<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6324
BURLINGTON NORTHERN RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-6034000
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3800 Continental Plaza, 777 Main St.
Fort Worth, Texas 76102-5384
(Address of principal executive offices) (Zip Code)
(817) 333-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding
----- -----------
Common stock, without par value
as of June 30, 1994* 1,000 shares
*Burlington Northern Railroad Company is a wholly owned subsidiary of Burlington
Northern Inc. (BNI) and there is no market data with respect to such shares.
Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format permitted by General Instruction H(2).
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial Statements......................... 1
Item 2. Management's Narrative Analysis of Results of
Operations................................. 7
(i)
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues.......................... $1,192 $1,142 $2,402 $2,312
Costs and expenses:
Compensation and benefits....... 423 414 868 854
Fuel............................ 89 89 172 177
Materials....................... 70 74 155 154
Equipment rents................. 122 102 238 201
Purchased services.............. 117 119 235 225
Depreciation.................... 82 82 163 165
Other........................... 115 116 219 224
------ ------ ------ ------
Total costs and expenses...... 1,018 996 2,050 2,000
------ ------ ------ ------
Operating income.................. 174 146 352 312
Interest expense.................. 21 22 42 42
Other income, net................. 2 4 4 5
------ ------ ------ ------
Income before income taxes and
cumulative effect of change in
accounting method............... 155 128 314 275
Income tax expense................ 60 47 122 102
------ ------ ------ ------
Income before cumulative effect of
change in accounting method..... 95 81 192 173
Cumulative effect of change in
accounting method, net of tax... - - (10) -
------ ------ ------ ------
Net income........................ $ 95 $ 81 $ 182 $ 173
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Millions)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1994 1993
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................... $ 18 $ 17
Accounts receivable, net.................... 574 591
Material and supplies....................... 117 91
Current portion of deferred income taxes.... 170 167
Other current assets........................ 46 23
------ ------
Total current assets...................... 925 889
Property and equipment, net................... 5,662 5,488
Investments in and advances to affiliates..... 96 104
Other assets.................................. 139 130
------ ------
Total assets.............................. $6,822 $6,611
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................ $ 509 $ 498
Casualty and environmental reserves......... 274 286
Compensation and benefits payable........... 252 269
Taxes payable............................... 129 131
Accrued interest............................ 20 22
Other current liabilities................... 47 69
Current portion of long-term debt........... 28 177
Commercial paper............................ 204 26
------ ------
Total current liabilities.............. 1,463 1,478
Long-term debt................................ 723 702
Deferred income taxes......................... 1,368 1,329
Casualty and environmental reserves........... 410 426
Other liabilities............................. 182 182
------ ------
Total liabilities......................... 4,146 4,117
------ ------
Common stockholder's equity:
Common stock, without par value, 1,000
shares authorized, issued and outstanding. 1,191 1,191
Retained earnings........................... 1,485 1,303
------ ------
Total common stockholder's equity......... 2,676 2,494
------ ------
Total liabilities and stockholder's equity $6,822 $6,611
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1994 1993
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 182 $ 173
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting
method...................................... 10 -
Depreciation.................................. 163 165
Deferred income taxes......................... 43 32
Changes in current assets and liabilities:
Accounts receivable, net.................... 17 10
Materials and supplies...................... (27) 1
Other current assets........................ (23) (13)
Accounts payable............................ 11 (13)
Casualty and environmental reserves......... (12) 17
Compensation and benefits payable........... (19) (29)
Taxes payable............................... (2) 20
Accrued interest............................ (2) 5
Other current liabilities................... (22) (22)
Changes in long-term casualty and
environmental reserves...................... (16) (24)
Other, net.................................... (26) (29)
------ ------
Net cash provided by operating activities........... 277 292
------ ------
Cash flows from investing activities:
Additions to property and equipment............... (286) (217)
Collections from (advances to) affiliates, net.... 8 (110)
Proceeds from property and equipment dispositions 13 14
Other, net........................................ (11) (15)
------ ------
Net cash used in investing activities............... (276) (328)
------ ------
Cash flows from financing activities:
Net increase in commercial paper.................. 178 98
Payments on long-term debt........................ (178) (70)
Dividends paid.................................... - (24)
------ ------
Net cash provided by financing activities........... - 4
------ ------
Increase (decrease) in cash and cash equivalents.... 1 (32)
Cash and cash equivalents:
Beginning of period............................... 17 57
------ ------
End of period..................................... $ 18 $ 25
====== ======
Supplemental cash flow information:
Interest paid, net of amounts capitalized......... $ 42 $ 44
Income taxes paid, net of refunds................. 79 61
Supplemental, noncash investing and financing
activities information:
Assets financed through a capital lease obligation $ 50 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting policies
The 1993 Annual Report on Form 10-K for Burlington Northern Railroad
Company (Railroad), a wholly owned subsidiary of Burlington Northern Inc.
