CONSOLIDATED FINANCIAL HIGHLIGHTS
Burlington Northern Santa Fe Corporation and Subsidiaries
(Dollars in millions, except per share data)
The selected financial data shown below include BNSF results for each of the
years ended December 31, 1998, 1997 and 1996, Burlington Northern Inc. results
for each of the two years ended December 31, 1995, and Santa Fe Pacific
Corporation results from September 22, 1995 through December 31, 1995.
- ---------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED:
Revenues $ 8,941 $ 8,370 $ 8,109 $ 6,099 $4,894
Operating income/(1)/ 2,158 1,767 1,748 526 853
Income before extraordinary item and cumulative
effect of change in accounting method/(2)/ 1,155 885 889 198 426
Accounting change/Extraordinary item/(3)(4)/ -- -- -- (106) (10)
Net income $ 1,155 $ 885 $ 889 $ 92 $ 416
Earnings available for common stockholders $ 1,155 $ 885 $ 889 $ 71 $ 394
Basic earnings per share:/(5)/
Before extraordinary item and change in
accounting method $ 2.45 $ 1.91 $ 1.95 $ .57 $ 1.51
Accounting change/Extraordinary item -- -- -- (.34) (.04)
Basic earnings per share $ 2.45 $ 1.91 $ 1.95 $ .23 $ 1.47
Average shares (in millions) 470.5 464.4 456.3 313.2 267.3
Diluted earnings per share:/(5)/
Before extraordinary item and change in
accounting method $ 2.43 $ 1.88 $ 1.91 $ .55 $ 1.46
Accounting change/Extraordinary item -- -- -- (.33) (.03)
Diluted earnings per share $ 2.43 $ 1.88 $ 1.91 $ .22 $ 1.43
Average shares (in millions) 476.2 471.1 464.4 317.7 291.3
Dividends declared per common share/(5)/ $ .44 $ .40 $ .40 $ .40 $ .40
- -------------------------------------------------- ------- ------- ------- ------- ------
AT YEAR END:
Total assets $22,690 $21,336 $19,763 $18,269 $7,592
Long-term debt and commercial paper,
including current portion 5,456 5,289 4,711 4,233 1,819
Stockholders' equity 7,770 6,812 5,981 5,037 2,237
Total debt to capital 41% 44% 44% 46% 45%
- -------------------------------------------------- ------- ------- ------- ------- ------
FOR THE YEAR ENDED:
Capital expenditures $ 2,147 $ 2,182 $ 2,234 $ 890 $ 698
Depreciation and amortization 832 773 760 520 362
Operating ratio/(6)/ 75.9% 77.8% 78.4% 79.3% 82.6%
- -------------------------------------------------- ------- ------- ------- ------- ------
(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) Includes items in note (1) above. Additionally, 1998 includes a $32 million
after tax gain on the sale of substantially all of the Company's interest in
Santa Fe Pacific Pipeline Partners, L.P. as discussed in Note 2 of the
financial statements.
(3) 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 (after tax).
(4) 1994 includes the cumulative effect of the implementation of the accounting
standard for post-employment benefits.
(5) Information for prior periods has been restated to reflect the 1998 three-
for-one common stock split.
(6) 1997 and 1995 operating ratios exclude the pre-tax charges discussed in note
(1) above.
BURLINGTON NORTHERN SANTA FE CORPORATION 1
FINANCIAL CONTENTS
15 Management's Discussion and Analysis
25 Report of Management
25 Report of Independent Accountants
26 Consolidated Statement of Income
27 Consolidated Balance Sheet
28 Consolidate Statement of Cash Flows
29 Consolidated Statement of Changes in Stockholders' Equity
30 Notes to Consolidated Financial Statements
- --------------------------------------------------------------
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, 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 $885 million ($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
real estate portfolio sales and a first quarter 1998 $67 million pre-tax gain
($32 million after-tax or $0.07 per share) on the sale of substantially all of
the Company's interest in Santa Fe Pacific Pipeline Partners, L.P. also
contributed to the improvement. In addition, 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).
Excluding the 1998 gain on the pipelines sale and the 1997 special charge,
BNSF's adjusted net income for 1998 was $1,123 million ($2.36 per share)
compared with 1997 adjusted net income of $942 million ($2.00 per share)
- --------------------------------------------------------------------------------
REVENUE TABLE
The following table presents BNSF's revenue information by commodity for the
years ended December 31, 1998, 1997 and 1996 and includes certain
reclassifications of prior year information to conform to current year
presentation.
Revenues Can/Units Average Revenue Per Can/Units
------------------------------ ---------------------------- -----------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
(IN MILLIONS) (IN THOUSANDS)
------ ------ ------ ------ ------ ------ ------ ------ ------
Intermodal $2,469 $2,282 $2,039 3,126 2,854 2,570 $ 790 $ 800 $ 793
Coal 2,239 1,972 1,973 2,078 1,862 1,854 1,077 1,059 1,064
Agriculture Commodities 1,077 1,087 1,171 581 577 587 1,854 1,884 1,995
Chemicals 841 812 782 504 482 460 1,669 1,685 1,700
Metals and Minerals 757 731 693 660 622 628 1,147 1,175 1,104
Forest Products 598 564 548 344 335 334 1,738 1,684 1,641
Consumer Goods 553 497 468 365 349 308 1,515 1,424 1,519
Automotive 388 422 396 226 264 251 1,717 1,598 1,578
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Freight Revenues 8,922 8,367 8,070 7,884 7,345 6,992 $1,132 $1,139 $1,154
====== ====== ====== ====== ====== ======
Other Revenues 19 3 39
- ------------------------- ------ ------ ------
Total Revenues $8,941 $8,370 $8,109
========================= ====== ====== ======
REVENUES
Total revenues for 1998 were $8,941 million, 7 percent or $571 million higher
than revenues of $8,370 million for 1997. The increase primarily reflects
increases in the intermodal, coal, chemicals, metals and minerals, forest
products, and consumer goods sectors partially offset by lower agricultural
commodities and 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
Association of American Railroads (AAR), increased 2.9 points to 44.3 percent.
This gain was primarily the result of the trackage rights gained from Union
Pacific Corporation (UP) and operating problems experienced by the UP associated
with consolidating operations.
Intermodal revenues of $2,469 million improved $187 million or 8 percent
compared with 1997 reflecting increases in the direct marketing, international
and truckload sectors. Direct marketing revenues benefited from increased units
shipped for UPS, less than truckload (LTL) customers and the United States
Postal Service. International revenues were up due to higher volume associated
with market share gains
BURLINGTON NORTHERN SANTA FE CORPORATION 15
and new business established with Sealand, NYK, Maersk and K-Line. Truckload
revenues increased primarily 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 gains associated with market
share improvements and favorable operating conditions as a result of a more
moderate winter in 1998.
Agricultural commodities revenues of $1,077 million for 1998 were $10
million or 1 percent lower than 1997 due to poor Pacific Northwest (PNW) corn
and soybeans exports as well as weak barley exports. This was partially offset
by increased movements of minor oilseeds exports.
Chemicals revenues of $841 million for 1998 were $29 million or 4 percent
higher than 1997. Increases in industrial chemicals, petroleum products and
plastics were partially offset by weak fertilizer markets.
Metals and minerals revenues of $757 million for 1998 were $26 million or 4
percent higher than 1997 and were led primarily by strength in aluminum and non-
ferrous materials as well as volume increases in steel products, cement and rock
and specialty minerals.
Forest products revenues of $598 million for 1998 were $34 million or 6
percent higher than 1997 primarily due to printing paper volume gains as 1997
was impacted by severe winter weather, increased Canadian newsprint imports and
pulpboard volume gains as a result of market share gains. Lumber volumes
increased due to higher levels of construction activity.
Consumer goods revenues of $553 million for 1998 were $56 million or 11
percent higher than 1997 primarily due to volume increases in corn syrup traffic
to Mexico, Texas and California and increased sugar traffic as 1997 was impacted
by severe winter weather. Government and machinery revenues increased as a
result of increased Boeing traffic.
Automotive revenues of $388 million for 1998 were $34 million or 8 percent
lower than 1997 reflecting decreases in volumes due to the loss of Ford's
Southwestern U.S. business and the impact of the 1998 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 higher than 1997. As discussed above, 1997 included a $90
million ($57 million after-tax) special charge principally related to the
consolidation of clerical functions. Excluding the special charge, 1998
operating expenses were $270 million or 4 percent higher than 1997. The
operating ratio improved to 75.9 percent for 1998 compared with a 77.8 percent
adjusted operating ratio for 1997.
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, wage increases for 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 expenses 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 performance penalties
for grain cars were partially offset by volume driven increases for leased coal
cars and locomotives.
Fuel expenses of $724 million for 1998 were $23 million or 3 percent lower
than 1997, as a result of a 6 cent or 8 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 the 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 a continuing favorable operating trend resulting
from new, fuel efficient locomotives and more fuel efficient operating
practices.
Materials and other expenses of $717 million for 1998 were $42 million or 6
percent higher than 1997 principally due to lower credits from joint facility
billings due to lower UP traffic levels on BNSF facilities. Other expenses in
1997 also included more income from the sale of easements and higher 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 by $64 million compared to 1997
primarily due to the $67 million pre-tax gain on the pipeline partnership sale
in the first quarter of 1998 as discussed in Note 2: Sale of Investment in
Pipeline Partnership. In addition, lower equity in earnings of pipelines due to
the first quarter sale of this investment was offset by gains on real estate
portfolio sales.
16 BURLINGTON NORTHERN SANTA FE CORPORATION
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
BNSF recorded net income for 1997 of $885 million ($1.88 per share), compared
with net income of $889 million ($1.91 per share) for 1996. The decrease in net
income is primarily due to a fourth quarter special charge of $90 million ($57
million after-tax or $.12 per share) principally related to the consolidation of
clerical functions (see Other Matters: Employee Merger and Separation Costs).
This was largely offset by improved operating results in 1997 despite severe
weather conditions in the first quarter of 1997 throughout the Northern Plains
and the PNW. The financial impact of recurring and protracted outages on many
parts of the system, the cost of repairing track, signals and equipment, and the
operating inefficiencies caused by the weather is virtually impossible to
measure with precision. However, the Company estimates that the severe weather
in the first quarter of 1997 resulted in lost revenue opportunities of
approximately $100 million and increased operating expenses by at least $50
million. Excluding the fourth quarter special charge, net income for 1997 was
$942 million ($2.00 per share) compared with 1996 net income of $889 million
($1.91 per share).
