Exhibit 13.1
Consolidated Financial Highlights
Burlington Northern Santa Fe Corporation and Subsidiaries
(Dollars in millions, except per share data)
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December 31, 1999 1998 1997 1996 1995(3)
- ------------------------------------------ ---------- -------- --------- -------- ---------
For The Year Ended:
Revenues $ 9,100 $ 8,941 $ 8,370 $ 8,109 $ 6,099
Operating income (1) 2,205 2,158 1,767 1,748 526
Income before extraordinary item and cumulative
effect of change in accounting method 1,137 1,155 885 889 198
Accounting change/Extraordinary item (2) - - - - (106)
Net income $ 1,137 $ 1,155 $ 885 $ 889 $ 92
Earnings available for common stockholders $ 1,137 $ 1,155 $ 885 $ 889 $ 71
Basic earnings per share:
Before extraordinary item and change
in accounting method $ 2.46 $ 2.45 $ 1.91 $ 1.95 $ 0.57
Accounting change/Extraordinary item (2) - - - - (0.34)
Basic earnings per share $ 2.46 $ 2.45 $ 1.91 $ 1.95 $ 0.23
Average shares (in millions) 463.2 470.5 464.4 456.3 313.2
Diluted earnings per share:
Before extraordinary item and change
in accounting method $ 2.44 $ 2.43 $ 1.88 $ 1.91 $ 0.55
Accounting change/Extraordinary item (2) - - - - (0.33)
Diluted earnings per share $ 2.44 $ 2.43 $ 1.88 $ 1.91 $ 0.22
Average shares (in millions) 466.8 476.2 471.1 464.4 317.7
Dividends declared per common share $ 0.48 $ 0.44 $ 0.40 $ 0.40 $ 0.40
- ------------------------------------------ ---------- -------- --------- -------- ---------
At Year End:
Total assets $ 23,700 $ 22,646 $ 21,266 $19,693 $ 18,199
Long-term debt and commercial paper,
including current portion 5,813 5,456 5,289 4,711 4,233
Stockholders' equity 8,172 7,784 6,822 5,994 5,037
Total debt to capital 41.6% 41.2% 43.7% 44.0% 45.7%
- ------------------------------------------ ---------- -------- --------- -------- ---------
For The Year Ended:
Capital expenditures $ 1,788 $ 2,147 $ 2,182 $ 2,234 $ 890
Depreciation and amortization 897 832 773 760 520
- ------------------------------------------ ---------- -------- --------- -------- ---------
(1) 1997 and 1995 include $90 million ($57 million after-tax) and $735 million
($453 million after-tax), respectively, for special charges principally
related to employee merger and separation costs.
(2) 1995 includes the cumulative effect of the change in accounting method for
locomotive overhauls which decreased net income by $100 million.
Additionally, 1995 includes an extraordinary loss on retirement of debt of
$6 million.
(3) 1995 includes Burlington Northern Inc. results for the year ended December
31, 1995 and Santa Fe Pacific Corporation results from September 22, 1995
though December 31, 1995.
Burlington Northern Santa Fe Corporation 1
Financial Contents
19 Management's Discussion and Analysis
29 Report of Management
29 Report of Independent Accountants
30 Consolidated Statement of Income
31 Consolidated Balance Sheet
32 Consolidated Statement of Cash Flows
33 Consolidated Statement of Changes in Stockholders' Equity
34 Notes to Consolidated Financial Statements
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Revenue Table
The following table presents BNSF's revenue information by commodity for the
years ended December 31, 1999, 1998 and 1997 and includes certain
reclassifications of prior year information to conform to current year
presentation.
Revenues Cars/Units Average Revenue Per Car/Unit
----------------------------- ----------------------------- --------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
(IN MILLIONS) (IN THOUSANDS)
------ ------ ------ ------ ------ ------ ------ ------ ------
Carload $2,553 $2,588 $2,482 1,773 1,801 1,739 $1,440 $1,437 $1,427
Intermodal 2,518 2,437 2,243 3,203 3,086 2,811 786 790 798
Coal 2,227 2,239 1,972 2,123 2,078 1,862 1,049 1,077 1,059
Agricultural Commodities 1,329 1,271 1,248 715 689 669 1,859 1,845 1,865
Automotive 443 390 422 250 230 264 1,772 1,696 1,598
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Freight Revenues 9,070 8,925 8,367 8,064 7,884 7,345 $1,125 $1,132 $1,139
Other Revenues 30 16 3 ------ ------ ------ ------ ------ ------
- ------------------------- ------ ------ ------
Total Revenues $9,100 $8,941 $8,370
========================= ====== ====== ======
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's discussion and analysis relates to the financial condition and
results of operations of Burlington Northern Santa Fe Corporation and its
majority-owned subsidiaries (collectively, BNSF or Company). The principal
subsidiary of BNSF 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
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
Earnings per share increased to $2.44 per share for 1999 from $2.43 per share
for 1998 although net income was slightly lower for 1999 at $1,137 million
compared with 1998 net income of $1,155 million. The slight decrease in net
income is primarily due to a 1998 gain of $67 million on the sale of
substantially all of the Company's interest in Santa Fe Pacific Pipeline
Partners, L.P., along with 1998 gains on real estate portfolio sales and higher
interest expense in 1999 incurred on borrowings to fund the repurchase of 22
million shares of BNSF common stock, as compared to 5 million shares in 1998,
and increased 1999 environmental expenses. These decreases in net income were
partially offset by increased operating revenues in 1999 due to volume gains in
most sectors.
Revenues
Total revenues for 1999 were $9,100 million or 2 percent higher compared with
revenues of $8,941 million for 1998. The $159 million increase primarily
reflects increases in the intermodal, agricultural commodities and automotive
sectors, partially offset by lower carload and coal revenues. Average revenue
per car/unit decreased slightly in 1999 to $1,125 from $1,132 in 1998. During
1999, BNSF's share of the Western United States rail traffic market, based on
reporting to the Association of American Railroads (AAR), decreased 0.8 points
to 43.5 percent. This decrease in market share was primarily due to Union
Pacific Corporation (UP) regaining market share as a result of its recovery from
operating difficulties experienced in the prior year.
Carload revenues, which include revenues from the chemicals, forest products,
metals, minerals and machinery, perishable and dry boxcar sectors, of $2,553
million for 1999 were $35 million or 1 percent lower than 1998 due to decreases
in the chemicals, minerals and machinery, and metals sectors, partially offset
by increased forest product revenues. The decreases were a result of weaknesses
in the chemicals sector due to soft fertilizer markets, weaknesses in the metals
sector due to increased steel imports, and a decrease in dedicated train
movements of heavy machinery. These decreases were partially offset by increased
inland shipments of forest products.
Burlington Northern Santa Fe Corporation
19
Intermodal revenues of $2,518 million improved $81 million or 3 percent
compared with 1998 reflecting increases in the direct marketing, international
and truckload sectors, partially offset by decreases in the intermodal marketing
companies (IMC) sector. Direct marketing revenues benefited from year over year
growth of units shipped for UPS and Roadway. International revenues were up due
to market share gains and new business with Sealand, NYK, Maersk and K-Line.
Truckload revenues were driven primarily by year over year growth in J.B. Hunt,
Swift and Triple Crown loadings. These revenue increases were partially offset
by decreases in the IMC sector due to UP pricing pressures, an overall softening
in the IMC market, and increased trucking capacity.
Coal revenues of $2,227 million for 1999 decreased $12 million or less than 1
percent, as a result of a decrease in average revenue per car due to a decline
in coal shipping rates on contracts renewed beginning in late 1998 at the lower
1998 and 1999 market based rates. Operating difficulties early in the year at
the Powder River Basin mines and a decrease in the demand for coal due to milder
weather for most of the year also contributed to the year over year decrease.
Agricultural commodities revenues of $1,329 million for 1999 were $58 million
or 5 percent higher than 1998 due primarily to increased demand for soybean
exports and corn from the Midwest that moved to the Pacific Northwest for
export. The increase in soybean revenue was fueled by favorable pricing and an
increased supply of soybeans that was sufficient to meet the higher demand.
Increases in volume were slightly offset by lower wheat revenue per car and
fewer soybean oil shipments in 1999 compared to 1998.
Automotive revenues of $443 million for 1999 were $53 million or 14 percent
higher than 1998 reflecting growth in vehicle shipments due to both a record
year of new vehicle production coupled with an increase in revenue per unit as a
result of a favorable change in the mix of vehicles transported.
Expenses
Total operating expenses for 1999 were $6,895 million, an increase of $112
million or 2 percent, compared with operating expenses for 1998 of $6,783
million.
Compensation and benefits expenses of $2,772 million were $40 million or 1
percent lower than 1998 primarily due to lower employment levels due in part to
the second quarter 1999 reorganization, as discussed in Other Matters: Employee
Merger and Separation Costs, partially offset by increased wage rates.
Purchased services of $946 million for 1999 were $52 million or 6 percent
higher than 1998 due primarily to increased contract equipment maintenance costs
as well as ramping and other transportation service contracts.
Equipment rents expenses of $752 million were $52 million or 6 percent lower
than 1998 as a result of lower intermodal equipment costs due to a reduction in
time and mileage, and trailer and container expenses. Lower agricultural leased
car expense due to improved cycle times also contributed to the decrease.
Fuel expenses of $700 million for 1999 were $21 million or 3 percent lower
than 1998, as a result of a 3 cent or 6 percent decrease in the average all-in
cost per gallon of diesel fuel, partially offset by a 3 percent volume driven
increase in consumption from 1,155 million gallons to 1,187 million gallons. The
average all-in cost per gallon of diesel fuel decreased year over year due to
current year fuel hedge losses of 1 cent per gallon compared to 7 cents per
gallon in the prior year, which were partially offset by a 3 cent increase in
the average purchase price.
Materials and other expenses of $834 million for 1999 were $114 million or 16
percent higher than 1998 principally reflecting higher environmental, personal
injury and property and other tax expenses.
As discussed in Other Matters: Employee Merger and Separation Costs,
reorganization costs of $48 million were incurred during the second quarter of
1999 for severance, pension, medical and other benefit costs for approximately
325 involuntarily terminated salaried employees that were part of a
reorganization program announced in May 1999 to reduce operating expenses. In
addition, the Company also reversed during the second quarter certain merger
severance liabilities of $54 million associated with the Company's clerical
consolidation plan. These liabilities related to planned work-force reductions
which were no longer needed due to the Company's ability to utilize a series of
job swaps between certain locations to achieve the advantages of functional work
consolidation.
Interest expense for 1999 increased by $33 million to $387 million principally
reflecting higher debt levels used to fund the share repurchase program. Total
debt increased to $5,813 million at December 31, 1999, from $5,456 million at
December 31, 1998.
Other income (expense), net was unfavorable by $44 million compared to 1998
primarily due to the $67 million gain on the sale of substantially all of the
Company's interest in Santa Fe Pacific Pipeline Partners, L.P. in 1998 and gains
of $26 million from the sale of a real estate portfolio in 1998. This was
partially offset by the recognition in 1999 of a $50 million deferred gain in
connection with the sale of rail lines in Southern California in 1992 and 1993.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
BNSF recorded net income for 1998 of $1,155 million ($2.43 per share), compared
with net income of $885million ($1.88 per share) for 1997 principally reflecting
increased revenues in intermodal, coal and other sectors. More moderate winter
weather in the first quarter of 1998 relative to 1997, gains on 1998 real estate
portfolio sales and a 1998 $67 million gain on the sale of substantially all of
the Company's interest in Santa Fe Pacific Pipeline Partners, L.P. also
contributed to the improvement. Additionally, 1997 included a $90 million pre-
tax special charge ($57 million after-tax or $0.12 per share) principally
related to the consolidation of clerical functions (see Other Matters: Employee
Merger and Separation Costs).
Burlington Northern Santa Fe Corporation
20
Revenues
Total revenues for 1998 were $8,941 million or 7 percent higher compared with
revenues of $8,370 million for 1997. The $571 million increase primarily
reflects increases in the carload, intermodal, coal and agricultural commodities
sectors partially offset by lower automotive revenues. Average revenue per
car/unit decreased slightly in 1998 to $1,132 from $1,139 in 1997. During 1998,
BNSF's share of the Western United States (U.S.) rail traffic market, based on
reporting to the AAR, increased 2.9 points to 44.3 percent. This gain was
primarily the result of the trackage rights gained from UP and operating
problems experienced by UP associated with consolidating operations.
Carload revenues of $2,588 for 1998 were $106 million or 4 percent higher than
1997 due to increases in the chemicals, forest products, minerals and machinery,
and metals sectors, partially offset by a decrease in dry boxcar revenues.
Chemicals revenues increased due to strength in industrial chemicals, petroleum
products and plastics. Forest products revenues increased due to printing paper
and pulpboard volume gains, increased Canadian newsprint imports, and increased
lumber volumes due to higher levels of construction activity. Minerals and
machinery revenues increased primarily due to volume increases in cement and
specialty minerals and increased heavy machinery traffic. Metals revenues
increased due to strength in aluminum and non-ferrous materials as well as
volume increases in steel products.
Intermodal revenues of $2,437 million improved $194 million or 9 percent
compared with 1998 reflecting increases in the direct marketing, international
and truckload sectors. Direct marketing revenues benefited from increased units
shipped for UPS, less than truckload customers and the United States Postal
Service. International revenues were up due to volume increases associated with
market share gains and 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 $2,239 million for 1998 increased $267 million or 14 percent
primarily due to strong demand, volume increases associated with market share
gains, and favorable operating conditions as a result of a more moderate winter
in 1998.
