UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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) 352-6856
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes__X__ No_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares
Class Outstanding at October 31, 1998
----- -------------------------------
Common stock, $.01 par value 469,094,916 shares
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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)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
Revenues $2,307 $2,138 $6,688 $6,226
------- ------- ------- -------
Operating expenses:
Compensation and benefits 695 661 2,087 2,006
Purchased services 243 217 707 644
Depreciation and amortization 211 195 618 574
Equipment rents 203 200 597 601
Fuel 178 173 541 555
Materials and other 163 151 548 517
------- ------- ------- -------
Total operating expenses 1,693 1,597 5,098 4,897
------- ------- ------- -------
Operating income 614 541 1,590 1,329
Interest expense 91 86 264 255
Other income (expense), net (19) (10) 54 (13)
------- ------- ------- -------
Income before income taxes 504 445 1,380 1,061
Income tax expense 187 162 521 393
------- ------- ------- -------
Net income $ 317 $ 283 $ 859 $ 668
======= ======= ======= =======
Earnings per share:
Basic $ 0.67 $ 0.61 $ 1.82 $ 1.44
======= ======= ======= =======
Diluted $ 0.66 $ 0.60 $ 1.80 $ 1.42
======= ======= ======= =======
Average shares (in millions)
Basic 471.7 465.8 470.9 463.4
Dilutive potential common shares 5.3 6.4 5.9 6.9
------- ------- ------- -------
Diluted 477.0 472.2 476.8 470.3
======= ======= ======= =======
Dividends declared per common share $ 0.12 $ 0.10 $ 0.32 $ 0.30
</TABLE>
See accompanying notes to consolidated financial statements.
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BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 17 $ 31
Accounts receivable, net 615 635
Materials and supplies 212 205
Current portion of deferred income taxes 327 333
Other current assets 45 30
------------- ------------
Total current assets 1,216 1,234
Property and equipment, net 20,267 19,211
Other assets 777 891
------------- ------------
Total assets $ 22,260 $ 21,336
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 1,855 $ 1,952
Long-term debt due within one year 261 108
------------- ------------
Total current liabilities 2,116 2,060
Long-term debt and commercial paper 5,154 5,181
Deferred income taxes 5,479 5,175
Casualty and environmental reserves 418 448
Employee, merger and separation costs 420 469
Other liabilities 1,132 1,191
------------- ------------
Total liabilities 14,719 14,524
------------- ------------
Commitments and contingencies (See notes 3 and 4)
Stockholders' equity:
Common stock, $.01 par value, 600,000,000
shares authorized; 470,879,665 and
156,746,601 shares issued, respectively 5 2
Additional paid-in capital 5,141 4,995
Retained earnings 2,572 1,863
Accumulated other comprehensive deficit (7) (7)
Treasury stock (167) (39)
Other (3) (2)
------------- ------------
Total stockholders' equity 7,541 6,812
------------- ------------
Total liabilities and stockholders'
equity $ 22,260 $ 21,336
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
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BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Nine Months Ended
September 30,
-----------------
1998 1997
------- -------
Operating Activities:
Net income $ 859 $ 668
Adjustments to reconcile net income to net cash
provided operating activities:
Depreciation and amortization 618 574
Deferred income taxes 309 272
Employee, merger and separation costs paid (63) (86)
Other, net (125) (106)
Sale of accounts receivable 19 320
Other changes in working capital (65) (532)
------- -------
Net cash provided by operating activities 1,552 1,110
------- -------
Investing Activities:
Cash used for capital expenditures (1,558) (1,476)
Other, net (240) (122)
------- --------
Net cash used for investing activities (1,798) (1,598)
------- --------
Financing Activities:
Net increase (decrease) in commercial paper and
bank loans (17) 46
Proceeds from issuance of long-term debt 507 654
Payments on long-term debt (92) (158)
Dividends paid (141) (138)
Proceeds from stock options exercised 94 87
Purchase of BNSF common stock (110) -
Other, net (9) (5)
------- --------
Net cash provided by financing activities 232 486
------- --------
Decrease in cash and cash equivalents (14) (2)
Cash and cash equivalents:
Beginning of period 31 47
------- --------
End of period $ 17 $ 45
======= ========
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 279 $ 252
Income taxes paid, net of refunds 164 14
</TABLE>
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
--
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 September 30, 1998 and December 31, 1997
and the consolidated results of operations for the three and nine month
periods ended September 30, 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
three and nine month periods ended September 30, 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
$488 million are included in the consolidated balance sheet at September 30,
1998. During the first nine months of 1998, the Company paid $63 million of
employee, merger and separation costs.
At September 30, 1998, $68 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.
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 354 sites, at which it is being asked to
participate in the study or clean-up, or both, of alleged environmental
contamination. BNSF paid approximately $36 million during the first nine
months of 1998 for mandatory clean-up efforts, including amounts expended
under federal and state voluntary clean-up programs. BNSF has accruals of
approximately $192 million for remediation and restoration of all known sites.
BNSF anticipates that the majority of the accrued costs at September 30, 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. Final
regulations applicable to new and rebuilt locomotive engines were promulgated
by the United States Environmental Protection Agency ("EPA") and became
effective June 15, 1998. The new standards will be phased in between 2000
and 2005. BNSF Railway has evaluated compliance requirements and associated
costs and believes the costs will not be material in any given year. BNSF
Railway has also entered into agreements with the California State Air
Resources Board and the EPA regarding a program to reduce emissions in
Southern California through accelerated deployment of locomotives which comply
with the federal standards.
Other claims and litigation
BNSF 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.
4. Debt
BNSF issues commercial paper from time to time which are supported by bank
revolving credit agreements. Outstanding commercial paper balances are
considered as reducing the amount of borrowings available under these
agreements. The commitments of the lenders under BNSF's short-term agreement
were extended on November 12, 1998 and are currently scheduled to expire on
June 15, 1999. The amended short-term borrowing facility allows borrowings of
up to $425 million. The commitments of the lenders under the long-term
agreement, which allow borrowings of up to $1.5 billion, are scheduled to
expire on November 12, 2002.
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.
In July 1998, BNSF issued $200 million of 6.70% debentures due August 1, 2028,
under the March 1998 shelf registration of debt securities. The net proceeds
were used for the repayment of commercial paper. Subsequent to this
transaction, the March 1998 shelf registration had $550 million of potential
borrowings remaining.
5. Hedging activities and other commitments
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 transactions which are
accounted for as hedges. Any gains or losses associated with changes in
market value of these hedges are deferred and recognized as a component of
fuel expense in the period in which the hedged fuel is purchased and used. To
the extent BNSF hedges portions of its fuel purchases, it may not fully
benefit from decreases in fuel prices.
As of September 30, 1998, BNSF had entered into fuel swaps for approximately
1.9 billion gallons at an average price of approximately 49 cents per gallon
and forward purchases for approximately 100 million gallons at an average
price of approximately 53 cents per gallon.
The above prices do not include taxes, transportation costs, certain other
fuel handling costs and, except for forward purchases, any differences which
may occur from time to time between the prices of commodities hedged and the
purchase price of BNSF's diesel fuel.