REVENUES
Total revenues for 1997 were $8,370 million or 3 percent higher compared with
revenues of $8,109 million for 1996. The $261 million increase primarily
reflects increases in the intermodal, consumer goods, metals and minerals,
chemicals, automotive, and forest products sectors partially offset by lower
agricultural commodities revenues. Average revenue per car/unit decreased
slightly in 1997 to $1,139 from $1,154 in 1996. During 1997, BNSF'S share of the
Western U.S. rail traffic market, based on reporting to the AAR, increased 1.8
points to 41.4 percent. This gain was primarily the result of the trackage
rights gained from UP and operating problems experienced by the UP associated
with consolidating operations.
Intermodal revenues improved $243 million or 12 percent compared with 1996,
due to increased volume growth in the direct, international, truckload, and
international marketing companies sectors. The direct sector experienced a 14
percent growth in revenues primarily due to an 18 percent gain in loadings.
Direct sector growth was due to volume increases from LTL shipments led by
Yellow Freight, Consolidated Freightways and Roadway. LTL volume from Yellow
Freight, Consolidated Freightways, and Roadway has grown substantially all year
with growth accelerating in the 2nd, 3rd, and 4th quarters in particular due to
Yellow Freight's change of operations completed in April 1997. International
revenues increased 10 percent from 1996 due to an 8 percent increase in units
moved. International growth has been the result of a strong import economy and
increased market share by steamship lines such as Hyundai, OOCL, and Cosco.
Truckload revenues increased 21 percent due to a 20 percent increase in
loadings, primarily attributable to strength in the Company's Chicago to
California and Southeast to California corridors.
Agricultural commodities revenues decreased $84 million, or 7 percent, due
primarily to a decrease in shipments of wheat for export in the first and second
quarters due to the U.S. uncompetitiveness in the world market and severe
weather conditions in the Northern Plains and PNW in the first quarter. Some of
the volume losses were partially offset by an increased number of shorter haul,
lower revenue movements from the southern U.S. plains wheat region. Agricultural
commodities revenues were also unfavorably impacted by lower revenue per car for
corn movements and volume declines in barley traffic.
Chemicals revenues increased $30 million, or 4 percent, primarily due to
higher demand for petroleum products and plastics. Chemicals carloadings
increased 4 percent due to additional traffic from Texas Gulf Coast shippers.
Rate increases in petroleum products offset average revenue per car decreases in
agricultural minerals and industrial products.
Metals and minerals revenues increased $38 million, or 5 percent, primarily
due to strength in steel products as well as volume increases in clay and
aggregates, sand, rock and specialty minerals and sodium compounds. This was
partially offset by a decrease in shipments of cement, gypsum and lime.
Consumer goods revenues increased $29 million, or 6 percent, primarily due to
growth in the government and machinery and bulk foods sectors. Overall consumer
goods carloadings increased 13 percent. Volume gains in bulk foods were the
result of strong corn syrup and sugar loadings, while gains in government and
machinery was the result of special moves for Boeing and additional military
movements.
Automotive revenues increased $26 million, or 7 percent, due to a 5 percent
volume gain in motor vehicle and vehicle parts traffic. BNSF experienced gains
in units moved for Honda and General Motors which were partially offset by
reduced Ford shipments. Revenue per revenue ton mile decreased 9 percent due to
changes in the traffic mix.
EXPENSES
Total operating expenses for 1997 were $6,603 million or $242 million higher
compared with expenses of $6,361 million for 1996. As discussed above, the
Company recorded a $90 million ($57 million after-tax) special charge in the
fourth quarter of 1997 primarily related to the consolidation of clerical
functions. Excluding the special charge, operating expenses for 1997 were $6,513
million, $152 million or
BURLINGTON NORTHERN SANTA FE CORPORATION 17
2 percent higher than 1996. The adjusted operating ratio for 1997 was 77.8
percent, compared with an operating ratio of 78.4 percent for 1996.
Compensation and benefits expenses of $2,675 million were $114 million or 4
percent higher than 1996. A majority of the increase was due to higher labor
costs associated with weather-related repairs to track and equipment and slower
operations. Wages were also higher due to volume related increases in train crew
costs and wage increases for salaried and union employees.
Purchased services expenses of $823 million increased $23 million, or 3
percent, compared with 1996 due to higher ramping and drayage costs related to
increased intermodal volumes. Joint facility costs were also higher due to
operations over trackage rights gained as a condition of the merger of UP and
Southern Pacific Corporation. This increase was partially offset by lower
professional service expenses.
Equipment rents expenses of $820 million were $84 million, or 11 percent,
higher than 1996. Lower equipment utilization and higher volumes resulted in
increased locomotive rents and higher time and mileage expenses for rail car and
intermodal trailers and flat cars. In addition, equipment related performance
penalties for grain cars increased $19 million from 1996.
Fuel expenses of $747 million were $20 million higher than in 1996 due to a 1
percent increase in the average price paid per gallon of diesel fuel as well as
a 2 percent increase in consumption due to volume. Gross ton miles per gallon of
fuel increased by 2 percent due to additional new, fuel-efficient locomotives
and the adoption of more fuel-efficient operating practices.
Materials and other expenses of $675 million were $102 million lower than 1996
partially due to lower derailment and personal injury expenses reflecting the
continuing benefits of employee safety programs. Other expenses were also
reduced by income from the sale of signboard easements and tax incentives from
the State of Nebraska related to investment and employment levels in the state.
Interest expense of $344 million was $43 million higher than in 1996,
primarily due to higher debt levels, which increased from $4,711 million at
December 31, 1996 to $5,289 million at December 31, 1997.
Other income (expense), net was $12 million below 1996. The increase in
expense is due to higher fees from the sale of accounts receivable reflecting an
increase in receivables sold and lower profits from land sales.
Income tax expense of $519 million was $32 million lower in 1997 due to lower
pre-tax income and a lower effective tax rate due to adjustments to prior years'
tax estimates.
CAPITAL RESOURCES AND LIQUIDITY
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.
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 ageements.
The bank revolving credit agreements allow borrowings of up to $425 million on a
short-term basis and $1.5 billion on a long-term basis. Annual facility fees are
currently 0.075 percent and 0.09 percent, respectively, and are subject to
change based upon changes in BNSF's senior unsecured debt ratings. Borrowing
rates are based upon i) LIBOR plus a spread based upon BNSF's senior unsecured
debt ratings, ii) money market rates offered at the option of the lenders, or
iii) an alternate base rate. The commitments of the lenders under the short-term
agreement were extended on November 12, 1998 and are currently scheduled to
expire on June 15, 1999. The commitments of the lenders under the long-term
agreement are scheduled to expire on November 12, 2002.
At December 31, 1998, there were no borrowings against the revolving credit
agreements and the maturity value of commercial paper outstanding was $474
million, leaving a total remaining capacity of $1,026 million available under
the long-term revolving credit agreement and $425 million available under the
short-term credit agreement.
OPERATING ACTIVITIES
Net cash provided by operating activities was $2,218 million during 1998
compared with $1,814 million during 1997. The increase in cash from operations
was primarily due to higher net income before depreciation and amortization and
deferred taxes, a decrease in cash used for working capital reflecting the
timing of payments, and a decrease in payments for employee merger and
separation costs.
INVESTING ACTIVITIES
Net cash used for investing activities during 1998 was $2,418 million,
principally comprised of $2,147 million in capital expenditures.
A breakdown of cash capital expenditures is set forth in the following table
(in millions):
Year ended December 31, 1998 1997 1996
- ----------------------- ------ ------ ------
Maintenance of Way $ 917 $ 974 $ 854
Equipment 583 572 514
Expansion Projects 488 428 439
Other 159 208 427
- ----------------------- ------ ------ ------
Total $2,147 $2,182 $2,234
- ----------------------- ------ ------ ------
18 BURLINGTON NORTHERN SANTA FE CORPORATION
Maintenance of way expenditures for 1998 decreased primarily due to use of a
higher proportion of second hand rail and reduced tie renewal projects.
Equipment expenditures were higher in 1998 reflecting increases for
remanufactured freight cars, mechanical shops and shop machinery, partially
offset by lower locomotive purchases as more locomotives were acquired through
operating leases. Expansion projects in both 1998 and 1997 principally reflect
double and triple tracking of main line track and expansion of intermodal
terminals. Other projects for 1998 decreased primarily as a result of spending
for merger related improvements in 1997 which did not occur in 1998, partially
offset by higher capitalized software and computer hardware costs.
BNSF has entered into commitments to acquire 476 locomotives in 1999. 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 the current market
conditions and other factors at the time of financing. Beginning in 2000, the
Company expects new locomotive acquisitions to significantly decline compared to
1999. BNSF has currently committed to acquire 196 and 50 locomotives in 2000 and
2001, respectively.
FINANCING ACTIVITIES
Net cash provided by financing activities during 1998 was $194 million,
primarily related to net proceeds from total debt of $440 million and proceeds
from stock options exercised of $111 million, partially offset by dividend
payments of $197 million and common share repurchases of $153 million.
In March 1998, BNSF issued $100 million of 6.05 percent medium-term notes due
March 15, 2031, under the August 1997 shelf registration of debt securities. The
notes included a provision that gave the Company a call option to purchase all
of the notes from the holders in 2001. In connection with the debt issuance, the
Company sold the call option to a third party and received cash of $4 million,
which has been deferred and is being amortized to interest expense over the life
of the debt. If the third party exercises the call option, the third party will
repurchase the notes from the holders and remarket them. If the call option is
not exercised, the Company must repurchase the notes from the holders. The net
proceeds from the sale of the notes were used for general corporate purposes
including the repayment of commercial paper. Subsequent to this transaction, the
August 1997 shelf registration had $250 million of potential borrowings
remaining.
In March 1998, the Company filed a shelf registration of debt securities,
including medium-term notes that may be issued in one or more series at an
aggregate offering price not to exceed $500 million. In April 1998, prior to the
effective date of the March 1988 shelf registration, the Company amended the
August 1997 shelf registration to combine it with the March 1998 shelf
registration.
In July 1998, BNSF issued $200 million of 6.70 percent debentures due August
1, 2028, and in November 1998 BNSF issued $200 million of puttable reset
debentures (PURS) due May 13, 2029, under the March 1998 shelf registration of
debt securities. The net proceeds from the sale of the debentures were used for
general corporate purposes, including the repayment of commercial paper. As of
December 31, 1998, the March 1998 shelf registration had $350 million of
potential borrowings remaining.
