-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A9yBvYSDVmtYKROXEZY3TRCzShmE2FfL+vhKsvoL8TU35Ycjq7RfbkOkY9TjnmvO YloYuEMK6HjUtLJzsZRzFQ== 0000930661-99-001940.txt : 19990817 0000930661-99-001940.hdr.sgml : 19990817 ACCESSION NUMBER: 0000930661-99-001940 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURLINGTON NORTHERN RAILROAD CO CENTRAL INDEX KEY: 0000015511 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 416034000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06324 FILM NUMBER: 99690532 BUSINESS ADDRESS: STREET 1: 3800 CONTINENTAL PLZ STREET 2: 777 MAIN ST CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8178782000 MAIL ADDRESS: STREET 1: 3800 CONTINENTAL PLAZA STREET 2: 777 MAIN STREET CITY: FORT WORTH STATE: TX ZIP: 76102-5384 FORMER COMPANY: FORMER CONFORMED NAME: BURLINGTON NORTHERN INC DATE OF NAME CHANGE: 19810602 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-6324 THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY (Exact name of registrant as specified in its charter) Delaware 41-6034000 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2650 Lou Menk Drive Fort Worth, Texas 76131 (Address of principal executive offices) (Zip Code) (817) 333-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Class Outstanding at July 31, 1999 ----- ---------------------------- Common stock, $1.00 par value 1,000 shares * The Burlington Northern and Santa Fe Railway Company is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation (BNSF); as a result there is no market data with respect to registrant's shares. Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format permitted by General Instruction H (2). PART I FINANCIAL INFORMATION Item 1. Financial Statements THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Dollars in Millions) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenues $2,193 $2,203 $4,382 $4,350 ---------- ---------- ---------- ---------- Operating expenses: Compensation and benefits 679 690 1,368 1,392 Purchased services 236 219 472 436 Depreciation and amortization 221 204 440 406 Equipment rents 181 203 374 394 Fuel 169 181 334 362 Materials and other 222 178 429 385 Reorganization costs 48 - 48 - Merger severance adjustment (54) - (54) - ---------- ---------- ---------- ---------- Total operating expenses 1,702 1,675 3,411 3,375 ---------- ---------- ---------- ---------- Operating income 491 528 971 975 Interest expense 46 39 93 84 Interest expense, related parties 29 29 58 57 Other income (expense), net (4) 1 (5) 85 ---------- ---------- ---------- ---------- Income before income taxes 412 461 815 919 Income tax expense 155 170 306 350 ---------- ---------- ---------- ---------- Net income $ 257 $ 291 $ 509 $ 569 ========== ========== =========== ==========
See accompanying notes to consolidated financial statements. -1- THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in Millions) (Unaudited)
June 30, December 31, ASSETS 1999 1998 ----------------- ----------------- Current assets: Cash and cash equivalents $ 114 $ 95 Accounts receivable, net 484 676 Materials and supplies 244 244 Current portion of deferred income taxes 318 335 Other current assets 39 33 ----------------- ----------------- Total current assets 1,199 1,383 Property and equipment, net 21,126 20,604 Other assets 1,128 764 ----------------- ----------------- Total assets $23,453 $22,751 ================= ================= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and other current liabilities $ 2,026 $ 1,933 Long-term debt due within one year 163 268 ----------------- ----------------- Total current liabilities 2,189 2,201 Long-term debt 2,604 2,500 Intercompany notes payable 2,288 2,288 Deferred income taxes 5,796 5,634 Casualty and environmental liabilities 417 389 Employee merger and separation costs 348 409 Other liabilities 1,063 1,102 ----------------- ----------------- Total liabilities 14,705 14,523 ----------------- ----------------- Commitments and contingencies (See notes 4 and 5) Stockholder's equity: Common stock, $1 par value (1,000 shares authorized, issued and outstanding) and paid-in capital 4,716 4,706 Retained earnings 4,040 3,530 Accumulated other comprehensive deficit (8) (8) ----------------- ----------------- Total stockholder's equity 8,748 8,228 ----------------- ----------------- Total liabilities and stockholder's equity $23,453 $22,751 ================= =================
See accompanying notes to consolidated financial statements. -2- THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions) (Unaudited)
Six Months Ended June 30, ----------------------------------- 1999 1998 -------------- --------------- Operating Activities: Net income $ 509 $ 569 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 440 406 Deferred income taxes 179 151 Employee merger and separation costs paid (40) (45) Other, net (55) (100) Changes in current assets and liabilities: Accounts receivable 107 66 Materials and supplies - (6) Other current assets (6) (38) Accounts payable and other current liabilities 182 28 -------------- --------------- Net cash provided by operating activities 1,316 1,031 -------------- --------------- Investing Activities: Capital expenditures (921) (952) Other, net (376) (240) -------------- --------------- Net cash used for investing activities (1,297) (1,192) -------------- --------------- Financing Activities: Proceeds from issuance of long-term debt 229 92 Payments on long-term debt (227) (50) Net increase in intercompany notes payable - 225 Other, net (2) (5) -------------- --------------- Net cash provided by financing activities - 262 Increase in cash and cash equivalents 19 101 Cash and cash equivalents: Beginning of period 95 - -------------- --------------- End of period $ 114 $ 101 ============== =============== Supplemental cash flow information: Interest paid, net of amounts capitalized $ 156 $ 161 Income taxes paid, net of refunds 71 112
