<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10595
SFP PIPELINE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3713699
(State of incorporation) (I.R.S. Employer Identification No.)
2650 Lou Menk Drive
Fort Worth, Texas 76131
(Address of principal executive offices, including zip code)
(817) 333-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Number of shares outstanding of the registrant's common stock ($0.01 par value)
as of May 15, 1998: 1,000.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT PERMITTED BY GENERAL INSTRUCTION H.
================================================================================
<PAGE>
SFP PIPELINE HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 1998 and December 31, 1997....... 1
Consolidated Statement of Operations
for the three-month periods ended March 31, 1998 and 1997.............. 2
Consolidated Statement of Cash Flows
for the three-month periods ended March 31, 1998 and 1997.............. 3
Notes to Consolidated Financial Statements............................... 4
Item 2. Management's Narrative Analysis of the Results of Operations....... 6
Financial Information of Burlington Northern Santa Fe Corporation........... **
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 7
Item 6. Exhibits and Reports on Form 8-K................................... 7
Signature................................................................... 8
</TABLE>
** Incorporated by reference from Part I of the Form 10-Q of Burlington Northern
Santa Fe Corporation for the quarter ended March 31, 1998 (Commission File
Number 1-11535)
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1998 1997
--------- ------------
A S S E T S
Cash and cash equivalents.......................................... $ 92,890 $ 9,073
Interest receivable................................................ 1,238 1,126
Other current assets............................................... 755 2,093
Investment in Santa Fe Pacific Pipeline Partners, L.P.............. 4,500 64,775
Investment in Kinder Morgan Energy Partners, L.P.
Common Units held in escrow...................................... 392,874 --
Notes receivable from Burlington Northern Santa Fe Corporation..... 130,000 130,000
Other assets....................................................... 3,087 9,075
--------- ----------
Total assets.................................................. $ 625,344 $ 216,142
========= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Interest payable................................................... $ -- $ 6,111
Income taxes currently payable..................................... 74,619 1,253
Other current liabilities.......................................... 1,138 7,889
Variable Rate Exchangeable Debentures.............................. 219,000 204,756
Deferred income taxes.............................................. 74,361 56,943
Other liabilities.................................................. 197,230 4,229
--------- ----------
Total liabilities............................................. 566,348 281,181
--------- ----------
Commitments and contingencies (Note (f))........................... -- --
--------- ----------
Stockholder's equity (deficit)
Common stock.................................................... 1 1
Additional paid-in capital...................................... 60,333 (33,388)
Accumulated deficit............................................. (1,338) (31,652)
--------- ----------
Total stockholder's equity (deficit).......................... 58,996 (65,039)
--------- ----------
Total liabilities and stockholder's equity (deficit).......... $ 625,344 $ 216,142
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months
ended March 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Equity in income of
Santa Fe Pacific Pipeline Partners, L.P............. $ 4,059 $ 4,894
General and administrative expenses
and other, net of reimbursements ................... 126 126
-------- --------
Operating income...................................... 3,933 4,768
Gain on sale of general partnership interests......... 67,461 --
Interest income....................................... 1,997 2,119
Interest expense...................................... -- 6,376
-------- --------
Income before taxes................................... 73,391 511
Income taxes.......................................... 36,077 208
-------- --------
Net income............................................ 37,314 303
Accumulated deficit
Beginning of period.............................. (31,652) (39,043)
Cash dividends................................... (7,000) (2,000)
-------- --------
End of period.................................... $ (1,338) $(40,740)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................. $ 37,314 $ 303
-------- -------
Adjustments to reconcile net income to net
cash provided by operating activities--
Proceeds from sale of general partnership interests . 90,200 --
Gain on sale of general partnership interests ....... (67,461) --
Equity in undistributed earnings of
Santa Fe Pacific Pipeline Partners, L.P. .......... 3,043 2,208
Deferred income taxes ............................... (40,668) (26)
Other, net .......................................... 6,477 (78)
Changes in--
Interest receivable ............................... (112) 26
Other current assets .............................. 1,338 (206)
Interest payable .................................. (6,111) --
Income taxes currently payable .................... 73,366 (820)
Other current liabilities ......................... (6,751) 1,926
-------- -------
Total adjustments ............................... 53,321 3,030
-------- -------
Net cash provided by operating activities ....... 90,635 3,333
-------- -------
Cash flows from investing activities ...................... -- --
Cash flows from financing activities:
Cash dividends .......................................... (7,000) (2,000)
Amortization of debt costs and discount ................. 182 262
-------- -------
Net cash (used) by financing activities ......... (6,818) (1,738)
-------- -------
Increase in cash and cash equivalents ..................... 83,817 1,595
Cash and cash equivalents--
Beginning of period ..................................... 9,073 3,061
-------- -------
End of period ........................................... $ 92,890 $ 4,656
======== =======
Income taxes paid ........................................ $ 1,070 $ 1,055
======== =======
Interest paid ............................................. $ 6,111 $ 6,111
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The accompanying consolidated financial statements include the accounts of
SFP Pipeline Holdings, Inc. ("Holdings") and its wholly owned subsidiary, Santa
Fe Pacific Pipelines, Inc. ("SFPPI") (collectively, the "Company"). Holdings and
SFPPI are wholly owned indirect subsidiaries of Burlington Northern Santa Fe
Corporation ("BNSF"). 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. On January 2, 1998, Santa Fe merged
with and into The Burlington Northern and Santa Fe Railway Company, a wholly
owned subsidiary of BNSF. The accompanying consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included in its Annual Report on Form 10-K for the
year ended December 31, 1997, as amended. The results of operations for any
interim period are not necessarily indicative of the results of operations to be
expected for the entire year. In the opinion of management, all adjustments
(consisting of only normal recurring adjustments, except as disclosed) necessary
to present fairly the Company's consolidated financial position as of March 31,
1998 and December 31, 1997 and the consolidated results of operations for the
three month periods ended March 31, 1998 and 1997 have been included. Certain
comparative prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation.
(b) In October 1997, Santa Fe Pacific Pipeline Partners, L.P. (the "Trading
Partnership"), SFPPI and Holdings entered into a Purchase Agreement with Kinder
Morgan Energy Partners, L.P. ("Kinder Morgan") and Kinder Morgan G.P., Inc. The
Purchase Agreement and the transactions provided for therein (collectively, the
"KM Transaction") were approved by the respective unitholders of the Trading
Partnership and Kinder Morgan on March 6, 1998, and the KM Transaction was
completed later that day. Pursuant to the Purchase Agreement, Kinder Morgan
acquired substantially all of the assets of the Trading Partnership for
approximately 26.6 million common units of limited partner interests in Kinder
Morgan ("Kinder Morgan 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 common unit of limited partner
interest in the Trading Partnership ("SFP Common Units") then outstanding was
converted into the right to receive 1.39 Kinder Morgan Common Units. In
connection with the KM Transaction, SFPPI retained a 1% special (non-voting)
limited partnership interest in the operating partnership, SFPP, L.P. ("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. The
Company recognized a $67 million one-time pre-tax gain at the time of the sale
of the general partner interests. Prior to the closing of the KM Transaction,
SFPPI owned 8,148,148 SFP Common Units. At closing, SFPPI placed into escrow
certificates representing the right to receive the 11,325,925 Kinder Morgan
Common Units into which the SFP Common Units became convertible for issuance to
holders of the Company's outstanding Variable Rate Exchangeable Debentures Due
2010 ("VREDs").
Consummation of the KM Transaction constituted an "Exchange Event" under the
original terms of the VREDs, as a result of which the VRED holders became
entitled to receive either cash equal to the par value of and accrued interest
on the VREDs or substantially all of the Kinder Morgan Common Units received by
the Company in exchange for its SFP Common Units. Kinder Morgan has agreed to
pay and perform all obligations of Holdings related to the VREDs and has agreed
to indemnify and hold harmless
-4-
<PAGE>
BNSF and its subsidiaries from and against any and all losses, costs, damages,
expenses, liabilities and claims arising or resulting from or relating to, among
other things, the VREDs, the Trading Partnership, or SFPP. Kinder Morgan has
commenced an exchange offer (the "Exchange Offer") to the holders of the VREDs
pursuant to which it is offering to exchange 51.720927 Kinder Morgan Common
Units for each $1,000 principal amount of VREDs. The Exchange Offer will expire
May 26, 1998 and Kinder Morgan has stated that all VREDs tendered by the holders
thereof in the Exchange Offer will be exchanged on June 4, 1998, with any VREDs
that have not been tendered to be redeemed for cash at their principal amount
plus accrued and unpaid interest thereon as of that date. Further detailed
information concerning the terms and conditions of the Exchange Offer and
information and financial statements relating to Kinder Morgan are set forth in
the Registration Statement on Form S-4 under the Securities Act of 1933 (the
"Exchange Offer Registration Statement") filed by Kinder Morgan with the
Securities and Exchange Commission in connection with the Exchange Offer (File
No. 333-46709).
