As discussed in Note 3: Special charges, the Company recorded $735 million for
merger, severance and asset rationalization costs in 1995. The principal
components of the charge were $287 million related to BNSF's plan to centralize
the majority of its clerical functions and $254 million for severance, pension
and other salaried employee benefits and for employee relocation costs incurred
during the period. Additionally, $105 million was recorded for planned branch
line dispositions. The remaining $89 million included obligations for vacating
leased facilities and the write-off of duplicate and excess assets. Additional
accruals of $138 million were recorded through purchase accounting related to
former SFP employees and assets. When its plans are fully implemented, BNSF
expects to have eliminated over 3,300 positions and disposed of approximately
4,000 miles of low density track. To date, BNSF has eliminated approximately
1,700 salaried positions and 1,250 clerical positions and has disposed of
approximately 2,800 miles of low density track.
REVENUES
Total revenues for 1996 were $8,141 million compared with revenues of $6,117
million for 1995. The $2,024 million increase primarily reflects inclusion of a
full year of SFP results in 1996. Prior to the business combination, coal and
agricultural commodities made up approximately 50 percent of BNI's revenues
while intermodal shipments comprised approximately 45 percent of total SFP
revenues.
Intermodal revenues increased $963 million compared with 1995, due to
inclusion of a full year of SFP operations.
Coal revenues improved $152 million during 1996. Approximately 85 percent of
the increase was due to inclusion of a full year of SFP operations.
Additionally, tonnage of low-sulfur coal shipped from the Powder River Basin
increased from 1995. Revenue per thousand revenue ton miles declined principally
as a result of continuing competitive pricing pressures and a change in traffic
mix.
Agricultural commodities revenues during 1996 were $28 million greater than
1995 reflecting a full year of SFP operations largely offset by lower export
shipments of wheat and corn.
Chemicals revenues increased $322 million compared with 1995. Approximately 90
percent of the increase was due to inclusion of a full year of SFP operations.
The remaining increase was due to strong petroleum products and agricultural
chemicals demand.
BURLINGTON NORTHERN SANTA FE CORPORATION 15
<PAGE>
Revenue increases and changes per thousand revenue ton miles in all other
commodity groups are principally due to the inclusion of SFP results for the
full year.
EXPENSES
Total operating expenses for 1996 were $6,393 million compared with expenses of
$5,591 million for 1995. The operating ratio for 1996 was 78.5 percent, compared
with an operating ratio of 79.4 percent for 1995, excluding a $735 million
special charge. The favorable decrease in the operating ratio reflects synergies
from combining operations which resulted in reduced costs principally within
administrative functions. These benefits were partially offset by higher prices
paid for labor, services and materials, including a significant increase in the
cost of diesel fuel during 1996.
Compensation and benefits expenses of $2,561 million were $494 million above
1995 principally due to the full year of combined operations. The Company began
to realize the benefits of the merger during 1996 as employment, which
approximated 43,000 at the end of 1996, decreased by 5 percent when compared
with the prior year. Salaried employee levels decreased over 15 percent in the
same time period.
Purchased services expenses increased $285 million for 1996 compared with
1995, principally reflecting a full year of combined operations.
Equipment rents expenses were $196 million higher than 1995 due to the full
year combined operations as well as an increase in lease rental expense for
freight cars.
Depreciation and amortization expense for 1996 was $240 million higher than
1995 primarily due to the full year depreciation and amortization for combined
operations.
Fuel expenses for 1996 were $247 million or 51 percent higher than 1995
primarily due to an increase in consumption resulting from the full year of
combined operations and an 8 cent increase in the average price per gallon.
Materials and other expenses for 1996 increased $75 million compared with
1995. The increase reflects the full year of combined operations partially
offset by decreases in expenses from cost initiatives including reductions in
employee injuries due to increased focus on employee safety.
Interest expense increased $81 million compared with 1995, due to the full
year effect of interest on SFP debt in 1996 as well as an increase in the levels
of outstanding debt.