The PURS included a provision that gave the Company a call option to purchase
all of the debentures from the holders on May 13, 1999. In connection with the
debt issuance, the Company sold the call option to a third party and received
cash of $12 million, which was deferred and is being amortized to interest
expense over the life of the debt. In addition, the Company closed out $200
million of treasury lock transactions at a loss of approximately $11 million
which was deferred and is being amortized to interest expense over the life of
the debt. Until May 13, 1999, the PURS will have a floating interest rate based
upon the one month LIBOR rate plus 0.75 percent. On May 13, 1999, either the
third party will exercise the call option or the PURS will be put back to the
Company by the holders. If the third party exercises the call option, the third
party will repurchase the PURS from the holders and remarket them. The interest
rate paid by the Company will be reset to a fixed interest rate until maturity
in 2029 of approximately 5.67 percent plus a credit spread to be determined at
that time. If the call option is not exercised, the Company must repurchase the
PURS from the holders.
During 1998, BNSF Railway entered into $258 million of equipment secured debt
of which $173 million was recorded as capital lease obligations.
In February 1999, the Company filed a new shelf registration of debt
securities that may be issued in one or more series at an aggregate offering
price not to exceed $750 million. As of February 8, 1999, the shelf registration
had not yet been declared effective. When it becomes effective, the Company will
have $1.1 billion of borrowing capacity available through the combined shelf
registrations.
Aggregate long-term debt scheduled to mature in 1999 is $268 million,
excluding the $200 million PURS due 2029 which may be redeemed in 1999 as
discussed above. BNSF's ratio of total debt to total capital was 41 percent at
the end of 1998 and 44 percent at the end of both 1997 and 1996.
BURLINGTON NORTHERN SANTA FE CORPORATION 19
During 1998, the Company began share repurchase activity under a 30 million
share common stock repurchase program approved by the Board of Directors in July
1997.
During 1997 there were no share repurchases made under this program. During
1998, the Company repurchased approximately 5 million shares of its common stock
at an average price of $30.75 per share. In connection with its share repurchase
program, during 1998 BNSF sold equity put options for 3 million shares of BNSF
common stock to an independent third party and received cash proceeds of $2
million. All of the equity put options expired unexercised. Repurchased shares
are available to satisfy future requirements of various stock-based employee
compensation programs. Management considers many factors which include, among
other things, economic and market business conditions and outlook, alternative
uses of cash and debt, balance sheet ratios, and stockholder returns when
evaluating the timing of share repurchases.
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 have
been restated to reflect the stock split.
DIVIDENDS
Common stock dividends declared were $0.44, $0.40 and $0.40 per common share
annually for 1998, 1997 and 1996, respectively. Dividends paid on common stock
were $197 million, $185 million and $184 million during 1998, 1997 and 1996,
respectively. On July 16, 1998, the Board of Directors increased by 20 percent
the amount of its regular quarterly dividend from 10 cents per share to 12 cents
per share. The dividend increase was effective beginning with the 1998 third
quarter dividend which was paid on October 1, 1998.
On January 21, 1999, 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 1, 1999, to stockholders of record on March 10, 1999.
OTHER MATTERS
CASUALTY AND ENVIRONMENTAL
Personal injury claims, including work-related injuries to employees, are a
significant expense for the railroad industry. Employees of BNSF are compensated
for work-related injuries according to the provisions of the Federal Employers'
Liability Act (FELA). FELA's system of requiring finding of fault, coupled with
unscheduled awards and reliance on the jury system, contributed to significant
increases in expense in past years. BNSF has implemented a number of safety
programs to reduce the number of personal injuries as well as the associated
claims and personal injury expense. BNSF made personal injury payments of
approximately $193 million, $210 million, and $249 million in 1998, 1997 and
1996, respectively.
As discussed in more detail in Note 12: Environmental and Other Contingencies,
the Company's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNSF's operating
procedures include practices to protect the environment from the environmental
risks inherent in railroad operations, which frequently involve transporting
chemicals and other hazardous materials. 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 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 $64 million, $55
million and $47 million during 1998, 1997 and 1996, respectively, for mandatory
and unasserted clean-up efforts, including amounts expended under federal and
state voluntary clean-up programs. BNSF has accruals of approximately $185
million for remediation and restoration of all known sites. BNSF anticipates
that the majority of the accrued costs at December 31, 1998 will be paid over
the next five years. No individual site is considered to be material.
During 1998, BNSF settled an environmental matter in the State of Missouri
related to release of a reportable quantity of lead sulfide into a waterway.
BNSF agreed in the settlement to pay a fine of $7 million, make restitution
payments to the State of Missouri of $3 million and committed to spend $9
million in connection with its ongoing remediation efforts. BNSF has made
payments of approximately $16 million related to this settlement, including
approximately $12 million that was paid during 1998 which is included in total
1998 payments discussed above.
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
20 BURLINGTON NORTHERN SANTA FE CORPORATION
required, evolving environmental laws and regulations, advances in environmental
technology, the extent of other parties' participation in clean-up efforts,
developments in ongoing environmental analyses related to sites determined to be
contaminated, and developments in environmental surveys and studies of
potentially contaminated sites. As a result, future charges to income for
environmental liabilities could have a significant effect on results of
operations in a particular quarter or fiscal year as individual site studies and
remediation and restoration efforts proceed or as new sites arise. However,
management believes that it is unlikely that any identified matters, either
individually or in the aggregate, will have a material adverse effect on BNSF's
consolidated financial position or liquidity.
The railroad industry, including BNSF Railway, is subject to future
requirements regulating air emissions from diesel locomotives. Final regulations
applicable to new and rebuilt locomotive engines were promulgated by the United
States Environmental Protection Agency (EPA) and became effective June 15, 1998.
The new standards will be phased in between 2000 and 2005. BNSF Railway has
evaluated compliance requirements and associated costs and believes the costs
will not be material in any given year. BNSF Railway has also entered into
agreements with the California State Air Resources Board and the EPA regarding a
program to reduce emissions in Southern California through accelerated
deployment of locomotives which comply with the federal standards.
OTHER CLAIMS AND LITIGATION
BNSF and its subsidiaries are parties to a number of legal actions and claims,
various governmental proceedings and private civil suits arising in the ordinary
course of business, including those related to environmental matters and
personal injury claims. While the final outcome of these items cannot be
predicted with certainty, considering among other things the meritorious legal
defenses available, it is the opinion of management that none of these items,
when finally resolved, will have a material adverse effect on the annual results
of operations, financial position or liquidity of BNSF, although an adverse
resolution of a number of these items could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.
EMPLOYEE MERGER AND SEPARATION COSTS
LIABILITY BALANCE AND ACTIVITY
Current and long-term employee merger and separation liabilities totaling $474
million and $551 million are included in the consolidated balance sheet at
December 31, 1998 and 1997, 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 $211 million and $259 million at December 31, 1998 and
1997, 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 will result in the elimination
of approximately 1,600 permanent positions, of which approximately 1,500
positions have been eliminated through 1998, including approximately 250
positions that were eliminated in 1998. Upon adoption in 1995, the Consolidation
Plan was expected to be completed by early 1999. However, the Consolidation Plan
was partially delayed as a result of the timing related to completion of merger
integration and other issues and is now expected to be completed by 2001.
Remaining clerical positions to be eliminated by the Company will result in
involuntary separations. Benefits paid to affected employees are in the form of
lump-sum payments or payments made 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 $207
million and $224 million at December 31, 1998 and 1997, 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.
Liabilities principally related to certain remaining non-union employee
severances resulting from the Merger were $56 million and $68 million at
December 31, 1998 and 1997, respectively. These costs will be paid over the next
several years based on deferral elections made by affected employees.
Approximately 1,500 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.
During 1998, 1997 and 1996, BNSF made employee merger and separation payments
of $77 million, $116 million and $183 million, respectively. At December 31,
1998, $65 million of the remaining liabilities are included within current
liabilities for anticipated costs to be paid in 1999.
1997 SPECIAL CHARGE
In the fourth quarter of 1997, the Company recorded a $90 million pre-tax
special charge. Approximately $65 million of the charge related to the
Consolidation Plan and the remainder of the charge related to severance and
other costs for non-union employees. BNSF recorded an initial charge in 1995 for
the Consolidation Plan, however, the 1995 charge excluded costs associated with
voluntary severance for employees who were given the opportunity to relocate and
follow their work, but elected severance.
BURLINGTON NORTHERN SANTA FE CORPORATION 21
YEAR 2000
Background. The Company has established a committee of managers and employees,
chaired by the Company's Chief Information Officer, to evaluate and manage the
costs and risks associated with becoming Year 2000 compliant and to minimize the
impact of the Year 2000 problem on the Company. Because many existing computer
programs and microprocessors recognize only the last two digits of years (and
not the century designation), they may be unable to accurately recognize and
process dates beyond December 31, 1999, and consequently may fail or produce
erroneous data. The Year 2000 problem may adversely affect the Company's
operations and financial performance if its remediation efforts are not
successfully implemented or if the railroads with which the Company connects,
critical customers or suppliers fail to become Year 2000 compliant.
State of Readiness. Year 2000 issues were reviewed in September 1995 following
the approval of the merger of the two railroads that now constitute BNSF
Railway. The core mainframe systems for the merged railroad were selected in
part because they were substantially Year 2000 compliant. These systems
integrate all transportation-related activities and computer systems that
support BNSF's transportation network, including operations, customer
information, and revenue data. This merger-related information systems
integration and upgrade activity was substantially completed by July 1997.
Following this systems integration, BNSF adopted a three-phase approach to
Year 2000: Inventory and Assessment; Remediation; and Certification Testing.
Separate teams address technologies administered or maintained by the
Information Systems Services department (ISS technologies) and other enterprise-
wide products and technologies used by the Company, including embedded
microprocessor technology (Enterprise technologies). BNSF has completed the
Inventory and Assessment phase for both ISS and Enterprise technologies. During
this phase, BNSF inventoried all ISS-administered source code, hardware,
software and communications equipment that could be affected by the Year 2000
problem, and identified items potentially needing remediation. In addition, the
Enterprise team completed a company-wide audit of Enterprise technologies and
associated suppliers and service providers for potential Year 2000 problems.
The Remediation phase is more than three-fourths complete. Remediation
includes converting source code and replacing or upgrading purchased software
and hardware. Remediation is substantially complete for ISS technologies and is
expected to be completed by July 1999 for Enterprise technologies.