Agricultural commodities revenues of $1,271 million for 1998 were $23 million
or 2 percent higher than 1997 primarily due to increased corn syrup loadings and
the recovery of sugar traffic which was hampered in 1997 due to poor weather
conditions. This increase was partially offset by poor Pacific Northwest corn
and soybeans exports as well as a record breaking year in 1997 of barley
exports.
Automotive revenues of $390 million for 1998 were $32 million or 8 percent
lower than 1997 reflecting decreases in volumes due to the loss of Ford's
southwestern United States business and the impact of the General Motors strike,
partially offset by strong Honda loadings.
Expenses
Total operating expenses for 1998 were $6,783 million, an increase of $180
million or 3 percent, compared with operating expenses for 1997 of $6,603
million. 1997 included a $90 million ($57 million after-tax) special charge
principally related to the consolidation of clerical functions.
Compensation and benefits expenses of $2,812 million were $137 million or 5
percent higher than 1997. Wages were higher due to volume related increases
primarily in train crew costs, 1998 wage increases to both salaried and union
employees, and increased incentive compensation expense. These increases were
partially offset by lower labor costs associated with repairs to track and
equipment as 1997 was unusually high because of severe winter weather.
Purchased services of $894 million for 1998 were $71 million or 9 percent
higher than 1997 due principally to higher joint facility costs from increased
operations over trackage rights obtained from UP, increased equipment
maintenance costs, and higher ramping costs related to increased intermodal
volumes.
Equipment rents expenses of $804 million were $16 million or 2 percent lower
than 1997. Improved equipment utilization and lower equipment related
performance penalties for grain were partially offset by volume driven increases
for leased coal cars and locomotives.
Fuel expenses of $721 million for 1998 were $26 million or 3 percent lower
than 1997, as a result of a 6 cent or 9 percent decrease in the average all-in
cost per gallon of diesel fuel, partially offset by a 6 percent volume driven
increase in consumption from 1,092 million gallons to 1,155 million gallons. The
decrease in average all-in cost per gallon of diesel fuel includes a 13 cent
decrease in the average purchase price, partially offset by current year losses
related to BNSF's fuel hedging program. Gross ton-miles per gallon of fuel
increased 4 percent reflecting the continuing favorable operating trend
resulting from new, fuel efficient locomotives and more fuel efficient operating
practices.
Materials and other expenses of $720 million for 1998 were $45 million or 7
percent higher than 1997 principally due to lower credits from joint facility
billings due to lower UP traffic levels on BNSF facilities. Additionally, other
expenses in 1997 included more income from the sale of easements and tax
incentives from the State of Nebraska related to investment and employment
levels in the state.
Interest expense for 1998 increased by $10 million to $354 million reflecting
higher debt levels which increased to $5,456 million at December 31, 1998 from
$5,289 million at December 31, 1997, partially offset by lower interest rates.
Other income (expense), net was favorable $64 million compared to 1997
primarily due to the $67 million gain on the sale of substantially all of the
Company's interest in Santa Fe Pacific Pipeline Partners, L.P. Additionally,
lower equity in earnings of the pipeline partnership due to the first quarter
1998 sale of this investment was offset by gains of $26 million on real estate
portfolio sales.
Burlington Northern Santa Fe Corporation
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Liquidity and Capital Resources
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.
During 1999, BNSF generated free cash flow after dividends paid (cash flow
from operating activities less capital expenditures and other investing
activities and dividends paid) for the first time since the 1995 merger. Free
cash flow after dividends paid was $260 million in 1999, an improvement of $657
from the free cash flow deficit of $397 million in 1998. This increase was due
primarily to reduced capital spending and increased cash flow from operating
activities.
Operating Activities
Net cash provided by operating activities was $2,424 million during 1999
compared with $2,218 million during 1998. The increase in cash from operations
was primarily due to an increase in cash provided by changes in working capital,
principally accounts receivable, and a decrease in cash used for other net-
operating activities primarily due to lower tax and personal injury payments.
Investing Activities
Net cash used for investing activities during 1999 was $1,940 million,
principally comprised of $1,788 million in capital expenditures.
A breakdown of cash capital expenditures is set forth in the following table
(in millions):
Year ended December 31, 1999 1998 1997
- ---------------------------- ------ ------ ------
Maintenance of way $ 861 $ 897 $ 958
Mechanical 240 243 198
Information services 74 76 38
Other 114 104 83
- ---------------------------- ------ ------ ------
Total maintenance of business 1,289 1,320 1,277
New locomotives and freight cars 261 340 374
Terminal and line expansion 233 487 428
Other projects 5 - 103
============================ ====== ====== ======
Total $1,788 $2,147 $2,182
============================ ====== ====== ======
BNSF reduced 1999 cash capital expenditures compared to 1998 by approximately
$359 million to $1,788 million. Maintenance of way expenditures for 1999
decreased primarily due to the installation of fewer concrete ties. Cash used
for new locomotives was lower in 1999 reflecting a decrease in the number of
locomotives purchased. Terminal and line expansion projects principally reflect
double and triple tracking of main line track and capacity expansion of
terminals. Terminal and line expansion expenditures for 1999 decreased due to
fewer line expansion projects in 1999 compared to 1998.
BNSF has entered into commitments to acquire 196 and 50 locomotives in 2000
and 2001, respectively. The locomotives will be financed from one or a
combination of sources including, but not limited to, cash from operations,
capital or operating leases, and debt issuances. The decision on the method used
will depend upon then current market conditions and other factors.
Financing Activities
Net cash used for financing activities during 1999 was $487 million, primarily
related to share repurchases of $688 million and dividend payments of $224
million partially offset by net debt borrowings of $363 million and proceeds
from stock options exercised of $121 million.
In February 1999, the Company filed a new shelf registration statement that
became effective in March 1999 for the issuance of debt securities, including
medium-term notes, which may be issued in one or more series at an aggregate
offering price not to exceed $750 million. Additionally, in February 1999, prior
to the effective date of the new shelf registration, the Company amended its
March 1998 shelf registration to combine it with the February 1999 shelf
registration. Subsequently, the Company had $1.1 billion of borrowing capacity
available under its shelf registration statement.
In March 1999, BNSF issued $200 million of 6.1 percent notes due March 2009
and $200 million of 6.8 percent debentures due March 2029 under the February
1999 shelf registration statement. The net proceeds were used for general
corporate purposes including the repayment of commercial paper. At the time of
issuing the $200 million of 6.1 percent notes discussed above, the Company
closed out a $100 million treasury lock transaction at a gain of approximately
$8 million which has been deferred and is being amortized to interest expense
over the 10-year life of the notes.
In April 1999, the holder of a call option on $200 million of the Company's
puttable reset debentures due 2029 exercised the call option. As a result, on
May 13, 1999, the holder repurchased the debentures which were subsequently
resold to investors. The interest rate on the debentures was reset to a fixed
interest rate of 7.1 percent. The Company did not receive any proceeds from the
resale of these debentures; however, the resale of these debentures, along with
the $400 million of debt securities issued in March, reduced the amount
available for borrowing under the Company's February 1999 shelf registration
statement to $500 million.
During 1999, BNSF Railway entered into equipment obligations totaling $212
million payable from 2000 to 2016 with interest rates ranging from 5.4 percent
to 7.0 percent and $60 million of capital lease obligations payable from 2000 to
2016. The capital lease and $137 million of equipment obligations relate to
financing transactions involving German investors. In order to comply with the
terms of the capital lease and the associated foreign regulations, BNSF Railway
simultaneously deposited $60 million with a German bank and pledged this amount
as an irrevocable security deposit to be used to pay the capital lease
obligations. The capital lease obligation is classified as Long-Term Debt and
the security deposit is classified as an Other Asset in the consolidated balance
sheet.
Aggregate long-term debt scheduled to mature in 2000 is $158 million,
excluding $100 million of 6.1 percent notes due 2027 for which BNSF received
notice from the holders that they will exercise a put option on the notes in
February 2000. BNSF's ratio of total debt to total capital was 41.6 per-
Burlington Northern Santa Fe Corporation
22
cent at the end of 1999, 41.2 percent at the end of 1998, and 43.7 percent at
the end of 1997.
Credit Agreements
BNSF issues commercial paper from time to time which is 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 which were renewed and extended
effective June 28, 1999, allow borrowings of up to $750 million on a short-term
basis and $750 million on a long-term basis. Annual facility fees are currently
0.10 percent and 0.125 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 are
scheduled to expire in June 2000. The commitments of the lenders under the long-
term agreement are scheduled to expire in June 2004.
At December 31, 1999, there were no borrowings against the long-term revolving
credit agreement and the maturity value of commercial paper outstanding was $477
million, leaving a total remaining capacity of $1,023 million available under
the revolving credit agreements. BNSF must maintain compliance with certain
financial covenants under its revolving credit agreements and at December 31,
1999, the Company was in compliance.
Common Stock Repurchase Program
In July 1997, the Board of Directors of BNSF authorized the repurchase of up to
30 million shares of the Company's common stock from time to time in the open
market. In December 1999, the Board of Directors extended the repurchase program
by approving an additional 30 million shares. During 1999 and 1998, the Company
repurchased approximately 22 million and 5 million shares, respectively, of its
common stock at an average price of $31.08 per share and $30.75 per share,
respectively. There were no repurchases under this program in 1997. Total
repurchases through February 4, 2000, were approximately 33 million shares at a
total average cost of $29.86 per share, leaving 27 million shares available for
repurchase under the authorization.
In connection with its share repurchase program, during 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 $2.2 million. These options expired
unexercised. In April 1999, BNSF sold equity put options for 100 thousand shares
of common stock to an independent third party and received cash proceeds of $135
thousand. The third party exercised the options on October 12, 1999, which
resulted in the Company purchasing 100 thousand shares of its common stock at
$29 per share.
An equity put option is a financial instrument whereby BNSF receives an
upfront cash premium for granting another party the option to sell a defined
number of BNSF shares to the Company at a fixed price on a specified future
date. The Company considers the sale of equity put options as a method to
acquire its common stock at a share price consistent with its share repurchase
strategy and potentially reduce the all-in cost of the program. The Company's
risk is that it may be required to purchase shares at a specified price that is
higher than the common stock price at the exercise date of the equity put
option. The Company has the ability to settle its equity put option transactions
on a net share or net cash basis and accounts for the effects of these
transactions within stockholders' equity. The number of shares subject to
outstanding put options sold by the Company cannot exceed the amount of
remaining shares the Board of Directors has authorized for repurchase. As of
February 4, 2000 there were no equity put options outstanding.
Common Stock Split
On July 16, 1998, the Board of Directors approved a three-for-one common stock
split which was 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 stockholders of record on August 17, 1998. All
equity-based benefit plans reflect the issuance of additional shares or options
due to the declaration of the stock split. All share and per share data were
restated to reflect the stock split.
Dividends
Common stock dividends declared were $0.48, $0.44 and $0.40 per share annually
for 1999, 1998 and 1997, respectively. Dividends paid on common stock were $224
million, $197 million and $185 million during 1999, 1998 and 1997, respectively.
On January 20, 2000, the Board of Directors declared a quarterly dividend of 12
cents per share upon its outstanding shares of common stock, $.01 par value,
payable April 3, 2000, to stockholders of record on March 13, 2000.
On July 16, 1998, the Board of Directors increased by 20 percent the amount of
the regular quarterly dividend. The dividend increase was effective beginning
with the 1998 third quarter dividend which was paid on October 1, 1998.
Other Matters
Proposed Combination With Canadian National Railway Company
On December 18, 1999, BNSF and Canadian National Railway Company (CN) entered
into a Combination Agreement, as amended, providing for the combination of the
two companies (the Combination). To comply with Canadian legal requirements
that, among other things, prohibit any person and that person's associates from
holding more than 15 percent of the voting rights in CN, while ensuring that the
combination will be tax-efficient for each company's shareholders, the combined
enterprise will consist of two public companies: North American Railways, Inc.
(North American Railways) and CN. Upon completion of the combination, North
American Railways will be the parent company of BNSF and will own all of the
limited voting equity shares of CN. All shareholders will have voting interests
in both North American Railways and CN and economic interests in the combined
companies.
Burlington Northern Santa Fe Corporation
23
In the Combination, BNSF shareholders will receive one share of North American
Railways common stock and one CN voting share for each BNSF share. Additionally,
CN shareholders will receive, for each CN common share, 1.05 CN voting shares
and either 1.05 shares of North American Railways common stock or 1.05 CN
exchangeable shares. The CN exchangeable shares will be exchangeable at any time
on a one-for-one basis for shares of North American Railways common stock. CN
shareholders who elect to receive the CN exchangeable shares will also receive
the right to vote on matters submitted to North American Railways shareholders
in proportion to their economic interest in the combined companies. Dividends
paid on the North American Railways common stock and the CN exchangeable shares
will be equivalent. Any shares of BNSF common stock owned by BNSF or any of its
subsidiaries as treasury stock will be automatically canceled and cease to
exist.