See accompanying notes to consolidated financial statements. -3- THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Accounting policies and interim results The consolidated financial statements should be read in conjunction with The Burlington Northern and Santa Fe Railway Company (BNSF Railway or Company) Annual Report on Form 10-K for the year ended December 31, 1998, as amended. BNSF Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation (BNSF). The consolidated financial statements include the accounts of The Burlington Northern and Santa Fe Railway Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the entire year. In the opinion of management, all adjustments (consisting of only normal recurring adjustments, except as disclosed) necessary to present fairly BNSF Railway's consolidated financial position as of June 30, 1999 and December 31, 1998 and the consolidated results of operations for the three and six month periods ended June 30, 1999 and 1998 have been included. For the three and six month periods ended June 30, 1999 and 1998, the Company's comprehensive income was equal to net income. Certain comparative prior year amounts in the consolidated financial statements and notes have been reclassified to conform to the current year presentation. 2. SPECIAL ITEMS Included in the Statement of Income for the second quarter of 1999 are the following special items: . The Company incurred during the quarter $48 million of reorganization costs for severance, pension, medical and other benefit costs for approximately 325 involuntarily terminated salaried employees that were part of the program announced in May 1999 to reduce operating costs. Components of the charge include approximately $29 million relating to estimated severance costs for salaried employees, approximately $16 million for special termination benefits to be received under the Company's retirement and medical plans, and approximately $3 million of costs incurred for relocating approximately 60 salaried employees as a result of the reorganization. The majority of these costs have not been paid out as of June 30, 1999. The program sought to eliminate approximately 400 salaried and 1,000 scheduled (union) positions. Approximately half of the planned reductions were made by June 30, 1999 with substantially all of the 325 salaried employees eliminated through severance and the remainder of the 400 through the elimination of contractors and normal attrition. The remaining union positions will be substantially eliminated during the third quarter of 1999. No significant costs have been or are anticipated to be incurred as a result of eliminating the 1,000 scheduled positions. . The Company recorded a $54 million credit for the reversal of certain liabilities associated with its clerical consolidation plan. These liabilities were related to planned work-force reductions that are no longer anticipated due to the Company's ability to utilize a series of job swaps between certain locations to achieve the advantages of functional work consolidation. This change in the clerical consolidation plan was communicated to Company employees in May 1999. . The Company accrued an additional $37 million for environmental expense as a result of significant developments at certain sites, primarily related to new information on the extent of contamination and other related developments. None of the sites are individually considered material in relation to the Company's results of operations, financial position or liquidity. These costs are classified as materials and other expenses on the Statement of Income. On a combined basis, the three items increased operating expenses $31 million in the second quarter of 1999. -4- 3. EMPLOYEE MERGER AND SEPARATION COSTS Current and long-term employee merger and separation liabilities totaling $409 million are included in the consolidated balance sheet at June 30, 1999, 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 salaried employee severance costs. During the first six months of 1999, the Company made employee merger and separation payments of $40 million. As discussed in Note 2: Special Items, during the second quarter, the Company recorded a $29 million liability for estimated severance costs for involuntarily terminated salaried employees and a $54 million credit for the reversal of certain liabilities associated with the clerical consolidation plan. Liabilities related to the consolidation of clerical functions are paid to affected union employees in the form of a lump-sum payment or payments made over five to ten years, or in some cases, through retirement. Liabilities related to deferred benefits payable to certain active conductors, trainmen and locomotive engineers are paid upon the employee's separation or retirement. Liabilities principally related to certain remaining salaried employee severances will be paid in the form of a lump sum payment or over the next several years based on deferral elections made by affected employees. At June 30, 1999, $61 million of the remaining liabilities are included within current liabilities for anticipated costs to be paid over the next twelve months. 