UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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 July 31, 1995* 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
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
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<S> <C> <C>
Item 1. Financial Statements 1
Item 2. Management's Narrative Analysis of Results of
Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<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,
1995 1994 1995 1994
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues $ 1,284 $ 1,192 $ 2,631 $ 2,402
Costs and expenses:
Compensation and benefits 451 423 939 868
Fuel 100 89 198 172
Materials 69 70 149 155
Equipment rents 132 122 261 238
Purchased services 112 117 218 235
Depreciation 92 82 184 163
Other 85 115 202 219
------- ------- ------- --------
Total costs and expenses 1,041 1,018 2,151 2,050
------- ------- ------- --------
Operating income 243 174 480 352
Interest expense 21 21 39 42
Other income, net 13 2 17 4
------- ------- ------- --------
Income before income taxes and
cumulative effect of change in
accounting method 235 155 458 314
Income tax expense 92 60 180 122
------- ------- ------- --------
Income before cumulative effect of
change in accounting method 143 95 278 192
Cumulative effect of change in
accounting method, net of tax - - - (10)
------- ------- ------- --------
Net income $ 143 $ 95 $ 278 $ 182
======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1995 1994
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31 $ 27
Accounts receivable, net 671 702
Materials and supplies 130 100
Current portion of deferred income taxes 151 157
Other current assets 52 27
------- -------
Total current assets 1,035 1,013
Property and equipment, net 6,020 5,848
Investments in and advances to affiliates 236 94
Other assets 160 133
------- -------
Total assets $ 7,451 $ 7,088
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 541 $ 539
Compensation and benefits payable 281 263
Casualty and environmental reserves 225 248
Taxes payable 122 130
Accrued interest 19 19
Other current liabilities 42 64
Commercial paper 231 90
Current portion of long-term debt 25 25
------- -------
Total current liabilities 1,486 1,378
Long-term debt 705 719
Deferred income taxes 1,458 1,421
Casualty and environmental reserves 421 415
Other liabilities 200 202
------- -------
Total liabilities 4,270 4,135
------- -------
Common stockholder's equity:
Common stock, without par value (1,000 shares
authorized, issued and outstanding) 1,191 1,191
Retained earnings 1,990 1,762
------- -------
Total common stockholder's equity 3,181 2,953
------- -------
Total liabilities and stockholder's
equity $ 7,451 $ 7,088
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BURLINGTON NORTHERN RAILROAD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1994
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 278 $ 182
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting method - 10
Depreciation 184 163
Deferred income taxes 43 43
Changes in current assets and liabilities:
Accounts receivable, net 33 17
Materials and supplies (31) (27)
Other current assets (25) (23)
Accounts payable 2 11
Compensation and benefits payable 18 (19)
Casualty and environmental reserves (23) (12)
Taxes payable (8) (2)
Accrued interest - (2)
Other current liabilities (22) (22)
Changes in long-term casualty and environmental
reserves 6 (16)
Other, net (26) (31)
------- -------
Net cash provided by operating activities 429 272
------- -------
Cash flows from investing activities:
Additions to property and equipment (352) (281)
Collections from (advances to) affiliates, net (142) 8
Proceeds from property and equipment dispositions 15 13
Other, net (18) (11)
------- -------
Net cash used in investing activities (497) (271)
------- -------
Cash flows from financing activities:
Net increase in commercial paper 141 178
Payments on long-term debt (19) (178)
Dividends paid (50) -
------- -------
Net cash provided by financing activities 72 -
------- -------
Increase in cash and cash equivalents 4 1
Cash and cash equivalents:
Beginning of period 27 17
------- -------
End of period $ 31 $ 18
======= =======
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 38 $ 42
Income taxes paid, primarily to parent 142 79
Supplemental noncash investing and financing
activities information:
Assets financed through capital lease obligations $ 3 $ 50
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Accounting policies
The 1994 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, 1995 and December 31, 1994 and the results of
operations for the three-month and six-month periods ended June 30, 1995 and
1994 and cash flows for the six-month periods ended June 30, 1995 and 1994
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. Certain prior year data has been reclassified to conform to the
current year presentation.
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 United States 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 85 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 analyses.