The September 22, 1995 business combination of Santa Fe and Burlington Northern
Inc. 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 BNSF's books and records and were not reflected by (or "pushed down to") the
Company. Upon consummation of the KM Transaction, the Company recorded its
interests in Kinder Morgan Common Units at fair value. At March 31, 1998, the
recorded value is based on the closing price of Kinder Morgan Common Units on
the New York Stock Exchange. The Company has recorded its VRED obligation at par
value at March 31, 1998 which represents the cash value VRED holders are
entitled to if a holder does not elect to receive Kinder Morgan Units. The
Company has recorded as an other liability $173.9 million representing the
difference between the fair value of the Kinder Morgan Common Units and the par
value of the VRED's pending consummation of the Exchange Offer.
Certain purchase accounting adjustments unrelated to the Company's investment
and VRED obligation were pushed down to the Company upon consummation of the KM
Transaction. The adjustments included an adjustment to the Company's deferred
tax liabilities to reflect the deferred tax liabilities of BNSF relating to the
Company. The net effect of the adjustments increased the Company's additional
paid-in capital. The pre-tax gain recognized by the Company is the same amount
reported by BNSF reflecting BNSF's purchase accounting cost basis of the general
partner interests sold for cash net of transaction and certain other costs. The
Company does not anticipate any further gain or loss on the transaction as
Kinder Morgan is contractually responsible for the Company's VRED obligations.
The Company's special 0.5% (non-voting) limited partnership interest in SFPP has
been recorded at an estimated fair value of $4.5 million at March 31, 1998.
(c) SFPPI received distributions aggregating $7.1 million during both the three-
month periods ended March 31, 1998 and 1997, by virtue of its general and
limited partner interests in the Trading Partnership.
(d) The notes receivable from Burlington Northern Santa Fe Corporation ("BNSF")
are due and payable upon the maturity of the Company's VREDs, but are payable at
any time prior to that date to the extent, and only to the extent, that
Holdings' board of directors determines in good faith that payment is needed,
after taking into account all other available funds, for Holdings to meet its
obligations with respect to the VREDs. BNSF assumed the obligations associated
with these notes from Santa Fe in January 1997. Financial information with
respect to BNSF is incorporated herein by reference from BNSF's Form 10-Q for
the quarter ended March 31, 1998.
-5-
<PAGE>
(e) The VREDs bear interest at a variable rate, payable quarterly in arrears.
Interest expense for each quarter has generally been recorded in an amount equal
to the aggregate amount of distributions declared by the Trading Partnership for
that quarter on the 8,148,130 SFP Common Units for which the VREDs were
exchangeable prior to the completion of the KM Transaction. On April 22, 1998,
Kinder Morgan announced its quarterly distribution of $0.5625 per Kinder Morgan
Common Unit for the first quarter, payable May 15, 1998 to unit holders of
record on April 30, 1998. As a result of the KM Transaction, Kinder Morgan is
responsible for first quarter 1998 interest payable to VRED holders. The
Partnership declared cash distributions of $0.75 per SFP Common Unit for the
first quarter of 1997, and, accordingly, the Company accrued interest expense of
$6.1 million for the three months ended March 31, 1997.
(f) As special limited partner of SFPP, SFPPI remains contingently liable for
$190 million of long-term debt of SFPP in the event of default.
As discussed in Note 5 to the Company's consolidated financial statements
for the year ended December 31, 1997, certain of the SFPP's shippers have
filed civil suits and initiated Federal Energy Regulatory Commission ("FERC")
complaint proceedings against SFPP. SFPP'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, SFPP is, from time to
time, subject to environmental cleanup and enforcement actions. Additional
information regarding these matters is contained in Kinder Morgan's Exchange
Offer Registration Statement referred to in Note (b) and its subsequent filings
with the Securities and Exchange Commission under the Securities Exchange Act of
1934.
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS
The sale of substantially all of the assets of the Trading Partnership and
related transactions provided for in the previously reported Purchase Agreement,
dated October 18, 1997, entered into among the Company, the Trading Partnership
and Kinder Morgan were completed on March 6, 1998. See Note (b) to the
consolidated financial statements contained herein for further information
regarding these transactions. Holders of the Company's outstanding VREDs will be
able to exchange those VREDs for Kinder Morgan Common Units pursuant to the
Exchange Offer described in Note (b) to such consolidated financial statements.
The following narrative analysis should be read in conjunction with the Exchange
Offer Registration Statement referred to in Note (b) and the business and
financial information included in Kinder Morgan's 1997 Annual Report on Form
10-K and its subsequent filings with the Securities and Exchange Commission
under the Securities Exchange Act of 1934. As one of the Company's principal
assets is its notes receivable from BNSF, the following narrative analysis
should also be read in conjunction with the first quarter consolidated financial
statements and the management's discussion and analysis of financial condition
and results of operations of BNSF, filed as Exhibit 99.1 to this Form 10-Q.
For the three months ended March 31, 1998, the Company's net income of $37.3
million was $37.0 million higher than in the first quarter of 1997. The increase
in net income is primarily due to a $67.5 million pre-tax gain on the sale of
substantially all of the Company's general partner interests in the Partnership
as discussed in Note (b) to the consolidated financial statements. As discussed
in Note (e) to the consolidated financial statements, no interest expense was
accrued in the first quarter of 1998. The Company's equity in income of the
Partnership of $4.1 million was $0.8 million, or 17% lower than in the 1996
period primarily due to the sale occurring on March 6, 1998.
The Company's interest income is earned on its notes receivable from BNSF
bearing interest at rates tied to the Federal Funds rate. The provision for
income taxes resulted in an effective rate of 49.2% compared to 40.7% in the
first quarter of 1997 due to higher taxes on the sale.
-6-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Kinder Morgan and SFPP are subject to litigation and regulatory proceedings, to
which Holdings is not a party and as to which it is indemnified against by
Kinder Morgan, that are described in periodic filings by Kinder Morgan pursuant
to the Securities Exchange Act of 1934.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
Exhibit 27 Financial Data Schedule as of and for the three months
ended March 31, 1998
Exhibit 99.1 Form 10-Q of Burlington Northern Santa Fe Corporation for
the quarter ended March 31, 1998.
(b) Reports on Form 8-K filed during the quarter ended March 31, 1998: None.
-7-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SFP PIPELINE HOLDINGS, INC.
(Registrant)
Date: May 15, 1998 By: /s/ THOMAS N. HUND
------------------------------------
Thomas N. Hund
Vice President and Controller
(On behalf of the Registrant and as
principal accounting officer)
-8-
<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 quarter ended March 31, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 92,890
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 625,344
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 625,344
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 73,391
<INCOME-TAX> 36,077
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,314
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to ______________
Commission file number 1-11535
BURLINGTON NORTHERN SANTA FE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 41-1804964
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2650 Lou Menk Drive
Fort Worth, Texas 76131
(Address of principal executive offices) (Zip Code)
(817) 333-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares
Class Outstanding at April 30, 1998
Common stock, $.01 par value 157,585,511 shares
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $2,162 $2,024
------ ------
Operating expenses:
Compensation and benefits 702 693
Purchased services 231 216
Depreciation and amortization 202 190
Equipment rents 191 200
Fuel 182 196
Materials and other 207 200
------ ------
Total operating expenses 1,715 1,695
------ ------
Operating income 447 329
Interest expense 88 84
Other income (expense), net 77 (3)
------ ------
Income before income taxes 436 242
Income tax expense 171 92
------ ------
Net income $ 265 $ 150
====== ======
Earnings per common share:
Basic $ 1.69 $ 0.97
====== ======
Diluted $ 1.67 $ 0.96
====== ======
Average shares (in millions)
Basic 156.4 153.9
Dilutive potential common shares 2.0 2.5
------ ------
Diluted 158.4 156.4
====== ======
Dividends declared per common share $ 0.30 $ 0.30
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
March 31, December 31,
1998 1997
--------- --------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 33 $ 31
Accounts receivable, net 569 635
Materials and supplies 213 205
Current portion of deferred income taxes 333 333
Other current assets 37 30
------- -------
Total current assets 1,185 1,234
Property and equipment, net 19,421 19,211
Other assets 1,062 891
------- -------
Total assets $21,668 $21,336
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 1,905 $ 1,952
Long-term debt due within one year 108 108
------- -------
Total current liabilities 2,013 2,060
Long-term debt and commercial paper 5,158 5,181
Deferred income taxes 5,203 5,175
Casualty and environmental reserves 431 448
Employee, merger and separation costs 444 469
Other liabilities 1,312 1,191
------- -------
Total liabilities 14,561 14,524
------- -------
Commitments and contingencies (See note 3)
Stockholders' equity:
Common stock, $.01 par value, 300,000,000
shares authorized; 158,102,246 shares and
156,746,601 shares issued, respectively 2 2
Additional paid-in capital 5,088 4,995
Retained earnings 2,081 1,863
Accumulated other comprehensive income (7) (7)
Other (57) (41)
------- -------
Total stockholders' equity 7,107 6,812
------- -------
Total liabilities and stockholders'
equity $21,668 $21,336
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
---- ----
Operating Activities:
<S> <C> <C>
Net income $ 265 $ 150
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 202 190
Deferred income taxes 28 40
Employee, merger and separation costs paid (30) (31)
Other, net (31) (11)
Sale of accounts receivable 19 20
Other changes in working capital 8 (285)
------- -------
Net cash provided by operating activities 461 73
------- -------
Investing Activities:
Cash used for capital expenditures (366) (296)
Other, net (82) (35)
------- -------
Net cash used for investing activities (448) (331)
------- -------
Financing Activities:
Net increase (decrease) in commercial paper and
bank loans (122) 263
Proceeds from issuance of long-term debt 127 121
Payments on long-term debt (26) (100)
Dividends paid (47) (46)
Proceeds from stock options exercised 63 19
Other, net (6) 1
------- -------
Net cash provided by (used for) financing activities (11) 258
------- -------
Increase in cash and cash equivalents 2 -
Cash and cash equivalents:
Beginning of period 31 47
------- ------
End of period $ 33 $ 47
======= ======
Supplemental cash flow information:
Interest paid, net of amounts capitalized 94 74
Income taxes refunded, net (1) (3)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Accounting policies and interim results
The consolidated financial statements should be read in conjunction with the
Burlington Northern Santa Fe Corporation Annual Report on Form 10-K for the year
ended December 31, 1997, including the financial statements and notes thereto
incorporated by reference from the Registrant's 1997 Annual Report to
Shareholders. The consolidated financial statements include the accounts of
Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries
(collectively, "BNSF" or "Company"). BNSF was incorporated in Delaware on
December 16, 1994. The Company's principal operating subsidiary is The
Burlington Northern and Santa Fe Railway Company ("BNSF Railway"). All
significant intercompany accounts and transactions have been eliminated.