The Certification Testing phase includes validating the performance of ISS and
Enterprise technologies in a Year 2000 test environment. The Certification
Testing phase also includes validating Year 2000 compliance for critical third
party suppliers and service providers. This phase, which is ongoing, overlaps
with the Remediation phase. Certification testing for ISS technologies began in
November 1998, with critical applications receiving priority; testing for all
applications is scheduled for completion by the end of September 1999.
Certification testing of all critical Enterprise technologies began in May 1998
and is scheduled for completion in February 1999; testing for non-critical
Enterprise technologies is scheduled for completion by July 1999.
Costs. As a result of its merger-related systems integration that was completed
in 1997, BNSF achieved substantial Year 2000 compliance on its core mainframe
systems. In addition, spending on Year 2000 activities approximates $8 million
to date. Currently, the total cost of achieving Year 2000 compliance for the
Company's ISS and Enterprise technologies is estimated to be approximately $20
million.
Year 2000 Risks and Contingency Plans. Certain BNSF business processes rely on
third parties for the efficient functioning of its transportation network. The
Association of American Railroads (AAR) administers systems that benefit all
North American railroads and their customers, including interline settlement,
shipment tracing and waybill processing. BNSF and other AAR-member railroads are
participating in a process to test and certify these systems for Year 2000
compliance. The AAR expects that these systems will be compliant and pilot
tested by specific carriers by April 1999, with open carrier testing conducted
promptly thereafter. BNSF plans to develop contingency plans for the business
processes supported by AAR systems.
Certain BNSF routes and resulting revenues are dependent on the use of
trackage rights over other railroads, including UP, Montana Rail Link and the
Arizona and California Railroad. Other BNSF traffic may originate or terminate
on other carriers' lines or may otherwise involve use of a foreign connection en
route. Approximately [60] percent of units handled by BNSF run over BNSF
facilities only. BNSF's traffic levels and revenues could be significantly
reduced and/or its operational network significantly impaired through congestion
and other factors if other railroads are not able to accommodate BNSF trains or
interchange traffic for any extended period of time due to Year 2000 problems.
However, as a result of its work with other railroads to address Year 2000
problems on an industry-wide basis, management believes that the possibility of
extended failures on other railroads is not significant. At present, the Company
generally has not determined which of its customers
22 BURLINGTON NORTHERN SANTA FE CORPORATION
may have Year 2000 problems that could result in reduced traffic for the
Company.
It is the opinion of management that Year 2000 problems in BNSF's internal
information systems and technology infrastructure will not have a materially
adverse effect on the results of operations, liquidity or financial position of
the Company. However, there can be no assurance that the systems or equipment of
other parties which interact with BNSF's systems will be compliant on a timely
basis. BNSF believes that the failure of systems or equipment of one or more of
its key third parties or customers is the most reasonably likely worst case Year
2000 scenario, and that an extended failure could have a material adverse effect
on the results of operations, liquidity or financial position of the Company.
Where appropriate, BNSF is developing contingency plans in the event that BNSF's
key third parties do not become Year 2000 compliant on a timely basis, which
effort includes the formalization of existing disaster recovery plans.
Contingency plans are expected to be in place by the end of the first quarter
1999.
HEDGING ACTIVITIES
FUEL
During 1998, 1997 and 1996 fuel expenses approximated 11 percent of total
operating expenses. Due to the significance of diesel fuel expenses to the
operations of the railroad 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 in expense in
the period in which the fuel is purchased and used. Based on 1998 fuel
consumption, 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 8, 1999, BNSF had entered into fuel swaps for approximately
1,776 million gallons at an average price of approximately 49 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, BNSF's fuel hedging program covers approximately 75 percent, 40
percent, 22 percent and 7 percent of estimated annual and quarterly fuel
purchases for 1999, 2000, 2001, and 2002, respectively. Hedge positions are
closely monitored to ensure that they will not exceed actual fuel requirements
in any period. Unrecognized losses from BNSF's fuel swap transactions were
approximately $174 million as of December 31, 1998, of which $120 million
relates to swap transactions that will expire in 1999. 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 8, 1999, BNSF had interest rate swap transactions which fix the
interest rate on the total principal amount of $125 million of its commercial
paper debt. The interest rate swap transactions require payment of a weighted
average fixed interest rate of approximately 6.1 percent, and the receipt of a
variable interest rate based on a commercial paper composite rate. The swap
transactions expire in December 1999. Any gains and losses associated with
changes in market value of these swaps are not recognized. BNSF recognizes, on
an accrual basis, a fixed rate of interest on the principal amount of commercial
paper hedged over the term of the swap agreements. Unrecognized losses from
BNSF's interest rate swap transactions were approximately $2 million as of
December 31, 1998.
During July 1998, at the time of a $200 million debt issuance, the Company
closed out $200 million of treasury lock transactions at a loss of approximately
$7 million that has been deferred and is being amortized to interest expense
over the life of the debt.
As discussed under Capital Resources and Liquidity: Financing Activities, in
November 1998, at the time of the $200 million PURS issuance, the Company closed
out $200 million of treasury lock transactions at a loss of approximately $11
million which was deferred and is being amortized to interest expense over the
life of the debt.
In anticipation of future debt issuances, BNSF has entered into treasury lock
transactions, based on the 10-year and 30-year U.S. treasury rates, totaling
$300 million and $200 million, respectively. The 10-year and 30-year treasury
lock transactions have average interest rates of approximately 4.5 percent and
5.0 percent, respectively, and expire between 1999 and 2001. These rates do not
include a credit spread which will 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 $19 million as of December 31, 1998.
LABOR
Labor unions represent approximately 88 percent of BNSF Railway employees under
collective bargaining agreements with 13 different labor organizations. The
collective bargaining agreements reached in 1995 and 1996 as a result of
industry-wide labor
BURLINGTON NORTHERN SANTA FE CORPORATION 23
contract negotiations will remain in effect through at least December 31, 1999
and until new agreements are reached or the Railway Labor Act's procedures are
exhausted.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The Statement is effective for the
Company's fiscal year 2000; however, early adoption is permitted. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. For fair value hedge transactions in which the Company is
hedging changes in the fair value of an asset, liability or an unrecognized firm
commitment, changes in the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's fair
value. For cash-flow hedge transactions in which the Company is hedging the
variability of cash flows related to a variable rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income to the extent it offsets changes
in the cash flows related to the variable rate asset, liability or forecasted
transaction, with the difference reported in current period earnings. The gains
and losses on the derivative instrument that are reported in other comprehensive
income will be reclassified 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.
The Company is currently evaluating SFAS No. 133 and whether it will adopt
this pronouncement prior to the effective date. Based on interest rate and fuel
hedging instruments outstanding at December 31, 1998 and previously deferred
losses from past interest rate hedging transactions, all of which are cash-flow
hedge transactions, the Company currently estimates that the impact of SFAS No.
133 would result in a net-of-tax cumulative-effect charge to accumulated other
comprehensive deficit of approximately $125 million if adopted December 31,
1998. The Company is presently evaluating the impact SFAS No. 133 will have on
its ongoing results of operations.
FORWARD-LOOKING INFORMATION
The Year 2000 discussion above contains forward-looking statements, including
those concerning the Company's plans and estimated completion dates, cost
estimates, assessments of Year 2000 readiness of BNSF and third parties, and
possible consequences of any failure on the part of the Company or third parties
to be Year 2000 compliant on a timely basis. Forward-looking statements involve
a number of risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Such factors
include, but are not limited to, the following: continued availability of
qualified personnel to assess, remediate, and test ISS and Enterprise
technologies at current estimated costs; emergence of unforeseen software or
hardware problems, including where applications interact with each other in ways
not anticipated, which could delay or hinder commercial transactions or other
operations; the ability to locate and remediate Year 2000 problems with software
source code and embedded computer chips in equipment; the failure, in whole or
in part, of other railroads or AAR-supported systems to be Year 2000 compliant;
the Year 2000 compliance of its business partners and customers and reduced
traffic levels due to their failure, in whole or part, to be Year 2000
compliant; business interruption due to delays in obtaining supplies, parts, or
equipment from key vendors or suppliers that are affected by Year 2000 problems;
the ripple effect of Year 2000-related failures in industries supporting the
nation's basic infrastructure, including fuel vendors and pipelines, gas,
electric, and water utilities, communications companies, banks and financial
institutions, and highway, water, and air transportation systems; and any
significant downturn in the general economy, and adverse industry-specific
economic conditions at the international, national, and regional levels, wholly
or partially caused by Year 2000 problems.
To the extent that all other written statements include predictions concerning
future operations and results of operations, such statements are forward-looking
statements that involve risks and uncertainties, and actual results may differ
materially. Factors that could cause actual results to differ materially
include, but are not limited to, general economic downturns, which may limit
demand and pricing; labor matters, which may affect the costs and feasibility of
certain operations; and competition and commodity concentrations, which may
affect traffic and pricing levels.
24 BURLINGTON NORTHERN SANTA FE CORPORATION
REPORT OF MANAGEMENT TO THE STOCKHOLDERS 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 generally accepted accounting principles 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, President and Chief Executive Officer
/s/ Denis E. Springer
Denis E. Springer
Senior Vice President and Chief Financial Officer
/s/ Thomas N. Hund
Thomas N. Hund
Vice President and Controller
REPORT OF INDEPENDENT ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity present fairly, in all material respects, the financial position of
Burlington Northern Santa Fe Corporation and subsidiary companies at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Fort Worth, Texas
February 8, 1999
BURLINGTON NORTHERN SANTA FE CORPORATION 25
CONSOLIDATED STATEMENT OF INCOME
Burlington Northern Santa Fe Corporation and Subsidiaries
(Dollars in millions, except per share data)
- -----------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------
Revenues $8,941 $8,370 $8,109
------ ------ ------
Operating expenses:
Compensation and benefits 2,812 2,675 2,561
Purchased services 894 823 800
Depreciation and amortization 832 773 760
Equipment rents 804 820 736
Fuel 724 747 727
Materials and other 717 675 777
Special charge -- 90 --
------ ------ ------
Total operating expenses 6,783 6,603 6,361
- --------------------------------------------- ------ ------ ------
Operating income 2,158 1,767 1,748
Interest expense 354 344 301
Other income (expense), net 45 (19) (7)
------ ------ ------
Income before income taxes 1,849 1,404 1,440
Income tax expense 694 519 551
------ ------ ------
Net income $1,155 $ 885 $ 889
- --------------------------------------------- ------ ------ ------
Earnings per share:
Basic $ 2.45 $ 1.91 $ 1.95
Diluted $ 2.43 $ 1.88 $ 1.91
- --------------------------------------------- ----- ------ ------
Average shares (in millions):
Basic 470.5 464.4 456.3
Dilutive effect of stock options 5.7 6.7 8.1
----- ------ ------
Diluted 476.2 471.1 464.4
- --------------------------------------------- ------ ------ ------
See accompanying notes to consolidated financial statements.