Railroad is involved in a number of administrative and judicial proceedings
and other mandatory clean-up efforts at approximately 170 sites, including the
PRP sites, at which Railroad is being asked to participate in the clean-up of
the sites contaminated by material discharged into the environment. Railroad
paid approximately $10 million during the six months ended June 30, 1995
relating to mandatory clean-up efforts, including amounts expended under
federal and state voluntary clean-up programs. Recoveries received from third
parties, net of legal costs incurred, were approximately $5 million during the
six months ended June 30, 1995. At this time, Railroad estimates that it will
spend approximately $110 million in future years to remediate and restore all
known sites, including $105 million pertaining to mandated sites, of which
approximately $75 million relates to the PRP sites. Of the $110 million,
Railroad estimates that it will spend $18 million during the remainder of
1995. Also, Railroad anticipates that the majority of the $110 million will
be paid out over a period of less than seven years; however, some costs will
be paid out over a longer period, in some cases up to 40 years. At June 30,
1995, 24 sites accounted for approximately $75 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 both asserted and
unasserted claims. At June 30, 1995, Railroad had accrued approximately $110
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,
1995. Although recorded liabilities include Railroad's best estimates of all
costs, without reduction for anticipated recoveries from third parties,
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.
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. As of June 30, 1995, 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 106 million gallons which
Railroad had committed to purchase was approximately 50 cents per gallon,
exclusive of taxes, certain transportation costs and other charges. In
addition, Railroad held petroleum futures contracts representing approximately
68 million gallons at an average price of approximately 50 cents per gallon.
These contracts have expiration dates ranging from July, 1995 to May, 1996.
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.
4. Other income, net
Other income, net includes the following (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 8 $ 3 $ 10 $ 5
Gain on property dispositions 7 1 8 3
Loss on sale of receivables - (2) - (4)
Miscellaneous, net (2) - (1) -
------- ------- ------- -------
Total $ 13 $ 2 $ 17 $ 4
======= ======= ======= =======
</TABLE>
<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, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
Railroad recorded net income for the first six months of 1995 of $278 million
compared with net income of $182 million for the same period in 1994. Results
for 1994 were reduced by a $10 million, net of tax, cumulative effect of an
accounting change for postemployment benefits.
REVENUES
The following table presents Railroad's revenue information by Railroad
business unit for the six months ended June 30, 1995 and 1994 and includes
certain reclassifications of prior year information to conform to current year
presentation:
<TABLE>
<CAPTION>
Revenues
Revenue Per Revenue
Revenues Ton Miles Ton Mile
1995 1994 1995 1994 1995 1994
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal $ 883 $ 835 77,320 67,532 1.14 1.24
Agricultural Commodities 493 344 24,902 13,919 1.98 2.47
Intermodal 377 350 12,737 11,681 2.96 3.00
Minerals 178 181 7,063 7,061 2.52 2.56
Food 144 139 5,185 4,886 2.78 2.84
Metals 147 131 6,218 5,809 2.36 2.26
Chemicals 146 138 5,366 4,826 2.72 2.86
Wood 129 136 6,144 6,551 2.10 2.08
Paper 103 101 3,407 3,364 3.02 3.00
Vehicles & Machinery 97 97 1,414 1,293 6.86 7.50
Shortlines and other (66) (50) (5,858) (4,277) - -
-------- -------- -------- --------
Total $ 2,631 $ 2,402 143,898 122,645 1.83 1.96
======== ======== ======== ========
</TABLE>
Total revenues for the first six months of 1995 were $2,631 million compared
with revenues of $2,402 million for the same period in 1994. The $229 million
increase was primarily due to improved Agricultural Commodities and Coal
revenues.
Coal revenues improved $48 million during the first six months of 1995 due to
higher traffic levels caused primarily by new business, favorable weather
conditions early in the year and increased demand for low-sulfur coal from the
Powder River Basin. Partially offsetting this increase was a decline in
yields as a result of continuing competitive pricing pressures in contract
negotiations and a change in traffic mix.
Revenues from the transportation of Agricultural Commodities during the first
six months of 1995 were $149 million greater than the first six months of
1994. The increase was principally caused by improvements in corn and soybean
revenues of $152 million and $23 million, respectively, partially offset by a
decrease in wheat revenues of $26 million. Corn and soybean revenues
benefited primarily from increased crop production as well as higher traffic
volumes to the Pacific Northwest due to stronger export demand during the
first six months of 1995. Wheat revenues declined due to weaker export demand
when compared with the strong demand in 1994. The shift in commodities to
lower yielding corn and soybeans from higher yielding wheat led to the
aggregate decrease in revenues per revenue ton mile.