4. 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 Railway's operating procedures include practices to protect the environment from the risks inherent in railroad operations, which include transporting chemicals and other hazardous materials. Additionally, many of BNSF Railway'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 Railway 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 Railway 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 Railway may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF Railway may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF Railway 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 Railway'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 Railway 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. During the first six months of 1999, BNSF Railway recorded total environmental expense of $56 million, including $37 million of additional expense as a result of significant second quarter developments at certain existing sites, primarily related to new information on the extent of contamination and other related developments. BNSF Railway 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 Railway paid approximately $24 million during the first six months of -5- 1999 for mandatory and unasserted clean-up efforts, including amounts expended under federal and state voluntary clean-up programs. BNSF Railway has accruals of approximately $217 million for remediation and restoration of all known sites. BNSF Railway anticipates that the majority of the accrued costs at June 30, 1999, will be paid over the next five years. No individual site is considered to be material. Liabilities recorded for environmental costs represent BNSF Railway'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 Railway's best estimates of all costs, without reduction for anticipated recoveries from third parties, BNSF Railway'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 Railway'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 Railway 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 Railway, although an adverse resolution of a number of these items in a single period could have a material adverse effect on the results of operations in a particular quarter or fiscal year. 5. HEDGING ACTIVITIES AND OTHER COMMITMENTS FUEL During the past three years, fuel expenses approximated 11 percent of total operating expenses. Due to the significance of diesel fuel expenses to the operations of BNSF Railway 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 may 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 annualized fuel consumption during the first six months of 1999 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. -6- As of June 30, 1999, BNSF Railway had entered into fuel swaps for approximately 1,323 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 Railway's diesel fuel. Currently, BNSF Railway's fuel hedging program covers approximately 78 percent of estimated fuel purchases for the remaining six months of 1999, and approximately 40 percent, 22 percent and 7 percent of estimated annual and quarterly fuel purchases for 2000, 2001, and 2002, respectively. Hedge positions are closely monitored to ensure that they will not exceed actual fuel requirements in any period. Unrecognized losses from BNSF Railway's fuel swap transactions were approximately $47 million as of June 30, 1999, of which $17 million relates to swap transactions that will expire in 1999. BNSF Railway also monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. 6. RELATED PARTY TRANSACTIONS BNSF Railway is involved with BNSF and certain of its subsidiaries in related party transactions in the ordinary course of business, which include payments made on each other's behalf and performance of services. Under the terms of a tax allocation agreement with BNSF, BNSF Railway made federal and state income tax payments of $71 million and $112 million, net of refunds, during the first six months of 1999 and 1998, respectively, which are reflected in changes in working capital in the consolidated statement of cash flows. BNSF Railway had a net intercompany payable balance of $210 million at June 30, 1999, which is reflected in accounts payable and other current liabilities in the consolidated balance sheet. BNSF Railway had a net intercompany receivable balance of $86 million at December 31, 1998, which is reflected in accounts receivable, net in the consolidated balance sheet. Net intercompany receivable or payable balances are settled in the ordinary course of business. BNSF Railway had intercompany notes payable to BNSF of $2,288 million at June 30, 1999 and December 31, 1998, included in the consolidated balance sheet. At June 30, 1999, $1,579 million of