-----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, VOT+1dFqv9H35ZXNq0JmsE7sMyGzRWIShlA4mo7oyI6vRLl8vJXgl/eCQUpdPnJm opoUdl74qHn4AcORi5nJkg== 0000930661-00-000833.txt : 20000331 0000930661-00-000833.hdr.sgml : 20000331 ACCESSION NUMBER: 0000930661-00-000833 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURLINGTON NORTHERN SANTA FE CORP CENTRAL INDEX KEY: 0000934612 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 411804964 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11535 FILM NUMBER: 588492 BUSINESS ADDRESS: STREET 1: 2650 LOU MENK DR STREET 2: 777 MAIN ST CITY: FT WORTH STATE: TX ZIP: 76131 BUSINESS PHONE: 8173526856 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 SANTE FE CORP DATE OF NAME CHANGE: 19950913 FORMER COMPANY: FORMER CONFORMED NAME: BNSF CORP DATE OF NAME CHANGE: 19941223 10-K405 1 FORM 10-K (FYE 12-31-99) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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: 1-11535 --------------- Burlington Northern Santa Fe Corporation (Exact name of registrant as specified in its charter) Delaware 41-1804964 (State of Incorporation) (I.R.S. Employer Identification No.) 2650 Lou Menk Drive Second Floor Fort Worth, Texas 76131-2830 (Address of principal executive offices, including zip code) 817/333-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each Class on which registered ------------------- ----------------------- Common Stock, $0.01 par value New York Stock Exchange Chicago Stock Exchange Pacific Exchange
--------------- Securities registered pursuant to Section 12(g) of the Act: None 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 requirement for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $8.68 billion on February 29, 2000. For purposes of this calculation only, the registrant has excluded stock beneficially owned by directors and officers. By doing so, the registrant does not admit that such persons are affiliates within the meaning of Rule 405 under the Securities Act of 1933 or for any other purpose. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 441,954,657 shares outstanding as of February 29, 2000. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the documents from which parts thereof have been incorporated by reference and the part of the Form 10-K into which such information is incorporated: Annual Report to Shareholders for the fiscal year ended December 31, 1999...................................... PARTS I, II, AND IV Proxy Statement dated March 23, 2000.................... PART III
TABLE OF CONTENTS
Page ---- PART I Items 1 and 2. Business and Properties.................................... 1 Item 3. Legal Proceedings................................................. 10 Item 4. Submission of Matters to a Vote of Security Holders............... 12 EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................................................. 13 Item 6. Selected Financial Data........................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 13 Item 8. Financial Statements and Supplementary Data....................... 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................... 17 PART III Item 10. Directors and Executive Officers of the Registrant............... 17 Item 11. Executive Compensation........................................... 17 Item 12. Security Ownership of Certain Beneficial Owners and Management... 17 Item 13. Certain Relationships and Related Transactions................... 17 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 18 SIGNATURES................................................................ S-1 REPORT OF INDEPENDENT ACCOUNTANTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE....................................................... F-1 EXHIBITS.................................................................. E-1
PART I ITEMS 1. and 2. Business and Properties Burlington Northern Santa Fe Corporation ("BNSF" or "Company") was incorporated in the State of Delaware on December 16, 1994. On September 22, 1995, the stockholders of Burlington Northern Inc. ("BNI") and Santa Fe Pacific Corporation ("SFP") became the stockholders of BNSF pursuant to a business combination of the two companies. To effect the combination, BNSF was formed to act as the parent holding company of BNI and SFP. BNI and SFP each owned a large, Class I railroad: Burlington Northern Railroad Company ("BNRR") and The Atchison, Topeka and Santa Fe Railway Company ("ATSF"), respectively. On December 30, 1996, BNI merged with and into SFP. On December 31, 1996, ATSF merged with and into BNRR, and BNRR changed its name to The Burlington Northern and Santa Fe Railway Company ("BNSF Railway"). On January 2, 1998, SFP merged with and into BNSF Railway. Through March 6, 1998, BNSF also had an equity interest in Santa Fe Pacific Pipeline Partners, L.P. and its operating subsidiary, which operated a 3,300- mile refined petroleum products pipeline system in six western and southwestern states, substantially all of which interest has now been sold. See the discussion in Note 3 to the Consolidated Financial Statements on pages 35-36 of BNSF's 1999 Annual Report to Shareholders, which information is hereby incorporated by reference. Through its subsidiaries, BNSF is engaged primarily in the rail transportation business. At December 31, 1999, BNSF and its subsidiaries had approximately 41,600 employees. The rail operations of BNSF Railway, BNSF's principal operating subsidiary, comprise one of the largest railroad systems in the United States. BNSF Railway's business and operations are described below. On December 18, 1999, BNSF and Canadian National Railway Company ("CN") entered into an agreement to combine their companies ("Combination"). Pursuant to the Amended and Restated Combination Agreement dated as of December 18, 1999 by and among BNSF, CN, North American Railways, Inc. ("North American Railways") and Western Merger Sub, Inc. (The "Combination Agreement"), the combined enterprise will consist of two public companies--North American Railways and CN--to comply with Canadian requirements prohibiting any person and that person's associates from owning more than 15 percent of the voting rights in CN and to ensure that the combination will be tax-efficient for each company's shareholders. Upon completion of the combination, BNSF will be a wholly owned subsidiary of North American Railways. All shareholders will have voting interests in both North American Railways and CN and economic interests in the combined companies. Further, upon completion of the combination each of the boards of directors of North American Railways and CN will be identical and will initially consist of six directors named by BNSF, six directors named by CN, and three directors named jointly. Completion of the combination requires approval of the shareholders of BNSF and CN. The combination is also subject to approval of the United States Surface Transportation Board ("STB"), compliance with the Competition Act (Canada), and approval by the Quebec Superior Court. See the discussion under "Proposed Combination With Canadian National Railway Company" in Note 1 to the Consolidated Financial Statements on pages 34-35 of BNSF's 1999 Annual Report to Shareholders, which information is hereby incorporated by reference. On March 17, 2000, the STB served a Decision (STB Ex Parte No. 582) directing Class I railroads to suspend activity relating to any railroad transaction that would be deemed a "major transaction" under STB regulations, "pending development of new rules" by the STB governing merger transactions. The Decision followed a four-day hearing that ended March 10, 2000, which the STB held to discuss the impact of future rail consolidations on the present and future structure of the rail industry and what the evolving structure of the North American railroad industry should be. The Decision stated that no filings relating to a major railroad transaction will be accepted for 15 months. The Decision also suspended the Notice of Intent to File Railroad Control Application that had been filed by BNSF and CN on December 20, 1999, giving notice of their intent to file a joint application for STB approval of their proposed rail combination on or after March 20, 2000. 1 On March 17, 2000, BNSF, CN, and the Western Coal Traffic League filed petitions for review of the STB's March 17, 2000 Decision in the United States Court of Appeals for the District of Columbia Circuit. On March 20, 2000, BNSF filed a petition for stay pending judicial review with the STB. In the stay petition, BNSF argued that the STB lacks statutory authority to impose a moratorium on the filing of railroad applications, failed to observe required procedures before entering its moratorium, and could not suspend the Notice of Intent to File Railroad Application without conducting an adjudicatory proceeding. BNSF also argued that during the pendency of the stay, the Board should accept the BNSF/CN control application and should review it within the statutorily prescribed 16-month period. In the absence of action by the STB on the petition for a stay by March 29, 2000, BNSF filed on that date a motion for stay pending judicial review in the United States Court of Appeals for the District of Columbia Circuit, seeking similar relief to the petition for a stay filed with the STB. A special meeting for BNSF shareholders to vote on the proposed Combination has been postponed in light of the STB's March 17, 2000 Decision. The rescheduling of the special meeting will depend on the resolution of some or all of the litigation matters concerning the Combination described above and under Item 3, Legal Proceedings in this Form 10-K. Track Configuration BNSF Railway operates over a railroad system consisting of, at December 31, 1999, approximately 33,500 route miles of track (excluding second, third and fourth main tracks, yard tracks, and sidings), approximately 25,000 miles of which are owned route miles, including easements, through 28 states and two Canadian provinces. Approximately 7,700 route miles of BNSF Railway's system consist of trackage rights that permit BNSF Railway to operate its trains with its crews over another railroad's tracks. BNSF Railway operates over other trackage through lease or contractual arrangements. As of December 31, 1999, the total BNSF Railway system, including first, second, third and fourth main tracks, yard tracks, and sidings, consisted of approximately 51,000 operated miles of track, all of which were owned by or held under easement by BNSF Railway except for approximately 8,500 miles operated under trackage rights agreements with other parties. At December 31, 1999, approximately 26,300 miles of BNSF Railway's track consisted of 112-pound per yard or heavier rail, including approximately 18,400 track miles of 131- pound per yard or heavier rail. 2 Equipment Configuration BNSF Railway owned or had under non-cancelable leases exceeding one year the following units of railroad rolling stock as of the dates shown below:
At December 31, -------------------- 1999 1998 1997 ------ ------ ------ Diesel Locomotives...................................... 5,095 4,992 4,697 ====== ====== ====== Locomotives Under Power Purchase Agreements............. 99 99 196 ====== ====== ====== Freight Cars: Box-general purpose................................... 913 948 1,042 Box-specially equipped................................ 10,111 10,295 10,533 Open Hopper........................................... 10,287 10,772 10,617 Covered Hopper........................................ 45,463 44,643 43,145 Gondola............................................... 12,753 12,427 11,845 Refrigerator.......................................... 6,236 6,476 6,606 Autorack.............................................. 4,799 3,304 3,588 Flat.................................................. 6,468 6,289 5,454 Tank.................................................. 482 489 491 Caboose............................................... 319 351 389 Other................................................. 728 729 732 ------ ------ ------ Total Freight Cars.................................... 98,559 96,723 94,442 ====== ====== ====== Domestic Containers..................................... 11,019 9,849 15,513 Trailers................................................ 2,213 2,410 721 Domestic Chassis........................................ 9,406 9,409 5,152 Company Service Cars.................................... 4,399 4,685 5,196 Commuter Passenger Cars................................. 141 141 141
In addition to the chassis, containers, trailers, and freight cars shown above, BNSF Railway had under short-term leases 19,692 chassis, 15,420 containers, 4,764 trailers, and 810 freight cars at December 31, 1999. The average age from date of manufacture of the locomotive fleet at December 31, 1999 was 11.46 years; the average age from date of manufacture or remanufacture of the freight car fleet at December 31, 1999 was 21.66 years. These averages are not weighted to reflect the greater capacities of the newer equipment. 3 Capital Expenditures and Maintenance BNSF Railway capital expenditures for the periods indicated were as follows:
Year Ended December 31, -------------------- 1999 1998 1997 ------ ------ ------ (in millions) Maintenance of Way Rail................................................. $ 256 $ 238 $ 286 Ties................................................. 170 220 231 Surfacing............................................ 130 136 124 Other................................................ 305 303 317 ------ ------ ------ Total Maintenance of Way........................... 861 897 958 Mechanical............................................. 240 243 198 Information Services................................... 74 76 38 Other.................................................. 114 104 83 ------ ------ ------ Total Maintenance of Business........................ 1,289 1,320 1,277 New Locomotives and Freight Cars....................... 261 340 374 Terminal and Line Expansion............................ 233 487 428 Other Projects......................................... 5 -- 103 ------ ------ ------ Total Capital Expenditures............................. $1,788 $2,147 $2,182 ====== ====== ======
The above table does not include expenditures for equipment financed through operating leases (principally locomotives and rolling stock). BNSF's planned 2000 cash capital commitments and total capital commitments (including equipment obtained through operating leases) approximate $1.5 billion and $1.7 billion, respectively. Approximately $1.5 billion of the total planned capital commitments will be for maintenance of business activities, primarily consisting of expenditures to maintain BNSF's track, signals, bridges and tunnels, as well as to overhaul locomotives and freight cars and to acquire new replacement locomotives, with the remaining to be spent on terminal and line expansions and other projects. As of December 31, 1999, General Electric Company, the Electro-Motive Division of General Motors Corporation, and Boise Locomotive Corporation performed locomotive maintenance and overhauls for BNSF Railway under various maintenance agreements that covered approximately 2,900 locomotives. These agreements require the work to be done at BNSF Railway's facilities using BNSF Railway employees. The majority of maintenance of way expenditures for track has been for rail and tie refurbishment and track resurfacing. The extent of the BNSF Railway track maintenance program is depicted in the following table:
Year Ended December 31, -------------------- 1999 1998 1997 ------ ------ ------ Track miles of rail laid (1)............................ 926 1,029 1,035 Cross ties inserted (thousands)(1)...................... 2,365 2,452 2,941 Track resurfaced (miles)................................ 10,505 12,383 12,430
- -------- (1) Includes both maintenance of way for the existing route system and expansion projects. BNSF Railway's planned 2000 track maintenance of way program, together with expansion projects, will result in the installation of approximately 725 track miles of rail, the replacement of about 2.5 million ties and the resurfacing of approximately 11,600 miles of track. 4 Property and Facilities BNSF Railway operates facilities and equipment to maintain its track, locomotives and freight cars. It also owns or leases other equipment to support rail operations, such as highway trailers, containers and vehicles. Support facilities for rail operations include yards and terminals throughout its rail network, system locomotive shops to perform locomotive servicing and maintenance, a centralized network operations center for train dispatching and network operations monitoring and management in Fort Worth, Texas, computers, telecommunications equipment, signal systems, and other support systems. Transfer facilities are maintained for rail-to-rail as well as intermodal transfer of containers, trailers and other freight traffic. These facilities include 38 major intermodal hubs located across the system and three intermodal hub centers off-line used in connection with haulage agreements with other railroads. BNSF Railway's largest intermodal facilities in terms of 1999 volume are:
Intermodal Facilities Units --------------------- ------- Hobart Yard (Los Angeles)........................................ 988,000 Corwith Yard (Chicago)........................................... 732,000 Willow Springs (Illinois)........................................ 678,000 Alliance (Texas)................................................. 413,000 Chicago Hub Center............................................... 405,000 San Bernardino (California)...................................... 328,000 Seattle International Gateway (Washington)....................... 247,000
BNSF Railway owns 27 automotive distribution facilities where automobiles are loaded or unloaded from multi-level rail cars and serves eight port facilities in the United States and Canada. BNSF Railway's largest freight car classification yards based on the average daily number of cars processed (excluding cars that do not change trains at the terminal and intermodal and coal cars) are shown below:
Daily Average Classification Yard Cars Processed ------------------- -------------- Argentine (Kansas)........................................ 2,070 Galesburg (Illinois)...................................... 1,570 Pasco (Washington)........................................ 1,420 Northtown (Minnesota)..................................... 1,290 Memphis (Tennessee)....................................... 1,270 Barstow (California)...................................... 1,230
Certain BNSF Railway properties and other assets are subject to liens securing, as of December 31, 1999, $503 million of mortgage debt. Certain locomotives and rolling stock of BNSF Railway are subject to equipment obligations and leases, as referred to in Note 8 to the Consolidated Financial Statements on pages 37-38 of BNSF's 1999 Annual Report to Shareholders, which information is hereby incorporated by reference. Employees and Labor Relations Productivity as measured by revenue ton miles per employee has risen steadily in the last three years, while compensation and benefits expense per revenue ton mile decreased over the same period, as shown in the table below.
Year Ended December 31, ------------------- 1999 1998 1997 ------ ------ ----- Thousand revenue ton-miles divided by average number of employees............................................. 11,435 10,576 9,769 Compensation and benefits expense per thousand revenue ton-miles............................................. $5.68 $6.00 $6.30
5 Approximately 88 percent of BNSF Railway employees are union-represented. They work under collective bargaining agreements with 13 different labor organizations. The negotiating process for new, major collective bargaining agreements covering all of BNSF Railway's union employees has begun. As during the previous round five years ago, wages, health and welfare benefits, work rules, and other issues are being addressed through industry-wide negotiations. These negotiations have traditionally taken place over a number of months and have previously not resulted in any extended work stoppages. The major collective bargaining agreements reached in 1995 and 1996 as a result of industry-wide labor contract negotiations remained in effect on December 31, 1999 and will continue in effect until new agreements are reached or the Railway Labor Act's procedures (which include mediation, cooling-off periods, and the possibility of Presidential intervention) are exhausted. The current agreements provide for periodic wage increases until new agreements are reached. Railroad industry personnel are covered by the Railroad Retirement System instead of Social Security. BNSF Railway's contributions under the Railroad Retirement System are approximately triple those in industries covered by Social Security. Railroad industry personnel are also covered by the Federal Employers' Liability Act ("FELA") rather than by state workers' compensation systems. FELA is a fault-based system, with compensation for injuries settled by negotiation and litigation, not subject to specific statutory limitations on the amount of recovery. By contrast, most other industries are covered under state no-fault workers' compensation plans with standard compensation schedules. BNSF Railway believes it has adequate recorded liabilities for its FELA claims. However, the ultimate costs of these FELA claims are uncertain and the actual costs could be significantly higher than anticipated. Business Mix In serving the Midwest, Pacific Northwest and the Western, Southwestern, and Southeastern regions and ports of the country, BNSF Railway transports, through one operating transportation services segment, a wide range of products and commodities derived from manufacturing, agricultural, and natural resource industries. Accordingly, its financial performance is influenced by, among other things, general and industry economic conditions at the international, national, and regional levels. Major markets served directly by BNSF Railway include Albuquerque, Amarillo, Billings, Birmingham, Cheyenne, Chicago, Corpus Christi, Dallas, Denver, Des Moines, Duluth/Superior, El Paso, Fargo/Moorhead, Fort Worth, Fresno/Bakersfield, Galveston, Houston, Kansas City, Lake Charles, Lincoln, Little Rock/Pine Bluff, Los Angeles, Memphis, Mobile, New Orleans, Oklahoma City, Omaha, Phoenix, Portland, Reno/Sparks, Salt Lake City/Ogden, San Antonio, San Diego, the San Francisco Bay area, the San Joaquin Valley area, St. Louis, St. Paul/Minneapolis, Seattle, Spokane, Springfield (Missouri), Tacoma, Tulsa, Waco, Wichita, Vancouver (British Columbia), and Winnipeg (Manitoba). Other major cities are served through Intermodal Market Extension terminals located at various off-line points. Major ports served include Beaumont, Brownsville, Corpus Christi, Galveston, Houston, Kalama, Long Beach, Longview, Los Angeles, Mobile, New Orleans, Portland, Richmond (Oakland), San Diego, Seattle, Duluth/Superior, Tacoma, Vancouver (Washington), and Vancouver (British Columbia). Canadian traffic is accessed through border crossings in Minnesota, North Dakota, Montana, and Washington, as well as through interchange with Canadian railroads at Chicago, Minneapolis/St. Paul, and other gateways. BNSF Railway also accesses the Mexican market through the United States/Mexico crossings at Brownsville, Eagle Pass and El Paso, Texas and San Diego, California and, through an interline agreement with the Texas Mexican Railway Company, BNSF Railway reaches Laredo, Texas, a major rail gateway between the U.S. and Mexico. Carload. The carload freight business provided approximately 28 percent of revenues in 1999. Carload 1999 results include revenue from five types of business: . Chemicals. The chemicals business is composed of fertilizer, petroleum, plastics and chemical commodities. Chemicals and plastics resins are transported for industrial and agricultural use. Industrial chemicals and plastics resins are used by the automotive, housing, and packaging 6 industries, as well as for feedstocks to produce other chemical and plastic products. Agricultural minerals include sulphur that generally moves to the Gulf Coast and from there via vessels to Florida and overseas markets for use in making phosphatic fertilizers. Potash is transported to domestic markets and to export points for markets in Canada, Mexico, and overseas. . Forest Products. The primary forest product commodities transported are lumber, plywood, oriented strand board, paper products, pulpmill feedstock, and wood pulp. Based on carloadings and tonnage hauled, BNSF Railway is the largest rail transporter of forest products in the United States. Commodity origins are primarily from the Pacific Northwest, upper Midwest, and the Southeast for shipment mainly into domestic markets. Industries served include construction, furniture, photography, publishing, newspaper, and industrial packaging. . Metals. The Metals business serves virtually all of the commodities included in or resulting from the production of steel. Taconite, an iron ore derivative produced in northern Minnesota, scrap steel, and coal coke are BNSF Railway's primary input products, while finished steel products range from structural beams and steel coils to wire and nails. BNSF Railway also hauls both ferrous and non-ferrous products including recyclable metals. BNSF Railway links the integrated steel mills in the East with fabricators in the West and Southwest. Service is also provided to various mini-mills in the Southwest that produce rebar, beams, and coiled rod to the construction industry. Various non-ferrous products such as copper, lead, and aluminum are transported for the beverage, automotive, and telecommunications industries. . Minerals and Machinery. Mineral commodities include clays, sands, cements, aggregates, sodium compounds, waste and other industrial minerals. Both the oil and the construction industries are served. Industrial minerals include various mined and processed commodities such as cement and aggregates (construction sand, gravel and crushed stone) that generally move to domestic markets for use in general construction and public work projects, including highways. Borates and clays move to domestic points as well as to export markets primarily through West Coast ports. Sodium compounds, primarily soda ash, is moved to domestic markets for use in the manufacturing of glass and other industrial products. Sand is utilized in the manufacturing of glass and for use in foundry and oil drilling applications. Shipments of waste, ranging from municipal waste to contaminated soil, are transported to landfills and reclamation centers across the country. Machinery includes aircraft parts, agricultural and construction machinery, military equipment and large industrial machinery. . Consumer Goods (Perishables and Dry Boxcar). Beverages, canned goods, and perishables are the principal food commodities moved by BNSF Railway. Other consumer goods handled include cotton, salt, rubber and tires, and miscellaneous boxcar shipments. Intermodal. The intermodal freight business provided approximately 28 percent of revenues in 1999 and consists of the hauling of freight, usually in containers or truck trailers, through a combination of different modes of transportation such as rail, truck or water carriers. The intermodal business is highly service-driven, and in many cases truck carriers and railroads work jointly to provide intermodal service. Intermodal 1999 results include revenue from four types of business: . Direct Marketing. Direct marketing efforts resulted in approximately 35 percent of total intermodal revenue. These center around traffic contracted from United Parcel Service and the United States Postal Service, and service for nationwide LTL (Less-Than-Truckload) carriers including Yellow Freight, Roadway Express, and Consolidated Freightways. . International. International business consists primarily of traffic from steamship companies and accounted for approximately 31 percent of intermodal revenues. . Intermodal Marketing Companies. Approximately 19 percent of total intermodal revenue was generated through intermodal marketing companies, primarily shipper agents and consolidators. 7 . Truckload. Truckload traffic represented approximately 15 percent of total intermodal revenue. The joint service arrangement with J.B. Hunt, referred to as Quantum, represented the largest truckload component, while Schneider National was the next largest. Coal. Based on carloadings and tons hauled, BNSF Railway is the largest transporter of western low-sulfur coal in the United States, and the transportation of coal contributed about 24 percent to 1999 revenues. Approximately 90 percent of BNSF Railway's coal traffic originated in the Powder River Basin of Wyoming and Montana during the three years ended December 31, 1999. These coal shipments were destined for coal-fired electric generating stations located primarily in the North Central, South Central and Mountain regions of the United States. BNSF Railway also transports increasing amounts of low-sulfur coal from the Powder River Basin for delivery to markets in the eastern and southeastern portions of the United States. The low-sulfur coal from the Powder River Basin is abundant, inexpensive to mine, clean-burning, and has a low delivered-cost to power plants. Also, deregulation in the electric utility industry is expected to cause utilities to seek lower cost fuel sources and boost demand for Powder River Basin coal. Other coal shipments originate principally in Colorado, Illinois, New Mexico, and North Dakota and are moved to electrical generating stations and industrial plants in the Mountain and North Central regions. Agricultural Commodities. The transportation of agricultural commodities provided approximately 15 percent of 1999 revenues and includes wheat, corn, bulk foods, soybeans, oil seeds and meals, barley, oats and rye, feeds, flour and mill products, milo, oils, specialty grains, and malt. The BNSF Railway system is strategically located to serve the grain-producing regions of the Midwest and Great Plains. In addition to serving most grain-producing areas, BNSF Railway serves most major terminal, storage, feeding and food-processing locations. Furthermore, BNSF Railway has access to major export markets in the Pacific Northwest, western Great Lakes, and Texas Gulf regions, and in Mexico. Automotive. The transportation of both assembled motor vehicles and shipments of vehicle parts to numerous destinations throughout the Midwest, Southwest, West and Pacific Northwest provided about five percent of 1999 revenues. Freight Statistics. The following tables set forth certain freight statistics relating to rail operations for the periods indicated. Certain amounts have been reclassified to reflect changes in the business groups for years prior to 1999 and to conform to current year presentation.