Intermodal and Metals revenues increased $27 million and $16 million,
respectively, when compared with the first six months of 1994. The
improvement in Intermodal revenues was largely due to a $27 million increase
in Intermodal-international revenues resulting from new business and
continuing growth of existing business. The improvement in Metals revenues
resulted primarily from increased taconite and coal coke revenues. Resumed
production at a plant closed by a labor strike during the first six months of
1994 accounted for the majority of the increase in taconite and coal coke
revenues.
Current year revenues for Chemicals increased $8 million while Wood revenues
declined $7 million when compared to the first six months of 1994. Strong
plastic demand contributed to the increase in Chemicals revenues; whereas,
lower traffic levels for lumber accounted for the majority of the decrease in
Wood revenues.
Minerals, Food, Paper and Vehicles & Machinery revenues for the current year
were relatively flat compared with the same period in 1994.
Shortlines and other, which are a net reduction of revenues, increased $16
million when compared with the first six months of 1994. This increase
resulted primarily from a higher volume of Railroad traffic moving over
shortline railroads which caused an $11 million increase in amounts due to the
shortlines.
EXPENSES
Total operating expenses for the first six months of 1995 were $2,151 million
compared with expenses of $2,050 million for the same period in 1994. The
operating ratio was 82 percent, an improvement of three percentage points
compared with an operating ratio of 85 percent for the first six months of
1994.
Compensation and benefits expenses were $71 million greater compared with the
first six months of 1994. Increased traffic levels as well as a 4 percent
base wage increase for union represented employees effective July 1994 caused
increased wages and related payroll taxes of approximately $35 million. A $14
million increase in health and welfare costs for union employees, due
primarily to an increase in insurance premium rates, and increased incentive
compensation expense of approximately $12 million also contributed to the
higher compensation and benefits expenses. These increases were partially
offset by a payroll tax refund in 1995.
Fuel expenses for 1995 were $26 million higher compared with 1994 primarily
due to an $18 million increase in consumption from higher traffic volumes in
1995. An increase in the average price paid for diesel fuel of 2.3 cents per
gallon to 58.9 cents per gallon in the first six months of 1995 contributed to
the remainder of the increase.
Materials expenses for the first six months of 1995 decreased $6 million
compared with 1994 as decreases in car repair expense and track materials
costs in 1995 were partially offset by increased locomotive materials expense.
Equipment rents expenses were $23 million higher than the first six months of
1994 principally due to a $17 million increase in lease rental expense as a
result of a larger fleet of leased freight cars in 1995 as well as an increase
in the leasing of locomotives to meet power requirements. Increased equipment
rentals from an affiliate in 1995 also contributed to the higher equipment
rents expenses. These increases were partially offset by a $10 million
decrease in payments for failure to achieve service commitments compared with
1994 as Railroad improved service performance in 1995.
Purchased services for the first six months of 1995 decreased $17 million from
the first six months of 1994. The most significant contributing factors were
lower derailment-related expenses and higher car repair billings to third
parties.
Depreciation expense for the first six months of 1995 was $21 million higher
than the same period in 1994 due to higher traffic levels and an increase in
the asset base.
Other operating expenses were $17 million lower compared with the first six
months of 1994. A $21 million decrease in costs associated with personal
injury claims and the recognition of a $14 million gain from a sales-type
capital lease of freight cars in the second quarter of 1995 were partially
offset by increased severance expenses of approximately $13 million and
increased moving expenses, due to the completion of the centralized train
dispatching facility in the first quarter of 1995.
Interest expense for the period decreased $3 million compared with the same
period in 1994 due to a lower outstanding debt balance in 1995.
Other income, net was $13 million higher in the first six months of 1995
compared with the same period in 1994. This increase in income was due to an
increase in gain on property dispositions, interest income received on the
settlement of a tax refund in 1995 and the elimination of losses on the sale
of accounts receivable in 1995 as the sales agreement expired in December
1994.
The effective tax rate was 39.2 percent for the first six months of 1995
compared with 38.8 percent for the first six months of 1994.
