UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 October 31, 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 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................... 15
Item 6. Exhibits and Reports on Form 8-K........................ 18
(i)
<PAGE>1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Millions)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Revenues.......................... $1,249 $1,141 $3,651 $3,453
Costs and expenses:
Compensation and benefits....... 435 426 1,303 1,280
Fuel............................ 95 83 267 260
Materials....................... 70 73 225 227
Equipment rents................. 112 108 350 309
Purchased services.............. 121 122 356 347
Depreciation.................... 84 82 247 247
Other........................... 112 129 331 353
Total costs and expenses...... 1,029 1,023 3,079 3,023
Operating income.................. 220 118 572 430
Interest expense.................. 20 22 62 64
Other income, net................. 5 4 9 9
Income before income taxes and
cumulative effect of change in
accounting method............... 205 100 519 375
Income tax expense................ 80 66 202 168
Income before cumulative effect of
change in accounting method..... 125 34 317 207
Cumulative effect of change in
accounting method, net of tax... - - (10) -
Net income........................ $ 125 $ 34 $ 307 $ 207
See accompanying notes to consolidated financial statements.
<PAGE>2
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Millions)
(Unaudited)
ASSETS September 30, December 31,
1994 1993
Current assets:
Cash and cash equivalents................... $ 17 $ 17
Accounts receivable, net.................... 614 591
Material and supplies....................... 117 91
Current portion of deferred income taxes.... 180 167
Other current assets........................ 38 23
Total current assets...................... 966 889
Property and equipment, net................... 5,774 5,488
Investments in and advances to affiliates..... 95 104
Other assets.................................. 132 130
Total assets.............................. $6,967 $6,611
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................ $ 583 $ 498
Casualty and environmental reserves......... 259 286
Compensation and benefits payable........... 270 269
Taxes payable............................... 137 131
Accrued interest............................ 29 22
Other current liabilities................... 73 69
Current portion of long-term debt........... 26 177
Commercial paper............................ 70 26
Total current liabilities.............. 1,447 1,478
Long-term debt................................ 722 702
Deferred income taxes......................... 1,396 1,329
Casualty and environmental reserves........... 423 426
Other liabilities............................. 178 182
Total liabilities......................... 4,166 4,117
Common stockholder's equity:
Common stock, without par value, 1,000
shares authorized, issued and outstanding. 1,191 1,191
Retained earnings........................... 1,610 1,303
Total common stockholder's equity......... 2,801 2,494
Total liabilities and stockholder's equity $6,967 $6,611
See accompanying notes to consolidated financial statements.
<PAGE>3
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Millions)
(Unaudited)
Nine Months Ended
September 30,
1994 1993
Cash flows from operating activities:
Net income ....................................... $ 307 $ 207
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting
method...................................... 10 -
Depreciation.................................. 247 247
Deferred income taxes......................... 60 75
Changes in current assets and liabilities:
Accounts receivable, net.................... (23) (32)
Materials and supplies...................... (28) 5
Other current assets........................ (15) (20)
Accounts payable............................ 83 21
Casualty and environmental reserves......... (27) 23
Compensation and benefits payable........... 1 (37)
Taxes payable............................... 6 18
Accrued interest............................ 7 17
Other current liabilities................... 4 2
Changes in long-term casualty and
environmental reserves...................... (3) (32)
Other, net.................................... (21) (42)
Net cash provided by operating activities........... 608 452
Cash flows from investing activities:
Additions to property and equipment............... (480) (367)
Collections from (advances to) affiliates, net.... 9 (24)
Proceeds from property and equipment dispositions 24 29
Other, net........................................ (22) (16)
Net cash used in investing activities............... (469) (378)
Cash flows from financing activities:
Net increase in commercial paper.................. 44 38
Payments on long-term debt........................ (182) (77)
Dividends paid.................................... - (74)
Other, net....................................... (1) -
Net cash used in financing activities............... (139) (113)
Increase (decrease) in cash and cash equivalents.... - (39)
Cash and cash equivalents:
Beginning of period............................... 17 57
End of period..................................... $ 17 $ 18
Supplemental cash flow information:
Interest paid, net of amounts capitalized......... $ 52 $ 53
Income taxes paid, net of refunds................. 143 89
Supplemental, noncash investing and financing
activities information:
Assets financed through a capital lease obligation $ 50 $ -
See accompanying notes to consolidated financial statements.