Year Ended December 31, ----------------------- 1999 1998 1997 ------- ------- ------- Revenue ton-miles (millions)......................... 487,756 469,045 424,588 Freight revenue per thousand revenue ton-miles....... $18.60 $19.03 $19.71 Average haul per ton (miles)......................... 983 970 935
Revenues
Year Ended December 31, -------------------- 1999 1998 1997 ------ ------ ------ (in millions) Carload................................................ $2,553 $2,588 $2,482 Intermodal............................................. 2,518 2,437 2,243 Coal................................................... 2,227 2,239 1,972 Agricultural Commodities............................... 1,329 1,271 1,248 Automotive............................................. 443 390 422 ------ ------ ------ Total Freight Revenue.................................. 9,070 8,925 8,367 Other Revenue.......................................... 30 16 3 ------ ------ ------ Total Revenues......................................... $9,100 $8,941 $8,370 ====== ====== ======
8 Cars/Units
Year Ended December 31, ----------------------- 1999 1998 1997 ------- ------- ------- (in thousands) Carload.............................................. 1,773 1,801 1,739 Intermodal........................................... 3,203 3,086 2,811 Coal................................................. 2,123 2,078 1,862 Agricultural Commodities............................. 715 689 669 Automotive........................................... 250 230 264 ------- ------- ------- Total Cars/Units..................................... 8,064 7,884 7,345 ======= ======= =======
Average Revenue Per Car/Unit
Year Ended December 31, -------------------- 1999 1998 1997 ------ ------ ------ Carload................................................ $1,440 $1,437 $1,427 Intermodal............................................. 786 790 798 Coal................................................... 1,049 1,077 1,059 Agricultural Commodities............................... 1,859 1,845 1,865 Automotive............................................. 1,772 1,696 1,598 Average Revenue Per Car/Unit........................... 1,125 1,132 1,139
Government Regulation and Legislation Rail operations are subject to the regulatory jurisdiction of the STB of the United States Department of Transportation ("DOT"), the Federal Railroad Administration of DOT, the Occupational Safety and Health Administration ("OSHA"), and state regulatory agencies. The STB, which is the successor to the Interstate Commerce Commission, has jurisdiction over certain rates, routes, and services, the extension, sale, or abandonment of rail lines, and consolidation or merger with, or acquisition of control of, rail common carriers. The STB has announced that it will soon begin a rulemaking relating to standards to be used in evaluating applications for authority to engage in certain railroad mergers, consolidations, and changes in control that are deemed "major transactions" under STB regulations. Such new standards may affect the ability of rail carriers and parent companies, such as BNSF, to obtain approval of merger, consolidation, or control applications before the STB. DOT and OSHA have jurisdiction under several federal statutes over a number of safety and health aspects of rail operations. State agencies regulate some aspects of rail operations with respect to health and safety in areas not otherwise pre-empted by federal law. BNSF Railway's rail operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. These laws cover discharges to waters, air emissions, toxic substances, and the generation, handling, storage, transportation, and disposal of waste and hazardous materials. This regulation has the effect of increasing the cost and liabilities associated with rail operations. Environmental risks are also inherent in rail operations which frequently involve transporting chemicals and other hazardous materials. 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 now subject and will from time to time continue to be subject to environmental cleanup and enforcement actions. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, generally 9 imposes joint and several liability for cleanup and enforcement costs, without regard to fault or the legality of the original conduct, on current and former owners and operators of a site. Accordingly, BNSF Railway may be responsible under CERCLA and other federal and state statutes for all or part of the costs to clean up sites at which certain substances may have been released by BNSF Railway, its current lessees, former owners or lessees of properties, or other third parties. For further discussion, reference is made to Note 11 to the Consolidated Financial Statements on pages 39-40 of BNSF's 1999 Annual Report to Shareholders, which information is hereby incorporated by reference. Competition The business environment in which BNSF Railway operates remains highly competitive. Depending on the specific market, deregulated motor carriers, other railroads and river barges may exert pressure on price and service levels. The presence of advanced, high service truck lines with expedited delivery, subsidized infrastructure and minimal empty mileage continues to affect the market for non-bulk, time sensitive freight. The potential expansion of longer combination vehicles could further encroach upon markets traditionally served by railroads. In order to remain competitive, BNSF Railway and other railroads continue to develop and implement operating efficiencies to improve productivity. As railroads streamline, rationalize and otherwise enhance their franchises, competition among rail carriers intensifies. BNSF Railway's primary rail competitor in the western region of the United States is Union Pacific Railroad Company ("UP"). Other Class I railroads and numerous regional railroads and motor carriers also operate in parts of the same territories served by BNSF Railway. Coal, one of BNSF Railway's primary commodities, continues to be subject to various types of competitive pressures. In 1998, BNSF Railway and UP entered into an agreement to exchange half interests in the two pieces of the former Southern Pacific Transportation Company ("SP") rail line between Houston and New Orleans which are separately owned by the two railroads. Both railroads now have access to all customers, including chemical, steel, gas and other companies, along the entire line, including on connecting former SP branch lines. The two railroads set up a joint regional dispatching center at Spring, Texas in March 1998 for much of their Gulf Coast train operations to better coordinate train flows in and through Houston. In February 1999, BNSF Railway and UP agreed to coordinate dispatching operations covering Southern California, the Kansas City area, and the Powder River Basin of Wyoming. The STB approved the carve-up of Consolidated Rail Corporation ("Conrail") between CSX Corporation and Norfolk Southern Corporation which was implemented in 1999. CSX and Norfolk Southern operate the two largest rail systems in the eastern United States. Also, in 1999, CN acquired Illinois Central Corporation ("IC"). CN is Canada's largest railroad and reaches the U.S. cities of Detroit, Buffalo, Duluth, and Chicago, while IC has operations extending from Chicago to the Gulf of Mexico, and west through Iowa to Council Bluffs and Sioux City. See the discussion in Item 3, Legal Proceedings, regarding the litigation resulting from the March 17, 2000 STB Decision to impose a 15-month moratorium suspending activities relating to major transactions pending development of new rules by the STB for evaluating railroad merger and control proceedings. ITEM 3. Legal Proceedings Set forth below is a description of certain legal proceedings involving BNSF and its subsidiaries. BNSF/CN Combination On December 20, 1999, BNSF and BNSF Railway, together with the Canadian National Railway Company, Grand Trunk Western Railroad Incorporated, and Illinois Central Railroad Company (collectively, "CN") filed their notice of intent to file a railroad control application with the STB. The BNSF/CN common control proceeding was docketed as Finance Docket No. 33842. 10 Subsequently, on January 24, 2000, the STB initiated a proceeding to solicit "Public Views on Major Rail Consolidations" and issued a notice of public hearing and request for comments. See Public Views on Major Rail Consolidations, STB Ex Parte No. 582, (STB served January 24, 2000) (hereinafter "January 24, 2000 Decision"). In the January 24, 2000 Decision, the STB stated that the public hearing was "prompted in part by the initiation of, but will be conducted separate and apart from, the BNSF/CN' control proceeding in STB Finance Docket No. 33842. . . . We are aware that, in the wake of the filing of the BNSF/CN notice of intent, there has been a great deal of speculation that the strategic responses of the remaining North American rail carriers to the proposed BNSF/CN transaction will lead to a new round of major railroad consolidations. . . ." January 24, 2000 Decision, slip op. at 2. The STB noted that "there appears to be strong sentiment for a public review at this time of what the evolving structure of the North American railroad industry is and should be." In Ex Parte No. 582, the STB conducted four days of hearings ending March 10, 2000, in which more than 130 persons commented orally (and others supplied written comments). Following the hearing, in a decision served March 17, 2000, the STB entered an order directing "Class I railroads [including BNSF and CN]. . . . to suspend activity relating to any railroad transaction that would be categorized as a major transaction under 49 CFR 1180.2, pending development of new rules by the Board" for evaluating railroad merger and control proposals. Public Views on Major Rail Consolidations, STB Ex Parte No. 582, (STB served March 17, 2000) ( "March 17, 2000 Decision"), slip op. at 11. The STB further declared that "[n]o filings relating to such a transaction will be accepted for 15 months," and suspended the BNSF/CN notice of intent to file. On the same day that the STB's March 17, 2000 Decision was served, BNSF, CN, and the Western Coal Traffic League filed petitions for review challenging the decision in the United States Court of Appeals for the District of Columbia Circuit. Burlington Northern Santa Fe Corporation and The Burlington Northern and Santa Fe Railway Company v. Surface Transportation Board and United States of America, No. 00-1120. CSX Corporation and CSX Transportation, Inc., Canadian Pacific Railway Company and three of its subsidiaries, Norfolk Southern Corporation, Norfolk Southern Railway Company, and Union Pacific Railroad Company have intervened in the D.C. Circuit Court of Appeals cases brought by BNSF, CN, and the Western Coal Traffic League. On March 20, 2000, BNSF filed a petition with the STB for a stay pending judicial review of the STB's Decision. In the stay petition, BNSF argued that the STB lacks statutory authority to impose a moratorium on the filing of railroad applications, failed to observe required procedures before entering its moratorium, and could not suspend the Notice of Intent to File Railroad Application without conducting an adjudicatory proceeding. BNSF also argued that during the pendency of the stay, the Board should accept the BNSF/CN control application and should review it within the statutorily prescribed 16- month period. In the absence of action by the STB on the petition for a stay by March 29, 2000, BNSF filed on that date a motion for stay pending judicial review in the United States Court of Appeals for the District of Columbia Circuit, seeking similar relief to the petition for a stay filed with the STB. Environmental Proceeding On December 18, 1995, the State of Illinois filed a Complaint captioned People of the State of Illinois v. Burlington Northern Railroad Company, Beazer East, Inc. and Koppers Industries, Inc. (PCB No. 96-132) before the Illinois Pollution Control Board against BNSF Railway, Beazer East, Inc. and Koppers Industries, Inc. alleging violations of the Illinois Environmental Protection Act with respect to a facility in Galesburg, Illinois. This facility is not operated by BNSF Railway. BNSF Railway, Beazer East, Inc. and the State of Illinois have agreed to settle this matter, with BNSF Railway agreeing to pay $131,000. This matter is now considered terminated. BNI/SFP Merger-Related Litigation Numerous complaints were filed in the Court of Chancery of the State of Delaware arising out of the Agreement and Plan of Merger dated June 29, 1994, as amended, between BNI and SFP alleging the breach of 11 fiduciary duties by SFP's directors and various other claims. On October 14, 1994, the Chancery Court entered an order consolidating 11 purported stockholder class action suits under the heading In Re Santa Fe Pacific Corporation Shareholder Litigation, C.A. No. 13587. See description in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. On May 12, 1999, upon a stipulation of the parties, the Delaware Chancery Court dismissed the lawsuit without prejudice and with the parties to bear their own respective costs. This matter is now considered terminated. Other Claims BNSF and its subsidiaries also are parties to a number of other 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 and other legal actions referred to under Item 3 of this Report on Form 10-K cannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of BNSF 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. Reference is made to Note 4 to the consolidated financial statements on page 36 of BNSF's 1999 Annual Report to Shareholders for information concerning certain pending administrative appeals with the Internal Revenue Service, which information is hereby incorporated by reference. ITEM 4. Submission Of Matters To a Vote Of Security Holders No matters were submitted by BNSF to a vote of its securities holders during the fourth quarter of 1999. EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the names, ages, and positions of all executive officers of BNSF (excluding Robert D. Krebs, an executive officer who is also a director of BNSF, information as to whom is included in BNSF's Proxy Statement dated March 23, 2000) and their business experience during the past five years. Executive officers hold office until their successors are elected or appointed, or until their earlier death, resignation, or removal. Thomas N. Hund, 46 Senior Vice President and Chief Financial Officer since August 1999. Prior to that, Vice President and Controller from September 1995, and Vice President and Controller of SFP from July 1990 to January 1998. Carl R. Ice, 43 Senior Vice President-Operations since June 1999. Prior to that, Vice President-Operations North from January 1999, Vice President-Chief Mechanical Officer from December 1996, Vice President-Chief Mechanical Officer of ATSF from January 1996, Vice President-Executive of ATSF from May 1995, and Vice President-Carload Commodities Unit of ATSF from May 1994. Dennis R. Johnson, 38 Vice President and Controller since August 1, 1999. Prior to that, Assistant Vice President and Assistant Controller from January 1997, and Assistant Vice President and Assistant Controller for ATSF from January 1992 to December 1996. Jeffrey R. Moreland, 55 Senior Vice President-Law and Chief of Staff since February 1998. Prior to that, Senior Vice President-Law and General Counsel from September 1995, and Vice President-Law and General Counsel of SFP from October 1994 to January 1998. 12 Matthew K. Rose, 40 President and Chief Operating Officer since June 1999. Prior to that, Senior Vice President and Chief Operations Officer from August 1997, Senior Vice President-Merchandise Business Unit from May 1996, Vice President-Chemicals and Plastics of ATSF and BNRR from January 1996, and Vice President, South Region Field Marketing of BNRR from January 1995. Charles L. Schultz, 52 Executive Vice President and Chief Marketing Officer since June 1, 1999. Prior to that, Senior Vice President-Intermodal and Automotive Business Unit since February 1996, Vice President-Intermodal of ATSF and BNRR from September 1995, and Vice President-Intermodal of ATSF from January 1994. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters BNSF's common stock is listed on the New York Stock Exchange under the symbol "BNI." The common stock is also listed on the Chicago Stock Exchange and Pacific Exchange. Information as to the high and low sales prices of such stock for the two years ending December 31, 1999, and the frequency and amount of dividends declared on such stock during such period, is set forth in Note 15 to the Consolidated Financial Statements on page 44 of BNSF's 1999 Annual Report to Shareholders and such information is hereby incorporated by reference. The approximate number of record holders of the common stock at February 29, 2000 was 46,000. ITEM 6. Selected Financial Data Selected financial data of BNSF for each of the last five fiscal years, and data with respect to the following topics disclosed on page 1 of BNSF's 1999 Annual Report to Shareholders are hereby incorporated by reference: Revenues; Operating income; Income before extraordinary item and cumulative effect of change in accounting method; Accounting change/Extraordinary item; Net income; Basic earnings per share; Diluted earnings per share; Dividends declared per common share; Total assets; and Long-term debt and commercial paper, including current portion. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 19 through 28 of BNSF's 1999 Annual Report to Shareholders is hereby incorporated by reference. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk In the ordinary course of business, BNSF utilizes various financial instruments, which inherently have some degree of market risk. The quantitative information presented below and the additional qualitative information presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations section and Notes 8, 10, and 14 of the Consolidated Financial Statements contained in the 1999 Annual Report to Shareholders describe significant aspects of BNSF's financial instrument programs which have a material market risk. Interest Rate Sensitivity The tables below provide information about BNSF's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations as of December 31, 1999 and 1998. For debt obligations, the tables present principal cash flows and related weighted average interest rates by contractual maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. 13 Current and Long-term Debt
December 31, 1999 ----------------------------------------------------------- Maturity Date ---------------------------------------- 2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ------ ---------- Fixed Rate Debt (in millions).............. $158 $233 $285 $141 $241 $4,282 $5,340 $5,159 Average Interest Rate... 6.5% 7.7% 7.1% 7.2% 7.7% 7.0% 7.1% -- Variable Rate Debt (in millions).............. -- -- -- -- $473 -- $ 473 $ 473 Average Interest Rate... -- -- -- -- 7.0% -- 7.0% --
December 31, 1998 ----------------------------------------------------------- Maturity Date ---------------------------------------- 2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ------ ---------- Fixed Rate Debt (in millions).............. $268 $146 $222 $248 $130 $3,946 $4,960 $5,216 Average Interest Rate... 7.4% 6.5% 7.8% 7.1% 7.2% 7.1% 7.1% -- Variable Rate Debt (in millions).............. -- -- -- $496 -- -- $ 496 $ 496 Average Interest Rate... -- -- -- 5.4% -- -- 5.4% --
BNSF has included $473 million in 2004 maturities and $471 million in 2002 maturities of commercial paper borrowings in the 1999 and 1998 tables, respectively. The commercial paper program is supported by bank revolving credit agreements. Outstanding commercial paper balances are considered as reducing the amount of borrowings available under these agreements. The bank revolving credit agreements which were renewed and extended effective June 28, 1999, allow borrowings of up to $750 million on a short-term basis and $750 million on a long-term basis. The commitments of the lenders under short-term and long-term agreements are scheduled to expire in June 2000 and June 2004, respectively. BNSF classified commercial paper borrowings as long-term debt in the consolidated balance sheet at December 31, 1999 and 1998. In addition, maturities in 2000 included in the 1999 and 1998 tables exclude $100 million of 6.1 percent notes due 2027 for which a put option on the notes was exercised at the option of the holders on February 28, 2000. Maturities in 2001 exclude $100 million of 6.1 percent notes due 2031, which will either be remarketed by the holder of a call option on the debt and mature in 2031 or will otherwise be repurchased by the Company in 2001. Maturities in 2003 exclude $175 million of 6.5 percent notes due 2037, which may be redeemed in 2003 at the option of the holder. In March 1999, BNSF issued $200 million of 6.1 percent notes due March 2009 and $200 million of 6.8 percent debentures due March 2029 under the February 1999 shelf registration statement. The net proceeds were used for general corporate purposes including the repayment of commercial paper. At the time of issuing the $200 million of 6.1 percent notes discussed above, the Company closed out a $100 million treasury lock transaction at a gain of approximately $8 million which has been deferred and is being amortized to interest expense over the 10-year life of the notes. In April 1999, the holder of a call option on $200 million of the Company's puttable reset debentures due 2029 exercised the call option. As a result, on May 13, 1999, the holder repurchased the debentures which were subsequently resold to investors. The interest rate on the debentures was reset to a fixed interest rate of 7.1 percent. The Company did not receive any proceeds from the resale of these debentures; however, the resale of these debentures, along with the $400 million of debt securities issued in March 1999, reduced the amount available for borrowing under the Company's February 1999 shelf registration statement to $500 million. During 1999, BNSF Railway entered into equipment obligations totaling $212 million payable from 2000 to 2016 with interest rates ranging from 5.4 percent to 7.0 percent and $60 million of capital lease obligations payable from 2000 to 2016. The capital lease and $137 million of equipment obligations relate to financing transactions involving German investors. In order to comply with the terms of the capital lease and the associated foreign regulations, BNSF Railway simultaneously deposited $60 million with a German bank and 14 pledged this amount as an irrevocable security deposit to be used to pay the capital lease obligations. The capital lease obligation is classified as Long- Term Debt and the security deposit is classified as an Other Asset in the Company's consolidated balance sheet at December 31, 1999. Interest Rate Swaps From time to time, BNSF enters into various interest rate hedging transactions for purposes of managing exposure to fluctuations in interest rates. At December 31, 1999, the Company had no interest rate swap instruments in place. At December 31, 1998, BNSF had entered into swap transactions reflected in the table below, which fixed the interest rate on a portion of its commercial paper debt. These instruments expired in December 1999.
December 31, 1998 ---------------------- Maturity Date Fair 1999 Value (1) ------------- -------- Variable to Fixed Swaps (in millions)................ $125 $ (2) Average Pay Rate..................................... 6.14% -- Average Receive Rate................................. 4.95% --
- -------- (1) Represents unrecognized losses in millions. Treasury Locks 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 as of December 31, 1999 and 1998, which are summarized in the tables below. Additionally, as discussed above, at the time of a March 1999 debt issuance, BNSF closed out the $100 million treasury lock transaction scheduled to expire in 1999 at a gain of approximately $8 million.
December 31, 1999 --------------------------- Maturity Date ---------- Fair 2000 2001 Total Value (1) ---- ---- ----- -------- Fixed Rate Treasury Locks (in millions)......... $200 $200 $400 $ 62 Average Pay Rate................................ 4.80% 4.84% 4.82% --
December 31, 1998 --------------------------------- Maturity Date ---------------- Fair 1999 2000 2001 Total Value (1) ---- ---- ---- ----- -------- Fixed Rate Treasury Locks (in millions).... $100 $200 $200 $500 $ 19 Average Pay Rate........ 4.37% 4.80% 4.84% 4.73% --
- -------- (1) Represents unrecognized gains in millions. Commodity Price Sensitivity Fuel expense historically approximates 10 percent of total operating expenses. Due to the significance of diesel fuel expense to the operations of the railroad and the historical volatility of fuel prices, BNSF has established a program to hedge against fluctuations in the price of its diesel fuel purchases. The intent of the program is to protect BNSF's operating margins and overall profitability from adverse fuel price changes. However, to the extent BNSF 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 these hedging instruments are deferred and recognized as a component of fuel expense in the period in which the fuel is purchased and used. Swap transactions are typically based on the price of pipeline delivery of Gulf Coast #2 heating oil and require BNSF to purchase a defined quantity at a defined price. Swap transactions are generally settled with the counterparty in cash. Based on historical information, BNSF believes there is a significant correlation between the market prices of diesel fuel and Gulf Coast #2 heating oil. 15 The tables below provide information about BNSF's diesel fuel hedging instruments that are sensitive to changes in commodity prices. The tables present notional amounts in gallons and the weighted average contract price by contractual maturity date. The prices included in the tables do not include taxes, transportation costs, certain other fuel handling costs and any differences which may occur from time to time between the prices of commodities hedged and the purchase price of BNSF's diesel fuel.
December 31, 1999 --------------------------------- Maturity Date ----------------- Fair 2000 2001 2002 Total Value (1) ----- ----- ----- ----- --------- Diesel Fuel Swaps: Gallons (in millions).................... 491 277 101 869 $ 37 Weighted average price per gallon........ $0.50 $0.49 $0.50 $0.50 --
December 31, 1998 --------------------------------------- Maturity Date ----------------------- Fair 1999 2000 2001 2002 Total Value (1) ----- ----- ----- ----- ----- --------- Diesel Fuel Swaps: Gallons (in millions).............. 907 491 277 101 1,776 $(174) Weighted average price per gallon........................ $0.48 $0.50 $0.49 $0.50 $0.49 --
- -------- (1) Represents unrecognized gains (losses) (in millions) based on the price of Gulf Coast #2 heating oil. Additionally, at December 31, 1999 and 1998, BNSF maintained fuel inventories for use in normal operations which were not material to BNSF's overall financial position and therefore represent no significant market exposure. Equity Price Sensitivity An equity put option is a financial instrument whereby BNSF receives an upfront cash premium for granting another party the option to sell a defined number of BNSF shares to the Company at a fixed price on a specified future date. The Company considers the sale of equity put options as a method to acquire its common stock at a share price consistent with its share repurchase strategy and potentially reduce the all-in cost of the program. The Company's risk is that it may be required to purchase shares at a specified price that is higher than the common stock price at the exercise date of the equity put option. The Company has the ability to settle its equity put option transactions on a net share or net cash basis and accounts for the effects of these transactions within stockholders' equity. The number of shares subject to outstanding put options sold by the Company cannot exceed the amount of remaining shares the Board of Directors has authorized for repurchase. During the second and third quarters of 1998, BNSF sold equity put options for 3 million shares of the Company's common stock to an independent third party and received cash proceeds of $2.2 million. The option contracts had exercise prices ranging from $29.00 to $30.00 per share with expiration dates ranging from November 1998 to February 1999. These options expired unexercised. In April 1999, BNSF sold equity put options for 100,000 shares of BNSF common stock to an independent third party and received cash proceeds of $135,000. The third party exercised the options on October 12, 1999, which resulted in the Company purchasing 100,000 shares of its common stock at $29 per share. As of December 31, 1999 there were no equity put options outstanding. The table below presents the notional amount in shares of BNSF common stock and the contract price by contractual maturity date of equity put options outstanding at December 31, 1998.