Each share of North American Railways common stock will be "stapled" to a CN
voting share and will trade as a single security. Similarly, each CN
exchangeable share will be "stapled" to a CN voting share and will trade as a
single security. In addition, CN will issue to North American Railways limited
voting equity shares carrying 10.1 percent of the voting rights in CN and 100
percent of CN's equity. The result of these arrangements will be that, at all
times, each company will have the same public shareholder base with each public
shareholder effectively having the same economic benefits and voting rights on a
per security basis.
The Combination is subject to, among other things, approval by the
shareholders of both companies, as well as approvals by the Quebec Superior
Court and the United States Surface Transportation Board (STB). North American
Railways, by its charter, will conform to the provisions of the CN
Commercialization Act and Canadian corporate law on the composition of boards of
directors. Like CN, North American Railways shareholders will be subject to an
ownership limit whereby no single shareholder can own more than 15 percent of
North American Railways' voting shares. The companies currently expect that all
required regulatory approvals can be obtained and the transaction consummated by
mid-2001. Shareholders of both CN and BNSF are expected to vote on the proposed
Combination during the second quarter of 2000.
Upon consummation, the Combination will be accounted for by North American
Railways pursuant to the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." Under this
method, North American Railways will prepare its financial statements reflecting
the assets and liabilities of BNSF at their historical cost basis and the fair
value of North American Railways' common stock issued or issuable to the CN
shareholders will be allocated to the assets and liabilities of CN based on fair
value. CN's results of operations will be included with North American Railways
from the date the transaction is consummated. Based on the current agreement,
the fair value of North American Railways' common stock will be based on a
$25.63 per share fair value of BNSF common stock which was determined using the
average of the closing daily BNSF common stock prices as reported by The Wall
Street Journal for the two days preceding, the day of, and the two days
following the December 20, 1999 announcement of the Combination.
Under the Combination Agreement, as amended, BNSF is required to pay a cash
termination fee of $450 million to CN if the Combination is terminated as a
result of any of the following: i) another party has made a proposal for an
alternative transaction and the Company's shareholders do not approve the
Combination; ii) CN elects to terminate the Combination because BNSF's Board of
Directors changed its previously favorable recommendation of the Combination to
its shareholders or iii) BNSF breaches certain obligations not to solicit or
respond to alternative transaction proposals. CN is obligated to pay a cash
termination fee of $200 million to BNSF if the Combination is terminated as a
result of actions similar to those above that are caused by CN.
Pursuant to the Combination Agreement, as amended, CN and BNSF entered into
reciprocal stock option agreements. Each company's option is exercisable by the
other company under the same circumstances in which that party is entitled to
receive the $450 million or $200 million termination fee, as applicable,
referred to above. The option agreement allows BNSF and CN to purchase, in the
case of BNSF, approximately 29 million CN common shares and, in the case of CN,
approximately 65 million shares of BNSF common stock. The number of shares
subject to the stock options will be adjusted in each case so that the number of
shares issued will always be equal to, but not exceed, 12.5 percent of the
outstanding common shares of the option issuer after giving effect to the
issuance of shares under the option. The exercise price of the option is, in
each case, the average of the closing price of the option issuer's common stock
on the New York Stock Exchange on the five trading days preceding the date of
notice of exercise multiplied by the number of shares to be issued.
Additionally, BNSF is required to pay a cash termination fee of $300 million
to CN if BNSF terminates the Combination because of conditions imposed by the
STB that BNSF believes would significantly and adversely affect the benefits of
the Combination, and CN is willing to complete the Combination despite these
conditions. CN is obligated to pay a cash termination fee of $150 million to
BNSF if it terminates the Combination as a result of STB conditions and BNSF is
willing to complete the Combination.
Casualty and Environmental
Personal injury claims, including work-related injuries to employees, are a
significant expense for the railroad industry. Employees of BNSF are compensated
for work-related injuries according to the provisions of the Federal Employers'
Liability Act (FELA). FELA's system of requiring the finding of fault, coupled
with unscheduled awards and reliance on the jury system, contributed to
significant increases in expense in past years. BNSF has implemented a number of
safety programs to reduce the number of
Burlington Northern Santa Fe Corporation
24
personal injuries as well as the associated claims and personal injury expense.
BNSF made payments for personal injuries of approximately $179 million, $193
million, and $210 million in 1999, 1998 and 1997, respectively.
As discussed in more detail in Note 11: Commitments and 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 approximately 400 sites, including the
Superfund sites, at which it is being asked to participate in the study or
clean-up, or both, of alleged environmental contamination. BNSF paid
approximately $67 million, $64 million and $55 million during 1999, 1998 and
1997, respectively, for mandatory clean-up efforts, including amounts expended
under federal and state voluntary clean-up programs. During 1999, the Company
experienced significant developments at certain existing sites primarily related
to new information on the extent of contamination and other related developments
that led the Company to increase its recorded liabilities for remediation and
restoration of all known sites to approximately $232 million at December 31,
1999 from $185 million at December 31, 1998. BNSF anticipates that the majority
of the accrued costs at December 31, 1999 will be paid over the next five years.
No individual site is considered to be material.
Liabilities recorded for environmental costs represent BNSF's best estimates
for remediation and restoration of these sites and include both asserted and
unasserted claims. Unasserted claims are not considered to be a material
component of the liability. Although recorded liabilities include BNSF's best
estimates of all costs, without reduction for anticipated recoveries from third
parties, BNSF's total clean-up costs at these sites cannot be predicted with
certainty due to various factors such as the extent of corrective actions that
may be required, evolving environmental laws and regulations, advances in
environmental technology, the extent of other parties' participation in clean-up
efforts, developments in ongoing environmental analyses related to sites
determined to be contaminated, and developments in environmental surveys and
studies of potentially contaminated sites. As a result, future charges to income
for environmental liabilities could have a significant effect on results of
operations in a particular quarter or fiscal year as individual site studies and
remediation and restoration efforts proceed or as new sites arise. However,
management believes that it is unlikely that any identified matters, either
individually or in the aggregate, will have a material adverse effect on BNSF's
consolidated financial position or liquidity.
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.
Employee Merger and Separation Costs
Current and long-term employee merger and separation liabilities totaling $356
million and $474 million are included in the consolidated balance sheet at
December 31, 1999 and 1998, respectively, and principally represent: (i)
employee-related severance costs for the consolidation of clerical functions;
(ii) deferred benefits payable upon separation or retirement to certain active
conductors, trainmen and locomotive engineers; and (iii) certain non-union
employee severance costs.
Liabilities related to the consolidation of clerical functions (the
Consolidation Plan) were $119 million and $211 million at December 31, 1999 and
1998, respectively. These liabilities provide for severance costs associated
with the Consolidation Plan adopted in 1995 upon consummation of the merger of
BNSF's predecessor companies Burlington Northern Inc. and Santa Fe Pacific
Corporation (the Merger). The Consolidation Plan resulted in the elimination of
approximately 1,500 permanent positions and was substantially completed during
1999. Additionally, in 1999 the Company recorded a $54 million credit for the
reversal of certain liabilities associated with the Consolidation Plan. These
liabilities related to planned work-force reductions that are no longer required
due to the Company's ability to utilize a series of job swaps between certain
locations to achieve the advantages of functional work consolidation. This
change in the Consolidation Plan was communicated to Company employees in May
1999. The remaining liability balance represents benefits to be paid to affected
employees who did not receive lump-sum payments, but instead will be paid over
five to ten years or in some cases through retirement.
Liabilities related to deferred benefits payable upon
Burlington Northern Santa Fe Corporation
25
separation or retirement to certain active conductors, trainmen and locomotive
engineers were $193 million and $207 million at December 31, 1999 and 1998,
respectively. These costs were incurred in connection with labor agreements
reached prior to the Merger which, among other things, reduced train crew sizes
and allowed for more flexible work rules.
In the second quarter of 1999, the Company incurred $48 million of
reorganization costs for severance, pension, medical and other benefit costs for
approximately 325 involuntarily terminated non-union employees that were part of
the program announced in May 1999 that sought to reduce operating expenses by
eliminating approximately 400 non-union and 1,000 union positions through
severances, normal attrition and the elimination of contractors. Components of
the charge include approximately $29 million relating to severance costs for
non-union employees, approximately $16 million for special termination benefits
to be received under the Company's retirement and medical plans, and
approximately $3 million of costs incurred for relocating approximately 60 non-
union employees as a result of the reorganization. Substantially all of the
planned reductions were made by September 30, 1999. No significant costs were
incurred as a result of eliminating the 1,000 union positions. Total annual
savings of compensation and benefits related to the May 1999 reorganization are
expected to approximate $100 million.
Liabilities principally related to certain remaining non-union employee
severances resulting from the Merger and from the May 1999 reorganization were
$44 million and $56 million at December 31, 1999 and 1998, respectively. These
costs will be paid over the next several years based on deferral elections made
by the employee. Approximately 1,825 non-union employees received or are
receiving severance payments and special termination benefits under the
Company's retirement and health and welfare plans resulting from the Merger and
the May 1999 reorganization program discussed above.
During 1999, 1998 and 1997, BNSF made employee merger and separation payments
of $93 million, $77 million and $116 million, respectively. At December 31,
1999, $54 million of the remaining liabilities are included within current
liabilities for anticipated costs to be paid in 2000.
In the fourth quarter of 1997, the Company recorded a $90 million pre-tax
Merger-related special charge. Approximately $65 million of the charge related
to additional costs of the Consolidation Plan and the remainder of the charge
related to severance and other costs for non-union employees.
Year 2000
Background
The Company 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. Because many existing computer
programs and microprocessors recognize only the last two digits of years (and
not the century designation), they had the possibility of being unable to
accurately recognize and process dates beyond December 31, 1999, and
consequently fail. The Company began assessing Year 2000 issues in September
1995 and devoted considerable efforts and energies to the inventory and
assessment of its systems, systems remediation, certification testing, and
contingency planning during 1998 and 1999. By the fourth quarter of 1999, the
certification phases had been completed, and the Company earned a rating in the
"very low risk" category from the Federal Railroad Administration sponsored Year
2000 readiness review of BNSF performed by CACI International Inc. Accordingly,
the Company had a high degree of confidence in the readiness of its own systems
and applications.
The Company continued its vigilance with respect to Year 2000 issues during
the December 31, 1999 - January 1, 2000 date change, and the rollover to the
Year 2000 was completed as planned. During the Year 2000 rollover, train
operations intentionally ceased for a short period of time to allow for testing
of signal and other safety systems. Additionally, the Company performed testing
of all other computer systems and applications. The testing and subsequent
normal use of the systems and applications to date has uncovered no significant
matters affecting the Company's safety, train operations, or financial
performance.
COSTS
As a result of its merger-related systems integration completed in 1997, BNSF
achieved substantial Year 2000 compliance on its core mainframe systems.
Additionally, spending on Year 2000 activities approximated $16 million through
December 31, 1999, which is consistent with the estimate of total costs of
achieving Year 2000 compliance for the Company. No significant additional
spending is anticipated.
YEAR 2000 RISKS AND CONTINGENCY PLANS
To date, Year 2000 has not had a materially adverse effect on the Company's
results of operations, liquidity or financial position. Additionally, management
believes the risk of any significant Year 2000 problems related to BNSF's
internal information systems and technology infrastructure that could have a
materially adverse effect on the Company is unlikely. Further, BNSF is not aware
of any significant Year 2000 problems with respect to its suppliers, key
transportation partners or customers which would adversely affect the
operations, liquidity or financial position of the Company. However, there can
be no assurance that all potential internal or external problems related to Year
2000 have been identified. Where appropriate, BNSF has developed disaster
recovery and contingency plans should currently unidentified Year 2000 problems
arise.
Hedging Activities
FUEL
Fuel expense historically approximates 10 percent of total operating expenses.
Due to the significance of diesel fuel expense to the operations of BNSF and the
historical volatility of fuel prices, the Company has established a program to
hedge against fluctuations in the price of its diesel fuel
Burlington Northern Santa Fe Corporation
26
purchases. The intent of the program is to protect the Company's operating
margins and overall profitability from adverse fuel price changes. However, to
the extent the Company hedges portions of its fuel purchases, it will not
realize the impact of decreases in fuel prices. The fuel hedging program
includes the use of commodity swap transactions that are accounted for as
hedges. Any gains or losses associated with changes in the market value of the
fuel swaps are deferred and recognized as a component of fuel expense in the
period in which the fuel is purchased and used. Based on 1999 fuel consumption
and excluding the impact of the hedging program, each one-cent increase in the
price of fuel would result in approximately $12 million of additional fuel
expense on an annual basis.
As of February 4, 2000, BNSF had entered into fuel swaps for approximately 869
million gallons at an average price of approximately 50 cents per gallon. The
above price does not include taxes, transportation costs, certain other fuel
handling costs, and any differences which may occur from time to time between
the prices of commodities hedged and the purchase price of BNSF's diesel fuel.
Currently, these fuel swaps cover approximately 41 percent, 23 percent, and 8
percent of estimated annual and quarterly fuel purchases for 2000, 2001, and
2002, respectively. Hedge positions are closely monitored to ensure that they
will not exceed actual fuel requirements in any period. Unrecognized gains from
BNSF's fuel swap transactions were approximately $37 million as of December 31,
1999, of which $33 million relates to swap transactions that will expire in
2000. BNSF also monitors its hedging positions and credit ratings of its
counterparties and does not anticipate losses due to counterparty
nonperformance.