<PAGE>4
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting policies
The 1993 Annual Report on Forms 10-K and 10-K/A 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 September 30, 1994 and December 31, 1993 and the results of operations
for the three-month and nine-month periods ended September 30, 1994 and
1993 and cash flows for the nine-month periods ended September 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
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 60 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
<PAGE>5
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 160 sites, including the PRP
sites, for which it is being asked to participate in the clean-up of
contaminated material discharged into the environment. Railroad paid
approximately $13 million during the nine months ended September 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 all known sites, $105 million of which pertains to mandated
sites, of which approximately $65 million pertains to the PRP sites. Of
the $115 million, Railroad expects to spend $6 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. At September 30, 1994, 22 sites were accountable for approximately
$70 million of the accrual and no individual site was 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 September 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 $10 million as of September 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.
<PAGE>6
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
September 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 67 million gallons which Railroad had committed to
purchase was approximately 52 cents per gallon, exclusive of taxes,
certain transportation costs and other charges. In addition, Railroad
held petroleum futures contracts representing approximately 52 million
gallons at an average price of approximately 50 cents per gallon. These
contracts have expiration dates ranging from October 1994 to June 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 interest
rate swap on a notional amount of $50 million 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 declines 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 first nine months of 1994, the effect of this swap on
interest expense was immaterial and there were no deferred gains or losses
on the balance sheet at September 30, 1994.
<PAGE>7
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Other income, net
Other income (expense), net includes the following (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Gain on property dispositions $ 5 $ 4 $ 8 $ 10
Loss on sale of receivables.. (3) (2) (7) (7)
Interest income.............. 2 2 7 7
Miscellaneous, net........... 1 - 1 (1)
Total........................ $ 5 $ 4 $ 9 $ 9
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.
<PAGE>8
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
Results of Operations
Nine months ended September 30, 1994 compared with nine months ended September
30, 1993
Railroad had net income for the first nine months of 1994 of $307 million
compared with net income of $207 million for the same period in 1993. Results
for 1993 included the effects of severe flooding in the Midwest, most notably
in the third quarter. Railroad estimated that the third quarter flooding
reduced revenues during 1993 by $44 million and increased operating expenses
by $35 million, for a combined reduction of $79 million. Net income for 1993
included the retroactive effects of the Omnibus Budget Reconciliation Act of
1993 (the Act), which was passed into law during August 1993. The Act
increased the corporate federal income tax rate by one percent, effective
January 1, 1993, which reduced net income by $28 million through the date of
enactment. Railroad recognized a one-time, non-cash charge of $27 million to
income tax expense to adjust deferred taxes as of the enactment date and a
charge of $1 million to current income tax expense.
Revenues
The following table presents Railroad's revenue information by business unit:
<TABLE>
<CAPTION>
Revenues Per
Revenues Revenue Ton Miles Revenue Ton Mile
Nine months ended September 30, 1994 1993 1994 1993 1994 1993
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal............................... $1,253 $1,121 103,583 88,981 1.21 1.26
Agricultural Commodities........... 556 563 22,664 26,144 2.45 2.15
Intermodal......................... 556 542 18,487 17,620 3.01 3.08
Forest Products.................... 376 361 15,704 14,714 2.39 2.45
Chemicals.......................... 308 304 11,086 11,046 2.78 2.75
Consumer Products.................. 195 188 6,955 6,610 2.80 2.84
Minerals Processors................ 155 146 6,271 5,979 2.47 2.44
Iron & Steel...................... 127 129 6,021 6,095 2.11 2.12
Vehicles & Machinery............... 144 139 1,943 1,782 7.41 7.80
Aluminum, Nonferrous Metals & Ores 77 77 2,912 2,963 2.64 2.60
Shortlines and other............... (96) (117) (6,547) (8,048) - -
Total.............................. $3,651 $3,453 189,079 173,886 1.93 1.99
</TABLE>
Total revenues for the first nine months of 1994 were $3,651 million compared
with revenues of $3,453 million for the same period in 1993. The $198 million
improvement was primarily attributable to a $132 million improvement in Coal
revenues.