26 BURLINGTON NORTHERN SANTA FE CORPORATION
CONSOLIDATED BALANCE SHEET
Burlington Northern Santa Fe Corporation and Subsidiaries
(Shares in thousands. Dollars in millions)
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------- ------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 25 $ 31
Accounts receivable, net 594 635
Materials and supplies 244 205
Current portion of deferred income taxes 335 333
Other current assets 8 30
------- -------
Total current assets 1,206 1,234
Property and equipment, net 20,662 19,211
Other assets 822 891
------- -------
Total assets $22,690 $21,336
- ---------------------------------------------------------------------------------------------------- ------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 1,929 $ 1,952
Long-term debt due within one year 268 108
------- -------
Total current liabilities 2,197 2,060
Long-term debt and commercial paper 5,188 5,181
Deferred income taxes 5,662 5,175
Casualty and environmental liabilities 389 448
Employee merger and separation costs 409 469
Other liabilities 1,075 1,191
------- -------
Total liabilities 14,920 14,524
- ---------------------------------------------------------------------------------------------------- ------- ------
Commitments and contingencies (see Notes 8, 11 and 12)
Stockholders' equity:
Common stock, $.01 par value, 600,000 shares authorized;
477,436 shares and 470,240 shares issued, respectively 5 5
Additional paid-in capital 5,177 4,992
Retained earnings 2,811 1,863
Treasury stock, at cost, 6,961 shares and 1,329 shares, respectively (213) (39)
Accumulated other comprehensive deficit (8) (7)
Other (2) (2)
------- -------
Total stockholders' equity 7,770 6,812
------- -------
Total liabilities and stockholders' equity $22,690 $21,336
- ---------------------------------------------------------------------------------------------------- ------- -------
See accompanying notes to consolidated financial statements.
BURLINGTON NORTHERN SANTA FE CORPORATION 27
CONSOLIDATED STATEMENT OF CASH FLOWS
Burlington Northern Santa Fe Corporation and Subsidiaries
(Dollars in millions)
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------ ------- ------- -------
OPERATING ACTIVITIES
Net income $ 1,155 $ 885 $ 889
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 832 773 760
Deferred income taxes 489 433 453
Special charge -- 90 --
Employee merger and separation costs paid (77) (116) (183)
Other, net (243) (221) (62)
Changes in current assets and liabilities:
Accounts receivable:
Sale of accounts receivable 19 301 40
Other changes 20 (333) (140)
Materials and supplies (39) 17 (2)
Other current assets 22 4 (6)
Accounts payable and other current liabilities 40 (19) 122
------- ------- -------
Net cash provided by operating activities 2,218 1,814 1,871
- ------------------------------------------------------------------------------------ ------- ------- -------
INVESTING ACTIVITIES
Capital expenditures (2,147) (2,182) (2,234)
Other, net (271) (147) (10)
------- ------- -------
Net cash used for investing activities (2,418) (2,329) (2,244)
- ------------------------------------------------------------------------------------ ------- ------- -------
FINANCING ACTIVITIES
Net decrease in commercial paper and bank borrowings (242) (235) (98)
Proceeds from issuance of long-term debt 794 1,002 626
Payments on long-term debt (112) (177) (83)
Dividends paid (197) (185) (184)
Proceeds from stock options exercised 111 102 118
Purchase of BNSF common stock (153) -- --
Other, net (7) (8) (9)
------- ------- -------
Net cash provided by financing activities 194 499 370
------- ------- -------
Decrease in cash and cash equivalents (6) (16) (3)
Cash and cash equivalents:
Beginning of year 31 47 50
------- ------- -------
End of year $ 25 $ 31 $ 47
- ------------------------------------------------------------------------------------ ------- ------- -------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized $ 370 $ 346 $ 306
Income taxes paid, net of refunds 220 32 69
Directly financed asset acquisitions -- -- 43
- ------------------------------------------------------------------------------------ ------- ------- -------
See accompanying notes to consolidated financial statements.
28 BURLINGTON NORTHERN SANTA FE CORPORATION
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
Stock Treasury Paid-in Retained Treasury Comprehensive
Issued Stock Capital Earnings Stock Deficit Other Total
- ------------------------------------------- --------- ---------- -------- -------- ------------- ----- ------
Balance at December 31, 1995 448,950 (135) $4,607 $ 459 $ (3) $(19) $(7) $5,037
Comprehensive income:
Net income 889 889
Minimum pension liability
adjustment (net of tax of $9) 15 15
------
Total comprehensive income 904
------
Common stock dividends,
$0.40 per share (183) (183)
Adjustments associated with
unearned compensation,
restricted stock 1,683 (66) 8 (2) 3 9
Exercise of stock options and
related tax benefit 10,749 (387) 191 (11) 180
Acquisition of a subsidiary 1,089 31 31
Other 123 3 3
- ------------------------------------------- --------- ---------- -------- -------- ------------- ----- ------
Balance at December 31, 1996 462,594 (588) 4,840 1,165 (16) (4) (4) 5,981
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) 13 (4) 2 11
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) 4,997 1,863 (39) (7) (2) 6,812
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 (4) 2 13
Exercise of stock options and
related tax benefit 6,669 (537) 1.67 (17) 150
Purchase of BNSF common stock (4,963) (153) (153)
Other 3 (2) 1
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 477,436 (6,961) $5,182 $2,811 $(213) $ (8) $(2) $7,770
==================================================================================================================================
See accompanying notes to consolidated financial statements.
BURLINGTON NORTHERN SANTA FE CORPORATION 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BURLINGTON NORTHERN SANTA FE CORPORATION
AND SUBSIDIARIES
1 ACCOUNTING POLICIES
THE COMPANY AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Burlington
Northern Santa Fe Corporation and its majority-owned subsidiaries, all of which
are separate legal entities (collectively, BNSF or Company). All significant
inter-company accounts and transactions have been eliminated. Through its
principal subsidiary, The Burlington Northern and Santa Fe Railway Company (BNSF
Railway), BNSF operates one of the largest railroad networks in the United
States, with 34,000 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, 25 percent and 12 percent, respectively, of total
revenues for the year ended December 31, 1998. Revenues derived from sources
other than transportation services are not significant.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented.
RECLASSIFICATIONS
Certain comparative prior year amounts in the consolidated financial statements
and notes have been reclassified to conform with the current year presentation.
CASH AND CASH EQUIVALENTS
All short-term investments with original maturities of less than 90 days are
considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value.
MATERIALS AND SUPPLIES
Materials and supplies, 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 is charged to accumulated depreciation
and no gain or loss is recognized. Significant premature retirements are
recorded as gains or losses at the time of their occurrence. Expenditures which
significantly increase asset values or extend useful lives are capitalized.
Repair and maintenance expenditures are charged to operating expense when the
work is performed. Property and equipment are stated at cost.
The Company incurs certain direct labor, contract service and other costs
associated with the development and installation of computer software. Costs for
newly developed software or significant enhancements to existing software are
typically capitalized. Research, operations and maintenance costs are charged to
operating expense when the work is performed.
REVENUE RECOGNITION
Transportation revenues are recognized based upon the proportion of service
provided.
COMMON STOCK SPLIT
On April 16, 1998, the Company's stockholders approved an amendment to the
Company's certificate of incorporation to increase authorized common shares from
300 million to 600 million. 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 the 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 have been restated to reflect the stock split.
2 SALE OF INVESTMENT IN PIPELINE PARTNERSHIP
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 Partnership's and SFPP, L.P.'s general partner and an approximate 42
percent interest as limited partner of the Pipeline Partnership. As general
partner, SFP Pipelines received two percent of all amounts available for
distribution by the Partnership and an additional incentive depending upon the
level of cash distributions paid to holders of limited partner interests in the
Pipeline Partnership (Partnership Units). SFP Pipeline Holdings, Inc., an
indirect, wholly-owned subsidiary of BNSF (SFP Holdings), had outstanding $219
million principal amount of Variable Rate Exchangeable Debentures due 2010
(VREDs) at December 31, 1997.
In October 1997, SFP Pipelines and SFP Holdings entered into an agreement
with Kinder Morgan Energy Partners, L.P. (Kinder Morgan) pursuant to which
Kinder Morgan acquired substantially all of SFP Pipelines' interests in the
Pipeline Partnership and SFPP, L.P. for approximately
30 BURLINGTON NORTHERN SANTA FE CORPORATION
$84 million in cash on March 6, 1998. The Pipeline Partnership was liquidated as
part of the transaction and each Partnership Unit was converted into the right
to receive 1.39 Kinder Morgan common units. SFP Pipelines' 8,148,148 Partnership
Units were converted into the right to receive 11,325,925 Kinder Morgan common
units. In addition, the agreement called for the interest of SFP Pipelines in
SFPP, L.P. to be partially redeemed for a cash distribution of $5.8 million,
with SFP Pipelines retaining only a 0.5 percent special limited partnership
interest in SFPP, L.P. The Company recognized a $67 million one-time pre-tax
gain ($32 million or $0.07 per share on a diluted basis after-tax) at the time
of the sale.
Consummation of the transaction caused an "Exchange Event" under the VRED
agreement and in June 1998 all VRED holders received either partnership units of
Kinder Morgan or cash equal to the par value of the VREDs. As a result of this
transaction, substantially all of the Company's investment in the Pipeline
Partnership and SFPP, L.P. and the VREDs were removed from the consolidated
balance sheet.