INTEREST RATE
From time to time, the Company enters into various interest rate hedging
transactions for the purpose of managing exposure to fluctuations in interest
rates and establishing rates in anticipation of future debt issuances. As of
February 4, 2000, BNSF had no interest rate swap instruments in place. Swaps
totaling $125 million used to fix the interest rate on commercial paper debt
expired in December 1999. While the swaps were outstanding, BNSF recognized, on
an accrual basis, a fixed rate of interest on the principal amount of commercial
paper hedged over the term of the swap agreements.
In anticipation of future debt issuances, BNSF has entered into treasury lock
transactions totaling $400 million, of which $200 million is based on the 10-
year U.S. Treasury rates and $200 million is based on the 30-year U.S. Treasury
rates. The 10-year and 30-year treasury lock transactions have average interest
rates of approximately 4.6 percent and 5.0 percent, respectively, and expire in
June 2000 and June 2001. These rates do not include a credit spread which would
be determined at the time of the actual debt issuance and included in the all-in
interest rate. The treasury locks can be closed by BNSF anytime up to
expiration. Unrecognized gains on the treasury lock transactions were
approximately $62 million as of December 31, 1999. BNSF monitors its treasury
lock positions and the credit ratings of its counterparties and does not
anticipate losses due to counterparty nonperformance.
In 1999, at the time of issuing $200 million of debt, the Company closed out
$100 million of treasury lock transactions at a gain of $8 million. During 1998,
at the time of issuing $400 million of debt, the Company closed out $400 million
of treasury lock transactions at a loss of approximately $18 million. In each
case, the gain or loss has been deferred and is being amortized to interest
expense over the life of the debt.
Labor
Labor unions represent approximately 88 percent of BNSF Railway's employees
under collective bargaining agreements with 13 different labor organizations.
The negotiating process for new, major collective bargaining agreements
covering all of BNSF Railway's union employees has begun. As during the previous
round five years ago, wages, health and welfare benefits, work rules, and other
issues are being addressed through industry-wide negotiations. These
negotiations have traditionally taken place over a number of months and have
previously not resulted in any extended work stoppages. The major collective
bargaining agreements reached in 1995 and 1996 as a result of industry-wide
labor contract negotiations remained in effect on December 31, 1999 and will
continue in effect until new agreements are reached or the Railway Labor Act's
procedures are exhausted. The current agreements provide for periodic wage
increases until new agreements are reached.
Inflation
Due to the capital intensive nature of BNSF's business, the full effect of
inflation is not reflected in operating expenses because depreciation is based
on historical cost. An assumption that all operating assets were depreciated at
current price levels would result in substantially greater expense than
historically reported amounts.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." BNSF will be required to adopt FAS 133
beginning January 1, 2001. While earlier adoption is permitted, the Company does
not currently believe it is likely to adopt the Statement before the effective
date. 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
Burlington Northern Santa Fe Corporation
27
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 in 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.
Based on interest rate and fuel hedging instruments outstanding at December
31, 1999 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 benefit to accumulated other comprehensive deficit of
approximately $42 million if adopted December 31, 1999. The Company is presently
evaluating the impact SFAS No. 133 will have on its ongoing results of
operations.
Forward Looking Information
The discussion concerning the proposed Combination with CN in this annual report
contains forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those projected in
the forward-looking statements. The use of words such as "expect," "believe,"
"anticipate," and other similar expressions, as they relate to the Company, the
Company's management, or the proposed Combination, identify forward-looking
statements. Such statements regarding efficiencies, cost savings, revenue and
service enhancements, market share potential, as well as timing for the
completion of the Combination reflect the current views of the Company with
respect to future events and are based on information currently available.
Should one or more of the risk factors discussed below materialize, or should
underlying assumptions or estimates prove incorrect, then actual results may
differ materially from those described herein.
The Year 2000 discussion above contains forward-looking statements, including
those concerning the Company's cost estimates and assessments of BNSF's and
third parties' ultimate Year 2000 impact. Specific risk factors related to these
forward-looking statements include, but are not limited to, the following:
emergence of unforeseen software or hardware problems, including where
applications interact with each other in ways not yet discovered, which could
delay or hinder commercial transactions or other operations; the emergence, in
whole or in part, of unforeseen issues concerning other railroads or AAR-
supported systems thought to not be experiencing Year 2000 problems; business
interruption due to delays in obtaining supplies, parts, or equipment from key
vendors or suppliers not yet discovered to be affected by Year 2000 problems.
Accordingly, these risks and uncertainties could cause actual results to differ
materially from those projected in the forward-looking statements.
To the extent that all other statements made by the Company relate to the
Company's future economic performance or business outlook, predictions or
expectations of financial or operational results, or refer to matters which are
not historical facts, such statements are "forward-looking" statements within
the meaning of the federal securities laws. These forward-looking statements
involve a number of risks and uncertainties, and actual results may differ
materially. Factors that could cause actual results to differ materially
include, but are not limited to, economic and industry conditions: material
adverse changes in economic or industry conditions, customer demand, effects of
adverse economic conditions affecting shippers, adverse economic conditions in
the industries and geographic areas that produce and consume freight, changes in
fuel prices, and labor difficulties including strikes; legal and regulatory
factors: change in laws and regulations and the ultimate outcome of shipper
claims, environmental investigations or proceedings and other types of claims
and litigation; and operating factors: technical difficulties, changes in
operating conditions and costs, competition and commodity concentrations as well
as natural events such as severe weather, floods and earthquakes. The factors
noted, individually or in combination could, among other things, limit demand
and pricing, affect costs and the feasibility of certain operations, or affect
traffic and pricing levels.
Burlington Northern Santa Fe Corporation
28
Report of Management
To the Shareholders of
Burlington Northern Santa Fe Corporation
The accompanying consolidated financial statements of Burlington Northern Santa
Fe Corporation and subsidiary companies were prepared by management, who are
responsible for their integrity and objectivity. They were prepared in
accordance with accounting principles generally accepted in the United States
and properly include amounts that are based on management's best judgments and
estimates. Other financial information included in this annual report is
consistent with that in the consolidated financial statements.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that the books and records
reflect the authorized transactions of the Company. Limitations exist in any
system of internal accounting controls based upon the recognition that the cost
of the system should not exceed the benefits derived. The Company believes its
system of internal accounting controls, augmented by its internal auditing
function, appropriately balances the cost/benefit relationship.
Independent accountants provide an objective assessment of the degree to which
management meets its responsibility for fairness of financial reporting. They
regularly evaluate the system of internal accounting controls and perform such
tests and other procedures as they deem necessary to express an opinion on the
fairness of the consolidated financial statements.
The Board of Directors pursues its responsibility for the Company's financial
statements through its Audit Committee which is composed solely of directors who
are not officers or employees of the Company. The Audit Committee meets
regularly with the independent accountants, management and internal auditors.
The independent accountants and the Company's internal auditors have direct
access to the Audit Committee, with and without the presence of management
representatives, to discuss the scope and results of their work and their
comments on the adequacy of internal accounting controls and the quality of
financial reporting.
/s/ ROBERT D. KREBS
Robert D. Krebs
Chairman and Chief Executive Officer
/s/ THOMAS N. HUND
Thomas N. Hund
Senior Vice President and Chief Financial Officer
/s/ DENNIS R. JOHNSON
Dennis R. Johnson
Vice President and Controller
Report of Independent Accounts
To the Shareholders of
Burlington Northern Santa Fe Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity present fairly, in all material respects, the financial position of
Burlington Northern Santa Fe Corporation and subsidiary companies at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Fort Worth, Texas
February 4, 2000
Burlington Northern Santa Fe Corporation
29
Consolidated Statement of Income
Burlington Northern Santa Fe Corporation and Subsidiaries
(Dollars in millions, except per share data)
- --------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- --------------------------------------- ----- ----- -----
Revenues $ 9,100 $ 8,941 $ 8,370
----- ----- -----
Operating expenses:
Compensation and benefits 2,772 2,812 2,675
Purchased services 946 894 823
Depreciation and amortization 897 832 773
Equipment rents 752 804 820
Fuel 700 721 747
Materials and other 834 720 675
Reorganization costs 48 - -
Merger related severance (54) - 90
----- ----- -----
Total operating expenses 6,895 6,783 6,603
- --------------------------------------- ----- ----- -----
Operating income 2,205 2,158 1,767
Interest expense 387 354 344
Other income (expense), net 1 45 (19)
----- ----- -----
Income before income taxes 1,819 1,849 1,404
Income tax expense 682 694 519
----- ----- -----
Net income $ 1,137 $ 1,155 $ 885
======================================= ===== ===== =====
Earnings per share:
Basic $ 2.46 $ 2.45 $ 1.91
Diluted $ 2.44 $ 2.43 $ 1.88
======================================= ===== ===== =====
Average shares (in
millions):
Basic 463.2 470.5 464.4
Dilutive effect of stock options 3.6 5.7 6.7
----- ----- -----
Diluted 466.8 476.2 471.1
======================================= ===== ===== =====
See accompanying notes to consolidated financial statements.
Burlington Northern Santa Fe Corporation
30
Consolidated Balance Sheet
Burlington Northern Santa Fe Corporation and Subsidiaries
(Shares in thousands. Dollars in millions)
================================================================================
December 31, 1999 1998
- ----------------------------------------- ------ ------
Assets
Current assets:
Cash and cash equivalents $ 22 $ 25
Accounts receivable, net 397 524
Materials and supplies 255 244
Current portion of deferred income taxes 326 335
Other current assets 66 34
====== ======
Total current assets 1,066 1,162
Property and equipment, net 21,681 20,662
Other assets 953 822
------ ------
Total assets $23,700 $22,646
========================================= ====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other current
liabilities $ 1,917 $ 1,885
Long-term debt due within one year 158 268
====== ======
Total current liabilities 2,075 2,153
Long-term debt and commercial paper 5,655 5,188
Deferred income taxes 6,097 5,662
Casualty and environmental liabilities 423 389
Employee merger and separation costs 302 409
Other liabilities 976 1,061
------ ------
Total liabilities 15,528 14,862
========================================= ====== ======
Commitments and contingencies (see Notes
1, 8, 10 and 11)
Stockholders' equity:
Common stock, $.01 par value, 600,000
shares authorized; 484,572 shares and
477,436 shares issued, respectively 5 5
Additional paid-in capital 5,390 5,213
Retained earnings 3,726 2,811
Treasury stock, at cost, 30,013 shares
and 6,961 shares, respectively (913) (206)
Unearned compensation (29) (31)
Accumulated other comprehensive deficit (7) (8)
------ ------
Total stockholders' equity 8,172 7,784
------ ------
Total liabilities
and stockholders' equity $23,700 $22,646
========================================= ====== ======
See accompanying notes to consolidated financial statements.
Burlington Northern Santa Fe Corporation
31
Consolidated Statement of Cash Flows
Burlington Northern Santa Fe Corporation and Subsidiaries
(Dollars in millions)
================================================================================
Year ended December 31, 1999 1998 1997
- ----------------------------------------- ----- ----- -----
Operating Activities
Net income $ 1,137 $ 1,155 $ 885
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 897 832 773
Deferred income taxes 444 489 433
Employee merger and separation
costs paid (93) (77) (116)
Other, net (112) (243) (131)
Changes in current assets and
liabilities:
Accounts receivable:
Sale of accounts receivable - 19 301
Other changes 127 20 (333)
Materials and supplies (11) (39) 17
Other current assets (32) (4) 4
Accounts payable and other current
liabilities 67 66 (19)
----- ----- -----
Net cash provided by operating
activities 2,424 2,218 1,814
- ----------------------------------------- ----- ----- -----
Investing Activities
Capital expenditures (1,788) (2,147) (2,182)
Other, net (152) (271) (147)
----- ----- -----
Net cash used for investing activities (1,940) (2,418) (2,329)
- ----------------------------------------- ----- ----- -----
Financing Activities
Net decrease in commercial paper and
bank borrowings (23) (242) (235)
Proceeds from issuance of long-term debt 679 794 1,002
Payments on long-term debt (293) (112) (177)
Dividends paid (224) (197) (185)
Proceeds from stock options exercised 121 111 102
Purchase of BNSF common stock (688) (153) -
Other, net (59) (7) (8)
----- ----- -----
Net cash provided by (used for)
financing activities (487) 194 499
----- ----- -----
Decrease in cash and cash equivalents (3) (6) (16)
Cash and cash equivalents:
Beginning of year 25 31 47
----- ----- -----
End of year $ 22 $ 25 $ 31
========================================= ===== ===== =====
Supplemental Cash Flow Information
Interest paid, net of amounts
capitalized $ 382 $ 354 $ 346
Income taxes paid, net of refunds 142 220 32
========================================= ===== ===== =====
See accompanying notes to consolidated financial statements.
Burlington Northern Santa Fe Corporation
32
Consolidated Statement of Changes in Stockholders' Equity
Burlington Northern Santa Fe Corporation and Subsidiaries
(Shares in thousands. Dollars in millions, except per share data.)
