BNSF 99 annrpt

Burlington Northern Santa Fe Corporation

1999 Annual Report to Shareholders

Contents

2 Message from

the Chairman

8 Introduction

10 Industrial Products

12 Coal

14 Consumer Products

16 Agricultural Products

18 BNSF’s Values

19 Financial Review

45 Executive Officers

and Directors

46 Corporate Information

The BNSF Vision

Our vision is to realize the

tremendous potential of the

Burlington Northern and

Santa Fe Railway by providing

transportation services that

consistently meet our cus-

tomers’ expectations.

We will know we have

succeeded when:

• Our customers find it easy

to do business with us, receive

100-percent on-time, damage-

free service, accurate and timely

information regarding their

shipment, and the best value

for their transportation dollar.

• Our employees work in a safe

environment free of accidents

and injuries, are focused on con-

tinuous improvement, share the

opportunity for personal and pro-

fessional growth that is available

to all members of our diverse

work force, and take pride in

their association with BNSF.

• Our owners earn financial

returns that exceed other rail-

roads and the general market

as a result of BNSF’s superior

revenue growth, an operating

ratio in the low 70s, and a return

on invested capital which is

greater than our cost of capital.

• The communities we serve

benefit from our sensitivity

to their interests and to the

environment in general, our

adherence to the highest legal

and ethical standards, and

the participation of our com-

pany and our employees in

community activities.

About the Cover

A BNSF Industrial Products train

approaches Chemult, Oregon,

bound for Southern California.

BNSF’s on-time performance

averaged 91 percent across all

commodities in 1999, setting

a new record in meeting cus-

tomer expectations.BNSFOn Time!

Burlington Northern Santa Fe Corporation 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 through December 31, 1995.

To Our Shareholders, Customers and Colleagues

After a slow start in 1999, BNSF produced

record-breaking results in the second-

half of the year. We capped 1999 by

announcing on December 20 an agreement to

combine with Canadian National Railway

Company (CN) to create an end-to-end North

American railroad that will offer shippers substan-

tially expanded single-line service over a 50,000

route-mile network.

Our decision to combine with CN has pro-

voked considerable talk about rail mergers, and

whether or not they are of benefit to shippers,

employees and shareholders. Obviously, the

merger we know most about is the one between

Burlington Northern and Santa Fe, which was

consummated 54 months ago. And our answer

to that talk is: BNSF is a resounding success.

I’d like to review with you BNSF’s results for

1999 and compare our progress, where possible,

with the combined pro forma results of Burlington

Northern and Santa Fe for 1994, the year that we

announced our merger. My review will discuss,

in turn, safety, customer service, efficiency and

financial performance. Then, I’ll discuss the pro-

posed combination with CN.

Safety

Employee injury frequency and severity (lost

workdays) ratios, as measured per 200,000

hours worked, have dropped 38 percent and

65 percent, respectively, since 1994.

Total lost workdays are about 65 percent

lower than 1994, representing an annual

decrease of 35,400 days of human pain and

suffering. This reduction is the equivalent of

170 yearly full-time employees who now are

available to serve our customers.

While our rail traffic has been increasing, our

system has experienced a 25 percent reduction

in train accidents per one million train miles

compared with 1994. The communities we serve

have also benefited from a 37 percent decrease

in the number of highway/rail crossing accidents

per million train miles.

With the help of our labor unions and the

Federal Railroad Administration, BNSF has pio-

neered programs that help keep our employees

alert and safe on the job as well as provide for

efficient work and rest cycles. Predictable off-

duty schedules, such as 11-days-on/4-days-off or

8-on/3-off, are now in place on 69, or more than

20 percent, of the railroad’s train crew extra

boards. Assigned rest days for pool crews are

now in place at Fort Madison, Iowa, and Superior,

Wisconsin. Additional pilot projects in 2000 are

expected to extend assigned rest-day schedules

to more train, yard and engine employees.

Improved safety has also provided tangible

benefits for our customers. Since 1995, we have

reduced the ratio of freight loss and damage to

freight revenue by 34 percent.

2 Burlington Northern Santa Fe Corporation

--------

Lost Workdays per 200,000 Manhours 1994 –1999

125

100

75

50

25

01997 1998 19991994

Pro Forma1995

Pro Forma1996

122.388.3

59.846.0 43.6

A key safety measure is the severity ratio, or lost workdays per 200,000 hoursworked. It reflects the size of BNSF’s workforce and the number of hours worked,which fluctuate each year. 1999’s lost workday ratio of 43.0 represents a 65 percentreduction compared with 1994.

43.0

Lost Workdays per200,000 Manhours

Customer Service

In mid-1997, we cut over to a new integrated

information system. As a result, we do not

have comparable service data for 1994 through

1996. We know that in 1997 and 1998, BNSF’s

service slipped because larger than planned

volumes were carried by our railroad, brought

on in part by the service disruptions of our

foremost competitor.

Since 1994, units, tons and freight revenue

have all increased approximately 20 percent. Our

rate of revenue growth has been about triple the

growth rate of other United States railroads.

Throughout 1999, our railroad operated bet-

ter than ever. We met on-time service levels

based on customers’ expectations never

achieved before by a railroad of our size. Our

system-wide on-time performance averaged 91

percent for the year compared with 82 percent

and 79 percent, respectively, in 1998 and 1997.

From 1995 to 1999, BNSF’s intermodal traffic

across selected major routes and new routes has

grown by 40 percent to upwards of 170 percent.

During the 28-day period preceding

Christmas, we handled 35,101 trailers, or about

53 million packages without a single service

failure for United Parcel Service (UPS), our

largest intermodal customer. This was the

largest peak volume ever handled by a railroad

and a 10 percent increase over the BNSF’s

1998 27-day peak volume. It was the fourth

consecutive year that we provided 100 percent

on-time service during the UPS peak season.

BNSF continued operating failure free for UPS

until February 23, 2000, a 96-day period during

which we handled more than 103,000 trailers—

establishing a new railroad industry record.

We met all of our 1999 coal customer require-

ments, amounting to about 236 million tons

of delivered coal, with a virtual 100 percent on-

time performance. At the same time, coal cycle

performance improved for the first time since

1994, even with a 34 percent increase in the

number of unit trains in operation.

As we predicted, our merger opened new

markets for our upper Midwest grain shippers.

Traffic volumes have grown 40 percent to more

than 75,000 units on seven major new, single-

line routes into California and the Southwest.

Since 1997, loads to and from Mexico have

increased to almost 120,000 units annually, as

a result of our trackage rights agreement with

UP/SP and an earlier agreement with SP in our

merger case.

Volumes over UP/SP lines are now

approaching 30,000 carloads a month, with

revenue exceeding $400 million in 1999, and

these volumes are still growing.

On BNSF, freight rates have continued to

drop both in current and adjusted (for inflation)

terms since 1994. Based on system revenue-

per-ton-mile averages, current and adjusted

rates are 11 and 22 percent lower, respectively,

than in 1994.


Loss/Damage Percentage of Freight Revenue 1994 –1999

1997 1998 19991994Pro Forma

1995Pro Forma

1996

.33 .35 .36.31

.27.23

Since the merger in 1995, our loss/damage ratio has dropped by 34 percent.

0.40%

0.30%

0.20%

0.10%

0.0%

Efficiency

Operating expense per 1,000 gross ton miles

(GTMs) has steadily decreased since 1994, and was

about 20 and 25 percent lower in current and in

inflation-adjusted terms, respectively, in 1999. At

$7.90, BNSF has the lowest operating expense per

1,000 GTMs in the industry, a result of implement-

ing $1.29 billion of efficiency initiatives since 1994.

Our operating ratio is approximately 9 points

lower than in 1994 at 75.4 percent. This has

added about $800 million to operating income,

based on 1999 revenues of $9.1 billion.

Employment is 7 percent, or 3,100 people,

lower than in 1994, largely reflecting the elimi-

nation of redundant staff positions and clerical

consolidation. During this period, we hired about

16,300 people, most of whom work in union oper-

ating and maintenance jobs, to ensure that safety

and customer service would be unaffected.

Workforce utilization, as measured in GTMs per

employee, has improved 46 percent since 1994.

Our road locomotive fleet has grown 22 per-

cent, or about 900 units, and available horsepower

has increased by 40 percent since 1994. As a

result, there were many days during the second

half of 1999 when our railroad was virtually free

of power delays.

During the last four years, we have acquired

or overhauled 3,250 road locomotives, about 75

percent of our fleet.

Active freight car inventory has decreased

6 percent since 1996, while BNSF moved an

additional 1.1 million units, a 15 percent vol-

ume increase. This has resulted in a 20 per-

cent increase in GTMs per active car.

Financial Performance

Operating income, which grew to a record $2.24

billion in 1999, on an adjusted basis, has increased

at a compounded 14 percent rate since 1994.

Net income was a record $1.13 billion in 1999,

on an adjusted basis, and has increased at a

compounded 16 percent rate since 1994.

Diluted earnings per share, on an adjusted

basis, has increased at a compounded 20 percent

rate since 1994 and was a record $2.43 in 1999.

Between 1996 and 1999, BNSF’s capital

spending of $9.4 billion was about two times

the combined amount spent in the 1992-1995

period by both former railroads. Since 1996,

almost $1.6 billion has been spent on expan-

sion projects across the BNSF network.


Financial Performance*Operating Ratio 1994 –1999

85%

80%

75%

70%

1997 1998 19991994Pro Forma

1995Pro Forma

1996

84.4

81.0

78.4 77.875.9

The 9-point drop in operating ratio is worth about $800 million, based upon revenues of $9.1 billion in 1999. *Reflects continuing operations adjusted for special items.

75.4

Financial Performance*Operating Income 1994 –1999

2.5

2.0

1.5

1.0

.5

01997 1998 19991994

Pro Forma

$ in Billions

1995Pro Forma

1996

1.191.53

1.75 1.862.16

Operating income has increased at a compounded 14 percent rate since 1994.*1999 operating income has been increased to exclude previously reported second quarter special

items consisting of reorganization costs and environmental expenses, partially offset by a credit for

the reversal of liabilities associated with the consolidation of certain clerical workforces. 1999 net

income and diluted earnings per share have also been adjusted to exclude a third-quarter gain in

connection with prior period line sales that was partially offset by costs related to those line sales.

In total, these adjustments reduced 1999 net income and diluted earnings per share by $4 million

and $0.01, respectively. Other years have also been adjusted for special items.

2.24

Capital investment for 1999 totaled $2.27

billion, including locomotives acquired through

purchases and long-term leases. About $1.3 bil-

lion was spent on maintaining our network, loco-

motives, freight cars, and information systems at

the highest level to provide customers with more

reliable, consistent service.

Another $233 million was spent in 1999 on

terminal and line expansion projects, including

adding about 53 miles of double track in New

Mexico and Texas on BNSF’s transcontinental

route between Chicago and California; adding

about 12 miles of double track on our Nebraska

coal route, 18 miles of triple track and six miles

of double track at different locations along the

Wyoming coal route; continued expansion

of the Los Angeles (Hobart) Intermodal facility,

which set an annual record of 988,000 lifts;

expanding our Palos, Alabama yard; and open-

ing in May a coordinated dispatch center in

San Bernardino, California.

In addition, $738 million was used to

acquire 476 new road locomotives, the largest

single-year acquisition in railroad history.

As a result, total invested capital reached

$16.3 billion at the end of 1999 and has increased

44 percent since 1995. Return on invested capi-

tal, has remained in the 9-plus percent range

since then, up from 7.2 percent in 1994.

Even with record capital spending and an

aggressive stock buyback program since 1997,

pre-tax interest coverage has improved about 26

percent since 1995. Our debt to capital ratio has

dropped 400 basis points to 41.6 since 1995.

For the first time, BNSF generated free cash

flow in 1999. After dividends, it totaled $260

million. A large portion of our expansion capital

expenditures are behind us, and free cash flow,

after dividends, will increase considerably in

2000 and beyond.

During 1998 and 1999, BNSF repurchased

27 million shares of its common stock for

$841 million and in December, our Board of

Directors authorized an additional 30-million-

share repurchase program.

Beginning on Page 8, we describe in detail,

including maps and photographs, service

improvements we have made during 1999 to

help BNSF customers in all of our business units.

We also highlight how our investments in loco-

motives, main-line track capacity, terminals and

intermodal facilities are helping BNSF deliver

transportation solutions that meet, and in some

instances exceed, our customers’ expectations.

BNSF/CN Combination Benefits

Shippers and Shareholders

Based on our accomplishments, the BN and

Santa Fe merger is good for shippers, sharehold-

ers and employees. Safety, service, market share,

efficiency and financial performance are all

improving. We are convinced that a combination

with CN will give us the opportunity to continue


Financial PerformanceFree Cash Flow, After Dividends 1994 –1999

300

100

–100

–300

–500

–7001997 1998 19991994

Pro Forma1995

Pro Forma1996

–25 –110

–557–700

–397

Negative free cash flow of $1.654 billion in the first three years after merger reflects the capital program undertaken to provide shippers with improved service. Cash flow turned positive in 1999, and should increase significantly in future years.

260

$ in Millions

Vancouver

Seattle

Prince Rupert

Calgary

Edmonton

Winnipeg

ChicagoSioux City

Kansas City

Omaha

BuffaloToronto

Montréal Halifax

Detroit

MobileJackson

Dallas/Fort Worth

Houston

Alliance

Memphis

Birmingham

New Orleans CorpusChristi

SanFrancisco

Los Angeles

PhoenixEl Paso

Denver

Gillette

Duluth/Superior

Stockton

making progress in these areas. I want to tell

you why I believe the creation of North American

Railways, Inc., is in everyone’s best interest.

This is a competitive end-to-end combination

with little or no overlap. BNSF and CN share a

common vision: to provide shippers with supe-

rior service by creating an efficient, growing

North American railroad that will significantly

expand competitive single-line service. Our

combination will provide our shippers with the

ability to grow their markets, and we are confi-

dent that we can effect our combination without

adversely affecting either BNSF or CN customers

during implementation. The map below illus-

trates the potential shippers will have to access

new markets and the faster transit times made

possible through extended single-line service

that will eliminate interchanges.

For shareholders, we believe the combined

companies will be able to create more value

than could be achieved individually by our

companies. CN is a very well run railroad with

the lowest operating ratio in the industry. CN is

in the process of integrating the Illinois Central

into its network, and over the years has accom-

plished significantly improved on-time perform-

ance, transit times and asset utilization. The CN

management and our management are a good

match and together, we intend to make North

American Railways, Inc. the best railroad in

North America.

Based on the condition of our two properties

and opportunities to improve utilization of cars and

locomotives, we do not expect a big increase in

capital expenditures. Our no-premium transaction

is expected to be accretive to earnings per share

in the first year after the combination becomes

effective, and it is expected to generate more than

$1 billion in free cash flow after dividends are paid

in the first full year.