Coal revenues improved $132 million during the first nine 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 during the first half of 1994, which were partially depleted during
the 1993 summer flooding. Railroad estimated lost revenues of approximately
<PAGE> 9
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
$35 million during 1993 as a result of this flooding. Partially offsetting
the increase in 1994 traffic was a decline in revenues per revenue ton mile.
These lower yields were largely due to customers meeting minimum tonnage
requirements earlier in 1994 and therefore, receiving lower rates on
subsequent moves. Continuing competitive pricing pressures in contract
renegotiations also contributed to lower yields.
Revenues from the transportation of Agricultural Commodities during 1994 were
$7 million less than the first nine months of 1993, primarily as a result of a
decline in volumes. Volume related declines, which were largely attributable
to reduced crop production and lower export demand, caused a decrease of $47
million in corn revenues. A $25 million improvement in barley revenues and a
$21 million improvement in wheat revenues were caused by favorable market
conditions. The impact of the overall volume decline was reduced by an
increase in yield, which is a product of commodity mix, price and length of
haul.
Year-to-date Intermodal and Forest Products revenues increased $14 million and
$15 million, respectively, when compared with the same period in 1993.
Intermodal-international revenues were boosted $21 million by both new
business and growth in existing business. Partially offsetting this increase
was a decrease in domestic trailer revenues. Overall, increased traffic in
Railroad's key intermodal lanes more than offset Railroad's withdrawal from
the Texas market. Increased housing starts during the current year
contributed to a $16 million improvement in lumber revenues within Forest
Products revenues.
Minerals Processors revenues increased $9 million and Consumer Products
revenues increased $7 million when compared with the first nine months of
1993. Improved Minerals Processors revenues resulted primarily from stronger
clays and aggregates traffic caused by increases in both domestic and export
demands. Consumer Products revenues increased primarily from increased export
demand.
Current year revenues for Chemicals, Iron & Steel, and Vehicles & Machinery
were relatively flat compared with the same period in 1993 while Aluminum,
Nonferrous Metals & Ores remained unchanged.
Total current year revenues also benefited from a $21 million reduction in
Shortlines and other. This decline was partially due to additional haulage
agreement revenues and increased miscellaneous revenues.
Expenses
Total operating expenses for the first nine months of 1994 were $3,079 million
compared with $3,023 million for the same period in 1993. However, the
operating ratio improved 4 percentage points to 84 percent from 88 percent, as
increased revenues more than offset increased operating expenses.
Compensation and benefits expenses for year-to-date 1994 were $23 million
greater than last year. Higher traffic volumes during 1994 as well as the
basic wage increases for union represented employees, 3 percent effective July
1993 and 4 percent effective July 1994, caused an increase in excess of $30
million to wages and related payroll taxes. These increases were partially
<PAGE>10
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
offset by decreases in cost of living allowances and lower costs associated
with union employees receiving reserve status compensation in 1994. Increased
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.
Fuel expenses were $7 million higher during the first nine months of 1994 as
compared with 1993. The average price paid for diesel fuel decreased 2.7
cents per gallon in 1994 to 57.6 cents 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 price savings were
more than offset by a $19 million increase in consumption due to higher
traffic volumes. 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 petroleum futures contracts.
Materials expenses for the first nine months of 1994 were relatively flat
compared with 1993. Track and locomotive repair materials costs increased due
to higher maintenance levels and a larger fleet size in 1994. Partially
offsetting this increase were greater scrap sales due to the higher
maintenance levels and a reduction in expenditures for safety and protective
equipment deployed in 1993.
Equipment rents expenses were $41 million higher than the first nine months of
1993. This increase was primarily attributable to higher lease expenses due
to a larger fleet of leased rail cars as well as leasing locomotives to meet
power requirements. Other contributing factors were increased rentals from an
affiliate and payments for failure to achieve service commitments in the first
half of 1994 under various transportation agreements.
Year-to-date purchased services expenses increased $9 million compared with
the same period in 1993. Higher intermodal-related costs, due to increased
volumes, and higher third party locomotive maintenance and repair costs were
the most significant contributing factors to this increase. These increases
were partially offset by haulage agreement-related reimbursements from The
Atchison, Topeka and Santa Fe Railroad (ATSF) for operating services provided
by Railroad to ATSF.