- -----------------------------------------------------------------------------------------------------------------------------------
Common
Shares of Stock and Accumulated
Common Shares of Additional Other Com-
Stock Treasury Paid-in Retained Treasury Unearned prehensive
Issued Stock Capital Earnings Stock Compensation Deficit Total
- ---------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1996 462,594 (588) $ 4,878 $ 1,165 $ (17) $ (28) $ (4) $ 5,994
Comprehensive income:
Net income 885 885
Minimum pension
liability adjustment
(net of tax benefit of $2) (3) (3)
-------
Total comprehensive income 882
-------
Common stock dividends,
$0.40 per share (187) (187)
Adjustments associated with
unearned compensation,
restricted stock 366 (117) 11 (3) 8
Exercise of stock options
and related tax benefit 7,197 (624) 140 (19) 121
Other 83 4 4
- ---------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1997 470,240 (1,329) 5,033 1,863 (36) (31) (7) 6,822
Comprehensive income:
Net income 1,155 1,155
Minimum pension
liability adjustment
(net of tax benefit
of $0.5) (1) (1)
-------
Total comprehensive income 1,154
-------
Common stock dividends,
$0.44 per share (207) (207)
Adjustments associated with
unearned compensation,
restricted stock 527 (132) 15 2 17
Exercise of stock options
and related tax benefit 6,669 (537) 167 (17) 150
Purchase of BNSF common stock (4,963) (153) (153)
Other 3 (2) 1
- ---------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1998 477,436 (6,961) 5,218 2,811 (206) (31) (8) 7,784
Comprehensive income:
Net income 1,137 1,137
Minimum pension liability
adjustment (net of tax
benefit of $0.5) 1 1
-------
Total comprehensive income 1,138
-------
Common stock dividends,
$0.48 per share (222) (222)
Adjustments associated with
unearned compensation,
restricted stock 811 (332) 14 2 16
Exercise of stock options
and related tax benefit 6,325 (600) 163 (19) 144
Purchase of BNSF common stock (22,120) (688) (688)
- ---------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1999 484,572 (30,013) $ 5,395 $ 3,726 $ (913) $ (29) $ (7) $ 8,172
============================ ======= ======= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
Burlington Northern Santa Fe Corporation
33
Notes to Consolidated Financial Statements Burlington Northern Santa Fe
Corporation and Subsidiaries
1 The Company
Burlington Northern Santa Fe Corporation including its majority-owned
subsidiaries (collectively, BNSF or Company) is engaged primarily in railroad
transportation through its principal subsidiary, The Burlington Northern and
Santa Fe Railway Company (BNSF Railway), which operates one of the largest
railroad networks in North America with 33,500 route miles covering 28 states
and two Canadian provinces. Through one operating transportation services
segment, BNSF Railway transports a wide range of products and commodities
including the transportation of containers and trailers (intermodal), coal and
agricultural commodities which constituted 28 percent, 24 percent and 15
percent, respectively, of total revenues for the year ended December 31, 1999.
Other significant aspects of BNSF's business include the transportation of
chemicals, forest products, consumer goods, metals, minerals, automobiles and
automobile parts. Revenues derived from other sources are not significant.
Proposed Combination With Canadian National Railway Company
On December 18, 1999, BNSF and Canadian National Railway Company (CN) entered
into a Combination Agreement, as amended, providing for the combination of the
two companies (the Combination). To comply with Canadian legal requirements
that, among other things, prohibit any person and that person's associates from
holding more than 15 percent of the voting rights in CN, while ensuring that the
combination will be tax-efficient for each company's shareholders, the combined
enterprise will consist of two public companies: North American Railways, Inc.
(North American Railways) and CN. Upon completion of the combination, North
American Railways will be the parent company of BNSF and will own all of the
limited voting equity shares of CN. All shareholders will have voting interests
in both North American Railways and CN and economic interests in the combined
companies.
In the Combination, BNSF shareholders will receive one share of North
American Railways common stock and one CN voting share for each BNSF share.
Additionally, CN shareholders will receive, for each CN common share, 1.05 CN
voting shares and either 1.05 shares of North American Railways common stock or
1.05 CN exchangeable shares. The CN exchangeable shares will be exchangeable at
any time on a one-for-one basis for shares of North American Railways common
stock. CN shareholders who elect to receive the CN exchangeable shares will also
receive the right to vote on matters submitted to North American Railways
shareholders in proportion to their economic interest in the combined companies.
Dividends paid on the North American Railways common stock and the CN
exchangeable shares will be equivalent. Any shares of BNSF common stock owned by
BNSF or any of its subsidiaries as treasury stock will be automatically canceled
and cease to exist.
Each share of North American Railways common stock will be "stapled" to a
CN voting share and will trade as a single security. Similarly, each CN
exchangeable share will be "stapled" to a CN voting share and will trade as a
single security. In addition, CN will issue to North American Railways limited
voting equity shares carrying 10.1 percent of the voting rights in CN and 100
percent of CN's equity. The result of these arrangements will be that, at all
times, each company will have the same public shareholder base with each public
shareholder effectively having the same economic benefits and voting rights on a
per security basis.
The Combination is subject to, among other things, approval by the
shareholders of both companies, as well as approvals by the Quebec Superior
Court and the United States Surface Transportation Board (STB). North American
Railways, by its charter, will conform to the provisions of the CN
Commercialization Act and Canadian corporate law on the composition of boards of
directors. Like CN, North American Railways shareholders will be subject to an
ownership limit whereby no single shareholder can own more than 15 percent of
North American Railways' voting shares. The companies currently expect that all
required regulatory approvals can be obtained and the transaction consummated
by mid-2001. Shareholders of both CN and BNSF are expected to vote on the
proposed Combination during the second quarter of 2000.
Upon consummation, the Combination will be accounted for by North American
Railways pursuant to the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." Under this
method, North American Railways will prepare its financial statements
reflecting the assets and liabilities of BNSF at their historical cost basis
and the fair value of North American Railways common stock issued or issuable
to the CN shareholders will be allocated to the assets and liabilities of CN
based on fair value. CN's results of operations will be included with North
American Railways from the date the transaction is consummated. Based on the
current agreement, the fair value of North American Railways common stock will
be based on a $25.63 per share fair value of BNSF common stock which was
determined using the average of the closing daily BNSF common stock prices as
reported by The Wall Street Journal for the two days preceding, the day of, and
the two days following the December 20, 1999 announcement of the Combination.
Under the terms of the Combination Agreement, as amended, BNSF is required
to pay a cash termination fee of $450 million to CN if the Combination is
terminated as a result of any of the following: i) another party has made a
proposal for an alternative transaction and the Company's shareholders do not
approve the Combination; ii) CN elects to terminate the Combination because
BNSF's Board of Directors changed its previously favorable recommendation of the
Combination to its shareholders or iii) BNSF breaches certain obligations not to
solicit or respond to alternative transaction proposals. CN is obligated to pay
a cash termination fee of $200 million to BNSF if the Combination is terminated
as a
34 Burlington Northern Santa Fe Corporation
result of actions similar to those above that are caused by CN.
Pursuant to the Combination Agreement, as amended, CN and BNSF entered into
reciprocal stock option agreements. Each company's option is exercisable by the
other company under the same circumstances in which that party is entitled to
receive the $450 million or $200 million termination fee, as applicable,
referred to above. The option agreement allows BNSF and CN to purchase, in the
case of BNSF, approximately 29 million CN common shares and, in the case of CN,
approximately 65 million shares of BNSF common stock. The number of shares
subject to the stock options will be adjusted in each case so that the number of
shares issued will always be equal to, but not exceed, 12.5 percent of the
outstanding common shares of the option issuer after giving effect to the
issuance of shares under the option. The exercise price of the option is, in
each case, the average of the closing price of the option issuer's common stock
on the New York Stock Exchange on the five trading days preceding the date of
notice of exercise multiplied by the number of shares to be issued.
Additionally, BNSF is required to pay a cash termination fee of $300
million to CN if BNSF terminates the Combination because of conditions imposed
by the STB that the Company believes would significantly and adversely affect
the benefits of the Combination, and CN is willing to complete the Combination
despite these conditions. CN is obligated to pay a cash termination fee of $150
million to BNSF if it terminates the Combination as a result of STB conditions
and BNSF is willing to complete the Combination.
2 Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Burlington
Northern Santa Fe Corporation and its majority-owned subsidiaries, including its
principal subsidiary BNSF Railway, all of which are separate legal entities. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. Actual results could differ from those estimates.
Reclassfications
Certain comparative prior year amounts in the consolidated financial statements
and accompanying notes have been reclassified to conform with the current year
presentation.
Cash and Cash Equivalents
All short-term investments with original maturities of less than 90 days are
considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value because of the short maturity of these instruments.
Materials and Supplies
Materials and supplies, which consist mainly of rail, ties and other items for
construction and maintenance of property and equipment, as well as diesel fuel,
are valued at the lower of average cost or market.
Property and Equipment
Property and equipment are depreciated and amortized on a straight-line basis
over their estimated useful lives. Upon normal sale or retirement of
depreciable railroad property, cost less net salvage value is charged to
accumulated depreciation and no gain or loss is recognized. Significant
premature retirements and the disposal of land and non-rail property are
recorded as gains or losses at the time of their occurrence. Expenditures which
significantly increase asset values or extend useful lives are capitalized.
Repair and maintenance expenditures are charged to operating expense when the
work is performed. Property and equipment are stated at cost.
The Company incurs certain direct labor, contract service and other costs
associated with the development and installation of internal-use computer
software. Costs for newly developed software or significant enhancements to
existing software are typically capitalized. Research, preliminary project,
operations, maintenance and training costs are charged to operating expense
when the work is performed.
Revenue Recognition
Transportation revenues are recognized based upon the proportion of service
provided as of the balance sheet date.
3 Other Income (Expense), Net
Other income (expense), net includes the following (in millions):
Year ended December 31, 1999 1998 1997
- ------------------------------------------- ----- ----- -----
Deferred gain on prior period line sale $ 50 $ - $ -
Gain on property dispositions 26 48 14
Gain on sale of Pipeline Partnership - 67 -
Equity in earnings of Pipeline Partnership - 4 30
Accounts receivable sale fees (33) (34) (27)
Miscellaneous, net (42) (40) (36)
- ------------------------------------------- ----- ----- -----
Total $ 1 $ 45 $ (19)
=========================================== ===== ===== =====
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. (Pipeline Partnership) and of its operating partnership
subsidiary, SFPP, L.P. SFP Pipelines owned a two percent interest as the
Pipeline Partnerships and SFPP, L.P.'s general partner and an approximate 42
percent interest in partnership units of the Pipeline Partnership. 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 (VREDs).
On March 6, 1998 Kinder Morgan Energy Partners, L.P. (Kinder Morgan)
acquired substantially all of SFP Pipelines' interest in the Pipeline
Partnership and SFPP, L.P. for approximately $84 million in cash. The Pipeline
Partnership was liquidated as part of the transaction and SFP Pipelines'
partnership units were converted into the right to receive Kinder Morgan common
units. Consummation of the transaction caused an "Exchange Event" under the VRED
agreement and in June 1998 all VRED holders received either partner-
Burlington Northern Santa Fe Corporation 35
ship units of Kinder Morgan or cash equal to the par value of the VREDs. In
addition, the agreement called for SFP Pipelines' interest 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.
As a result of the transaction, the Company recognized a $67 million gain and
substantially all of the Company's investment in the Pipeline Partnership and
SFPP, L.P. and the VREDs were removed from the consolidated balance sheet.
BNSF recognized a $50 million deferred gain in the third quarter of 1999 in
connection with the sale of rail lines in Southern California in 1992 and 1993.
4 Income Taxes
Income tax expense was as follows (in millions):
Year ended December 31, 1999 1998 1997
- ------------------------------------------- ----- ----- -----
Current:
Federal $ 213 $ 191 $ 72
State 25 14 14
- ------------------------------------------- ----- ----- -----
238 205 86
- ------------------------------------------- ----- ----- -----
Deferred:
Federal 376 410 372
State 68 79 61
- ------------------------------------------- ----- ----- -----
444 489 433
- ------------------------------------------- ----- ----- -----
Total $ 682 $ 694 $ 519
=========================================== ===== ===== =====
Reconciliation of the federal statutory income tax rate to the effective tax
rate was as follows:
Year ended December 31, 1999 1998 1997
- ------------------------------------------- ----- ----- -----
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal tax benefit 3.3 3.3 3.5
Other, net (0.8) (0.7) (1.5)
- ------------------------------------------- ----- ----- -----
Effective tax rate 37.5% 37.6% 37.0%
=========================================== ===== ===== =====
The components of deferred tax assets and liabilities were as follows (in
millions):
December 31, 1999 1998
- ------------------------------------------- -------- --------
Deferred tax liabilities:
Depreciation and amortization $(6,106) $(5,868)
Other (441) (417)
- ------------------------------------------- -------- --------
Total deferred tax liabilities (6,547) (6,285)
- ------------------------------------------- -------- --------
Deferred tax assets:
Casualty and environmental 272 253
Employee merger and separation costs 137 182
Postretirement benefits 93 89
Other 274 434
- ------------------------------------------- -------- --------
Total deferred tax assets 776 958
- ------------------------------------------- -------- --------
Net deferred tax liability $(5,771) $(5,327)
=========================================== ======== ========
Noncurrent deferred income tax liability $(6,097) $(5,662)
Current deferred income tax asset 326 335
- ------------------------------------------- -------- --------
Net deferred tax liability $(5,771) $(5,327)
=========================================== ======== ========
The federal income tax returns of BNSF's predecessor companies, Burlington
Northern, Inc. (BNI) and Santa Fe Pacific Corporation (SFP) have been examined
through 1994 and the merger date in September 1995, respectively. All years
prior to 1992 for BNI and 1993 for SFP are closed. Issues relating to the years
1992-1994 for BNI and for years 1993 through the merger date in September 1995
for SFP are being contested through various stages of administrative appeal.