3 OTHER INCOME (EXPENSE), NET
Other income (expense), net includes the following (in millions):
Year ended December 31, 1998 1997 1996
- ----------------------------------------------- ---- ---- ----
Gain on sale of Pipeline Partnership $ 67 $ -- $ --
Gain on property dispositions 48 14 23
Equity in earnings of Pipeline Partnership 4 30 24
Accounts receivable sale fees (34) (27) (14)
Miscellaneous, net (40) (36) (40)
- ----------------------------------------------- ---- ---- ----
Total $ 45 $(19) $ (7)
=============================================== ==== ==== ====
4 INCOME TAXES
Income tax expense was as follows (in millions):
Year ended December 31, 1998 1997 1996
- ----------------------------------------------- ---- ---- ----
Current:
Federal $191 $ 72 $ 81
State 14 14 17
- ----------------------------------------------- ---- ---- ----
205 86 98
- ----------------------------------------------- ---- ---- ----
Deferred:
Federal 410 372 396
State 79 61 57
- ----------------------------------------------- ---- ---- ----
489 433 453
- ----------------------------------------------- ---- ---- ----
Total $694 $519 $551
=============================================== ==== ==== ====
Reconciliation of the federal statutory income tax rate to the effective tax
rate was as follows:
Year ended December 31, 1998 1997 1996
- --------------------------------------------- ----- ----- -----
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal tax benefit 3.3 3.5 3.4
Other, net (0.7) (1.5) (0.1)
- --------------------------------------------- ----- ----- -----
Effective tax rate 37.6% 37.0% 38.3%
============================================= ===== ===== =====
The components of deferred tax assets and liabilities were as follows (in
millions):
December 31, 1998 1997
- --------------------------------------------- -------- -------
Deferred tax liabilities:
Depreciation and amortization $(5,868) $(5,677)
Other (417) (331)
- --------------------------------------------- -------- -------
Total deferred tax liabilities (6,285) (6,008)
- --------------------------------------------- -------- -------
Deferred tax assets:
Casualty and environmental 253 270
Employee merger and separation costs 182 213
Post-retirement benefits 89 86
Non-expiring AMT credit carryforwards -- 36
Other 434 561
- --------------------------------------------- ------- -------
Total deferred tax assets 958 1,166
- --------------------------------------------- ------- -------
Net deferred tax liability $(5,327) $(4,842)
- --------------------------------------------- ------- -------
Noncurrent deferred income tax liability $(5,662) $(5,175)
Current deferred income tax asset 335 333
- --------------------------------------------- ------- -------
Net deferred tax liability $(5,327) $(4,842)
BNSF filed its first federal income tax return for 1995. 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 1992,
respectively. All years prior to 1989 for BNI and 1991 for SFP are closed.
Issues relating to the years 1991-1992 for SFP and for the years 1989-1994 for
BNI are being contested through various stages of administrative appeal. In
addition, BNSF and its subsidiaries have various state income tax returns in the
process of examination, administrative appeal or litigation. Management believes
that adequate provision has been made for any adjustment that might be assessed
for open years through 1998.
5 ACCOUNTS RECEIVABLE, NET
Effective June 1997, an accounts receivable sale agreement which allowed the
sale of up to $300 million in receivables effective through 1999, was replaced
by an amended and restated agreement which allows BNSF Railway, through a
special purpose subsidiary, to sell up to $600 million of variable rate
certificates which mature in 2002 evidencing undivided interests in an accounts
receivable master trust. The master trust's assets include an ownership interest
in a revolving portfolio of BNSF Railway's accounts receivable which are used to
support the certificates. At December 31, 1998, $600 million of certificates
were outstanding and were supported by receivables of approximately $1.1
billion in the master trust. Certificates outstanding were $581 million at
December 31, 1997. BNSF Railway has retained the collection responsibility with
respect to the accounts receivable held in trust. BNSF Railway is exposed to
credit loss related to collection of accounts receivable to the extent that the
amount of receivables in the master trust exceeds the amount of certificates
sold. Costs related to such agreements vary on
BURLINGTON NORTHERN SANTA FE CORPORATION 31
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 corrections to and collectibility of freight
and other billings. At December 31, 1998 and 1997, $84 million and $70 million
of such allowances had been recorded, respectively. BNSF believes the allowance
is adequate to cover disputed and uncollectible receivables at December 31,
1998.
6 PROPERTY AND EQUIPMENT, NET
Property and equipment, net (in millions), and the weighted average annual
depreciation rate (%) were as follows:
1998
Depreciation
December 31, 1998 1997 Rate
- -------------------------------- ------- ------- ------------
Land $ 1,431 $ 1,416 --%
Track structure 11,340 10,527 4.0
Other roadway 8,389 7,856 2.5
Locomotives 2,276 1,874 4.9
Freight cars and
other equipment 1,860 1,870 4.0
Computer hardware
and software 405 412 15.5
- -------------------------------- ------- -------
Total cost 25,701 23,955
Less accumulated depreciation
and amortization (5,039) (4,744)
- -------------------------------- ------- -------
Property and equipment, net $20,662 $19,211
================================ ======= =======
The consolidated balance sheet at December 31, 1998 and 1997 included $1,082
million and $875 million, respectively, for property and equipment under capital
leases.
7 ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of the following (in
millions):
December 31, 1998 1997
- ---------------------------------------- ------ ------
Compensation and benefits payable $ 386 $ 399
Casualty and environmental liabilities 272 291
Accounts payable 174 222
Rents and leases 155 144
Tax liabilities 117 132
Employee merger and separation costs 65 82
Other 760 682
- ---------------------------------------- ------ ------
Total $1,929 $1,952
======================================== ====== ======
8 DEBT
Debt outstanding was as follows
(in millions):
December 31, 1998 1997
- -------------------------------------------- ------ ------
Notes and debentures, weighted average
rate of 7.04%, due 1999 to 2097 $3,073 $2,842
Capitalized lease obligations, weighted
average rate of 6.65%, due 1999 to 2012 818 695
Equipment obligations, weighted average
rate of 7.62%, due 1999 to 2016 595 565
Mortgage bonds, weighted average rate of
7.56%, due 1999 to 2047 498 467
Commercial paper, 5.71% (variable) 471 668
Bank borrowings, 5.35% (variable) 25 70
Unamortized discount and other, net (24) (18)
- -------------------------------------------- ------ ------
Total 5,456 5,289
Less current portion of long-term debt (268) (108)
- -------------------------------------------- ------ ------
Long-term debt $5,188 $5,181
============================================ ====== ======
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 allow borrowings of up to $425
million on a short-term basis and $1.5 billion on a long-term basis. Annual
facility fees are currently 0.075 percent and 0.09 percent, respectively, and
are subject to change based upon changes in BNSF's senior unsecured debt
ratings. Borrowing rates are based upon i) LIBOR plus a spread based upon BNSF's
senior unsecured debt ratings, ii) money market rates offered at the option of
the lenders, or iii) an alternate base rate. The commitments of the lenders
under the short-term agreement were extended on November 12, 1998 and are
currently scheduled to expire on June 15, 1999. The commitments of the lenders
under the long-term agreement are scheduled to expire on November 12, 2002.
At December 31, 1998, there were no borrowings against the revolving credit
agreements and the maturity value of commercial paper outstanding was $474
million, leaving a total remaining capacity of $1,026 million available under
the long-term revolving credit agreement and $425 million available under the
short-term credit agreement. A portion of commercial paper has been hedged to
fix interest rates through interest rate swap transactions (see Note 11: Hedging
Activities, Leases and Other Commitments). The financial covenants of the bank
revolving credit agreements require that BNSF's consolidated tangible net worth,
as defined in the agreements, be at least $4.4 billion, and that its debt cannot
exceed 55 percent of its consolidated total capital as defined in the
agreements. BNSF was in compliance with these financial covenants at December
31, 1998.
32 BURLINGTON NORTHERN SANTA FE CORPORATION
In March 1998 the Company filed a shelf registration of debt securities,
including medium-term notes that may be issued in one or more series at an
aggregate offering price not to exceed $500 million. In April 1998, prior to the
effective date of the March 1998 shelf registration, the Company amended its
August 1997 shelf registration to combine it with the March 1998 shelf
registration. As of December 31, 1998, the March 1998 shelf registration had
$350 million of potential borrowings remaining. In February 1999, the Company
filed a new shelf registration of debt securities that may be issued in one or
more series at an aggregate offering price not to exceed $750 million. As of
February 8, 1999, the shelf registration had not yet been declared effective.
When it becomes effective, the Company will have $1.1 billion of borrowing
capacity available through the combined shelf registrations.
Aggregate long-term debt scheduled maturities are $268 million, $146
million, $222 million, $744 million and $130 million for 1999 through 2003,
respectively. Commercial paper of $471 million is included in maturities for
2002. Maturities in 1999 exclude $200 million of variable rate debentures due
2029 and maturities in 2001 exclude $100 million of 6.05 percent notes due 2031,
which will either be remarketed by the holder of a call option on the debt and
mature in 2029 and 2031, respectively; or will otherwise be repurchased by the
Company in 1999 and 2001, respectively. In addition, maturities in 2000 exclude
$100 million of 6.1 percent notes due 2027 and maturities in 2003 exclude $175
million of 6.53 percent notes due 2037, which may be redeemed in 2000 and 2003,
respectively, at the option of the holder.
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.
An indirect wholly-owned subsidiary of BNSF, in connection with its
remaining 0.5 percent special limited partner interest in a pipeline
partnership, is contingently liable for $190 million of certain debt of the
pipeline partnership assumed by Kinder Morgan pursuant to the sale discussed in
Note 2: Sale of Investment in Pipeline Partnership. 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.
9 EMPLOYEE MERGER AND SEPARATION COSTS LIABILITY BALANCE AND ACTIVITY
Current and long-term employee merger and separation liabilities totaling
$474 million and $551 million are included in the consolidated balance sheet at
December 31, 1998 and 1997, 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 $211 million and $259 million at December 31, 1998 and
1997, 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 will result in the elimination
of approximately 1,600 permanent positions, of which approximately 1,500
positions have been eliminated through 1998, including approximately 250
positions that were eliminated in 1998. Upon adoption in 1995, the Consolidation
Plan was expected to be completed by early 1999. However, the Consolidation Plan
was partially delayed as a result of the timing related to completion of merger
integration and other issues and is now expected to be completed by 2001.
Remaining clerical positions to be eliminated by the Company will result in
involuntary separations. Benefits paid to affected employees are in the form of
lump-sum payments or payments made 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
$207 million and $224 million at December 31, 1998 and 1997, 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.
Liabilities principally related to certain remaining non-union employee
severances resulting from the Merger were $56 million and $68 million at
December 31, 1998 and 1997, respectively. These costs will be paid over the next
several years based on deferral elections made by affected employees.
Approximately 1,500 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.
During 1998, 1997 and 1996, BNSF made employee merger and separation
payments of $77 million, $116 million and $183 million, respectively. At
December 31, 1998, $65 million of the remaining liabilities are included within
current liabilities for anticipated costs to be paid in 1999.
1997 SPECIAL CHARGE
In the fourth quarter of 1997, the Company recorded a $90 million pre-tax
special charge. Approximately $65 million of the charge related to the
Consolidation Plan and the remainder of the charge related to severance and
other costs for non-union employees. BNSF recorded an initial charge in 1995 for
the Consolidation Plan, however, the 1995 charge excluded costs associated with
voluntary severance for employees who were given the opportunity to relocate and
follow their work, but elected severance.