BNSF's fuel hedging program covers approximately 82 percent of estimated fuel
purchases for the remaining three months of 1998, and approximately 75
percent, 40 percent, 22 percent and 7 percent of estimated fuel purchases for
1999, 2000, 2001 and 2002, respectively. Hedge positions are closely
monitored to ensure that they will not exceed actual fuel requirements in any
period. Unrecognized losses from BNSF's fuel hedging transactions were
approximately $70 million based on Gulf Coast #2 heating oil as of September
30, 1998. BNSF also monitors its hedging positions and credit ratings of its
counterparties and does not anticipate losses due to counterparty
nonperformance.
Interest Rate
During June 1998, in anticipation of a future debt issuance, BNSF entered into
a treasury lock transaction for $200 million at an interest rate of
approximately 5.67 percent. This treasury lock transaction was based on the
then-current 30-year U.S. treasury rate and as explained in Note 8, in
conjunction with a November 1998 debt issuance, the treasury lock was closed
out.
During July 1998, in conjunction with the $200 million debt issuance, the
Company closed out $200 million of treasury lock transactions at a loss of
approximately $7 million which has been deferred and will be amortized as an
interest adjustment over the life of the debt.
Equity Put Options
During the third quarter of 1998, BNSF sold equity put options for 1.2 million
shares of the Company's common stock to an independent third party and
received cash proceeds of approximately $0.9 million. The option contracts
have exercise prices ranging from $29.67 to $30 per share with expiration
dates in February, 1999. Including these options, total outstanding equity
put options are 3 million shares with exercise prices ranging from $29 to $30
per share and expiration dates ranging from November 1998 to February 1999.
The option contracts permit a net-share or net-cash settlement method at
BNSF's election. The Company accounts for the effects of these transactions
within stockholders' equity.
6. 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
December 31, 1997.
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 Unit 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 $0.07 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 in June 1998 all VRED holders received either partnership units
of Kinder Morgan or cash equal to the par value of the VREDs. As a result of
this transaction, substantially all of the Company's investment in the
Partnership and SFPP, L.P. and the VREDs were removed from the consolidated
balance sheet.
7. Common Stock
Common Stock Split
On July 16, 1998, the Board of Directors approved a three-for-one common stock
split to be effected in the form of a stock dividend of two additional shares
of BNSF common stock payable for each share outstanding or held in treasury on
September 1, 1998, to the stockholders of record on August 17, 1998. All
equity-based benefit plans reflected the issuance of additional shares or
options due to the declaration of the stock split. An amount equal to the par
value of the common shares issued was transferred from additional paid-in
capital to common stock when the stock split occurred. All earnings per share
information included on the consolidated statement of income reflects the
common stock split.
Share Repurchase Program
During the first nine months of 1998, the Company repurchased 3,567,000 shares
of its common stock at an average price of $30.72 per share under the
Company's share repurchase program.
Since September 30, 1998, the Company repurchased 1,148,900 shares of its
common stock at an average price of $30.47 per share, bringing total
repurchases under the Company's share repurchase program through November 12,
1998 to 4,715,900 shares at an average cost of $30.66 per share.
8. Subsequent Events
Treasury Lock Transactions
During October 1998, in anticipation of future debt issuances, BNSF entered
into treasury lock transactions, based on the 10-year and 30-year U.S.
treasury rates, for $300 million and $200 million, respectively. The 10-year
and 30-year treasury lock transactions have average interest rates of 4.53
and 5.03 percent, respectively, and expire between 1999 and 2001 and can be
closed by BNSF anytime up to expiration.
Debt Issuance
On November 13, 1998, BNSF issued $200 million of puttable reset debentures
("debentures") due May 13, 2029, under the March 1998 shelf registration of
debt securities. The debentures included a provision which gave the Company
the option to purchase all of the debentures from the holders on May 13, 1999
("Call Option"). In connection with the debt issuance, the Company sold the
Call Option to a third party and received cash of $12 million, which will be
deferred and amortized to interest expense over the life of the debt.
Additionally, in conjunction with the debt issuance, the Company closed out
$200 million of treasury lock transactions at a loss of approximately $11
million which will be deferred and amortized to interest expense over the life
of the debt.
Until May 13, 1999, the debentures will have a floating interest rate based
upon the monthly LIBOR rate plus 0.75%. On May 13, 1999, one of two things
will happen. Either: (1) the third party will exercise the Call Option or
(2) the debentures will be put back to the Company by the holders. If the
third party exercises the Call Option, the third party will repurchase the
debentures from the holders and remarket them. The interest rate paid by the
Company will be reset to a fixed interest rate until maturity in 2029 of
approximately 5.67% plus a credit spread to be determined at that time. If
the Call Option is not exercised, the Company must repurchase the debentures
from the holders. The net proceeds from the issuance of the debentures were
used for general corporate purposes including the repayment of commercial
paper. Subsequent to this transaction, the March 1998 shelf registration has
$350 million of potential borrowings remaining.
<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 SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997.
BNSF recorded net income for the third quarter of 1998 of $317 million or
$0.66 per share, compared with third quarter 1997 net income of $283 million
or $0.60 per share. The increase in net income is a result of increased
revenue in intermodal, coal and other sectors, partially offset by a 6 percent
increase in operating expense despite a 8 percent increase in cars and units
handled.
<TABLE>
<CAPTION>
REVENUES
The following table presents BNSF's revenue information by commodity for the
three months ended September 30, 1998 and 1997:
<S> <C> <C> <C> <C> <C> <C>
Average Revenue
Revenues Cars/Units Per Car/Unit
----------------- -------------- ---------------
1998 1997 1998 1997 1998 1997
------- ------- ------ ------ ------- -------
(In Millions) (In Thousands)
Intermodal $ 659 $ 590 838 735 $ 786 $ 803
Coal 565 500 520 467 1,087 1,071
Agricultural Commodities 267 269 146 154 1,829 1,747
Chemicals 213 200 127 120 1,677 1,667
Metals and Minerals 208 199 175 168 1,189 1,185
Forest Products 159 145 89 86 1,787 1,686
Consumer Goods 144 131 94 92 1,532 1,424
Automotive 86 101 49 62 1,755 1,629
------- ------- ------ ------ ------- -------
Total Freight Revenues 2,301 2,135 2,038 1,884 $1,129 $1,133
====== ====== ======= =======
Other Revenues 6 3
------- -------
Total Operating Revenues $2,307 $2,138
======= =======
</TABLE>
Total revenues for third quarter of 1998 were $2,307 million or 8 percent
higher compared with revenues of $2,138 million for the third quarter of 1997.
Intermodal revenues $659 million for the third quarter of 1998 increased $69
million or 12 percent reflecting increases in the direct marketing,
international and truckload sectors. Direct marketing revenues benefited from
increased units shipped for Yellow Freight, Roadway, ABF and the United States
Postal Service. International revenues were up due to volume gains associated
with diversion of traffic from Union Pacific Corporation ("UP") to BNSF and
due to new business established with Sealand and NYK. Truckload revenues
increased due to volume growth from J.B. Hunt and Schneider.