Other income (expense), net was $35 million below 1995. The decrease is due to
a full year of combined operations in 1996 as well as $16 million of equity in
earnings of SFP from February 21, 1995, the date of BNI's initial investment in
SFP, to September 22, 1995, the date of merger consummation.
ACQUISITION OF SFP
On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger (as
amended, the Merger Agreement) pursuant to which SFP would merge with BNI in the
manner described in Note 2: Acquisition of SFP (the Merger). Stockholders of BNI
and SFP approved the Merger Agreement at special stockholders' meetings held on
February 7, 1995. On August 23, 1995, the Interstate Commerce Commission issued
a written decision approving the Merger and on September 22, 1995 the Merger was
consummated. As discussed in Note 2, the business combination with SFP was
accounted for by the purchase method.
Pursuant to the Merger Agreement, BNI and SFP commenced tender offers
(together, the Tender Offer) to acquire 25 million and 38 million shares of SFP
common stock, respectively, at $20 per share in cash. During 1995, SFP borrowed
$1.0 billion under a credit facility of which $760 million of the proceeds were
used to purchase the 38 million shares pursuant to the Tender Offer. In
addition, BNI borrowed $500 million under a credit facility of which the
proceeds were used to finance BNI's purchase of SFP common stock in the Tender
Offer. The Tender Offer was completed on February 21, 1995.
CAPITAL RESOURCES AND LIQUIDITY
1997 CASH FLOWS
Cash generated from operations is BNSF's principal source of liquidity. BNSF
generally funds any additional liquidity requirements through debt issuance,
including commercial paper, or leasing of assets.
Operating activities provided cash of $1,814 million during 1997 compared with
$1,871 million during 1996. The decrease in cash from operations was in part
caused by an increase in cash used for working capital reflecting the timing of
payments, partially offset by a decrease in payments for employee, merger and
separation costs. Additionally, the Company had a significant increase in
receivable balances during 1997 which was largely offset by the sale of an
additional $300 million of accounts receivable in June.
BNSF's cash outflows from investing activities for 1997 predominantly
consisted of capital expenditures of $2,182 million which are further discussed
below, while cash inflows from financing activities of $499 million principally
reflect net proceeds from borrowings partially offset by dividend payments.
16 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
OTHER CAPITAL RESOURCES AND LIQUIDITY
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 December 31, 1997, there were no borrowings against the long-term revolving
credit agreement and the maturity value of commercial paper outstanding was $673
million, leaving a total remaining capacity of $827 million under the long-term
revolving credit agreement available and $500 million under the short-term
credit agreement available. Additionally, the Company has a shelf registration
of debt securities, including medium-term notes, which had $350 million
available for borrowing at December 31, 1997.
In February 1997, BNSF issued $100 million of 6.1% 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% notes due
July 15, 2037 and $200 million of 7.25% debentures due August 1, 2097. The $175
million 6.53% notes may be redeemed on July 15, 2003, at the option of the
holder. In August 1997, BNSF filed a 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. In December 1997, the
Company issued $200 million of 6 7/8% debentures, due December 1, 2027. The net
proceeds of these debt issues were used for general corporate purposes including
the repayment of commercial paper.
During 1997, BNSF Railway installed a new revenue management system, replacing
separate BNRR and ATSF systems. Primarily as a result of systems integration,
accounts receivable balances have risen above historical levels. Receivable
balances reached a 1997 high at September 30, 1997 and during the fourth
quarter, the Company was able to reduce outstanding receivables by $140 million.
The Company expects to further reduce receivables during 1998. The increase is
largely offset by additional accounts receivable sales in 1997. BNSF maintains
an allowance for corrections to and collectibility of freight and other billing,
and believes that the December 31, 1997 allowance is adequate to cover disputed
and uncollectible receivables.
As discussed in Note 9 to the financial statements, the Company completed a
new amended and restated 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.