10 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of BNSF's financial instruments at December 31,
1998 and 1997 and the methods and assumptions used to estimate the fair value of
each class of financial instruments held by BNSF, were as follows (see also Note
11: Hedging Activities, Leases and Other Commitments regarding the fair values
of BNSF's outstanding hedging instruments):
CASH AND CASH EQUIVALENTS
The carrying amount approximated fair value because of the short maturity of
these instruments.
LONG-TERM DEBT AND COMMERCIAL PAPER
The fair value of long-term debt was primarily based on quoted market prices for
the same or similar issues, or on the current rates that would be offered for
debt of the same remaining maturities. The carrying amount of commercial paper
approximated fair value because of the short maturity of these instruments. The
carrying amounts of long-term debt and commercial paper at December 31, 1998 and
1997 were $5,456 million and $5,289 million, respectively, while the estimated
fair values at December 31, 1998 and 1997 were $5,712 million and $5,472
million, respectively.
11 HEDGING ACTIVITIES, LEASES AND OTHER COMMITMENTS
HEDGING ACTIVITIES
FUEL
During 1998, 1997 and 1996 fuel expenses approximated 11 percent of total
operating expenses. Due to the significance of diesel fuel expenses to the
operations of the railroad 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 1998 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 8, 1999, BNSF had entered into fuel swaps for approximately
1,776 million gallons at an average price of approximately 49 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, BNSF's fuel hedging program covers approximately 75 percent, 40
percent, 22 percent and 7 percent of estimated annual and quarterly fuel
purchases for 1999, 2000, 2001, and 2002, respectively. Hedge positions are
closely monitored to ensure that they will not exceed actual fuel requirements
in any period. Unrecognized losses from BNSF's fuel swap transactions were
approximately $174 million as of December 31, 1998, of which $120 million
relates to swap transactions that will expire in 1999. 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 8, 1999, BNSF had interest rate swap transactions which fix the
interest rate on the total principal amount of $125 million of its commercial
paper debt. The interest rate swap transactions require payment of a weighted
average fixed interest rate of approximately 6.1 percent, and the receipt of a
variable interest rate based on a commercial paper composite rate. The swap
transactions expire in December 1999. Any gains and losses associated with
changes in market value of these swaps are not recognized. BNSF recognizes, on
an accrual basis, a fixed rate of interest on the principal amount of commercial
paper hedged over the term of the swap agreements. Unrecognized losses from
BNSF's interest rate swap transactions were approximately $2 million as of
December 31, 1998.
In anticipation of future debt issuances, BNSF has entered into treasury
lock transactions, based on the 10-year and 30-year U.S. treasury rates,
totaling $300 million and $200 million, respectively. The 10-year and 30-year
treasury lock transactions have average interest rates of approximately 4.5
percent and 5.0 percent, respectively, and expire between 1999 and 2001. These
rates do not include a credit spread which will 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 $19 million as of December 31,
1998.
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 which has been deferred and is being amortized to interest expense
over the life of the debt.
LEASES
BNSF has substantial lease commitments for locomotives, freight cars, trailers,
office buildings and other property. Most of these leases provide the option to
purchase the equipment at fair market value at the end of the lease. However,
some provide fixed price purchase options. Future minimum lease payments (which
reflect leases having non-cancelable lease terms in excess of one year) as of
December 31, 1998 are summarized as follows (in millions):
Capital Operating
Year ended December 31 Leases Leases
- ------------------------------------------- ------- ---------
1999 $ 116 $ 350
2000 105 256
2001 116 206
2002 110 175
2003 109 164
Thereafter 594 1,814
- ------------------------------------------- ------- ---------
Total 1,150 $2,965
---------
Less amount representing interest 332
- ------------------------------------------- -------
Present value of minimum lease payments $ 818
=========================================== =======
Lease rental expense for all operating leases was $503 million, $456 million
and $446 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Contingent rentals and sublease rentals were not significant.
OTHER COMMITMENTS
BNSF has entered into commitments to acquire 476 locomotives in 1999. 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 the current market
conditions and other factors at the time of financing. Additionally, BNSF has
committed to acquire 196 and 50 locomotives in 2000 and 2001, respectively.
In connection with the closing of the sale of rail lines in Southern
California in 1992 and 1993, BNSF has a $50 million liability recorded for an
obligation retained by BNSF which under certain conditions requires the Company
to repurchase a portion of the properties sold.
12 ENVIRONMENTAL AND OTHER CONTINGENCIES
ENVIRONMENTAL
BNSF's operations, as well as those of its competitors, are subject to extensive
federal, state and local environmental regulation. BNSF's operating procedures
include practices to protect the environment from the environmental risks
inherent in railroad operations, which frequently involve transporting chemicals
and other hazardous materials. Additionally, many of BNSF's land holdings are
and have been used for industrial or transportation-related purposes or leased
to commercial or industrial companies whose activities may have resulted in
discharges onto the property. As a result, BNSF is subject to environmental
clean-up and enforcement actions. In particular, the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also
known as the "Superfund" law, as well as similar state laws generally impose
joint and several liability for clean-up and enforcement costs without regard to
fault or the legality of the original conduct on current and former owners and
operators of a site. BNSF has been notified that it is a potentially responsible
party (PRP) for study and clean-up costs at approximately 32 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 $64 million, $55
million and $47 million during 1998, 1997 and 1996 respectively, for mandatory
and unasserted clean-up efforts, including amounts expended under federal and
state voluntary clean-up programs. BNSF has accruals of approximately $185
million for remediation and restoration of all known sites. BNSF anticipates
that the majority of the accrued costs at December 31, 1998, will be paid over
the next five years. No individual site is considered to be material.
BURLINGTON NORTHERN SANTA FE CORPORATION 35
During 1998, BNSF settled an environmental matter in the State of Missouri
related to the release of a reportable quantity of lead sulfide into a waterway.
BNSF agreed in the settlement to pay a fine of $7 million, make restitution
payments to the State of Missouri of $3 million and committed to spend $9
million, which includes amounts previously paid, in connection with its ongoing
remediation efforts. BNSF has made payments of approximately $16 million related
to this settlement, including approximately $12 million that was paid during
1998, which is included in total 1998 payments discussed above.
Liabilities recorded for environmental costs represent BNSF's best estimates
for remediation and restoration of these sites and include both asserted and
unasserted claims. Unasserted claims are not considered to be a material
component of the liability. Although recorded liabilities include BNSF's best
estimates of all costs, without reduction for anticipated recoveries from third
parties, BNSF's total clean-up costs at these sites cannot be predicted with
certainty due to various factors such as the extent of corrective actions that
may be required, evolving environmental laws and regulations, advances in
environmental technology, the extent of other parties' participation in clean-up
efforts, developments in ongoing environmental analyses related to sites
determined to be contaminated, and developments in environmental surveys and
studies of potentially contaminated sites. As a result, future charges to income
for environmental liabilities could have a significant effect on results of
operations in a particular quarter or fiscal year as individual site studies and
remediation and restoration efforts proceed or as new sites arise. However,
management believes that it is unlikely that any identified matters, either
individually or in the aggregate, will have a material adverse effect on BNSF's
consolidated financial position or liquidity.
The railroad industry, including BNSF Railway, is subject to future
requirements regulating air emissions from diesel locomotives. Final regulations
applicable to new and rebuilt locomotive engines were promulgated by the United
States Environmental Protection Agency (EPA) and became effective June 15, 1998.
The new standards will be phased in between 2000 and 2005. BNSF Railway has
evaluated compliance requirements and associated costs and believes the costs
will not be material in any given year. BNSF Railway has also entered into
agreements with the California State Air Resources Board and the EPA regarding a
program to reduce emissions in Southern California through accelerated
deployment of locomotives which comply with the federal standards.
OTHER CLAIMS AND LITIGATION
BNSF and its subsidiaries are parties to a number of legal actions and claims,
various governmental proceedings and private civil suits arising in the ordinary
course of business, including those related to environmental matters and
personal injury claims. While the final outcome of these items cannot be
predicted with certainty, considering among other things the meritorious legal
defenses available, it is the opinion of management that none of these items,
when finally resolved, will have a material adverse effect on the annual results
of operations, financial position or liquidity of BNSF, although an adverse
resolution of a number of these items could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.
13 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.
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, 1998 1997 1996
- ----------------------------------------- ------ ----- -----
Service cost $ 15 $ 14 $ 17
Interest cost 101 100 97
Expected return on plan assets (117) (112) (113)
Net amortization and deferred amounts 4 4 8
- ----------------------------------------- ------ ----- -----
Net benefit cost $ 3 $ 6 $ 9
========================================= ====== ===== =====
Medical and Life Benefits
----------------------------
Year ended December 31, 1998 1997 1996
- ----------------------------------------- ------ ----- -----
Service cost $ 4 $ 4 $ 5
Interest cost 16 14 16
Net amortization and deferred amounts -- (1) --
- ----------------------------------------- ------ ----- -----
Net benefit cost $ 20 $ 17 $ 21
========================================= ====== ===== =====
36 BURLINGTON NORTHERN SANTA FE CORPORATION
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 1998 1997 1998 1997
- ------------------------------------- ------ ------ ----- -----
Benefit obligation at
beginning of year $1,404 $1,286 $ 190 $ 210
Service cost 15 14 4 4
Interest cost 101 100 16 14
Plan participants' contributions -- -- 3 5
Amendments -- -- 13 --
Actuarial (gain) loss 85 117 39 (22)
Benefits paid (118) (113) (16) (21)
- ------------------------------------- ------ ------ ----- -----
Benefit obligation at year end $1,487 $1,404 $ 249 $ 190
===================================== ====== ====== ===== =====
Pension Medical and
Benefits Life Benefits
---------------- ---------------
Change in plan assets 1998 1997 1998 1997
- ------------------------------------- ------ ------ ----- -----
Fair value of plan assets
at beginning of year $1,540 $1,320 $ -- $ --
Actual return on plan assets 43 329 -- --
Employer contribution 4 4 13 16
Plan participants' contributions -- -- 3 5
Benefits paid (118) (113) (16) (21)
- ------------------------------------- ------ ------ ----- -----
Fair value of plan assets
at year end $1,469 $1,540 $ -- $ --
===================================== ====== ====== ===== =====
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, 1998 1997 1998 1997
- ------------------------------------- ------ ------ ----- -----
Funded status $ (18) $ 136 $(249) $(190)
Unrecognized net (gain) loss 7 (151) 4 (16)
Unrecognized prior service cost (8) (8) 13 --
Unamortized net
transition obligation 11 14 -- --
- ------------------------------------- ------ ------ ----- -----
Net amount recognized $ (8) $ (9) $(232) $(206)
===================================== ====== ====== ===== =====
Pension Medical and
Benefits Life Benefits
---------------- ---------------
December 31, 1998 1997 1998 1997
- ------------------------------------- ------ ------ ----- -----
Amounts recognized in the
consolidated balance sheet:
Prepaid benefit cost $ 20 $ 17 $ -- $ --
Accrued benefit liability (43) (39) (232) (206)
Intangible asset 2 2 -- --
Accumulated other
comprehensive income 13 11 -- --
- ------------------------------------- ------ ------ ----- -----
Net amount recognized $ (8) $ (9) $(232) $(206)
===================================== ====== ====== ===== =====
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 1998 1997 1998 1997
- ------------------------------------- ------ ------ ----- -----
Discount rate 7.0% 7.5% 7.0% 7.5%
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 1998, the
assumed health care cost trend rate for both managed care and non-managed care
medical costs is 9 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 1998 by $1
million. Decreasing the assumed health care cost trend rates by one percentage
point would decrease the accumulated postretirement benefit obligation by $17
million and the combined service and interest components of net postretirement
benefit cost recognized in 1998 by $1 million.