Coal revenues of $565 million for the 1998 third quarter increased $65 million
or 13 percent primarily due to favorable operating conditions and strong
demand from volume gains associated with the diversion of business from UP to
BNSF.
Agricultural commodities revenues of $267 million for the 1998 third quarter
were $2 million or 1 percent lower than revenues for the 1997 third quarter
due to weak Gulf wheat and Pacific Northwest corn exports. This was partially
offset by increased soybean and feed exports.
Chemicals revenues of $213 million for the third quarter of 1998 were $13
million or 7 percent higher than the third quarter of 1997. Increases in
petroleum and plastics were partially offset by weak fertilizer markets.
Metals and minerals revenues of $208 million for the third quarter of 1998
were $9 million or 5 percent higher than the third quarter of 1997 and were
led primarily by volume increases in cement and non-ferrous metals, partially
offset by a decline in domestic steel production resulting from increased
Asian imports.
Forest products revenues of $159 million for the 1998 third quarter were $14
million or 10 percent higher than the 1997 third quarter primarily due to
higher printing paper revenues as a result of increased imports of Canadian
newsprint. Additionally, higher volumes and average revenue per car for
lumber and pulpboard contributed to the revenue growth.
Consumer goods revenues of $144 million for the 1998 third quarter were $13
million or 10 percent higher than the 1997 third quarter primarily due to
volume increases in corn syrup traffic to Mexico, Texas and California and
sugar traffic moving out of storage. Additionally, government and machinery
revenues increased as a result of increased Boeing traffic.
Automotive revenues of $86 million for the 1998 third quarter were $15 million
or 15 percent lower than the third quarter of 1997 reflecting decreases in
volumes due to the loss in late 1997 of Ford's Southwestern United States
business, the effects of the General Motors strike and a rail industry
shortage of equipment.
EXPENSES
Total operating expenses for the third quarter of 1998 were $1,693 million, an
increase of $96 million or 6 percent, compared with operating expenses for the
1997 third quarter of $1,597 million. The operating ratio improved to 73.4
percent for the third quarter of 1998, compared with a 74.7 percent operating
ratio for the third quarter 1997.
Compensation and benefits expenses of $695 million were $34 million or 5
percent higher than the third quarter of 1997. A majority of the increase was
due to volume driven increases in train crew costs and wage increases to both
salaried and union employees.
Purchased services of $243 million for the third quarter of 1998 were $26
million or 12 percent higher than the 1997 third quarter due principally to
volume driven increases in ramping and other contracted expenses. Joint
facility costs were also higher due to increased operations over trackage
rights gained from UP.
Equipment rents expenses for the third quarter of 1998 of $203 million were $3
million or 2 percent higher than the 1997 third quarter reflecting higher
leased equipment expense, partially offset by lower private railcar expense.
Fuel expenses of $178 million for the third quarter of 1998 were $5 million or
3 percent higher than the third quarter of 1997, as a result of a 7 percent
increase in consumption, partially offset by a 2 cent or 4 percent decrease in
the average price (including the hedge effect) paid per gallon of diesel fuel.
Materials and other expenses $163 million for the third quarter of 1998 were
$12 million or 8 percent higher than the 1997 third quarter principally
reflecting a decrease in joint facility billing credits due to lower UP use of
trackage rights on BNSF's lines.
Interest expense of $91 million for the third quarter of 1998 was $5 million
or 6 percent higher than the third quarter of 1997, reflecting higher debt
levels partially offset by lower interest rates.
Other income (expense), net was $9 million unfavorable verses the third
quarter of 1997 reflecting in part the absence of equity in earnings of
pipelines due to the first quarter sale of this investment.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997.
BNSF recorded net income for the nine months $859 million or $1.80 per share,
compared with first nine months 1997 net income of $668 million or $1.42 per
share. The increase in net income is principally a result of increased
revenue in intermodal, coal and other sectors, partially offset by only a 4
percent increase in operating expense despite a 8 percent increase in units
handled. More moderate winter weather in the first quarter of 1998 relative
to 1997 and gains on real estate portfolio sales 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 first
quarter $67 million pre-tax gain ($32 million after-tax or $0.07 per 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 $827 million or $1.73 per share for the first
nine months of 1998.
<TABLE>
<CAPTION>
REVENUES
The following table presents BNSF's revenue information by commodity for the
nine months ended September 30, 1998 and 1997:
<S> <C> <C> <C> <C> <C> <C>
Average Revenue
Revenues Cars/Units Per Car/Unit
----------------- -------------- ---------------
1998 1997 1998 1997 1998 1997
------- ------- ------ ------ ------- -------
(In Millions) (In Thousands)
Intermodal $1,825 $1,660 2,307 2,069 $ 791 $ 802
Coal 1,678 1,471 1,542 1,375 1,088 1,070
Agricultural Commodities 771 800 422 427 1,827 1,874
Chemicals 632 614 379 360 1,668 1,706
Metals and Minerals 606 559 503 461 1,205 1,213
Forest Products 464 428 262 251 1,771 1,705
Consumer Goods 420 377 272 255 1,544 1,478
Automotive 278 315 164 195 1,695 1,615
------- ------- ------ ------ ------- -------
Total Freight Revenues 6,674 6,224 5,851 5,393 $1,141 $1,154
====== ====== ======= =======
Other Revenues 14 2
------- -------
Total Operating Revenues $6,688 $6,226
======= ======
</TABLE>
Total revenues for the first nine months of 1998 were $6,688 million or 7
percent higher compared with revenues $6,226 million for the first nine months
of 1997.
Intermodal revenues of $1,825 million for the first nine months of 1998
increased $165 million or 10 percent reflecting increases in the direct
marketing, international and truckload sectors. Direct marketing revenues
benefited from increased units shipped for Yellow Freight, Roadway, ABF and
the United States Postal Service. International revenues were up due to
volume gains associated with diversion of traffic from UP to BNSF and due to
new business established with Sealand, NYK, Maersk and K-Line. Truckload
revenues increased due to volume growth from J.B. Hunt and Schneider.
Coal revenues of $1,678 million for the first nine months of 1998 increased
$207 million or 14 percent primarily due to favorable operating conditions as
a result of a more moderate winter in 1998, strong demand and volume gains
associated with the diversion of business from UP to BNSF.
Agricultural commodities revenues of $771 million for the first nine months of
1998 were $29 million or 4 percent lower than revenues for the first nine
months of 1997 due to poor Pacific Northwest corn and wheat exports as well as
soft barley exports.
Chemicals revenues of $632 million for the first nine months of 1998 were $18
million or 3 percent higher than the first nine months of 1997. Increases in
petroleum and plastics were partially offset by weak fertilizer markets.
Metals and minerals revenues $606 million for the first nine months of 1998
were $47 million or 8 percent higher than the first nine months of 1997 and
were led primarily by volume increases in steel products. Strength in
aluminum, cement and rock and specialty minerals also contributed to the
increase in revenues.