the intercompany notes payable had a fixed interest rate of 6.9 percent and $709 million had a variable interest rate of 1.0 percent above the monthly average of the daily effective Federal Funds rate. During 1999, BNSF Railway has not had any borrowings from BNSF. Interest is paid semi-annually on all intercompany notes payable. Interest expense on intercompany notes payable is reflected in interest expense, related parties in the consolidated income statement. The intercompany notes are due on demand; however, it is not anticipated that BNSF Railway will be required to pay these obligations in the next twelve months. Item 2. Management's Narrative Analysis of Results of Operations Management's narrative analysis relates to the financial condition and results of operations of The Burlington Northern and Santa Fe Railway Company and its majority-owned subsidiaries (collectively BNSF Railway, Registrant or Company). Results of Operations Six months ended June 30, 1999 compared with six months ended June 30, 1998 BNSF Railway recorded net income for the first six months of 1999 of $509 million, compared with the first six months of 1998 net income of $569 million. The decrease in net income is primarily due to the Company recording pre-tax special items in 1999 of $48 million ($30 million after-tax) and $37 million ($23 million after-tax) for reorganization costs and environmental expenses, respectively, partially offset by a $54 million ($34 million after-tax) credit for the reversal of liabilities associated with the consolidation of certain clerical work-forces and a first quarter 1998 pre-tax gain of $67 million ($32 million after-tax) on the sale of substantially all of the Company's interest in Santa Fe Pacific Pipeline Partners, L.P. Excluding the after-tax effects of these items, BNSF Railway's adjusted net income was $528 million and $537 million for the first six months of 1999 and 1998, respectively. The decrease in adjusted net income is primarily due to a decrease in other income (expense), net as discussed below. -7- Revenues The following table presents BNSF Railway's revenue information by commodity for the six months ended June 30, 1999 and 1998 and includes certain reclassifications of prior year information to conform to the current year presentation:
Average Revenue Revenues Cars/Units Per Car/Unit --------------------------- ----------------------------- ---------------------------- 1999 1998 1999 1998 1999 1998 ----------- ----------- ------------- ----------- ------------ ------------ (In Millions) (In Thousands) Carload $ 1,261 $ 1,292 880 898 $ 1,433 $ 1,439 Intermodal 1,181 1,149 1,503 1,448 786 794 Coal 1,109 1,113 1,041 1,022 1,065 1,089 Agricultural Commodities 597 599 326 327 1,831 1,832 Automotive 220 194 126 118 1,746 1,644 ----------- ----------- ----------- ---------- ----------- ---------- Total Freight Revenues 4,368 4,347 3,876 3,813 $ 1,127 $ 1,140 =========== ========== =========== ========== Other Revenues 14 3 ----------- ----------- Total Operating Revenues $ 4,382 $ 4,350 =========== ===========
Total revenues for the first six months of 1999 were $4,382 million or 1 percent higher compared with revenues of $4,350 million for the first six months of 1998. The increase primarily reflects increases in the intermodal and automotive sectors, partially offset by lower carload, coal, and agricultural commodities revenues. Average revenue per car/unit decreased in the first six months of 1999 to $1,127 from $1,140 in the first six months of 1998. Carload revenues of $1,261 million for the first six months of 1999 were $31 million or 2 percent lower than the first six months of 1998 due to decreases in the chemicals, metals, and minerals and machinery sectors, partially offset by increased forest product revenues. Weaknesses in the chemicals sector due to soft fertilizer markets and weaknesses in the metals sector due to increased steel imports and a decrease in special train movements of heavy machinery for Boeing contributed to the decrease. These decreases were partially offset by increased inland shipments of forest products. Intermodal revenues of $1,181 million for the first six months of 1999 increased $32 million or 3 percent compared with the first six months of 1998 reflecting increases in the direct marketing and international 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 new business established with Sealand, NYK, Maersk and K-Line. Coal revenues of $1,109 million for the first six months of 1999 were $4 million or slightly lower than the first six months of 1998 primarily due to traffic congestion in the Powder River Basin and operating difficulties at two utility plants in early 1999, which resulted in plant closures during the second quarter. Agricultural commodities revenues of $597 million for the first six months of 1999 were $2 million or slightly lower than revenues for the first six months of 1998 due to poor northern wheat exports, partially offset by increased Pacific Northwest corn exports. Automotive revenues of $220 million for the first six months of 1999 were $26 million or 13 percent higher than the first six months of 1998 reflecting growth in both vehicle and parts shipments. Expenses Total operating expenses for the first six months