(BNI), includes a summary of significant accounting policies and should
be read in conjunction with this Form 10-Q. The statements for the
periods presented are condensed and do not contain all information
required by generally accepted accounting principles to be included in a
full set of financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary
to present fairly Railroad's financial position as of June 30, 1994 and
December 31, 1993 and the results of operations for the three-month and
six-month periods ended June 30, 1994 and 1993 and cash flows for the
six-month periods ended June 30, 1994 and 1993 have been included. The
results of operations for any interim period are not necessarily
indicative of the results of operations to be expected for the entire
year.
2. Environmental reserves and other contingencies
Under the requirements of the Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (Superfund) and certain
other laws, Railroad is potentially liable for the cost of clean-up of
various contaminated sites identified by the U.S. Environmental
Protection Agency and other agencies. Railroad has been notified that it
is a potentially responsible party (PRP) for study and clean-up costs at
approximately 55 sites (the PRP sites) and, in many instances, is one of
several PRPs. Railroad generally participates in the clean-up of these
sites through cost-sharing agreements with terms that vary from site to
site. Costs are typically allocated based on relative volumetric
contribution of material, the amount of time the site was owned or
operated, and/or the portion of the total site owned or operated by each
PRP. However, under Superfund and certain other laws, as a PRP, Railroad
can be held jointly and severally liable for all environmental costs
associated with a site.
Environmental costs include initial site surveys and environmental
studies of potentially contaminated sites as well as costs for
remediation and restoration of sites determined to be contaminated.
Liabilities for environmental clean-up costs are initially recorded when
Railroad's liability for environmental clean-up is both probable and a
reasonable estimate of associated costs can be made. Adjustments to
initial estimates are recorded as necessary based upon additional
information developed in subsequent periods. Railroad conducts an
ongoing environmental contingency analysis, which considers a combination
of factors, including independent consulting reports, site visits, legal
reviews, analysis of the likelihood of participation in and ability to
pay for clean-up by other PRPs, and historical trend analysis.
Railroad is involved in administrative and judicial proceedings and other
mandatory clean-up efforts at approximately 150 sites for which it is
being asked to participate in the clean-up of contaminated material
-4-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
discharged into the environment. These approximate 150 sites include the
PRP sites. Railroad paid approximately $9 million during the six months
ended June 30, 1994 relating to mandatory clean-up efforts, including
amounts expended under federal and state voluntary clean-up programs. At
this time, Railroad expects to spend approximately $115 million in future
years to remediate and restore these sites, $110 million of which pertains
to mandated sites, of which approximately $55 million pertains to the PRP
sites. Of the $115 million, Railroad expects to spend $24 million during the
remainder of 1994. Also, Railroad anticipates that the majority of the $115
million will be paid out over a period of less than 7 years; however, some
costs will be paid out over a longer period, in some cases up to 40 years.
In addition, 21 sites account for approximately $90 million of the accrual;
however, no individual site is considered to be material.