The combination of CN and BNSF uses a new

model for railroad consolidation—one that will

enable us to effectively integrate with maximum

efficiency and without sacrificing quality customer

service or reducing competition. The model pre-

serves and protects the existing identities and

efficient rail networks of BNSF and CN, consid-

ered to be the two best operating railroads in

North America. What makes this model different

from previous rail consolidations is that this trans-

action is not a merger or a takeover. This combi-

nation will have a minimal impact on employees.

But, it has the potential to create jobs based on

annual revenue and earnings growth that will result

from extended single-line service and superior cus-

tomer service.

As a BNSF shareholder, you will receive for

each BNSF common share a common share in

North American Railways and stapled to it will

be a CN voting share; they will trade together

as one security. North American Railways will

hold 100 percent of the equity interest in both

companies. The reason for the separate voting

share is that Canadian law requires that no

individual shareholder may hold or control more

than 15 percent of the voting rights of CN.

North American Railways is a Delaware

corporation, but Canadian law requires the head-

quarters to be in Montreal, Canada, where CN

will continue to have its headquarters. BNSF will

continue to be headquartered in Fort Worth. We

expect about 70 percent of the assets of North

American Railways will be in the United States

and about 90 percent of its shares will be held by

U.S. individuals, institutions or funds.

Your BNSF Board of Directors unanimously

believes this transaction is in the best interests

of our shareholders, employees, customers and

shippers. We plan to file our application with the

Surface Transportation Board (STB) soon and we

plan to hold a special shareholders meeting to

approve this transaction in the near future. Upon

STB approval, which we anticipate in the second

half of 2001, we will be uniquely positioned to

expand our business and improve profitability.

In closing, I want to thank all of those people

who have been involved with our success: our

shippers for giving us the opportunity to provide

them with transportation services at record vol-

umes; our employees for seeing that the service

we provide is meeting our customers’ expecta-

tions; and our owners for supporting our efforts

to become the number one performer in our

industry. We expect our record-setting perform-

ance to continue—and our combination with CN

will only make us better!

Robert D. Krebs

Chairman and

Chief Executive Officer

March 6, 2000

ROBERT D. KREBSChairman and Chief Executive Officer, Burlington Northern Santa Fe Corporation



BNSF made significant strides in service in 1999, in line with our Vision “to realize the tremen-

dous potential” of BNSF by “providing transportation services that consistently meet our

customers’ expectations.” With the combined efforts of a community of more than 40,000

people, we also made progress toward achieving our No. 1 Shared Value: “Listening to customers and

doing what it takes to meet their expectations.” (See BNSF Vision on inside front cover and BNSF Values

on Page 18.) This service commitment was one reason BNSF received transportation awards in the past

year from Honda, Toyota, Shell, Chevron, Dow Chemical, Solvay Polymers, Schneider and Wal-Mart.

Every day, BNSF operates about 1,300 trains across its 33,500 route miles. The challenge of coordi-

nating this traffic with thousands of customer schedules is formidable. BNSF is sharpening its focus on

customers, developing a better understanding of their needs and designing transportation solutions

that not only meet, but exceed, their expectations.

BNSF has implemented various programs to improve on-time performance—from capacity expan-

sion to facility enhancements to new operating strategies. These improvements paid off. BNSF

BNSF’s transcontinental main line is theshortest rail route connecting SouthernCalifornia and Chicago. BNSF moves a widevariety of traffic along this line, led byConsumer Products, including domestic andinternational intermodal traffic.

BNSF’s northern line handles a variety oftraffic, but some of the biggest growth alongthis line in 1999 came with AgriculturalProducts, especially corn shipments thatspiked from August through November.

BNSF’s Pacific north-south corridor,which connects the Pacific Northwestwith Northern and Southern Californiamarkets, saw tremendous volumegrowth in 1999, led by IndustrialProducts, including forest products, metals and chemicals.

BNSF’s line between Wyoming’sPowder River Basin (PRB) and theSoutheast is one of BNSF’s key routes forCoal traffic.

2

1 3

achieved a 91 percent on-time average across all commodities in 1999. In 1999, BNSF also launched

an “Ease of Doing Business” initiative, which focuses on improving communication, simplifying the

marketing of our services, and consistently executing the operating plan for each customer. To empha-

size our commitment to being customer-focused, we introduced a company-wide brand identity in late

1999 with the line, “We Can Move Your World.”™ This commitment will continue to guide our corpo-

rate initiatives in the years ahead.

On the following pages, we’ll profile BNSF’s service achievements for our four commodity groups,

and we’ll look at how capital investments and service strategies on key corridors are benefiting our

customers. These achievements and the dedication to further improvement position BNSF for growth.

Although a grain elevator operator, an auto manufacturer and a chemicals producer operate in differ-

ent markets with different transportation needs, BNSF can bring value to all of them.

42

1

4

3

BNSF’s unified marketing department has four marketing groups—Industrial Products,Coal, Consumer Products and Agricultural Products. This unified structure allows customers to have a single point of contact, even when shipping multiple commodities.It also enables BNSF to consistently implement strategies that respond to customerneeds, enhance communication, and deliver results across all commodities.

Agricultural Productsgrain commodities and bulk food products

Industrial Productschemicals, minerals, metals and forest products

Coal

Consumer Productsintermodal, automotive, beverages, canned goods, perishables and farm products

Tuesday,6:46a.m.

Klamath Falls, Oregon

Portland

Barstow

StocktonKeddie

Bakersfield

Klamath Falls

Spokane

Wishram

Seattle

BNSF saw a 44 percent volume increase in lumber and forestproducts along the I-5 Corridor in 1999 compared with 1998,a 32 percent increase in coiled steel and other metals, and a 76 percent increase in chemicals and petroleum products.

INDUSTRIAL PRODUCTS At 6:46 a.m. on August 10, a BNSF Industrial Products train moved

through the area south of Klamath Falls, Oregon, known as the I-5 Corridor. The train is precisely

on time thanks to expedited handling at BNSF’s Klamath Falls yard and an optimal Transportation

Service Plan created by BNSF’s Service Design and Performance group. BNSF examined all aspects of

the route to ensure truck competitive service for all commodities on this route. The result? By the end of

1999, BNSF saw on-time percentages in the mid 80s on this route and saw volumes increase 50 percent

compared with 1998. Strong market demand for Industrial Products—such as lumber, steel, aluminum,

chemicals and construction-related materials—in Southern California and Arizona created by the region’s

continuing population growth has contributed to the significant opportunities for BNSF along this corridor.


On-Time PerformanceBNSF’s on-time service toIndustrial Products shippersoverall improved to 86 percentin 1999 from 77 percent in1998. BNSF’s Service Designand Performance group, workingwith field operations, continuallyscrutinizes traffic flows betweenvarious origins and destinationsto improve the TransportationService Plan, looking at sched-ules by carload, customer anddestination.

Distribution CentersIn 1999, BNSF’s volume growthfrom northern I-5 origins wasdue largely to customers’ abilityto ship directly on BNSF to dis-tribution centers. These includeBNSF’s Quality DistributionCenter (QDC) in Sparks, Nevada,and distribution centers nearSan Francisco, Los Angeles,and Phoenix, Arizona. In all,BNSF has more than 100 distribution centers on its net-work, handling commodities asdiverse as corn syrup, plasticpellets, paper, roofing tile andstructural steel.

Responsive Equipment PlanningHaving the right equipment avail-able at the right time and in theright markets requires good com-munication and planning. Forinstance, BNSF serves more NorthAmerican timber-producing regionsthan any other railroad, from thePacific Northwest to Minnesota tothe Southeast. To improve the pre-dictability of centerbeam cars forlumber and building materials,BNSF introduced LOGS™ in late1999, the industry’s first LoadingOrigin Guarantee program. LOGS™allows customers to electronicallysecure guaranteed centerbeam carcapacity weeks before shippingand improves the efficiency ofBNSF’s fleet.

Growth on UP/SP MergerCondition LinesBNSF acquired the I-5 Corridorin 1996 as part of the track andtrackage rights agreement as acondition of the UP/SP merger.In all, BNSF acquired 335 milesof track and gained trackagerights on another 3,900 milesthrough the UP/SP agreement.From 1997 through 1999, BNSFincreased average monthly loadson the UP/SP merger conditionlines from 13,450 to 30,994,respectively, an increase of 130 percent.

25,453

30,994

UP/SP Merger Condition LinesBNSF Average Monthly Loaded Units

13,450

1998 19991997

Wednesday,9:20a.m.

Gillette, Wyoming

Distributive PowerIn 1999, BNSF took on a majorinitiative to convert unit coaltrains to distributive power(DP), placing locomotives at the end of the train, remotelycontrolled from the lead loco-motives. DP allows for longer,heavier trains. By the end of1999, approximately 122 coalsets were operated with DPpower, or about 37 percent ofBNSF’s coal sets.


COAL At 9:20 a.m., BNSF’s first unit coal train of the day bound for Palos, Alabama passed

Gillette, Wyoming. In 1999, BNSF initiated service under a new long-term contract with

Southern Company to Plant Miller at Palos, the largest producer of electricity in Alabama

and one of the largest producers in the country. Prior to the exclusive contract, Plant Miller

received eastern coal via truck, barge, and several railroads. The decision was made to switch

to cleaner-burning Powder River Basin (PRB) coal to comply with the Federal Clean Air Act

requirements and take advantage of the low delivered price of PRB coal. BNSF was chosen as

the sole supplier, consistently delivering two to three 135-car trains daily, feeding the plant the

equivalent of 1,420 tons of coal per hour via a six-state, 1,500-mile “conveyor belt.”

Lincoln

Kansas City

SpringfieldMemphis

Birmingham

Palos

GuernseyAlliance

Gillette

More than 90 percent of the coal BNSF hauls comes from the Powder River Basin (PRB) in Wyoming and Montana,which contains the world’s largest single deposit of low-sulfur coal. In 1999, the Coal group extended more than 20 contracts with commitments of nearly 250 million tons over the life of the agreements,which range up to 10 years.

On-Time PerformanceBNSF coal unit trains operated 99.5 percent on-time in 1999,due to close coordinationbetween marketing and opera-tions and BNSF’s investment of $1.2 billion in coal-relatedassets since 1996. Increasedcoal velocity benefits customersduring peak demand and ensurescars are available sooner forreloading. From 1990 to 1999,BNSF increased its coal tonnageby 39 percent to about 236 mil-lion tons, while also improving on-time performance, due toa combination of increased ton-nage per car, increased cars pertrain, and increased velocity.

Coordinated DispatchingIn 1999, BNSF and UP initiatedcoordinated dispatching on thecoal territory, headquartered at BNSF’s Network OperationsCenter in Fort Worth, to managetraffic volumes over a 102-milesegment on the PRB known asthe “joint line.” BNSF and UPhave jointly operated the linesince 1984 and have investedrecord amounts in capacityexpansion. Approximately 120 to 130 trains operate per day on the joint line, making it one of the busiest track segmentsanywhere.

Capacity ExpansionIn 1999, BNSF added about 12 miles of double track on itsNebraska coal route, 18 miles of triple track and six miles ofdouble track at different loca-tions along the Wyoming coalroute. To handle increased coal volumes, the Palos, Alabama,yard was expanded with addi-tional storage tracks. Since1996, BNSF has acquired 444new high-traction AC-poweredlocomotives, which are ideallysuited to coal service, as part of its acquisition of more than1,400 locomotives.

Thursday,5:34p.m.

Los Angeles,California

Galesburg

Chicago

Kansas City

AmarilloBelen

NeedlesBarstow

San Bernardino Long Beach

LosAngeles Albuquerque

BNSF has the rail industry’s shortest routebetween Chicago and Southern California(2,214 miles to Los Angeles). More than 85percent of the Chicago to Southern Californiaroute is now double track, which helpsimprove traffic flows and velocity.


CONSUMER PRODUCTS At 5:34 p.m., BNSF was on its way to another record-breaking day

at its Los Angeles intermodal facility. This facility, which handles more container and trailer

volume than any other facility in the nation, continued to break daily lift records in 1999. In

fact, on December 11, it set a daily record of 3,888 lifts, or 2.7 lifts per minute. And the volume was

handled efficiently. BNSF’s capacity investments helped, including $42 million for parking and track

expansion projects at the Los Angeles facility in 1998 and 1999. BNSF also redesigned its checkpoints

and sped up processing at the ports of Los Angeles and Long Beach. The regional dispatching center

at San Bernardino, California, which opened in May 1999, enabled BNSF and Union Pacific to better

manage the heavy train volumes that operate through Southern and Northern California.

On-Time PerformanceBNSF’s on-time performance to Consumer Products shippersin 1999 averaged nearly 90 percent overall, and averaged95 percent for BNSF’s mostservice-sensitive intermodalcustomers. This was a signifi-cant increase over the previousyear’s performance, thanks to capacity investments, betterservice plans, increased ter-minal efficiency, and othervelocity improvements.

Automotive GrowthIn 1999, the automotive groupsaw increases in volume andrevenue per unit. This reflecteda record-breaking year for theoverall North American vehiclemarket, as well as BNSF marketshare gains due to GeneralMotors’ strength, increased Fordbusiness and improved length ofhaul. BNSF innovations includeddevelopment of a “mixing cen-ter” type of operation for Ford at Naperville, Illinois, for PacificNorthwest traffic and introduc-tion of the Automax railcar withsubstantially more capacity totransport top-selling SUVs.

Ice Cold ExpressIn June, BNSF introduced IceCold Express, a truck-competi-tive alternative for fast, reliable,temperature-controlled trans-portation. The train featuresRoadRailer™ equipment forsuperior ride quality and satellitetechnology for real-time statusreports. The weekly service hasbeen so successful in convertingformerly over-the-road traffic tothe railroad that BNSF will soondouble its volume by addinganother dedicated train betweenSouthern California and Chicago.

Intermodal NetworksIn 1999, BNSF formed an alliancewith Wal-Mart, the nation’slargest retailer, to handle theirfreight across our entire trans-portation network. In 1999, Wal-Mart named BNSF its railcarrier of the year. BNSF alsohas a long-standing alliancewith UPS, the world’s largestpackage delivery company. Trainschedules are designed to meettight sorting windows at UPSfacilities across the nation.

Friday,9:48p.m.

Hemingford, Nebraska

TacomaHavre

WhitefishMinot

FargoGrand Forks

Sioux Falls

Spokane

Seattle

Hemingford

VancouverBNSF is the largest grain-hauling railroad in the United States. In 1999, BNSF transported 700,000 carloads of agricultural commodities, more than half of which were corn and wheat movements. The northern corridor handled much of the growth in 1999, including export shipments destined for the ports at Tacoma, Seattle, and Vancouver, Washington.


On-Time PerformanceBNSF’s grain and agriculturalproducts on-time performancewas 88 percent in 1999, improvedfrom 79 percent in 1998.

Shuttle TrainsDuring peak periods in 1999,BNSF operated 30 grain shuttletrains, using dedicated equip-ment and locomotives. A 110-car shuttle can load 440,000bushels of grain in 15 hours andcan unload the same volume atdestination in 15 hours. Coveredhoppers in a shuttle, on average,are two to three times more pro-ductive than those in conven-tional service. This improvesequipment utilization and avail-ability, enhancing BNSF’s abilityto meet customer needs.