OTHER MATTERS
PROPOSED MERGER
As of June 29, 1994, BNI and 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 would merge (effected in the
merger set forth below, the Merger) with and into BNI, and BNI would be the
surviving corporation and each share of Santa Fe common stock would be
converted into 0.27 of a share of BNI common stock. The Original Agreement
was subsequently amended as of October 26, 1994, December 18, 1994 and January
24, 1995. The Original Agreement, as so amended, is referred to as the Merger
Agreement. Stockholders of BNI and Santa Fe approved the Merger Agreement at
special stockholders' meetings held on February 7, 1995.
Pursuant to the Merger Agreement, BNI and Santa Fe were entitled to elect to
consummate the Merger through the use of one of two possible structures: (i)
a merger of Santa Fe with and into BNI and (ii) the holding company structure
(the Holding Company Structure) described below. In order to ensure that the
transaction contemplated by the Merger Agreement qualifies as a tax-free
transaction for United States federal income tax purposes, the parties intend
to utilize the Holding Company Structure.
Under the Holding Company Structure, BNSF Corporation, a Delaware corporation
(BNSF), formed to effect the transaction in this manner, would create two
subsidiaries. One such subsidiary would merge into BNI, and the other such
subsidiary would merge into Santa Fe. Each holder of one share of BNI common
stock would receive one share of BNSF common stock and each holder of one
share of Santa Fe common stock, excluding the Santa Fe common stock acquired
by BNI in the Tender Offer referred to below and the Santa Fe common stock
held by Santa Fe as treasury stock, would receive not less than 0.40 and not
more than 0.4347 shares of BNSF common stock depending upon the number of
additional shares of Santa Fe common stock repurchased by Santa Fe as
permitted under the Repurchase Program discussed below. The Santa Fe common
stock acquired by BNI in the Tender Offer would remain outstanding and the
Santa Fe common stock held by Santa Fe as treasury stock would be canceled.
The rights of each stockholder of BNSF would be substantially identical to the
rights of a stockholder of BNI, and the Holding Company Structure would have
the same economic effect with respect to the stockholders of BNI and Santa Fe
as would a direct merger of BNI and Santa Fe. The Merger will be accounted
for under the purchase method of accounting upon consummation, and BNI's
investment will be included in the purchase price.
Also pursuant to the Merger Agreement, on December 23, 1994, BNI and Santa Fe
commenced tender offers, (together, the Tender Offer) to acquire 25 million
and 38 million shares of Santa Fe common stock, respectively, at $20 per share
in cash. The Tender Offer expired on February 8, 1995, with approximately
111.6 million shares of Santa Fe common stock tendered. As 63 million shares
of Santa Fe common stock in the aggregate were accepted for payment by BNI and
Santa Fe, tenders by Santa Fe stockholders were subject to proration. The
final proration factor for the Tender Offer was approximately 56.5 percent.
On February 6, 1995, BNI entered into the $500 million Tender Offer Facility,
whereby a group of banks agreed to finance BNI's purchase of shares of Santa
Fe common stock in the Tender Offer. Funding of the Tender Offer was
completed on February 21, 1995. At BNI's option, renewals of borrowings can
be obtained either through a competitive bid or a standby procedure. Rates
for borrowing under the standby procedure are, at BNI's option, based upon the
selected term of LIBOR or certificate of deposit rate plus, in either case, a
spread based upon BNI's senior unsecured debt ratings and the amount borrowed
under the Tender Offer Facility, or an alternative base rate.
As of June 30, 1995, Santa Fe had borrowed $1,033 million from a syndicate of
financial institutions under a new credit agreement, of which $760 million was
used for the Santa Fe tender offer and the remaining borrowings were primarily
used to replace existing Santa Fe debt and pay related expenses.
Under the Repurchase Program as set forth in the Merger Agreement, Santa Fe is
permitted, at its discretion and subject to certain financial and performance
criteria of Santa Fe set forth in its credit agreement and the Merger
Agreement (including minimum cash flows, cash capital expenditures and maximum
total debt), to repurchase up to 10 million shares of Santa Fe common stock
prior to consummation of the Merger. The number of shares of BNSF common
stock to be issued in the Merger will not be affected by the number of
additional shares of Santa Fe common stock repurchased by Santa Fe under the
Repurchase Program. Accordingly, the exchange ratio of BNSF common shares to
be offered for each share of outstanding Santa Fe common stock upon
consummation of the Merger would be set at not less than 0.40 and not more
than 0.4347 shares. As of June 30, 1995, Santa Fe had repurchased
approximately 2.3 million shares which would result in an exchange ratio of
.4073 shares.