December 31, 1998 ------------------- Maturity Date ------------- Fair 1999 Value ------------- ----- Contract Number of Shares............................ 1,200,000 $ 0 Option Strike Price.................................. $29.67 to $30 --
16 ITEM 8. Financial Statements and Supplementary Data The consolidated financial statements of BNSF and subsidiary companies, together with the reports thereon, appearing in Part IV of this Report on Form 10-K and on pages 29 through 44 of BNSF's 1999 Annual Report to Shareholders, are hereby incorporated by reference. ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III ITEM 10. Directors and Executive Officers of the Registrant Information concerning the directors of BNSF is provided on pages 4-6 under the heading "NOMINEES FOR DIRECTORS" of BNSF's proxy statement dated March 23, 2000, and the information under that heading is hereby incorporated by reference. Information concerning the executive officers of BNSF (excluding one executive officer who is also a director of BNSF) is included in Part I of this Report. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is provided on page 7 under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in BNSF's Proxy Statement dated March 23, 2000, and the information under that heading is hereby incorporated by reference. ITEM 11. Executive Compensation Information concerning the compensation of directors and executive officers of BNSF is provided on page 9 under the heading "Directors' Compensation" and pages 19-25 under the headings "Summary Compensation Table," "Stock Option Grants in 1999," "Aggregated 1999 Stock Option Exercises and Year-End Option Values," "Pension Plans," "Employment Contracts and Change in Control Arrangements" and "Trust Agreements," in BNSF's proxy statement dated March 23, 2000, and the information under those headings is hereby incorporated by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management Information concerning the ownership of BNSF equity securities by certain beneficial owners and by management is provided on pages 11-13 under the headings "Certain Beneficial Owners" and "Ownership of Management" in BNSF's proxy statement dated March 23, 2000, and the information under those headings is hereby incorporated by reference. ITEM 13. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions is provided on page 10 under the heading "Certain Relationships" of BNSF's proxy statement dated March 23, 2000, and the information under that heading is hereby incorporated by reference. 17 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as a part of this report:
Page -------- 1.Consolidated Financial Statements: Report of PricewaterhouseCoopers LLP................................ [29*] Consolidated Statement of Income for the three years ended December 31, 1999........................................................... [30*] Consolidated Balance Sheet at December 31, 1999 and 1998............ [31*] Consolidated Statement of Cash Flows for the three years ended December 31, 1999.................................................. [32*] Consolidated Statement of Changes In Stockholders' Equity for the three years ended December 31, 1999................................ [33*] Notes to Consolidated Financial Statements.......................... [34-44*] - -------- (*Incorporated by reference from the indicated pages of BNSF's 1999 Annual Report to Shareholders.) 2.Consolidated Financial Statement Schedules for the three years ended December 31, 1999: Report of PricewaterhouseCoopers LLP................................ F-1 Schedule II--Valuation and Qualifying Accounts...................... F-2
Schedules other than those listed above are omitted because they are not required or applicable, or the required information is included in the consolidated financial statements or related notes. 3.Exhibits: See Index to Exhibits on pages E-1 to E-4 for a description of the exhibits filed as a part of this Report. (b) Reports on Form 8-K BNSF filed the following Current Reports on Form 8-K during the quarter ended December 31, 1999, or subsequently: Current Report on Form 8-K (Date of earliest event reported: February 17, 2000 which referenced under Item 5, Other Events, and filed as an exhibit under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits the following: Amended and Restated Combination Agreement dated as of December 18, 1999 among Burlington Northern Santa Fe Corporation, Canadian National Railway Company, North American Railways, Inc. and Western Merger Sub, Inc., and Stock Option Agreements between Burlington Northern Santa Fe Corporation and Canadian National Railway Company. Current Report on Form 8-K (Date of earliest event reported: February 4, 2000), as amended, which referenced under Item 5, Other Events, and filed as an exhibit under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, the following material from the registrant's 1999 Annual Report to Shareholders: Consolidated Financial Highlights; Management's Discussion and Analysis of Financial Condition and Results of Operations; and Consolidated Financial Statements and Footnotes and Report of Management and Report of Independent Accountants thereon, dated February 4, 2000, and one other exhibit. Current Report on Form 8-K (Date of earliest event reported: January 20, 2000) which referenced under Item 5, Other Events, and filed as an exhibit under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits an amendment to the registrant's By-laws and the registrant's fourth quarter 1998 and annual earnings press release. 18 Current Report on Form 8-K (Date of earliest event reported: December 20, 1999) which referenced under Item 5, Other Events, and filed as exhibits under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits various exhibits relating to the announcement of the proposed combination between Burlington Northern Santa Fe Corporation and Canadian National Railway Company. Current Report on Form 8-K (Date of earliest event reported: December 18, 1999) which referenced under Item 5, Other Events, and filed as exhibits under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits the following: Combination Agreement dated as of December 18, 1999 among Burlington Northern Santa Fe Corporation, Canadian National Railway Company, North American Railways, Inc. and Western Merger Sub, Inc.; Stock Option Agreements between Burlington Northern Santa Fe Corporation and Canadian National Railway Company; and December 20, 1999 press release announcing the proposed combination. Current Report on Form 8-K (Date of earliest event reported: December 18, 1999) which referenced under Item 5, Other Events, and filed as exhibits under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits the following: Rights Agreement, dated as of December 18, 1999, between Burlington Northern Santa Fe Corporation and First Chicago Trust Company of New York, as Rights Agent; registrant's Certificate of Designations, Preferences and Rights of the Series B Junior Participating Preferred Stock; and press release dated December 22, 1999. 19 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Burlington Northern Santa Fe Corporation and Subsidiaries Our audits of the consolidated financial statements referred to in our report dated February 4, 2000 appearing in the 1999 Annual Report to Shareholders of Burlington Northern Santa Fe Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)2. of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Fort Worth, Texas February 4, 2000 F-1 SCHEDULE II BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1999, 1998 and 1997 (In Millions)
Column A Column B Column C Column D Column E -------- --------- --------- ------------- --------- Balance Additions at Charged Balance Beginning to at End of Description of Period Income Deductions (1) Period (2) ----------- --------- --------- ------------- --------- December 31, 1999 Personal injury and environmental liabilities..................... $635 $295 $252 $678 ==== ==== ==== ==== December 31, 1998 Personal injury and environmental liabilities..................... $711 $177 $253 $635 ==== ==== ==== ==== December 31, 1997 Personal injury and environmental liabilities .................... $810 $165 $264 $711 ==== ==== ==== ====
- -------- (1) Principally represents cash payments (2) Classified in the consolidated balance sheet as follows:
1999 1998 1997 ---- ---- ---- Accounts payable and other current liabilities............... $255 $246 $263 Casualty and environmental liabilities....................... 423 389 448 ---- ---- ---- $678 $635 $711 ==== ==== ====
F-2 SIGNATURES Burlington Northern Santa Fe Corporation, pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BURLINGTON NORTHERN SANTA FE CORPORATION /s/Robert D. Krebs By: _________________________________ Robert D. Krebs Chairman and Chief Executive Officer Dated: March 30, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Burlington Northern Santa Fe Corporation and in the capacities and on the date indicated. Signature Title /s/Robert D. Krebs Chairman and Chief Executive - ------------------------------------- Officer (Principal Executive Robert D. Krebs Officer), and Director /s/Thomas N. Hund Senior Vice President and Chief - ------------------------------------- Financial Officer (Principal Thomas N. Hund Financial Officer) /s/Dennis R. Johnson Vice President and Controller - ------------------------------------- (Principal Accounting Officer) Dennis R. Johnson /s/Joseph F. Alibrandi* Director - ------------------------------------- Joseph F. Alibrandi /s/Jack S. Blanton* Director - ------------------------------------- Jack S. Blanton /s/John J. Burns, Jr.* Director - ------------------------------------- John J. Burns, Jr. /s/George Deukmejian* Director - ------------------------------------- George Deukmejian S-1 Signature Title /s/Bill M. Lindig* Director - ------------------------------------- Bill M. Lindig /s/Vilma S. Martinez* Director - ------------------------------------- Vilma S. Martinez /s/Roy S. Roberts* Director - ------------------------------------- Roy S. Roberts /s/Marc J. Shapiro* Director - ------------------------------------- Marc J. Shapiro /s/Arnold R. Weber* Director - ------------------------------------- Arnold R. Weber /s/Robert H. West* Director - ------------------------------------- Robert H. West /s/J. Steven Whisler* Director - ------------------------------------- J. Steven Whisler /s/Edward E. Whitacre, Jr.** Director - ------------------------------------- Edward E. Whitacre, Jr. /s/Ronald B. Woodard* Director - ------------------------------------- Ronald B. Woodard /s/Michael B. Yanney* Director - ------------------------------------- Michael B. Yanney Dated: March 30, 1999 *By: /s/ Jeffrey R. Moreland --------------------------------- Jeffrey R. Moreland Senior Vice President-Law and Chief of Staff Attorney in Fact S-2 BURLINGTON NORTHERN SANTA FE CORPORATION INDEX OF EXHIBITS
Exhibit Number Description ------- ----------- 2.1 Amended and Restated Combination Agreement dated as of December 18, 1999 by and among Burlington Northern Santa Fe Corporation ("BNSF"), Canadian National Railway Company, North American Railways, Inc. and Western Merger Sub, Inc. Incorporated by reference to Exhibit 2.1 to BNSF's Current Report on Form 8-K (Date of earliest event reported: February 17, 2000). 3.1 Amended and Restated Certificate of Incorporation of BNSF (amended as of April 21, 1998). Incorporated by reference to Exhibit 3.1 to BNSF's Report on Form 10-Q for the quarter ended June 30, 1998. 3.2 By-Laws of BNSF. Incorporated by reference to Exhibit 3.1 to BNSF's Report on Form 10-Q for the quarter ended September 30, 1997. Amendment to By-Laws effective January 20, 2000 is incorporated by reference to Exhibit 3.1 to BNSF's Current Report on Form 8-K (Date of earliest event reported: January 20, 2000). 4.1 Indenture, dated as of December 1, 1995, between BNSF and The First National Bank of Chicago, as Trustee. Incorporated by reference to Exhibit 4 to BNSF's Registration Statement on Form S-3 (No. 333- 72013). 4.2 Form of BNSF's 6 1/8% Notes Due 2009. Incorporated by reference to Exhibit 4.2 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1998. 4.3 Form of BNSF's 6 3/4% Debentures Due 2029. Incorporated by reference to Exhibit 4.3 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1998. 4.4 Form of BNSF's 6.70% Debenture Due August 1, 2028. Incorporated by reference to BNSF's Report on Form 10-K for the year ended December 31, 1998. 4.5 Certain instruments evidencing long-term indebtedness of BNSF are not being filed as exhibits to this Report because the total amount of securities authorized under any single such instrument does not exceed 10% of BNSF's total assets. BNSF will furnish copies of any material instruments upon request of the Securities and Exchange Commission. 4.6 Rights Agreement dated as of December 18, 1999, between Burlington Northern Santa Fe Corporation and First Chicago Trust Company of New York, as Rights Agent, and Certificate of Designations, Preferences and Rights of the Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibits 4.1 and 99.1 to BNSF's Current Report on Form 8-K (Date of earliest event reported: December 18, 1999). 10.1* Burlington Northern Santa Fe Non-Employee Directors' Stock Plan. Incorporated by reference to Appendix A to BNSF's Proxy Statement dated March 5, 1996. Amendment to Burlington Northern Santa Fe Non- Employee Directors' Stock Plan dated January 16, 1997 is incorporated by reference to Exhibit 10.1 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1996. 10.2* Burlington Northern Santa Fe Corporation 1987 Stock Option Incentive Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62833). 10.3* Burlington Northern Santa Fe Incentive Compensation Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62835). 10.4* Burlington Northern Inc. Senior Executive Survivor Benefit Plan as of April 1, 1986. Incorporated by reference to Amendment No. 1 to BNI's Report on Form 10-K for the fiscal year ended December 31, 1987.
E-1
Exhibit Number Description ------- ----------- 10.5* Burlington Northern Santa Fe Corporation Deferred Compensation Plan, as amended and restated effective September 16, 1998. Incorporated by reference to Exhibit 10.1 to BNSF's Report on Form 10-Q for the quarter ended September 30, 1998 (formerly, Burlington Northern Inc. Deferred Compensation Plan). 10.6* Burlington Northern Santa Fe Corporation Senior Management Stock Deferral Plan. Incorporated by reference to Exhibit 10.37 to BNSF Report on Form 10-K for the fiscal year ended December 31, 1999. 10.7* Burlington Northern Santa Fe 1993 Long Term Incentive Compensation Plan. Incorporated by reference to Exhibit 10(s) to BNSF's Registration Statement on Form S-8 (File No. 33-63247). 10.8* Burlington Northern Inc. Supplemental Benefits Plan (as amended and restated effective September 21, 1995). Incorporated by reference to Exhibit 10.8 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1995. 10.9* 1989 Burlington Northern Inc. Restricted Stock Incentive Plan. Incorporated by reference to BNI's Report on Form 10-K for the fiscal year ended December 31, 1990. 10.10* Burlington Northern Santa Fe Corporation 1990 Directors Stock Option Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62825). 10.11* Burlington Northern Santa Fe Incentive Bonus Stock Program. 10.12* Burlington Northern Santa Fe Corporation 1992 Stock Option Incentive Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62839). 10.13* Burlington Northern Santa Fe 1996 Stock Incentive Plan. Incorporated by reference to Appendix B to BNSF's Proxy Statement dated March 5, 1996. Amendment of Burlington Northern Santa Fe 1996 Stock Incentive Plan dated January 15, 1998 is incorporated by reference to Exhibit 10.13 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1997. Amendment dated December 3, 1998. 10.14* Burlington Northern Santa Fe Supplemental Retirement Plan. Incorporated by reference to Exhibit 10.1 to BNSF's Report on Form 10- Q for the quarter ended September 30, 1996. 10.15* Burlington Northern Santa Fe Estate Enhancement Program, as amended and restated effective October 1, 1996. Incorporated by reference to Exhibit 10.15 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1996. Amendment to Burlington Northern Santa Fe Estate Enhancement Program is incorporated by reference to Exhibit 10.2 to BNSF's Form 10-Q for the quarter ended June 30, 1999. 10.16* Agreement between BNSF and Robert D. Krebs dated as of January 30, 1997. Incorporated by reference to Exhibit 10.16 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1996. 10.17* Form of BNSF Change-in-Control Agreement (applicable to Messrs. Hund, Moreland, and Schultz, and two other executive officers). Incorporated by reference to Exhibit 10.17 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1996. 10.18* Burlington Northern Santa Fe Incentive Stock Compensation Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-63253). 10.19* Burlington Northern Santa Fe Deferred Compensation Plan for Directors as amended January 16, 1997. Incorporated by reference to Exhibit 10.19 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1996.
E-2
Exhibit Number Description ------- ----------- 10.20* Burlington Northern Inc. Nonqualified 401(k) Restoration Plan. Incorporated by reference to Exhibit 10.20 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1995. 10.21* Burlington Northern Inc. Form of Severance Agreement and amendments through September 18, 1995 (applicable to Mr. Rose). Incorporated by reference to Exhibit 10.21 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1995. Amendment to Form of Severance Agreement dated December 3, 1997 is incorporated by reference to Exhibit 10.21 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1997. 10.22* Burlington Northern Inc. Director's Charitable Award Program. Incorporated by reference to Exhibit 10.22 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1995. 10.23* Burlington Northern Santa Fe Salary Exchange Option Program. 10.24* Santa Fe Pacific Corporation Supplemental Retirement Plan ("Supplemental Plan"). Incorporated by reference to Exhibit 10(d) to SFP's Report on Form 10-K for the fiscal year ended December 31, 1984. Supplemental Plan as amended October 1, 1989, and Amendment to Supplemental Plan dated February 27, 1990, are incorporated by reference to Exhibit 10(d) to SFP's Report on Form 10-K for the fiscal year ended December 31, 1989. Amendment to Supplemental Plan dated March 22, 1994, and effective January 1, 1994, is incorporated by reference to Exhibit 10.24 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1995. 10.25* The Burlington Northern and Santa Fe Railway Company Severance Plan as amended effective June 1, 1999. Incorporated by reference to Exhibit 10.1 to BNSF's Report on Form 10-Q for the quarter ended June 30, 1999. 10.26* Burlington Northern Santa Fe 1999 Stock Incentive Plan. Incorporated by reference to Appendix to BNSF's Proxy Statement dated March 8, 1999. 10.27* Burlington Northern Santa Fe Directors' Retirement Plan. Incorporated by reference to Exhibit 10.29 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1995. 10.28* Benefits Protection Trust Agreement dated as of January 22, 1996 by and between BNSF and Bankers Trust Company. Incorporated by reference to Exhibit 10.28 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1996. 10.29* Retirement Benefit Agreement dated February 26, 1992 between SFP and R. D. Krebs. Incorporated by reference to Exhibit 10(l) to SFP's Report on Form 10-K for the fiscal year ended December 31, 1991. 10.30* Amended and Restated Trust Agreement dated as of April 1, 1994 by and between SFP and The Bank of New York. Incorporated by reference to Exhibit 10.30 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1995. 10.31* Trust Agreement dated as of July 26, 1994 by and between SFP and The Bank of New York. Incorporated by reference to Exhibit 10.31 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1995. 10.32* Burlington Northern Santa Fe 1993 Long Term Incentive Stock Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-63247). 10.33* Santa Fe Pacific Corporation Supplemental Retirement and Savings Plan. Incorporated by reference to Exhibit 10(s) to SFP's Report on Form 10- K for the fiscal year ended December 31, 1993.
E-3
Exhibit Number Description ------- ----------- 10.34* Form of indemnification agreement dated as of September 17, 1998 between BNSF and directors. Incorporated by reference to Exhibit 10.37 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1998. 10.35* Form of indemnification agreement dated as of September 17, 1998 between BNSF and certain officers. Incorporated by reference to Exhibit 10.38 to BNSF's Report on Form 10-K for the fiscal year ended December 31, 1998. 12.1 Computation of Ratio of Earnings to Fixed Charges. 13.1 1999 Annual Report to Shareholders of BNSF (Consolidated Financial Highlights on page 1, and pages 19-44, only.) 21.1 Subsidiaries of BNSF. 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Powers of Attorney 27.1 Financial Data Schedule (for the year ended December 31, 1999). 27.2 Financial Data Schedule (restated for the period ended March 31, 1999). 27.3 Financial Data Schedule (restated for the period ended June 30, 1999). 27.4 Financial Data Schedule (restated for the period ended September 30, 1999). 27.5 Financial Data Schedule (restated for the year ended December 31, 1998). 27.6 Financial Data Schedule (restated for the period ended March 31, 1998). 27.7 Financial Data Schedule (restated for the period ended June 30, 1998). 27.8 Financial Data Schedule (restated for the period ended September 30, 1998). 27.9 Financial Data Schedule (restated for the year ended December 31, 1997).