BNSF is currently under IRS examination for years 1995-1997. In addition, BNSF
and its subsidiaries have various state income tax returns in the process of
examination, administrative appeal or litigation. Management believes that
adequate provision has been made for any adjustment that might be assessed for
open years through 1999.
5 Accounts Receivable, Net
BNSF Railway, through a special purpose subsidiary, has an account receivable
sales agreement which allows it to sell up to $600 million of variable rate
certificates that mature in 2002 and evidence undivided interests in an accounts
receivable master trust. The master trust's assets include an ownership interest
in a revolving portfolio of BNSF Railway's accounts receivable which are used to
support the certificates. At December 31, 1999, $600 million of certificates
were outstanding and were supported by receivables of approximately $1.0 billion
in the master trust. Certificates outstanding were $600 million at December 31,
1998. BNSF Railway has retained the collection responsibility with respect to
the accounts receivable. Costs related to this agreement vary on a monthly
basis and are generally related to certain interest rates. These costs are
included in other income (expense), net.
BNSF maintains an allowance for uncollectible accounts receivable. At
December 31, 1999 and 1998, $50 million and $71 million, respectively, of such
allowances had been recorded.
6 Property and Equipment, Net
Property and equipment, net (in millions), and the weighted average annual
depreciation rate (%) were as follows:
1999
Depreciation
December 31, 1999 1998 Rate
- ------------------------------------------- ------- ------- ------------
Land $ 1,430 $ 1,431 -%
Track structure 11,152 11,340 4.0%
Other roadway 8,884 8,389 2.5%
Locomotives 2,772 2,276 5.0%
Freight cars and
other equipment 1,838 1,860 4.0%
Computer hardware
and software 448 405 15.0%
- ------------------------------------------- ------- -------
Total cost 26,524 25,701
Less accumulated depreciation
and amortization (4,843) (5,039)
- ------------------------------------------- ------- -------
Property and equipment, net $21,681 $20,662
=========================================== ======= =======
The consolidated balance sheet at December 31, 1999 and 1998 included $1,218
million and $1,082 million, respectively, for property and equipment under
capital leases.
36 Burlington Northern Santa Fe Corporation
7 Accounts Payable and Other Current Liabilities
Accounts payable and other current liabilities consisted of the following (in
millions):
December 31, 1999 1998
- ------------------------------------------- -------- --------
Compensation and benefits payable $ 376 $ 387
Casualty and environmental liabilities 287 272
Tax liabilities 201 117
Accounts payable 161 174
Rents and leases 160 155
Employee merger and separation costs 54 65
Other 678 715
- ------------------------------------------- -------- --------
Total $ 1,917 $ 1,885
=========================================== ======== ========
8 Debt
Debt outstanding was as follows (in millions):
December 31, 1999 1998
- ------------------------------------------- -------- --------
Notes and debentures, weighted average
rate of 7.0%, due 2001 to 2097 $ 3,321 $ 3,074
Capitalized lease obligations, weighted
average rate of 6.6%, due 2000 to 2016 791 818
Equipment obligations, weighted average
rate of 7.4%, due 2000 to 2016 755 595
Mortgage bonds, weighted average rate
of 7.6%, due 2000 to 2047 503 498
Commercial paper, 6.2% (variable) 473 471
Bank borrowings - 25
Unamortized discount and other, net (30) (25)
- ------------------------------------------- -------- --------
Total 5,813 5,456
Less current portion of long-term debt (158) (268)
- ------------------------------------------- -------- --------
Long-term debt $ 5,655 $ 5,188
=========================================== ======== ========
BNSF issues commercial paper from time to time which is 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 which were renewed and
extended effective June 28, 1999, allow borrowings of up to $750 million on a
short-term basis and $750 million on a long-term basis. Annual facility fees
are currently 0.10 percent and 0.125 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 are scheduled to expire in June 2000. The commitments of the lenders
under the long-term agreement are scheduled to expire in June 2004.
At December 31, 1999, there were no borrowings against the long-term
revolving credit agreement and the maturity value of commercial paper
outstanding was $477 million, leaving a total remaining capacity of $1,023
million available under the revolving credit agreements. BNSF must maintain
compliance with certain financial covenants under its revolving credit
agreements and at December 31, 1999, the Company was in compliance.
In February 1999, the Company filed a new shelf registration statement that
became effective in March 1999 for the issuance of debt securities, including
medium-term notes, which may be issued in one or more series at an aggregate
offering price not to exceed $750 million. Additionally, in February 1999,
prior to the effective date of the new shelf registration, the Company amended
its March 1998 shelf registration statement to combine it with the February
1999 shelf registration. Subsequently, the Company had $1.1 billion of
borrowing capacity available under its shelf registration statement.
In March 1999, BNSF issued $200 million of 6.1 percent notes due March 2009
and $200 million of 6.8 percent debentures due March 2029 under the February
1999 shelf registration statement. The net proceeds were used for general
corporate purposes including the repayment of commercial paper. At the time of
issuing the $200 million of 6.1 percent notes discussed above, the Company
closed out a $100 million treasury lock transaction at a gain of approximately
$8 million which has been deferred and is being amortized to interest expense
over the 10-year life of the notes.
In April 1999, the holder of a call option on $200 million of the Company's
puttable reset debentures due 2029 exercised the call option. As a result, on
May 13, 1999, the holder repurchased the debentures which were subsequently
resold to investors. The interest rate on the debentures was reset to a fixed
interest rate of 7.1 percent. The Company did not receive any proceeds from the
resale of these debentures; however, the resale of these debentures, along with
the $400 million of debt securities issued in March 1999, reduced the amount
available for borrowing under the Company's February 1999 shelf registration
statement to $500 million.
During 1999, BNSF Railway entered into equipment obligations totaling $212
million payable from 2000 to 2016 with interest rates ranging from 5.4 percent
to 7.0 percent and $60 million of capital lease obligations payable from 2000 to
2016. The capital lease and $137 million of equipment obligations relate to
financing transactions involving German investors. In order to comply with the
terms of the capital lease and the associated foreign regulations, BNSF Railway
simultaneously deposited $60 million with a German bank and pledged this amount
as an irrevocable security deposit to be used to pay the capital lease
obligations. The capital lease obligation is classified as Long-Term Debt and
the security deposit is classified as an Other Asset in the consolidated balance
sheet.
Most BNSF Railway properties and certain other assets are pledged as
collateral to, or are otherwise restricted under, the various BNSF Railway long-
term debt agreements. Equipment obligations and capital leases are secured by
the underlying equipment.
SFP Pipelines, in connection with its remaining 0.5 percent special limited
partner interest in SFPP, L.P., is contingently liable for $190 million of
long-term debt due December 2001 previously held by Pipelines Partnership
Burlington Northern Santa Fe Corporation 37
that were assumed by Kinder Morgan pursuant to the sale discussed in Note 3:
Other Income (Expense), Net. In addition, BNSF and another major railroad
jointly and severally guarantee $75 million of debt of KCT Intermodal
Transportation Corporation, the proceeds of which are being used to finance the
construction of a double track grade separation bridge in Kansas City, Missouri,
to be operated and used by Kansas City Terminal Railway Company.
Aggregate long-term debt scheduled maturities are $158 million, $233
million, $285 million, $141 million and $714 million for 2000 through 2004,
respectively. Maturities in 2000 exclude $100 million of 6.1 percent notes due
2027 for which the Company received notice from the holders that they will
exercise a put option on the notes in February 2000. Maturities in 2001 exclude
$100 million of 6.1 percent notes due 2031, which will either be remarketed by
the holder of a call option on the debt and mature in 2031 or will otherwise be
repurchased by the Company in 2001. Maturities in 2003 exclude $175 million of
6.5 percent notes due 2037, which may be redeemed in 2003 at the option of the
holder. In addition, commercial paper of $473 million is included in maturities
for 2004.
The carrying amounts of BNSF's long-term debt and commercial paper at
December 31, 1999 and 1998 were $5,813 million and $5,456 million, respectively,
while the estimated fair values at December 31, 1999 and 1998 were $5,632
million and $5,712 million, respectively. The fair value of BNSF's long-term
debt is primarily based on quoted market prices for the same or similar issues,
or on the current rates that would be offered to BNSF for debt of the same
remaining maturities. The carrying amount of commercial paper approximates fair
value because of the short maturity of these instruments.
9 Employee Merger and Separation Costs
Current and long-term employee merger and separation liabilities totaling $356
million and $474 million are included in the consolidated balance sheet at
December 31, 1999 and 1998, respectively, and principally represent: (i)
employee-related severance costs for the consolidation of clerical functions;
(ii) deferred benefits payable upon separation or retirement to certain active
conductors, trainmen and locomotive engineers; and (iii) certain non-union
employee severance costs.
Liabilities related to the consolidation of clerical functions (the
Consolidation Plan) were $119 million and $211 million at December 31, 1999 and
1998, respectively. These liabilities provide for severance costs associated
with the Consolidation Plan adopted in 1995 upon consummation of the merger of
BNSF's predecessor companies Burlington Northern Inc. and Santa Fe Pacific
Corporation (the Merger). The Consolidation Plan resulted in the elimination of
approximately 1,500 permanent positions and was substantially completed during
1999. Additionally, in 1999 the Company recorded a $54 million credit for the
reversal of certain liabilities associated with the Consolidation Plan. These
liabilities related to planned work-force reductions that are no longer required
due to the Company's ability to utilize a series of job swaps between certain
locations to achieve the advantages of functional work consolidation. This
change in the Consolidation Plan was communicated to Company employees in May
1999. The remaining liability balance represents benefits to be paid to affected
employees who did not receive lump-sum payments, but instead will be paid over
five to ten years or in some cases through retirement.
Liabilities related to deferred benefits payable upon separation or
retirement to certain active conductors, trainmen and locomotive engineers were
$193 million and $207 million at December 31, 1999 and 1998, respectively. These
costs were incurred in connection with labor agreements reached prior to the
Merger which, among other things, reduced train crew sizes and allowed for more
flexible work rules.
In the second quarter of 1999, the Company incurred $48 million of
reorganization costs for severance, pension, medical and other benefit costs for
approximately 325 involuntarily terminated non-union employees that were part
of the program announced in May 1999 that sought to reduce operating expenses by
eliminating approximately 400 non-union and 1,000 union positions through
severances, normal attrition and the elimination of contractors. Components of
the charge include approximately $29 million relating to severance costs for
non-union employees, approximately $16 million for special termination benefits
to be received under the Company's retirement and medical plans, and
approximately $3 million of costs incurred for relocating approximately 60 non-
union employees as a result of the reorganization. Substantially all of the
planned reductions were made by September 30, 1999. No significant costs were
incurred as a result of eliminating the 1,000 union positions.
Liabilities principally related to certain remaining non-union employee
severances resulting from the May 1999 reorganization and from the Merger were
$44 million and $56 million at December 31, 1999 and 1998, respectively. These
costs will be paid over the next several years based on deferral elections made
by the employee. Approximately 1,825 non-union employees received or are
receiving severance payments and special termination benefits under the
Company's retirement and health and welfare plans resulting from the Merger and
the May 1999 reorganization program discussed above.
During 1999, 1998 and 1997, BNSF made employee merger and separation
payments of $93 million, $77 million and $116 million, respectively. At December
31, 1999, $54 million of the remaining liabilities are included within current
liabilities for anticipated costs to be paid in 2000.
In the fourth quarter of 1997, the Company recorded a $90 million Merger-
related pre-tax special charge. Approximately $65 million of the charge related
to additional costs of the Consolidation Plan and the remainder of the charge
related to severance and other costs for non-union employees.
38 Burlington Northern Santa Fe Corporation
10 Hedging Activities
Fuel
Fuel expense historically approximates 10 percent of total operating expenses.
Due to the significance of diesel fuel expense to the operations of BNSF and the
historical volatility of fuel prices, the Company has established a program to
hedge against fluctuations in the price of its diesel fuel purchases. The intent
of the program is to protect the Company's operating margins and overall
profitability from adverse fuel price changes. However, to the extent the
Company hedges portions of its fuel purchases, it will not realize the impact of
decreases in fuel prices. The fuel hedging program includes the use of
commodity swap transactions that are accounted for as hedges. Any gains or
losses associated with changes in the market value of the fuel swaps are
deferred and recognized as a component of fuel expense in the period in which
the fuel is purchased and used. Based on 1999 fuel consumption and excluding the
impact of the hedging program, each one-cent increase in the price of fuel would
result in approximately $12 million of additional fuel expense on an annual
basis.
As of February 4, 2000, BNSF had entered into fuel swaps for approximately
869 million gallons at an average price of approximately 50 cents per gallon.
The above price does not include taxes, transportation costs, certain other fuel
handling costs, and any differences which may occur from time to time between
the prices of commodities hedged and the purchase price of BNSF's diesel fuel.
Currently, these fuel swaps cover approximately 41 percent, 23 percent, and 8
percent of estimated annual and quarterly fuel purchases for 2000, 2001, and
2002, respectively. Hedge positions are closely monitored to ensure that they
will not exceed actual fuel requirements in any period. Unrecognized gains from
BNSF's fuel swap transactions were approximately $37 million as of December 31,
1999, of which $33 million relates to swap transactions that will expire in
2000. BNSF also monitors its hedging positions and credit ratings of its
counterparties and does not anticipate losses due to counterparty
nonperformance.