The results of operations for any interim period are not necessarily indicative
of the results of operations to be expected for the entire year. In the opinion
of management, all adjustments (consisting of only normal recurring adjustments,
except as disclosed) necessary to present fairly BNSF's consolidated financial
position as of March 31, 1998 and December 31, 1997 and the consolidated results
of operations for the three month periods ended March 31, 1998 and 1997 have
been included.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" on January 1, 1998. SFAS No. 130 requires the
presentation of comprehensive income and its components in a full set of
financial statements, including the restatement of prior periods. For the
quarters ended March 31, 1998 and 1997, the Company's comprehensive income was
equal to net income.
Certain comparative prior year amounts in the consolidated financial statements
have been reclassified to conform with the current year presentation.
2. Employee, merger and separation costs
Current and long-term employee, merger and separation liabilities totaling $521
million are included in the consolidated balance sheet at March 31, 1998. During
the first three months of 1998, the Company paid $30 million of employee, merger
and separation costs.
At March 31, 1998, approximately $77 million of the total liability is included
within current liabilities for anticipated costs to be paid over the next twelve
months. The remaining costs are anticipated to be paid over the next five years,
except for certain costs related to conductors, trainmen and locomotive
engineers which will be paid upon the employees' separation or retirement, as
well as certain benefits for clerical employees which may be paid on an
installment basis, generally over five to ten years or in some cases through
retirement. In addition, certain merger-related costs have been recorded as
operating expenses.
3. Environmental and other contingencies
The Company's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNSF'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 352 sites, at which it is being asked to
participate in the study or clean-up, or both, of alleged environmental
contamination. BNSF paid approximately $11 million during the first three months
of 1998 for mandatory clean-up efforts, including amounts expended under federal
and state voluntary clean-up programs. BNSF has accruals of approximately $200
million for remediation and restoration of all known sites. BNSF anticipates
that the majority of the accrued costs at March 31, 1998, will be paid over the
next five years. No individual site is considered to be material.
Liabilities recorded for environmental costs represent BNSF's best estimates for
remediation and restoration of these sites and include both asserted and
unasserted claims. Unasserted claims are not considered to be a material
component of the liability. Although recorded liabilities include BNSF's best
estimates of all costs, without reduction for anticipated recoveries from third
parties, BNSF's total clean-up costs at these sites cannot be predicted with
certainty due to various factors such as the extent of corrective actions that
may be required, evolving environmental laws and regulations, advances in
environmental technology, the extent of other parties' participation in clean-up
efforts, developments in ongoing environmental analyses related to sites
determined to be contaminated, and developments in environmental surveys and
studies of potentially contaminated sites. As a result, future charges to income
for environmental liabilities could have a significant effect on results of
operations in a particular quarter or fiscal year as individual site studies and
remediation and restoration efforts proceed or as new sites arise. However,
expenditures associated with such liabilities are typically paid out over a long
period; therefore, management believes that it is unlikely that any identified
matters, either individually or in the aggregate, will have a material adverse
effect on BNSF's consolidated financial position or liquidity.
The railroad industry, including BNSF Railway, is subject to future requirements
regulating air emissions from diesel locomotives that will increase their
operating costs. Final regulations applicable to new and rebuilt locomotive
engines were promulgated by the Environmental Protection Agency on April 16,
1998. These regulations, which in most respects become effective June 15, 1998,
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.
<PAGE>
4. Hedging activities
Fuel
BNSF has a program to hedge against fluctuations in the price of its diesel
fuel purchases. This program includes forward purchases for delivery at
fueling facilities, and various commodity swap and collar transactions which
are accounted for as hedges. Any gains or losses associated with changes in
market value of these hedges are deferred and recognized as a component of
fuel expense in the period in which the hedged fuel is purchased and used. To
the extent BNSF hedges portions of its fuel purchases, it may not fully
benefit from decreases in fuel prices.
As of March 31, 1998, BNSF had entered into forward purchases for
approximately 330 million gallons at an average price of approximately 47
cents per gallon, and fuel swaps for approximately 1.2 billion gallons at an
average price of approximately 52 cents per gallon.
The above prices do not include taxes, fuel handling costs, certain
transportation costs and any differences which may occur from time to time
between the price of commodities hedged and the purchase price of BNSF's
diesel fuel.
BNSF's fuel hedging program covers approximately 85 percent of estimated fuel
purchases for the remaining nine months of 1998, and approximately 35 percent,
25 percent and 10 percent of estimated fuel purchases for 1999, 2000 and 2001,
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 $63 million as of March
31, 1998. BNSF also monitors its hedging positions and credit ratings of its
counterparties and does not anticipate losses due to counterparty
nonperformance.
5. Sale of Investment in Pipeline Partnerships
Santa Fe Pacific Pipelines, Inc. ("SFP Pipelines"), an indirect, wholly-owned
subsidiary of BNSF, served as the general partner of Santa Fe Pacific Pipeline
Partners, L.P. (the "Partnership") and of its operating partnership
subsidiary, SFPP, L.P. SFP Pipelines owned a two percent interest as the
Partnership's and SFPP, L.P.'s general partner and an approximate 42 percent
interest as limited partner of the Partnership. As general partner, SFP
Pipelines received two percent of all amounts available for distribution by
the Partnership and an additional incentive depending upon the level of cash
distributions paid to holders of limited partner interests in the Partnership
("Partnership Units"). SFP Pipeline Holdings, Inc., an indirect, wholly-owned
subsidiary of BNSF (SFP Holdings), had outstanding $219 million principal
amount of Variable Rate Exchangeable Debentures due 2010 (the "VREDs") at
March 31, 1998.
In October 1997, SFP Pipelines and SFP Holdings, entered into an agreement
with Kinder Morgan Energy Partners, L.P. ("Kinder Morgan") pursuant to which
Kinder Morgan acquired substantially all of SFP Pipelines' interests in the
Partnership and SFPP, L.P. for approximately $84 million in cash on March 6,
1998. The Partnership was liquidated as part of the transaction and each
Partnership Units was converted into the right to receive 1.39 Kinder Morgan
common units. SFP Pipelines' 8,148,148 Partnership Units were converted into
the right to receive 11,325,925 Kinder Morgan common units. In addition, the
agreement called for the interest of SFP Pipelines in SFPP, L.P. to be
partially redeemed for a cash distribution of $5.8 million, with SFP Pipelines
retaining only a 0.5 percent special limited partnership interest in SFPP,
L.P. The Company recognized a $67 million one-time pre-tax gain ($32 million
or $0.20 per share on a diluted basis after-tax) at the time of the sale.
Consummation of the transaction caused an "Exchange Event" under the VRED
agreement and VRED holders became eligible to receive either cash equal to the
par value of the VREDs or substantially all of the Kinder Morgan units
received by SFP Pipelines in exchange for its SFP Common Units. Kinder Morgan
has agreed to pay and perform all obligations of SFP Holdings related to the
VREDs and has agreed to indemnify and hold harmless BNSF and its subsidiaries
from and against any and all losses, costs, damages, expenses, liabilities and
claims arising or resulting from or relating to, among other things, the
Partnership, SFPP, L.P. or the VREDs.