CAPITAL EXPENDITURES AND RESOURCES
A breakdown of cash capital expenditures is set forth in the following table (in
millions):
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Maintenance of Way $ 974 $ 854 $ 482
Equipment 572 514 112
Expansion Projects 428 445 229
Other 208 421 67
- ----------------------- ------ ------ -----
Total $2,182 $2,234 $ 890
======================= ====== ====== =====
</TABLE>
Maintenance of way expenditures for 1997 increased primarily due to an
increase in spending on rail and tie renewal projects. Expansion projects in
both 1997 and 1996 reflect double and triple tracking of main line track and
construction of intermodal facilities. Equipment expenditures were higher in
1997 reflecting an increase in locomotive purchases. Other projects in 1996
include $150 million related to rail lines acquired from UP-SP.
BNSF has entered into commitments to acquire 380 locomotives in 1998. The
locomotives will be financed from one or a combination of sources including, but
not limited to, cash from operations, capital or operating leases, and debt
issuances. The decision on the method used will depend upon then current market
conditions and other factors. Additionally, BNSF has committed to acquire 325,
76 and 50 locomotives in each of 1999, 2000, and 2001, respectively.
INFLATION
Due to the capital intensive nature of BNSF's business, the full effect of
inflation is not reflected in operating expenses because depreciation is based
on historical cost. An assumption that all operating assets were depreciated at
current price levels would result in substantially greater expense than
historically reported amounts.
BURLINGTON NORTHERN SANTA FE CORPORATION 17
<PAGE>
DIVIDENDS
Common stock dividends declared were $1.20 per common share annually for 1997,
1996 and 1995. Dividends paid on common stock were $185 million and $184 million
during 1997 and 1996, respectively. Dividends on common and preferred stock were
$129 million during 1995. The increase in 1996 dividends as compared to 1995
reflects an increase in outstanding shares of common stock principally due to
the Merger. On January 15, 1998, the Board of Directors declared a dividend of
30 cents per share upon its outstanding shares of common stock, $.01 par value,
payable April 1, 1998, to stockholders of record on March 10, 1998.
CAPITAL STRUCTURE
BNSF's ratio of total debt to total capital was 44 percent, 44 percent and 46
percent at the end of 1997, 1996 and 1995, respectively.
OTHER MATTERS
CASUALTY AND ENVIRONMENTAL
Personal injury claims, including work-related injuries to employees, are a
significant expense for the railroad industry. Employees of BNSF are compensated
for work-related injuries according to the provisions of the Federal Employers'
Liability Act (FELA). FELA's system of requiring finding of fault, coupled with
unscheduled awards and reliance on the jury system, contributed to significant
increases in expense in past years. BNSF implemented a number of safety programs
to reduce the number of personal injuries as well as the associated claims and
personal injury expense. The total amount of personal injury expenses were $139
million, $162 million, and $143 million in 1997, 1996 and 1995, respectively.
Expenses in 1997 and 1996 reflect a full year of combined operations while 1995
includes SFP expenses from September 22, 1995 through December 31, 1995.
As discussed in more detail in Note 15: 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 subject to
environmental clean-up and enforcement actions. In particular, the Federal
Comprehensive Environmental Response Compensation and Liability Act of 1980,
also known as the "Superfund" law, as well as similar state laws generally
impose joint and several liability for clean-up and enforcement costs without
regard to fault or the legality of the original conduct on current and former
owners and operators of a site.
BNSF is involved in a number of administrative and judicial proceedings and
other mandatory clean-up efforts at 353 sites, including the Superfund sites, at
which it is being asked to participate in the study or clean-up, or both, of
alleged environmental contamination. BNSF paid approximately $51 million, $47
million and $31 million during 1997, 1996 and 1995 respectively, for mandatory
clean-up efforts, including amounts expended under federal and state voluntary
clean-up programs. BNSF has accruals of approximately $202 million for
remediation and restoration of all known sites. BNSF anticipates that the
majority of the accrued costs at December 31, 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,
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.