Liabilities for environmental costs represent Railroad's best estimates
for remediation and restoration of these sites and include asserted and
unasserted claims. At June 30, 1994, Railroad had accrued approximately
$115 million for estimated future environmental costs and believes it is
reasonably possible, although not probable, that actual environmental
costs could be lower than the recorded reserve or as much as 50 percent
higher. Railroad's best estimate of unasserted claims was approximately
$5 million as of June 30, 1994. Although recorded liabilities include
Railroad's best estimates of all costs, without reduction for anticipated
recovery from insurance, Railroad's total clean-up cost at these sites
cannot be predicted with certainty due to various factors such as the
extent of corrective actions that may be required, evolving environmental
laws and regulations, advances in environmental technology, the extent of
other PRPs participation in clean-up efforts, developments in ongoing
environmental analyses related to sites determined to be contaminated, and
developments in environmental surveys and studies of potentially
contaminated sites. As a result, charges to income for environmental
liabilities could possibly have a significant effect on results of
operations in a particular quarter or fiscal year as individual site
studies and remediation and restoration efforts proceed or as new sites
arise. However, expenditures associated with such liabilities are
typically paid out over a long period, in some cases up to 40 years, and
are therefore not expected to have a material adverse effect on Railroad's
consolidated financial position, cash flow or liquidity.
3. Hedging activities
Railroad has a program to hedge against fluctuations in the price of its
diesel fuel purchases. This program includes forward purchases for
delivery at fueling facilities and exchange-traded petroleum futures
contracts. The futures contracts are accounted for as hedges which are
marked to market with any gains or losses associated with changes in
market value being deferred and recognized as a component of fuel expense
in the period in which the designated fuel is purchased and used. At June
30, 1994, Railroad had entered into agreements with fuel suppliers setting
the price of fuel to be obtained by taking physical delivery directly from
such suppliers at a future date. The average price of the approximately
61 million gallons which Railroad had committed to purchase was
approximately 49 cents per gallon, exclusive of taxes, certain
transportation costs and other charges. In addition, Railroad held
-5-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
petroleum futures contracts representing approximately 67 million gallons
at an average price of approximately 47 cents per gallon. These contracts
have expiration dates ranging from July 1994 to March 1995.
Railroad's current fuel hedging program is designed to cover no more than
50 percent of projected fuel requirements for the subsequent 12-month
period; therefore, hedge positions will not exceed actual fuel
requirements. The current and future fuel delivery prices are monitored
continuously and hedge positions are adjusted accordingly. In order to
reduce risk associated with market movements, fuel hedging transactions do
not extend beyond a 12-month period. Railroad purchases petroleum futures
contracts only through regulated exchanges (e.g. New York Mercantile
Exchange). In order to effectively monitor the fuel hedging activities,
results of the program are summarized and reported to senior management on
a regular basis.
In the second quarter of 1994, Railroad entered into a three-year $50
million notional amount interest rate swap to hedge against interest rate
exposure on one of its debt issuances. Under the terms of this swap,
Railroad receives semiannual fixed-rate payments of 6.33 percent from a
AA-rated counterparty and makes semiannual floating rate payments tied to
the six-month London Interbank Offered Rate (LIBOR). The value of the
swap to Railroad would decline if LIBOR increases. Railroad monitors the
credit rating of its counterparty and does not anticipate losses due to
counterparty nonperformance. The swap is accounted for as a hedge with
realized gains or losses being recognized as a component of interest
expense. During the quarter ended June 30, 1994, the effect of this swap
on interest expense was immaterial and there were no deferred gains or
losses on the balance sheet at June 30, 1994.
4. Other income, net
Other income (expense), net includes the following (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income.............. $ 3 $ 3 $ 5 $ 5
Gain on property dispositions 1 5 3 6
Loss on sale of receivables.. (2) (2) (4) (5)
Miscellaneous, net........... - (2) - (1)
------ ------ ------ ------
Total........................ $ 2 $ 4 $ 4 $ 5
====== ====== ====== ======
</TABLE>
5. Accounting change
Effective January 1, 1994, Railroad adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits." The cumulative effect, net of $7 million income tax benefit,
of this change in accounting attributable to years prior to 1994, at the
time of adoption, was to decrease 1994 income by $10 million.