- -------- *Management contract or compensatory plan or arrangement. E-4 EX-10.11 2 BNSF INCENTIVE BONUS STOCK PROGRAM EXHIBIT 10.11 BURLINGTON NORTHERN SANTA FE INCENTIVE BONUS STOCK PROGRAM 1. Authority to Adopt. This program (the "Program") has been adopted by the ------------------ Compensation Committee (the "Committee") of the Board of Directors of Burlington Northern Santa Fe Corporation (the "Company") pursuant to its authority to promulgate rules for the administration and operation of the Burlington Northern Santa Fe 1999 Stock Incentive Plan (the "Plan") for Restricted Stock grants; 2. Purpose. The purpose of this Program is to enable the Committee and its ------- designated representatives to implement Restricted Stock grants (an "Exchange Grant") in exchange for a key employee electing to exchange receipt of cash compensation and other forms of compensation designated by the Committee ("Elective Compensation"). 3. Eligibility. The Committee shall designate key employees or classes of ----------- eligible employees (the "Eligible Participants") who shall be eligible to receive an Exchange Grant in exchange for foregoing Elective Compensation. 4. Amount of Elective Compensation. Unless the Committee shall designate ------------------------------- another amount of Elective Compensation as to any Eligible Participant, each Eligible Participant may elect to exchange all or any portions of the following element of compensation for an Exchange Grant: 100% of such Eligible Participant's annual incentive payment payable in the following calendar year, based upon the annual incentive compensation plan established for such Eligible Participant. 5. Method of Election. Unless the Committee shall designate another time or ------------------ times for making an election to forego receiving Elective Compensation, an Eligible Participant who wishes to receive an Exchange Grant (an "Electing Participant") must deliver to the Vice President - Human Resources, a written irrevocable election in a form acceptable to the Senior Vice President Law & Chief of Staff of Burlington Northern Santa Fe Corporation specifying the amount of Elective Compensation the Electing Participant wishes to forego (the "Cancelled Incentive Payment"), not later than the date established by the Committee from time to time or July 1 of the fiscal year in which the Eligible Participant earns the annual incentive. Notwithstanding the foregoing, any officer of the Company subject to Section 16(b) of the Securities Exchange Act of 1934, must make such election not less than six months before the scheduled grant date. 6. Date of Grant. Unless otherwise determined by the Committee, the Exchange ------------- Grant will be issued once a year on or about January 31 following the year in which the Elective Compensation is earned. 7. Valuation. For purposes of determining the number of shares subject to an --------- Exchange Grant, the following valuation rules shall apply. (1) The Cancelled Incentive Payment otherwise payable in cash will be valued at its dollar equivalent; and (2) The Restricted Stock award shall be equal to the number of shares determined by dividing 150% of the Cancelled Incentive Payment by the Fair Market Value of Company stock, determined under the Plan on the date of grant. 8. Vesting. The Exchange Grant shall be subject to restrictions for a period ------- of three years from the date of grant, provided however, the Committee may establish performance objectives for each grant to permit the restrictions to lapse over a shorter period, but in no event shall restrictions lapse in less than one year. Notwithstanding the foregoing, the Committee retains discretion to amend or modify these performance objectives at any time. 9. Committee Discretion. Notwithstanding anything else contained herein to -------------------- the contrary, the Committee shall have the right prior to the grant date, to override an election in whole or in part. If the Committee overrides an election in whole or in part, the Company shall reinstate the amount of the Cancelled Incentive Payment related thereto. 10. Unvested Restricted Stock. In the event that a participant with an ------------------------- Exchange Grant is involuntarily terminated by the Company other than for Cause, the Committee agrees to permit a participant to elect to receive (i) a proration of the outstanding award as set forth in the Plan or (ii) to surrender the Exchange Grant in exchange for the amount of the cash award previously foregone and the award of Restricted Stock will terminate as if never granted. In the event of retirement as defined in the Burlington Northern Santa Fe Retirement Plan, the Committee agrees to permit a participant to receive a proration of the outstanding award as set forth in Plan. Notwithstanding the foregoing, the Committee reserves the right to withdraw its consent to permit participants who terminate due to retirement from electing the benefits of this subparagraph. 11. Grant Terms. The grant shall be issued from authorized, but unissued ----------- shares or from treasury shares. 12. Amendments. This procedure may be amended at any time and from time to ---------- time by resolution of the Committee. (As amended and restated effective January 20, 1999) EX-10.13 3 AMENDMENT TO BNSF 1996 STOCK INCENTIVE PLAN EXHIBIT 10.13 Burlington Northern Santa Fe Corporation Amendment TO the Burlington Northern Santa Fe 1996 Stock Incentive Plan - ------------------------------------------- WHEREAS, Burlington Northern Santa Fe Corporation ("Company") maintains the Burlington Northern Santa Fe 1996 Stock Incentive Plan ("Plan"); WHEREAS, amendment of the Plan is now desirable; RESOLVED, effective upon the date of the adoption of this amendment, the Plan is amended as set forth below. 1. Section 2.1(s) should be amended by inserting the following at the end of the first sentence: "provided, that in respect to grants made on or after January 1, 1999, the following definition shall apply: Retirement. "Retirement" of a Participant shall mean the occurrence ---------- of a Participant's Date of Termination under circumstances that constitute a retirement with immediate eligibility for benefits under Article 6 or Article 7 of the Burlington Northern Santa Fe Retirement Plan, or under the terms of a Qualified Retirement Plan of an Employer or Related Company that is extended to the Participant immediately prior to the Participant's Date of Termination or, if no such plan is extended to the Participant on his Date of Termination, under the terms of any applicable retirement policy of the Participant's employer." 2. Section 13.9 should be added to read as follows: 13.9 Notwithstanding the foregoing provisions of this section, Awards of Non-Qualified Stock Options issued after January 1, 1999 which are or become exercisable upon early retirement under the terms of a Qualified Retirement Plan shall expire on the expiration date set forth in the award or, if earlier, three years after the Date of Termination. FURTHER RESOLVED, that each of the Secretary and other officers of the Company are authorized and empowered by and on behalf and in the name of the Company to do and perform, or cause to be done and performed, all such acts, deeds and things and to make, execute, and deliver, or cause to be made, executed, and delivered, all such agreements, undertakings, documents, instruments, or certificates, as each such officer may deem necessary or appropriate to effectuate or carry out fully the purpose and intent of the foregoing resolutions. Fort Worth, Texas December 3, 1998 EX-10.23 4 BNSF SALARY EXCHANGE OPTION PROGRAM EXHIBIT 10.23 BURLINGTON NORTHERN SANTA FE SALARY EXCHANGE OPTION PROGRAM 1. Authority to Adopt. This program (the "Program") has been adopted by ------------------ the Compensation Committee (the "Committee") of the Board of Directors of Burlington Northern Santa Fe Corporation (the "Company") pursuant to its authority to promulgate rules for the administration and operation of the Burlington Northern Santa Fe 1999 Stock Incentive Plan (the "Plan") for non-qualified stock option grants. This Program is effective January 1, 1999. 2. Purpose. The purpose of this Program is to enable the Committee and its ------- designated representatives to grant stock option awards ("Exchange Option Grants") to key employees in exchange for the employees' elective reduction of compensation otherwise payable to them, including cash compensation and other forms of compensation designated by the Committee ("Elective Compensation"). 3. Eligibility. The Committee shall designate key employees or classes of ----------- eligible employees (the "Eligible Participants") who shall be eligible to receive an Exchange Option Grant in exchange for foregoing Elective Compensation. 4. Amount of Elective Compensation. Unless the Committee shall designate ------------------------------- another amount of Elective Compensation as to any Eligible Participant, each Eligible Participant may elect to exchange all or any portion of the following element of compensation for an Exchange Grant: Up to 25% of such Eligible Participant's annual base salary for a calendar year up to three consecutive calendar years, to be deducted ratably with a minimum election of $5,000 for any calendar year. 5. Method of Election. Unless the Committee shall designate another time or ------------------ times for making an election to forego receiving Elective Compensation and subject to Section 7 herein, an Eligible Participant who wishes to receive an Exchange Option Grant (an "Electing Participant") must deliver to the Vice President - Human Resources, a written irrevocable election in a form acceptable to the Senior Vice President Law & Chief of Staff of Burlington Northern Santa Fe Corporation specifying the amount of Elective Compensation the Electing Participant wishes to forego (the "Canceled Compensation"), not later than the date established by the Committee from time to time or December 31 of the year prior to the year in which the compensation is earned. 6. Date of Grant. For elections filed in accordance with paragraph 5 prior to -------------- December 1, 1999, and unless otherwise determined by the Committee, the Exchange Grant will be issued January 1 of the year in which the Canceled Compensation is to be earned. For elections filed in accordance with paragraph 5 after December 1, 1999, and unless otherwise determined by the Committee, the Exchange Grant will be issued January 1 of the year in which the Canceled Compensation is to be earned; provided that if the grant is in exchange for Canceled Compensation otherwise payable over a period of more than one year, then the Exchange Grant shall be issued on the first day of the multiple-year period. 7. Terms of Grant. Each Exchange Option Grant shall be granted at the Fair -------------- Market Value as defined in the Burlington Northern Santa Fe 1999 Stock Incentive Plan on the date of grant in an amount equal to 450 option shares for each $1,000 of Canceled Compensation. Such Exchange Option Grants shall become exercisable one year from the date of grant; provided that in the event of an election to forego compensation for multiple years, such Exchange Option Grant shall become exercisable ratably over the number of years for which an election is made beginning one year from date of grant based upon the Canceled Compensation for each year divided by the total amount of Canceled Compensation. Such options shall have a term of ten years and shall be subject to the terms and conditions of the Burlington Northern Santa Fe 1999 Stock Incentive Plan. In the event a participant wishes to terminate an election that was filed in accordance with paragraph 5 prior to December 1, 1999, he or she may do so in respect to Elective Compensation for all future calendar years covered by such election, and such portion of the Exchange Option Grant related to such compensation shall be immediately forfeited; provided that no such termination shall be permitted with respect to elections filed in accordance with paragraph 5 after December 1, 1999. 8. Reloads. Reload options are hereby granted to senior executives and to ------- individuals in Salary Band 36 and above in respect to Exchange Option Grants, subject to the terms and conditions of the Plan, in respect to options granted under current or predecessor plans of the Company or its affiliates; provided a) that only two reloads on each option grant is permitted; b) that reloads are only available to current and actively employed individuals at the time of exercise of the Exchange Option Grant; and c) that reload rights are transferable to the same extent as option rights. 9. Committee Discretion. Notwithstanding anything else contained herein to -------------------- the contrary, the Committee shall have the right, prior to the grant date, to override an election in whole or in part. If the Committee overrides an election in whole or in part, the Company shall reinstate the amount of the Canceled Compensation related thereto. 2 10. Unvested Stock Options. ---------------------- a) In the event that a participant with an Exchange Option Grant resigns or is terminated for Cause, the full amount of the Exchange Option Grant shall be forfeited. b) In the event that a participant with an Exchange Option Grant dies, all restrictions shall lapse and the full amount of the Exchange Option Grant shall be exercisable. c) In the event that a participant with an Exchange Option Grant terminates due to Disability, Retirement or is involuntarily terminated by the Company other than for Cause, any portion of the outstanding award that is not exercisable shall be vested to the extent compensation for such options has been foregone and the award shall remain exercisable in accordance with the terms and limitations of the Plan. d) The Change in Control provisions set forth in the Plan shall apply to all grants of stock options issued pursuant to this Program or as such Change in Control provisions may be modified by the Committee in its sole discretion prior to the date of an Exchange Option Grant, but in no event shall these Exchange Option Grants be available under any Change in Control agreement that has become effective prior to the date of a grant hereunder. 11. Grant Terms. The grant shall be issued from authorized, but unissued ----------- shares or from treasury shares. 12. Amendments. This Program may be amended or terminated at any time and from ---------- time to time by resolution of the Committee. As Amended 1/20/99 and 12/08/99 3 EX-12.1 5 COMP. RATIO EARNINGS TO FIXED CHARGES EXHIBIT 12.1 BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In Millions, Except Ratio Amounts) (Unaudited)
Year Ended, ---------------------- 1999 1998 1997 ------ ------ ------ Earnings: Pre-tax income..................................... $1,819 $1,849 $1,404 Add: Interest and fixed charges, excluding capitalized interest........................................ 387 354 344 Portion of rent under long-term operating leases representative of an interest factor............ 182 202 183 Amortization of capitalized interest............... 5 4 3 Less: Undistributed equity in earnings of investments accounted for under the equity method. 13 18 17 ------ ------ ------ Total earnings available for fixed charges......... $2,380 $2,391 $1,917 ====== ====== ====== Fixed charges: Interest and fixed charges......................... $ 400 $ 371 $ 362 Portion of rent under long-term operating leases representative of an interest factor.............. 182 202 183 ------ ------ ------ Total fixed charges................................ $ 582 $ 573 $ 545 ------ ------ ------ Ratio of earnings to fixed charges................... 4.09x 4.17x 3.52x(1) ====== ====== ======
- -------- (1) Earnings for the year ended December 31, 1997 include a special charge of $90 million before-tax. Excluding this charge, the ratio for the year ended December 31, 1997 would have been 3.68x. E-5 EX-13.1 6 1999 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13.1 Consolidated Financial Highlights Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------- December 31, 1999 1998 1997 1996 1995(3) - ------------------------------------------ ---------- -------- --------- -------- --------- For The Year Ended: Revenues $ 9,100 $ 8,941 $ 8,370 $ 8,109 $ 6,099 Operating income (1) 2,205 2,158 1,767 1,748 526 Income before extraordinary item and cumulative effect of change in accounting method 1,137 1,155 885 889 198 Accounting change/Extraordinary item (2) - - - - (106) Net income $ 1,137 $ 1,155 $ 885 $ 889 $ 92 Earnings available for common stockholders $ 1,137 $ 1,155 $ 885 $ 889 $ 71 Basic earnings per share: Before extraordinary item and change in accounting method $ 2.46 $ 2.45 $ 1.91 $ 1.95 $ 0.57 Accounting change/Extraordinary item (2) - - - - (0.34) Basic earnings per share $ 2.46 $ 2.45 $ 1.91 $ 1.95 $ 0.23 Average shares (in millions) 463.2 470.5 464.4 456.3 313.2 Diluted earnings per share: Before extraordinary item and change in accounting method $ 2.44 $ 2.43 $ 1.88 $ 1.91 $ 0.55 Accounting change/Extraordinary item (2) - - - - (0.33) Diluted earnings per share $ 2.44 $ 2.43 $ 1.88 $ 1.91 $ 0.22 Average shares (in millions) 466.8 476.2 471.1 464.4 317.7 Dividends declared per common share $ 0.48 $ 0.44 $ 0.40 $ 0.40 $ 0.40 - ------------------------------------------ ---------- -------- --------- -------- --------- At Year End: Total assets $ 23,700 $ 22,646 $ 21,266 $19,693 $ 18,199 Long-term debt and commercial paper, including current portion 5,813 5,456 5,289 4,711 4,233 Stockholders' equity 8,172 7,784 6,822 5,994 5,037 Total debt to capital 41.6% 41.2% 43.7% 44.0% 45.7% - ------------------------------------------ ---------- -------- --------- -------- --------- For The Year Ended: Capital expenditures $ 1,788 $ 2,147 $ 2,182 $ 2,234 $ 890 Depreciation and amortization 897 832 773 760 520 - ------------------------------------------ ---------- -------- --------- -------- ---------
(1) 1997 and 1995 include $90 million ($57 million after-tax) and $735 million ($453 million after-tax), respectively, for special charges principally related to employee merger and separation costs. (2) 1995 includes the cumulative effect of the change in accounting method for locomotive overhauls which decreased net income by $100 million. Additionally, 1995 includes an extraordinary loss on retirement of debt of $6 million. (3) 1995 includes Burlington Northern Inc. results for the year ended December 31, 1995 and Santa Fe Pacific Corporation results from September 22, 1995 though December 31, 1995. Burlington Northern Santa Fe Corporation 1 Financial Contents 19 Management's Discussion and Analysis 29 Report of Management 29 Report of Independent Accountants 30 Consolidated Statement of Income 31 Consolidated Balance Sheet 32 Consolidated Statement of Cash Flows 33 Consolidated Statement of Changes in Stockholders' Equity 34 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Revenue Table The following table presents BNSF's revenue information by commodity for the years ended December 31, 1999, 1998 and 1997 and includes certain reclassifications of prior year information to conform to current year presentation.
Revenues Cars/Units Average Revenue Per Car/Unit ----------------------------- ----------------------------- -------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 (IN MILLIONS) (IN THOUSANDS) ------ ------ ------ ------ ------ ------ ------ ------ ------ Carload $2,553 $2,588 $2,482 1,773 1,801 1,739 $1,440 $1,437 $1,427 Intermodal 2,518 2,437 2,243 3,203 3,086 2,811 786 790 798 Coal 2,227 2,239 1,972 2,123 2,078 1,862 1,049 1,077 1,059 Agricultural Commodities 1,329 1,271 1,248 715 689 669 1,859 1,845 1,865 Automotive 443 390 422 250 230 264 1,772 1,696 1,598 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Freight Revenues 9,070 8,925 8,367 8,064 7,884 7,345 $1,125 $1,132 $1,139 Other Revenues 30 16 3 ------ ------ ------ ------ ------ ------ - ------------------------- ------ ------ ------ Total Revenues $9,100 $8,941 $8,370 ========================= ====== ====== ======
Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis relates to the financial condition and results of operations of Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries (collectively, BNSF or Company). The principal subsidiary of BNSF is The Burlington Northern and Santa Fe Railway Company (BNSF Railway). All earnings per share information is stated on a diluted basis. Results of Operations Year Ended December 31, 1999 Compared With Year Ended December 31, 1998 Earnings per share increased to $2.44 per share for 1999 from $2.43 per share for 1998 although net income was slightly lower for 1999 at $1,137 million compared with 1998 net income of $1,155 million. The slight decrease in net income is primarily due to a 1998 gain of $67 million on the sale of substantially all of the Company's interest in Santa Fe Pacific Pipeline Partners, L.P., along with 1998 gains on real estate portfolio sales and higher interest expense in 1999 incurred on borrowings to fund the repurchase of 22 million shares of BNSF common stock, as compared to 5 million shares in 1998, and increased 1999 environmental expenses. These decreases in net income were partially offset by increased operating revenues in 1999 due to volume gains in most sectors. Revenues Total revenues for 1999 were $9,100 million or 2 percent higher compared with revenues of $8,941 million for 1998. The $159 million increase primarily reflects increases in the intermodal, agricultural commodities and automotive sectors, partially offset by lower carload and coal revenues. Average revenue per car/unit decreased slightly in 1999 to $1,125 from $1,132 in 1998. During 1999, BNSF's share of the Western United States rail traffic market, based on reporting to the Association of American Railroads (AAR), decreased 0.8 points to 43.5 percent. This decrease in market share was primarily due to Union Pacific Corporation (UP) regaining market share as a result of its recovery from operating difficulties experienced in the prior year. Carload revenues, which include revenues from the chemicals, forest products, metals, minerals and machinery, perishable and dry boxcar sectors, of $2,553 million for 1999 were $35 million or 1 percent lower than 1998 due to decreases in the chemicals, minerals and machinery, and metals sectors, partially offset by increased forest product revenues. The decreases were a result of weaknesses in the chemicals sector due to soft fertilizer markets, weaknesses in the metals sector due to increased steel imports, and a decrease in dedicated train movements of heavy machinery. These decreases were partially offset by increased inland shipments of forest products. Burlington Northern Santa Fe Corporation 19 Intermodal revenues of $2,518 million improved $81 million or 3 percent compared with 1998 reflecting increases in the direct marketing, international and truckload sectors, partially offset by decreases in the intermodal marketing companies (IMC) sector. Direct marketing revenues benefited from year over year growth of units shipped for UPS and Roadway. International revenues were up due to market share gains and new business with Sealand, NYK, Maersk and K-Line. Truckload revenues were driven primarily by year over year growth in J.B. Hunt, Swift and Triple Crown loadings. These revenue increases were partially offset by decreases in the IMC sector due to UP pricing pressures, an overall softening in the IMC market, and increased trucking capacity. Coal revenues of $2,227 million for 1999 decreased $12 million or less than 1 percent, as a result of a decrease in average revenue per car due to a decline in coal shipping rates on contracts renewed beginning in late 1998 at the lower 1998 and 1999 market based rates. Operating difficulties early in the year at the Powder River Basin mines and a decrease in the demand for coal due to milder weather for most of the year also contributed to the year over year decrease. Agricultural commodities revenues of $1,329 million for 1999 were $58 million or 5 percent higher than 1998 due primarily to increased demand for soybean exports and corn from the Midwest that moved to the Pacific Northwest for export. The increase in soybean revenue was fueled by favorable pricing and an increased supply of soybeans that was sufficient to meet the higher demand. Increases in volume were slightly offset by lower wheat revenue per car and fewer soybean oil shipments in 1999 compared to 1998. Automotive revenues of $443 million for 1999 were $53 million or 14 percent higher than 1998 reflecting growth in vehicle shipments due to both a record year of new vehicle production coupled with an increase in revenue per unit as a result of a favorable change in the mix of vehicles transported. Expenses Total operating expenses for 1999 were $6,895 million, an increase of $112 million or 2 percent, compared with operating expenses for 1998 of $6,783 million. Compensation and benefits expenses of $2,772 million were $40 million or 1 percent lower than 1998 primarily due to lower employment levels due in part to the second quarter 1999 reorganization, as discussed in Other Matters: Employee Merger and Separation Costs, partially offset by increased wage rates. Purchased services of $946 million for 1999 were $52 million or 6 percent higher than 1998 due primarily to increased contract equipment maintenance costs as well as ramping and other transportation service contracts. Equipment rents expenses of $752 million were $52 million or 6 percent lower than 1998 as a result of lower intermodal equipment costs due to a reduction in time and mileage, and trailer and container expenses. Lower agricultural leased car expense due to improved cycle times also contributed to the decrease. Fuel expenses of $700 million for 1999 were $21 million or 3 percent lower than 1998, as a result of a 3 cent or 6 percent decrease in the average all-in cost per gallon of diesel fuel, partially offset by a 3 percent volume driven increase in consumption from 1,155 million gallons to 1,187 million gallons. The average all-in cost per gallon of diesel fuel decreased year over year due to current year fuel hedge losses of 1 cent per gallon compared to 7 cents per gallon in the prior year, which were partially offset by a 3 cent increase in the average purchase price. Materials and other expenses of $834 million for 1999 were $114 million or 16 percent higher than 1998 principally reflecting higher environmental, personal injury and property and other tax expenses. As discussed in Other Matters: Employee Merger and Separation Costs, reorganization costs of $48 million were incurred during the second quarter of 1999 for severance, pension, medical and other benefit costs for approximately 325 involuntarily terminated salaried employees that were part of a reorganization program announced in May 1999 to reduce operating expenses. In addition, the Company also reversed during the second quarter certain merger severance liabilities of $54 million associated with the Company's clerical consolidation plan. These liabilities related to planned work-force reductions which were no longer needed due to the Company's ability to utilize a series of job swaps between certain locations to achieve the advantages of functional work consolidation. Interest expense for 1999 increased by $33 million to $387 million principally reflecting higher debt levels used to fund the share repurchase program. Total debt increased to $5,813 million at December 31, 1999, from $5,456 million at December 31, 1998. Other income (expense), net was unfavorable by $44 million compared to 1998 primarily due to the $67 million gain on the sale of substantially all of the Company's interest in Santa Fe Pacific Pipeline Partners, L.P. in 1998 and gains of $26 million from the sale of a real estate portfolio in 1998. This was partially offset by the recognition in 1999 of a $50 million deferred gain in connection with the sale of rail lines in Southern California in 1992 and 1993. Year Ended December 31, 1998 Compared With Year Ended December 31, 1997 BNSF recorded net income for 1998 of $1,155 million ($2.43 per share), compared with net income of $885million ($1.88 per share) for 1997 principally reflecting increased revenues in intermodal, coal and other sectors. More moderate winter weather in the first quarter of 1998 relative to 1997, gains on 1998 real estate portfolio sales and a 1998 $67 million gain on the sale of substantially all of the Company's interest in Santa Fe Pacific Pipeline Partners, L.P. also contributed to the improvement. Additionally, 1997 included a $90 million pre- tax special charge ($57 million after-tax or $0.12 per share) principally related to the consolidation of clerical functions (see Other Matters: Employee Merger and Separation Costs). Burlington Northern Santa Fe Corporation 20 Revenues Total revenues for 1998 were $8,941 million or 7 percent higher compared with revenues of $8,370 million for 1997. The $571 million increase primarily reflects increases in the carload, intermodal, coal and agricultural commodities sectors partially offset by lower automotive revenues. Average revenue per car/unit decreased slightly in 1998 to $1,132 from $1,139 in 1997. During 1998, BNSF's share of the Western United States (U.S.) rail traffic market, based on reporting to the AAR, increased 2.9 points to 44.3 percent. This gain was primarily the result of the trackage rights gained from UP and operating problems experienced by UP associated with consolidating operations. Carload revenues of $2,588 for 1998 were $106 million or 4 percent higher than 1997 due to increases in the chemicals, forest products, minerals and machinery, and metals sectors, partially offset by a decrease in dry boxcar revenues. Chemicals revenues increased due to strength in industrial chemicals, petroleum products and plastics. Forest products revenues increased due to printing paper and pulpboard volume gains, increased Canadian newsprint imports, and increased lumber volumes due to higher levels of construction activity. Minerals and machinery revenues increased primarily due to volume increases in cement and specialty minerals and increased heavy machinery traffic. Metals revenues increased due to strength in aluminum and non-ferrous materials as well as volume increases in steel products. Intermodal revenues of $2,437 million improved $194 million or 9 percent compared with 1998 reflecting increases in the direct marketing, international and truckload sectors. Direct marketing revenues benefited from increased units shipped for UPS, less than truckload customers and the United States Postal Service. International revenues were up due to volume increases associated with market share gains and new business established with Sealand, NYK, Maersk and K- Line. Truckload revenues increased due to volume growth from J.B. Hunt and Schneider. Coal revenues of $2,239 million for 1998 increased $267 million or 14 percent primarily due to strong demand, volume increases associated with market share gains, and favorable operating conditions as a result of a more moderate winter in 1998. Agricultural commodities revenues of $1,271 million for 1998 were $23 million or 2 percent higher than 1997 primarily due to increased corn syrup loadings and the recovery of sugar traffic which was hampered in 1997 due to poor weather conditions. This increase was partially offset by poor Pacific Northwest corn and soybeans exports as well as a record breaking year in 1997 of barley exports. Automotive revenues of $390 million for 1998 were $32 million or 8 percent lower than 1997 reflecting decreases in volumes due to the loss of Ford's southwestern United States business and the impact of the General Motors strike, partially offset by strong Honda loadings. Expenses Total operating expenses for 1998 were $6,783 million, an increase of $180 million or 3 percent, compared with operating expenses for 1997 of $6,603 million. 