Depreciation expense for the first nine months of 1994 was flat compared with
the same period in 1993.
Other operating expenses were $22 million less compared with the first nine
months of 1993. A $31 million decrease in costs associated with personal
injury claims and the absence in 1994 of costs associated with the 1993 third
quarter floods was partially offset by an increase in derailment-related
expenses.
Interest expense for the year decreased $2 million compared with 1993, due to
a lower average outstanding debt balance in 1994.
<PAGE>11
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
Other income, net of expense, for the first nine months of 1994 remained
constant with the same period in 1993. Lower net gains on property
dispositions occurring in 1994 as compared with 1993 were offset by increases
in other miscellaneous income.
The effective tax rate was 38.9 percent for the first nine months of 1994
compared with 44.8 percent for the same period in 1993. The higher effective
tax rate for 1993 resulted from the retroactive increase, effective January 1,
1993, in tax rates pursuant to the provisions of the Omnibus Budget
Reconciliation Act of 1993 and the related impact on the deferred tax
liability at January 1, 1993.
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 60 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.
<PAGE>12
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
Railroad is involved in a number of administrative and judicial proceedings
and other mandatory clean-up efforts at approximately 160 sites, including the
PRP sites, for which it is being asked to participate in the clean-up of sites
contaminated by material discharged into the environment. Railroad paid
approximately $13 million during the nine months ended September 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
all known sites, $105 million of which pertains to mandated sites, of which
approximately $65 million pertains to the PRP sites. Of the $115 million,
Railroad expects to spend $6 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. At September 30, 1994, 22
sites were accountable for approximately $70 million of the accrual and no
individual site was 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 September 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 $10 million as of
September 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 September 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 67 million gallons which
<PAGE>13
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
Railroad had committed to purchase was approximately 52 cents per gallon,
exclusive of taxes, certain transportation costs and other charges. In
addition, Railroad held petroleum futures contracts representing approximately
52 million gallons at an average price of approximately 50 cents per gallon.
These contracts have expiration dates ranging from October 1994 to June 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 interest
rate swap on a notional amount of $50 million 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
declines 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 first
nine months of 1994 the effect of this swap on interest expense was immaterial
and there were no deferred gains or losses on the balance sheet at September
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 Original Agreement) pursuant to
which, on the terms and conditions set forth in the Original Agreement, Santa
Fe will merge (the "Merger") with and into BNI, and BNI will be the surviving
corporation and each share of Santa Fe common stock will be converted into
0.27 of a share of BNI common stock. As of October 26, 1994, BNI and Santa Fe
entered into an Amendment to the Original Agreement (as so amended, the
Agreement) to increase the exchange ratio in the proposed merger to 0.34 of a
share of BNI common stock per share of Santa Fe common stock. All other terms
of the Agreement are identical to those set forth in the Original Agreement.
Consummation of the Merger is subject to approval by the stockholders of BNI
and Santa Fe, approval by the Interstate Commerce Commission (ICC), approval
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other
customary conditions. Meetings of the stockholders of BNI and Santa Fe to
consider and vote upon the Agreement are scheduled for November 18, 1994. In
addition, the ICC has adopted a schedule calling for a final ICC determination
with respect to the Merger during the first quarter of 1996. Notwithstanding
this schedule, there can be no assurance that the ICC will issue a decision
any sooner than the second quarter of 1997, the last period within which the
ICC is permitted to issue a final decision under applicable law. As is
<PAGE>14
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Item 2. Management's Narrative Analysis of Results of Operations
typical in the context of a merger, upon approval by the stockholders of both
BNI and Santa Fe, certain benefits of 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 September 30, 1994, such unearned
compensation relating to restricted stock was approximately $25 million.
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.