-6-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
Results of Operations
- - - ---------------------
Six months ended June 30, 1994 compared with six months ended June 30, 1993
Railroad had net income of $182 million for the first six months of 1994
compared with net income of $173 million for the same period in 1993.
Revenues
The following table presents Railroad's revenue information by business unit:
<TABLE>
<CAPTION>
Revenues Per
Revenues Revenue Ton Miles Revenue Ton Mile
--------------- ----------------- ----------------
Six months ended June 30, 1994 1993 1994 1993 1994 1993
- - - -------------------------------------------------------------------------------------------------
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal............................... $ 835 $ 754 67,532 59,042 1.24 1.28
Agricultural Commodities........... 354 380 14,296 17,502 2.48 2.17
Intermodal......................... 350 357 11,681 11,537 3.00 3.09
Forest Products.................... 248 241 10,363 9,904 2.39 2.43
Chemicals.......................... 206 205 7,346 7,432 2.80 2.76
Consumer Products.................. 129 126 4,509 4,349 2.86 2.90
Minerals Processors................ 98 92 3,967 3,752 2.47 2.45
Iron & Steel...................... 84 87 3,994 4,048 2.10 2.15
Vehicles & Machinery............... 97 94 1,293 1,223 7.50 7.69
Aluminum, Nonferrous Metals & Ores 51 53 1,941 2,047 2.63 2.59
Shortlines and other............... (50) (77) (4,277) (5,468) - -
------ ------ ------- -------
Total.............................. $2,402 $2,312 122,645 115,368 1.96 2.00
====== ====== ======= =======
</TABLE>
Total revenues for the first six months of 1994 were $2,402 million compared
with revenues of $2,312 million for the same period in 1993. The $90 million
improvement was primarily attributable to Coal revenues. Lower Agricultural
Commodities revenues were offset by reduced Shortlines and other.
Coal revenues improved $81 million during the first six months of 1994 as a
result of increased traffic. This increase was primarily caused by a rise in
the demand for electricity as well as the need for utilities to replenish coal
stockpiles which were partially depleted during the 1993 summer flooding.
Partially offsetting the increase in traffic was a decline in revenues per
revenue ton mile. Lower yields resulted from continuing competitive pricing
pressures in contract renegotiations and declining cost indices.
Revenues from the transportation of Agricultural Commodities during 1994 were
$26 million less than the first six months of 1993, primarily as a result of a
decline in volumes. This decrease was principally caused by corn and soybean
revenues which were less than prior year revenues by $31 million and $10
million, respectively. These volume related declines were largely
attributable to reduced crop production and lower export demand. A $13
million improvement in barley revenues, caused by favorable market conditions
during the first six months of 1994 partially offset corn and soybean
results. The impact of the overall volume decline was reduced by an increase
in yield which is a product of traffic mix, price and length of haul.
-7-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
Revenues for Intermodal decreased $7 million, for the year, while Forest
Products and Minerals Processors revenues increased $7 million and $6 million,
respectively, when compared with the same period in 1993. Intermodal
revenues reflect Railroad's decision to close two intermodal hub centers in
Texas beginning in the second quarter of this year. Railroad has estimated
lost revenues in excess of $25 million for the first six months of 1994
relating to the closure of these hubs. Withdrawal from the Texas market,
however, has helped improve operating performance in Railroad's key intermodal
lanes, boosting revenues from existing customers and offsetting a portion of
the lost revenues. Increased housing starts during the current year
contributed to a $10 million improvement in lumber revenues within Forest
Products revenues, while improved Minerals Processors revenues resulted from
stronger clays and aggregates traffic caused by an increase in export demand.
Current year revenues for Chemicals, Consumer Products, Iron & Steel, Vehicles
& Machinery and Aluminum, Nonferrous Metals & Ores were relatively flat
compared with the same period in 1993.