As is typical in the context of a merger, certain benefits of officers and
employees vested upon approval of the Merger by the stockholders of BNI and
Santa Fe. In particular, on February 7, 1995, restrictions previously placed
upon certain BNI stock grants lapsed and the previously unearned compensation
relating to such restricted stock, included in BNI's stockholders' equity, was
charged to expense. The unearned compensation relating to restricted stock at
the time of vesting and related payroll taxes were approximately $24 million.
BNI expects to incur other costs related to the Merger, some of which will be
included in the determination of the total purchase price.
Consummation of the Merger is subject to approval by the Interstate Commerce
Commission (ICC) and other customary conditions. In connection with the ICC
proceedings, on January 27, 1995, BNI and Santa Fe requested the ICC to adopt
an expedited procedural schedule for reviewing the merger, based on a
timetable the ICC had proposed to adopt for all major railroad mergers. On
March 9, 1995, the ICC issued a schedule providing for a final decision on the
merger application on or before August 23, 1995. Interested parties,
including other railroads, shippers and state agencies, indicated their intent
to participate in the ICC proceeding on April 10, 1995. Railroad and The
Atchison, Topeka and Santa Fe Railway Company (ATSF) have entered into
agreements with Union Pacific Railroad Company; Southern Pacific
Transportation Company, The Denver Rio Grande Western Railroad Company, St.
Louis Southwestern Railway Company and SPCSL Corp.; and Kansas City Southern
Railway Company, among others, whereby those carriers agreed not to oppose the
ICC's approval of the Merger in exchange for grants of certain trackage
rights, haulage arrangements or other such arrangements. On July 20, 1995,
the ICC held a voting conference at which it voted to approve the Merger,
subject to limited conditions primarily regarding other carriers' operations
over Railroad's and ATSF's tracks. Given their limited nature, these
conditions will not impact the anticipated benefits of the Merger. It is
expected the ICC will issue a written decision approving the Merger on or
before August 23, 1995; the effective date of such decision will be set forth
therein.
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 United States 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 85 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 analyses.
Railroad is involved in a number of administrative and judicial proceedings
and other mandatory clean-up efforts at approximately 170 sites, including the
PRP sites, at which Railroad is being asked to participate in the clean-up of
the sites contaminated by material discharged into the environment. Railroad
paid approximately $10 million during the six months ended June 30, 1995
relating to mandatory clean-up efforts, including amounts expended under
federal and state voluntary clean-up programs. Recoveries received from third
parties, net of legal costs incurred, were approximately $5 million during the
six months ended June 30, 1995. At this time, Railroad estimates that it will
spend approximately $110 million in future years to remediate and restore all
known sites, including $105 million pertaining to mandated sites, of which
approximately $75 million relates to the PRP sites. Of the $110 million,
Railroad estimates that it will spend $18 million during the remainder of
1995. Also, Railroad anticipates that the majority of the $110 million will
be paid out over a period of less than seven years; however, some costs will
be paid out over a longer period, in some cases up to 40 years. At June 30,
1995, 24 sites accounted for approximately $75 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 both asserted and
unasserted claims. At June 30, 1995, Railroad had accrued approximately $110
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,
1995. Although recorded liabilities include Railroad's best estimates of all
costs, without reduction for anticipated recoveries from third parties,
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. As of June 30, 1995, 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 106 million gallons which
Railroad had committed to purchase was approximately 50 cents per gallon,
exclusive of taxes, certain transportation costs and other charges. In
addition, Railroad held petroleum futures contracts representing approximately
68 million gallons at an average price of approximately 50 cents per gallon.
These contracts have expiration dates ranging from July, 1995 to May, 1996.
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.
LABOR
In December 1994, Railroad and the railroad industry reached an agreement with
the Railroad Yardmasters Division (Yardmasters) of the United Transportation
Union which is effective through 1999 with respect to wages, work rules and
all other matters except health and welfare benefits. Health and welfare
issues are being addressed at the national level and will apply to Railroad's
approximately 250 Yardmasters. Effective July 1, 1995, the Yardmasters
received a 3 percent base wage increase under the agreement.