Equipment, Track and Facility CapacityIn 1998, BNSF announced theacquisition of 6,000 high capacitygrain cars, 2,000 per year in1998, 1999 and 2000. From1996 to 1999, BNSF customersinvested more than $330 mil-lion in their own expansion programs, increasing storagecapacity and speed at their on-line elevators and loadingtracks to accommodate 110-car shuttle trains.

Grain DeskTo coordinate the efficientmovement of grain equipmentand locomotives, as well as toexpedite customer notification,BNSF trainmasters and otherfield personnel are in frequentcontact with the grain desk inthe Network Operations Center(NOC) in Fort Worth. The graindesk, which was expanded in1999 with additional personneland a customized computerapplication, operates around-the-clock, every day of the year.BNSF has comparable commod-ity desks to coordinate coal,intermodal/automotive, andmerchandise shipments.

AGRICULTURAL PRODUCTS At 9:48 p.m. near Hemingford, Nebraska, BNSF started move-

ment of another wheat shuttle train destined for the Pacific Northwest. BNSF handled an average

of 2000 carloads of grain per day from August through November. That was about 300 more

cars per day than BNSF loaded in the same months in 1998. How did BNSF handle these volumes?

For one, increased use of shuttle trains and investment in higher-capacity covered hoppers enabled

BNSF and customers to load and unload greater volumes more quickly. In addition, closer coordination

between marketing, field operations, and the grain desk in the Network Operations Center, as well as

tailored service plans by Service Design and Performance, enabled BNSF to move enormous amounts of

grain while minimizing supply/demand imbalances that in earlier years might have led to car shortages.

Style

As a Community,

we are:

•Tough-minded optimists

•Decisive yet thorough

•Open and supportive,

and

•Confident and proud of

our success

Shared Values

As a Community, BNSF

values:

•Listening to customers

and doing what it takes

to meet their expectations

•Empowering employees

and showing concern for

their well-being, and

respect for their talent

and achievements

•Continuously improving

by striving to do the right

thing safely and efficiently

•Celebrating our rich

heritage and building on

our success as we shape

our promising future

Community

BNSF is a Community

of over 40,000 mutually

dependent members. Each

one of us depends upon

BNSF for our livelihood,

and through our collective

efforts, BNSF depends

upon us to defend, sus-

tain and strengthen

our Community.

We are an effective

Community when each

of us:

•Believes in our Vision

and embraces our

Shared Values

•Knows our own role and

strives to fulfill it

•Respects, trusts and

openly communicates

with other Community

members

•Is proud of our heritage

and confident in our

future

Liberty

As a member of the

BNSF Community, each

of us has the right to:

•A safe work

environment—for the

sake of ourselves, our

co-workers, our shippers

and the communities

we serve

•Feel the satisfaction that

comes from a job well

done—by using our

talent, judgment and

initiative, and by

performing

to our fullest potential

•Express our individual-

ism, ideas and concerns—

consistent with the

Community’s Vision and

Shared Values, to anyone

in the Community with-

out fear of retribution

•Participate fully in life

outside of work—by

enjoying the fruits of

our own labor

Equality

As a member of the

BNSF Community, I can

expect:

•To be treated with dignity

and respect

•To be given equal access to

tools, training and devel-

opment opportunities

•To have equal oppor-

tunity to achieve my full

potential

Efficiency

Efficiency is the best

collective application of

our resources to meet our

customers’ expectations.

Each of us contributes to

efficiency when we:

•Understand our cus-

tomers’ expectations

and priorities

•Help develop business

processes that best

match BNSF resources

with our customers’

requirements

•Constantly monitor and

measure our results in

order to continuously

improve

•Manage our Community’s

resources as if they were

our own

BNSF’s Values


Financial Contents19 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

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 TheBurlington Northern and Santa Fe Railway Company (BNSF Railway). All earnings per share information is stated on a diluted basis.Results of OperationsYear Ended December 31,1999 Compared WithYear Ended December 31,1998Earnings per share increased to $2.44 per share for 1999from $2.43 per share for 1998 although net income wasslightly lower for 1999 at $1,137 million compared with 1998net income of $1,155 million. The slight decrease in netincome is primarily due to a 1998 gain of $67 million on thesale of substantially all of the Company’s interest in Santa FePacific Pipeline Partners, L.P., along with 1998 gains on realestate portfolio sales and higher interest expense in 1999incurred on borrowings to fund the repurchase of 22 millionshares of BNSF common stock, as compared to 5 millionshares in 1998, and increased 1999 environmental expenses.These decreases in net income were partially offset byincreased operating revenues in 1999 due to volume gainsin most sectors.

RevenuesTotal revenues for 1999 were $9,100 million or 2 percenthigher compared with revenues of $8,941 million for 1998.The $159 million increase primarily reflects increases in theintermodal, agricultural commodities and automotive sectors,partially offset by lower carload and coal revenues. Averagerevenue per car/unit decreased slightly in 1999 to $1,125from $1,132 in 1998. During 1999, BNSF’s share of theWestern United States rail traffic market, based on reportingto the Association of American Railroads (AAR), decreased0.8 points to 43.5 percent. This decrease in market share wasprimarily due to Union Pacific Corporation (UP) regaining market share as a result of its recovery from operating diffi-culties experienced in the prior year.

Carload revenues, which include revenues from thechemicals, forest products, metals, minerals and machinery,perishable and dry boxcar sectors, of $2,553 million for1999 were $35 million or 1 percent lower than 1998 due to decreases in the chemicals, minerals and machinery, andmetals sectors, partially offset by increased forest productrevenues. The decreases were a result of weaknesses in thechemicals sector due to soft fertilizer markets, weaknesses in the metals sector due to increased steel imports, and adecrease in dedicated train movements of heavy machinery.These decreases were partially offset by increased inlandshipments of forest products.

Revenue TableThe following table presents BNSF’s revenue information by commodity for the years ended December 31, 1999, 1998 and1997 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( I N M I L L I O N S ) ( I N T H O U S A N D S )

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


Intermodal revenues of $2,518 million improved $81 mil-lion or 3 percent compared with 1998 reflecting increases inthe direct marketing, international and truckload sectors, par-tially offset by decreases in the intermodal marketing compa-nies (IMC) sector. Direct marketing revenues benefited fromyear over year growth of units shipped for UPS and Roadway.International revenues were up due to market share gains andnew business with Sealand, NYK, Maersk and K-Line.Truckload revenues were driven primarily by year over yeargrowth in J.B. Hunt, Swift and Triple Crown loadings. Theserevenue increases were partially offset by decreases in theIMC sector due to UP pricing pressures, an overall softeningin the IMC market, and increased trucking capacity.

Coal revenues of $2,227 million for 1999 decreased $12million or less than 1 percent, as a result of a decrease in aver-age revenue per car due to a decline in coal shipping rates oncontracts renewed beginning in late 1998 at the lower1998and 1999 market based rates.Operating difficulties early in theyear at the Powder River Basin mines and a decrease in thedemand for coal due to milder weather for most of the yearalso contributed to the year over year decrease.

Agricultural commodities revenues of $1,329 million for1999 were $58 million or 5 percent higher than 1998 dueprimarily to increased demand for soybean exports and cornfrom the Midwest that moved to the Pacific Northwest forexport. The increase in soybean revenue was fueled byfavorable pricing and an increased supply of soybeans thatwas sufficient to meet the higher demand. Increases in vol-ume were slightly offset by lower wheat revenue per car andfewer soybean oil shipments in 1999 compared to 1998.

Automotive revenues of $443 million for 1999 were $53million or 14 percent higher than 1998 reflecting growth invehicle shipments due to both a record year of new vehicleproduction coupled with an increase in revenue per unit as aresult of a favorable change in the mix of vehicles transported.

ExpensesTotal operating expenses for 1999 were $6,895 million, an increase of $112 million or 2 percent, compared withoperating expenses for 1998 of $6,783 million.

Compensation and benefits expenses of $2,772 millionwere $40 million or 1 percent lower than 1998 primarily dueto lower employment levels due in part to the second quar-ter 1999 reorganization, as discussed in Other Matters:Employee Merger and Separation Costs, partially offset byincreased wage rates.

Purchased services of $946 million for 1999 were $52million or 6 percent higher than 1998 due primarily toincreased 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 lowerintermodal equipment costs due to a reduction in time and mileage, and trailer and container expenses. Loweragricultural leased car expense due to improved cycle times also contributed to the decrease.

Fuel expenses of $700 million for 1999 were $21 millionor 3 percent lower than 1998, as a result of a 3 cent or 6percent decrease in the average all-in cost per gallon ofdiesel fuel, partially offset by a 3 percent volume drivenincrease in consumption from 1,155 million gallons to 1,187million gallons. The average all-in cost per gallon of dieselfuel decreased year over year due to current year fuelhedge losses of 1 cent per gallon compared to 7 cents pergallon 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 1998principally reflecting higher environmental, personal injuryand property and other tax expenses.

As discussed in Other Matters: Employee Merger andSeparation Costs, reorganization costs of $48 million wereincurred during the second quarter of 1999 for severance,pension, medical and other benefit costs for approximately325 involuntarily terminated salaried employees that werepart of a reorganization program announced in May 1999 toreduce operating expenses. In addition, the Company alsoreversed during the second quarter certain merger sever-ance liabilities of $54 million associated with the Company’sclerical consolidation plan. These liabilities related toplanned work-force reductions which were no longer need-ed due to the Company’s ability to utilize a series of jobswaps between certain locations to achieve the advantagesof 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 increasedto $5,813 million at December 31, 1999, from $5,456 millionat December 31, 1998.

Other income (expense), net was unfavorable by $44 million compared to 1998 primarily due to the $67 milliongain on the sale of substantially all of the Company’s interestin Santa Fe Pacific Pipeline Partners, L.P. in 1998 and gainsof $26 million from the sale of a real estate portfolio in1998. 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 WithYear Ended December 31, 1997BNSF recorded net income for 1998 of $1,155 million ($2.43 per share), compared with net income of $885 million ($1.88 per share) for 1997 principally reflectingincreased revenues in intermodal, coal and other sectors.More moderate winter weather in the first quarter of 1998relative to 1997, gains on 1998 real estate portfolio salesand a 1998 $67 million gain on the sale of substantially all of the Company’s interest in Santa Fe Pacific PipelinePartners, L.P. also contributed to the improvement.Additionally, 1997 included a $90 million pre-tax specialcharge ($57 million after-tax or $0.12 per share) principallyrelated to the consolidation of clerical functions (see Other Matters: Employee Merger and Separation Costs).


RevenuesTotal revenues for 1998 were $8,941 million or 7 percenthigher compared with revenues of $8,370 million for 1997. The $571 million increase primarily reflectsincreases in the carload, intermodal, coal and agriculturalcommodities sectors partially offset by lower automotiverevenues. Average revenue per car/unit decreasedslightly in 1998 to $1,132 from $1,139 in 1997. During1998, 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 UPand operating problems experienced by UP associatedwith consolidating operations.

Carload revenues of $2,588 for 1998 were $106 million or 4 percent higher than 1997 due to increases in the chemi-cals, forest products, minerals and machinery, and metalssectors, partially offset by a decrease in dry boxcar revenues.Chemicals revenues increased due to strength in industrialchemicals, petroleum products and plastics. Forest productsrevenues increased due to printing paper and pulpboardvolume gains, increased Canadian newsprint imports, andincreased lumber volumes due to higher levels of constructionactivity. Minerals and machinery revenues increased primari-ly due to volume increases in cement and specialty mineralsand increased heavy machinery traffic. Metals revenuesincreased due to strength in aluminum and non-ferrousmaterials as well as volume increases in steel products.

Intermodal revenues of $2,437 million improved $194million or 9 percent compared with 1998 reflecting increasesin the direct marketing, international and truckload sectors.Direct marketing revenues benefited from increased unitsshipped for UPS, less than truckload customers and theUnited States Postal Service. International revenues were updue to volume increases associated with market share gainsand new business established with Sealand, NYK, Maerskand K-Line. Truckload revenues increased due to volumegrowth 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 moremoderate winter in 1998.

Agricultural commodities revenues of $1,271 million for 1998 were $23 million or 2 percent higher than 1997primarily due to increased corn syrup loadings and therecovery of sugar traffic which was hampered in 1997 due to poor weather conditions. This increase was partiallyoffset by poor Pacific Northwest corn and soybeans exportsas well as a record breaking year in 1997 of barley exports.

Automotive revenues of $390 million for 1998 were $32million or 8 percent lower than 1997 reflecting decreases in volumes due to the loss of Ford’s southwestern UnitedStates business and the impact of the General Motors strike,partially offset by strong Honda loadings.

ExpensesTotal operating expenses for 1998 were $6,783 million, an increase of $180 million or 3 percent, compared withoperating 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 millionwere $137 million or 5 percent higher than 1997. Wageswere higher due to volume related increases primarily intrain crew costs, 1998 wage increases to both salaried andunion employees, and increased incentive compensationexpense. These increases were partially offset by lower laborcosts 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 $71million or 9 percent higher than 1997 due principally tohigher joint facility costs from increased operations overtrackage rights obtained from UP, increased equipmentmaintenance costs, and higher ramping costs related toincreased intermodal volumes.

Equipment rents expenses of $804 million were $16 million or 2 percent lower than 1997. Improved equipmentutilization and lower equipment related performance penalties for grain were partially offset by volume drivenincreases for leased coal cars and locomotives.

Fuel expenses of $721 million for 1998 were $26 millionor 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 drivenincrease in consumption from 1,092 million gallons to 1,155million 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 lossesrelated 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 1998were $45 million or 7 percent higher than 1997 principallydue to lower credits from joint facility billings due to lowerUP traffic levels on BNSF facilities. Additionally, otherexpenses in 1997 included more income from the sale ofeasements and tax incentives from the State of Nebraskarelated 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 millionat December 31, 1997, partially offset by lower interest rates.

Other income (expense), net was favorable $64 millioncompared to 1997 primarily due to the $67 million gain onthe sale of substantially all of the Company’s interest in SantaFe Pacific Pipeline Partners, L.P. Additionally, lower equity inearnings of the pipeline partnership due to the first quarter1998 sale of this investment was offset by gains of $26 mil-lion on real estate portfolio sales.


Liquidity and Capital Resources

C ash generated from operations is BNSF’s principalsource of liquidity. BNSF generally funds any addi-tional liquidity requirements through debt issuance,

including commercial paper, or leasing of assets.During 1999, BNSF generated free cash flow after divi-

dends paid (cash flow from operating activities less capitalexpenditures and other investing activities and dividendspaid) for the first time since the 1995 merger. Free cash flowafter dividends paid was $260 million in 1999, an improve-ment of $657 from the free cash flow deficit of $397 million in1998. This increase was due primarily to reduced capitalspending and increased cash flow from operating activities.

Operating ActivitiesNet cash provided by operating activities was $2,424 millionduring 1999 compared with $2,218 million during 1998.The increase in cash from operations was primarily due toan increase in cash provided by changes in working capital,principally accounts receivable, and a decrease in cashused for other net-operating activities primarily due to lowertax and personal injury payments.