of 1999 were $3,411 million, an increase of $36 million or 1 percent, over the first six months of 1998. As discussed above, the Company recorded three special items in the second quarter of 1999 which increased operating expenses $31 million ($19 million after-tax). Excluding the special items, operating expenses for the first six months of 1999 were $3,380 or slightly higher than the first six months of 1998. The adjusted operating ratio improved to 77.1 percent for the first six months of 1999, compared with a 77.6 percent operating ratio for the first six months of 1998. -8- Compensation and benefits expenses of $1,368 million were $24 million or 2 percent lower than the first six months of 1998 primarily due to lower employment levels and lower incentive compensation expense. Purchased services of $472 million for the first six months of 1999 were $36 million or 8 percent higher than the first six months of 1998 principally due to increased equipment maintenance, intermodal ramping and other costs. Equipment rents expenses for the first six months of 1999 of $374 million were $20 million or 5 percent lower than the first six months of 1998 reflecting lower intermodal equipment expenses. Fuel expenses of $334 million for the first six months of 1999 were $28 million or 8 percent lower than the first six months of 1998, as a result of a 6 cent or 9 percent decrease in the average all-in cost per gallon of diesel fuel, partially offset by a 2 percent volume driven increase in consumption from 572 million to 582 million gallons. The decrease in the average all-in cost per gallon of diesel fuel includes a 9-cent decrease in the average purchase price, partially offset by a 3-cent per gallon increase in losses related to the Company's fuel hedging program. Materials and other expenses of $429 million for the first six months of 1999 were $44 million or 11 percent higher than the first six months of 1998 principally reflecting additional environmental expense accruals of $37 million as discussed above and higher personal injury and casualties expenses. Interest expense with external and related parties of $151 million for the first six months of 1999 was $10 million or 7 percent higher than in the first six months of 1998, reflecting higher debt levels which increased to $5,055 million at June 30, 1999 from $4,918 million at June 30, 1998. Other income (expense) net was unfavorable by $90 million compared to the first six months of 1998 primarily due to the $67 million pre-tax gain on the sale of substantially all of the Company's interest in Santa Fe Pacific Pipeline Partners, L.P. in the first quarter of 1998, and gains of $26 million from the sale of a real estate portfolio during the first six months of 1998. Other Matters Reorganization Costs The Company incurred during the quarter $48 million of reorganization costs for severance, pension, medical and other benefit costs for approximately 325 involuntarily terminated salaried employees that were part of the program announced in May 1999 to reduce operating costs. Components of the charge include approximately $29 million relating to estimated severance costs for salaried employees, approximately $16 million for special termination benefits to be received under the Company's retirement and medical plans, and approximately $3 million of costs incurred for relocating approximately 60 salaried employees as a result of the reorganization. The majority of these costs have not been paid out as of June 30, 1999. The program sought to eliminate approximately 400 salaried and 1,000 scheduled (union) positions. Approximately half of the planned reductions were made by June 30, 1999 with substantially all of the 325 salaried employees eliminated through severance and the remainder of the 400 through the elimination of contractors and normal attrition. The remaining union positions will be substantially eliminated during the third quarter of 1999. No significant costs have been or are anticipated to be incurred as a result of eliminating the 1,000 scheduled positions. Total savings related to the reorganization are expected to be approximately $40 million in the remainder of 1999 and to approximate $100 million on an annual basis. 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 -9- 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 Railway'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 Railway 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 Railway has completed the Inventory and Assessment phase for both ISS and Enterprise technologies. During this phase, BNSF Railway 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 98 percent complete. Remediation includes converting source code and replacing or upgrading purchased software and hardware. Remediation is complete for ISS technologies and is expected to be completed by October 1999 for Enterprise technologies. The Certification Testing phase addresses 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. Certification testing for existing ISS critical applications was completed in July 1999. Testing for all applications is scheduled for completion by the end of September 1999. Certification testing of all critical and non-critical Enterprise technologies began in May 1998 and is scheduled