Total current year revenues also benefited from a $27 million reduction in
Shortlines and other. This decline was partially due to a decrease in amounts
due to shortline railroads caused by less Railroad traffic on their lines,
additional haulage agreement revenues and increased miscellaneous revenues.
Expenses
Total operating expenses for the first six months of 1994 were $2,050 million
compared with expenses of $2,000 million for the same period in 1993. The
operating ratio for the six months ended June 30, 1994 was 85 percent, an
improvement of 2 percentage points compared with the same period in 1993.
Compensation and benefits expenses for the first six months of 1994 were $14
million greater when compared with 1993. The combination of higher traffic
volumes in 1994, the three percent basic wage increase for union represented
employees, effective July 1993, and severe winter weather in January and
February of 1994 caused an increase in excess of $18 million to wages and
related payroll taxes. Increases in salaries, related payroll taxes and
pension expense, due to a reduction in the discount rate used in determining
the projected benefit obligation, also contributed to higher compensation and
benefits expenses. These increases were partially offset by a $14 million
decrease due to reduced crew sizes in the Northern tier, decreases for cost of
living allowances and decreases in railroad unemployment and annuity taxes.
Fuel expenses for the first six months of 1994 were $5 million lower compared
with 1993 primarily due to a favorable price variance of $16 million. The
average price paid for diesel fuel decreased to 56.6 cents per gallon in 1994
from 61.7 cents per gallon in 1993 despite the 4.3 cents per gallon increase
in the federal fuel tax, effective October 1, 1993, enacted as part of the
Omnibus Budget Reconciliation Act of 1993. These savings were partially
offset by increased consumption due to higher traffic volumes and severe
weather experienced in January and February of 1994. Railroad has a program
-8-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
to hedge against fluctuations in the price of its diesel fuel purchases. This
program includes forward purchases for delivery at fueling facilities and
petroleum futures contracts.
Materials expenses for the first six months of 1994 increased $1 million
compared with 1993, primarily due to higher track and locomotive materials
costs resulting from higher maintenance levels and severe winter weather
experienced in January and February of 1994. These costs were partially
offset by increased scrap sales due to the higher maintenance levels and a
reduction in expenditures for safety and protective equipment deployed in 1993.
Equipment rents expenses for the first six months of 1994 were $37 million
higher than the first six months of 1993. A significant factor was payments
of $11 million for failure to achieve service commitments under various
transportation agreements. Also contributing to the increase were higher
lease rentals, for both rail cars and locomotives, higher car-hire expenses
and increased rentals from an affiliate. These increases were attributable to
traffic volume growth coupled with decreased train velocity. Slower
performance resulted from severe weather operating conditions in January and
February of 1994 and general equipment congestion caused by the additional
rail cars in service.
Year-to-date purchased services expenses increased $10 million compared with
the same period in 1993. The most significant contributing factors were
higher intermodal and automotive traffic-related costs. These increases were
partially offset by payments received from the Atchison, Topeka and Santa Fe
Railway Company (ATSF) for the reimbursement of operating services provided by
BN to ATSF.
Depreciation expense for the first six months of 1994 was slightly lower than
the same period in 1993.
Other operating expenses were $5 million less compared with the first six
months of 1993. A $23 million decrease in costs associated with personal
injury claims was substantially offset by an increase in derailment-related
expenses of approximately $10 million and higher property taxes.
Interest expense for the year remained constant with 1993. A decrease in
interest expense due to a lower average outstanding debt balance in 1994 was
offset by a favorable court ruling in 1993 which reduced interest expense for
the 1993 period.
Other income, net was $1 million lower in 1994 compared with the same period
in 1993. This primarily resulted from lower net gains on property
dispositions occurring in 1994 as compared with 1993.
The effective tax rate was 38.8 percent for the first six months of 1994
compared with 37.1 percent for the same period in 1993. This increase
resulted primarily from the 1 percent increase in the corporate federal income
tax rate as a part of the Omnibus Budget Reconciliation Act of 1993. This
rate change was enacted in the third quarter of 1993 with retroactive
application. Previously issued financial statements were not adjusted.