Interest Rate
From time to time, the Company enters into various interest rate hedging
transactions for the purpose of managing exposure to fluctuations in interest
rates and establishing rates in anticipation of future debt issuances. As of
February 4, 2000, BNSF had no interest rate swap instruments in place. Swaps
totaling $125 million used to fix the interest rate on commercial paper debt
expired in December 1999. While the swaps were outstanding, BNSF recognized, on
an accrual basis, a fixed rate of interest on the principal amount of commercial
paper hedged over the term of the swap agreements.
In anticipation of future debt issuances, BNSF has entered into treasury
lock transactions totaling $400 million, of which $200 million is based on the
10-year U.S. Treasury rates and $200 million is based on the 30-year U.S.
Treasury rates. The 10-year and 30-year treasury lock transactions have average
interest rates of approximately 4.6 percent and 5.0 percent, respectively, and
expire in June 2000 and June 2001. These rates do not include a credit spread
which would be determined at the time of the actual debt issuance and included
in the all-in interest rate. The treasury locks can be closed by BNSF anytime
up to expiration. Unrecognized gains on the treasury lock transactions were
approximately $62 million as of December 31, 1999. BNSF also monitors its
treasury lock positions and credit ratings of its counterparties and does not
anticipate losses due to counterparty nonperformance.
In 1999, at the time of issuing $200 million of 6.1 percent notes, the
Company closed out $100 million of treasury lock transactions at a gain of $8
million. During 1998, at the time of issuing $400 million of debt, the Company
closed out $400 million of treasury lock transactions at a loss of
approximately $18 million. In each case the gain or loss has been deferred and
is being amortized to interest expense over the life of the debt.
11 Commitments and Contingencies
Lease Commitments
BNSF has substantial lease commitments for locomotives, freight cars, trailers,
office buildings and other property. Most of these leases provide the option to
purchase the equipment at fair market value at the end of the lease. However,
some provide fixed price purchase options. Future minimum lease payments (which
reflect leases having non-cancelable lease terms in excess of one year) as of
December 31, 1999 are summarized as follows (in millions):
December 31, 1999 1998
- ------------------------------------------- ------ ------
2000 $ 102 $ 285
2001 113 249
2002 106 226
2003 106 220
2004 106 207
Thereafter 529 2,535
------ ------
Total 1,062 $3,722
======
Less amount representing interest 271
- ------------------------------------------- ------
Present value of minimum lease payments $ 791
=========================================== ======
Lease rental expense for all operating leases was $440 million, $491 million
and $456 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Contingent rentals and sublease rentals were not significant.
Other Commitments
BNSF has entered into commitments to acquire 196 and 50 locomotives in 2000 and
2001, respectively. The locomotives will be financed from one or a combination
of sources including, but not limited to, cash from operations, capital or
operating leases, and debt issuances. The decision on the method used will
depend upon then current market conditions and other factors.
Environmental
BNSF's operations, as well as those of its competitors, are subject to extensive
federal, state and local environmental regulation. BNSF's operating procedures
include practices to protect the environment from the environmental risks
inherent in railroad operations, which frequently involve transporting chemicals
and other hazardous materials.
Burlington Northern Santa Fe Corporation 39
Additionally, many of BNSF's land holdings are and have been used for industrial
or transportation-related purposes or leased to commercial or industrial
companies whose activities may have resulted in discharges onto the property. As
a result, BNSF is subject to environmental clean-up and enforcement actions. In
particular, the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well as
similar state laws generally impose joint and several liability for clean-up and
enforcement costs without regard to fault or the legality of the original
conduct on current and former owners and operators of a site. BNSF has been
notified that it is a potentially responsible party (PRP) for study and clean-up
costs at approximately 33 Superfund sites for which investigation and
remediation payments are or will be made or are yet to be determined (the
Superfund sites) and, in many instances, is one of several PRPs. In addition,
BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA
and other federal and state statutes, BNSF may be held jointly and severally
liable for all environmental costs associated with a particular site. If there
are other PRPs, BNSF generally participates in the clean-up of these sites
through cost-sharing agreements with terms that vary from site to site. Costs
are typically allocated based on relative volumetric contribution of material,
the amount of time the site was owned or operated, and/or the portion of the
total site owned or operated by each PRP.
Environmental costs include initial site surveys and environmental
studies of potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when BNSF's liability for
environmental clean-up is both probable and a reasonable estimate of associated
costs can be made. Adjustments to initial estimates are recorded as necessary
based upon additional information developed in subsequent periods. BNSF conducts
an ongoing environmental contingency analysis, which considers a combination of
factors including independent consulting reports, site visits, legal reviews,
analysis of the likelihood of participation in and the ability of other PRPs to
pay for clean-up, and historical trend analyses.
BNSF is involved in a number of administrative and judicial
proceedings and other clean-up efforts at approximately 400 sites, including the
Superfund sites, at which it is participating in the study or clean-up, or
both, of alleged environmental contamination. BNSF paid approximately $67
million, $64 million and $55 million during 1999, 1998 and 1997, respectively,
for mandatory and unasserted clean-up efforts, including amounts expended under
federal and state voluntary clean-up programs. During 1999, the Company
experienced significant developments at certain existing sites primarily
related to new information on the extent of contamination and other related
developments that led the Company to increase its recorded liabilities for
remediation and restoration of all known sites to approximately $232 million at
December 31, 1999 from $185 million at December 31, 1998. BNSF anticipates that
the majority of the accrued costs at December 31, 1999, will be paid over the
next five years. No individual site is considered to be material.
Liabilities recorded for environmental costs represent BNSF's best
estimates for remediation and restoration of these sites and include both
asserted and unasserted claims. Unasserted claims are not considered to be a
material component of the liability. Although recorded liabilities include
BNSF's best estimates of all costs, without reduction for anticipated recoveries
from third parties, BNSF's total clean-up costs at these sites cannot be
predicted with certainty due to various factors such as the extent of
corrective actions that may be required, evolving environmental laws and
regulations, advances in environmental technology, the extent of other parties'
participation in clean-up efforts, developments in ongoing environmental
analyses related to sites determined to be contaminated, and developments in
environmental surveys and studies of potentially contaminated sites. As a
result, future charges to income for environmental liabilities could have a
significant effect on results of operations in a particular quarter or fiscal
year as individual site studies and remediation and restoration efforts proceed
or as new sites arise. However, management believes that it is unlikely that any
identified matters, either individually or in the aggregate, will have a
material adverse effect on BNSF's consolidated financial position or liquidity.
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.
12 Retirement Plans and Other Postemployment Benefit Plans
BNSF sponsors two significant defined benefit pension plans: the noncontributory
qualified BNSF Retirement Plan, which covers substantially all non-union
employees, and the nonqualified BNSF Supplemental Retirement Plan, which covers
certain officers and other employees. The benefits under BNSF's plans are based
on years of credited service and the highest five-year average compensation
levels. BNSF's funding policy is to contribute annually not less than the
regulatory minimum and not more than the maximum amount deductible for income
tax purposes.
40 Burlington Northern Santa Fe Corporation
Certain salaried employees of BNSF that have met certain age and years
of service requirements are eligible for medical benefits and life insurance
coverage during retirement. The retiree medical plan is contributory and
provides benefits to retirees, their covered dependents and beneficiaries.
Retiree contributions are adjusted annually. The plan also contains fixed
deductibles, coinsurance and out-of-pocket limitations. The life insurance plan
is noncontributory and covers retirees only. BNSF's policy is to fund benefits
payable under the medical and life insurance plans as they come due. Employees
beginning salaried employment with BNSF subsequent to September 22, 1995 are not
eligible for benefits under these plans.
Components of the net benefit costs for these plans were as follows (in
millions):
Pension Benefits
--------------------------
Year ended December 31, 1999 1998 1997
- ------------------------------------------- ------ ------ ------
Service cost $ 15 $ 15 $ 14
Interest cost 100 101 100
Expected return on plan assets (126) (117) (112)
Special termination benefits 10 - -
Net amortization and deferred amounts 3 4 4
- ------------------------------------------- ------ ------ ------
Net benefit cost $ 2 $ 3 $ 6
=========================================== ====== ====== ======
Medical and Life Benefits
--------------------------
Year ended December 31, 1999 1998 1997
- ------------------------------------------- ------ ------ ------
Service cost $ 5 $ 4 $ 4
Interest cost 17 16 14
Special termination benefits 6 - -
Net amortization and deferred amounts 1 - (1)
- ------------------------------------------- ------ ------ ------
Net benefit cost $ 29 $ 20 $ 17
=========================================== ====== ====== ======
The following tables show the change in benefit obligation and plan assets of
these plans (in millions):
Pension Medical and
Benefits Life Benefits
---------------- ----------------
Change in benefit obligation 1999 1998 1999 1998
- -------------------------------- ------ ------ ------ ------
Benefit obligation at
beginning of year $1,487 $1,404 $ 249 $ 190
Service cost 15 15 5 4
Interest cost 100 101 17 16
Plan participants' contributions - - 4 3
Amendments - - - 13
Actuarial (gain) loss (115) 85 (17) 39
Special termination benefits 10 - 6 -
Curtailment loss 7 - - -
Benefits paid (117) (118) (20) (16)
- -------------------------------- ------ ------ ------ ------
Benefit obligation at year end $1,387 $1,487 $ 244 $ 249
================================ ====== ====== ====== ======
Pension Medical and
Benefits Life Benefits
---------------- ----------------
Change in plan assets 1999 1998 1999 1998
- -------------------------------- ------ ------ ------ ------
Fair value of plan assets
at beginning of year $1,469 $1,540 $ - $ -
Actual return on plan assets 174 43 - -
Employer contribution 4 4 16 13
Plan participants' contributions - - 4 3
Benefits paid (117) (118) (20) (16)
- -------------------------------- ------ ------ ------ ------
Fair value of plan assets
at year end $1,530 $1,469 $ - $ -
================================ ====== ====== ====== ======
The following tables show the reconciliation of the funded status of these plans
with amounts recorded in the consolidated balance sheet (in millions):
Pension Medical and
Benefits Life Benefits
---------------- ----------------
December 31, 1999 1998 1999 1998
- -------------------------------- ------ ------ ------ ------
Funded status $ 143 $ (18) $ (244) $ (249)
Unrecognized net (gain) loss (151) 7 (7) 4
Unrecognized prior service cost (7) (8) 7 13
Unamortized net
transition obligation 9 11 - -
- -------------------------------- ------ ------ ------ ------
Net amount recognized $ (6) $ (8) $ (244) $ (232)
================================ ====== ====== ====== ======
Pension Medical and
Benefits Life Benefits
---------------- ----------------
December 31, 1999 1998 1999 1998
- -------------------------------- ------ ------ ------ ------
Amounts recognized in
the consolidated balance
sheet consist of:
Prepaid benefit cost $ 24 $ 20 $ - $ -
Accrued benefit liability (44) (43) (244) (232)
Intangible asset 2 2 - -
Accumulated other
comprehensive deficit 12 13 - -
- -------------------------------- ------ ------ ------ ------
Net amount recognized $ (6) $ (8) $ (244) $ (232)
================================ ====== ====== ====== ======
BNSF uses a September 30 measurement date. The assumptions used in accounting
for the BNSF plans were as follows:
Pension Medical and
Benefits Life Benefits
---------------- ----------------
Assumptions 1999 1998 1999 1998
- -------------------------------- ------ ------ ------ ------
Discount rate 7.5% 7.0% 7.5% 7.0%
Rate of increase in
compensation levels 4.0% 4.0% N/A N/A
Expected return on plan assets 9.5% 9.5% N/A N/A
- -------------------------------- ------ ------ ------ ------
For purposes of the medical and life benefits calculations for 1999, the assumed
health care cost trend rate for both managed care and non-managed care medical
costs is 8.5 percent and is assumed to decrease gradually to 5 percent by 2005
and remain constant thereafter. Increasing the assumed health care cost trend
rates by one percentage point would increase the accumulated postretirement
benefit obligation by $18 million and the combined service and interest
components of net postretirement benefit cost recognized in 1999 by $2 million.
Decreasing the assumed health care cost trend rates by one percentage point
would decrease the accumulated postretirement benefit obligation by $15 million
and the combined service and interest components of net postretirement
benefit cost recognized in 1999 by $2 million.
Other Plans
Under collective bargaining agreements, BNSF participates in multi-employer
benefit plans which provide certain postretirement health care and life
insurance benefits for eligible union employees. Insurance premiums paid
attributable to retirees, which are generally expensed as incurred, were $14
million, $18 million and $15 million, in 1999, 1998 and 1997, respectively.
Defined Contribution Plans
BNSF sponsors 401(k) thrift and profit sharing plans which cover substantially
all non-union employees and certain union employees. BNSF matches 50 percent of
the first 6 percent of non-union employees' contributions, which are subject
Burlington Northern Santa Fe Corporation 41
to certain percentage limits of the employees' earnings, at each pay period.
Depending on BNSF's performance, an additional matching contribution of up to 30
percent of the first 6 percent can be made at the end of the year. Employer
contributions for all non-union employees are subject to a five year length of
service vesting schedule. BNSF's 401(k) matching expense was $18 million, $16
million and $14 million in 1999, 1998 and 1997, respectively.