On October 5, 1994, Union Pacific Corporation (UP) submitted a proposal to
Santa Fe pursuant to which UP would acquire Santa Fe for 0.344 shares of UP
common stock per share of Santa Fe common stock, and on October 30, 1994 UP
announced an increased proposal to 0.407 shares of UP common stock per share
of Santa Fe common stock. Santa Fe's Board of Directors considered both of
these UP proposals and reiterated its support of the BNI Agreement. On
November 8, 1994, UP submitted a new proposal to Santa Fe pursuant to which UP
would acquire up to 57 percent of Santa Fe's common stock for $17.50 per share
in cash in a cash tender offer and would acquire the remaining 43 percent of
Santa Fe's common stock in a second-step merger for 0.354 shares of UP common
stock for each share of Santa Fe common stock. On November 9, 1994, UP
commenced the cash tender offer, which is scheduled to expire on December 8,
1994, unless extended. UP's proposal (including the tender offer) is subject
to a number of conditions, including termination of the BNI-Santa Fe merger
agreement, but contemplates use of an ICC "voting trust" and is therefore not
subject to ICC approval. The Santa Fe Board of Directors has not taken a
public position with respect to the November 8, 1994 UP proposal. In the
November 8, 1994 proposal, UP indicated that, alternatively, if preferred by
the Santa Fe Board of Directors, UP would be prepared to proceed with its
prior proposal to acquire Santa Fe for 0.407 shares of UP common stock per
share of Santa Fe common stock without the use of a voting trust. UP has also
disseminated proxy materials soliciting proxies from Santa Fe stockholders in
opposition to the BNI-Santa Fe Merger.
<PAGE>15
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Wheat and Barley Transportation Rates
In September 1980 a class action lawsuit was filed against Railroad in United
States District Court for the District of Montana ("District Court")
challenging the reasonableness of Railroad's export wheat and barley rates.
The class consists of Montana grain producers and elevators. The plaintiffs
sought a finding that Railroad's single car export wheat and barley rates for
shipments moving from Montana to the Pacific Northwest were unreasonably high
and requested damages in the amount of $64 million. In March 1981 the District
Court referred the rate reasonableness issue to the Interstate Commerce
Commission ("ICC"). Subsequently, the State of Montana filed a complaint at
the ICC challenging Railroad's multiple car rates for Montana wheat and barley
movements occurring after October 1, 1980.
The ICC issued a series of decisions in this case from 1988 to 1991. Under
these decisions, the ICC applied a revenue to variable cost test to the rates
and determined that Railroad owed $9,685,918 in reparations plus interest. In
its last decision, dated November 26, 1991, the ICC found Railroad's total
reparations exposure to be $16,559,012 through July 1, 1991. The ICC also
found that Railroad's current rates were below a reasonable maximum and vacated
its earlier rate prescription order.
Railroad appealed to the United States Court of Appeals for the District of
Columbia Circuit ("D.C. Circuit") those portions of the ICC's decisions
concerning the post-October 1, 1980 rate levels. Railroad's primary contention
on appeal was that the ICC erred in using the revenue to variable cost rate
standard to judge the rates instead of Constrained Market Pricing/Stand Alone
Cost principles. The limited portions of decisions that cover pre-October 1,
1980 rates were appealed to the Montana District Court.
On March 24, 1992, the Montana District Court dismissed plaintiffs' case as to
all aspects other than those relating to pre-October 1, 1980 rates. On
February 9, 1993, the D.C. Circuit served its decision regarding the appeal of
the several ICC decisions in this case. The Court held that the ICC did not
adequately justify its use of the revenue to variable cost standard as Railroad
had argued and remanded the case to the ICC for further administrative
proceedings.
On July 22, 1993, the ICC served an order in response to the D.C. Circuits'
February 9, 1993 decision. In its order, the ICC stated it would use the
Constrained Market Pricing/Stand Alone Cost Standards in assessing the
reasonableness of BN wheat and barley rates moving from Montana to Pacific
Coast ports from 1978 forward. The ICC assigned the case to the Office of
Hearings to develop a procedural schedule. On October 28, 1994, plaintiff's
filed their opening evidence arguing that the revenue received by Railroad
exceeded the stand alone costs of transporting that traffic and that Railroad's
rates were unreasonably high. Although no procedural schedule has been
established for the receipt of Railroad's evidence, Railroad, on November 7,
1994, filed a petition with the ICC requesting that a procedural schedule be
set allowing Railroad to file six months after the close of discovery. The ICC
has issued a procedural schedule calling for the receipt of Railroad's evidence
<PAGE>16
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
PART II OTHER INFORMATION
on February 27, 1995. However, Railroad has sought reconsideration of that
schedule and under Railroad's proposal its evidence would not be due until June
1995.