Investing ActivitiesNet cash used for investing activities during 1999 was$1,940 million, principally comprised of $1,788 million incapital 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 $ 958Mechanical 240 243 198Information services 74 76 38Other 114 104 83

Total maintenance of business 1,289 1,320 1,277New locomotives and freight cars 261 340 374Terminal and line expansion 233 487 428Other 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 primarilydue to the installation of fewer concrete ties. Cash used fornew locomotives was lower in 1999 reflecting a decrease inthe number of locomotives purchased. Terminal and line expan-sion projects principally reflect double and triple tracking ofmain line track and capacity expansion of terminals. Terminaland line expansion expenditures for 1999 decreased due tofewer line expansion projects in 1999 compared to 1998.

BNSF has entered into commitments to acquire 196 and50 locomotives in 2000 and 2001, respectively. The locomo-tives will be financed from one or a combination of sourcesincluding, 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 ActivitiesNet cash used for financing activities during 1999 was $487 million, primarily related to share repurchases of $688million and dividend payments of $224 million partially offset by net debt borrowings of $363 million and proceedsfrom stock options exercised of $121 million.

In February 1999, the Company filed a new shelf registra-tion statement that became effective in March 1999 for theissuance of debt securities, including medium-term notes,which may be issued in one or more series at an aggregateoffering price not to exceed $750 million. Additionally, inFebruary 1999, prior to the effective date of the new shelfregistration, the Company amended its March 1998 shelf reg-istration to combine it with the February 1999 shelf registration.Subsequently, the Company had $1.1 billion of borrowingcapacity available under its shelf registration statement.

In March 1999, BNSF issued $200 million of 6.1 percentnotes due March 2009 and $200 million of 6.8 percentdebentures due March 2029 under the February 1999 shelfregistration statement.The net proceeds were used for generalcorporate purposes including the repayment of commercialpaper. At the time of issuing the $200 million of 6.1 percentnotes 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 millionof the Company’s puttable reset debentures due 2029 exercised the call option. As a result, on May 13, 1999, theholder repurchased the debentures which were subsequentlyresold to investors. The interest rate on the debentures wasreset to a fixed interest rate of 7.1 percent. The Company did not receive any proceeds from the resale of these deben-tures; however, the resale of these debentures, along with the $400 million of debt securities issued in March, reducedthe amount available for borrowing under the Company’sFebruary 1999 shelf registration statement to $500 million.

During 1999, BNSF Railway entered into equipmentobligations totaling $212 million payable from 2000 to 2016with interest rates ranging from 5.4 percent to 7.0 percentand $60 million of capital lease obligations payable from2000 to 2016. The capital lease and $137 million of equip-ment obligations relate to financing transactions involvingGerman investors. In order to comply with the terms of thecapital lease and the associated foreign regulations, BNSFRailway simultaneously deposited $60 million with a Germanbank and pledged this amount as an irrevocable securitydeposit to be used to pay the capital lease obligations. Thecapital lease obligation is classified as Long-Term Debt andthe security deposit is classified as an Other Asset in theconsolidated balance sheet.

Aggregate long-term debt scheduled to mature in 2000 is $158 million, excluding $100 million of 6.1 percent notesdue 2027 for which BNSF received notice from the holdersthat they will exercise a put option on the notes in February2000. BNSF’s ratio of total debt to total capital was 41.6 per-


cent at the end of 1999, 41.2 percent at the end of 1998,and 43.7 percent at the end of 1997.Credit AgreementsBNSF issues commercial paper from time to time which issupported by bank revolving credit agreements. Outstandingcommercial paper balances are considered as reducing the amount of borrowings available under these agreements.The bank revolving credit agreements which were renewedand extended effective June 28, 1999, allow borrowings of up to $750 million on a short-term basis and $750 millionon a long-term basis. Annual facility fees are currently 0.10percent and 0.125 percent, respectively, and are subject tochange based upon changes in BNSF’s senior unsecureddebt 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 lendersunder the short-term agreement are scheduled to expire in June 2000. The commitments of the lenders under thelong-term agreement are scheduled to expire in June 2004.

At December 31, 1999, there were no borrowings againstthe long-term revolving credit agreement and the maturityvalue of commercial paper outstanding was $477 million,leaving a total remaining capacity of $1,023 million avail-able under the revolving credit agreements. BNSF mustmaintain compliance with certain financial covenants underits revolving credit agreements and at December 31, 1999,the Company was in compliance.

Common Stock Repurchase ProgramIn July 1997, the Board of Directors of BNSF authorized therepurchase of up to 30 million shares of the Company’scommon stock from time to time in the open market. InDecember 1999, the Board of Directors extended the repur-chase program by approving an additional 30 million shares.During 1999 and 1998, the Company repurchased approxi-mately 22 million and 5 million shares, respectively, of itscommon stock at an average price of $31.08 per share and$30.75 per share, respectively. There were no repurchasesunder this program in 1997. Total repurchases throughFebruary 4, 2000, were approximately 33 million shares at atotal average cost of $29.86 per share, leaving 27 millionshares available for repurchase under the authorization.

In connection with its share repurchase program, during1998, BNSF sold equity put options for 3 million shares of the Company’s common stock to an independent thirdparty and received cash proceeds of $2.2 million. Theseoptions expired unexercised. In April 1999, BNSF sold equityput options for 100 thousand shares of common stock to anindependent third party and received cash proceeds of $135thousand. The third party exercised the options on October12, 1999, which resulted in the Company purchasing 100thousand shares of its common stock at $29 per share.

An equity put option is a financial instrument wherebyBNSF receives an upfront cash premium for granting anoth-er party the option to sell a defined number of BNSF sharesto the Company at a fixed price on a specified future date.

The Company considers the sale of equity put options as amethod to acquire its common stock at a share price consis-tent with its share repurchase strategy and potentiallyreduce the all-in cost of the program. The Company's risk isthat it may be required to purchase shares at a specifiedprice that is higher than the common stock price at the exer-cise date of the equity put option. The Company has theability to settle its equity put option transactions on a netshare or net cash basis and accounts for the effects of thesetransactions within stockholders' equity. The number of sharessubject to outstanding put options sold by the Company can-not exceed the amount of remaining shares the Board ofDirectors has authorized for repurchase. As of February 4,2000 there were no equity put options outstanding. Common Stock SplitOn July 16, 1998, the Board of Directors approved a three-for-one common stock split which was effected in the form ofa stock dividend of two additional shares of BNSF commonstock payable for each share outstanding or held in treasuryon September 1, 1998, to stockholders of record on August17, 1998. All equity-based benefit plans reflect the issuanceof additional shares or options due to the declaration of thestock split. All share and per share data were restated toreflect the stock split.

DividendsCommon stock dividends declared were $0.48, $0.44 and$0.40 per share annually for 1999, 1998 and 1997, respec-tively. 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 Directorsdeclared a quarterly dividend of 12 cents per share upon itsoutstanding shares of common stock, $.01 par value, payableApril 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 1998third quarter dividend which was paid on October 1, 1998.Other MattersProposed Combination With Canadian National Railway CompanyOn December 18, 1999, BNSF and Canadian NationalRailway Company (CN) entered into a CombinationAgreement, as amended, providing for the combination of the two companies (the Combination). To comply withCanadian legal requirements that, among other things, pro-hibit any person and that person’s associates from holdingmore than 15 percent of the voting rights in CN, whileensuring that the combination will be tax-efficient for eachcompany’s shareholders, the combined enterprise will con-sist of two public companies: North American Railways, Inc.(North American Railways) and CN. Upon completion of thecombination, North American Railways will be the parentcompany of BNSF and will own all of the limited votingequity shares of CN. All shareholders will have voting inter-ests in both North American Railways and CN and econom-ic interests in the combined companies.


In the Combination, BNSF shareholders will receive oneshare of North American Railways common stock and oneCN voting share for each BNSF share. Additionally, CNshareholders will receive, for each CN common share, 1.05CN voting shares and either 1.05 shares of North AmericanRailways common stock or 1.05 CN exchangeable shares.The CN exchangeable shares will be exchangeable at anytime on a one-for-one basis for shares of North AmericanRailways common stock. CN shareholders who elect toreceive the CN exchangeable shares will also receive theright to vote on matters submitted to North American Railwaysshareholders in proportion to their economic interest in thecombined companies. Dividends paid on the North AmericanRailways common stock and the CN exchangeable shareswill be equivalent. Any shares of BNSF common stock ownedby BNSF or any of its subsidiaries as treasury stock will beautomatically canceled and cease to exist.

Each share of North American Railways common stockwill 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 asingle security. In addition, CN will issue to North AmericanRailways limited voting equity shares carrying 10.1 percentof 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 basewith each public shareholder effectively having the sameeconomic 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 UnitedStates Surface Transportation Board (STB). North AmericanRailways, 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 ownmore than 15 percent of North American Railways’ votingshares. The companies currently expect that all requiredregulatory approvals can be obtained and the transactionconsummated by mid-2001. Shareholders of both CN andBNSF are expected to vote on the proposed Combinationduring the second quarter of 2000.

Upon consummation, the Combination will be accountedfor by North American Railways pursuant to the purchasemethod of accounting in accordance with AccountingPrinciples 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 ofNorth American Railways’ common stock issued or issuableto the CN shareholders will be allocated to the assets and liabilities of CN based on fair value. CN’s results ofoperations will be included with North American Railwaysfrom the date the transaction is consummated. Based on thecurrent agreement, the fair value of North American

Railways’ common stock will be based on a $25.63 pershare fair value of BNSF common stock which was deter-mined using the average of the closing daily BNSF commonstock prices as reported by The Wall Street Journal for thetwo days preceding, the day of, and the two days followingthe December 20, 1999 announcement of the Combination.

Under the Combination Agreement, as amended, BNSFis required to pay a cash termination fee of $450 million toCN if the Combination is terminated as a result of any of thefollowing: i) another party has made a proposal for analternative transaction and the Company’s shareholders donot approve the Combination; ii) CN elects to terminate theCombination because BNSF’s Board of Directors changed itspreviously favorable recommendation of the Combination toits shareholders or iii) BNSF breaches certain obligationsnot to solicit or respond to alternative transaction proposals.CN is obligated to pay a cash termination fee of $200 mil-lion to BNSF if the Combination is terminated as a result ofactions similar to those above that are caused by CN.

Pursuant to the Combination Agreement, as amended, CNand BNSF entered into reciprocal stock option agreements.Each company’s option is exercisable by the other companyunder the same circumstances in which that party is entitled toreceive the $450 million or $200 million termination fee, asapplicable, referred to above. The option agreement allowsBNSF and CN to purchase, in the case of BNSF, approximately29 million CN common shares and, in the case of CN, approx-imately 65 million shares of BNSF common stock. The num-ber of shares subject to the stock options will be adjusted ineach case so that the number of shares issued will always beequal to, but not exceed, 12.5 percent of the outstanding com-mon shares of the option issuer after giving effect to theissuance of shares under the option. The exercise price of theoption is, in each case, the average of the closing price of theoption issuer’s common stock on the New York Stock Exchangeon the five trading days preceding the date of notice of exer-cise multiplied by the number of shares to be issued.

Additionally, BNSF is required to pay a cash terminationfee of $300 million to CN if BNSF terminates the Combina-tion because of conditions imposed by the STB that BNSFbelieves would significantly and adversely affect the benefitsof the Combination, and CN is willing to complete theCombination 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 conditionsand BNSF is willing to complete the Combination.Casualty and EnvironmentalPersonal injury claims, including work-related injuries to employees, are a significant expense for the railroadindustry. Employees of BNSF are compensated for work-related injuries according to the provisions of the FederalEmployers’ Liability Act (FELA). FELA’s system of requiringthe finding of fault, coupled with unscheduled awards and reliance on the jury system, contributed to significantincreases in expense in past years. BNSF has implemented a number of safety programs to reduce the number of


personal injuries as well as the associated claims and per-sonal injury expense. BNSF made payments for personalinjuries 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 asthose of its competitors, are subject to extensive federal,state and local environmental regulation. BNSF’s operatingprocedures include practices to protect the environmentfrom the environmental risks inherent in railroad operations,which frequently involve transporting chemicals and otherhazardous materials. Additionally, many of BNSF’s land hold-ings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial com-panies whose activities may have resulted in discharges ontothe property. As a result, BNSF is subject to environmentalclean-up and enforcement actions. In particular, the FederalComprehensive Environmental Response, Compensationand Liability Act of 1980, also known as the “Superfund” law, as well as similar state laws generally impose joint andseveral liability for clean-up and enforcement costs withoutregard 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 effortsat approximately 400 sites, including the Superfund sites, at which it is being asked to participate in the study orclean-up, or both, of alleged environmental contamination.BNSF paid approximately $67 million, $64 million and $55 million during 1999, 1998 and 1997, respectively, formandatory clean-up efforts, including amounts expendedunder federal and state voluntary clean-up programs.During 1999, the Company experienced significant devel-opments at certain existing sites primarily related to newinformation on the extent of contamination and other relateddevelopments that led the Company to increase its recordedliabilities for remediation and restoration of all known sitesto approximately $232 million at December 31, 1999 from$185 million at December 31, 1998. BNSF anticipates thatthe majority of the accrued costs at December 31, 1999 will be paid over the next five years. No individual site isconsidered to be material.

Liabilities recorded for environmental costs representBNSF’s best estimates for remediation and restoration ofthese sites and include both asserted and unasserted claims.Unasserted claims are not considered to be a material component of the liability. Although recorded liabilitiesinclude BNSF’s best estimates of all costs, without reductionfor anticipated recoveries from third parties, BNSF’s totalclean-up costs at these sites cannot be predicted with cer-tainty due to various factors such as the extent of correctiveactions that may be required, evolving environmental lawsand regulations, advances in environmental technology, theextent of other parties’ participation in clean-up efforts, devel-opments in ongoing environmental analyses related to sitesdetermined to be contaminated, and developments in envi-

ronmental surveys and studies of potentially contaminatedsites. As a result, future charges to income for environmentalliabilities could have a significant effect on results of opera-tions in a particular quarter or fiscal year as individual sitestudies and remediation and restoration efforts proceed or as new sites arise. However, management believes that it isunlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on BNSF’sconsolidated financial position or liquidity.Other Claims and LitigationBNSF and its subsidiaries are parties to a number of legalactions and claims, various governmental proceedings andprivate civil suits arising in the ordinary course of business,including those related to environmental matters and personalinjury claims. While the final outcome of these items cannotbe predicted with certainty, considering among other thingsthe meritorious legal defenses available, it is the opinion ofmanagement that none of these items, when finally resolved,will have a material adverse effect on the annual results ofoperations, financial position or liquidity of BNSF, although an adverse resolution of a number of these items could havea material adverse effect on the results of operations in aparticular quarter or fiscal year.Employee Merger and Separation CostsCurrent and long-term employee merger and separation lia-bilities totaling $356 million and $474 million are includedin the consolidated balance sheet at December 31, 1999and 1998, respectively, and principally represent: (i) employee-related severance costs for the consolidation ofclerical functions; (ii) deferred benefits payable upon sepa-ration or retirement to certain active conductors, trainmenand locomotive engineers; and (iii) certain non-unionemployee severance costs.