13 Stock Options and Other Incentive Plans
On April 15, 1999, BNSF shareholders approved 20 million shares of BNSF common
stock for issuance under the BNSF 1999 Stock Incentive Plan which were
authorized to be issued in the form of stock options, restricted stock,
restricted stock units and performance stock. Total shares authorized under the
BNSF 1999 and 1996 Stock Incentive Plans and the Non-Employee Directors' Stock
Plan (NEDS) are up to 50 million and 0.9 million shares of BNSF common stock,
respectively. Approximately 14 million common shares were available for future
grant at December 31, 1999.
Stock Options
Under BNSF's stock option plans, options may be granted to officers and salaried
employees at the fair market value of the Company's common stock on the date of
grant. All options generally vest in one year and expire within 10 years after
the date of grant. Shares issued upon exercise of options may be issued from
treasury shares or from authorized but unissued shares.
The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for its fixed stock option plans as the
exercise price equals the stock price on the date of grant. Had compensation
expense been determined for stock options granted in 1999, 1998 and 1997 based
on the fair value at grant dates consistent with Statement of Financial
Accounting Standards (SFAS) No. 123 "Accounting for Stock Based Compensation,"
the Company's pro forma net income and earnings per share would have been as
follows:
1999 1998 1997
- ------------------------------------------- ------ ------ ------
Net income (in millions) $1,092 $1,124 $ 857
Basic earnings per share $ 2.36 $ 2.39 $ 1.85
Diluted earnings per share $ 2.34 $ 2.36 $ 1.82
- ------------------------------------------- ------ ------ ------
The pro forma amounts were estimated using the Black-Scholes option pricing
model with the following assumptions:
1999 1998 1997
- ------------------------------------------- ------ ------ ------
Weighted average expected
life (years) 3.0 3.0 3.0
Expected volatility 30% 20% 20%
Annual dividend per share $ 0.48 $ 0.48 $ 0.40
Risk free interest rate 6.63% 5.11% 5.81%
Weighted average fair value
of options granted $ 8.43 $ 5.13 $ 5.15
- ------------------------------------------- ------ ------ ------
A summary of the status of the stock option plans as of December 31, 1999, 1998
and 1997, and changes during the years then ended, is presented below:
1999 1998 1997
------------------------------ ----------------------------- ------------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Prices Options Exercise Prices Options Exercise Prices
- ----------------------------- ---------- ---------------- ---------- ---------------- ---------- ----------------
Balance at beginning of
year 28,135,869 $ 24.27 25,761,369 $ 20.98 24,765,855 $ 16.49
Granted 9,857,345 32.96 9,587,926 29.33 8,778,036 29.40
Exercised (6,315,238) 21.24 (6,666,864) 18.66 (7,092,690) 15.46
Cancelled (1,869,819) 30.94 (546,562) 26.25 (689,832) 23.58
- ----------------------------- ---------- --------------- ---------- --------------- ---------- ---------------
Balance at end of year 29,808,157 $ 27.37 28,135,869 $ 24.27 25,761,369 $ 20.98
============================= ========== =============== ========== =============== ========== ===============
Options exercisable at
year end 20,710,679 $ 25.00 17,763,770 $ 21.45 16,419,858 $ 16.31
============================= ========== =============== ========== =============== ========== ===============
The following table summarizes information regarding stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Range of Number Weighted Average Weighted Average Number Weighted Average
Exercise prices Outstanding Remaining Life Exercise Prices Exercisable Exercise Prices
- ----------------------------- ----------- --------------- ---------------- ----------- ----------------
$ 3.01 to $24.83 7,514,077 4.6 Years $ 17.42 7,514,077 $ 17.42
$26.73 to $29.10 7,756,421 7.7 Years $ 28.89 7,366,221 $ 28.89
$29.38 to $32.58 5,510,894 7.1 Years $ 29.60 5,507,809 $ 29.60
$32.84 to $36.73 9,026,765 9.0 Years $ 32.99 322,572 $ 34.15
- ----------------------------- ----------- --------------- ---------------- ----------- ----------------
$ 3.01 to $36.73 29,808,157 7.2 Years $ 27.37 20,710,679 $ 25.00
============================= =========== =============== ================ =========== ================
42 Burlington Northern Santa Fe Corporation
On January 12, 2000, 10.8 million stock options were granted to active salaried
employees as of January 11, 2000. These options have an exercise price equal to
the fair market value of BNSF common stock on the date of grant and will vest
and expire one year and ten years, respectively, from the date of grant.
Stock options totaling 8.9 million and 21.4 million were excluded from the
calculation of diluted earnings per share in the third and fourth quarters of
1999, respectively, because their exercise price exceeded the average market
price of the Company's common stock for those periods.
Other Incentive Plans
BNSF has other long-term incentive programs in addition to stock options which
are administered separately on behalf of employees.
BNSF awarded a total of approximately 1.2 million shares of restricted
stock subject to performance periods to eligible employees and directors during
1996. No cash payment is required by the individuals. The restrictions will be
lifted in thirds over three years beginning on the third anniversary of the
grant date if certain stock price based performance goals are met. If, however,
the performance goals are not met, the restricted shares will be forfeited. All
shares still subject to restrictions are generally forfeited and returned to the
plan if the employee's or director's relationship is terminated. Approximately
700 thousand restricted shares related to this award were outstanding as of
December 31, 1999.
Under the BNSF 1999 and 1996 Stock Incentive Plans certain eligible
employees may defer through the BNSF Incentive Bonus Stock Program (IBSP) the
cash payment of their bonus paid under the Incentive Compensation Plan (ICP)
and receive restricted stock for which restrictions lapse in three years (or in
two years if certain performance goals are met). The number of restricted shares
awarded are based on the amount of bonus deferred, plus incremental shares,
using the market price of BNSF common stock on the date of grant. Restricted
awards granted under this program totaled approximately 400 thousand, 380
thousand and 360 thousand shares in 1999, 1998 and 1997, respectively. A total
of approximately 1.0 million shares were outstanding under this and prior
programs of this type on December 31, 1999.
In addition, all regularly-assigned salaried employees not eligible to
participate in the IBSP are eligible to participate in the BNSF Discounted Stock
Purchase Program. This program allows employees to use their bonus earned under
the ICP to purchase BNSF common stock at a discount from the market price and
requires that the stock be restricted for a three year period. During the years
ended December 31, 1999, 1998 and 1997, approximately 65 thousand, 55 thousand
and 85 thousand shares, respectively, were purchased under this program.
Additionally, the Company periodically issues time vesting restricted
shares, which generally vest ratably over five years. Restricted stock awards
under these plans, net of forfeitures, were approximately 330 thousand, and 90
thousand for the years ended December 1999 and 1997, respectively. A total of
365 thousand restricted shares related to these awards were outstanding on
December 31, 1999.
Shares awarded under the plans may not be sold or used as collateral, and
are generally not transferable, by the holder until the shares awarded become
free of restrictions. Compensation expense is recorded under the BNSF Stock
Incentive Plans in accordance with APB Opinion 25 and was not material in 1999,
1998 or 1997.
14 Common Stock and Preferred Capital Stock
Common Stock
BNSF is authorized to issue 600 million shares of common stock, $.01 Par Value.
At December 31, 1999, there were 454.6 million shares of common stock
outstanding. Each holder of common stock is entitled to one vote per share in
the election of directors and on all matters submitted to a vote of stock-
holders. Subject to the rights and preferences of any future issuances of
preferred stock, each share of common stock is entitled to receive dividends as
may be declared by the Board of Directors out of funds legally available and to
share ratably in all assets available for distribution to stockholders upon
dissolution or liquidation. No holder of common stock has any preemptive right
to subscribe for any securities of BNSF.
Shareholder Rights Plan
In December 1999, BNSF's Board of Directors (the Board) approved a shareholder
rights plan (Rights Plan). In connection with the Rights Plan, the Board
declared a dividend of one Preferred Stock Purchase Right (Right or Rights) for
each outstanding share of BNSF common stock to shareholders of record on
December 31, 1999. Shareholders are automatically entitled to the Rights
corresponding to their shares owned. The distribution is not taxable to
shareholders under current United States tax laws. Adoption of the Rights Plan
was required by the terms of the Combination Agreement, as amended, discussed in
Note 1.
Subject to certain exceptions, each Right will be exercisable only if a
person or group acquires 15 percent or more of BNSF common stock or announces a
tender or exchange offer which would result in ownership of 15 percent or more
of BNSF common stock. Each Right, which is not presently exercisable, will
entitle its holder to buy one one-hundredth of a share of Series B Junior
Participating Preferred Stock at an exercise price of $100, subject to
adjustment. Following the acquisition of 15 percent or more of BNSF common
stock by a person or group, each holder of a Right (other than the acquiring
person or group) will be entitled to purchase, upon exercise at the stated
exercise price of the Right, common stock having a value equal to two times the
exercise price of the Right. In the event of a subsequent combination or merger
or other acquisition of the Company, each holder of a Right, upon exercise at
the stated exercise price of the Right, will be entitled to buy shares of common
stock of the acquiring or surviving entity having a value equal to two times the
exercise price of the Right. A Right is redeemable for $0.01 per Right, subject
to adjustment, before the control by a person or group of 15 percent or more of
BNSF common stock. Each Right will expire on December 18, 2009 or earlier upon
BNSF becoming a subsidiary of North American Railways pursuant to the
Combination Agreement, as amended, or upon redemption of the Rights by BNSF.
Burlington Northern Santa Fe Corporation 43
Preferred Capital Stock
At December 31, 1999, BNSF had 50 million shares of Class A Preferred Stock,
$.01 Par Value and 25 million shares of Preferred Stock, $.01 Par Value
available for issuance. The Board of Directors has the authority to issue such
stock in one or more series, to fix the number of shares and to fix the
designations and the powers, rights, and qualifications and restrictions of each
series.
Common Stock Repurchase Program
In July 1997, the Board of Directors of BNSF authorized the repurchase of up to
30 million shares of the Company's common stock from time to time in the open
market. In December 1999, the Board of Directors extended the repurchase
program by approving an additional 30 million shares. Repurchased shares will be
available to satisfy future requirements of various stock-based employee com-
pensation programs. During 1999 and 1998, the Company repurchased approximately
22 million and 5 million shares, respectively, of its common stock at an average
price of $31.08 per share and $30.75 per share, respectively. There were no
repurchases under this program in 1997. Total repurchases through February 4,
2000, were approximately 33 million shares at a total average cost of $29.86 per
share leaving 27 million shares available for repurchase under the
authorization.
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 $2.2 million. The option contracts had exercise
prices ranging from $29.00 to $30.00 per share with expiration dates ranging
from November, 1998 to February, 1999. The option contracts permitted a net-
share or net-cash settlement method at BNSF's election. These options expired
unexercised. In April 1999, BNSF sold equity put options for 100 thousand
shares of BNSF common stock to an independent third party and received cash
proceeds of $135 thousand. The third party exercised the options on October 12,
1999, which resulted in the Company purchasing 100 thousand shares of its
common stock at $29 per share.
An equity put option is a financial instrument whereby BNSF receives an
upfront cash premium for granting another party the option to sell a defined
number of BNSF shares to the Company at a fixed price on a specified future
date. The Company considers the sale of equity put options as a method to
acquire its common stock at a share price consistent with its share repurchase
strategy and potentially reduce the all-in cost of the program. The Company's
risk is that it may be required to purchase shares at a specified price that is
higher than the common stock price at the exercise date of the equity put
option. The Company has the ability to settle its equity put option transactions
on a net share or net cash basis and accounts for the effects of these
transactions within stockholders' equity. The number of shares subject to
outstanding put options sold by the Company cannot exceed the amount of
remaining shares the Board of Directors has authorized for repurchase. As of
February 4, 2000 there were no equity put options outstanding.
15 Quarterly Financial Data--Unaudited
(Dollars in millions, except per share data)
Fourth Third Second First
- ---------------------------------------------------------------------------
1999
Revenues $2,370 $2,346 $2,194 $2,190
- ---------------------------------------------------------------------------
Operating income 603 631 491 480
- ---------------------------------------------------------------------------
Net income $ 315 $ 348 $ 238 $ 236
- ---------------------------------------------------------------------------
Basic earnings per share $ .69 $ .76 $ .51 $ .50
Diluted earnings per share $ .69 $ .75 $ .50 $ .50
Dividends declared per share $ .12 $ .12 $ .12 $ .12
Common stock price:
High $32.75 $33.38 $37.94 $36.44
Low 22.88 25.63 29.75 31.56
- ---------------------------------------------------------------------------
1998
Revenues $2,294 $2,294 $2,205 $2,148
- ---------------------------------------------------------------------------
Operating income 568 614 529 447
- ---------------------------------------------------------------------------
Net income $ 296 $ 317 $ 277 $ 265
- ---------------------------------------------------------------------------
Basic earnings per share $ .63 $ .67 $ .59 $ .56
Diluted earnings per share $ .63 $ .66 $ .58 $ .56
Dividends declared per share $ .12 $ .12 $ .10 $ .10
Common stock price:
High $34.81 $35.58 $35.71 $35.65
Low 28.63 26.87 31.25 28.08
- ---------------------------------------------------------------------------
44 Burlington Northern Santa Fe Corporation