1997 included a $90 million ($57 million after-tax) special charge principally related to the consolidation of clerical functions. Compensation and benefits expenses of $2,812 million were $137 million or 5 percent higher than 1997. Wages were higher due to volume related increases primarily in train crew costs, 1998 wage increases to both salaried and union employees, and increased incentive compensation expense. These increases were partially offset by lower labor costs associated with repairs to track and equipment as 1997 was unusually high because of severe winter weather. Purchased services of $894 million for 1998 were $71 million or 9 percent higher than 1997 due principally to higher joint facility costs from increased operations over trackage rights obtained from UP, increased equipment maintenance costs, and higher ramping costs related to increased intermodal volumes. Equipment rents expenses of $804 million were $16 million or 2 percent lower than 1997. Improved equipment utilization and lower equipment related performance penalties for grain were partially offset by volume driven increases for leased coal cars and locomotives. Fuel expenses of $721 million for 1998 were $26 million or 3 percent lower than 1997, as a result of a 6 cent or 9 percent decrease in the average all-in cost per gallon of diesel fuel, partially offset by a 6 percent volume driven increase in consumption from 1,092 million gallons to 1,155 million gallons. The decrease in average all-in cost per gallon of diesel fuel includes a 13 cent decrease in the average purchase price, partially offset by current year losses related to BNSF's fuel hedging program. Gross ton-miles per gallon of fuel increased 4 percent reflecting the continuing favorable operating trend resulting from new, fuel efficient locomotives and more fuel efficient operating practices. Materials and other expenses of $720 million for 1998 were $45 million or 7 percent higher than 1997 principally due to lower credits from joint facility billings due to lower UP traffic levels on BNSF facilities. Additionally, other expenses in 1997 included more income from the sale of easements and tax incentives from the State of Nebraska related to investment and employment levels in the state. Interest expense for 1998 increased by $10 million to $354 million reflecting higher debt levels which increased to $5,456 million at December 31, 1998 from $5,289 million at December 31, 1997, partially offset by lower interest rates. Other income (expense), net was favorable $64 million compared to 1997 primarily due to the $67 million gain on the sale of substantially all of the Company's interest in Santa Fe Pacific Pipeline Partners, L.P. Additionally, lower equity in earnings of the pipeline partnership due to the first quarter 1998 sale of this investment was offset by gains of $26 million on real estate portfolio sales. Burlington Northern Santa Fe Corporation 21 Liquidity and Capital Resources Cash generated from operations is BNSF's principal source of liquidity. BNSF generally funds any additional liquidity requirements through debt issuance, including commercial paper, or leasing of assets. During 1999, BNSF generated free cash flow after dividends paid (cash flow from operating activities less capital expenditures and other investing activities and dividends paid) for the first time since the 1995 merger. Free cash flow after dividends paid was $260 million in 1999, an improvement of $657 from the free cash flow deficit of $397 million in 1998. This increase was due primarily to reduced capital spending and increased cash flow from operating activities. Operating Activities Net cash provided by operating activities was $2,424 million during 1999 compared with $2,218 million during 1998. The increase in cash from operations was primarily due to an increase in cash provided by changes in working capital, principally accounts receivable, and a decrease in cash used for other net- operating activities primarily due to lower tax and personal injury payments. Investing Activities Net cash used for investing activities during 1999 was $1,940 million, principally comprised of $1,788 million in capital expenditures. A breakdown of cash capital expenditures is set forth in the following table (in millions): Year ended December 31, 1999 1998 1997 - ---------------------------- ------ ------ ------ Maintenance of way $ 861 $ 897 $ 958 Mechanical 240 243 198 Information services 74 76 38 Other 114 104 83 - ---------------------------- ------ ------ ------ Total maintenance of business 1,289 1,320 1,277 New locomotives and freight cars 261 340 374 Terminal and line expansion 233 487 428 Other projects 5 - 103 ============================ ====== ====== ====== Total $1,788 $2,147 $2,182 ============================ ====== ====== ====== BNSF reduced 1999 cash capital expenditures compared to 1998 by approximately $359 million to $1,788 million. Maintenance of way expenditures for 1999 decreased primarily due to the installation of fewer concrete ties. Cash used for new locomotives was lower in 1999 reflecting a decrease in the number of locomotives purchased. Terminal and line expansion projects principally reflect double and triple tracking of main line track and capacity expansion of terminals. Terminal and line expansion expenditures for 1999 decreased due to fewer line expansion projects in 1999 compared to 1998. BNSF has entered into commitments to acquire 196 and 50 locomotives in 2000 and 2001, respectively. The locomotives will be financed from one or a combination of sources including, but not limited to, cash from operations, capital or operating leases, and debt issuances. The decision on the method used will depend upon then current market conditions and other factors. Financing Activities Net cash used for financing activities during 1999 was $487 million, primarily related to share repurchases of $688 million and dividend payments of $224 million partially offset by net debt borrowings of $363 million and proceeds from stock options exercised of $121 million. In February 1999, the Company filed a new shelf registration statement that became effective in March 1999 for the issuance of debt securities, including medium-term notes, which may be issued in one or more series at an aggregate offering price not to exceed $750 million. Additionally, in February 1999, prior to the effective date of the new shelf registration, the Company amended its March 1998 shelf registration to combine it with the February 1999 shelf registration. Subsequently, the Company had $1.1 billion of borrowing capacity available under its shelf registration statement. In March 1999, BNSF issued $200 million of 6.1 percent notes due March 2009 and $200 million of 6.8 percent debentures due March 2029 under the February 1999 shelf registration statement. The net proceeds were used for general corporate purposes including the repayment of commercial paper. At the time of issuing the $200 million of 6.1 percent notes discussed above, the Company closed out a $100 million treasury lock transaction at a gain of approximately $8 million which has been deferred and is being amortized to interest expense over the 10-year life of the notes. In April 1999, the holder of a call option on $200 million of the Company's puttable reset debentures due 2029 exercised the call option. As a result, on May 13, 1999, the holder repurchased the debentures which were subsequently resold to investors. The interest rate on the debentures was reset to a fixed interest rate of 7.1 percent. The Company did not receive any proceeds from the resale of these debentures; however, the resale of these debentures, along with the $400 million of debt securities issued in March, reduced the amount available for borrowing under the Company's February 1999 shelf registration statement to $500 million. During 1999, BNSF Railway entered into equipment obligations totaling $212 million payable from 2000 to 2016 with interest rates ranging from 5.4 percent to 7.0 percent and $60 million of capital lease obligations payable from 2000 to 2016. The capital lease and $137 million of equipment obligations relate to financing transactions involving German investors. In order to comply with the terms of the capital lease and the associated foreign regulations, BNSF Railway simultaneously deposited $60 million with a German bank and pledged this amount as an irrevocable security deposit to be used to pay the capital lease obligations. The capital lease obligation is classified as Long-Term Debt and the security deposit is classified as an Other Asset in the consolidated balance sheet. Aggregate long-term debt scheduled to mature in 2000 is $158 million, excluding $100 million of 6.1 percent notes due 2027 for which BNSF received notice from the holders that they will exercise a put option on the notes in February 2000. BNSF's ratio of total debt to total capital was 41.6 per- Burlington Northern Santa Fe Corporation 22 cent at the end of 1999, 41.2 percent at the end of 1998, and 43.7 percent at the end of 1997. Credit Agreements BNSF issues commercial paper from time to time which is supported by bank revolving credit agreements. Outstanding commercial paper balances are considered as reducing the amount of borrowings available under these agreements. The bank revolving credit agreements which were renewed and extended effective June 28, 1999, allow borrowings of up to $750 million on a short-term basis and $750 million on a long-term basis. Annual facility fees are currently 0.10 percent and 0.125 percent, respectively, and are subject to change based upon changes in BNSF's senior unsecured debt ratings. Borrowing rates are based upon i) LIBOR plus a spread based upon BNSF's senior unsecured debt ratings, ii) money market rates offered at the option of the lenders, or iii) an alternate base rate. The commitments of the lenders under the short-term agreement are scheduled to expire in June 2000. The commitments of the lenders under the long- term agreement are scheduled to expire in June 2004. At December 31, 1999, there were no borrowings against the long-term revolving credit agreement and the maturity value of commercial paper outstanding was $477 million, leaving a total remaining capacity of $1,023 million available under the revolving credit agreements. BNSF must maintain compliance with certain financial covenants under its revolving credit agreements and at December 31, 1999, the Company was in compliance. Common Stock Repurchase Program In July 1997, the Board of Directors of BNSF authorized the repurchase of up to 30 million shares of the Company's common stock from time to time in the open market. In December 1999, the Board of Directors extended the repurchase program by approving an additional 30 million shares. During 1999 and 1998, the Company repurchased approximately 22 million and 5 million shares, respectively, of its common stock at an average price of $31.08 per share and $30.75 per share, respectively. There were no repurchases under this program in 1997. Total repurchases through February 4, 2000, were approximately 33 million shares at a total average cost of $29.86 per share, leaving 27 million shares available for repurchase under the authorization. In connection with its share repurchase program, during 1998, BNSF sold equity put options for 3 million shares of the Company's common stock to an independent third party and received cash proceeds of $2.2 million. These options expired unexercised. In April 1999, BNSF sold equity put options for 100 thousand shares of common stock to an independent third party and received cash proceeds of $135 thousand. The third party exercised the options on October 12, 1999, which resulted in the Company purchasing 100 thousand shares of its common stock at $29 per share. An equity put option is a financial instrument whereby BNSF receives an upfront cash premium for granting another party the option to sell a defined number of BNSF shares to the Company at a fixed price on a specified future date. The Company considers the sale of equity put options as a method to acquire its common stock at a share price consistent with its share repurchase strategy and potentially reduce the all-in cost of the program. The Company's risk is that it may be required to purchase shares at a specified price that is higher than the common stock price at the exercise date of the equity put option. The Company has the ability to settle its equity put option transactions on a net share or net cash basis and accounts for the effects of these transactions within stockholders' equity. The number of shares subject to outstanding put options sold by the Company cannot exceed the amount of remaining shares the Board of Directors has authorized for repurchase. As of February 4, 2000 there were no equity put options outstanding. Common Stock Split On July 16, 1998, the Board of Directors approved a three-for-one common stock split which was effected in the form of a stock dividend of two additional shares of BNSF common stock payable for each share outstanding or held in treasury on September 1, 1998, to stockholders of record on August 17, 1998. All equity-based benefit plans reflect the issuance of additional shares or options due to the declaration of the stock split. All share and per share data were restated to reflect the stock split. Dividends Common stock dividends declared were $0.48, $0.44 and $0.40 per share annually for 1999, 1998 and 1997, respectively. Dividends paid on common stock were $224 million, $197 million and $185 million during 1999, 1998 and 1997, respectively. On January 20, 2000, the Board of Directors declared a quarterly dividend of 12 cents per share upon its outstanding shares of common stock, $.01 par value, payable April 3, 2000, to stockholders of record on March 13, 2000. On July 16, 1998, the Board of Directors increased by 20 percent the amount of the regular quarterly dividend. The dividend increase was effective beginning with the 1998 third quarter dividend which was paid on October 1, 1998. Other Matters Proposed Combination With Canadian National Railway Company On December 18, 1999, BNSF and Canadian National Railway Company (CN) entered into a Combination Agreement, as amended, providing for the combination of the two companies (the Combination). To comply with Canadian legal requirements that, among other things, prohibit any person and that person's associates from holding more than 15 percent of the voting rights in CN, while ensuring that the combination will be tax-efficient for each company's shareholders, the combined enterprise will consist of two public companies: North American Railways, Inc. (North American Railways) and CN. Upon completion of the combination, North American Railways will be the parent company of BNSF and will own all of the limited voting equity shares of CN. All shareholders will have voting interests in both North American Railways and CN and economic interests in the combined companies. Burlington Northern Santa Fe Corporation 23 In the Combination, BNSF shareholders will receive one share of North American Railways common stock and one CN voting share for each BNSF share. Additionally, CN shareholders will receive, for each CN common share, 1.05 CN voting shares and either 1.05 shares of North American Railways common stock or 1.05 CN exchangeable shares. The CN exchangeable shares will be exchangeable at any time on a one-for-one basis for shares of North American Railways common stock. CN shareholders who elect to receive the CN exchangeable shares will also receive the right to vote on matters submitted to North American Railways shareholders in proportion to their economic interest in the combined companies. Dividends paid on the North American Railways common stock and the CN exchangeable shares will be equivalent. Any shares of BNSF common stock owned by BNSF or any of its subsidiaries as treasury stock will be automatically canceled and cease to exist. Each share of North American Railways common stock will be "stapled" to a CN voting share and will trade as a single security. Similarly, each CN exchangeable share will be "stapled" to a CN voting share and will trade as a single security. In addition, CN will issue to North American Railways limited voting equity shares carrying 10.1 percent of the voting rights in CN and 100 percent of CN's equity. The result of these arrangements will be that, at all times, each company will have the same public shareholder base with each public shareholder effectively having the same economic benefits and voting rights on a per security basis. The Combination is subject to, among other things, approval by the shareholders of both companies, as well as approvals by the Quebec Superior Court and the United States Surface Transportation Board (STB). North American Railways, by its charter, will conform to the provisions of the CN Commercialization Act and Canadian corporate law on the composition of boards of directors. Like CN, North American Railways shareholders will be subject to an ownership limit whereby no single shareholder can own more than 15 percent of North American Railways' voting shares. The companies currently expect that all required regulatory approvals can be obtained and the transaction consummated by mid-2001. Shareholders of both CN and BNSF are expected to vote on the proposed Combination during the second quarter of 2000. Upon consummation, the Combination will be accounted for by North American Railways pursuant to the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations." Under this method, North American Railways will prepare its financial statements reflecting the assets and liabilities of BNSF at their historical cost basis and the fair value of North American Railways' common stock issued or issuable to the CN shareholders will be allocated to the assets and liabilities of CN based on fair value. CN's results of operations will be included with North American Railways from the date the transaction is consummated. Based on the current agreement, the fair value of North American Railways' common stock will be based on a $25.63 per share fair value of BNSF common stock which was determined using the average of the closing daily BNSF common stock prices as reported by The Wall Street Journal for the two days preceding, the day of, and the two days following the December 20, 1999 announcement of the Combination. Under the Combination Agreement, as amended, BNSF is required to pay a cash termination fee of $450 million to CN if the Combination is terminated as a result of any of the following: i) another party has made a proposal for an alternative transaction and the Company's shareholders do not approve the Combination; ii) CN elects to terminate the Combination because BNSF's Board of Directors changed its previously favorable recommendation of the Combination to its shareholders or iii) BNSF breaches certain obligations not to solicit or respond to alternative transaction proposals. CN is obligated to pay a cash termination fee of $200 million to BNSF if the Combination is terminated as a result of actions similar to those above that are caused by CN. Pursuant to the Combination Agreement, as amended, CN and BNSF entered into reciprocal stock option agreements. Each company's option is exercisable by the other company under the same circumstances in which that party is entitled to receive the $450 million or $200 million termination fee, as applicable, referred to above. The option agreement allows BNSF and CN to purchase, in the case of BNSF, approximately 29 million CN common shares and, in the case of CN, approximately 65 million shares of BNSF common stock. The number of shares subject to the stock options will be adjusted in each case so that the number of shares issued will always be equal to, but not exceed, 12.5 percent of the outstanding common shares of the option issuer after giving effect to the issuance of shares under the option. The exercise price of the option is, in each case, the average of the closing price of the option issuer's common stock on the New York Stock Exchange on the five trading days preceding the date of notice of exercise multiplied by the number of shares to be issued. Additionally, BNSF is required to pay a cash termination fee of $300 million to CN if BNSF terminates the Combination because of conditions imposed by the STB that BNSF believes would significantly and adversely affect the benefits of the Combination, and CN is willing to complete the Combination despite these conditions. CN is obligated to pay a cash termination fee of $150 million to BNSF if it terminates the Combination as a result of STB conditions and BNSF is willing to complete the Combination. Casualty and Environmental Personal injury claims, including work-related injuries to employees, are a significant expense for the railroad industry. Employees of BNSF are compensated for work-related injuries according to the provisions of the Federal Employers' Liability Act (FELA). FELA's system of requiring the finding of fault, coupled with unscheduled awards and reliance on the jury system, contributed to significant increases in expense in past years. BNSF has implemented a number of safety programs to reduce the number of Burlington Northern Santa Fe Corporation 24 personal injuries as well as the associated claims and personal injury expense. BNSF made payments for personal injuries of approximately $179 million, $193 million, and $210 million in 1999, 1998 and 1997, respectively. As discussed in more detail in Note 11: Commitments and Contingencies, the Company's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF's operating procedures include practices to protect the environment from the environmental risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF's land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental clean-up and enforcement actions. In particular, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as the "Superfund" law, as well as similar state laws generally impose joint and several liability for clean-up and enforcement costs without regard to fault or the legality of the original conduct on current and former owners and operators of a site. BNSF is involved in a number of administrative and judicial proceedings and other mandatory clean-up efforts at approximately 400 sites, including the Superfund sites, at which it is being asked to participate in the study or clean-up, or both, of alleged environmental contamination. BNSF paid approximately $67 million, $64 million and $55 million during 1999, 1998 and 1997, respectively, for mandatory clean-up efforts, including amounts expended under federal and state voluntary clean-up programs. During 1999, the Company experienced significant developments at certain existing sites primarily related to new information on the extent of contamination and other related developments that led the Company to increase its recorded liabilities for remediation and restoration of all known sites to approximately $232 million at December 31, 1999 from $185 million at December 31, 1998. BNSF anticipates that the majority of the accrued costs at December 31, 1999 will be paid over the next five years. No individual site is considered to be material. Liabilities recorded for environmental costs represent BNSF's best estimates for remediation and restoration of these sites and include both asserted and unasserted claims. Unasserted claims are not considered to be a material component of the liability. Although recorded liabilities include BNSF's best estimates of all costs, without reduction for anticipated recoveries from third parties, BNSF's total clean-up costs at these sites cannot be predicted with certainty due to various factors such as the extent of corrective actions that may be required, evolving environmental laws and regulations, advances in environmental technology, the extent of other parties' participation in clean-up efforts, developments in ongoing environmental analyses related to sites determined to be contaminated, and developments in environmental surveys and studies of potentially contaminated sites. As a result, future charges to income for environmental liabilities could have a significant effect on results of operations in a particular quarter or fiscal year as individual site studies and remediation and restoration efforts proceed or as new sites arise. However, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on BNSF's consolidated financial position or liquidity. Other Claims and Litigation BNSF and its subsidiaries are parties to a number of legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters and personal injury claims. While the final outcome of these items cannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of management that none of these items, when finally resolved, will have a material adverse effect on the annual results of operations, financial position or liquidity of BNSF, although an adverse resolution of a number of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. Employee Merger and Separation Costs Current and long-term employee merger and separation liabilities totaling $356 million and $474 million are included in the consolidated balance sheet at December 31, 1999 and 1998, respectively, and principally represent: (i) employee-related severance costs for the consolidation of clerical functions; (ii) deferred benefits payable upon separation or retirement to certain active conductors, trainmen and locomotive engineers; and (iii) certain non-union employee severance costs. Liabilities related to the consolidation of clerical functions (the Consolidation Plan) were $119 million and $211 million at December 31, 1999 and 1998, respectively. These liabilities provide for severance costs associated with the Consolidation Plan adopted in 1995 upon consummation of the merger of BNSF's predecessor companies Burlington Northern Inc. and Santa Fe Pacific Corporation (the Merger). The Consolidation Plan resulted in the elimination of approximately 1,500 permanent positions and was substantially completed during 1999. Additionally, in 1999 the Company recorded a $54 million credit for the reversal of certain liabilities associated with the Consolidation Plan. These liabilities related to planned work-force reductions that are no longer required due to the Company's ability to utilize a series of job swaps between certain locations to achieve the advantages of functional work consolidation. This change in the Consolidation Plan was communicated to Company employees in May 1999. The remaining liability balance represents benefits to be paid to affected employees who did not receive lump-sum payments, but instead will be paid over five to ten years or in some cases through retirement. Liabilities related to deferred benefits payable upon Burlington Northern Santa Fe Corporation 25 separation or retirement to certain active conductors, trainmen and locomotive engineers were $193 million and $207 million at December 31, 1999 and 1998, respectively. These costs were incurred in connection with labor agreements reached prior to the Merger which, among other things, reduced train crew sizes and allowed for more flexible work rules. In the second quarter of 1999, the Company incurred $48 million of reorganization costs for severance, pension, medical and other benefit costs for approximately 325 involuntarily terminated non-union employees that were part of the program announced in May 1999 that sought to reduce operating expenses by eliminating approximately 400 non-union and 1,000 union positions through severances, normal attrition and the elimination of contractors. Components of the charge include approximately $29 million relating to severance costs for non-union employees, approximately $16 million for special termination benefits to be received under the Company's retirement and medical plans, and approximately $3 million of costs incurred for relocating approximately 60 non- union employees as a result of the reorganization. Substantially all of the planned reductions were made by September 30, 1999. No significant costs were incurred as a result of eliminating the 1,000 union positions. Total annual savings of compensation and benefits related to the May 1999 reorganization are expected to approximate $100 million. Liabilities principally related to certain remaining non-union employee severances resulting from the Merger and from the May 1999 reorganization were $44 million and $56 million at December 31, 1999 and 1998, respectively. These costs will be paid over the next several years based on deferral elections made by the employee. Approximately 1,825 non-union employees received or are receiving severance payments and special termination benefits under the Company's retirement and health and welfare plans resulting from the Merger and the May 1999 reorganization program discussed above. During 1999, 1998 and 1997, BNSF made employee merger and separation payments of $93 million, $77 million and $116 million, respectively. At December 31, 1999, $54 million of the remaining liabilities are included within current liabilities for anticipated costs to be paid in 2000. In the fourth quarter of 1997, the Company recorded a $90 million pre-tax Merger-related special charge. Approximately $65 million of the charge related to additional costs of the Consolidation Plan and the remainder of the charge related to severance and other costs for non-union employees. Year 2000 Background The Company established a committee of managers and employees, chaired by the Company's Chief Information Officer, to evaluate and manage the costs and risks associated with becoming Year 2000 compliant. Because many existing computer programs and microprocessors recognize only the last two digits of years (and not the century designation), they had the possibility of being unable to accurately recognize and process dates beyond December 31, 1999, and consequently fail. The Company began assessing Year 2000 issues in September 1995 and devoted considerable efforts and energies to the inventory and assessment of its systems, systems remediation, certification testing, and contingency planning during 1998 and 1999. By the fourth quarter of 1999, the certification phases had been completed, and the Company earned a rating in the "very low risk" category from the Federal Railroad Administration sponsored Year 2000 readiness review of BNSF performed by CACI International Inc. Accordingly, the Company had a high degree of confidence in the readiness of its own systems and applications. The Company continued its vigilance with respect to Year 2000 issues during the December 31, 1999 - January 1, 2000 date change, and the rollover to the Year 2000 was completed as planned. During the Year 2000 rollover, train operations intentionally ceased for a short period of time to allow for testing of signal and other safety systems. Additionally, the Company performed testing of all other computer systems and applications. The testing and subsequent normal use of the systems and applications to date has uncovered no significant matters affecting the Company's safety, train operations, or financial performance. COSTS As a result of its merger-related systems integration completed in 1997, BNSF