-9-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
Other Matters
- - - -------------
Environmental issues
Railroad's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. In order to
comply with such regulation and to be consistent with Railroad's corporate
environmental policy, Railroad's operating procedures include practices to
protect the environment. Amounts expended relating to such practices are
inextricably contained in the normal day-to-day costs of Railroad's business
operations.
Under the requirements of the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund) and certain other laws,
Railroad is potentially liable for the cost of clean-up of various
contaminated sites identified by the U.S. Environmental Protection Agency and
other agencies. Railroad has been notified that it is a potentially
responsible party (PRP) for study and clean-up costs at approximately 55 sites
(the PRP sites) and, in many instances, is one of several PRPs. Railroad
generally participates in the clean-up of these sites through cost-sharing
agreements with terms that vary from site to site. Costs are typically allocated
based on relative volumetric contribution of material, the amount of time the
site was owned or operated, and/or the portion of the total site owned or
operated by each PRP. However, under Superfund and certain other laws, as a PRP,
Railroad can be held jointly and severally liable for all environmental costs
associated with a site.
Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when Railroad's liability
for environmental clean-up is both probable and a reasonable estimate of
associated costs can be made. Adjustments to initial estimates are recorded
as necessary based upon additional information developed in subsequent
periods. Railroad conducts an ongoing environmental contingency analysis,
which considers a combination of factors, including independent consulting
reports, site visits, legal reviews, analysis of the likelihood of
participation in and ability to pay for clean-up by other PRPs, and historical
trend analysis.
Railroad is involved in administrative and judicial proceedings and other
mandatory clean-up efforts at approximately 150 sites for which it is being
asked to participate in the clean-up of contaminated material discharged into
the environment. These approximate 150 sites include the PRP sites. Railroad
paid approximately $9 million during the six months ended June 30, 1994 relating
to mandatory clean-up efforts, including amounts expended under federal and
state voluntary clean-up programs. At this time, Railroad expects to spend
approximately $110 million in future years to remediate and restore these sites,
$110 million of which pertains to mandated sites, of which approximately $55
million pertains to the PRP sites. Of the $115 million, Railroad expects to
spend $24 million during the remainder of 1994. Also, Railroad anticipates that
the majority of the $115 million will be paid out over a period of less than 7
years; however, some costs will be paid out over a longer period, in some cases
up to 40 years. In addition, 21 sites account for approximately $90 million of
the accrual; however, no individual site is considered to be material.
-10-
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
Liabilities for environmental costs represent Railroad's best estimates for
remediation and restoration of these sites and include asserted and unasserted
claims. At June 30, 1994, Railroad had accrued approximately $115 million for
estimated future environmental costs and believes it is reasonably possible,
although not probable, that actual environmental costs could be lower than the
recorded reserve or as much as 50 percent higher. Railroad's best estimate of
unasserted claims was approximately $5 million as of June 30, 1994. Although
recorded liabilities include Railroad's best estimates of all costs, without
reduction for anticipated recovery from insurance, Railroad's total clean-up
costs at these sites cannot be predicted with certainty due to various factors
such as the extent of corrective actions that may be required, evolving
environmental laws and regulations, advances in environmental technology, the
extent of other PRPs participation in clean-up efforts, developments in
ongoing environmental analyses related to sites determined to be contaminated,
and developments in environmental surveys and studies of potentially
contaminated sites. As a result, charges to income for environmental
liabilities could possibly have a significant effect on results of operations
in a particular quarter or fiscal year as individual site studies and
remediation and restoration efforts proceed or as new sites arise. However,
expenditures associated with such liabilities are typically paid out over a
long period, in some cases up to 40 years, and are therefore not expected to
have a material adverse effect on Railroad's consolidated financial position,
cash flow or liquidity.