Liabilities related to the consolidation of clerical functions(the Consolidation Plan) were $119 million and $211 millionat December 31, 1999 and 1998, respectively. These liabilities provide for severance costs associated with theConsolidation Plan adopted in 1995 upon consummation of the merger of BNSF’s predecessor companies BurlingtonNorthern Inc. and Santa Fe Pacific Corporation (the Merger).The Consolidation Plan resulted in the elimination ofapproximately 1,500 permanent positions and was substan-tially completed during 1999. Additionally, in 1999 theCompany recorded a $54 million credit for the reversal of certain liabilities associated with the Consolidation Plan.These liabilities related to planned work-force reductionsthat 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 affectedemployees who did not receive lump-sum payments, butinstead will be paid over five to ten years or in some casesthrough retirement.

Liabilities related to deferred benefits payable upon


separation or retirement to certain active conductors, trainmenand locomotive engineers were $193 million and $207 millionat December 31, 1999 and 1998, respectively. These costswere incurred in connection with labor agreements reachedprior to the Merger which, among other things, reduced traincrew sizes and allowed for more flexible work rules.

In the second quarter of 1999, the Company incurred $48million of reorganization costs for severance, pension, medicaland other benefit costs for approximately 325 involuntarilyterminated non-union employees that were part of the programannounced in May 1999 that sought to reduce operatingexpenses by eliminating approximately 400 non-union and1,000 union positions through severances, normal attritionand the elimination of contractors. Components of the chargeinclude approximately $29 million relating to severance costsfor non-union employees, approximately $16 million for spe-cial termination benefits to be received under the Company’sretirement and medical plans, and approximately $3 millionof costs incurred for relocating approximately 60 non-unionemployees as a result of the reorganization. Substantially allof the planned reductions were made by September 30, 1999.No significant costs were incurred as a result of eliminating the1,000 union positions. Total annual savings of compensationand benefits related to the May 1999 reorganization areexpected to approximate $100 million.

Liabilities principally related to certain remaining non-union employee severances resulting from the Merger andfrom the May 1999 reorganization were $44 million and $56million at December 31, 1999 and 1998, respectively. Thesecosts will be paid over the next several years based ondeferral elections made by the employee. Approximately1,825 non-union employees received or are receiving severance payments and special termination benefits underthe Company’s retirement and health and welfare plansresulting from the Merger and the May 1999 reorganizationprogram discussed above.

During 1999, 1998 and 1997, BNSF made employeemerger and separation payments of $93 million, $77 millionand $116 million, respectively. At December 31, 1999, $54 million of the remaining liabilities are included withincurrent 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 addi-tional costs of the Consolidation Plan and the remainder of the charge related to severance and other costs for non-union employees.Year 2000B A C K G R O U N D

The Company established a committee of managers andemployees, chaired by the Company’s Chief InformationOfficer, to evaluate and manage the costs and risks asso-ciated with becoming Year 2000 compliant. Because manyexisting computer programs and microprocessors recognizeonly the last two digits of years (and not the century designa-tion), 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 consider-able 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 beencompleted, and the Company earned a rating in the “very low risk” category from the Federal Railroad Administrationsponsored Year 2000 readiness review of BNSF performedby 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 wascompleted as planned. During the Year 2000 rollover, trainoperations 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 othercomputer systems and applications. The testing and subsequent normal use of the systems and applications to date has uncovered no significant matters affecting theCompany’s safety, train operations, or financial performance. C O S T S

As a result of its merger-related systems integration com-pleted in 1997, BNSF achieved substantial Year 2000 compliance on its core mainframe systems. Additionally,spending on Year 2000 activities approximated $16 millionthrough December 31, 1999, which is consistent with theestimate of total costs of achieving Year 2000 compliancefor the Company. No significant additional spending is anticipated.Y E A R 2 0 0 0 R I S K S A N D C O N T I N G E N C Y P L A N S

To date, Year 2000 has not had a materially adverse effect on the Company’s results of operations, liquidity or financialposition. Additionally, management believes the risk of anysignificant Year 2000 problems related to BNSF’s internalinformation systems and technology infrastructure that couldhave 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 transportationpartners or customers which would adversely affect theoperations, liquidity or financial position of the Company.However, there can be no assurance that all potential internal or external problems related to Year 2000 havebeen identified. Where appropriate, BNSF has developed disaster recovery and contingency plans should currentlyunidentified Year 2000 problems arise.Hedging ActivitiesF U E L

Fuel expense historically approximates 10 percent of totaloperating expenses. Due to the significance of diesel fuelexpense to the operations of BNSF and the historical vola-tility 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 theCompany’s operating margins and overall profitability fromadverse fuel price changes. However, to the extent theCompany hedges portions of its fuel purchases, it will not realize the impact of decreases in fuel prices. The fuelhedging 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 thefuel swaps are deferred and recognized as a component of fuel expense in the period in which the fuel is purchasedand used. Based on 1999 fuel consumption and excludingthe impact of the hedging program, each one-cent increasein the price of fuel would result in approximately $12 millionof 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 averageprice of approximately 50 cents per gallon. The above pricedoes not include taxes, transportation costs, certain otherfuel handling costs, and any differences which may occurfrom time to time between the prices of commodities hedgedand the purchase price of BNSF’s diesel fuel. Currently, thesefuel swaps cover approximately 41 percent, 23 percent, and 8 percent of estimated annual and quarterly fuel purchases for 2000, 2001, and 2002, respectively. Hedgepositions are closely monitored to ensure that they will notexceed actual fuel requirements in any period. Unrecognizedgains from BNSF’s fuel swap transactions were approximately$37 million as of December 31, 1999, of which $33 millionrelates to swap transactions that will expire in 2000. BNSFalso monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance.I N T E R E S T R A T E

From time to time, the Company enters into various interestrate hedging transactions for the purpose of managing expo-sure to fluctuations in interest rates and establishing rates inanticipation of future debt issuances. As of February 4, 2000,BNSF had no interest rate swap instruments in place. Swapstotaling $125 million used to fix the interest rate on commercialpaper debt expired in December 1999. While the swaps wereoutstanding, BNSF recognized, on an accrual basis, a fixedrate of interest on the principal amount of commercial paperhedged over the term of the swap agreements.

In anticipation of future debt issuances, BNSF hasentered into treasury lock transactions totaling $400 million,of which $200 million is based on the 10-year U.S. Treasuryrates and $200 million is based on the 30-year U.S.Treasury rates. The 10-year and 30-year treasury lock trans-actions have average interest rates of approximately 4.6percent and 5.0 percent, respectively, and expire in June2000 and June 2001. These rates do not include a creditspread which would be determined at the time of the actualdebt issuance and included in the all-in interest rate. Thetreasury locks can be closed by BNSF anytime up to expira-tion. Unrecognized gains on the treasury lock transactionswere approximately $62 million as of December 31, 1999.

BNSF monitors its treasury lock positions and the credit rat-ings of its counterparties and does not anticipate losses dueto 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 ofapproximately $18 million. In each case, the gain or loss has been deferred and is being amortized to interestexpense over the life of the debt.LaborLabor unions represent approximately 88 percent of BNSF Railway’s employees under collective bargainingagreements with 13 different labor organizations. The negotiating process for new, major collective bargainingagreements covering all of BNSF Railway’s union employeeshas begun. As during the previous round five years ago,wages, health and welfare benefits, work rules, and otherissues are being addressed through industry-wide nego-tiations. 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 aresult of industry-wide labor contract negotiations remainedin effect on December 31, 1999 and will continue in effect until new agreements are reached or the RailwayLabor Act’s procedures are exhausted. The current agreements provide for periodic wage increases until new agreements are reached.

InflationDue to the capital intensive nature of BNSF’s business, the full effect of inflation is not reflected in operatingexpenses because depreciation is based on historical cost.An assumption that all operating assets were depreciated at current price levels would result in substantially greaterexpense than historically reported amounts.Accounting PronouncementsIn June 1998, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards(SFAS) No. 133 “Accounting for Derivative Instruments andHedging Activities.” BNSF will be required to adopt FAS 133beginning January 1, 2001. While earlier adoption is permit-ted, the Company does not currently believe it is likely toadopt the Statement before the effective date. SFAS No.133requires that all derivative instruments be recorded on thebalance sheet at their fair value. Changes in fair value ofderivatives are recorded each period in current earnings or other comprehensive income, depending on whether aderivative is designated as part of a hedge transaction and,if it is, the type of hedge transaction. For fair value hedgetransactions in which the Company is hedging changes inthe fair value of an asset, liability or an unrecognized firmcommitment, changes in the fair value of the derivativeinstrument will generally be offset in the income statementby changes in the hedged item’s fair value. For cash flow


hedge transactions in which the Company is hedging the variability of cash flows related to a variable rate asset,liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in othercomprehensive 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 incurrent period earnings. The gains and losses on the deriva-tive instrument that are reported in other comprehensiveincome will be reclassified in earnings in the periods inwhich earnings are impacted by the variability of the cashflows of the hedged item. The ineffective portion of allhedges will be recognized in current-period earnings.

Based on interest rate and fuel hedging instruments outstanding at December 31, 1999 and previously deferredlosses from past interest rate hedging transactions, all ofwhich are cash flow hedge transactions, the Company currently estimates that the impact of SFAS No. 133 wouldresult in a net-of-tax cumulative-effect benefit to accumu-lated other comprehensive deficit of approximately $42 million if adopted December 31, 1999. The Company ispresently evaluating the impact SFAS No. 133 will have on its ongoing results of operations.

Forward Looking InformationThe discussion concerning the proposed Combination withCN in this annual report contains forward-looking statementsthat are subject to risks and uncertainties that could causeactual 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 state-ments. Such statements regarding efficiencies, cost savings,revenue and service enhancements, market share potential,as well as timing for the completion of the Combinationreflect the current views of the Company with respect to future events and are based on information currentlyavailable. Should one or more of the risk factors discussedbelow materialize, or should underlying assumptions or estimates prove incorrect, then actual results may differmaterially from those described herein.

The Year 2000 discussion above contains forward-look-ing 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 tothese forward-looking statements include, but are not limit-ed to, the following: emergence of unforeseen software orhardware problems, including where applications interactwith each other in ways not yet discovered, which coulddelay or hinder commercial transactions or other opera-tions; the emergence, in whole or in part, of unforeseenissues concerning other railroads or AAR-supported systemsthought to not be experiencing Year 2000 problems; busi-ness interruption due to delays in obtaining supplies, parts,or equipment from key vendors or suppliers not yet discov-ered to be affected by Year 2000 problems. Accordingly,these risks and uncertainties could cause actual results todiffer materially from those projected in the forward-lookingstatements.

To the extent that all other statements made by theCompany relate to the Company’s future economic perfor-mance 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 risksand uncertainties, and actual results may differ materially.Factors that could cause actual results to differ materiallyinclude, but are not limited to, economic and industry con-ditions: material adverse changes in economic or industryconditions, customer demand, effects of adverse economicconditions affecting shippers, adverse economic conditionsin the industries and geographic areas that produce andconsume freight, changes in fuel prices, and labor difficul-ties including strikes; legal and regulatory factors: change in laws and regulations and the ultimate outcome of shipperclaims, environmental investigations or proceedings andother types of claims and litigation; and operating factors:technical difficulties, changes in operating conditions andcosts, competition and commodity concentrations as well as natural events such as severe weather, floods and earth-quakes. The factors noted, individually or in combinationcould, among other things, limit demand and pricing, affect costs and the feasibility of certain operations, or affect traffic and pricing levels.


Report of ManagementTo the Shareholders of Burlington Northern Santa Fe Corporation

T he accompanying consolidated financial statementsof Burlington Northern Santa Fe Corporation andsubsidiary companies were prepared by manage-

ment, who are responsible for their integrity and objectivity.They were prepared in accordance with accounting princi-ples generally accepted in the United States and properlyinclude amounts that are based on management’s best judg-ments and estimates. Other financial information included inthis annual report is consistent with that in the consolidatedfinancial statements.

The Company maintains a system of internal accountingcontrols to provide reasonable assurance that assets are safe-guarded and that the books and records reflect the autho-rized transactions of the Company. Limitations exist in anysystem of internal accounting controls based upon the recog-nition that the cost of the system should not exceed the benefits derived.The Company believes its system of internalaccounting controls, augmented by its internal auditing function, appropriately balances the cost/benefit relationship.

Independent accountants provide an objective assessmentof the degree to which management meets its responsibilityfor 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 consolidatedfinancial statements.

The Board of Directors pursues its responsibility for theCompany’s financial statements through its Audit Committeewhich is composed solely of directors who are not officers or employees of the Company. The Audit Committee meetsregularly with the independent accountants, managementand internal auditors. The independent accountants and theCompany’s internal auditors have direct access to the AuditCommittee, with and without the presence of managementrepresentatives, to discuss the scope and results of their workand their comments on the adequacy of internal accountingcontrols and the quality of financial reporting.

Robert D. KrebsChairman and Chief Executive Officer

Thomas N. HundSenior Vice President and Chief Financial Officer

Dennis R. JohnsonVice President and Controller

Report of Independent AccountantsTo the Shareholders and Board of Directors of Burlington Northern Santa Fe Corporation and Subsidiaries

I n our opinion, the accompanying consolidated balancesheet and the related consolidated statements of income,of cash flows and of changes in stockholders’ equity

present fairly, in all material respects, the financial positionof Burlington Northern Santa Fe Corporation and subsidiarycompanies at December 31,1999 and 1998, and the resultsof 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 theresponsibility of the Company’s management; our responsi-bility is to express an opinion on these financial statementsbased on our audits. We conducted our audits of thesestatements in accordance with auditing standards generallyaccepted in the United States, which require that we planand perform the audit to obtain reasonable assuranceabout whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in thefinancial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis forthe opinion expressed above.

PricewaterhouseCoopers LLPFort Worth, TexasFebruary 4, 2000


Consolidated Statement of Income


(Dollars in millions, except per share data)


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.


Consolidated Balance Sheet


(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



Consolidated Statement of Cash Flows

Burlington Northern Santa Fe Corporation and Subsidiaries(Dollars in millions)


Operating Activities

Net income $ 1,137 $1,155 $ 885Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 897 832 773Deferred income taxes 444 489 433Employee 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 301Other changes 127 20 (333)

Materials and supplies (11) (39) 17Other current assets (32) (4) 4Accounts 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 1,002Payments on long-term debt (293) (112) (177)Dividends paid (224) (197) (185)Proceeds from stock options exercised 121 111 102Purchase 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 $ 346Income taxes paid, net of refunds 142 220 32



Consolidated Statement of Changes in Stockholders’ Equity


(Shares in thousands. Dollars in millions, except per share data.)