In April 1998, an amendment to the VREDs Registration Statement on Form S-4
announcing the intention to offer to exchange the VREDs for the partnership
units of Kinder Morgan was filed. Subsequently, an exchange prospectus was
distributed to unit holders who have until May 26, 1998 to elect to exchange
the VREDs. Any unit holders who do not elect the exchange will have their
VREDs redeemed in cash.
6. COMMON STOCK
On April 16, 1998, the stockholders of BNSF approved an amendment to the
Company's Amended and Restated Certificate of Incorporation that increased the
number of authorized shares of common stock from 300 million to 600 million.
<PAGE>
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis relates to the financial condition and
results of operations of Burlington Northern Santa Fe Corporation and its
majority-owned subsidiaries (collectively "BNSF", "Registrant" or "Company").
The Company's principal operating subsidiary is The Burlington Northern and
Santa Fe Railway Company ("BNSF Railway"). All earnings per share information is
stated on a diluted basis.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997.
BNSF recorded net income for the first quarter of 1998 of $265 million or $1.67
per common share, compared with first quarter 1997 net income of $150 million or
$0.96 per common share. The increase in net income is a result of increased
revenue in coal, merchandise and intermodal sectors, partially offset by only a
1 percent increase in operating expense despite an 8 percent increase in cars
and units handled. In addition, more moderate winter weather in the first
quarter of 1998 relative to 1997 and the initial phase of a real estate
portfolio sale contributed to the improvement. Additionally, as discussed in
Note 5 to the consolidated financial statements, the increase in net income was
partially due to a $67 million pre-tax gain ($32 million after-tax or $0.20 per
common share) on the sale of substantially all of the Company's interest in
Santa Fe Pacific Pipeline Partners, L.P. Excluding the after-tax gain on the
pipelines sale, BNSF's adjusted net income was $233 million or $1.47 per common
share for the first quarter of 1998.
REVENUES
The following table presents BNSF's revenue information by commodity for the
three months ended March 31, 1998 and 1997 and includes certain
reclassifications of prior year information to conform to current year
presentation.
<TABLE>
<CAPTION>
Revenue
Revenue Per Thousand
Revenues Ton Miles Ton Miles
------------ ------------- -------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C> <C>
Intermodal $ 561 $ 516 19,448 18,232 $28.85 $28.30
Coal 558 489 49,160 39,653 11.35 12.33
Agricultural Commodities 279 292 14,481 15,153 19.27 19.27
Chemicals 197 191 8,051 7,201 24.47 26.52
Metals and Minerals 194 175 8,792 7,350 22.07 23.81
Forest Products 147 136 6,829 6,049 21.53 22.48
Consumer Goods 132 118 4,852 4,407 27.21 26.78
Automotive 92 106 1,501 1,579 61.29 67.13
------ ------ -------- ------ ------ ------
Total Freight Revenues 2,160 2,023 113,114 99,624 $19.10 $20.31
======== ====== ====== ======
Other Revenues 2 1
------ ------
Total Operating Revenues $2,162 $2,024
====== ======
</TABLE>
Total revenues for first quarter of 1998 were $2,162 million or 7 percent higher
compared with revenues of $2,024 million for the first quarter of 1997.
Intermodal revenues of $561 million for the first quarter of 1998 increased $45
million or 9 percent reflecting increases in all sectors. Direct marketing
revenues benefited from increased units shipped for Yellow Freight.
International revenues were up due to volume gains associated with diversion of
traffic from Union Pacific Corporation ("UP") to BNSF. Truckload revenues
increased due to volume growth from J.B. Hunt and Schneider, and from new Triple
Crown business.
Coal revenues of $558 million for the 1998 first quarter increased $69 million
or 14 percent primarily due to favorable operating conditions as a result of a
more moderate winter in 1998 and from volume gains associated with the diversion
of business from UP to BNSF.
Agricultural Commodities revenues of $279 million for the 1998 first quarter
were $13 million or 4 percent lower than revenues for the 1997 first quarter due
to weak corn and wheat export markets through the Pacific Northwest.
Metals and minerals revenues of $194 million for the first quarter of 1998 were
$19 million or 11 percent higher than the first quarter of 1997 and were led
primarily by volume increases in steel products. Strength in the aluminum, clay
and rock and specialty minerals also contributed to the increase in revenues.
Forest products revenues of $147 million for the 1998 first quarter were $11
million or 8 percent higher than the 1997 first quarter primarily due to
pulpboard volume gains as a result of the diversion of traffic from UP to BNSF.
Additionally, lumber volumes increased due to higher construction activity.
Consumer goods revenues of $132 million for the 1998 first quarter were $14
million or 12 percent higher than the 1997 first quarter primarily due to volume
increases in corn syrup traffic to Mexico and a milder winter in 1998 which
favorably impacted sugar traffic. Additionally, government and machinery
revenues increased due primarily to higher movements for Boeing.
Automotive revenues of $92 million for the 1998 first quarter were $14 million
or 13 percent lower than the first quarter of 1997 reflecting decreases in
volume due to the loss of Ford's Southwestern United States business and a rail
industry shortage of vehicle carriers.
EXPENSES
Total operating expenses for the first quarter of 1998 were $1,715 million, an
increase of $20 million or 1 percent, compared with operating expenses for the
1997 first quarter of $1,695 million. The operating ratio improved significantly
to 79.3 percent for the first quarter of 1998, compared with an 83.7 percent
operating ratio for the first quarter 1997.
Compensation and benefits expenses of $702 million were $9 million or 1 percent
higher than the first quarter of 1997. The increase was primarily due to wage
increases, higher incentive compensation expense (minimal amounts were earned in
the first quarter of 1997) and increased employment, partially offset by
increased operating efficiency due to less severe weather in the first quarter
of 1998.
Purchased services of $231 million for the first quarter of 1998 were $15
million or 7 percent higher than the 1997 first quarter due principally to
volume driven increases in ramping, drayage and distribution services expenses.
Equipment rents expenses for the first quarter of 1998 of $191 million were $9
million or 5 percent lower than the 1997 first quarter reflecting lower private
railcar expense and lower time and mileage payments for freight cars as a result
of improved equipment utilization.
Fuel expenses of $182 million for the first quarter of 1998 were $14 million or
7 percent lower than the first quarter of 1997, as a result of a 9 cent or 13
percent decrease in the average price paid per gallon of diesel fuel partially
offset by a 7 percent increase in consumption.
Materials and other expenses of $207 million for the first quarter of 1998 were
$7 million or 4 percent higher than the 1997 first quarter principally
reflecting a decrease in credits from the sale of easements, and higher casualty
and locomotive material expenses, partially offset by lower personal injury and
employee relocation expenses.
Interest expense for the first quarter of 1998 increased by $4 million to $88
million reflecting higher debt levels partially offset by lower interest
rates.
Other income (expense), net was $80 million higher than the 1997 first quarter
due primarily to the $67 million pre-tax gain on the pipelines sale in 1998.
Excluding the gain on the pipeline partnerships sale, other income (expense),
net for the first quarter of 1998 was $13 million higher than 1997 due to gains
on the initial phase of a real estate portfolio sale. This increase was
partially offset by higher accounts receivable sale fees due to the increase in
receivables sold.
Income tax expense of $171 million was $79 million higher in the first quarter
of 1998 due to higher pre-tax income and a higher effective tax rate resulting
from the sale of the Company's interest in the pipeline partnerships.
CAPITAL RESOURCES AND LIQUIDITY
CASH FROM OPERATIONS
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 $461 million for the three months ended
March 31, 1998 compared with $73 million for the three months ended March 31,
1997. The increase in cash from operations was in part caused by higher net
income and a $293 million decrease in cash used for working capital. This
variance was partially a result of the Company's efforts to reduce the higher
accounts receivable balances due to the integration issues arising from the
implementation of a new revenue system in 1997. In addition, higher accrued
federal income taxes, due principally to the pipelines sale and increases in
accounts payable and accrued incentive compensation liabilities also contributed
to decreased cash used for working capital. BNSF's cash outflows from investing
activities for the three months ended March 31, 1998 predominately consisted of
capital expenditures of $366 million. Cash outflows for financing activities of
$11 million principally reflect a decrease in commercial paper borrowings and
dividends paid, partially offset by net proceeds from long-term debt borrowings
and proceeds from the exercise of employee stock options.
OTHER CAPITAL RESOURCES
BNSF issues commercial paper from time to time. These borrowings are supported
by bank revolving credit agreements. Outstanding commercial paper balances are
considered as reducing the amount of borrowings available under these
agreements. The bank revolving credit agreements allow borrowings of up to $500
million on a short-term basis and $1.5 billion on a long-term basis. Annual
facility fees are currently 0.075 percent and 0.11 percent, respectively, and
are subject to change based upon changes in BNSF's senior unsecured debt
ratings. Borrowing rates are based upon i) LIBOR plus a spread based upon BNSF's
senior unsecured debt ratings, ii) money market rates offered at the option of
the lenders, or iii) an alternate base rate. The commitments of the lenders
under the short-term and long-term agreements were extended on November 12,
1997, and are currently scheduled to expire on November 11, 1998 and November
12, 2002, respectively.