Hedging activities
Railroad has a program to hedge against fluctuations in the price of its
diesel fuel purchases. This program includes forward purchases for delivery
at fueling facilities and exchange-traded petroleum futures contracts. The
futures contracts are accounted for as hedges which are marked to market with
any gains or losses associated with changes in market value being deferred and
recognized as a component of fuel expense in the period in which the
designated fuel is purchased and used. At June 30, 1994, Railroad had entered
into agreements with fuel suppliers setting the price of fuel to be obtained
by taking physical delivery directly from such suppliers at a future date.
The average price of the approximately 61 million gallons which Railroad had
committed to purchase was approximately 49 cents per gallon, exclusive of
taxes, certain transportation costs and other charges. In addition, Railroad
held petroleum futures contracts representing approximately 67 million gallons
at an average price of approximately 47 cents per gallon. These contracts
have expiration dates ranging from July 1994 to March 1995.
Railroad's current fuel hedging program is designed to cover no more than 50
percent of projected fuel requirements for the subsequent 12-month period;
therefore, hedge positions will not exceed actual fuel requirements. The
current and future fuel delivery prices are monitored continuously and hedge
positions are adjusted accordingly. In order to reduce risk associated with
market movements, fuel hedging transactions do not extend beyond a 12-month
period. Railroad purchases petroleum futures contracts only through regulated
exchanges (e.g. New York Mercantile Exchange). In order to effectively
monitor the fuel hedging activities, results of the program are summarized and
reported to senior management on a regular basis.
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<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
In the second quarter of 1994, Railroad entered into a three-year $50 million
notional amount interest rate swap to hedge against interest rate exposure on
one of its debt issuances. Under the terms of this swap, Railroad receives
semiannual fixed-rate payments of 6.33 percent from a AA-rated counterparty
and makes semiannual floating rate payments tied to the six-month London
Interbank Offered Rate (LIBOR). The value of the swap to Railroad would
decline if LIBOR increases. Railroad monitors the credit rating of its
counterparty and does not anticipate losses due to counterparty
nonperformance. The swap is accounted for as a hedge with realized gains or
losses being recognized as a component of interest expense. During the
quarter ended June 30, 1994, the effect of this swap on interest expense was
immaterial and there were no deferred gains or losses on the balance sheet at
June 30, 1994.
Proposed merger
As of June 29, 1994, BNI and Santa Fe Pacific Corporation (Santa Fe) entered
into an Agreement and Plan of Merger (the Agreement) pursuant to which, on the
terms and conditions set forth in the Agreement, Santa Fe will merge (the
Merger) with and into BNI, and BNI will be the surviving corporation. On June
30, 1994, BNI and Santa Fe issued a joint press release announcing, among
other things, the execution of the Agreement and describing the conversion of
each Santa Fe share into 0.27 of a share of BNI common stock to be effected
upon consummation of the proposed Merger. Consummation of the Merger is
subject to approval by the stockholders of BNI and Santa Fe, approval by the
Interstate Commerce Commission, approval under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, and other customary conditions. As is typical in
the context of a merger, upon stockholder approval, certain benefits of
Railroad officers and employees will vest. In particular, restrictions placed
upon certain BNI stock grants will lapse and the previously unearned
compensation relating to such restricted stock, included in BNI stockholders'
equity, will then be a non-cash charge to compensation and benefits expense.
As of June 30, 1994 such unearned compensation relating to restricted stock
was approximately $27 million. BNI is currently evaluating alternatives
pursuant to which such restrictions would continue to remain in effect by the
voluntary action of certain Railroad officers and employees and accordingly,
may delay the timing of recognition of the unearned compensation as expense
and the amount thereof. While BNI and Railroad expect to incur additional
costs related to the merger, it is anticipated that the combined company will
realize significant business and economic advantages not available to either
company on a stand alone basis.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BURLINGTON NORTHERN RAILROAD COMPANY
(Registrant)
By: /s/ Don S. Snyder
---------------------------------
Vice President, Controller
Date: October 5, 1994
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