The railroad industry, including BNSF Railway, will become subject to future
requirements regulating air emissions from diesel locomotives that will increase
their operating costs. Regulations applicable to new and rebuilt locomotive
engines were issued by the Environmental Protection Agency in December 1997.
These regulations, which are not yet effective, will be phased in between 2000
and 2010. Under some interpretations of federal law, older locomotive engines
may be regulated by states based on standards and procedures which the State
18 BURLINGTON NORTHERN SANTA FE CORPORATION
<PAGE>
of California ultimately adopts. The State of California has previously
indicated to the Environmental Protection Agency that it will support the
federal rule as proposed subject to slight technical modifications. Presently,
the magnitude of any future expense is unknown.
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.
LABOR
Labor unions represent approximately 88 percent of BNSF Railway employees under
collective bargaining agreements with 13 different labor organizations. The
collective bargaining agreements reached in 1995 and 1996 as a result of
industry-wide labor contract negotiations will remain in effect through at least
December 31, 1999 and until new agreements are reached or the Railway Labor
Act's procedures are exhausted.
POTENTIAL SALE OF INVESTMENT IN PIPELINE PARTNERSHIPS
As discussed in Note 4: Potential sale of investment in pipeline partnerships,
Santa Fe Pacific Pipelines, Inc. (Pipelines), an indirect wholly-owned
subsidiary of BNSF, entered into an agreement with Kinder Morgan Energy Partners
L.P. (Kinder Morgan) whereby Kinder Morgan will acquire substantially all of
Pipelines' interests in Santa Fe Pacific Pipeline Partners, L.P. and its
operating subsidiary (Pipeline Partnerships). Total cash consideration to be
received by Pipelines 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 results of operations is not anticipated
to be significant as Pipelines' equity income from its interest in the Pipeline
Partnerships is largely offset by interest expense related to outstanding debt
of the Company.
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. Through February 6, 1998,
65,100 shares at a cost of $84.98 per share have been repurchased under the
program. As discussed in Note 20: Share repurchase program, in November 1997,
the Company sold 500,000 equity put options in connection with its share
repurchase program.
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 will not realize the impact of
increases or decreases in fuel prices. Based on 1997 fuel consumption, each one
cent increase in the price of fuel would result in approximately $11 million in
additional fuel expense on an annual basis.
As of February 6, 1998, BNSF had entered into forward purchases for
approximately 353 million gallons at an average price of approximately 53 cents
per gallon, and fuel swaps for approximately 1,046 million gallons at an average
price of approximately 53 cents per gallon.
The above prices do not include taxes, transportation costs, certain other
fuel handling costs and, except for forward 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.
BNSF's fuel hedging program covers approximately 72 percent, 29 percent and 18
percent of estimated fuel purchases for 1998, 1999, and 2000, respectively.
Quarterly hedges in 1998 range from 64 percent to 82 percent of anticipated fuel
purchases. Hedges for 1999 and 2000 approximate 29 percent and 18 percent of
estimated consumption for each quarter, respectively. Hedge positions are
closely monitored to ensure that they will not exceed actual fuel requirements
in any period. Unrecognized losses from BNSF's fuel hedging transactions were
approximately $24 million as of December 31, 1997 and unrecognized gains as of
December 31, 1996
BURLINGTON NORTHERN SANTA FE CORPORATION 19
<PAGE>
were approximately $17 million. BNSF also monitors its hedging positions and
credit ratings of its counterparties and does not anticipate losses due to
counterparty nonperformance.
INTEREST RATE
From time to time, the Company enters into various interest rate hedging
transactions for the purpose of managing exposure to fluctuations in interest
rates and establishing rates in anticipation of future debt issuances. As of
February 6, 1998, BNSF had interest rate swap transactions which fix the
interest rate on the total principal amount of $375 million of its commercial
paper debt. The interest rate swap transactions require payment of a weighted
average fixed interest rate of approximately 6.1 percent, and the receipt of a
variable interest rate based on a commercial paper composite rate. Swap
transactions of $250 million will expire in December 1998, and $125 million will
expire in December 1999. Any gains and losses associated with changes in market
value of these swaps are not recognized. BNSF recognizes, on an accrual basis, a
fixed rate of interest on the principal amount of commercial paper hedged over
the term of the swap agreements. Unrecognized losses from BNSF's swap
transactions were not material as of December 31, 1997.