At March 31, 1998, there were no borrowings against either the long-term or
short-term revolving credit agreements and the maturity value of commercial
paper outstanding was $623 million, leaving a total remaining capacity of $877
million under the long-term revolving credit agreement available and $500
million under the short-term credit agreement available.
In March 1998, BNSF issued $100 million of 6.05% medium-term notes due March 15,
2031, under the August 1997 shelf registration of debt securities. These notes
can be put back to the Company in March 2001. The net proceeds were used for
general corporate purposes including the repayment of commercial paper.
Subsequent to this transaction, the August 1997 shelf registration had $250
million of potential borrowings remaining.
In March 1998, the Company filed a new shelf registration of debt securities,
including medium-term notes, that may be issued in one or more series at an
aggregate offering price not to exceed $500 million. Additionally, in April
1998, prior to the effective date of the new shelf registration, the Company
amended the August 1997 shelf registration to combine it with the March 1998
shelf registration. The combined shelf registration has $750 million of
borrowing capacity remaining.
CAPITAL EXPENDITURES
A breakdown of cash capital expenditures is set forth in the following table
(in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Maintenance of Way $201 $121
Equipment 73 87
Expansion Projects 77 50
Other 15 38
---- ----
Total $366 $296
==== ====
</TABLE>
The increase in Maintenance of Way expenditures principally reflects an
acceleration of spending for rail programs due to mild winter weather in the
first quarter of 1998. For the three months ended March 31, 1998, BNSF laid a
total of 98 track miles of new and secondhand rail compared to 65 track miles
for the three months ended March 31, 1997. Equipment expenditures were $14
million lower than 1997 reflecting a decrease in locomotive purchases partially
offset by minor increases in locomotive overhauls and remanufactured freight
cars. Expansion projects increased to $77 million from $50 million due to
additional capacity expansion projects to meet higher demand and relieve
congestion. The $23 million decrease in other is a result of lower merger
related improvements in yards, line connections and information systems.
DIVIDENDS
Common stock dividends declared for the three months ended March 31, 1998 and
1997 were $0.30 per common share. Dividends paid on common stock during the
first three months of 1998 and 1997 were $47 million and $46 million,
respectively. On January 15, 1998, BNSF's Board of Directors declared a regular
quarterly common stock dividend of $0.30 per share to stockholders of record on
March 10, 1998 to be paid on April 1, 1998.
CAPITAL STRUCTURE
BNSF's ratio of total debt to total capital was 43 percent and 44 percent at
March 31, 1998 and December 31, 1997, respectively.
<PAGE>
OTHER MATTERS
SURFACE TRANSPORTATION BOARD REVIEW OF RAIL INDUSTRY
Certain interest groups have long sought to subject the rail industry to renewed
federal economic regulation. In 1998, these efforts have been focused before
Congress and the Surface Transportation Board (the "STB"). In response to a
Congressional request, the STB held hearings in which rail access and
competition issues were raised by shippers and shipper groups. On April 17,
1998, in Review of Rail Access and Competition Issues, STB Ex Parte No. 575, the
STB initiated a review of several rail access and competition issues. The STB
stated it would begin rulemaking proceedings to consider revisions to its
competitive access rules--under which shippers served by one railroad can obtain
service from another--to address quality of service issues, and to consider
eliminating the use of product and geographic competition from its analysis in
rate relief proceedings to determine if a carrier has market dominance over the
traffic involved. On other issues, the STB requested that members of the
shipping community and rail industry meet and make recommendations to address
competitive access issues not related to quality of service, to consider
expanding the role of short-line railroads and other smaller carriers, to
establish a formalized dialogue on a regular basis between carriers, their
employees, and shippers, and, through a panel of disinterested experts selected
by rail and shipping interests, to examine and recommend an appropriate standard
for whether railroad revenues are "adequate." Management cannot predict at this
time the outcome of these proceedings or the impact, if any, on the Company's
results of operations, liquidity or financial position.
YEAR 2000
BNSF has established a committee to evaluate and manage the cost and risk
associated with the Company's computer 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 system that
will be affected by year 2000 non-compliance and is in the process of
implementing changes and recommending alternative solutions. To date specific
spending on year 2000 activities has not been significant. Additionally, BNSF
has completed year 2000 compliance on certain systems in conjunction with the
merger-related systems integration. Currently, 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. Management is also 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,
liquidity or financial position of the Company.
OTHER CLAIMS AND LITIGATION
BNSF and its subsidiaries are parties to a number of legal actions and claims,
various governmental proceedings and private civil suits arising in the ordinary
course of business, including those related to environmental matters and
personal injury claims. While the final outcome of these items cannot be
predicted with certainty, considering among other things the meritorious legal
defenses available, it is the opinion of management that none of these items,
when finally resolved, will have a material adverse effect on the annual results
of operations, financial position or liquidity of BNSF, although an adverse
resolution of a number of these items in a single period could have a material
adverse effect on the results of operations in a particular quarter or fiscal
year.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132 "Disclosure about
Pensions and Other Postretirement Benefits." The Statement is effective for the
Company's fiscal year 1998 and provides for modified disclosure about pension
and other postretirement benefit plans. The Company does not anticipate
significant changes in its disclosures as a result of adopting SFAS No. 132.
In the first quarter of 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued Statement of
Position ("SoP") 98-1 "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." The SoP is required to be adopted by the Company
in 1999 and provides prospective guidance on accounting for internally developed
software, and proceeds from the sale of internally developed software. The
Company currently capitalizes certain costs related to internally developed
software and is presently evaluating the SoP's impact on its results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of business, BNSF utilizes various financial instruments
which inherently have some degree of market risk. The qualitative and
quantitative information presented in the Managements Discussion and Analysis of
Financial Condition and Results of Operations section of the 1997 Annual Report
to Shareholders and in Item 7A of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, describe significant aspects of BNSF's
financial instrument programs which have material market risk. Presented below
updated quantitative information for those programs that have changed
significantly from the information reported in Form 10-K.
Commodity Price Sensitivity
As discussed in Note 4 to the Company's consolidated financial statements, BNSF
has a program to hedge against fluctuations in the price of its diesel fuel
purchases. The table below provides information about the BNSF's diesel fuel
hedging instruments that are sensitive to changes in diesel fuel prices. For
diesel fuel swaps and forward purchase contracts the table presents notional
amounts in gallons and the weighted average contract price by contractual
maturity date as of March 31, 1998. The prices included in the table below do
not include taxes, transportation costs, certain other fuel handling costs and
any differences which may occur from time to time between the prices of
commodities hedged and the purchase price of BNSFs diesel fuel.
<TABLE>
<CAPTION>
Maturity Date
----------------------------------
1998 1999 2000 2001 Total Value(1)
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Diesel Fuel Swaps:
Gallons (in millions) 400 403 290 113 1,206 $(55)
Weighted average
price per gallon $0.5284 $0.5127 $0.5094 $0.4991 $0.5158 -
Diesel Fuel Forward
Purchase Contracts:
Gallons (in millions) 329 - - - 329 $ (8)
Weighted average
price per gallon $0.4692 - - - $0.4692 -
</TABLE>
(1) Represents unrealized loss (in millions) based on the price of Gulf Coast
#2 heating oil at March 31, 1998.
Equity Price Sensitivity
The common stock put options sold by the Company in November 1997 expired
unexercised on May 5, 1998.
In May 1998, BNSF sold equity put options for 100,000 shares of the Company's
common stock at $90 per share to an independent third party and received cash
proceeds of approximately $200,000. The option contract is for physical
settlement on November 20, 1998; however, it permits a net-share or net-cash
settlement method at the BNSF's election.
<PAGE>
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
COAL TRANSPORTATION CONTRACT LITIGATION
Reference is made to the discussion in Registrant's Report on Form 10-K for the
year ended December 31, 1997 of the action originally filed against BNSF
Railway by Southwestern Electric Power Company ("SWEPCO") in the 102nd Judicial
Court for Bowie County, Texas seeking a reduction of the transportation rates
required to be paid under two coal transportation contracts (Southwestern
Electric Power Company v. Burlington Northern Railroad Company, No. D-102-CV-
91-0720). On March 13, 1998, the Texas Supreme Court rendered judgment in favor
of BNSF Railway, unanimously affirming the decision of the Court of Appeals for
the Sixth Court of Appeals District of Texas, and assessing SWEPCO costs of
appeal (Southwestern Electric Power Company v. Burlington Northern Railroad
Company, No. 96-0684, Supreme Court of Texas). On April 7, 1998, SWEPCO served
its Motion for Rehearing which is pending.