for completion in October 1999. COSTS As a result of its merger-related systems integration that was completed in 1997, BNSF Railway achieved substantial Year 2000 compliance on its core mainframe systems. In addition, spending on Year 2000 activities approximates $12 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 $16 million. YEAR 2000 RISKS AND CONTINGENCY PLANS Certain BNSF Railway 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 Railway 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 the end of August 1999, with open carrier testing through October 1999. BNSF Railway has developed contingency plans for critical business processes supported by AAR systems. Certain BNSF Railway routes and resulting revenues are dependent on the use of trackage rights over other railroads, including Union Pacific Corporation, Montana Rail Link and the Arizona and California Railroad. Other BNSF Railway traffic may originate or terminate on other carriers' lines or may otherwise involve use of a foreign -10- connection en route. Approximately 60 percent of units handled by BNSF Railway run over BNSF Railway facilities only. BNSF Railway'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 Railway 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 is in the process of determining which of its larger customers may have Year 2000 problems that could result in reduced traffic for the Company. It is the opinion of management that Year 2000 problems in BNSF Railway'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 Railway's systems will be compliant on a timely basis. BNSF Railway 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 Railway continues to develop contingency plans in the event that BNSF Railway's key third parties do not become Year 2000 compliant on a timely basis, which effort includes the formalization of existing disaster recovery plans. Other Claims and Litigation BNSF Railway 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 Railway, although an adverse resolution of a number of these items in a single period could have a material adverse effect on the results of operations in a particular quarter or fiscal year. 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 Railway 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. -11- The BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K A. Exhibits See Index to Exhibits on page E-1 for a description of the exhibits filed as part of this report. B. Reports on Form 8-K The Registrant has filed no Current Reports on Form 8-K since those reported in the Annual Report on Form 10-K, as amended, for the year ended December 31, 1998. -12- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY (Registrant) By: /s/ Dennis R. Johnson ------------------------------------ Dennis R. Johnson Vice President and Controller (On behalf of the Registrant and as principal accounting officer) Fort Worth, Texas August 13, 1999 -13- THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES Exhibit Index 12 Computation of ratio of earnings to fixed charges. 27 Financial Data Schedule for the quarter ended June 30, 1999. EX-12 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In Millions, Except Ratio Amounts) (Unaudited)
Six Months Ended June 30, ------------------------------------ 1999 1998 ------------- --------------- Earnings: Pre-tax income $ 815 $ 919 Add: Interest and fixed charges, excluding capitalized interest 151 141 Portion of rent under long-term operating leases representative of an interest factor 93 94 Amortization of capitalized interest 2 2 Less: Undistributed equity in earnings of investments accounted for under the equity method 9 8 ------------ --------------- Total earnings available for fixed charges $1,052 $1,148 ============ =============== Fixed charges: Interest and fixed charges $ 157 $ 148 Portion of rent under long-term operating leases representative of an interest factor 93 94 ------------ --------------- Total fixed charges $ 250 $ 242 ============= =============== Ratio of earnings to fixed charges 4.21x (1) 4.74x (2)
(1) Earnings for the six months ended June 30, 1999 include pre-tax special items of $48 million and $37 million for reorganization costs and environmental expenses, respectively, partially offset by a $54 million credit for the reversal of liabilities associated with the consolidation of certain clerical work-forces. Excluding the special items, the ratio for the six months ended June 30, 1999 would have been 4.33x. (2) Earnings for the six months ended June 30, 1998 include a pre-tax gain on the pipeline partnerships sale of $67 million. Excluding this gain, the ratio for the three months ended June 30, 1998 would have been 4.47x. EX-27 3 FINANCIAL DATA SCHEDULE
5 This financial data schedule contains summary financial information extracted from The Burlington Northern and Santa Fe Railway Company's Consolidated Financial Statements and is qualified in its entirety by reference to such financial statements. 0000015511 THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY 1,000,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 114 0 564 80 244 1,199 26,435 5,309 23,453 2,189 4,892 0 0 0 8,748 23,453 0 4,382 0 3,411 0 0 151 815 306 509 0 0 0 509 0 0
-----END PRIVACY-ENHANCED MESSAGE-----