Coal Transportation Contract Litigation
On April 26, 1991, an action was filed against Railroad in the 102nd Judicial
District Court for Bowie County, Texas seeking a reduction of the
transportation rates required to be paid under two contracts (Southwestern
Electric Power Company v. Burlington Northern Railroad Company, No.
D-102-CV-91-0720). The plaintiff, Southwestern Electric Power Company
("SWEPCO"), is challenging the contract rates for transportation of coal to its
electric generating facilities at Cason, Texas and Flint Creek, Arkansas.
SWEPCO contends that productivity gains achieved by Railroad constitute unusual
economic conditions giving rise to a "gross inequity" because Railroad's costs
of providing service have been reduced over the contracts' terms. SWEPCO seeks
both prospective rate relief and recovery of alleged past overcharges.
Railroad's primary contention is that both parties anticipated productivity
gains in the rail industry when negotiating the contracts and agreed that
Railroad would retain most of its productivity gains. Railroad further
contends that there was no agreement that transportation rates paid by SWEPCO
would be based on Railroad's costs of providing service.
The case is currently in litigation. Due to uncertainties inherent in
presenting the case to the jury, it is not possible for Railroad to predict the
likely outcome of the trial or Railroad's potential exposure under the jury's
verdict.
Environmental Proceeding
On May 25, 1994, the United States Department of Justice ("Department") filed
suit on behalf of the United States Environmental Protection Agency ("EPA")
against Railroad in United States District Court for the Eastern District of
Wisconsin for the release of oil and hazardous substances into navigable waters
of the United States in the course of three derailments. Specifically
referenced are (1) the alleged release of hazardous substances into the Nemadji
River and its shoreline near Superior, Wisconsin, on June 30, 1992, (2) the
alleged release of oil into the North Platte River and its shoreline near
Guernsey, Wyoming, on January 9, 1993, and (3) the alleged release of oil into
a tributary of the Bighorn River near Worland, Wyoming, on May 6, 1993. The
suit claims that pursuant to 33 U.S.C. Section 1321(b)(7), Railroad is liable
to the United States for civil penalties of up to $25,000 per day of violation
or $1,000 per barrel of oil or per reportable quantity of each hazardous
substance discharged. The EPA calculates the statutory maximum penalty
associated with these three spills to be $10,137,000. Railroad has answered
the complaint and opposed the penalties sought by the EPA.
Under the applicable water pollution statutes it appears that some fine against
Railroad is likely. However, such statutes, specifically 33 U.S.C. Section
1321(b)(8), provide that penalties shall be mitigated based upon factors such
as the seriousness of the violation, the economic benefit to the violator, the
degree of culpability, the history of violation and the response of the
<PAGE>17
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
PART II OTHER INFORMATION
violator to minimize or mitigate the adverse effects of the spill.
Furthermore, issues concerning whether the Worland spill occurred in navigable
waters of the United States and whether the EPA's calculations for the Nemadji
spill are proper will significantly affect the amount of any fine. Based upon
the facts of these spills and Railroad's conduct, all of the above-referenced
mitigation factors favor a substantially lower fine than that calculated by the
EPA and the Department.
Settlement meetings with the Department have involved discussions of the basis
for the Department's claims and penalty calculations, and Railroad has
presented mitigating factors in the context of the allegations. Settlement
discussions are ongoing. Discovery, however, has begun and the case has been
set for trial in June 1995. If a compromise is not reached, Railroad believes
that it has substantial defenses to, and evidence to mitigate the severity of
any fines which could be imposed. Railroad also believes it can demonstrate
that the amounts claimed by the government are out of proportion to any
reasonable assessment. Accordingly, in litigation, Railroad believes it should
be successful in significantly reducing the amount of any fine from the above
calculated statutory maximum.
<PAGE>18
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
The following exhibits are filed as part of this report:
Designation Nature of Exhibit
10.1 Employment Agreement, dated September 13,
1994, between Burlington Northern Railroad
Company and Mr. James L. Noel.
27 Financial Data Schedule.
B. Reports on Form 8-K
During the quarter covered by this report, there were no reports on
Form 8-K filed.
Items 2, 3, 4 and 5 of Part II were not applicable and have been
omitted.