ENVIRONMENTAL PROCEEDINGS
Reference is made to the discussion in Registrant's Report on Form 10-K for the
year ended December 31, 1997 of the action originally filed against BNSF
Railway by the Wisconsin Department of Natural Resources (State of Wisconsin v.
Burlington Northern Railroad Company, Case No. 96 CV-403, Circuit Court,
Douglas County, Wisconsin). BNSF Railway and the State have reached a
settlement in principle calling for BNSF Railway to reimburse the State for
$30,000 in costs and to pay a civil forfeiture of $85,000, a penalty assessment
of $18,700, an environmental assessment of $8,500, and costs and attorneys'
fees of $10,000, for a total of $152,200. A stipulation signed by the parties
would be subject to court approval.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the April 16, 1998, annual meeting of stockholders, the Company's
stockholders elected 15 directors, each for a one-year term, and voted on one
Company proposal, one stockholder proposal included in the Company's proxy
materials, and three stockholder proposals raised from the floor at the
meeting.
<PAGE>
Election of Fifteen Directors
- -----------------------------
The stockholders elected the Company's fifteen nominees to the fifteen
directors positions by the vote shown below; one stockholder nominee
received the votes shown below but was not elected.
Nominees (Elected*) Votes For Withheld
------------------- --------- --------
Joseph F. Alibrandi* 138,687,726 1,158,120
Jack S. Blanton* 137,423,134 2,422,712
John J. Burns, Jr.* 138,756,102 1,089,744
George Deukmejian* 137,422,881 2,422,965
Robert D. Krebs* 138,550,968 1,294,878
Bill M. Lindig* 137,504,295 2,341,551
Vilma S. Martinez* 138,658,559 1,187,287
Roy S. Roberts* 138,777,785 1,068,061
Marc J. Shapiro* 120,710,678 19,135,168
Arnold R. Weber* 137,369,962 2,475,884
Robert H. West* 138,768,698 1,077,148
J. Steven Whisler* 138,785,266 1,060,580
Edward E. Whitacre, Jr.* 138,770,204 1,075,642
Ronald B. Woodard* 138,771,830 1,074,011
Michael B. Yanney* 138,762,026 1,083,820
William S. Purdy 1,960 0
Company Proposal
- ----------------
The stockholders approved a Company proposal to amend the Company's Amended and
Restated Certificate of Incorporation to increase authorized shares from
300,000,000 to 600,000,000 by the following vote:
For 123,184,797
Against 16,144,537
Abstentions 516,512
Broker Non-Votes 0
Stockholder Proposals
The stockholders did not approve a stockholder proposal recommending the
establishment of a dividend policy tying dividends to performance benchmarks
similar to the manner in which executive compensation is tied to
performance-based goals by the following vote:
For 8,068,658
Against 113,733,355
Abstentions 6,843,718
Broker Non-Votes 11,200,115
The stockholders did not approve a stockholder proposal raised from the floor
recommending that the directors increase the size of the Board by two and
nominate one female and one current or former non-officer railroad employee to
these positions, and that the Board "nominate and otherwise encourage" the
election of persons to the Board of "diverse racial, ethnic and gender
background" by the following vote:
For 1,155
Against 139,844,691
Abstentions 0
Broker Non-Votes 0
<PAGE>
The stockholders did not approve a stockholder proposal raised from the floor
recommending that the Board immediately declare a 4-for-1 stock split by the
following vote:
For 1,155
Against 139,844,691
Abstentions 0
Broker Non-Votes 0
The stockholders did not approve a stockholder proposal raised from the floor
recommending that the Board shorten the advance notice required to be given for
stockholder proposals and nominations, that interested stockholders be invited
to attend and give their opinions at Board meetings, that a committee be
appointed to make corporate governance more "open" and include employees and
former employees in all decisions affecting railroad safety, that the Company
terminate officers who have "inappropriately disciplined" employees "for
attempting to work in a safe manner and consistent with railroad safety or
operating rules," and that the Company give safety commendations and publicly
accept safety commendations from other organizations awarded to its employees,
by the following vote:
For 1,155
Against 139,844,691
Abstentions 0
Broker Non-Votes 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
See Index to Exhibits on page E-1 for a description of the exhibits
filed as part of this report.
B. Reports on Form 8-K
The Registrant has filed no Current Reports on Form 8-K since those
reported on Annual Report on Form 10-K for 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BURLINGTON NORTHERN SANTA FE CORPORATION
(Registrant)
By: /s/ THOMAS N. HUND
----------------------------------
Thomas N. Hund
Vice President and Controller
(On behalf the Registrant and as
principal accounting officer)
Schaumburg, Illinois
May 14, 1998
BURLINGTON NORTHERN SANTA FE CORPORATION
EXHIBIT INDEX
4 Form of Note for BNSF's Medium-Term Notes, Series B,
$100,000,000 6.05% Reset Put Securities
12 Computation of ratio of earnings to fixed charges.
27 Financial Data Schedule.
EXHIBIT 4
CUSIP NO.: 12189QAC4 PRINCIPAL AMOUNT: $100,000,000
REGISTERED NO.: R-1
BURLINGTON NORTHERN SANTA FE CORPORATION
MEDIUM-TERM FIXED RATE NOTE, SERIES B
Due Nine Months or More From Date of Issue
/X/ Check this box if the Note is a Global Note.
Applicable if the Note is a Global Note:
Unless this certificate is presented by an authorized representative of The
Depository Trust Company, a New York corporation, to the issuer or its agent for
registration of transfer, exchange or payment, and any certificate issued is
registered in the name of Cede & Co. or such other name as requested by an
authorized representative of The Depository Trust Company (and any payment is
made to Cede & Co. or to such other entity as is requested by an authorized
representative of The Depository Trust Company), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the
registered owner hereof, Cede & Co., has an interest herein.
ORIGINAL ISSUE DATE: March 24, 1998
INTEREST RATE PER ANNUM: To but excluding March 15, 2001, 6.05%. From and
including March 15, 2001, as described under "Interest Rate and Interest Payment
Dates" on the reverse of this Note.
MATURITY DATE: March 15, 2031, subject to mandatory repayment of principal to
the existing Holder hereof pursuant to the Call Option and Put Option described
on the reverse of this Note
ISSUE PRICE: 99.90% (as a percentage of principal amount)
SPECIFIED CURRENCY: U.S. dollars (if other than U.S. dollars): N/A
INITIAL DATE ON WHICH THE NOTE IS REPAYABLE AT THE OPTION OF THE HOLDER: N/A
INITAL REPAYMENT PERCENTAGE: N/A
INITAL REDEMPTION PERCENTAGE: N/A
EXCHANGE RATE AGENT: N/A
(Only applicable if Specified Currency is other than U.S. dollars)
ANNUAL REPAYMENT PERCENTAGE REDUCTION: N/A
ANNUAL REDEMPTION PERCENTAGE REDUCTION: N/A
DEFAULT RATE: N/A
(Only applicable if Note issued at original issue discount)
AUTHORIZED DENOMINATIONS: N/A
(Only applicable if Specified Currency is other than U.S. dollars)
DEPOSITARY: The Depository Trust Company
(Only applicable if Note is a Global Note)
INTEREST PAYMENT DATES:
March 15 and September 15 of each year,
commencing September 15, 1998
SINKING FUND: N/A
ORIGINAL ISSUE DISCOUNT SECURITY: N/A
TOTAL AMOUNT OF OID: N/A
YIELD TO MATURITY: N/A
SHORT ACCRUAL PERIOD OID: N/A
METHOD USED TO DETERMINE YIELD FOR SHOURT ACCRUAL PERIOD: N/A
OID DEFAULT AMOUNT: N/A
DEFAULT RATE: N/A
CALL OPTION: The Notes may be called by the Callholder prior to the Maturity
Date, as described on the reverse of this Note under "Call Option; Put Option"
REPAYMENT/PUT OPTION: The Notes are subject to repayment by the Company prior to
the Maturity Date pursuant to the Put Option, as described on the reverse of
this Note under "Call Option; Put Option"
CALLHOLDER: The Company or its assignee.
Burlington Northern Santa Fe Corporation, a corporation duly organized and
existing under the laws of the State of Delaware (herein called the "Company"),
for value received, hereby promises to pay to CEDE & CO., or registered assigns,
the principal sum of U.S.$100,000,000 on the Maturity Date, and to pay interest
on said principal sum at the rate per annum (computed on the basis of a 360-day
year of twelve 30-day months) shown above, semiannually on each Interest Payment
Date set forth above from and including the immediately preceding Interest
Payment Date in respect of which interest has been paid or duly made available
for payment (or from and including March 24, 1998, if no interest has been paid
or duly made available for payment) to but excluding the applicable Interest
Payment Date or Maturity Date, as the case may be.