Forest products revenues of $464 million for the first nine months of 1998
were $36 million or 8 percent higher than the first nine months of 1997
primarily due to printing paper volume gains as 1997 was impacted by severe
winter weather, increased Canadian newsprint imports and pulpboard volume
gains as a result of the diversion of traffic from UP to BNSF. Additionally,
lumber volumes increased due to higher levels of construction activity.
Consumer goods revenues of $420 million for the first nine months of 1998 were
$43 million or 11 percent higher than the first nine months of 1997 primarily
due to volume increases in corn syrup traffic to Mexico, Texas and California
and increased sugar traffic as 1997 was impacted by severe winter weather.
Additionally, government and machinery revenues increased as a result of
increased Boeing traffic.
Automotive revenues of $278 million for the first nine months of 1998 were $37
million or 12 percent lower than the first nine months of 1997 reflecting
decreases in volumes due to the loss of Ford's Southwestern United States
business, the General Motors strike and a rail industry shortage of equipment.
EXPENSES
Total operating expenses for the first nine months of 1998 were $5,098
million, an increase of $201 million or 4 percent, compared with operating
expenses for the first nine months of 1997 of $4,897 million. The operating
ratio improved to 76.2 percent for the first nine months of 1998, compared
with a 78.7 percent operating ratio for the first nine months 1997.
Compensation and benefits expenses of $2,087 million were $81 million or 4
percent higher than the first nine months of 1997. The increase was primarily
due to higher scheduled wages related to volume driven increases as well as
higher incentive compensation expenses (1997 incentive compensation expense
was lower due to the impact of the severe winter weather). Additionally, wages
were higher because of wage increases to both salaried and union employees.
Purchased services of $707 million for the first nine months of 1998 were $63
million or 10 percent higher than the first nine month of 1997 due principally
to volume driven increases in ramping, distribution services and other
contracted expenses. Joint facility costs were also higher due to increased
operations over trackage rights gained from UP.
Equipment rents expenses for the first nine months of 1998 of $597 million
were slightly lower than the first nine months of 1997 reflecting lower
private railcar expense, partially offset by higher leased equipment expense.
Fuel expenses of $541 million for the first nine months of 1998 were $14
million or 3 percent lower than the first nine months of 1997, as a result of
a 6 cent or 8 percent decrease in the average price (including the hedge
effect) paid per gallon of diesel fuel partially offset by a 7 percent volume
driven increase in consumption.
Materials and other expenses of $548 million for the first nine months of 1998
were $31 million or 6 percent higher than the first nine months of 1997
principally reflecting a decrease in credits from joint facility billings due
to lower UP traffic levels and a decrease in credits from the sale of
easements.
Interest expense for the first nine months of 1998 increased by $9 million to
$264 million reflecting higher debt levels partially offset by lower interest
rates.
Other income (expense), net was $54 million of income in 1998 compared to $13
million of expense in 1997. This increase was due primarily to the $67
million pre-tax gain on the pipeline partnership sale in the first quarter of
1998. Excluding the gain on the pipeline partnership sale, other income
(expense), net for the first nine months of 1998 was equal to 1997 reflecting
gains on real estate portfolio sales offset by higher accounts receivable sale
fees and lower equity in earnings of pipelines due to the first quarter sale
of this investment.
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 $1,552 million for the nine months ended
September 30, 1998 compared with $1,110 million for the nine months ended
September 30, 1997. The increase in cash from operations was in part caused
by higher net income and a $467 million decrease in cash used for working
capital, partially offset by a $301 million decrease in accounts receivable
sold. The working capital variance was partially a result of the Company's
efforts to reduce the higher accounts receivable balances that had resulted
from the integration issues arising from the implementation of a new revenue
system in 1997. Cash inflows from financing activities were $232 million
principally reflecting net proceeds from borrowings used to fund capital
expenditures and other investing activities not funded through cash from
operations, and cash used to purchase BNSF common stock.
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 agreement were extended on
November 12, 1998 and are currently scheduled to expire on June 15, 1999. The
amended short-term borrowing facility allows borrowings of up to $425 million.
The commitments of the lenders under the long-term agreement are scheduled to
expire on November 12, 2002.
At September 30, 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 $726 million, leaving a total remaining capacity of $774
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.
In July 1998, BNSF issued $200 million of 6.70% debentures due August 1, 2028,
under the March 1998 shelf registration of debt securities. The net proceeds
were used for the repayment of commercial paper. Subsequent to this
transaction, the March 1998 shelf registration had $550 million of potential
borrowings remaining.
On November 13, 1998, BNSF issued $200 million of puttable reset debentures
("debentures") due May 13, 2029, under the March 1998 shelf registration of
debt securities. The debentures included a provision which gave the Company
the option to purchase all of the debentures from the holders on May 13, 1999
("Call Option"). In connection with the debt issuance, the Company sold the
Call Option to a third party and received cash of $12 million, which will be
deferred and amortized to interest expense over the life of the debt.
Additionally, in conjunction with the debt issuance, the Company closed out
$200 million of treasury lock transactions at a loss of approximately $11
million which will be deferred and amortized to interest expense over the life
of the debt.
Until May 13, 1999, the debentures will have a floating interest rate based
upon the monthly LIBOR rate plus 0.75%. On May 13, 1999, one of two things
will happen. Either: (1) the third party will exercise the Call Option or
(2) the debentures will be put back to the Company by the holders. If the
third party exercises the Call Option, the third party will repurchase the
debentures from the holders and remarket them. The interest rate paid by the
Company will be reset to a fixed interest rate until maturity in 2029 of
approximately 5.67% plus a credit spread to be determined at that time. If
the Call Option is not exercised, the Company must repurchase the debentures
from the holders. The net proceeds from the issuance of the debentures were
used for general corporate purposes including the repayment of commercial
paper. Subsequent to this transaction, the March 1998 shelf registration has
$350 million of potential borrowings remaining.
<TABLE>
<CAPTION>
<PAGE>
CAPITAL EXPENDITURES
The following table presents a breakdown of BNSF's cash capital expenditures
for the nine months ended September 30, 1998 and 1997:
<S> <C> <C>
September 30,
------------------
1998 1997
-------- --------
(In Millions)
Maintenance of Way $ 766 $ 693
Equipment 376 389
Expansion Projects 332 255
Other 84 139
-------- --------
Total $ 1,558 $ 1,476
======== ========
</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 nine months ended September 30, 1998,
equipment expenditures were $13 million lower than 1997 because more
locomotives were acquired through operating lease agreements in 1998. This
decrease was partially offset by increases in capitalized locomotive overhauls
and in remanufactured freight cars. Expansion projects increased to $332
million from $255 million due to additional capacity expansion projects to
meet higher demand and relieve congestion. The $55 million decrease in other
is primarily a result of lower merger-related improvements.
CAPITAL STRUCTURE
BNSF's ratio of total debt to total capital was 42 percent and 44 percent at
September 30, 1998 and December 31, 1997, respectively.