achieved substantial Year 2000 compliance on its core mainframe systems. Additionally, spending on Year 2000 activities approximated $16 million through December 31, 1999, which is consistent with the estimate of total costs of achieving Year 2000 compliance for the Company. No significant additional spending is anticipated. YEAR 2000 RISKS AND CONTINGENCY PLANS To date, Year 2000 has not had a materially adverse effect on the Company's results of operations, liquidity or financial position. Additionally, management believes the risk of any significant Year 2000 problems related to BNSF's internal information systems and technology infrastructure that could have a materially adverse effect on the Company is unlikely. Further, BNSF is not aware of any significant Year 2000 problems with respect to its suppliers, key transportation partners or customers which would adversely affect the operations, liquidity or financial position of the Company. However, there can be no assurance that all potential internal or external problems related to Year 2000 have been identified. Where appropriate, BNSF has developed disaster recovery and contingency plans should currently unidentified Year 2000 problems arise. Hedging Activities FUEL Fuel expense historically approximates 10 percent of total operating expenses. Due to the significance of diesel fuel expense to the operations of BNSF and the historical volatility of fuel prices, the Company has established a program to hedge against fluctuations in the price of its diesel fuel Burlington Northern Santa Fe Corporation 26 purchases. The intent of the program is to protect the Company's operating margins and overall profitability from adverse fuel price changes. However, to the extent the Company hedges portions of its fuel purchases, it will not realize the impact of decreases in fuel prices. The fuel hedging program includes the use of commodity swap transactions that are accounted for as hedges. Any gains or losses associated with changes in the market value of the fuel swaps are deferred and recognized as a component of fuel expense in the period in which the fuel is purchased and used. Based on 1999 fuel consumption and excluding the impact of the hedging program, each one-cent increase in the price of fuel would result in approximately $12 million of additional fuel expense on an annual basis. As of February 4, 2000, BNSF had entered into fuel swaps for approximately 869 million gallons at an average price of approximately 50 cents per gallon. The above price does not include taxes, transportation costs, certain other fuel handling costs, and any differences which may occur from time to time between the prices of commodities hedged and the purchase price of BNSF's diesel fuel. Currently, these fuel swaps cover approximately 41 percent, 23 percent, and 8 percent of estimated annual and quarterly fuel purchases for 2000, 2001, and 2002, respectively. Hedge positions are closely monitored to ensure that they will not exceed actual fuel requirements in any period. Unrecognized gains from BNSF's fuel swap transactions were approximately $37 million as of December 31, 1999, of which $33 million relates to swap transactions that will expire in 2000. BNSF also monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. INTEREST RATE From time to time, the Company enters into various interest rate hedging transactions for the purpose of managing exposure to fluctuations in interest rates and establishing rates in anticipation of future debt issuances. As of February 4, 2000, BNSF had no interest rate swap instruments in place. Swaps totaling $125 million used to fix the interest rate on commercial paper debt expired in December 1999. While the swaps were outstanding, BNSF recognized, on an accrual basis, a fixed rate of interest on the principal amount of commercial paper hedged over the term of the swap agreements. In anticipation of future debt issuances, BNSF has entered into treasury lock transactions totaling $400 million, of which $200 million is based on the 10- year U.S. Treasury rates and $200 million is based on the 30-year U.S. Treasury rates. The 10-year and 30-year treasury lock transactions have average interest rates of approximately 4.6 percent and 5.0 percent, respectively, and expire in June 2000 and June 2001. These rates do not include a credit spread which would be determined at the time of the actual debt issuance and included in the all-in interest rate. The treasury locks can be closed by BNSF anytime up to expiration. Unrecognized gains on the treasury lock transactions were approximately $62 million as of December 31, 1999. BNSF monitors its treasury lock positions and the credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. In 1999, at the time of issuing $200 million of debt, the Company closed out $100 million of treasury lock transactions at a gain of $8 million. During 1998, at the time of issuing $400 million of debt, the Company closed out $400 million of treasury lock transactions at a loss of approximately $18 million. In each case, the gain or loss has been deferred and is being amortized to interest expense over the life of the debt. Labor Labor unions represent approximately 88 percent of BNSF Railway's employees under collective bargaining agreements with 13 different labor organizations. The negotiating process for new, major collective bargaining agreements covering all of BNSF Railway's union employees has begun. As during the previous round five years ago, wages, health and welfare benefits, work rules, and other issues are being addressed through industry-wide negotiations. These negotiations have traditionally taken place over a number of months and have previously not resulted in any extended work stoppages. The major collective bargaining agreements reached in 1995 and 1996 as a result of industry-wide labor contract negotiations remained in effect on December 31, 1999 and will continue in effect until new agreements are reached or the Railway Labor Act's procedures are exhausted. The current agreements provide for periodic wage increases until new agreements are reached. Inflation Due to the capital intensive nature of BNSF's business, the full effect of inflation is not reflected in operating expenses because depreciation is based on historical cost. An assumption that all operating assets were depreciated at current price levels would result in substantially greater expense than historically reported amounts. Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities." BNSF will be required to adopt FAS 133 beginning January 1, 2001. While earlier adoption is permitted, the Company does not currently believe it is likely to adopt the Statement before the effective date. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability or an unrecognized firm commitment, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash flow Burlington Northern Santa Fe Corporation 27 hedge transactions in which the Company is hedging the variability of cash flows related to a variable rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income to the extent it offsets changes in the cash flows related to the variable rate asset, liability or forecasted transaction, with the difference reported in current period earnings. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified in earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. Based on interest rate and fuel hedging instruments outstanding at December 31, 1999 and previously deferred losses from past interest rate hedging transactions, all of which are cash flow hedge transactions, the Company currently estimates that the impact of SFAS No. 133 would result in a net-of-tax cumulative-effect benefit to accumulated other comprehensive deficit of approximately $42 million if adopted December 31, 1999. The Company is presently evaluating the impact SFAS No. 133 will have on its ongoing results of operations. Forward Looking Information The discussion concerning the proposed Combination with CN in this annual report contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. The use of words such as "expect," "believe," "anticipate," and other similar expressions, as they relate to the Company, the Company's management, or the proposed Combination, identify forward-looking statements. Such statements regarding efficiencies, cost savings, revenue and service enhancements, market share potential, as well as timing for the completion of the Combination reflect the current views of the Company with respect to future events and are based on information currently available. Should one or more of the risk factors discussed below materialize, or should underlying assumptions or estimates prove incorrect, then actual results may differ materially from those described herein. The Year 2000 discussion above contains forward-looking statements, including those concerning the Company's cost estimates and assessments of BNSF's and third parties' ultimate Year 2000 impact. Specific risk factors related to these forward-looking statements include, but are not limited to, the following: emergence of unforeseen software or hardware problems, including where applications interact with each other in ways not yet discovered, which could delay or hinder commercial transactions or other operations; the emergence, in whole or in part, of unforeseen issues concerning other railroads or AAR- supported systems thought to not be experiencing Year 2000 problems; business interruption due to delays in obtaining supplies, parts, or equipment from key vendors or suppliers not yet discovered to be affected by Year 2000 problems. Accordingly, these risks and uncertainties could cause actual results to differ materially from those projected in the forward-looking statements. To the extent that all other statements made by the Company relate to the Company's future economic performance or business outlook, predictions or expectations of financial or operational results, or refer to matters which are not historical facts, such statements are "forward-looking" statements within the meaning of the federal securities laws. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially. Factors that could cause actual results to differ materially include, but are not limited to, economic and industry conditions: material adverse changes in economic or industry conditions, customer demand, effects of adverse economic conditions affecting shippers, adverse economic conditions in the industries and geographic areas that produce and consume freight, changes in fuel prices, and labor difficulties including strikes; legal and regulatory factors: change in laws and regulations and the ultimate outcome of shipper claims, environmental investigations or proceedings and other types of claims and litigation; and operating factors: technical difficulties, changes in operating conditions and costs, competition and commodity concentrations as well as natural events such as severe weather, floods and earthquakes. The factors noted, individually or in combination could, among other things, limit demand and pricing, affect costs and the feasibility of certain operations, or affect traffic and pricing levels. Burlington Northern Santa Fe Corporation 28 Report of Management To the Shareholders of Burlington Northern Santa Fe Corporation The accompanying consolidated financial statements of Burlington Northern Santa Fe Corporation and subsidiary companies were prepared by management, who are responsible for their integrity and objectivity. They were prepared in accordance with accounting principles generally accepted in the United States and properly include amounts that are based on management's best judgments and estimates. Other financial information included in this annual report is consistent with that in the consolidated financial statements. The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company. Limitations exist in any system of internal accounting controls based upon the recognition that the cost of the system should not exceed the benefits derived. The Company believes its system of internal accounting controls, augmented by its internal auditing function, appropriately balances the cost/benefit relationship. Independent accountants provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures as they deem necessary to express an opinion on the fairness of the consolidated financial statements. The Board of Directors pursues its responsibility for the Company's financial statements through its Audit Committee which is composed solely of directors who are not officers or employees of the Company. The Audit Committee meets regularly with the independent accountants, management and internal auditors. The independent accountants and the Company's internal auditors have direct access to the Audit Committee, with and without the presence of management representatives, to discuss the scope and results of their work and their comments on the adequacy of internal accounting controls and the quality of financial reporting. /s/ ROBERT D. KREBS Robert D. Krebs Chairman and Chief Executive Officer /s/ THOMAS N. HUND Thomas N. Hund Senior Vice President and Chief Financial Officer /s/ DENNIS R. JOHNSON Dennis R. Johnson Vice President and Controller Report of Independent Accounts To the Shareholders of Burlington Northern Santa Fe Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of Burlington Northern Santa Fe Corporation and subsidiary companies at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Fort Worth, Texas February 4, 2000 Burlington Northern Santa Fe Corporation 29 Consolidated Statement of Income Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data) - -------------------------------------------------------------------------------- Year ended December 31, 1999 1998 1997 - --------------------------------------- ----- ----- ----- Revenues $ 9,100 $ 8,941 $ 8,370 ----- ----- ----- Operating expenses: Compensation and benefits 2,772 2,812 2,675 Purchased services 946 894 823 Depreciation and amortization 897 832 773 Equipment rents 752 804 820 Fuel 700 721 747 Materials and other 834 720 675 Reorganization costs 48 - - Merger related severance (54) - 90 ----- ----- ----- Total operating expenses 6,895 6,783 6,603 - --------------------------------------- ----- ----- ----- Operating income 2,205 2,158 1,767 Interest expense 387 354 344 Other income (expense), net 1 45 (19) ----- ----- ----- Income before income taxes 1,819 1,849 1,404 Income tax expense 682 694 519 ----- ----- ----- Net income $ 1,137 $ 1,155 $ 885 ======================================= ===== ===== ===== Earnings per share: Basic $ 2.46 $ 2.45 $ 1.91 Diluted $ 2.44 $ 2.43 $ 1.88 ======================================= ===== ===== ===== Average shares (in millions): Basic 463.2 470.5 464.4 Dilutive effect of stock options 3.6 5.7 6.7 ----- ----- ----- Diluted 466.8 476.2 471.1 ======================================= ===== ===== ===== See accompanying notes to consolidated financial statements. Burlington Northern Santa Fe Corporation 30 Consolidated Balance Sheet Burlington Northern Santa Fe Corporation and Subsidiaries (Shares in thousands. Dollars in millions) ================================================================================ December 31, 1999 1998 - ----------------------------------------- ------ ------ Assets Current assets: Cash and cash equivalents $ 22 $ 25 Accounts receivable, net 397 524 Materials and supplies 255 244 Current portion of deferred income taxes 326 335 Other current assets 66 34 ====== ====== Total current assets 1,066 1,162 Property and equipment, net 21,681 20,662 Other assets 953 822 ------ ------ Total assets $23,700 $22,646 ========================================= ====== ====== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and other current liabilities $ 1,917 $ 1,885 Long-term debt due within one year 158 268 ====== ====== Total current liabilities 2,075 2,153 Long-term debt and commercial paper 5,655 5,188 Deferred income taxes 6,097 5,662 Casualty and environmental liabilities 423 389 Employee merger and separation costs 302 409 Other liabilities 976 1,061 ------ ------ Total liabilities 15,528 14,862 ========================================= ====== ====== Commitments and contingencies (see Notes 1, 8, 10 and 11) Stockholders' equity: Common stock, $.01 par value, 600,000 shares authorized; 484,572 shares and 477,436 shares issued, respectively 5 5 Additional paid-in capital 5,390 5,213 Retained earnings 3,726 2,811 Treasury stock, at cost, 30,013 shares and 6,961 shares, respectively (913) (206) Unearned compensation (29) (31) Accumulated other comprehensive deficit (7) (8) ------ ------ Total stockholders' equity 8,172 7,784 ------ ------ Total liabilities and stockholders' equity $23,700 $22,646 ========================================= ====== ====== See accompanying notes to consolidated financial statements. Burlington Northern Santa Fe Corporation 31 Consolidated Statement of Cash Flows Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions) ================================================================================ Year ended December 31, 1999 1998 1997 - ----------------------------------------- ----- ----- ----- Operating Activities Net income $ 1,137 $ 1,155 $ 885 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 897 832 773 Deferred income taxes 444 489 433 Employee merger and separation costs paid (93) (77) (116) Other, net (112) (243) (131) Changes in current assets and liabilities: Accounts receivable: Sale of accounts receivable - 19 301 Other changes 127 20 (333) Materials and supplies (11) (39) 17 Other current assets (32) (4) 4 Accounts payable and other current liabilities 67 66 (19) ----- ----- ----- Net cash provided by operating activities 2,424 2,218 1,814 - ----------------------------------------- ----- ----- ----- Investing Activities Capital expenditures (1,788) (2,147) (2,182) Other, net (152) (271) (147) ----- ----- ----- Net cash used for investing activities (1,940) (2,418) (2,329) - ----------------------------------------- ----- ----- ----- Financing Activities Net decrease in commercial paper and bank borrowings (23) (242) (235) Proceeds from issuance of long-term debt 679 794 1,002 Payments on long-term debt (293) (112) (177) Dividends paid (224) (197) (185) Proceeds from stock options exercised 121 111 102 Purchase of BNSF common stock (688) (153) - Other, net (59) (7) (8) ----- ----- ----- Net cash provided by (used for) financing activities (487) 194 499 ----- ----- ----- Decrease in cash and cash equivalents (3) (6) (16) Cash and cash equivalents: Beginning of year 25 31 47 ----- ----- ----- End of year $ 22 $ 25 $ 31 ========================================= ===== ===== ===== Supplemental Cash Flow Information Interest paid, net of amounts capitalized $ 382 $ 354 $ 346 Income taxes paid, net of refunds 142 220 32 ========================================= ===== ===== ===== See accompanying notes to consolidated financial statements. Burlington Northern Santa Fe Corporation 32 Consolidated Statement of Changes in Stockholders' Equity Burlington Northern Santa Fe Corporation and Subsidiaries (Shares in thousands. Dollars in millions, except per share data.)
- ----------------------------------------------------------------------------------------------------------------------------------- Common Shares of Stock and Accumulated Common Shares of Additional Other Com- Stock Treasury Paid-in Retained Treasury Unearned prehensive Issued Stock Capital Earnings Stock Compensation Deficit Total - ---------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Balance at December 31, 1996 462,594 (588) $ 4,878 $ 1,165 $ (17) $ (28) $ (4) $ 5,994 Comprehensive income: Net income 885 885 Minimum pension liability adjustment (net of tax benefit of $2) (3) (3) ------- Total comprehensive income 882 ------- Common stock dividends, $0.40 per share (187) (187) Adjustments associated with unearned compensation, restricted stock 366 (117) 11 (3) 8 Exercise of stock options and related tax benefit 7,197 (624) 140 (19) 121 Other 83 4 4 - ---------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Balance at December 31, 1997 470,240 (1,329) 5,033 1,863 (36) (31) (7) 6,822 Comprehensive income: Net income 1,155 1,155 Minimum pension liability adjustment (net of tax benefit of $0.5) (1) (1) ------- Total comprehensive income 1,154 ------- Common stock dividends, $0.44 per share (207) (207) Adjustments associated with unearned compensation, restricted stock 527 (132) 15 2 17 Exercise of stock options and related tax benefit 6,669 (537) 167 (17) 150 Purchase of BNSF common stock (4,963) (153) (153) Other 3 (2) 1 - ---------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Balance at December 31, 1998 477,436 (6,961) 5,218 2,811 (206) (31) (8) 7,784 Comprehensive income: Net income 1,137 1,137 Minimum pension liability adjustment (net of tax benefit of $0.5) 1 1 ------- Total comprehensive income 1,138 ------- Common stock dividends, $0.48 per share (222) (222) Adjustments associated with unearned compensation, restricted stock 811 (332) 14 2 16 Exercise of stock options and related tax benefit 6,325 (600) 163 (19) 144 Purchase of BNSF common stock (22,120) (688) (688) - ---------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Balance at December 31, 1999 484,572 (30,013) $ 5,395 $ 3,726 $ (913) $ (29) $ (7) $ 8,172 ============================ ======= ======= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. Burlington Northern Santa Fe Corporation 33 Notes to Consolidated Financial Statements Burlington Northern Santa Fe Corporation and Subsidiaries 1 The Company Burlington Northern Santa Fe Corporation including its majority-owned subsidiaries (collectively, BNSF or Company) is engaged primarily in railroad transportation through its principal subsidiary, The Burlington Northern and Santa Fe Railway Company (BNSF Railway), which operates one of the largest railroad networks in North America with 33,500 route miles covering 28 states and two Canadian provinces. Through one operating transportation services segment, BNSF Railway transports a wide range of products and commodities including the transportation of containers and trailers (intermodal), coal and agricultural commodities which constituted 28 percent, 24 percent and 15 percent, respectively, of total revenues for the year ended December 31, 1999. Other significant aspects of BNSF's business include the transportation of chemicals, forest products, consumer goods, metals, minerals, automobiles and automobile parts. Revenues derived from other sources are not significant. Proposed Combination With Canadian National Railway Company On December 18, 1999, BNSF and Canadian National Railway Company (CN) entered into a Combination Agreement, as amended, providing for the combination of the two companies (the Combination). To comply with Canadian legal requirements that, among other things, prohibit any person and that person's associates from holding more than 15 percent of the voting rights in CN, while ensuring that the combination will be tax-efficient for each company's shareholders, the combined enterprise will consist of two public companies: North American Railways, Inc. (North American Railways) and CN. Upon completion of the combination, North American Railways will be the parent company of BNSF and will own all of the limited voting equity shares of CN. All shareholders will have voting interests in both North American Railways and CN and economic interests in the combined companies. In the Combination, BNSF shareholders will receive one share of North American Railways common stock and one CN voting share for each BNSF share. Additionally, CN shareholders will receive, for each CN common share, 1.05 CN voting shares and either 1.05 shares of North American Railways common stock or 1.05 CN exchangeable shares. The CN exchangeable shares will be exchangeable at any time on a one-for-one basis for shares of North American Railways common stock. CN shareholders who elect to receive the CN exchangeable shares will also receive the right to vote on matters submitted to North American Railways shareholders in proportion to their economic interest in the combined companies. Dividends paid on the North American Railways common stock and the CN exchangeable shares will be equivalent. Any shares of BNSF common stock owned by BNSF or any of its subsidiaries as treasury stock will be automatically canceled and cease to exist. Each share of North American Railways common stock will be "stapled" to a CN voting share and will trade as a single security. Similarly, each CN exchangeable share will be "stapled" to a CN voting share and will trade as a single security. In addition, CN will issue to North American Railways limited voting equity shares carrying 10.1 percent of the voting rights in CN and 100 percent of CN's equity. The result of these arrangements will be that, at all times, each company will have the same public shareholder base with each public shareholder effectively having the same economic benefits and voting rights on a per security basis. The Combination is subject to, among other things, approval by the shareholders of both companies, as well as approvals by the Quebec Superior Court and the United States Surface Transportation Board (STB). North American Railways, by its charter, will conform to the provisions of the CN Commercialization Act and Canadian corporate law on the composition of boards of directors. Like CN, North American Railways shareholders will be subject to an ownership limit whereby no single shareholder can own more than 15 percent of North American Railways' voting shares. The companies currently expect that all required regulatory approvals can be obtained and the transaction consummated by mid-2001. Shareholders of both CN and BNSF are expected to vote on the proposed Combination during the second quarter of 2000. Upon consummation, the Combination will be accounted for by North American Railways pursuant to the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations." Under this method, North American Railways will prepare its financial statements reflecting the assets and liabilities of BNSF at their historical cost basis and the fair value of North American Railways common stock issued or issuable to the CN shareholders will be allocated to the assets and liabilities of CN based on fair value. CN's results of operations will be included with North American Railways from the date the transaction is consummated. Based on the current agreement, the fair value of North American Railways common stock will be based on a $25.63 per share fair value of BNSF common stock which was determined using the average of the closing daily BNSF common stock prices as reported by The Wall Street Journal for the two days preceding, the day of, and the two days following the December 20, 1999 announcement of the Combination. Under the terms of the Combination Agreement, as amended, BNSF is required to pay a cash termination fee of $450 million to CN if the Combination is terminated as a result of any of the following: i) another party has made a proposal for an alternative transaction and the Company's shareholders do not approve the Combination; ii) CN elects to terminate the Combination because BNSF's Board of Directors changed its previously favorable recommendation of the Combination to its shareholders or iii) BNSF breaches certain obligations not to solicit or respond to alternative transaction proposals. CN is obligated to pay a cash termination fee of $200 million to BNSF if the Combination is terminated as a 34 Burlington Northern Santa Fe Corporation result of actions similar to those above that are caused by CN. Pursuant to the Combination Agreement, as amended, CN and BNSF entered into reciprocal stock option agreements. Each company's option is exercisable by the other company under the same circumstances in which that party is entitled to receive the $450 million or $200 million termination fee, as applicable, referred to above. The option agreement allows BNSF and CN to purchase, in the case of BNSF, approximately 29 million CN common shares and, in the case of CN, approximately 65 million shares of BNSF common stock. The number of shares subject to the stock options will be adjusted in each case so that the number of shares issued will always be equal to, but not exceed, 12.5 percent of the outstanding common shares of the option issuer after giving effect to the issuance of shares under the option. The exercise price of the option is, in each case, the average of the closing price of the option issuer's common stock on the New York Stock Exchange on the five trading days preceding the date of notice of exercise multiplied by the number of shares to be issued. Additionally, BNSF is required to pay a cash termination fee of $300 million to CN if BNSF terminates the Combination because of conditions imposed by the STB that the Company believes would significantly and adversely affect the benefits of the Combination, and CN is willing to complete the Combination despite these conditions. CN is obligated to pay a cash termination fee of $150 million to BNSF if it terminates the Combination as a result of STB conditions and BNSF is willing to complete the Combination. 2 Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries, including its principal subsidiary BNSF Railway, all of which are separate legal entities. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Reclassfications Certain comparative prior year amounts in the consolidated financial statements and accompanying notes have been reclassified to conform with the current year presentation. Cash and Cash Equivalents All short-term investments with original maturities of less than 90 days are considered cash equivalents. Cash equivalents are stated at cost, which approximates market value because of the short maturity of these instruments. Materials and Supplies Materials and supplies, which consist mainly of rail, ties and other items for construction and maintenance of property and equipment, as well as diesel fuel, are valued at the lower of average cost or market. Property and Equipment Property and equipment are depreciated and amortized on a straight-line basis over their estimated useful lives. Upon normal sale or retirement of depreciable railroad property, cost less net salvage value is charged to accumulated depreciation and no gain or loss is recognized. Significant premature retirements and the disposal of land and non-rail property are recorded as gains or losses at the time of their occurrence. Expenditures which significantly increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed. Property and equipment are stated at cost. The Company incurs certain direct labor, contract service and other costs associated with the development and installation of internal-use computer software. Costs for newly developed software or significant enhancements to existing software are typically capitalized. Research, preliminary project, operations, maintenance and training costs are charged to operating expense when the work is performed. Revenue Recognition Transportation revenues are recognized based upon the proportion of service provided as of the balance sheet date. 3 Other Income (Expense), Net Other income (expense), net includes the following (in millions):
Year ended December 31, 1999 1998 1997 - ------------------------------------------- ----- ----- ----- Deferred gain on prior period line sale $ 50 $ - $ - Gain on property dispositions 26 48 14 Gain on sale of Pipeline Partnership - 67 - Equity in earnings of Pipeline Partnership - 4 30 Accounts receivable sale fees (33) (34) (27) Miscellaneous, net (42) (40) (36) - ------------------------------------------- ----- ----- ----- Total $ 1 $ 45 $ (19) =========================================== ===== ===== =====