The interest payable, and punctually paid or duly provided for, on any
Interest Payment Date will be paid to the Person in whose name this Security is
registered at the close of business on the fifteenth calendar day next preceding
such Interest Payment Date (each such date a "Record Date"). Any such interest
not so punctually paid or duly provided for will forthwith cease to be payable
to the holder on such Record Date and may either be paid to the Person in whose
name this Note is registered at the close of business on a special Record Date
for the payment of such defaulted Interest to be fixed by the Trustee, notice
whereof shall be given to holders of Securities of this series not less than 10
days prior to such special Record Date, or be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities of this series may be listed, and upon such notice as
may be required by such exchange, all as more fully provided in said Indenture.
Additional provisions of this Note are contained on the reverse hereof, and
such provisions shall for all purposes have the same effect as though fully set
forth at this place.
This Note shall not be valid or become obligatory for any purpose until the
Certificate of Authentication hereon shall have been signed by an authorized
officer of the Trustee or its duly authorized agent under the Indenture referred
to hereinbelow.
IN WITNESS WHEREOF, Burlington Northern Santa Fe Corporation has caused
this instrument to be signed by its duly authorized officer, and has caused a
facsimile of its corporate seal to be affixed hereto or imprinted hereon.
E-1
<PAGE>
Dated: March 24, 1998 Burlington Northern Santa Fe Corporation
By:
-------------------------------------
Name:
Title:
[SEAL]
Attest:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the series designated
therein referred to in the
within-mentioned Indenture
The First National Bank of Chicago, as
Trustee
By:
--------------------------------------
Authorized Officer
(REVERSE OF NOTE)
Burlington Northern Santa Fe Corporation
MEDIUM-TERM FIXED RATE NOTE, SERIES B
Due Nine Months or More From Date of Issue
This Note is one of a duly authorized issue of debentures, notes or other
evidences of indebtedness of the Company (the "Debt Securities"), all issued
or to be issued under and pursuant to an indenture dated as of December
1, 1995 (the "Indenture"), duly executed and delivered by the Company to The
First National Bank of Chicago, as Trustee (the "Trustee"), to which Indenture
and all indentures supplemental thereto reference is hereby made for a
description of the rights, duties and immunities thereunder of the Trustee and
the rights thereunder of the holders of the Debt Securities. This Note is one
of a series of the Debt Securities, which series is limited in aggregate
principal amount to $550,000,000 designated as the Medium-Term Notes, Series
B (the "Series B Notes"), of the Company. This Note represents 6.05%
REset Put Securities ("REPSSM") (the "Notes") constituting a tranche of the
Series B Notes.
INTEREST RATE AND INTEREST PAYMENT DATES
The Notes will bear interest at the rate of 6.05% from and including
March 24, 1998 to but excluding March 15, 2001 (the "Coupon Reset
Date"). Interest on the Notes will be payable semiannually on March 15
and September 15 of each year, commencing September 15, 1998 (each,
an "Interest Payment Date"). Interest will be calculated based on a 360-day
year consisting of twelve 30-day months. "Business Day" means any day other
than a Saturday, a Sunday or a day on which banking institutions in The City
of New York are authorized or required by law or regulation to be closed.
If the Callholder elects to purchase the Notes pursuant to the Call
Option (as defined below), the Calculation Agent (as defined below) will reset
the interest rate for the Notes effective on the Coupon Reset Date, pursuant
to the Coupon Reset Process described below. In such circumstance, (i) this
Note will be purchased by the Callholder at 100% of the principal amount
hereof on the Coupon Reset Date, on the terms and subject to the conditions
described herein (interest accrued to but excluding the Coupon Reset Date will
be paid by the Company on such date to the Holder hereof on the most recent
Record Date), and (ii) from and including the Coupon Reset Date, the Notes
will bear interest at the rate determined by the Calculation Agent in
accordance with the procedures set forth under "Coupon Reset Process if Notes
are Called" below.
MATURITY DATE
The Notes will mature on March 15, 2031 (the "Maturity Date"). On
the Coupon Reset Date, the Holder hereof will be entitled to receive 100% of
the principal amount hereof from either (i) the Callholder, if the
Callholder purchases this Note pursuant to the Call Option, or (ii) the
Company, by exercise of the Put Option (as defined below) by the Trustee for
and on behalf of the Holder hereof, if the Callholder does not purchase this
Note pursuant to the Call Option.
CALL OPTION; PUT OPTION
(i) Call Option. The Callholder, by giving notice to the Trustee (the
"Call Notice"), has the right to purchase the aggregate principal amount of
this Note, in whole but not in part (the "Call Option"), on the Coupon Reset
Date, at a price equal to 100% of the principal amount hereof (the "Call
Price") (interest accrued to but excluding the Coupon Reset Date will be paid
by the Company on such date to the Holder hereof on the most recent Record
Date). The Call Notice is required to be given to the Trustee, in writing,
prior to 4:00 p.m., New York time, no later than fifteen calendar days
prior to the Coupon Reset Date for the Notes. The Call Notice must contain
the requisite delivery details, including the identity of the Callholder's
Depositary account.
If the Callholder exercises the Call Option, unless terminated in
accordance with its terms, (i) not later than 2:00 p.m., New York time,
on the Business Day prior to the Coupon Reset Date, the Callholder will
deliver the Call Price in immediately available funds to the Trustee for
payment of the Call Price on the Coupon Reset Date and (ii) the Holder
hereof will be required to deliver and will be deemed to have delivered this
Note to the Callholder against payment therefor on the Coupon Reset Date
through the facilities of the Depositary. No holder of any Notes or any
interest in such Notes will have any right or claim against the Callholder as
a result of the Callholders decision whether or not to exercise the Call
Option or performance or nonperformance of its obligations with respect
thereto.
The Callholder may at any time assign its rights and obligations under
its Call Option; provided, however, that (i) such rights and
obligations are assigned in whole and not in part; (ii) it provides the
Trustee and the Company with notice of such assignment contemporaneously with
such assignment; and (iii) such assignment may be made only to Affiliates
of Morgan Stanley & Co. Incorporated. Upon receipt of notice of
assignment, the Trustee will treat the assignee as Callholder for all purposes
hereunder. The Callholder may assign its rights under the Call Option without
notice to, or consent of, the holders of the Notes (including, if applicable,
the Holder hereof). "Affiliate" shall mean, in relation to any party, any
entity controlled, directly or indirectly, by the party, any entity that
controls, directly or indirectly, the party or any entity directly or
indirectly under a common control with the party. For this purpose, "control"
of any entity or party means ownership of a majority of the voting power of
the entity or party.
Except as otherwise specified in clause (i) below, the Call Option
will automatically and immediately terminate, no payment will be due hereunder
from the Callholder, and the Coupon Reset Process will terminate, if any of
the following occurs: (i) an Event of Default occurs under Section
501(1), 501(2), 501(3) or 501(4) under the Indenture (in such event,
termination is at the Callholder's option) or under Section 501(5) or
501(6) under the Indenture (in such event, termination is automatic); (ii)
the Callholder fails to deliver the Call Notice to the Trustee prior to 4:00
p.m., New York time, on the fifteenth calendar day prior to the Coupon Reset
Date or revokes the Call Notice; (iii) on the Bid Date (as defined
below), fewer than two Dealers (as defined below) submit timely Bids (as
defined below) substantially as provided below; or (iv) the Callholder
fails to pay the Call Price by 2:00 p.m., New York time, on the Business Day
prior to the Applicable Coupon Reset Date.
If the Call Option is terminated by the Callholder or the Company, notice
of such termination will be immediately given in writing to the Trustee by the
Callholder or the Company, as the case may be. If the Call Option so
terminates or is automatically terminated, the Trustee will exercise the Put
Option described below with respect to the Notes.
(ii) Put Option. If the Call Option is not exercised or if the Call
Option otherwise terminates, the Trustee will exercise the right of the
holders of the Notes (including, if applicable, the Holder hereof) to require
the Company to purchase the aggregate principal amount of Notes, in whole but
not in part (the "Put Option"), on the Coupon Reset Date at a price equal to
100% of the principal amount thereof (the "Put Price"), plus accrued but
unpaid interest to but excluding the Coupon Reset Date, in each case, to be
paid by the Company to the Holders of the Notes (including, if applicable, the
Holder hereof) in immediately available funds on the Coupon Reset Date. If
the Trustee exercises the Put Option then the Company will deliver the Put
Price in immediately available funds to the Trustee by no later than 10:00
a.m., New York time, on the Coupon Reset Date and the holders of the
Notes will be required to deliver and will be deemed to have delivered the
Notes to the Company against payment therefor on the Coupon Reset Date through
the facilities of the Depositary. By its purchase of Notes, each Holder
irrevocably agrees that the Trustee shall exercise the Put Option relating to
such Notes for or on behalf of the Notes as provided herein. No holder of any
Notes or any interest therein has the right to consent or object to the
exercise of the Trustee's duties under the Put Option.