On July 16, 1998, the Board of Directors approved a three-for-one common stock
split to be effected in the form of a stock dividend of two additional shares
of BNSF common stock payable for each share outstanding or held in treasury on
September 1, 1998, to the stockholders of record on August 17, 1998. All
equity-based benefit plans will reflect the issuance of additional shares or
options due to the declaration of the stock split. An amount equal to the par
value of the common shares issued was transferred from additional paid-in
capital to common stock.
DIVIDENDS
Common stock dividends declared for the nine months ended September 30, 1998
and 1997 were $0.32 and $0.30 per common share, respectively. Dividends paid
on common stock during the first nine months of 1998 and 1997 were $141
million and $138 million, respectively. On September 17, 1998, BNSF's Board
of Directors declared a regular quarterly common stock dividend of $0.12 per
share to stockholders of record on December 4, 1998 to be paid on January 4,
1999.
<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 subsequently began 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. No final decisions have been issued in
either of the rulemakings. In response to the STB decision, members of the
shipping community and rail industry have met to discuss competitive access
issues not related to quality of service, expanding the role of short-line
railroads and other smaller carriers, establishing a formalized dialogue on a
regular basis between carriers, their employees, and shippers, examining and
recommending 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
Background. The Company has established a committee of managers and
employees, chaired by the Company's Chief Information Officer, to evaluate and
manage the costs and risks associated with becoming Year 2000 compliant and to
minimize the impact of the Year 2000 problem on the Company. Because many
existing computer programs and microprocessors recognize only the last two
digits of years (and not the century designation), they may be unable to
accurately recognize and process dates beyond December 31, 1999, and
consequently may fail or produce erroneous data. The Year 2000 problem may
adversely affect the Company's operations and financial performance if its
remedial efforts are not successfully implemented or if the railroad industry
association or railroads with which the Company connects or critical customers
or suppliers fail to become Year 2000 compliant.
State of Readiness. Year 2000 issues were reviewed in September 1995
following the approval of the merger of the two railroads that now constitute
BNSF Railway. The core mainframe systems for the merged railroad were
selected in part because they were substantially Year 2000 compliant. These
systems integrate all transportation-related activities and computer systems
that support BNSF's transportation network, including operations, customer
information, and revenue data. This merger-related information systems
integration and upgrade activity was substantially completed by July 1997.
Following this systems integration, BNSF adopted a three-phase approach to
Year 2000: Inventory and Assessment; Remediation; and Certification Testing.
Separate teams address technologies administered or maintained by the
Information Systems Services department ("ISS technologies") and other
enterprise-wide products and technologies used by the Company, including
embedded microprocessor technology ("Enterprise technologies"). BNSF has
substantially completed the Inventory and Assessment phase for both ISS and
Enterprise technologies. During this phase, BNSF inventoried all
ISS-administered source code, hardware, software and communications equipment
that could be affected by the Year 2000 problem, and identified items
potentially needing remediation. Additionally, the Enterprise team completed
a company-wide audit of Enterprise technologies and associated suppliers and
service providers for potential Year 2000 problems.
The Remediation phase is more than two-thirds complete. Remediation includes
converting source code and replacing or upgrading purchased software and
hardware. Remediation is expected to be completed by year-end 1998 for ISS
technologies and by July 1999 for Enterprise technologies.
The Certification Testing phase includes validating the performance of ISS and
Enterprise technologies in a Year 2000 test environment. The Certification
Testing phase also includes validating Year 2000 compliance for critical third
party suppliers and service providers. This phase, which is ongoing, overlaps
with the Remediation phase. Certification testing for ISS technologies is
beginning in November 1998, with critical applications receiving priority;
testing for all applications is scheduled for completion in September 1999.
Certification testing of all critical Enterprise technologies began in May
1998 and is scheduled for completion during December 1998, with non-critical
Enterprise technologies to be certification tested by July 1999.
Costs. As a result of its merger-related systems integration that was
completed in 1997, BNSF achieved substantial Year 2000 compliance on its core
mainframe systems. In addition, spending on Year 2000 activities approximates
$4 million to date. Currently, the total cost of achieving Year 2000
compliance for the Company's ISS and Enterprise technologies is estimated to
be approximately $20 million.
Year 2000 Risks and Contingency Plans. Certain BNSF business processes rely
on third parties for the efficient functioning of its transportation network.
The Association of American Railroads (AAR) administers systems that benefit
all North American railroads and their customers, including interline
settlement, shipment tracing, and waybill processing. BNSF and other
AAR-member railroads are participating in a process to test and certify these
systems for Year 2000 compliance. The AAR expects that these systems will be
compliant by March 1999 with certification testing conducted promptly
thereafter. BNSF plans to develop contingency plans for the business
processes supported by AAR systems.
Certain BNSF routes and resulting revenues are dependent on the use of
trackage rights over other railroads, including Union Pacific Railroad,
Montana Rail Link and the Arizona and California Railroad. Other BNSF traffic
may originate or terminate on other carriers' lines or may otherwise involve
use of a foreign connection en route. Approximately 60 percent of units
handled by BNSF run over BNSF facilities only. BNSF's traffic levels and
revenues could be significantly reduced and/or its operational network
significantly impaired through congestion and other factors if other railroads
are not able to accommodate BNSF trains or interchange traffic for any
extended period of time due to Year 2000 problems. As a result of its work
with other railroads to address Year 2000 problems on an industry-wide basis,
however, management believes that the possibility of extended failures on
other railroads is not significant. At present, the Company generally has not
determined which of its customers may have Year 2000 problems that could
result in reduced traffic for the Company.
It is the opinion of management that Year 2000 problems in BNSF's internal
information systems and technology infrastructure will not have a materially
adverse effect on the results of operations, liquidity or financial position
of the Company. However, there can be no assurance that the systems or
equipment of other parties which interact with BNSF's systems will be
compliant on a timely basis. BNSF believes that the failure of systems or
equipment of one or more of key third parties (and of customers) is the most
reasonably likely worst case Year 2000 scenario, and that an extended failure
could have a material adverse effect on the results of operations, liquidity
or financial position of the Company. Where appropriate, BNSF is developing
contingency plans in the event that BNSF key third parties do not become Year
2000 compliant on a timely basis, which effort includes the formalization of
existing disaster recovery plans. Contingency plans are expected to be in
place by the end of the first quarter 1999.
***
<PAGE>
The preceding Year 2000 discussion contains forward-looking statements,
including those concerning the Company's plans and estimated completion dates,
cost estimates, assessments of Year 2000 readiness of BNSF and third parties,
and possible consequences of any failure on the part of the Company or third
parties to be Year 2000 compliant on a timely basis. Forward-looking
statements involve a number of risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, the following:
continued availability of qualified personnel to assess, remediate, and test
ISS and Enterprise technologies at current estimated costs; emergence of
unforeseen software or hardware problems, including where applications
interact with each other in ways not anticipated, which could delay or hinder
commercial transactions or other operations; the ability to locate and
remediate Year 2000 problems with software source code and embedded computer
chips in equipment; the failure, in whole or in part, of other railroads or
AAR-supported systems to be Year 2000 compliant; the Year 2000 compliance of
its business partners and customers and reduced traffic levels due to their
failure, in whole or part, to be Year 2000 compliant; business interruption
due to delays in obtaining supplies, parts, or equipment from key vendors or
suppliers that are affected by Year 2000 problems; the ripple effect of Year
2000-related failures in industries supporting the nation's basic
infrastructure, including fuel vendors and pipelines, gas, electric, and water
utilities, communications companies, banks and financial institutions, and
highway, water, and air transportation systems; and any significant downturn
in the general economy, and adverse industry-specific economic conditions at
the international, national, and regional levels, wholly or partially caused
by Year 2000 problems.