Santa Fe Pacific Pipelines, Inc. (SFP Pipelines), an indirect, wholly-owned subsidiary of BNSF, served as the general partner of Santa Fe Pacific Pipeline Partners, L.P. (Pipeline Partnership) and of its operating partnership subsidiary, SFPP, L.P. SFP Pipelines owned a two percent interest as the Pipeline Partnerships and SFPP, L.P.'s general partner and an approximate 42 percent interest in partnership units of the Pipeline Partnership. SFP Pipeline Holdings, Inc., an indirect, wholly-owned subsidiary of BNSF (SFP Holdings), had outstanding $219 million principal amount of Variable Rate Exchangeable Debentures due 2010 (VREDs). On March 6, 1998 Kinder Morgan Energy Partners, L.P. (Kinder Morgan) acquired substantially all of SFP Pipelines' interest in the Pipeline Partnership and SFPP, L.P. for approximately $84 million in cash. The Pipeline Partnership was liquidated as part of the transaction and SFP Pipelines' partnership units were converted into the right to receive Kinder Morgan common units. Consummation of the transaction caused an "Exchange Event" under the VRED agreement and in June 1998 all VRED holders received either partner- Burlington Northern Santa Fe Corporation 35 ship units of Kinder Morgan or cash equal to the par value of the VREDs. In addition, the agreement called for SFP Pipelines' interest in SFPP, L.P. to be partially redeemed for a cash distribution of $5.8 million, with SFP Pipelines retaining only a 0.5 percent special limited partnership interest in SFPP, L.P. As a result of the transaction, the Company recognized a $67 million gain and substantially all of the Company's investment in the Pipeline Partnership and SFPP, L.P. and the VREDs were removed from the consolidated balance sheet. BNSF recognized a $50 million deferred gain in the third quarter of 1999 in connection with the sale of rail lines in Southern California in 1992 and 1993. 4 Income Taxes Income tax expense was as follows (in millions):
Year ended December 31, 1999 1998 1997 - ------------------------------------------- ----- ----- ----- Current: Federal $ 213 $ 191 $ 72 State 25 14 14 - ------------------------------------------- ----- ----- ----- 238 205 86 - ------------------------------------------- ----- ----- ----- Deferred: Federal 376 410 372 State 68 79 61 - ------------------------------------------- ----- ----- ----- 444 489 433 - ------------------------------------------- ----- ----- ----- Total $ 682 $ 694 $ 519 =========================================== ===== ===== =====
Reconciliation of the federal statutory income tax rate to the effective tax rate was as follows:
Year ended December 31, 1999 1998 1997 - ------------------------------------------- ----- ----- ----- Federal statutory income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 3.3 3.3 3.5 Other, net (0.8) (0.7) (1.5) - ------------------------------------------- ----- ----- ----- Effective tax rate 37.5% 37.6% 37.0% =========================================== ===== ===== =====
The components of deferred tax assets and liabilities were as follows (in millions):
December 31, 1999 1998 - ------------------------------------------- -------- -------- Deferred tax liabilities: Depreciation and amortization $(6,106) $(5,868) Other (441) (417) - ------------------------------------------- -------- -------- Total deferred tax liabilities (6,547) (6,285) - ------------------------------------------- -------- -------- Deferred tax assets: Casualty and environmental 272 253 Employee merger and separation costs 137 182 Postretirement benefits 93 89 Other 274 434 - ------------------------------------------- -------- -------- Total deferred tax assets 776 958 - ------------------------------------------- -------- -------- Net deferred tax liability $(5,771) $(5,327) =========================================== ======== ======== Noncurrent deferred income tax liability $(6,097) $(5,662) Current deferred income tax asset 326 335 - ------------------------------------------- -------- -------- Net deferred tax liability $(5,771) $(5,327) =========================================== ======== ========
The federal income tax returns of BNSF's predecessor companies, Burlington Northern, Inc. (BNI) and Santa Fe Pacific Corporation (SFP) have been examined through 1994 and the merger date in September 1995, respectively. All years prior to 1992 for BNI and 1993 for SFP are closed. Issues relating to the years 1992-1994 for BNI and for years 1993 through the merger date in September 1995 for SFP are being contested through various stages of administrative appeal. BNSF is currently under IRS examination for years 1995-1997. In addition, BNSF and its subsidiaries have various state income tax returns in the process of examination, administrative appeal or litigation. Management believes that adequate provision has been made for any adjustment that might be assessed for open years through 1999. 5 Accounts Receivable, Net BNSF Railway, through a special purpose subsidiary, has an account receivable sales agreement which allows it to sell up to $600 million of variable rate certificates that mature in 2002 and evidence undivided interests in an accounts receivable master trust. The master trust's assets include an ownership interest in a revolving portfolio of BNSF Railway's accounts receivable which are used to support the certificates. At December 31, 1999, $600 million of certificates were outstanding and were supported by receivables of approximately $1.0 billion in the master trust. Certificates outstanding were $600 million at December 31, 1998. BNSF Railway has retained the collection responsibility with respect to the accounts receivable. Costs related to this agreement vary on a monthly basis and are generally related to certain interest rates. These costs are included in other income (expense), net. BNSF maintains an allowance for uncollectible accounts receivable. At December 31, 1999 and 1998, $50 million and $71 million, respectively, of such allowances had been recorded. 6 Property and Equipment, Net Property and equipment, net (in millions), and the weighted average annual depreciation rate (%) were as follows:
1999 Depreciation December 31, 1999 1998 Rate - ------------------------------------------- ------- ------- ------------ Land $ 1,430 $ 1,431 -% Track structure 11,152 11,340 4.0% Other roadway 8,884 8,389 2.5% Locomotives 2,772 2,276 5.0% Freight cars and other equipment 1,838 1,860 4.0% Computer hardware and software 448 405 15.0% - ------------------------------------------- ------- ------- Total cost 26,524 25,701 Less accumulated depreciation and amortization (4,843) (5,039) - ------------------------------------------- ------- ------- Property and equipment, net $21,681 $20,662 =========================================== ======= =======
The consolidated balance sheet at December 31, 1999 and 1998 included $1,218 million and $1,082 million, respectively, for property and equipment under capital leases. 36 Burlington Northern Santa Fe Corporation 7 Accounts Payable and Other Current Liabilities Accounts payable and other current liabilities consisted of the following (in millions):
December 31, 1999 1998 - ------------------------------------------- -------- -------- Compensation and benefits payable $ 376 $ 387 Casualty and environmental liabilities 287 272 Tax liabilities 201 117 Accounts payable 161 174 Rents and leases 160 155 Employee merger and separation costs 54 65 Other 678 715 - ------------------------------------------- -------- -------- Total $ 1,917 $ 1,885 =========================================== ======== ========
8 Debt Debt outstanding was as follows (in millions):
December 31, 1999 1998 - ------------------------------------------- -------- -------- Notes and debentures, weighted average rate of 7.0%, due 2001 to 2097 $ 3,321 $ 3,074 Capitalized lease obligations, weighted average rate of 6.6%, due 2000 to 2016 791 818 Equipment obligations, weighted average rate of 7.4%, due 2000 to 2016 755 595 Mortgage bonds, weighted average rate of 7.6%, due 2000 to 2047 503 498 Commercial paper, 6.2% (variable) 473 471 Bank borrowings - 25 Unamortized discount and other, net (30) (25) - ------------------------------------------- -------- -------- Total 5,813 5,456 Less current portion of long-term debt (158) (268) - ------------------------------------------- -------- -------- Long-term debt $ 5,655 $ 5,188 =========================================== ======== ========
BNSF issues commercial paper from time to time which is supported by bank revolving credit agreements. Outstanding commercial paper balances are considered as reducing the amount of borrowings available under these agreements. The bank revolving credit agreements which were renewed and extended effective June 28, 1999, allow borrowings of up to $750 million on a short-term basis and $750 million on a long-term basis. Annual facility fees are currently 0.10 percent and 0.125 percent, respectively, and are subject to change based upon changes in BNSF's senior unsecured debt ratings. Borrowing rates are based upon i) LIBOR plus a spread based upon BNSF's senior unsecured debt ratings, ii) money market rates offered at the option of the lenders, or iii) an alternate base rate. The commitments of the lenders under the short-term agreement are scheduled to expire in June 2000. The commitments of the lenders under the long-term agreement are scheduled to expire in June 2004. At December 31, 1999, there were no borrowings against the long-term revolving credit agreement and the maturity value of commercial paper outstanding was $477 million, leaving a total remaining capacity of $1,023 million available under the revolving credit agreements. BNSF must maintain compliance with certain financial covenants under its revolving credit agreements and at December 31, 1999, the Company was in compliance. In February 1999, the Company filed a new shelf registration statement that became effective in March 1999 for the issuance of debt securities, including medium-term notes, which may be issued in one or more series at an aggregate offering price not to exceed $750 million. Additionally, in February 1999, prior to the effective date of the new shelf registration, the Company amended its March 1998 shelf registration statement to combine it with the February 1999 shelf registration. Subsequently, the Company had $1.1 billion of borrowing capacity available under its shelf registration statement. In March 1999, BNSF issued $200 million of 6.1 percent notes due March 2009 and $200 million of 6.8 percent debentures due March 2029 under the February 1999 shelf registration statement. The net proceeds were used for general corporate purposes including the repayment of commercial paper. At the time of issuing the $200 million of 6.1 percent notes discussed above, the Company closed out a $100 million treasury lock transaction at a gain of approximately $8 million which has been deferred and is being amortized to interest expense over the 10-year life of the notes. In April 1999, the holder of a call option on $200 million of the Company's puttable reset debentures due 2029 exercised the call option. As a result, on May 13, 1999, the holder repurchased the debentures which were subsequently resold to investors. The interest rate on the debentures was reset to a fixed interest rate of 7.1 percent. The Company did not receive any proceeds from the resale of these debentures; however, the resale of these debentures, along with the $400 million of debt securities issued in March 1999, reduced the amount available for borrowing under the Company's February 1999 shelf registration statement to $500 million. During 1999, BNSF Railway entered into equipment obligations totaling $212 million payable from 2000 to 2016 with interest rates ranging from 5.4 percent to 7.0 percent and $60 million of capital lease obligations payable from 2000 to 2016. The capital lease and $137 million of equipment obligations relate to financing transactions involving German investors. In order to comply with the terms of the capital lease and the associated foreign regulations, BNSF Railway simultaneously deposited $60 million with a German bank and pledged this amount as an irrevocable security deposit to be used to pay the capital lease obligations. The capital lease obligation is classified as Long-Term Debt and the security deposit is classified as an Other Asset in the consolidated balance sheet. Most BNSF Railway properties and certain other assets are pledged as collateral to, or are otherwise restricted under, the various BNSF Railway long- term debt agreements. Equipment obligations and capital leases are secured by the underlying equipment. SFP Pipelines, in connection with its remaining 0.5 percent special limited partner interest in SFPP, L.P., is contingently liable for $190 million of long-term debt due December 2001 previously held by Pipelines Partnership Burlington Northern Santa Fe Corporation 37 that were assumed by Kinder Morgan pursuant to the sale discussed in Note 3: Other Income (Expense), Net. In addition, BNSF and another major railroad jointly and severally guarantee $75 million of debt of KCT Intermodal Transportation Corporation, the proceeds of which are being used to finance the construction of a double track grade separation bridge in Kansas City, Missouri, to be operated and used by Kansas City Terminal Railway Company. Aggregate long-term debt scheduled maturities are $158 million, $233 million, $285 million, $141 million and $714 million for 2000 through 2004, respectively. Maturities in 2000 exclude $100 million of 6.1 percent notes due 2027 for which the Company received notice from the holders that they will exercise a put option on the notes in February 2000. Maturities in 2001 exclude $100 million of 6.1 percent notes due 2031, which will either be remarketed by the holder of a call option on the debt and mature in 2031 or will otherwise be repurchased by the Company in 2001. Maturities in 2003 exclude $175 million of 6.5 percent notes due 2037, which may be redeemed in 2003 at the option of the holder. In addition, commercial paper of $473 million is included in maturities for 2004. The carrying amounts of BNSF's long-term debt and commercial paper at December 31, 1999 and 1998 were $5,813 million and $5,456 million, respectively, while the estimated fair values at December 31, 1999 and 1998 were $5,632 million and $5,712 million, respectively. The fair value of BNSF's long-term debt is primarily based on quoted market prices for the same or similar issues, or on the current rates that would be offered to BNSF for debt of the same remaining maturities. The carrying amount of commercial paper approximates fair value because of the short maturity of these instruments. 9 Employee Merger and Separation Costs Current and long-term employee merger and separation liabilities totaling $356 million and $474 million are included in the consolidated balance sheet at December 31, 1999 and 1998, respectively, and principally represent: (i) employee-related severance costs for the consolidation of clerical functions; (ii) deferred benefits payable upon separation or retirement to certain active conductors, trainmen and locomotive engineers; and (iii) certain non-union employee severance costs. Liabilities related to the consolidation of clerical functions (the Consolidation Plan) were $119 million and $211 million at December 31, 1999 and 1998, respectively. These liabilities provide for severance costs associated with the Consolidation Plan adopted in 1995 upon consummation of the merger of BNSF's predecessor companies Burlington Northern Inc. and Santa Fe Pacific Corporation (the Merger). The Consolidation Plan resulted in the elimination of approximately 1,500 permanent positions and was substantially completed during 1999. Additionally, in 1999 the Company recorded a $54 million credit for the reversal of certain liabilities associated with the Consolidation Plan. These liabilities related to planned work-force reductions that are no longer required due to the Company's ability to utilize a series of job swaps between certain locations to achieve the advantages of functional work consolidation. This change in the Consolidation Plan was communicated to Company employees in May 1999. The remaining liability balance represents benefits to be paid to affected employees who did not receive lump-sum payments, but instead will be paid over five to ten years or in some cases through retirement. Liabilities related to deferred benefits payable upon separation or retirement to certain active conductors, trainmen and locomotive engineers were $193 million and $207 million at December 31, 1999 and 1998, respectively. These costs were incurred in connection with labor agreements reached prior to the Merger which, among other things, reduced train crew sizes and allowed for more flexible work rules. In the second quarter of 1999, the Company incurred $48 million of reorganization costs for severance, pension, medical and other benefit costs for approximately 325 involuntarily terminated non-union employees that were part of the program announced in May 1999 that sought to reduce operating expenses by eliminating approximately 400 non-union and 1,000 union positions through severances, normal attrition and the elimination of contractors. Components of the charge include approximately $29 million relating to severance costs for non-union employees, approximately $16 million for special termination benefits to be received under the Company's retirement and medical plans, and approximately $3 million of costs incurred for relocating approximately 60 non- union employees as a result of the reorganization. Substantially all of the planned reductions were made by September 30, 1999. No significant costs were incurred as a result of eliminating the 1,000 union positions. Liabilities principally related to certain remaining non-union employee severances resulting from the May 1999 reorganization and from the Merger were $44 million and $56 million at December 31, 1999 and 1998, respectively. These costs will be paid over the next several years based on deferral elections made by the employee. Approximately 1,825 non-union employees received or are receiving severance payments and special termination benefits under the Company's retirement and health and welfare plans resulting from the Merger and the May 1999 reorganization program discussed above. During 1999, 1998 and 1997, BNSF made employee merger and separation payments of $93 million, $77 million and $116 million, respectively. At December 31, 1999, $54 million of the remaining liabilities are included within current liabilities for anticipated costs to be paid in 2000. In the fourth quarter of 1997, the Company recorded a $90 million Merger- related pre-tax special charge. Approximately $65 million of the charge related to additional costs of the Consolidation Plan and the remainder of the charge related to severance and other costs for non-union employees. 38 Burlington Northern Santa Fe Corporation 10 Hedging Activities Fuel Fuel expense historically approximates 10 percent of total operating expenses. Due to the significance of diesel fuel expense to the operations of BNSF and the historical volatility of fuel prices, the Company has established a program to hedge against fluctuations in the price of its diesel fuel purchases. The intent of the program is to protect the Company's operating margins and overall profitability from adverse fuel price changes. However, to the extent the Company hedges portions of its fuel purchases, it will not realize the impact of decreases in fuel prices. The fuel hedging program includes the use of commodity swap transactions that are accounted for as hedges. Any gains or losses associated with changes in the market value of the fuel swaps are deferred and recognized as a component of fuel expense in the period in which the fuel is purchased and used. Based on 1999 fuel consumption and excluding the impact of the hedging program, each one-cent increase in the price of fuel would result in approximately $12 million of additional fuel expense on an annual basis. As of February 4, 2000, BNSF had entered into fuel swaps for approximately 869 million gallons at an average price of approximately 50 cents per gallon. The above price does not include taxes, transportation costs, certain other fuel handling costs, and any differences which may occur from time to time between the prices of commodities hedged and the purchase price of BNSF's diesel fuel. Currently, these fuel swaps cover approximately 41 percent, 23 percent, and 8 percent of estimated annual and quarterly fuel purchases for 2000, 2001, and 2002, respectively. Hedge positions are closely monitored to ensure that they will not exceed actual fuel requirements in any period. Unrecognized gains from BNSF's fuel swap transactions were approximately $37 million as of December 31, 1999, of which $33 million relates to swap transactions that will expire in 2000. BNSF also monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. Interest Rate From time to time, the Company enters into various interest rate hedging transactions for the purpose of managing exposure to fluctuations in interest rates and establishing rates in anticipation of future debt issuances. As of February 4, 2000, BNSF had no interest rate swap instruments in place. Swaps totaling $125 million used to fix the interest rate on commercial paper debt expired in December 1999. While the swaps were outstanding, BNSF recognized, on an accrual basis, a fixed rate of interest on the principal amount of commercial paper hedged over the term of the swap agreements. In anticipation of future debt issuances, BNSF has entered into treasury lock transactions totaling $400 million, of which $200 million is based on the 10-year U.S. Treasury rates and $200 million is based on the 30-year U.S. Treasury rates. The 10-year and 30-year treasury lock transactions have average interest rates of approximately 4.6 percent and 5.0 percent, respectively, and expire in June 2000 and June 2001. These rates do not include a credit spread which would be determined at the time of the actual debt issuance and included in the all-in interest rate. The treasury locks can be closed by BNSF anytime up to expiration. Unrecognized gains on the treasury lock transactions were approximately $62 million as of December 31, 1999. BNSF also monitors its treasury lock positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. In 1999, at the time of issuing $200 million of 6.1 percent notes, the Company closed out $100 million of treasury lock transactions at a gain of $8 million. During 1998, at the time of issuing $400 million of debt, the Company closed out $400 million of treasury lock transactions at a loss of approximately $18 million. In each case the gain or loss has been deferred and is being amortized to interest expense over the life of the debt. 11 Commitments and Contingencies Lease Commitments BNSF has substantial lease commitments for locomotives, freight cars, trailers, office buildings and other property. Most of these leases provide the option to purchase the equipment at fair market value at the end of the lease. However, some provide fixed price purchase options. Future minimum lease payments (which reflect leases having non-cancelable lease terms in excess of one year) as of December 31, 1999 are summarized as follows (in millions):
December 31, 1999 1998 - ------------------------------------------- ------ ------ 2000 $ 102 $ 285 2001 113 249 2002 106 226 2003 106 220 2004 106 207 Thereafter 529 2,535 ------ ------ Total 1,062 $3,722 ====== Less amount representing interest 271 - ------------------------------------------- ------ Present value of minimum lease payments $ 791 =========================================== ======
Lease rental expense for all operating leases was $440 million, $491 million and $456 million for the years ended December 31, 1999, 1998 and 1997, respectively. Contingent rentals and sublease rentals were not significant. Other Commitments BNSF has entered into commitments to acquire 196 and 50 locomotives in 2000 and 2001, respectively. The locomotives will be financed from one or a combination of sources including, but not limited to, cash from operations, capital or operating leases, and debt issuances. The decision on the method used will depend upon then current market conditions and other factors. Environmental BNSF's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF's operating procedures include practices to protect the environment from the environmental risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Burlington Northern Santa Fe Corporation 39 Additionally, many of BNSF's land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental clean-up and enforcement actions. In particular, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well as similar state laws generally impose joint and several liability for clean-up and enforcement costs without regard to fault or the legality of the original conduct on current and former owners and operators of a site. BNSF has been notified that it is a potentially responsible party (PRP) for study and clean-up costs at approximately 33 Superfund sites for which investigation and remediation payments are or will be made or are yet to be determined (the Superfund sites) and, in many instances, is one of several PRPs. In addition, BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF generally participates in the clean-up of these sites through cost-sharing agreements with terms that vary from site to site. Costs are typically allocated based on relative volumetric contribution of material, the amount of time the site was owned or operated, and/or the portion of the total site owned or operated by each PRP. Environmental costs include initial site surveys and environmental studies of potentially contaminated sites as well as costs for remediation and restoration of sites determined to be contaminated. Liabilities for environmental clean-up costs are initially recorded when BNSF's liability for environmental clean-up is both probable and a reasonable estimate of associated costs can be made. Adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. BNSF conducts an ongoing environmental contingency analysis, which considers a combination of factors including independent consulting reports, site visits, legal reviews, analysis of the likelihood of participation in and the ability of other PRPs to pay for clean-up, and historical trend analyses. BNSF is involved in a number of administrative and judicial proceedings and other clean-up efforts at approximately 400 sites, including the Superfund sites, at which it is participating in the study or clean-up, or both, of alleged environmental contamination. BNSF paid approximately $67 million, $64 million and $55 million during 1999, 1998 and 1997, respectively, for mandatory and unasserted clean-up efforts, including amounts expended under federal and state voluntary clean-up programs. During 1999, the Company experienced significant developments at certain existing sites primarily related to new information on the extent of contamination and other related developments that led the Company to increase its recorded liabilities for remediation and restoration of all known sites to approximately $232 million at December 31, 1999 from $185 million at December 31, 1998. BNSF anticipates that the majority of the accrued costs at December 31, 1999, will be paid over the next five years. No individual site is considered to be material. Liabilities recorded for environmental costs represent BNSF's best estimates for remediation and restoration of these sites and include both asserted and unasserted claims. Unasserted claims are not considered to be a material component of the liability. Although recorded liabilities include BNSF's best estimates of all costs, without reduction for anticipated recoveries from third parties, BNSF's total clean-up costs at these sites cannot be predicted with certainty due to various factors such as the extent of corrective actions that may be required, evolving environmental laws and regulations, advances in environmental technology, the extent of other parties' participation in clean-up efforts, developments in ongoing environmental analyses related to sites determined to be contaminated, and developments in environmental surveys and studies of potentially contaminated sites. As a result, future charges to income for environmental liabilities could have a significant effect on results of operations in a particular quarter or fiscal year as individual site studies and remediation and restoration efforts proceed or as new sites arise. However, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on BNSF's consolidated financial position or liquidity. Other Claims and Litigation BNSF and its subsidiaries are parties to a number of legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters and personal injury claims. While the final outcome of these items cannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of management that none of these items, when finally resolved, will have a material adverse effect on the annual results of operations, financial position or liquidity of BNSF, although an adverse resolution of a number of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. 12 Retirement Plans and Other Postemployment Benefit Plans BNSF sponsors two significant defined benefit pension plans: the noncontributory qualified BNSF Retirement Plan, which covers substantially all non-union employees, and the nonqualified BNSF Supplemental Retirement Plan, which covers certain officers and other employees. The benefits under BNSF's plans are based on years of credited service and the highest five-year average compensation levels. BNSF's funding policy is to contribute annually not less than the regulatory minimum and not more than the maximum amount deductible for income tax purposes. 40 Burlington Northern Santa Fe Corporation Certain salaried employees of BNSF that have met certain age and years of service requirements are eligible for medical benefits and life insurance coverage during retirement. The retiree medical plan is contributory and provides benefits to retirees, their covered dependents and beneficiaries. Retiree contributions are adjusted annually. The plan also contains fixed deductibles, coinsurance and out-of-pocket limitations. The life insurance plan is noncontributory and covers retirees only. BNSF's policy is to fund benefits payable under the medical and life insurance plans as they come due. Employees beginning salaried employment with BNSF subsequent to September 22, 1995 are not eligible for benefits under these plans. Components of the net benefit costs for these plans were as follows (in millions):
Pension Benefits -------------------------- Year ended December 31, 1999 1998 1997 - ------------------------------------------- ------ ------ ------ Service cost $ 15 $ 15 $ 14 Interest cost 100 101 100 Expected return on plan assets (126) (117) (112) Special termination benefits 10 - - Net amortization and deferred amounts 3 4 4 - ------------------------------------------- ------ ------ ------ Net benefit cost $ 2 $ 3 $ 6 =========================================== ====== ====== ====== Medical and Life Benefits -------------------------- Year ended December 31, 1999 1998 1997 - ------------------------------------------- ------ ------ ------ Service cost $ 5 $ 4 $ 4 Interest cost 17 16 14 Special termination benefits 6 - - Net amortization and deferred amounts 1 - (1) - ------------------------------------------- ------ ------ ------ Net benefit cost $ 29 $ 20 $ 17 =========================================== ====== ====== ======