CommonShares of Stock and AccumulatedCommon Shares of Additional Other Com-

Stock Treasury Paid-in Retained Treasury Unearned prehensiveIssued 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 885Minimum 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 withunearned compensation,restricted stock 366 (117) 11 (3) 8

Exercise of stock options andrelated 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) 6,822Comprehensive income:

Net income 1,155 1,155Minimum pension

liability adjustment (net of tax benefit of $0.5) (1) (1)

Total comprehensive income 1,154


Adjustments associated withunearned compensation,restricted stock 527 (132) 15 2 17


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) 7,784Comprehensive income:

Net income 1,137 1,137Minimum pension

liability adjustment (net of tax benefit of $0.5) 1 1

Total comprehensive income 1,138


Adjustments associated withunearned compensation,restricted stock 811 (332) 14 2 16


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



Notes to Consolidated Financial Statements Burlington Northern Santa Fe Corporation andSubsidiaries

1The CompanyBurlington Northern Santa Fe Corporation including itsmajority-owned subsidiaries (collectively, BNSF or

Company) is engaged primarily in railroad transportationthrough its principal subsidiary, The Burlington Northern andSanta Fe Railway Company (BNSF Railway), which operatesone of the largest railroad networks in North America with33,500 route miles covering 28 states and two Canadianprovinces. Through one operating transportation services seg-ment,BNSF Railway transports a wide range of products andcommodities including the transportation of containers andtrailers (intermodal), coal and agricultural commodities whichconstituted 28 percent, 24 percent and 15 percent, respec-tively, of total revenues for the year ended December 31,1999. Other significant aspects of BNSF’s business includethe transportation of chemicals, forest products, consumergoods, metals, minerals, automobiles and automobile parts.Revenues derived from other sources are not significant.Proposed Combination With Canadian National Railway CompanyOn December 18, 1999, BNSF and Canadian NationalRailway Company (CN) entered into a Combination Agree-ment, as amended, providing for the combination of the twocompanies (the Combination). To comply with Canadian legalrequirements that, among other things, prohibit any personand that person’s associates from holding more than 15 per-cent of the voting rights in CN, while ensuring that the combi-nation 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) andCN. Upon completion of the combination, North AmericanRailways will be the parent company of BNSF and will own allof the limited voting equity shares of CN. All shareholders willhave 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 andone CN voting share for each BNSF share. Additionally, CNshareholders will receive, for each CN common share, 1.05CN voting shares and either 1.05 shares of North AmericanRailways common stock or 1.05 CN exchangeable shares.The CN exchangeable shares will be exchangeable at anytime on a one-for-one basis for shares of North AmericanRailways common stock. CN shareholders who elect toreceive the CN exchangeable shares will also receive theright to vote on matters submitted to North American Railwaysshareholders in proportion to their economic interest in thecombined companies. Dividends paid on the North AmericanRailways common stock and the CN exchangeable shareswill be equivalent. Any shares of BNSF common stock ownedby BNSF or any of its subsidiaries as treasury stock will beautomatically canceled and cease to exist.

Each share of North American Railways common stockwill 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 asingle security. In addition, CN will issue to North AmericanRailways limited voting equity shares carrying 10.1 percentof 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 basewith each public shareholder effectively having the sameeconomic 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 UnitedStates Surface Transportation Board (STB). North AmericanRailways, by its charter, will conform to the provisions of the CN Commercialization Act and Canadian corporate law on thecomposition of boards of directors. Like CN, North AmericanRailways shareholders will be subject to an ownership limitwhereby no single shareholder can own more than 15 percentof 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 onthe proposed Combination during the second quarter of 2000.

Upon consummation, the Combination will be accountedfor by North American Railways pursuant to the purchasemethod of accounting in accordance with AccountingPrinciples 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 ofNorth American Railways common stock issued or issuable to the CN shareholders will be allocated to the assets andliabilities of CN based on fair value. CN’s results of opera-tions will be included with North American Railways fromthe date the transaction is consummated. Based on the cur-rent agreement, the fair value of North American Railwayscommon stock will be based on a $25.63 per share fairvalue of BNSF common stock which was determined usingthe average of the closing daily BNSF common stock pricesas reported by The Wall Street Journal for the two days preceding, the day of, and the two days following theDecember 20, 1999 announcement of the Combination.

Under the terms of the Combination Agreement, asamended, BNSF is required to pay a cash termination fee of $450 million to CN if the Combination is terminated as aresult of any of the following: i) another party has made aproposal for an alternative transaction and the Company’sshareholders do not approve the Combination; ii) CN electsto terminate the Combination because BNSF’s Board of Direc-tors changed its previously favorable recommendation of theCombination to its shareholders or iii) BNSF breaches certainobligations not to solicit or respond to alternative transactionproposals. 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 agree-ments. Each company’s option is exercisable by the othercompany under the same circumstances in which that partyis entitled to receive the $450 million or $200 million termina-tion fee, as applicable, referred to above. The option agree-ment allows BNSF and CN to purchase, in the case of BNSF,approximately 29 million CN common shares and, in thecase of CN, approximately 65 million shares of BNSF com-mon stock. The number of shares subject to the stock optionswill be adjusted in each case so that the number of sharesissued will always be equal to, but not exceed, 12.5 percentof the outstanding common shares of the option issuer aftergiving effect to the issuance of shares under the option.Theexercise price of the option is, in each case, the average ofthe closing price of the option issuer’s common stock on theNew York Stock Exchange on the five trading days precedingthe date of notice of exercise multiplied by the number ofshares to be issued.

Additionally, BNSF is required to pay a cash terminationfee of $300 million to CN if BNSF terminates the Combina-tion because of conditions imposed by the STB that theCompany believes would significantly and adversely affectthe benefits of the Combination, and CN is willing to com-plete 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 PoliciesPrinciples of ConsolidationThe consolidated financial statements include the accounts

of Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries, including its principal subsidiary BNSFRailway, all of which are separate legal entities. All significantintercompany accounts and transactions have been eliminated.Use of EstimatesThe preparation of financial statements in accordance withaccounting principles generally accepted in the UnitedStates requires management to make estimates andassumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reportedamounts of revenues and expenses during the periods pre-sented. Actual results could differ from those estimates.ReclassficationsCertain comparative prior year amounts in the consolidatedfinancial statements and accompanying notes have beenreclassified to conform with the current year presentation.Cash and Cash EquivalentsAll short-term investments with original maturities of less than90 days are considered cash equivalents. Cash equivalentsare stated at cost, which approximates market value becauseof the short maturity of these instruments.Materials and SuppliesMaterials and supplies, which consist mainly of rail, ties and

other items for construction and maintenance of propertyand equipment, as well as diesel fuel, are valued at thelower of average cost or market.Property and EquipmentProperty 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 depreci-ation and no gain or loss is recognized. Significant prematureretirements and the disposal of land and non-rail property arerecorded as gains or losses at the time of their occurrence.Expenditures which significantly increase asset values orextend useful lives are capitalized. Repair and maintenanceexpenditures are charged to operating expense when the work is performed. Property and equipment are stated at cost.

The Company incurs certain direct labor, contract serviceand other costs associated with the development and instal-lation of internal-use computer software. Costs for newlydeveloped software or significant enhancements to existingsoftware are typically capitalized. Research, preliminary project, operations, maintenance and training costs are charged to operating expense when the work is performed.Revenue RecognitionTransportation revenues are recognized based upon theproportion of service provided as of the balance sheet date.

3 Other Income (Expense), NetOther income (expense), net includes the following(in millions):


Deferred gain on prior period line sale $ 50 $ – $ –Gain on property dispositions 26 48 14Gain on sale of Pipeline Partnership – 67 –Equity in earnings of Pipeline Partnership – 4 30Accounts 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. (PipelinePartnership) and of its operating partnership subsidiary, SFPP,L.P. SFP Pipelines owned a two percent interest as the PipelinePartnerships and SFPP, L.P.’s general partner and an approxi-mate 42 percent interest in partnership units of the PipelinePartnership. SFP Pipeline Holdings, Inc., an indirect, wholly-owned subsidiary of BNSF (SFP Holdings), had outstanding$219 million principal amount of Variable Rate Exchange-able 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 approxi-mately $84 million in cash. The Pipeline Partnership was liquidated as part of the transaction and SFP Pipelines’ part-nership units were converted into the right to receive KinderMorgan common units. Consummation of the transactioncaused an “Exchange Event” under the VRED agreementand in June 1998 all VRED holders received either partner-


ship units of Kinder Morgan or cash equal to the par valueof the VREDs. In addition, the agreement called for SFP Pipe-lines’ interest in SFPP, L.P. to be partially redeemed for a cashdistribution of $5.8 million, with SFP Pipelines retaining onlya 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’sinvestment in the Pipeline Partnership and SFPP, L.P. and theVREDs were removed from the consolidated balance sheet.

BNSF recognized a $50 million deferred gain in the thirdquarter of 1999 in connection with the sale of rail lines inSouthern California in 1992 and 1993.

4 Income TaxesIncome tax expense was as follows

(in millions):


Current:Federal $213 $191 $ 72State 25 14 14

238 205 86

Deferred:Federal 376 410 372State 68 79 61

444 489 433

Total $682 $694 $519

Reconciliation of the federal statutory income tax rate to theeffective tax rate was as follows:


Federal statutory income tax rate 35.0% 35.0% 35.0%State income taxes,

net of federal tax benefit 3.3 3.3 3.5Other, 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 asfollows (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 253Employee merger and separation costs 137 182Post-retirement benefits 93 89Other 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 com-panies, Burlington Northern, Inc. (BNI) and Santa Fe PacificCorporation (SFP) have been examined through 1994 andthe merger date in September 1995, respectively. All yearsprior to 1992 for BNI and 1993 for SFP are closed. Issuesrelating to the years 1992-1994 for BNI and for years 1993through the merger date in September 1995 for SFP arebeing contested through various stages of administrativeappeal. BNSF is currently under IRS examination for years1995-1997. In addition, BNSF and its subsidiaries have vari-ous state income tax returns in the process of examination,administrative appeal or litigation. Management believesthat adequate provision has been made for any adjustmentthat might be assessed for open years through 1999.

5 Accounts Receivable, NetBNSF Railway, through a special purpose subsidiary,has an account receivable sales agreement which

allows it to sell up to $600 million of variable rate certificatesthat mature in 2002 and evidence undivided interests in anaccounts receivable master trust. The master trust’s assetsinclude an ownership interest in a revolving portfolio ofBNSF Railway’s accounts receivable which are used to support the certificates. At December 31,1999, $600 million of certificates were outstanding and were supported byreceivables 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 generallyrelated to certain interest rates. These costs are included in other income (expense), net.

BNSF maintains an allowance for uncollectible accountsreceivable. At December 31, 1999 and 1998, $50 millionand $71 million, respectively, of such allowances had beenrecorded.

6 Property and Equipment, NetProperty and equipment, net (in millions), and the weight-ed average annual depreciation rate (%) were as follows:

1999Depreciation

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 25,701Less accumulated depreciation

and amortization (4,843) (5,039)

Property and equipment, net $21,681 $20,662

The consolidated balance sheet at December 31,1999 and1998 included $1,218 million and $1,082 million, respectively,for property and equipment under capital leases.


7 Accounts Payable and Other Current LiabilitiesAccounts payable and other current liabilities consisted

of the following (in millions):December 31, 1999 1998

Compensation and benefits payable $ 376 $ 387Casualty and environmental liabilities 287 272Tax liabilities 201 117Accounts payable 161 174Rents and leases 160 155Employee merger and separation costs 54 65Other 678 715

Total $1,917 $1,885

8 DebtDebt 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, weightedaverage rate of 6.6%, due 2000 to 2016 791 818

Equipment obligations, weighted averagerate 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 471Bank borrowings – 25Unamortized discount and other, net (30) (25)

Total 5,813 5,456Less current portion of long-term debt (158) (268)

Long-term debt $5,655 $5,188

BNSF issues commercial paper from time to time which issupported by bank revolving credit agreements. Outstandingcommercial paper balances are considered as reducing theamount of borrowings available under these agreements. The bank revolving credit agreements which were renewedand extended effective June 28, 1999, allow borrowings ofup to $750 million on a short-term basis and $750 million on a long-term basis. Annual facility fees are currently 0.10percent and 0.125 percent, respectively, and are subject tochange based upon changes in BNSF’s senior unsecureddebt 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 lendersunder the short-term agreement are scheduled to expire inJune 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 againstthe long-term revolving credit agreement and the maturityvalue of commercial paper outstanding was $477 million,leaving a total remaining capacity of $1,023 million availableunder the revolving credit agreements. BNSF must maintaincompliance 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 regis-tration statement that became effective in March1999 for theissuance of debt securities, including medium-term notes,which may be issued in one or more series at an aggregateoffering price not to exceed $750 million. Additionally, in February 1999, prior to the effective date of the newshelf 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 shelfregistration statement.

In March 1999, BNSF issued $200 million of 6.1 percentnotes due March 2009 and $200 million of 6.8 percentdebentures due March 2029 under the February 1999 shelfregistration statement. The net proceeds were used for gener-al corporate purposes including the repayment of commercialpaper. At the time of issuing the $200 million of 6.1 percentnotes 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 millionof the Company’s puttable reset debentures due 2029 exer-cised the call option. As a result, on May 13, 1999, the holderrepurchased the debentures which were subsequently resoldto investors. The interest rate on the debentures was reset to a fixed interest rate of 7.1 percent. The Company did notreceive 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, reducedthe amount available for borrowing under the Company’sFebruary 1999 shelf registration statement to $500 million.

During 1999, BNSF Railway entered into equipmentobligations totaling $212 million payable from 2000 to 2016with interest rates ranging from 5.4 percent to 7.0 percentand $60 million of capital lease obligations payable from2000 to 2016. The capital lease and $137 million of equip-ment obligations relate to financing transactions involvingGerman investors. In order to comply with the terms of thecapital lease and the associated foreign regulations, BNSFRailway simultaneously deposited $60 million with a Germanbank and pledged this amount as an irrevocable securitydeposit to be used to pay the capital lease obligations. Thecapital lease obligation is classified as Long-Term Debt andthe security deposit is classified as an Other Asset in theconsolidated balance sheet.

Most BNSF Railway properties and certain other assets are pledged as collateral to, or are otherwise restrictedunder, 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 dueDecember 2001 previously held by Pipelines Partnership


that were assumed by Kinder Morgan pursuant to the salediscussed in Note 3: Other Income (Expense), Net. Inaddition, BNSF and another major railroad jointly and severally guarantee $75 million of debt of KCT IntermodalTransportation Corporation, the proceeds of which are beingused to finance the construction of a double track gradeseparation bridge in Kansas City, Missouri, to be operatedand used by Kansas City Terminal Railway Company.