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 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 estimates that the impact of adopting this SoP will not
have a material effect on its results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The Statement is effective for the
Company's fiscal year 2000; however, early adoption is permitted. SFAS No.
133 requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. For fair value hedge transactions in which the
Company is hedging changes in the fair value of an asset, liability or an
unrecognized firm commitment, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. For cash-flow hedge transactions in which the
Company is hedging the variability of cash flows related to a variable rate
asset, liability, or a forecasted transaction, changes in the fair value of
the derivative instrument will be reported in other comprehensive income to
the extent it offsets changes in the cash flows related to the variable rate
asset, liability or forecasted transaction, with the difference reported in
current period earnings. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified as
earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. The ineffective portion of all hedges will
be recognized in current-period earnings.
The Company is currently evaluating SFAS No. 133 and whether it will adopt
this pronouncement prior to the effective date. Based on interest rate and
fuel hedging instruments outstanding at September 30, 1998 and previously
deferred losses from past interest rate hedging transactions, all of which are
cash-flow hedge transactions, the Company currently estimates that the impact
of SFAS No. 133 would result in a net-of-tax cumulative-effect charge to
accumulated other comprehensive deficit of approximately $75 million upon
adoption. The Company is presently evaluating the impact SFAS No. 133 will
have on its ongoing results of operations.
<PAGE>
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 Management's 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, describes significant aspects
of BNSF's financial instrument programs which have material market risk.
Presented below is updated quantitative information for those programs that
have changed significantly from the information reported in BNSF's Form 10-K
for the year ended December 31, 1997.
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 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 September 30, 1998. The prices included in the table
below do not include taxes, transportation costs, certain other fuel handling
costs and, except for forward contracts, any differences which may occur from
time to time between the prices of commodities hedged and the purchase price
of BNSF's diesel fuel.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Maturity Date
----------------------------------------
Fair
1998 1999 2000 2001 2002 Total Value (1)
------ ------ ------ ------ ------ ------ ----------
Diesel Fuel Swaps:
Gallons (in millions) 145 907 491 277 101 1,921 $ (63)
Weighted average
price per gallon $0.52 $0.48 $0.50 $0.49 $0.50 $0.49 -
Diesel Fuel Forward
Purchase Contracts:
Gallons (in millions) 100 - - - - 100 $ (7)
Weighted average
price per gallon $ 0.53 - - - - $ 0.53 -
<FN>
(1) Represents unrecognized loss (in millions) based on the price of Gulf
Coast #2 heating oil at September 30, 1998.
</TABLE>
<TABLE>
<CAPTION>
Treasury Lock Transactions
In anticipation of future debt issuances, BNSF has entered into treasury lock
transactions, based on the 30-year U.S. treasury rate, as reflected in the
following table as of September 30, 1998.
<S> <C> <C>
Maturity Fair
Date Value (1)
-----------------------
1,999
-------
Variable to Fixed Lock (in millions) $ 200 $ (21)
Average pay rate 5.67% -
<FN>
(1) Represents unrecognized loss based on the U.S. 30-year treasury rate at
September 30, 1998. As explained in Note 8 to the consolidated financial
statements, in October 1998, in anticipation of future debt issuances, the
Company entered into $500 million of treasury lock transactions. During
November 1998, in conjunction with a November 1998 debt issuance, the Company
closed out the $200 million treasury lock transaction detailed above.
</TABLE>
<PAGE>
Equity Price Sensitivity
The common stock put options sold by the Company in November 1997 expired
unexercised on May 5, 1998.
During the second and third quarters of 1998, BNSF sold equity put options for
3 million shares of the Company's common stock to an independent third party
and received cash proceeds of approximately $2.2 million. The option
contracts have exercise prices ranging from $29 to $30 per share with
expiration dates ranging from November 1998 to February 1999. The option
contracts permit a net-share or net-cash settlement method at BNSF's election.
<PAGE>
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WHEAT AND BARLEY TRANSPORTATION RATES
Reference is made to the discussion in Registrant's Report on Form 10-K for
the year ended December 31, 1997, of the challenge to the reasonableness
of BNSF Railway export wheat and barley rates that were the subject of the
August 14, 1997, decision of the Surface Transportation Board ("STB") in
McCarty Farms, Inc. et al. v. Burlington Northern Inc. (Docket No. 37809).
The STB ruled that the plaintiffs had failed to demonstrate that the rates
charged to transport wheat and barley from Montana to Pacific Coast ports were
unreasonable, and it dismissed the proceeding. Plaintiffs filed petitions to
review the STB decision before the United States Court of Appeals for the
District of Columbia Circuit ("D.C. Circuit") and the United States District
Court for the District of Montana ("Montana District Court"). In an October
20, 1998, decision, McCarty Farms, Inc. et al. v. Surface Transportation Board
(No. 97-1632), the D.C. Circuit affirmed the STB's decision in all respects
for those claims as to which it had jurisdiction (i.e., all claims except
those relating to single-car wheat shipments moving before September 12,
1980). The appeal of the STB decision as to single-car wheat shipments moving
before September 12, 1980, remains stayed in the Montana District Court at
this time.
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 one Current Report on Form 8-K since that reported on
its Quarterly Report on Form 10-Q for the second quarter of 1998:
On November 10, 1998, the Registrant filed a Current Report on Form 8-K (Date
of earliest event reported: October 20, 1998), in which it reported under
Item 5, Other Events, a press release concerning its third quarter 1998
earnings, and included as exhibits, under Item 7, Financial Statements and
Exhibits, a computation of ratio of earnings to fixed charges and selected
financial data from its 1997 Annual Report to Shareholders restated to reflect
the Company's three-for-one common stock split effective September 1, 1998.
<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 of the Registrant and as
principal accounting officer)
Fort Worth, Texas
November 13, 1998
<PAGE>
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
10.1 Burlington Northern Santa Fe Corporation Deferred Compensation Plan,
as amended and restated effective September 17, 1998 (formerly,
Burlington Northern Inc. Deferred Compensation Plan).