The following tables show the change in benefit obligation and plan assets of these plans (in millions):
Pension Medical and Benefits Life Benefits ---------------- ---------------- Change in benefit obligation 1999 1998 1999 1998 - -------------------------------- ------ ------ ------ ------ Benefit obligation at beginning of year $1,487 $1,404 $ 249 $ 190 Service cost 15 15 5 4 Interest cost 100 101 17 16 Plan participants' contributions - - 4 3 Amendments - - - 13 Actuarial (gain) loss (115) 85 (17) 39 Special termination benefits 10 - 6 - Curtailment loss 7 - - - Benefits paid (117) (118) (20) (16) - -------------------------------- ------ ------ ------ ------ Benefit obligation at year end $1,387 $1,487 $ 244 $ 249 ================================ ====== ====== ====== ====== Pension Medical and Benefits Life Benefits ---------------- ---------------- Change in plan assets 1999 1998 1999 1998 - -------------------------------- ------ ------ ------ ------ Fair value of plan assets at beginning of year $1,469 $1,540 $ - $ - Actual return on plan assets 174 43 - - Employer contribution 4 4 16 13 Plan participants' contributions - - 4 3 Benefits paid (117) (118) (20) (16) - -------------------------------- ------ ------ ------ ------ Fair value of plan assets at year end $1,530 $1,469 $ - $ - ================================ ====== ====== ====== ======
The following tables show the reconciliation of the funded status of these plans with amounts recorded in the consolidated balance sheet (in millions):
Pension Medical and Benefits Life Benefits ---------------- ---------------- December 31, 1999 1998 1999 1998 - -------------------------------- ------ ------ ------ ------ Funded status $ 143 $ (18) $ (244) $ (249) Unrecognized net (gain) loss (151) 7 (7) 4 Unrecognized prior service cost (7) (8) 7 13 Unamortized net transition obligation 9 11 - - - -------------------------------- ------ ------ ------ ------ Net amount recognized $ (6) $ (8) $ (244) $ (232) ================================ ====== ====== ====== ====== Pension Medical and Benefits Life Benefits ---------------- ---------------- December 31, 1999 1998 1999 1998 - -------------------------------- ------ ------ ------ ------ Amounts recognized in the consolidated balance sheet consist of: Prepaid benefit cost $ 24 $ 20 $ - $ - Accrued benefit liability (44) (43) (244) (232) Intangible asset 2 2 - - Accumulated other comprehensive deficit 12 13 - - - -------------------------------- ------ ------ ------ ------ Net amount recognized $ (6) $ (8) $ (244) $ (232) ================================ ====== ====== ====== ======
BNSF uses a September 30 measurement date. The assumptions used in accounting for the BNSF plans were as follows:
Pension Medical and Benefits Life Benefits ---------------- ---------------- Assumptions 1999 1998 1999 1998 - -------------------------------- ------ ------ ------ ------ Discount rate 7.5% 7.0% 7.5% 7.0% Rate of increase in compensation levels 4.0% 4.0% N/A N/A Expected return on plan assets 9.5% 9.5% N/A N/A - -------------------------------- ------ ------ ------ ------
For purposes of the medical and life benefits calculations for 1999, the assumed health care cost trend rate for both managed care and non-managed care medical costs is 8.5 percent and is assumed to decrease gradually to 5 percent by 2005 and remain constant thereafter. Increasing the assumed health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation by $18 million and the combined service and interest components of net postretirement benefit cost recognized in 1999 by $2 million. Decreasing the assumed health care cost trend rates by one percentage point would decrease the accumulated postretirement benefit obligation by $15 million and the combined service and interest components of net postretirement benefit cost recognized in 1999 by $2 million. Other Plans Under collective bargaining agreements, BNSF participates in multi-employer benefit plans which provide certain postretirement health care and life insurance benefits for eligible union employees. Insurance premiums paid attributable to retirees, which are generally expensed as incurred, were $14 million, $18 million and $15 million, in 1999, 1998 and 1997, respectively. Defined Contribution Plans BNSF sponsors 401(k) thrift and profit sharing plans which cover substantially all non-union employees and certain union employees. BNSF matches 50 percent of the first 6 percent of non-union employees' contributions, which are subject Burlington Northern Santa Fe Corporation 41 to certain percentage limits of the employees' earnings, at each pay period. Depending on BNSF's performance, an additional matching contribution of up to 30 percent of the first 6 percent can be made at the end of the year. Employer contributions for all non-union employees are subject to a five year length of service vesting schedule. BNSF's 401(k) matching expense was $18 million, $16 million and $14 million in 1999, 1998 and 1997, respectively. 13 Stock Options and Other Incentive Plans On April 15, 1999, BNSF shareholders approved 20 million shares of BNSF common stock for issuance under the BNSF 1999 Stock Incentive Plan which were authorized to be issued in the form of stock options, restricted stock, restricted stock units and performance stock. Total shares authorized under the BNSF 1999 and 1996 Stock Incentive Plans and the Non-Employee Directors' Stock Plan (NEDS) are up to 50 million and 0.9 million shares of BNSF common stock, respectively. Approximately 14 million common shares were available for future grant at December 31, 1999. Stock Options Under BNSF's stock option plans, options may be granted to officers and salaried employees at the fair market value of the Company's common stock on the date of grant. All options generally vest in one year and expire within 10 years after the date of grant. Shares issued upon exercise of options may be issued from treasury shares or from authorized but unissued shares. The Company applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for its fixed stock option plans as the exercise price equals the stock price on the date of grant. Had compensation expense been determined for stock options granted in 1999, 1998 and 1997 based on the fair value at grant dates consistent with Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock Based Compensation," the Company's pro forma net income and earnings per share would have been as follows:
1999 1998 1997 - ------------------------------------------- ------ ------ ------ Net income (in millions) $1,092 $1,124 $ 857 Basic earnings per share $ 2.36 $ 2.39 $ 1.85 Diluted earnings per share $ 2.34 $ 2.36 $ 1.82 - ------------------------------------------- ------ ------ ------
The pro forma amounts were estimated using the Black-Scholes option pricing model with the following assumptions:
1999 1998 1997 - ------------------------------------------- ------ ------ ------ Weighted average expected life (years) 3.0 3.0 3.0 Expected volatility 30% 20% 20% Annual dividend per share $ 0.48 $ 0.48 $ 0.40 Risk free interest rate 6.63% 5.11% 5.81% Weighted average fair value of options granted $ 8.43 $ 5.13 $ 5.15 - ------------------------------------------- ------ ------ ------
A summary of the status of the stock option plans as of December 31, 1999, 1998 and 1997, and changes during the years then ended, is presented below:
1999 1998 1997 ------------------------------ ----------------------------- ------------------------------ Weighted Average Weighted Average Weighted Average Options Exercise Prices Options Exercise Prices Options Exercise Prices - ----------------------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- Balance at beginning of year 28,135,869 $ 24.27 25,761,369 $ 20.98 24,765,855 $ 16.49 Granted 9,857,345 32.96 9,587,926 29.33 8,778,036 29.40 Exercised (6,315,238) 21.24 (6,666,864) 18.66 (7,092,690) 15.46 Cancelled (1,869,819) 30.94 (546,562) 26.25 (689,832) 23.58 - ----------------------------- ---------- --------------- ---------- --------------- ---------- --------------- Balance at end of year 29,808,157 $ 27.37 28,135,869 $ 24.27 25,761,369 $ 20.98 ============================= ========== =============== ========== =============== ========== =============== Options exercisable at year end 20,710,679 $ 25.00 17,763,770 $ 21.45 16,419,858 $ 16.31 ============================= ========== =============== ========== =============== ========== ===============
The following table summarizes information regarding stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable --------------------------------------------------- -------------------------------- Range of Number Weighted Average Weighted Average Number Weighted Average Exercise prices Outstanding Remaining Life Exercise Prices Exercisable Exercise Prices - ----------------------------- ----------- --------------- ---------------- ----------- ---------------- $ 3.01 to $24.83 7,514,077 4.6 Years $ 17.42 7,514,077 $ 17.42 $26.73 to $29.10 7,756,421 7.7 Years $ 28.89 7,366,221 $ 28.89 $29.38 to $32.58 5,510,894 7.1 Years $ 29.60 5,507,809 $ 29.60 $32.84 to $36.73 9,026,765 9.0 Years $ 32.99 322,572 $ 34.15 - ----------------------------- ----------- --------------- ---------------- ----------- ---------------- $ 3.01 to $36.73 29,808,157 7.2 Years $ 27.37 20,710,679 $ 25.00 ============================= =========== =============== ================ =========== ================
42 Burlington Northern Santa Fe Corporation On January 12, 2000, 10.8 million stock options were granted to active salaried employees as of January 11, 2000. These options have an exercise price equal to the fair market value of BNSF common stock on the date of grant and will vest and expire one year and ten years, respectively, from the date of grant. Stock options totaling 8.9 million and 21.4 million were excluded from the calculation of diluted earnings per share in the third and fourth quarters of 1999, respectively, because their exercise price exceeded the average market price of the Company's common stock for those periods. Other Incentive Plans BNSF has other long-term incentive programs in addition to stock options which are administered separately on behalf of employees. BNSF awarded a total of approximately 1.2 million shares of restricted stock subject to performance periods to eligible employees and directors during 1996. No cash payment is required by the individuals. The restrictions will be lifted in thirds over three years beginning on the third anniversary of the grant date if certain stock price based performance goals are met. If, however, the performance goals are not met, the restricted shares will be forfeited. All shares still subject to restrictions are generally forfeited and returned to the plan if the employee's or director's relationship is terminated. Approximately 700 thousand restricted shares related to this award were outstanding as of December 31, 1999. Under the BNSF 1999 and 1996 Stock Incentive Plans certain eligible employees may defer through the BNSF Incentive Bonus Stock Program (IBSP) the cash payment of their bonus paid under the Incentive Compensation Plan (ICP) and receive restricted stock for which restrictions lapse in three years (or in two years if certain performance goals are met). The number of restricted shares awarded are based on the amount of bonus deferred, plus incremental shares, using the market price of BNSF common stock on the date of grant. Restricted awards granted under this program totaled approximately 400 thousand, 380 thousand and 360 thousand shares in 1999, 1998 and 1997, respectively. A total of approximately 1.0 million shares were outstanding under this and prior programs of this type on December 31, 1999. In addition, all regularly-assigned salaried employees not eligible to participate in the IBSP are eligible to participate in the BNSF Discounted Stock Purchase Program. This program allows employees to use their bonus earned under the ICP to purchase BNSF common stock at a discount from the market price and requires that the stock be restricted for a three year period. During the years ended December 31, 1999, 1998 and 1997, approximately 65 thousand, 55 thousand and 85 thousand shares, respectively, were purchased under this program. Additionally, the Company periodically issues time vesting restricted shares, which generally vest ratably over five years. Restricted stock awards under these plans, net of forfeitures, were approximately 330 thousand, and 90 thousand for the years ended December 1999 and 1997, respectively. A total of 365 thousand restricted shares related to these awards were outstanding on December 31, 1999. Shares awarded under the plans may not be sold or used as collateral, and are generally not transferable, by the holder until the shares awarded become free of restrictions. Compensation expense is recorded under the BNSF Stock Incentive Plans in accordance with APB Opinion 25 and was not material in 1999, 1998 or 1997. 14 Common Stock and Preferred Capital Stock Common Stock BNSF is authorized to issue 600 million shares of common stock, $.01 Par Value. At December 31, 1999, there were 454.6 million shares of common stock outstanding. Each holder of common stock is entitled to one vote per share in the election of directors and on all matters submitted to a vote of stock- holders. Subject to the rights and preferences of any future issuances of preferred stock, each share of common stock is entitled to receive dividends as may be declared by the Board of Directors out of funds legally available and to share ratably in all assets available for distribution to stockholders upon dissolution or liquidation. No holder of common stock has any preemptive right to subscribe for any securities of BNSF. Shareholder Rights Plan In December 1999, BNSF's Board of Directors (the Board) approved a shareholder rights plan (Rights Plan). In connection with the Rights Plan, the Board declared a dividend of one Preferred Stock Purchase Right (Right or Rights) for each outstanding share of BNSF common stock to shareholders of record on December 31, 1999. Shareholders are automatically entitled to the Rights corresponding to their shares owned. The distribution is not taxable to shareholders under current United States tax laws. Adoption of the Rights Plan was required by the terms of the Combination Agreement, as amended, discussed in Note 1. Subject to certain exceptions, each Right will be exercisable only if a person or group acquires 15 percent or more of BNSF common stock or announces a tender or exchange offer which would result in ownership of 15 percent or more of BNSF common stock. Each Right, which is not presently exercisable, will entitle its holder to buy one one-hundredth of a share of Series B Junior Participating Preferred Stock at an exercise price of $100, subject to adjustment. Following the acquisition of 15 percent or more of BNSF common stock by a person or group, each holder of a Right (other than the acquiring person or group) will be entitled to purchase, upon exercise at the stated exercise price of the Right, common stock having a value equal to two times the exercise price of the Right. In the event of a subsequent combination or merger or other acquisition of the Company, each holder of a Right, upon exercise at the stated exercise price of the Right, will be entitled to buy shares of common stock of the acquiring or surviving entity having a value equal to two times the exercise price of the Right. A Right is redeemable for $0.01 per Right, subject to adjustment, before the control by a person or group of 15 percent or more of BNSF common stock. Each Right will expire on December 18, 2009 or earlier upon BNSF becoming a subsidiary of North American Railways pursuant to the Combination Agreement, as amended, or upon redemption of the Rights by BNSF. Burlington Northern Santa Fe Corporation 43 Preferred Capital Stock At December 31, 1999, BNSF had 50 million shares of Class A Preferred Stock, $.01 Par Value and 25 million shares of Preferred Stock, $.01 Par Value available for issuance. The Board of Directors has the authority to issue such stock in one or more series, to fix the number of shares and to fix the designations and the powers, rights, and qualifications and restrictions of each series. Common Stock Repurchase Program In July 1997, the Board of Directors of BNSF authorized the repurchase of up to 30 million shares of the Company's common stock from time to time in the open market. In December 1999, the Board of Directors extended the repurchase program by approving an additional 30 million shares. Repurchased shares will be available to satisfy future requirements of various stock-based employee com- pensation programs. During 1999 and 1998, the Company repurchased approximately 22 million and 5 million shares, respectively, of its common stock at an average price of $31.08 per share and $30.75 per share, respectively. There were no repurchases under this program in 1997. Total repurchases through February 4, 2000, were approximately 33 million shares at a total average cost of $29.86 per share leaving 27 million shares available for repurchase under the authorization. During the second and third quarters of 1998, BNSF sold equity put options for 3 million shares of the Company's common stock to an independent third party and received cash proceeds of $2.2 million. The option contracts had exercise prices ranging from $29.00 to $30.00 per share with expiration dates ranging from November, 1998 to February, 1999. The option contracts permitted a net- share or net-cash settlement method at BNSF's election. These options expired unexercised. In April 1999, BNSF sold equity put options for 100 thousand shares of BNSF common stock to an independent third party and received cash proceeds of $135 thousand. The third party exercised the options on October 12, 1999, which resulted in the Company purchasing 100 thousand shares of its common stock at $29 per share. An equity put option is a financial instrument whereby BNSF receives an upfront cash premium for granting another party the option to sell a defined number of BNSF shares to the Company at a fixed price on a specified future date. The Company considers the sale of equity put options as a method to acquire its common stock at a share price consistent with its share repurchase strategy and potentially reduce the all-in cost of the program. The Company's risk is that it may be required to purchase shares at a specified price that is higher than the common stock price at the exercise date of the equity put option. The Company has the ability to settle its equity put option transactions on a net share or net cash basis and accounts for the effects of these transactions within stockholders' equity. The number of shares subject to outstanding put options sold by the Company cannot exceed the amount of remaining shares the Board of Directors has authorized for repurchase. As of February 4, 2000 there were no equity put options outstanding. 15 Quarterly Financial Data--Unaudited (Dollars in millions, except per share data)
Fourth Third Second First - --------------------------------------------------------------------------- 1999 Revenues $2,370 $2,346 $2,194 $2,190 - --------------------------------------------------------------------------- Operating income 603 631 491 480 - --------------------------------------------------------------------------- Net income $ 315 $ 348 $ 238 $ 236 - --------------------------------------------------------------------------- Basic earnings per share $ .69 $ .76 $ .51 $ .50 Diluted earnings per share $ .69 $ .75 $ .50 $ .50 Dividends declared per share $ .12 $ .12 $ .12 $ .12 Common stock price: High $32.75 $33.38 $37.94 $36.44 Low 22.88 25.63 29.75 31.56 - --------------------------------------------------------------------------- 1998 Revenues $2,294 $2,294 $2,205 $2,148 - --------------------------------------------------------------------------- Operating income 568 614 529 447 - --------------------------------------------------------------------------- Net income $ 296 $ 317 $ 277 $ 265 - --------------------------------------------------------------------------- Basic earnings per share $ .63 $ .67 $ .59 $ .56 Diluted earnings per share $ .63 $ .66 $ .58 $ .56 Dividends declared per share $ .12 $ .12 $ .10 $ .10 Common stock price: High $34.81 $35.58 $35.71 $35.65 Low 28.63 26.87 31.25 28.08 - ---------------------------------------------------------------------------
44 Burlington Northern Santa Fe Corporation EX-21.1 7 SUBSIDIARIES OF BNSF EXHIBIT 21.1 BURLINGTON NORTHERN SANTA FE CORPORATION SUBSIDIARIES* BURLINGTON NORTHERN SANTA FE CORPORATION BNSF Acquisition, Inc. (DE).......................................... 100% Burlington Northern Santa Fe British Columbia, Ltd. (DE)............. 100% FreightWise, Inc. (DE)............................................... 100% The Burlington Northern and Santa Fe Railway Company (DE)............ 100% Alameda Belt Line (CA)............................................. 50% BN Leasing Corporation (DE)........................................ 100% Burlington Northern Dock Corporation (DE).......................... 100% Burlington Northern International Services, Inc. (DE).............. 100% Burlington Northern (Manitoba) Limited............................. 100% Burlington Northern Railroad Holdings, Inc. (DE)................... 100% Burlington Northern Santa Fe Manitoba, Inc. (DE)................... 100% Burlington Northern Santa Fe Properties, LLC (DE).................. 100% Burlington Northern Worldwide, Inc. (DE)........................... 100% Central California Traction Company (CA)........................... 33.3% Constellation 130, Inc. (CA)....................................... 100% The Dodge City and Cimarron Valley Railway Company (KS)............ 100% Electro Northern, Inc. (DE)........................................ 100% Houston Belt & Terminal Railway Company (TX)....................... 50% INB Corp. (NV)..................................................... 100% Los Angeles Junction Railway Company (CA).......................... 100% M-R Holdings Acquisition Company (DE).............................. 100% M T Properties, Inc. (MN).......................................... 37.8% Midwest/Northwest Properties Inc. (DE)............................. 100% Northern Radio Limited (British Columbia).......................... 100% The Oakland Terminal Railway (CA).................................. 50% Oklahoma City Junction Railway Company (OK)........................ 100% Paducah & Illinois Railroad Company (KY)........................... 33.3% Pine Canyon Land Company (DE)...................................... 100% Portland Terminal Railroad Company (OR)............................ 40% Rio Grande, El Paso and Santa Fe Railroad Company (TX)............. 100% SFP Pipeline Holdings, Inc. (DE)................................... 100% Santa Fe Pacific Pipelines, Inc. (DE)............................ 100% Santa Fe Pacific Insurance Company (VT)............................ 100% Santa Fe Pacific Railroad Company (Act of Congress)................ 100% Santa Fe Receivables Corporation (DE).............................. 100% Star Lake Railroad Company (DE).................................... 100% St. Joseph Terminal Railroad Company............................... 50% Sunset Communications Company (DE)................................. 100% Sunset Railway Company (CA)........................................ 50% TTX Company (DE)................................................... 17% Terminal Railroad Association of St. Louis (MO).................... 14.3% Western Fruit Express Company (DE)................................. 100% The Wichita Union Terminal Railway Company (KS).................... 66.6% Winona Bridge Railway Company (MN)................................. 100%
*The names of certain subsidiaries of Burlington Northern Santa Fe Corporation are omitted as those subsidiaries, considered as a single subsidiary, would not constitute a significant subsidiary. EX-23.1 8 CONSENT OF PRICEWATERHOUSECOOPERS Exhibit 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in (i) the Registration Statement on Form F-4/S-4 (Nos. 333-94399 and 333-94397) of Canadian National Railway Company and North American Railways, Inc., (ii) the Registration Statements on Form S-3 (Nos. 333-48227 and 333-72013) and (iii) the Registration Statements on Form S-8 (Nos. 33-62823, 33-62825, 33-62827, 33- 62829, 33-62831, 33-62833, 33-62835, 33-62837, 33-62839, 33-62841, 33-62943, 33-63247, 33-63249, 33-63253, 33-63255, 333-03275, 333-03277, 333-19241 and 333-77615) of Burlington Northern Santa Fe Corporation of our report dated February 4, 2000 relating to the consolidated financial statements, which appears in the 1999 Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 4, 2000 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Fort Worth, Texas March 30, 2000 EX-24.1 9 POWERS OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY WHEREAS, BURLINGTON NORTHERN SANTA FE CORPORATION, a Delaware corporation (the "Company"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999; and WHEREAS, the undersigned serve the Company in the capacity indicated; NOW, THEREFORE, the undersigned hereby constitutes and appoints THOMAS N. HUND and JEFFREY R. MORELAND, his or her attorney with full power to act for him or her in his or her name, place and stead, to sign his or her name in the capacity set forth below, to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1999, and to any and all amendments to such Annual Report on Form 10-K, and hereby ratifies and confirms all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been executed by the undersigned this 29th day of March, 2000.
/s/ Joseph F. Alibrandi /s/ Jack S. Blanton ______________________________________ ______________________________________ Joseph F. Alibrandi, Director Jack S. Blanton, Director /s/ John J. Burns /s/ George Deukmejian ______________________________________ ______________________________________ John J. Burns, Jr., Director George Deukmejian, Director /s/ Robert D. Krebs /s/ Bill M. Lindig ______________________________________ ______________________________________ Robert D. Krebs, Chairman Bill M. Lindig, Director and Chief Executive Officer, and Director /s/ Vilma S. Martinez /s/ Roy S. Roberts ______________________________________ ______________________________________ Vilma S. Martinez, Director Roy S. Roberts, Director /s/ Marc J Shapiro /s/ Arnold R. Weber ______________________________________ ______________________________________ Marc J. Shapiro, Director Arnold R. Weber, Director /s/ Robert H. West /s/ J. Steven Whisler ______________________________________ ______________________________________ Robert H. West, Director J. Steven Whisler, Director /s/ Edward E. Whitacre, Jr. /s/ Ronald B. Woodard ______________________________________ ______________________________________ Edward E. Whitacre, Jr., Director Ronald B. Woodard, Director /s/ Michael B. Yanney ______________________________________ Michael B. Yanney, Director
E-6 EX-27.1 10 FDS - YE 12-31-99
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN SANTA FE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000934612 BURLINGTON NORTHERN SANTA FE CORPORATION 1,000,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 22 0 447 50 255 1,066 26,524 4,843 23,700 2,075 5,655 0 0 5 8,167 23,700 0 9,100 0 6,895 0 0 387 1,819 682 1,137 0 0 0 1,137 2.46 2.44
EX-27.2 11 FDS - RESTATED FOR PERIOD ENDED 3-31-99
5 THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN SANTA FE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000934612 BURLINGTON NORTHERN SANTA FE CORPORATION 1,000,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 25 0 551 66 247 1,091 26,004 5,174 22,940 2,105 5,416 0 0 5 7,920 22,940 0 2,190 0 1,710 0 0 94 377 141 236 0 0 0 236 0.50 0.50 RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
EX-27.3 12 FDS - RESTATED PERIOD ENDED 6-30-99
5 THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN SANTA FE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000934612 BURLINGTON NORTHERN SANTA FE CORPORATION 1,000,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 28 0 483 67 244 1,046 26,492 5,309 23,410 1,959 5,917 0 0 5 7,940 23,410 0 4,384 0 3,413 0 0 192 758 284 474 0 0 0 474 1.01 1.00 RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
EX-27.4 13 FDS - RESTATED PERIOD ENDED 9-30-99
5 THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN SANTA FE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000934612 BURLINGTON NORTHERN SANTA FE CORPORATION 1,000,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 24 0 532 67 249 1,115 26,903 5,446 23,407 2,070 5,619 0 0 5 8,023 23,407 0 6,730 0 5,128 0 0 291 1,315 493 822 0 0 0 822 1.77 1.75 RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
EX-27.5 14 FDS - RESTATED PERIOD ENDED 12-31-98
5 THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN SANTA FE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000934612 BURLINGTON NORTHERN SANTA FE CORPORATION 1,000,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 25 0 595 71 244 1,162 25,701 5,039 22,646 2,153 5,188 0 0 5 7,779 22,646 0 8,941 0 6,783 0 0 354 1,849 694 1,155 0 0 0 1,155 2.45 2.43 RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
EX-27.6 15 FDS - RESTATED PERIOD ENDED 3-31-98
5 THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN SANTA FE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000934612 BURLINGTON NORTHERN SANTA FE CORPORATION 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 33 0 551 52 213 1,129 24,135 4,714 21,612 1,957 5,158 0 0 5 7,113 21,612 0 2,148 0 1,701 0 0 88 436 171 265 0 0 0 265 0.56 0.56 RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
EX-27.7 16 FDS - RESTATED PERIOD ENDED 6-30-98
5 THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN SANTA FE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000934612 BURLINGTON NORTHERN SANTA FE CORPORATION 1,000,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 31 0 561 63 211 1,128 24,624 4,785 21,762 2,118 4,969 0 0 5 7,373 21,762 0 4,353 0 3,377 0 0 173 876 334 542 0 0 0 542 1.15 1.14 RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
EX-27.8 17 FDS - RESTATED PERIOD ENDED 9-30-98
5 THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN SANTA FE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000934612 BURLINGTON NORTHERN SANTA FE CORPORATION 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 17 0 616 71 212 1,169 25,165 4,898 22,213 2,069 5,154 0 0 5 7,547 22,213 0 6,647 0 5,057 0 0 264 1,380 521 859 0 0 0 859 1.82 1.80 RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RECLASSIFICATOINS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
EX-27.9 18 FDS - RESTATED Y.E. 12-31-97
5 THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN SANTA FE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000934612 BURLINGTON NORTHERN SANTA FE CORPORATION 1,000,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 31 0 622 57 205 1,164 23,955 4,744 21,266 1,990 5,181 0 0 5 6,817 21,266 0 8,370 0 6,603 0 0 344 1,404 519 885 0 0 0 885 1.91 1.88 RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RECLASSIFICATOINS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
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