Labor agreements currently in effect for unions other than the Yardmasters
include provisions which prohibited the parties from serving notices to change
wages, benefits, rules and working conditions prior to November 1, 1994.
Railroad joined with the other railroads to negotiate with the unions on a
multi-employer basis on November 1, 1994. At that time, all unions were
served proposals for productivity improvements as well as other changes.
Thereafter, unions also served notices on the railroads which proposed not
only increasing wages and benefits but also restoring many of the restrictive
work rules and practices that were modified or eliminated under the current
agreements. A number of the unions are also challenging the railroads' right
to negotiate on a multi-employer basis and the issue is currently pending in
the federal district courts in both Washington, D.C. and St. Louis, Missouri.
At this time, the railroads and most of the unions are proceeding in direct
negotiations on the proposals. Negotiations with four unions are in
mediation. The National Mediation Board has scheduled meetings with three of
the unions. The ultimate outcome of the negotiations cannot be predicted.
Under labor agreements currently in effect for most of the unionized work
force, a cost of living allowance of 9 cents per hour went into effect on July
1, 1995 as new agreements were not reached with those parties prior to that
time. The cost of living allowance was dependent upon changes in the Consumer
Price Index not to exceed three percent.
Railroad is a party to service interruption agreements under which Railroad
would be required to pay premiums of up to a maximum of approximately $70
million in the event of work stoppages on other railroads. Railroad is also
entitled to receive payments under certain conditions if a work stoppage
occurs on its property.
During the second quarter of 1995, Railroad engaged in formal evaluations of
its non-union workforce requirements in certain areas. Based upon these
evaluations, Railroad expects to implement employment separation programs and
record a charge in the third quarter of 1995 for termination and
pension-related costs which could approximate $100 million.
Following the consummation of BNI's proposed merger with Santa Fe, Railroad
may record charges for nonrecurring costs associated with the Merger. Such
nonrecurring costs are expected to relate to the elimination of duplicate
facilities, computer systems and other assets as well as employee-related
payments.
OTHER
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This standard establishes the accounting and reporting requirements for
recognizing and measuring impairment of long-lived assets and related goodwill
to be either held and used or held for disposal. SFAS No. 121 is effective
for fiscal years beginning after December 15, 1995. Railroad is currently
evaluating the financial impact of adopting this standard including conditions
which may not be reasonably estimable, therefore, the impact is not
determinable at this time. The initial effect of adopting this standard would
be reported as a cumulative effect of a change in accounting method and
previously issued financial statements are not to be restated. Railroad has
made no decision on the exact timing of the adoption of this standard.
<PAGE>
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 applied 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. Circuit's
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 Railroad's 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,
plaintiffs 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. Railroad filed its evidence March
29, 1995, showing that the stand alone costs of transporting the traffic
exceeded the revenue derived by Railroad on that traffic and that
consequently, its rates were not unreasonably high. Plaintiffs filed their
rebuttal evidence on July 17, 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), was challenging the contract rates for transportation of coal to
its electric generating facilities at Cason, Texas and Flint Creek, Arkansas.
SWEPCO contended that productivity gains achieved by Railroad constituted
unusual economic conditions giving rise to a "gross inequity" because
Railroad's costs of providing service have been reduced over the contracts'
terms. On August 2, 1994, plaintiff filed an amendment to its complaint to
further allege that Railroad had been unjustly enriched by retaining
differences between the rates actually charged and those that should have been
charged. SWEPCO sought both prospective rate relief and recovery of alleged
past overcharges.
Railroad's primary contention was 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
contended that there was no agreement that transportation rates paid by SWEPCO
would be based on Railroad's costs of providing service.
On November 18, 1994, the jury rendered a verdict denying plaintiff's request
for prospective rate relief and that plaintiff take nothing on its principal
claims of "gross inequity." However, Railroad was assessed damages
approximating $56 million relating to plaintiff's alternative claim of unjust
enrichment. On January 20, 1995, the trial court rendered a judgment on the
verdict in an amount approximating $74 million, which included attorneys' fees
and interest. The judgment further awarded post judgment interest at 10
percent per annum and issued declaratory orders pertaining to the two
contracts. Railroad has appealed. In the opinion of outside counsel,
Railroad has a substantial likelihood of prevailing on appeal, although no
assurances can be given due to the uncertainties inherent in litigation.