12 Computation of ratio of earnings to fixed charges.
27 Financial Data Schedule.
E-1
<PAGE>
EXHIBIT 10.1
BURLINGTON NORTHERN SANTA FE CORPORATION
DEFERRED COMPENSATION PLAN
As Amended Effective September 17, 1998
Originally Effective July 1, 1985
<PAGE>
BURLINGTON NORTHERN SANTA FE CORPORATION
DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
-----------------
Page
----
Section 1 Purpose 1
Section 2 Administration 1
Section 3 Participants 1
Section 4 Deferrals 2
Section 5 General Provisions 4
- i -
<PAGE>
BURLINGTON NORTHERN SANTA FE CORPORATION
DEFERRED COMPENSATION PLAN
--------------------------
SECTION 1
PURPOSE
-------
1.1 Purpose. The purpose of this Plan is to permit the
executives of Burlington Northern Santa Fe Corporation (the "Company") and its
subsidiaries to defer all or some part of their base salary and/or
termination-related benefits, in order for the Company to attract and retain
exceptional executives.
SECTION 2
ADMINISTRATION
--------------
2.1 Management Committee. The Plan shall be administered by a
management committee (the "Management Committee") consisting of the Chief
Executive Officer and such other senior officers as he or she shall designate.
Subject to the Compensation Committee of the Company's Board of Directors (the
"Board"), the Management Committee shall interpret the Plan, prescribe, amend
and rescind rules relating to it, select eligible Participants, and take all
other actions necessary for its administration, which actions shall be final
and binding upon all Participants. No member of the Management Committee
shall vote on any matter that pertains solely to himself or herself.
SECTION 3
PARTICIPANTS
------------
3.1 Participants. The Management Committee shall determine and
designate the executives of the Company and its subsidiaries who are eligible
to defer base salary and/or termination-related benefits under the Plan (the
"Participants"). Participants, in general, will be limited to those
executives who because of their management or staff positions have the
principal responsibility for the management, direction and success of the
Company as a whole or a particular business unit thereof. Directors of the
Company who are full-time executives of the Company shall be eligible to
participate in the Plan. Notwithstanding the foregoing, employees who receive
benefits under The Atchison, Topeka and Santa Fe Railway Company, Burlington
Northern, Inc. or Burlington Northern Santa Fe Corporation change in control
agreements shall be eligible to participate in the Plan to the extent provided
in Section 4.7 hereof.
SECTION 4
DEFERRALS
---------
4.1 Deferred Payment. Prior to the commencement of any payroll
period, each Participant may elect to have the payment of all or a portion of
his or her base salary and/or termination-related benefits attributable to
services performed during such payroll period deferred until the earliest to
occur of his or her retirement, death, permanent disability, resignation or
termination of employment with the Company. The election shall be made on a
form prescribed by the Management Committee, and shall remain in effect for
subsequent payroll periods until amended or revoked by the Participant on a
form prescribed by the Management Committee. No such amendment or revocation
shall be effective until the payroll period next following the payroll period
in which such amendment or revocation is made. If a Participant does not have
an election in effect for a given payroll period, the base salary and/or
termination-related benefits paid to him or her for such payroll period shall
be paid in accordance with the Company's normal payroll practices.
4.2 Special Deferrals. The Management Committee may, in its
discretion, approve deferred payments (called "Special Deferrals") as follows.
Prior to the commencement of any payroll period, each Participant may elect to
have the payment of all or a portion of his or her base salary and/or
termination-related benefits attributable to services performed during such
payroll period deferred until the earliest to occur of a date specified by the
Management Committee, or the Participant's retirement, death, permanent
disability, resignation or termination of employment with the Company. The
Special Deferral election shall be made on a form prescribed by the Management
Committee, and shall remain in effect for subsequent payroll periods until
amended or revoked by the Participant on a form prescribed by the Management
Committee. No such amendment or revocation shall be effective until the
payroll period next following the payroll period in which such amendment or
revocation is made. If a Participant does not have a Special Deferral
election in effect for a given payroll period, the base salary and/or
termination-related benefits paid to him or her for such payroll period shall
be paid in accordance with Section 4.1.
4.3 Memorandum Account. The Company shall establish a ledger
account (the "Memorandum Account") for each Participant who has elected to
defer the payment of his or her base salary and/or termination-related
benefits, for the purpose of reflecting the Company's obligation to pay the
deferred base salary and/or termination-related benefits as provided in
Sections 4.5 and 4.7. A separate Memorandum Account shall be established for
each Special Deferral for each Participant. Interest shall accrue on the
deferred base salary and/or termination-related benefits to the date of
distribution, and shall be credited to the Memorandum Account at the end of
each calendar quarter or such other periods as may be determined by the
Management Committee. The Management Committee shall determine the rate of
interest periodically and in so doing may take into account the earnings,
losses, appreciation or depreciation attributable to any discretionary
investments made pursuant to Section 4.4.
4.4 Discretionary Investment by Company. The deferred base
salary and/or termination-related benefits to be paid to the Participants is
an unfunded obligation of the company. The Management Committee may annually
direct that an amount equal to the deferred base salary and/or
termination-related benefits for that year shall be invested by the Company as
the Management Committee, in its sole discretion, shall determine. The
Management Committee may in its sole discretion determine that all or some
portion of an amount equal to the deferred base salary and/or
termination-related benefits shall be paid into one or more grantor trusts to
be established by the Company of which it shall be the beneficiary, and to the
assets of which it shall become entitled as and to the extent that
Participants receive benefits under this Plan. The Management Committee may
designate an investment advisor to direct investments and reinvestments of the
funds, including investment of any grantor trusts hereunder.
4.5 Payment of Deferred Base Salary and/or Termination-Related
Benefits. Within sixty (60) days following the earliest to occur of the
retirement, death, permanent disability, resignation, termination of
employment or, if relevant, Special Deferral payment date of a Participant who
has elected to defer base salary and/or termination-related benefits for any
payroll period, the Participant (or his or her Beneficiary in the case of his
or her death) shall irrevocably elect to have the balance of his or her
Memorandum Account, plus interest (at a rate determined by the Management
Committee pursuant to Section 4.3) on the outstanding account balance to the
date of distribution paid to him or her as follows:
(a) in a lump sum cash payment; or
(b) in periodic, annual installments over a period of two
(2) to ten (10) years.
Payments shall commence or be made in January of the year following
the Participant's retirement, death, permanent disability, resignation,
termination of employment, or Special Deferral payment date (or within a
reasonable time thereafter); provided that with respect to a Participant who
retires on January 1, the Management Committee, in its sole discretion, may
direct that payment shall commence or be made on the December 31 preceding the
retirement date, on the January 31 following the retirement date or in January
of the year following retirement; and provided further that the Management
Committee, in its sole discretion, may direct payments to commence in the year
of a Participant's retirement, death, resignation, termination, permanent
disability or Special Deferral payment date.
4.6 Acceleration of Payment of Deferred Base Salary and/or
Termination-Related Benefits. The Management Committee, in its sole
discretion, may accelerate the payment of the unpaid balance of a Participant's
Memorandum Account upon its determination that the Participant(or his
Beneficiary in the case of his death) has incurred a severe and unexpected
financial hardship. Such accelerated payment shall not exceed the amount
necessary to relieve such hardship. The Management Committee in making its
determination may consider such factors and require such information as it
deems appropriate.