OTHER PLANS
Under collective bargaining agreements, BNSF participates in multiemployer
benefit plans which provide certain postretirement health care and life
insurance benefits for eligible union employees. Insurance premiums paid
attributable to retirees, which are generally expensed as incurred, were $18
million, $15 million and $14 million, in 1998, 1997 and 1996, 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 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 $16 million, $14
million and $13 million in 1998, 1997 and 1996, respectively.
BURLINGTON NORTHERN SANTA FE CORPORATION 37
14 STOCK OPTIONS AND OTHER INCENTIVE PLANS
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. Approximately 3.9 million common shares were available for future
grant at December 31, 1998. All options generally vest within one year and
expire within 10 years from 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 1998, 1997 and 1996 based
on the fair value at grant dates consistent with Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation," the
Company's pro forma net income and earnings per share would have been as
follows:
1998 1997 1996
- ----------------------------------- ------ ----- -----
Net income (in millions) $1,124 $ 857 $ 871
Basic earnings per share $ 2.39 $1.85 $1.91
Diluted earnings per share $ 2.36 $1.82 $1.88
- ----------------------------------- ------ ----- -----
The pro forma amounts were estimated using the Black-Scholes option pricing
model with the following assumptions:
1998 1997 1996
- ----------------------------------- ------ ----- -----
Weighted average expected
life (years) 3.0 3.0 3.0
Expected volatility 20% 20% 20%
Annual dividend per share $ 0.48 $0.40 $0.40
Risk free interest rate 5.11% 5.81% 6.11%
Weighted average fair value
of options granted $ 5.13 $5.15 $4.45
- ----------------------------------- ------ ----- -----
A summary of the status of the stock option plans as of December 31, 1998,
1997 and 1996, and changes during the years then ended, is presented below:
1998 1997 1996
----------------------------- ------------------------------- -----------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Prices Options Exercise Prices Options Exercise Prices
- ----------------------- ---------- ---------------- ---------- ---------------- ---------- ----------------
Balance at beginning of
year 25,761,369 $20.98 24,765,855 $16.49 28,795,959 $12.48
Granted 9,587,926 29.33 8,778,036 29.40 7,318,140 25.26
Exercised (6,666,864) 18.66 (7,092,690) 15.46 (10,748,892) 11.46
Cancelled (546,562) 26.25 (689,832) 23.58 (599,352) 21.34
---------- ---------------- ---------- ---------------- ---------- ----------------
Balance at end of year 28,135,869 $24.27 25,761,369 $20.98 24,765,855 $16.49
---------- ---------------- ---------- ---------------- ---------- ----------------
Options exercisable at
year end 17,763,770 $21.45 16,419,858 $16.31 17,082,372 $13.06
- ---------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information regarding stock options outstanding
at December 31, 1998:
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 $16.55 4,091,142 3.6 Years $7.93 4,091,142 $7.93
$16.86 to $29.08 8,407,778 6.6 Years $22.70 7,259,231 $21.90
$29.10 to $29.10 8,595,519 9.0 Years $29.10 -- --
$29.38 to $35.19 7,041,430 8.0 Years $29.76 6,413,397 $29.56
- ---------------- ----------- ---------------- ---------------- ----------- ---------------
$ 3.01 to $35.19 28,135,869 7.2 Years $24.27 17,763,770 $21.45
- ---------------- ----------- ---------------- ---------------- ----------- ---------------
38 BURLINGTON NORTHERN SANTA FE CORPORATION
OTHER INCENTIVE PLANS
BNSF has other long-term incentive programs in addition to stock options which
are administered separately on behalf of employees.
Under the BNSF 1996 Stock Incentive Plan and the Non-Employee Directors'
Stock Plan (NEDS), up to 30 million and 900,000 shares of BNSF common stock,
respectively, have been authorized to be issued in the form of stock options,
restricted stock, performance shares and performance units.
During 1996, BNSF awarded a total of approximately 1.2 million shares of
restricted stock to eligible employees and directors. No cash payment is
required by the individual. Shares awarded under the plans may not be sold,
transferred or used as collateral by the holder until the shares awarded become
free of restrictions. The restrictions will be lifted in thirds over three years
beginning on the third anniversary of the grant date if certain stock price
based performance goals are met. If, however, the performance goals are not met,
the restricted shares will be forfeited. All shares still subject to
restrictions are generally forfeited and returned to the plan if the employee's
or director's relationship is terminated. A total of approximately 934,000
restricted shares related to this award were outstanding as of December 31,
1998. Additionally, in December 1997, BNSF issued 90,000 restricted shares of
stock. The shares are time-vesting and vest ratably over the five year period
ending December 31, 2002. At December 31, 1998, 72,000 restricted shares related
to this award were outstanding.
Under the BNSF 1996 Stock Incentive Plan certain eligible employees may
defer the cash payment of their bonus paid under the Incentive Compensation Plan
(ICP) and will receive restricted stock which restrictions lapse in three years
or in two years if certain performance goals are met. The number of restricted
shares awarded are based on the amount of bonus deferred, plus incremental
shares, using the market price of BNSF common stock on the date of grant.
Restricted awards granted under this program totaled approximately 380,000
shares in 1998. A total of approximately 936,000 awards were outstanding under
this and prior programs on December 31, 1998.
In addition, all regularly-assigned salaried employees not eligible to
participate in deferrals of ICP are eligible to participate in the BNSF
Discounted Stock Purchase Program. This program allows employees to use their
bonus earned under the ICP to purchase BNSF common stock at a discount from the
market price and requires that the stock be restricted for a three year period.
During the years ended December 31, 1998, 1997 and 1996, approximately 54,000,
84,000 and 87,000 shares, respectively, were purchased under this plan.
Compensation expense is recorded under the BNSF Stock Incentive Plan in
accordance with APB Opinion 25 and was not material in 1998, 1997 or 1996.
15 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, 1998, there were 470.5 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
stockholders. 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.
PREFERRED CAPITAL STOCK
At December 31, 1998, 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.
SHARE 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. Repurchased shares will be available to satisfy future requirements of
various stock-based employee compensation programs. During 1998, the Company
repurchased approximately 5 million shares of its common stock at an average
price of $30.75 per share. Total Repurchases through February 8, 1999, were 6.1
million shares at a total average cost of $31.29 per share.
In November 1997, BNSF sold equity put options for 1.5 million shares of
the Company's common stock to an independent third party and received cash
proceeds of $1 million. The option contracts had an exercise price of $29.33 and
an expiration date of May 5, 1998. The option contracts permitted a net-share or
net-cash settlement method at BNSF's election. These options expired
unexercised.
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 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.
The Company accounted for the effects of these equity put option
transactions within stockholders' equity.
BURLINGTON NORTHERN SANTA FE CORPORATION 39
16 QUARTERLY FINANCIAL DATA -- UNAUDITED
(Dollars in millions, except per share data) Fourth Third Second First
- -------------------------------------------- ------ ------ ------ ------
1998
Revenues/(1)/ $2,294 $2,294 $2,205 $2,148
- -------------------------------------------- ------ ------ ------ ------
Operating income 568 614 529 447
- -------------------------------------------- ------ ------ ------ ------
Net income/(2)/ $ 296 $ 317 $ 277 $ 265
- -------------------------------------------- ------ ------ ------ ------
Basic earnings per share/(3)/ $ .63 $ .67 $ .59 $ .56
Diluted earnings per share/(3)/ $ .63 $ .66 $ .58 $ .56
Dividends declared per share/(3)/ $ .12 $ .12 $ .10 $ .10
Common stock price:
High/(3)/ $34.81 $35.58 $35.71 $35.65
Low/(3)/ 28.63 26.87 31.25 28.08
1997
Revenues/(1)/ $2,174 $2,125 $2,055 $2,016
- -------------------------------------------- ------ ------ ------ ------
Operating income/(4)/ 438 541 459 329
- -------------------------------------------- ------ ------ ------ ------
Net income/(4)/ $ 217 $ 283 $ 235 $ 150
- -------------------------------------------- ------ ------ ------ ------
Basic earnings per share/(3)/ $ .47 $ .61 $ .51 $ .32
Diluted earnings per share/(3)/ $ .46 $ .60 $ .50 $ .32
Dividends declared per share/(3)/ $ .10 $ .10 $ .10 $ .10
Common stock price:
High/(3)/ $33.46 $32.67 $30.50 $29.83
Low/(3)/ 30.44 30.19 23.63 24.67
- -------------------------------------------- ------ ------ ------ ------
(1) Amounts do not agree to previously reported amounts due to certain
reclassifications between revenues and expenses which are not significant.
(2) First quarter 1998 results include a $67 million pre-tax gain ($32 million
after-tax) on the sale of substantially all of the Company's interest in
Santa Fe Pacific Pipeline Partners, L.P. as discussed in Note 2 -- Sale of
Investment in Pipeline Partnership.
(3) Information for prior periods presented has been restated to reflect the
1998 three-for-one common stock split as discussed in Note 1 -- Accounting
Policies.
(4) Fourth quarter 1997 results include a $90 million pre-tax charge ($57
million after-tax) as discussed in Note 9--Employee Merger and Separation
Costs.
40 BURLINGTON NORTHERN SANTA FE CORPORATION