Railroad filed Notice of Appeal in the case on February 17, 1995 and posted a
bond to stay enforcement of the judgment pending prosecution of all appeals.
ENVIRONMENTAL PROCEEDINGS
United States Department of Justice
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 20, 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 initially calculated the statutory
maximum penalty associated with these three spills to be $10,137,000.
Railroad answered the complaint and opposed the penalties sought by the EPA.
In February 1995, Railroad and the EPA settled the case. Pursuant to the
compromise, Railroad will pay $1,500,000 to satisfy all claims by the United
States for fines, penalties, response costs and natural resource damages.
Railroad will also make a $100,000 contribution to a study (jointly approved
by Railroad and the Department) regarding methods or procedures to improve
rail safety and prevent derailments. In return for these payments, the
United States will release Railroad from all claims arising out of the three
derailments and provide Railroad contribution protection against claims by
other responsible parties who may later be pursued by the government for their
liability arising from the derailments.
A consent decree confirming the settlement was approved by the court on July
17, 1995.
State of Illinois
By letter dated January 5, 1995, the State of Illinois (the State) notified
Railroad and Beazer East, Inc. (Beazer) that it was preparing to file a
complaint against them for the recovery of penalties associated with alleged
violations of the Resource Conservation and Recovery Act (RCRA) at the
Galesburg Wood Treating Superfund Site in Galesburg, Illinois. The State has
informally alleged that it is seeking penalties in excess of $100,000. The
exact amount of the State's demand is unknown as Railroad has not been
provided with formal notice or detail to support the State's demand.
The alleged RCRA violations stem from Railroad's responsibility at the site as
it relates to contamination resulting from the operation of the wood treating
facility from 1907 to 1966 and its status as owner from 1966 to the present.
Koppers Company, Inc. (now Beazer East, Inc.) and subsequently Koppers
Industries, Inc. operated the facility from 1966 to the present. In March
1985, under the Comprehensive Environmental Response Compensation and
Liability Act, Railroad and Koppers Company, Inc. entered into a Consent Order
to perform a Remedial Investigation and Feasibility Study (RI/FS). Following
completion and submission of a RI Report and FS Report, the Illinois
Environmental Protection Agency (IEPA) reached a final decision on a remedial
action plan on June 29, 1989, and obtained concurrence from the United States
Environmental Protection Agency on June 30, 1989. The IEPA then proceeded to
negotiate with Railroad and Beazer to implement the remedial action plan. In
June 1994, the IEPA settled its claims against Railroad and Beazer for
implementing the final remedial action plan in People v. Koppers Company,
Inc., No. 83-CH-92, (9th Circuit Court, Knox County, Illinois), by entering
into a Consent Order effective August 30, 1994. Railroad and Beazer agreed in
the Consent Order to undertake certain other obligations but specifically to
implement the final remedial action plan. However, the Consent Order did not
resolve certain alleged RCRA violations which occurred prior to 1985.
<PAGE>
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
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>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Burlington Northern Railroad Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 9th day
of August, 1995.
BURLINGTON NORTHERN RAILROAD COMPANY
By: /s/ Don S. Snyder
Vice President, Controller and
Chief Accounting Officer
By: /s/ David C. Anderson
Executive Vice President,
Chief Financial Officer and
Director
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________
EXHIBITS
TO
FORM 10-Q
For the quarter ended June 30, 1995
____________
BURLINGTON NORTHERN RAILROAD COMPANY
Commission file number 1-6324
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Burlington
Northern Railroad Company's consolidated financial statements as of and for the
six month period ended June 30, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 31
<SECURITIES> 0
<RECEIVABLES> 699
<ALLOWANCES> 28
<INVENTORY> 130
<CURRENT-ASSETS> 1035
<PP&E> 9834
<DEPRECIATION> 3814
<TOTAL-ASSETS> 7451
<CURRENT-LIABILITIES> 1486
<BONDS> 705
<COMMON> 1191
0
0
<OTHER-SE> 1990
<TOTAL-LIABILITY-AND-EQUITY> 7451
<SALES> 0
<TOTAL-REVENUES> 2631
<CGS> 0
<TOTAL-COSTS> 2151
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> 458
<INCOME-TAX> 180
<INCOME-CONTINUING> 278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