4.7 Special Rule for Deferral and Payment of Termination-Related
Benefits. Each participant may also elect to defer the receipt of all or a
portion of his or her termination-related benefits from the Company. Payment
of deferred termination-related benefits shall be made to the Participant (or
his or her Beneficiary, in the event of the Participant's death) in periodic,
annual installments over a period of two (2) to ten (10) years, as elected by
the Participant. Such election shall be made prior to the Participant's
receiving or providing notice of termination of employment with the Company,
shall be in the form prescribed by the Management Committee, and shall be
irrevocable. Payment of deferred termination-related benefits shall commence
in the month of January of the year following the Participant's resignation or
termination of employment with the Company. If a Participant has not made an
election to defer the receipt of termination-related benefits, the
termination-related benefits shall be paid to him or her in accordance with
any existing agreement between the Participant and the Company, or in the
absence of such an agreement, in accordance with the Company's normal
procedures. For purposes of this Plan, the term "termination-related
benefits" shall mean cash payments from the Company attributable to a
Participant's termination of employment from the Company, including severance
and related payments, but excluding payments made from a qualified or
nonqualified retirement plan, payments made for legal fees or other expenses
incurred as a result of such termination, and payments made to compensate a
Participant for any excise tax liability under Internal Revenue Code section
4999.
SECTION 5
GENERAL PROVISIONS
------------------
5.1 Unfunded Obligation. The deferred amounts to be paid to
Participants pursuant to this Plan are unfunded obligations of the Company.
The Company is not required to segregate any monies from its general funds, to
create any trusts, or to make any special deposits with respect to this
obligation. Title to and beneficial ownership of any investments including
trust investments which the Company may make to fulfill this obligation shall
at all times remain in the Company. Any investments and the creation or
maintenance of any trust or memorandum accounts shall not create or constitute
a trust or a fiduciary relationship between the Management Committee or the
Company and a Participant, or otherwise create any vested or beneficial
interest in any Participant or his or her Beneficiary or his or her creditors
in any assets of the Company whatsoever. The Participants shall have no claim
against the Company for any changes in the value of any assets which may be
invested or reinvested by the Company with respect to this Plan.
5.2 Base Salary. The term "base salary" shall mean the
Participant's base salary exclusive of bonuses or other forms of cash or
non-cash incentive compensation.
5.3 Beneficiary. The term "Beneficiary" shall mean the person
or persons to whom payments are to be paid pursuant to the terms of the Plan
in the event of the Participant's death. The designation shall be on a form
provided by the Management Committee, executed by the Participant, and
delivered to the Committee. A Participant may change his beneficiary
designation at any time. If no beneficiary is designated, the designation is
ineffective, or in the event the Beneficiary dies before the balance of the
Memorandum Account is paid, the balance shall be paid to the Participant's
spouse, or if there is no surviving spouse, to his or her lineal descendants,
pro rata, or if there is no surviving spouse or lineal descendants, to the
Participant's estate (unless the Management Committee for a given year has
designated investment in an annuity, in which case the payment options
selected by the Participant with respect thereto shall govern).
5.4 Permanent Disability. A Participant shall be deemed to have
become disabled for purposes of this Plan if the Management Committee finds,
upon the basis of medical evidence satisfactory to it, that the Participant is
totally disabled, whether due to physical or mental condition, so as to be
prevented from engaging in further employment by the Company or any of its
subsidiaries and that such disability will be permanent and continuous during
the remainder of his or her life.
5.5 Incapacity of Participant or Beneficiary. If the Management
Committee finds that any Participant or Beneficiary to whom a payment is
payable under the Plan is unable to care for his or her affairs because of
illness or accident or is under a legal disability, any payment due (unless a
prior claim therefor shall have been made by a duly appointed legal
representative) at the discretion of the Committee, may be paid to the spouse,
child, parent or brother or sister of such Participant or Beneficiary or to
any person whom the Committee has determined has incurred expense for such
Participant or Beneficiary. Any such payment shall be a complete discharge of
the obligations of the Company under the provisions of the Plan.
5.6 Nonassignment. The right of a Participant or Beneficiary to
the payment of any amounts under the Plan may not be assigned, transferred,
pledged or encumbered nor shall such right or other interests be subject to
attachment, garnishment, execution or other legal process.
5.7 No Right to Continued Employment. Nothing in the Plan shall
be construed to confer upon any Participant any right to continued employment
with the Company or a subsidiary, nor interfere in any way with the right of
the Company or a subsidiary to terminate the employment of such Participant at
any time without assigning any reason therefore.
5.8 Withholding Taxes. Appropriate payroll taxes shall be
withheld from cash payments made to Participants pursuant to this Plan.
5.9 Termination and Amendment. The Compensation Committee may
from time to time amend, suspend or terminate the Plan, in whole or in part,
and if the Plan is suspended or terminated, the Committee may reinstate any or
all of its provisions. The Management Committee may amend the Plan provided
that it may not suspend or terminate the Plan, substantially increase the
administrative cost of the Plan or the obligations of the Company, or expand
the classification of employees who are eligible to participate in the Plan.
No amendment, suspension or termination may impair the right of a Participant
or his designated Beneficiary to receive the deferred compensation benefit
accrued prior to the later of the date of adoption or the effective date of
such amendment, suspension or termination.
5.10 Applicable Law. The Plan shall be construed and governed
in accordance with the laws of the State of Texas.
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Nine Months Ended
September 30,
-------------------
1998 1997
-------- --------
Earnings:
Pre-tax income $ 1,380 $ 1,061
Add:
Interest and fixed charges,
excluding capitalized interest 264 255
Portion of rent under long-term
operating leases representative
of an interest factor 144 139
Amortization of capitalized interest 3 3
Less: Undistributed equity in earnings
of investments accounted for
under the equity method (12) (8)
-------- --------
Total earnings available for fixed charges $ 1,779 $ 1,450
======== ========
Fixed charges:
Interest and fixed charges $ 276 $ 268
Portion of rent under long-term operating
leases representative of an interest
factor 144 139
-------- --------
Total fixed charges $ 420 $ 407
========= ========
Ratio of earnings to fixed charges 4.24x (1) 3.56x
<FN>
(1) Earnings for the nine months ended September 30, 1998 include a pre-tax
gain on the pipeline partnerships sale of $67 million. Excluding this
gain, the ratio for the nine months ended September 30, 1998 would have
been 4.08x.
</TABLE>
<TABLE> <S> <C>
<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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 699
<ALLOWANCES> 84
<INVENTORY> 212
<CURRENT-ASSETS> 1216
<PP&E> 25165
<DEPRECIATION> 4898
<TOTAL-ASSETS> 22260
<CURRENT-LIABILITIES> 2116
<BONDS> 5154
<COMMON> 5
0
0
<OTHER-SE> 7536
<TOTAL-LIABILITY-AND-EQUITY> 22260
<SALES> 0
<TOTAL-REVENUES> 6688
<CGS> 0
<TOTAL-COSTS> 5098
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264
<INCOME-PRETAX> 1380
<INCOME-TAX> 521
<INCOME-CONTINUING> 859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 859
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.80
</TABLE>