In anticipation of a future debt issuance, BNSF has entered into treasury lock
transactions totaling $200 million at an average interest rate of 5.875 percent.
The treasury lock transactions are based on a 30-year U.S. treasury rate and can
be closed by BNSF anytime up to expiration in June 1998. Unrecognized gains were
not material as of December 31, 1997.
UP-SP MERGER
The Surface Transportation Board (STB) approved the acquisition of Southern
Pacific Rail Corporation (SP) by Union Pacific Corporation (UP) in its written
decision dated August 12, 1996. The transaction was consummated on September 12,
1996. As a condition of the merger, the STB imposed provisions which grant
BNSF Railway access to approximately 4,000 miles of UP-SP track. The STB
decision provides BNSF Railway with greater access to Gulf Coast and West Coast
markets. Additionally, in late 1997 BNSF Railway was granted temporary access to
additional UP-SP rail lines by order of the STB. On February 13, 1998, the
Company and UP announced an agreement providing for joint ownership of the line
between Houston and New Orleans. This agreement establishes joint dispatching
responsibility for certain Gulf Coast lines and increased access to certain Gulf
Coast shippers for BNSF.
During 1997, the Company gained approximately 1.8 points of market share of
shipments by rail in the Western United States. This gain was primarily the
result of the trackage rights gained from the UP-SP and operating problems
experienced by the UP-SP associated with consolidating operations. It is
presently unknown when UP-SP's operating difficulties will be resolved and what
effect a fully operational UP-SP will have on BNSF Railway's future market
opportunities and alternatives.
YEAR 2000
BNSF has established a committee to evaluate and manage the cost and risk
associated with the Company's hardware and software becoming year 2000 compliant
and to minimize the impact on the Company's operations. The committee has
identified the major areas of BNSF's information systems that will be affected
by the year 2000 non-compliance and is in the process of implementing changes
and recommending alternative solutions for the year 2000. To date specific
spending on year 2000 activities has not been significant. However, BNSF has
completed year 2000 compliance on certain systems in conjunction with the
merger-related systems integration. The cost of making the Company's remaining
information systems and software year 2000 compliant is estimated to be
approximately $20 million and will be incurred over the next two years.
Additionally, management is evaluating the impact of year 2000 compliance on
other areas of the Company. It is the opinion of management that year 2000 will
not have a material adverse effect on the annual results of operations or
financial position of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB 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. 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 does not anticipate any
significant changes in disclosure as a result of adopting SFAS Nos. 130 and 131.
FORWARD-LOOKING INFORMATION
To the extent that these written statements include predictions concerning
future operations and results of operations, such statements are forward-looking
statements that involve risks and uncertainties, and actual results may differ
materially. Factors that could cause actual results to differ materially
include, but are not limited to, general economic downturns, which may limit
demand and pricing; labor matters, which may affect the costs and feasibility of
certain operations; and competition and commodity concentrations, which may
affect traffic and pricing levels.
20 BURLINGTON NORTHERN SANTA FE CORPORATION
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SFP PIPELINE HOLDINGS, INC. AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,073
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,292
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 216,142
<CURRENT-LIABILITIES> 15,253
<BONDS> 204,756
0
0
<COMMON> 1
<OTHER-SE> (65,039)
<TOTAL-LIABILITY-AND-EQUITY> 216,142
<SALES> 0
<TOTAL-REVENUES> 33,198
<CGS> 0
<TOTAL-COSTS> 628
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,515
<INCOME-PRETAX> 7,882
<INCOME-TAX> 6,560
<INCOME-CONTINUING> 9,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,391
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