Aggregate long-term debt scheduled maturities are $158million, $233 million, $285 million, $141 million and $714million for 2000 through 2004, respectively. Maturities in2000 exclude $100 million of 6.1 percent notes due 2027 for which the Company received notice from the holdersthat they will exercise a put option on the notes in February2000. Maturities in 2001 exclude $100 million of 6.1 percentnotes due 2031, which will either be remarketed by theholder of a call option on the debt and mature in 2031 orwill otherwise be repurchased by the Company in 2001.Maturities in 2003 exclude $175 million of 6.5 percent notesdue 2037, which may be redeemed in 2003 at the option ofthe holder. In addition, commercial paper of $473 million isincluded 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 theestimated fair values at December 31, 1999 and 1998 were$5,632 million and $5,712 million, respectively. The fairvalue of BNSF’s long-term debt is primarily based on quotedmarket prices for the same or similar issues, or on the current rates that would be offered to BNSF for debt of thesame remaining maturities. The carrying amount of commer-cial paper approximates fair value because of the shortmaturity of these instruments.

9 Employee Merger and Separation CostsCurrent and long-term employee merger and separa-tion 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, trainmenand locomotive engineers; and (iii) certain non-union employ-ee severance costs.

Liabilities related to the consolidation of clerical functions(the Consolidation Plan) were $119 million and $211 million atDecember 31, 1999 and 1998, respectively. These liabilitiesprovide for severance costs associated with the ConsolidationPlan adopted in 1995 upon consummation of the merger ofBNSF’s predecessor companies Burlington Northern Inc. andSanta Fe Pacific Corporation (the Merger). The ConsolidationPlan resulted in the elimination of approximately 1,500 per-manent positions and was substantially completed during1999. Additionally, in 1999 the Company recorded a $54 mil-lion credit for the reversal of certain liabilities associated withthe Consolidation Plan. These liabilities related to planned

work-force reductions that are no longer required due to theCompany’s ability to utilize a series of job swaps betweencertain locations to achieve the advantages of functional workconsolidation. This change in the Consolidation Plan wascommunicated to Company employees in May 1999. Theremaining liability balance represents benefits to be paid toaffected employees who did not receive lump-sum payments,but instead will be paid over five to ten years or in some casesthrough retirement.

Liabilities related to deferred benefits payable upon sepa-ration or retirement to certain active conductors, trainmenand locomotive engineers were $193 million and $207 millionat December 31, 1999 and 1998, respectively. These costswere incurred in connection with labor agreements reachedprior 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 toreduce operating expenses by eliminating approximately 400non-union and 1,000 union positions through severances,normal attrition and the elimination of contractors.Components of the charge include approximately $29 millionrelating to severance costs for non-union employees,approximately $16 million for special termination benefits tobe received under the Company’s retirement and medicalplans, and approximately $3 million of costs incurred for relo-cating approximately 60 non-union employees as a result ofthe reorganization. Substantially all of the planned reductionswere made by September 30, 1999. No significant costs wereincurred as a result of eliminating the 1,000 union positions.

Liabilities principally related to certain remaining non-union employee severances resulting from the May 1999reorganization 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 basedon deferral elections made by the employee. Approximately1,825 non-union employees received or are receiving severance payments and special termination benefits underthe Company’s retirement and health and welfare plansresulting from the Merger and the May 1999 reorganizationprogram discussed above.

During 1999, 1998 and 1997, BNSF made employeemerger and separation payments of $93 million, $77 millionand $116 million, respectively. At December 31,1999, $54 million of the remaining liabilities are included withincurrent 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 addi-tional costs of the Consolidation Plan and the remainder of the charge related to severance and other costs for non-union employees.


10Hedging Activities FuelFuel expense historically approximates 10 percent

of total operating expenses. Due to the significance of dieselfuel expense to the operations of BNSF and the historicalvolatility of fuel prices, the Company has established a program to hedge against fluctuations in the price of itsdiesel fuel purchases. The intent of the program is to protectthe Company’s operating margins and overall profitabilityfrom adverse fuel price changes. However, to the extent theCompany hedges portions of its fuel purchases, it will notrealize 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 orlosses associated with changes in the market value of thefuel swaps are deferred and recognized as a component offuel expense in the period in which the fuel is purchasedand used. Based on 1999 fuel consumption and excludingthe impact of the hedging program, each one-cent increasein 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 swapsfor approximately 869 million gallons at an average price ofapproximately 50 cents per gallon. The above price does notinclude taxes, transportation costs, certain other fuel handlingcosts, and any differences which may occur from time to timebetween the prices of commodities hedged and the purchaseprice of BNSF’s diesel fuel. Currently, these fuel swaps coverapproximately 41 percent, 23 percent, and 8 percent of esti-mated annual and quarterly fuel purchases for 2000, 2001,and 2002, respectively. Hedge positions are closely monitoredto ensure that they will not exceed actual fuel requirements in any period. Unrecognized gains from BNSF’s fuel swaptransactions were approximately $37 million as of December31, 1999, of which $33 million relates to swap transactionsthat 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 RateFrom time to time, the Company enters into various interestrate hedging transactions for the purpose of managing expo-sure to fluctuations in interest rates and establishing rates inanticipation of future debt issuances. As of February 4, 2000,BNSF had no interest rate swap instruments in place. Swapstotaling $125 million used to fix the interest rate on commer-cial paper debt expired in December 1999. While the swapswere outstanding, BNSF recognized, on an accrual basis, afixed rate of interest on the principal amount of commercialpaper hedged over the term of the swap agreements.

In anticipation of future debt issuances, BNSF has enteredinto 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. The10-year and 30-year treasury lock transactions have averageinterest 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 deter-mined at the time of the actual debt issuance and included in the all-in interest rate. The treasury locks can be closedby BNSF anytime up to expiration. Unrecognized gains onthe treasury lock transactions were approximately $62 millionas of December 31,1999. BNSF also monitors its treasury lockpositions 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 percentnotes, the Company closed out $100 million of treasury lock transactions at a gain of $8 million. During 1998, at thetime of issuing $400 million of debt, the Company closed out $400 million of treasury lock transactions at a loss ofapproximately $18 million. In each case the gain or loss hasbeen deferred and is being amortized to interest expenseover the life of the debt.

11 Commitments and ContingenciesLease Commitments BNSF has substantial lease commitments for locomo-

tives, freight cars, trailers, office buildings and other property.Most of these leases provide the option to purchase theequipment 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 ofDecember 31, 1999 are summarized as follows (in millions):

Capital OperatingYear ended December 31 Leases Leases

2000 $ 102 $ 2852001 113 2492002 106 2262003 106 2202004 106 207Thereafter 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 endedDecember 31, 1999, 1998 and 1997, respectively. Contingentrentals and sublease rentals were not significant.Other CommitmentsBNSF has entered into commitments to acquire 196 and 50locomotives in 2000 and 2001, respectively. The locomotiveswill be financed from one or a combination of sourcesincluding, 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.EnvironmentalBNSF’s operations, as well as those of its competitors, aresubject to extensive federal, state and local environmentalregulation. BNSF’s operating procedures include practicesto protect the environment from the environmental risksinherent in railroad operations, which frequently involvetransporting chemicals and other hazardous materials.


Additionally, many of BNSF’s land holdings are and havebeen used for industrial or transportation-related purposesor leased to commercial or industrial companies whoseactivities may have resulted in discharges onto the property.As a result, BNSF is subject to environmental clean-up andenforcement actions. In particular, the Federal Comprehen-sive Environmental Response, Compensation and LiabilityAct 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 withoutregard to fault or the legality of the original conduct on current and former owners and operators of a site. BNSFhas been notified that it is a potentially responsible party(PRP) for study and clean-up costs at approximately 33Superfund sites for which investigation and remediationpayments 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 PRPunder certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be heldjointly 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 sitesthrough cost-sharing agreements with terms that vary fromsite to site. Costs are typically allocated based on relativevolumetric contribution of material, the amount of time thesite was owned or operated, and/or the portion of the totalsite owned or operated by each PRP.

Environmental costs include initial site surveys and environmental studies of potentially contaminated sites aswell as costs for remediation and restoration of sites deter-mined to be contaminated. Liabilities for environmentalclean-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 necessarybased upon additional information developed in subse-quent periods. BNSF conducts an ongoing environmentalcontingency analysis, which considers a combination of factors including independent consulting reports, site visits, legal reviews, analysis of the likelihood of participationin 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 approxi-mately 400 sites, including the Superfund sites, at whichit is participating in the study or clean-up, or both, ofalleged environmental contamination. BNSF paid approxi-mately $67 million, $64 million and $55 million during1999, 1998 and 1997, respectively, for mandatory andunasserted clean-up efforts, including amounts expendedunder 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 millionat 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 representBNSF’s best estimates for remediation and restoration ofthese sites and include both asserted and unasserted claims.Unasserted claims are not considered to be a material component of the liability. Although recorded liabilitiesinclude BNSF’s best estimates of all costs, without reductionfor anticipated recoveries from third parties, BNSF’s totalclean-up costs at these sites cannot be predicted with certainty due to various factors such as the extent of correc-tive actions that may be required, evolving environmentallaws 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 developmentsin environmental surveys and studies of potentially con-taminated sites. As a result, future charges to income forenvironmental liabilities could have a significant effect onresults of operations in a particular quarter or fiscal year as individual site studies and remediation and restorationefforts proceed or as new sites arise. However, managementbelieves that it is unlikely that any identified matters, eitherindividually or in the aggregate, will have a material adverseeffect on BNSF’s consolidated financial position or liquidity.

Other Claims and LitigationBNSF and its subsidiaries are parties to a number of legalactions and claims, various governmental proceedings andprivate civil suits arising in the ordinary course of business,including those related to environmental matters and per-sonal injury claims. While the final outcome of these itemscannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of management that none of these items, whenfinally resolved, will have a material adverse effect on theannual results of operations, financial position or liquidity of BNSF, although an adverse resolution of a number ofthese items could have a material adverse effect on theresults of operations in a particular quarter or fiscal year.

12 Retirement Plans and Other Postemployment Benefit PlansBNSF sponsors two significant defined benefit pen-

sion plans: the noncontributory qualified BNSF RetirementPlan, 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 creditedservice and the highest five-year average compensation levels. BNSF’s funding policy is to contribute annually notless than the regulatory minimum and not more than themaximum amount deductible for income tax purposes.


Certain salaried employees of BNSF that have met certainage and years of service requirements are eligible for medicalbenefits and life insurance coverage during retirement. Theretiree medical plan is contributory and provides benefits toretirees, their covered dependents and beneficiaries. Retireecontributions are adjusted annually. The plan also contains fixeddeductibles, 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 medicaland life insurance plans as they come due. Employees begin-ning salaried employment with BNSF subsequent to September22, 1995 are not eligible for benefits under these plans.

Components of the net benefit costs for these plans wereas follows (in millions):

Pension Benefits


Service cost $ 15 $ 15 $ 14Interest cost 100 101 100Expected 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


Service cost $ 5 $ 4 $ 4Interest cost 17 16 14Special termination benefits 6 – –Net amortization and deferred amounts 1 – (1)

Net benefit cost $ 29 $ 20 $ 17

The following tables show the change in benefit obligationand plan assets of these plans (in millions):

Pension Medical andBenefits Life Benefits

Change in benefit obligation 1999 1998 1999 1998

Benefit obligation atbeginning of year $1,487 $1,404 $249 $190

Service cost 15 15 5 4Interest cost 100 101 17 16Plan participants’ contributions – – 4 3Amendments – – – 13Actuarial (gain) loss (115) 85 (17) 39Special termination benefits 10 – 6 _Curtailment loss 7 – – –Benefits paid (117) (118) (20) (16)

Benefit obligation at year end $1,387 $1,487 $244 $249


Change in plan assets 1999 1998 1999 1998

Fair value of plan assetsat beginning of year $1,469 $1,540 $ – $ –

Actual return on plan assets 174 43 – –Employer contribution 4 4 16 13Plan participants’ contributions – – 4 3Benefits paid (117) (118) (20) (16)

Fair value of plan assetsat year end $1,530 $1,469 $ – $ –

The following tables show the reconciliation of the fundedstatus of these plans with amounts recorded in theconsolidated balance sheet (in millions):


December 31, 1999 1998 1999 1998

Funded status $ 143 $ (18) $(244) $(249)Unrecognized net (gain) loss (151) 7 (7) 4Unrecognized prior service cost (7) (8) 7 13Unamortized net

transition obligation 9 11 – –

Net amount recognized $ (6) $ (8) $(244) $(232)


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 assump-tions used in accounting for the BNSF plans were as follows:


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/AExpected return on plan assets 9.5% 9.5% N/A N/A

For purposes of the medical and life benefits calculations for1999, the assumed health care cost trend rate for both man-aged care and non-managed care medical costs is 8.5 per-cent and is assumed to decrease gradually to 5 percent by2005 and remain constant thereafter. Increasing the assumedhealth care cost trend rates by one percentage point wouldincrease the accumulated postretirement benefit obligation by $18 million and the combined service and interest compo-nents of net postretirement benefit cost recognized in 1999 by $2 million. Decreasing the assumed health care cost trendrates by one percentage point would decrease the accumu-lated postretirement benefit obligation by $15 million and the combined service and interest components of net post-retirement benefit cost recognized in 1999 by $2 million.Other PlansUnder collective bargaining agreements, BNSF participatesin multi-employer benefit plans which provide certain post-retirement health care and life insurance benefits for eligibleunion employees. Insurance premiums paid attributable toretirees, which are generally expensed as incurred, were$14 million, $18 million and $15 million, in 1999, 1998 and1997, respectively.Defined Contribution PlansBNSF sponsors 401(k) thrift and profit sharing plans whichcover substantially all non-union employees and certain unionemployees. BNSF matches 50 percent of the first 6 percentof non-union employees’ contributions, which are subject


A summary of the status of the stock option plans as of December 31, 1999, 1998 and 1997, and changes during the yearsthen ended, is presented below: 1999 1998 1997

Weighted Average Weighted Average Weighted AverageOptions 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 $16.49Granted 9,857,345 32.96 9,587,926 29.33 8,778,036 29.40Exercised (6,315,238) 21.24 (6,666,864) 18.66 (7,092,690) 15.46Cancelled (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 AverageExercise prices Outstanding Remaining Life Exercise Prices Exercisable Exercise Prices

$03.01 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

$03.01 to $36.73 29,808,157 7.2 Years $27.37 20,710,679 $25.00

to certain percentage limits of the employees’ earnings, ateach pay period. Depending on BNSF’s performance, anadditional matching contribution of up to 30 percent of thefirst 6 percent can be made at the end of the year. Employercontributions for all non-union employees are subject to afive 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 PlansOn April 15, 1999, BNSF shareholders approved

20 million shares of BNSF common stock for issuance underthe BNSF 1999 Stock Incentive Plan which were authorizedto be issued in the form of stock options, restricted stock,restricted stock units and performance stock. Total sharesauthorized under the BNSF 1999 and 1996 Stock IncentivePlans and the Non-Employee Directors’ Stock Plan (NEDS)are up to 50 million and 0.9 million shares of BNSF commonstock, respectively. Approximately 14 million common shareswere available for future grant at December 31, 1999.Stock OptionsUnder BNSF’s stock option plans, options may be granted toofficers and salaried employees at the fair market value of theCompany’s common stock on the date of grant. All options gen-erally vest in one year and expire within 10 years after the dateof grant. Shares issued upon exercise of options may be issuedfrom treasury shares or from authorized but unissued shares.