<PAGE>19
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
By: /s/ David C. Anderson
Executive Vice President &
Chief Financial Officer
Date: November 10, 1994
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY and SUBSIDIARIES
Exhibit Index
Sequentially
Exhibit Numbered
Number Description Page
10.1 Employment Agreement, dated
September 13, 1994, between Burlington
Northern Railroad Company and
Mr. James L. Noel.
27 Financial Data Schedule
EXHIBIT 10.1
BURLINGTON NORTHERN RAILROAD
3000 Continental Plaza
JAMES B. DAGNON 777 Main Street
Executive Vice President Fort Worth, Texas 76102
Employee Relations Telephone (817) 878-3055
September 13, 1994
PERSONAL AND CONFIDENTIAL
Mr. James Noel
RD 1 Mineral Springs Road
Highland Mills, New York 10930
Dear Jim:
This letter will confirm the agreement for your employment as Vice President
Training and Development of Burlington Northern Railroad (the "Company").
1. Employment and Term. The Company agrees to your employment, and you agree
to act as its Vice President Training and Development commencing October
1, 1994 ("Date of Employment").
2. Basic Compensation. Commencing with your Date of Employment, your base
salary shall be $175,000 per annum or such rate as may be fixed from time
to time by the Board of Directors of the Company in connection with its
annual review of executive compensation.
3. Incentive Bonus. You will be paid an incentive bonus the minimum amount
of which will be $80,000. This payment will be made in January 1995. You
will be a regular participant in the Incentive Compensation Plan
commencing January 1, 1995, in accordance with the plan.
4. Employment Lump Sum. As soon as practicable upon your employment, you
will be paid an employment lump sum in the amount of $163,000 as
compensation for the items you are forfeiting by terminating employment
with your current employer.
5. Restricted Stock. You will be granted an initial award under the
Burlington Northern Inc. Restricted Stock Incentive Plan of 3,000 shares
to be effective upon approval by the Compensation & Nominating Committee
of the Board of Directors at their October 1994 meeting.
6. Stock Options. You will be granted an initial award under the Burlington
Northern Inc. Stock Option Incentive Plan of 5,000 Basic Options effective
upon approval by the Compensation & Nominating Committee of the Board of
Directors at their October 1994 meeting.
Mr. James Noel
September 13, 1994
Page -2-
7. Stock Options, Restricted Stock, Disability and Other Benefits. You will
participate with other executives of the Company in plans from time to
time in effect for Stock Options, Restricted Stock, short-term and
long-term disability benefits, change in control protection and
perquisites, including those available under the employee benefit plans of
the Company. See attachment.
8. Relocation Benefits. The Company will be responsible for any normal and
reasonable costs associated with your relocation to the Fort Worth, Texas
area, in accordance with our standard policy for exempt employees. This
benefit will include the relocation allowance equal to $17,500 on a net
after-tax basis.
This Agreement is contingent upon your passing a physical examination, which
includes a drug screen.
In consideration of this compensation package, you agree to devote your full
time and effort to the Company, to perform in a capacity of a Vice President
Training and Development and to perform to a standard suitable for such
position and compensation and to abide by all standards to which Company
employees are subject including those set forth in the Company Code of Ethics,
a copy of which is attached.
If this correctly sets forth our agreement, please sign the original and
return it to me, and keep the copy for your file.
Jim, we are looking forward to your joining the Burlington Northern team!
Sincerely,
BURLINGTON NORTHERN RAILROAD
By: /s/ James B. Dagnon
James B. Dagnon
Executive Vice President Employee Relations
Accepted this 25 day of September 1994
/s/ James L. Noel
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON
NORTHERN RAILROAD COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 636
<ALLOWANCES> 22
<INVENTORY> 0
<CURRENT-ASSETS> 966
<PP&E> 9501
<DEPRECIATION> 3727
<TOTAL-ASSETS> 6967
<CURRENT-LIABILITIES> 1447
<BONDS> 722
<COMMON> 1191
0
0
<OTHER-SE> 1610
<TOTAL-LIABILITY-AND-EQUITY> 6967
<SALES> 0
<TOTAL-REVENUES> 3651
<CGS> 0
<TOTAL-COSTS> 3079
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 519
<INCOME-TAX> 202
<INCOME-CONTINUING> 317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (10)
<NET-INCOME> 307
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</TABLE>