NOTICE TO HOLDERS BY TRUSTEE
In anticipation of the exercise of the Call Option or the Put Option on
the Coupon Reset Date, the Trustee will notify the Holder hereof, not less
than 30 days nor more than 60 days prior to the Coupon Reset Date, that all
Notes will be delivered on the Coupon Reset Date through the facilities of the
Depositary against payment of the Call Price by the Callholder under the Call
Option or payment of the Put Price by the Company under the Put Option. The
Trustee will notify the Holder hereof once it is determined whether the Call
Price or the Put Price will be delivered in accordance with the provisions
hereof.
COUPON RESET PROCESS IF NOTES ARE CALLED
The following steps shall be taken in order to determine the interest
rate to be paid on the Notes on and after the Applicable Coupon Reset Date in
the event the Call Option has been exercised with respect to the Notes.
Pursuant to and subject to the terms of a Calculation Agency Agreement,
dated March 24, 1998, between the Company and Morgan Stanley & Co.
Incorporated, Morgan Stanley & Co. Incorporated has been appointed the
calculation agent for the Notes (in such capacity as calculation agent, the
"Calculation Agent"). If the Callholder has exercised the Call Option, then
the following steps (the "Coupon Reset Process") will be taken in order to
determine the interest rate to be paid on the Notes from and including the
Coupon Reset Date to but excluding the Maturity Date. The Company and the
Calculation Agent will use reasonable efforts to cause the actions
contemplated below to be completed in as timely a manner as possible.
(a) The Company will provide the Calculation Agent with (i) a list (the
"Dealer List"), no later than five Business Days prior to the Applicable
Coupon Reset Date, containing the names and addresses of at least three but
not more than five dealers, one of which shall be Morgan Stanley & Co.
Incorporated, from whom the Company desires the Calculation Agent to obtain
the Bids for the purchase of such Notes and (ii) such other material as
may reasonably be requested by the Calculation Agent to facilitate a
successful Coupon Reset Process.
(b) Within one Business Day following receipt by the Calculation Agent of
the Dealer List, the Calculation Agent shall provide to each dealer ("Dealer")
on the Dealer List (i) a copy of the Pricing Supplement dated March 13,
1998, together with the Prospectus Supplement dated August 20, 1997 and
Prospectus dated August 12, 1997, relating to the offering of the Notes
(collectively, the "Pricing Supplement"), (ii) a copy of the form of
Notes and (iii) a written request that each Dealer submit a Bid to the
Calculation Agent by 12:00 noon, New York time, on the third Business Day
prior to the Coupon Reset Date (the "Bid Date"). "Bid" means an irrevocable
written offer given by a Dealer for the purchase of all the Notes, settling on
the Coupon Reset Date, and shall be quoted by such Dealer as a stated yield to
maturity on the Notes ("Yield to Maturity"). Each Dealer will also be
provided with (i) the name of the Company, (ii) an estimate of the Purchase
Price (which shall be stated as a US Dollar amount and be calculated by the
Calculation Agent in accordance with paragraph (c) below), (iii) the
principal amount and maturity of the Notes and (iv) the method by which
interest will be calculated on the Notes.
(c) The purchase price for the Notes in connection with the exercise of
the Call Option (the "Purchase Price") shall be equal to (i) the principal
amount of the Notes, plus (ii) a premium (the "Notes Premium") which shall be
equal to the excess, if any, on the Coupon Reset Date of (A) the discounted
present value to the Coupon Reset Date of a bond with a maturity of thirty
years from the Coupon Reset Date which has an interest rate of 5.892%,
semiannual interest payments on each March 15 and September 15
commencing September 15, 2001 following the Coupon Reset Date, and a
principal amount equal to the principal amount of the Notes, and assuming a
discount rate equal to the Treasury Rate over (B) such principal amount
of Notes. The "Treasury Rate" means the per annum rate equal to the offer
side yield to maturity of the current on-the-run thirty-year United States
Treasury Security per Telerate page 500, or any successor page, at 11:00
a.m., New York time, on the Bid Date (or such other time or date that may
be agreed upon by the Company and the Calculation Agent) or, if such rate does
not appear on Telerate page 500, or any successor page, at such time, the
rates on GovPX End-of-Day Pricing at 3:00 p.m., New York time, on
the Bid Date (or such other time or date that may be agreed upon by the
Company and the Calculation Agent).
(d) The Calculation Agent will provide written notice to the Company by
12:30 p.m., New York time on the Bid Date, setting forth (i) the names of
each of the Dealers from whom the Calculation Agent received Bids on the Bid
Date, (ii) the Bid submitted by each such Dealer and (iii) the Purchase Price
as determined pursuant to paragraph (c) above. The Calculation Agent will
thereafter select from the Bids received the Bid with the lowest Yield to
Maturity (the "Selected Bid"); provided, however, that (i) if the
Calculation Agent has not received a timely Bid from a Dealer on or before the
Bid Date, the Selected Bid shall be the lowest of all Bids received by such
time and (ii) if any two or more of the lowest Bids submitted are
equivalent, the Company shall in its sole discretion select any of such
equivalent Bids (and such selected Bid shall be the Selected Bid). The
Calculation Agent will set the Coupon Reset Rate equal to the interest rate
that would amortize the Notes Premium fully over the term of the Notes at the
Yield to Maturity indicated by the Selected Bid (the Coupon Reset Rate). The
Calculation Agent will notify the Dealer that submitted the Selected Bid by
4:00 p.m., New York time, on the Bid Date that its Bid was determined to be
the Selected Bid.
(e) Immediately after calculating the Coupon Reset Rate for the Notes,
the Calculation Agent will provide written notice to the Company and the
Trustee, setting forth the Coupon Reset Rate. The Coupon Reset Rate for the
Notes will be effective from and including the Applicable Coupon Reset Date to
but excluding the Maturity Date.
GENERAL MATTERS
Terms used herein which are defined in the Indenture shall have the
respective meanings assigned thereto in the Indenture.
This Note shall be governed by and construed in accordance with the laws
of the State of New York.
<PAGE>
---------------------------
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM as tenants in common UNIF GIFT MIN ACT______CUSTODIAN_______
TEN ENT as tenants by the entireties (Cust) (Minor)
JT TEN as joint tenants with right Under Uniform Gifts to Minors Act
of survivorship and not as
tenants in common
-------------------------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto
Please Insert Social Security or
Other Identifying Number of Assignee
- ------------------
/ /
---------------- ---------------------------------------------------------
- ------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP
CODE OF ASSIGNEE
- ---------------------------------------------------------------------------
- ---------------------------
- ---------------------------------------------------------------------------
- ---------------------------
the within Series B Note of Burlington Northern Santa Fe Corporation and
does hereby irrevocably constitute and appoint ____________________________
attorney to transfer said Series B Note on the books of the Company, with full
power of substitution in the premises.
Dated:
---------------------- ----------------------
----------------------
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within instrument in every particular, without
alteration or enlargement or any change whatever.
<PAGE>
EXHIBIT 12
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1998 1997
Earnings: ---- ----
<S> <C> <C>
Pre-tax income $436 $242
Add:
Interest and fixed charges,
excluding capitalized interest 88 84
Portion of rent under long-term
operating leases representative
of an interest factor 45 47
Amortization of capitalized interest 1 1
Less: Undistributed equity in earnings
of investments accounted for
under the equity method 3 (2)
---- ----
Total earnings available for fixed charges $567 $376
==== ====
Fixed charges:
Interest and fixed charges $ 91 $ 87
Portion of rent under long-term operating
leases representative of an interest
factor 45 47
---- ----
Total fixed charges $136 $134
==== ====
Ratio of earnings to fixed charges 4.17x(1) 2.81x
</TABLE>
(1) Earnings for the quarter ended March 31, 1998 include a pre-tax gain on the
pipeline partnerships sale of $67 million. Excluding this gain, the ratio
for the quarter ended March 31, 1998 would have been 3.68x.
<PAGE>
[ARTICLE] 5
(LEGEND) This schedule contains summary financial information extracted from
Burlington Northern Santa Fe Corporation's Consolidated Financial Statements and
is qualified in its entirety by reference to such financial statements.
(/LEGEND)
[MULTIPLIER] 1,000,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] MAR-31-1998
[CASH] 33
[SECURITIES] 0
[RECEIVABLES] 634
[ALLOWANCES] 65
[INVENTORY] 213
[CURRENT-ASSETS] 1185
[PP&E] 24135
[DEPRECIATION] 4714
[TOTAL-ASSETS] 21668
[CURRENT-LIABILITIES] 2013
[BONDS] 5158
[PREFERRED-MANDATORY] 2
[PREFERRED] 0
[COMMON] 0
[OTHER-SE] 7105
[TOTAL-LIABILITY-AND-EQUITY] 21668
[SALES] 0
[TOTAL-REVENUES] 2162
[CGS] 0
[TOTAL-COSTS] 1715
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 88
[INCOME-PRETAX] 436
[INCOME-TAX] 171
[INCOME-CONTINUING] 265
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 265
[EPS-PRIMARY] 1.69
[EPS-DILUTED] 1.67
</TABLE>