The Company applies Accounting Principles Board (APB)Opinion 25 and related interpretations in accounting for itsstock option plans. Accordingly, no compensation expensehas been recognized for its fixed stock option plans as theexercise price equals the stock price on the date of grant.Had compensation expense been determined for stockoptions granted in 1999, 1998 and 1997 based on the fairvalue at grant dates consistent with Statement of FinancialAccounting Standards (SFAS) No. 123 “Accounting for Stock Based Compensation,” the Company’s pro forma netincome and earnings per share would have been as follows:

1999 1998 1997

Net income (in millions) $1,092 $1,124 $ 857Basic earnings per share $ 2.36 $ 2.39 $1.85Diluted 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 20% 20%Annual dividend per share $ 0.48 $ 0.48 $ 0.40Risk free interest rate 6.63% 5.11% 5.81%Weighted average fair value

of options granted $ 8.43 $ 5.13 $ 5.15

1999 1998 1997

Net income (in millions) $1,092 $1,124 $ 857Basic earnings per share $ 2.36 $ 2.39 $1.85Diluted 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 $ 0.40Risk free interest rate 6.63% 5.11% 5.81%Weighted average fair value

of options granted $ 8.43 $ 5.13 $ 5.15


On January 12, 2000,10.8 million stock options were granted toactive salaried employees as of January 11, 2000. These optionshave an exercise price equal to the fair market value of BNSFcommon stock on the date of grant and will vest and expire oneyear and ten years, respectively, from the date of grant.

Stock options totaling 8.9 million and 21.4 million wereexcluded from the calculation of diluted earnings per sharein the third and fourth quarters of 1999, respectively,because their exercise price exceeded the average marketprice 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 behalfof employees.

BNSF awarded a total of approximately1.2 million sharesof restricted stock subject to performance periods to eligibleemployees and directors during 1996. No cash payment isrequired by the individuals. The restrictions will be lifted inthirds over three years beginning on the third anniversary of the grant date if certain stock price based performancegoals are met. If, however, the performance goals are notmet, the restricted shares will be forfeited. All shares still sub-ject to restrictions are generally forfeited and returned to theplan 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 Planscertain eligible employees may defer through the BNSFIncentive Bonus Stock Program (IBSP) the cash payment of their bonus paid under the Incentive Compensation Plan (ICP) and receive restricted stock for which restrictionslapse in three years (or in two years if certain performancegoals are met). The number of restricted shares awarded are based on the amount of bonus deferred, plus incre-mental shares, using the market price of BNSF commonstock 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 millionshares were outstanding under this and prior programs of this type on December 31, 1999.

In addition, all regularly-assigned salaried employees not eli-gible to participate in the IBSP are eligible to participate in theBNSF Discounted Stock Purchase Program.This program allowsemployees to use their bonus earned under the ICP to purchaseBNSF common stock at a discount from the market price andrequires 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 thousandshares, respectively, were purchased under this program.

Additionally, the Company periodically issues time vestingrestricted 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 theyears ended December 1999 and 1997, respectively. A totalof 365 thousand restricted shares related to these awardswere outstanding on December 31, 1999.

Shares awarded under the plans may not be sold or used as collateral, and are generally not transferable, by theholder until the shares awarded become free of restrictions.Compensation expense is recorded under the BNSF StockIncentive Plans in accordance with APB Opinion 25 and was not material in 1999, 1998 or 1997.

14 Common Stock and Preferred Capital StockCommon Stock

BNSF is authorized to issue 600 million shares of commonstock, $.01 Par Value. At December 31,1999, there were 454.6million shares of common stock outstanding. Each holder ofcommon stock is entitled to one vote per share in the electionof directors and on all matters submitted to a vote of stock-holders. Subject to the rights and preferences of any futureissuances of preferred stock, each share of common stock isentitled to receive dividends as may be declared by the Boardof Directors out of funds legally available and to share ratablyin 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 PlanIn December 1999, BNSF’s Board of Directors (the Board)approved a shareholder rights plan (Rights Plan). In con-nection with the Rights Plan, the Board declared a dividend of one Preferred Stock Purchase Right (Right or Rights) foreach outstanding share of BNSF common stock to share-holders of record on December 31, 1999. Shareholders are automatically entitled to the Rights corresponding totheir shares owned. The distribution is not taxable to share-holders under current United States tax laws. Adoption of theRights Plan was required by the terms of the CombinationAgreement, as amended, discussed in Note 1.

Subject to certain exceptions, each Right will be exercisableonly if a person or group acquires 15 percent or more of BNSFcommon stock or announces a tender or exchange offer whichwould result in ownership of 15 percent or more of BNSF com-mon stock. Each Right, which is not presently exercisable, willentitle its holder to buy one one-hundredth of a share of SeriesB 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 orgroup) will be entitled to purchase, upon exercise at the statedexercise price of the Right, common stock having a value equalto two times the exercise price of the Right. In the event of asubsequent combination or merger or other acquisition of theCompany, each holder of a Right, upon exercise at the statedexercise price of the Right, will be entitled to buy shares ofcommon stock of the acquiring or surviving entity having avalue equal to two times the exercise price of the Right. A Rightis redeemable for $0.01 per Right, subject to adjustment, beforethe control by a person or group of 15 percent or more of BNSFcommon stock. Each Right will expire on December 18, 2009 orearlier upon BNSF becoming a subsidiary of North AmericanRailways pursuant to the Combination Agreement, as amended,or upon redemption of the Rights by BNSF.


15 Quarterly Financial Data—Unaudited(Dollars in millions, except per share data)

Fourth Third Second First

1 9 9 9Revenues $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 $ .50Diluted earnings per share $ .69 $ .75 $ .50 $ .50Dividends declared per share $ .12 $ .12 $ .12 $ .12Common stock price:

High $32.75 $33.38 $37.94 $36.44Low 22.88 25.63 29.75 31.56

1 9 9 8Revenues $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 $ .56Diluted earnings per share $ .63 $ .66 $ .58 $ .56Dividends declared per share $ .12 $ .12 $ .10 $ .10Common stock price:

High $34.81 $35.58 $35.71 $35.65Low 28.63 26.87 31.25 28.08

Preferred Capital StockAt December 31, 1999, BNSF had 50 million shares of ClassA Preferred Stock, $.01 Par Value and 25 million shares ofPreferred Stock, $.01 Par Value available for issuance. TheBoard of Directors has the authority to issue such stock inone or more series, to fix the number of shares and to fix thedesignations and the powers, rights, and qualifications andrestrictions of each series.

Common Stock Repurchase ProgramIn July 1997, the Board of Directors of BNSF authorized therepurchase of up to 30 million shares of the Company’scommon stock from time to time in the open market. InDecember 1999, the Board of Directors extended the repurchase program by approving an additional 30 millionshares. Repurchased shares will be available to satisfy future requirements of various stock-based employee com-pensation programs. During 1999 and 1998, the Companyrepurchased 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 approxi-mately 33 million shares at a total average cost of $29.86per share leaving 27 million shares available for repurchaseunder the authorization.

During the second and third quarters of 1998, BNSF sold equity put options for 3 million shares of the Company’scommon stock to an independent third party and receivedcash proceeds of $2.2 million. The option contracts had

exercise prices ranging from $29.00 to $30.00 per sharewith expiration dates ranging from November, 1998 toFebruary, 1999. The option contracts permitted a net-shareor net-cash settlement method at BNSF’s election. Theseoptions expired unexercised. In April 1999, BNSF sold equity put options for 100 thousand shares of BNSF com-mon stock to an independent third party and received cash proceeds of $135 thousand. The third party exercised theoptions on October 12, 1999, which resulted in the Com-pany purchasing 100 thousand shares of its common stockat $29 per share.

An equity put option is a financial instrument wherebyBNSF receives an upfront cash premium for granting anoth-er party the option to sell a defined number of BNSF sharesto the Company at a fixed price on a specified future date. The Company considers the sale of equity put options as amethod to acquire its common stock at a share price consis-tent with its share repurchase strategy and potentially reducethe all-in cost of the program. The Company's risk is that itmay be required to purchase shares at a specified price thatis higher than the common stock price at the exercise dateof the equity put option. The Company has the ability to set-tle its equity put option transactions on a net share or netcash basis and accounts for the effects of these transactionswithin stockholders' equity. The number of shares subject tooutstanding put options sold by the Company cannot exceedthe amount of remaining shares the Board of Directors hasauthorized for repurchase. As of February 4, 2000 therewere no equity put options outstanding.


Burlington Northern Santa Fe Corporation Directors**

Burlington Northern Santa Fe Corporation Officers

Robert D. Krebs*Chairman andChief Executive Officer

Matthew K. Rose*President and Chief Operating Officer

Charles L. Schultz*Executive Vice Presidentand Chief Marketing Officer

Thomas N. Hund*Senior Vice President andChief Financial Officer

Carl R. Ice*Senior Vice President- Operations

Jeffrey R. Moreland*Senior Vice President-Law and Chief of Staff

Gary L. CrosbyVice President-Law and General Counsel

A. R. (Skip) Endres, Jr.Vice President-Government Affairs

Bruce E. FreemanVice President and Chief Information Officer

Dennis R. Johnson*Vice President andController

Marsha K. MorganVice President- Investor Relations andCorporate Secretary

Richard A. RussackVice President-Corporate Relations

Shelley J. VenickVice President andGeneral Tax Counsel

Richard E. WeicherVice President andSenior Regulatory Counsel

*Executive Officer ofBurlington Northern Santa Fe Corporation

Joseph F. Alibrandi(1) (2)

Retired Chairman andChief Executive Officer,Whittaker Corporation(aerospace), Los Angeles, California.Board member since 1982.

Jack S. Blanton(2) (4)

Chairman and ChiefExecutive Officer, Houston Endowment, Inc.(charitable foundation),Houston, Texas. Boardmember since 1989.

John J. Burns, Jr(1) (2)

President and ChiefExecutive Officer,Alleghany Corporation(holding company withinvestment management,reinsurance, industrial minerals, steel fasteneroperations, and an invest-ment position in BNSF),New York, New York. Board member since 1995.

George Deukmejian(3) (4)

Senior Counsel, Sidley and Austin (law firm) and former Governor of the State of California, Los Angeles, California. Board member since 1991.

Robert D. Krebs(1)

Chairman and Chief Executive Officer,Burlington Northern Santa Fe Corporation, Fort Worth,Texas. Board member since 1983.

Bill M. Lindig(2) (4)

ChairmanSYSCO Corporation (marketer and distributor of foodservice products),Houston, Texas. Board member since 1993.

Vilma S. Martinez(3) (4)

Partner, Munger, Tolles and Olson LLP (law firm), Los Angeles, California. Board member since 1998.

Roy S. Roberts(2) (4)

Group Vice President,North American VehicleSales, Service and Marketing, GeneralMotors Corporation (motor vehicle manufac-turer), Detroit, Michigan. Board member since 1993.

Marc J. Shapiro(3) (4)

Vice Chairman for Finance,Risk Management andAdministrationThe Chase ManhattanCorporation (banking), New York, New York. Board member since 1995.

Arnold R. Weber(1) (3)

President Emeritus,Northwestern University,Evanston, Illinois. Board member since 1986.

Robert H. West(2) (3)

Retired Chairman of the Board, Butler Manufacturing Company (manufacturer of pre-engineered building systems and specialty components), Kansas City, Missouri. Board member since 1980.

J. Steven Whisler(3) (4)

President and Chief Executive Officer, Phelps Dodge Corporation (mining and manufac-turing), Phoenix, Arizona. Board member since 1995.

Edward E. Whitacre, Jr.(1) (4)

Chairman and ChiefExecutive Officer, SBC Communications Inc.(telecommunications),San Antonio, Texas. Board member since 1993.

Ronald B. Woodard(2) (3)

President and ChiefExecutive Officer,MagnaDrive, Inc. (industrial equipment manufacturer), Seattle, WashingtonRetired President, BoeingCommercial AirplaneGroup (aerospace), Seattle, Washington. Board member since 1995.

Michael B. Yanney(1) (2)

Chairman and ChiefExecutive Officer, America First CompaniesL.L.C. (investments), Omaha, Nebraska. Board member since 1989.

Committee Assignments:(1) Executive Committee(2) Compensation

Committee(3) Audit Committee(4) Directors and Corporate

Governance Committee

**Years of Board serviceincludes service on Boards of BurlingtonNorthern Inc. and Santa FePacific Corporation and predecessor corporations.

Shares Listed

New York Stock

Exchange, Chicago

Stock Exchange,

Pacific Stock Exchange

Ticker Symbol: BNI

Principal

Corporate Office

2650 Lou Menk Drive,

Second Floor,

Fort Worth, Texas

76131-2830

(817) 333-2000

www.bnsf.com

Stock Transfer

Agent and Registrar

First Chicago Trust

Company of New York,

a division of Equiserve,

P.O. Box 2500,

Jersey City, New Jersey

07303-2500

(800) 526-5678

Shareholders

As of January 31, 2000,

there were approxi-

mately 47,000 share-

holders of record.

Shareholder Services

You are encouraged

to contact our Transfer

Agent directly for the

shareholder services

listed below:

Change in Certificate

Registration, Dividend

Reinvestment Service,

Change of Mailing

Address, Lost or

Stolen Certificates,

Replacement of

Dividend Checks, Direct

Deposit of Dividends,

Consolidation of

Multiple Accounts,

Elimination of Duplicate

Report Mailings,

Replacement of Form

1099-DIV.

Dividend

Reinvestment Plan

A dividend reinvestment

plan is provided for reg-

istered shareholders as

a convenient way to pur-

chase more shares

through investment of

dividends or voluntary

cash payments. A book-

let describing the plan

is available from the

Transfer Agent.

Form 10-K

A copy of the Company’s

Annual Report on Form

10-K when filed with the

Securities and Exchange

Commission will be

available to sharehold-

ers free of charge upon

request to the

Company’s Investor

Relations Department at

2650 Lou Menk Drive,

Second Floor,

Fort Worth, Texas

76131-2830.

Institutional Investors

Inquiries from security

analysts and investment

professionals should be

directed to the

Company’s investor

relations contact: Ms.

Marsha K. Morgan,

Vice President –

Investor Relations and

Corporate Secretary

(817) 352-6452


Copy

right

© 2

000

Burli

ngto

n No

rther

n Sa

nta

Fe C

orpo

ratio

n

Cove

r and

Prin

cipal

Pho

togr

aphy

: Rus

s Sc

hleip

man

A

dditi

onal

Pho

togr

aphy

: Glen

Ellm

an, B

arry

Rob

inso

n, a

nd R

oger

Poy

er

Map

Illu

stra

tion:

Will

Nelso

n

Prin

ting:

And

erso

n Lit

hogr

aph

P

rinte

d on

Rec

ycled

Pap

er

WeCan MoveYourWorld.™

Burlington Northern Santa Fe Corporation2650 Lou Menk Drive, Second Floor, Fort Worth, Texas 76131-2830

BNSF 99 annrpt

Economy & Finance

Transcript of BNSF 99 annrpt