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 September 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 41-1400580
(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, 1995* 1,000 shares
*Burlington Northern Railroad Company is a wholly-owned subsidiary of
Burlington Northern Inc. 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>
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<S> <C> <C>
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 14
Item 6. Exhibits and Reports on Form 8-K 16
</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 Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Revenues $1,387 $1,249 $4,018 $3,651
Operating expenses:
Compensation and benefits 444 435 1,383 1,303
Equipment rents 130 112 391 350
Purchased services 104 121 322 356
Fuel 103 95 301 267
Depreciation and amortization 94 84 278 247
Materials 75 70 224 225
Other 94 112 284 331
Merger and severance 72 - 84 -
------ ------ ------ -------
Total operating expenses 1,116 1,029 3,267 3,079
------ ------ ------ -------
Operating income 271 220 751 572
Interest expense 23 20 62 62
Other income, net 4 5 21 9
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Income before income taxes 252 205 710 519
Income tax expense 99 80 279 202
------ ------ ------ -------
Income before cumulative effect of
change in accounting method 153 125 431 317
Cumulative effect of change in
accounting method, net of tax - - - (10)
------ ------ ------ -------
Net income $ 153 $ 125 $ 431 $ 307
====== ====== ====== =======
</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 September 30, December 31,
1995 1994
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29 $ 27
Accounts receivable, net 718 702
Materials and supplies 139 100
Current portion of deferred income taxes 174 157
Other current assets 48 27
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Total current assets 1,108 1,013
Property and equipment, net 6,115 5,848
Investments in and advances to affiliates 853 94
Other assets 156 133
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Total assets $8,232 $7,088
========== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities $ 1,378 $1,263
Long-term debt and commercial paper due
within one year 23 115
---------- ------
Total current liabilities 1,401 1,378
Long-term debt and commercial paper 1,320 719
Deferred income taxes 1,500 1,421
Casualty and environmental reserves 430 415
Other liabilities 220 202
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Total liabilities 4,871 4,135
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Stockholder's equity:
Common stock 1,191 1,191
Retained earnings 2,170 1,762
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Total stockholder's equity 3,361 2,953
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Total liabilities and stockholder's
equity $8,232 $7,088
========== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 431 $ 307
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting method - 10
Depreciation and amortization 278 247
Deferred income taxes 46 60
Other, net 11 (33)
Changes in current assets and liabilities:
Accounts receivable, net (14) (23)
Materials and supplies (40) (28)
Other current assets (21) (15)
Accounts payable and other current liabilities 115 74
-------- ------
Net cash flow from operating activities 806 599
-------- ------
Cash flows from investing activities:
Additions to property and equipment (531) (471)
Collections from (advances to) affiliates, net (715) 9
Other, net (10) 2
-------- ------
Net cash flow from investing activities (1,256) (460)
-------- ------
Cash flows from financing activities:
Net increase in commercial paper 524 44
Payments on long-term debt (22) (182)
Dividends paid (50) -
Other, net - (1)
-------- ------
Net cash flow from financing activities 452 (139)
-------- ------
Increase in cash and cash equivalents 2 -
Cash and cash equivalents:
Beginning of period 27 17
-------- ------
End of period $ 29 $ 17
======== ======
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 50 $ 52
Income taxes paid, primarily to parent 230 143
Assets financed through capital lease obligation 4 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 and interim results
Burlington Northern Railroad Company (BNRR) is a wholly-owned subsidiary of
Burlington Northern Inc. (BNI). BNI is a wholly-owned subsidiary of
Burlington Northern Santa Fe Corporation (BNSF). The 1994 Annual Report on
Form 10-K for BNRR 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, except as disclosed)
necessary to present fairly BNRR's financial position as of September 30, 1995
and December 31, 1994 and the results of operations for the three-month and
nine-month periods ended September 30, 1995 and 1994 and cash flows for the
nine-month periods ended September 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. Acquisition of Santa Fe Pacific Corporation
On June 29, 1994, BNI and Santa Fe Pacific Corporation (SFP) entered into an
Agreement and Plan of Merger (as amended by amendments as of October 26, 1994,
December 18, 1994, January 24, 1995 and September 19, 1995, the Merger
Agreement) pursuant to which, on the terms and conditions set forth in the
Merger Agreement, SFP would merge with BNI (effected in the manner set forth
below, the Merger). Stockholders of BNI and SFP approved the Merger Agreement
at special stockholders' meetings held on February 7, 1995. On August 23,
1995, the Interstate Commerce Commission issued a written decision approving
the Merger and on September 22, 1995 the Merger was consummated.
Pursuant to the Merger Agreement, on December 23, 1994, BNI and SFP commenced
tender offers (together, the Tender Offer) to acquire 25 million and 38
million shares of SFP common stock, respectively, at $20 per share in cash.
During the first quarter of 1995, BNI borrowed $500 million under a credit
facility (the Tender Offer Facility) of which the proceeds were used to
finance BNI's purchase of 25 million shares of SFP common stock in the Tender
Offer. Funding of the Tender Offer was completed on February 21, 1995.
Also, pursuant to the Merger Agreement, BNI and SFP were entitled to elect to
consummate the Merger through the use of one of two possible structures: (i)
a merger of SFP with and into BNI and (ii) the Holding Company Structure
described below. To ensure that the transaction contemplated by the Merger
Agreement qualified as a tax-free transaction for federal income tax purposes,
the parties utilized the Holding Company Structure.
Under the Holding Company Structure, BNSF created two subsidiaries. One such
subsidiary merged with and into BNI, and the other such subsidiary merged with
and into SFP. Each holder of one share of BNI common stock received one share
of BNSF common stock and each holder of one share of SFP common stock,
excluding the SFP common stock acquired by BNI in the Tender Offer and the SFP
common stock held by SFP as treasury stock, received 0.41143945 shares of BNSF
common stock. The SFP common stock acquired by BNI in the Tender Offer
remains outstanding and the SFP common stock held by SFP as treasury stock
will be canceled. The rights of each stockholder of BNSF are substantially
identical to the rights of a stockholder of BNI, and the Holding Company
Structure has the same economic effect with respect to the stockholders of BNI
and SFP as would a direct merger of BNI and SFP.
3. Investments in and advances to affiliates
At September 30, 1995, BNRR had advances to BNSF, BNI and certain of BNI's
subsidiaries of approximately $790 million, including $381 million used to pay
down BNI's Tender Offer Facility and $275 million advanced to BNSF through BNI
to pay down a portion of SFP's credit facility related to the Tender Offer.
The remaining balance of $63 million consists primarily of certain equity
method investments.
4. Merger and severance expenses
During the second quarter of 1995, BNI engaged in formal evaluations of
certain of its non-union work force requirements. Involuntary and voluntary
separation programs were announced which resulted in the elimination of
approximately 450 non-union employees in the third quarter. As a result, BNRR
recorded expenses of $72 million for employee separation programs in the third
quarter, of which approximately $25 million resulted from pension curtailments
and related special termination benefits.
For the nine months ended September 30, 1995, merger and severance expenses
were $84 million. The remaining merger and severance expenses of $12 million
were the result of other non-union involuntary separation programs completed
in 1995.
BNRR expects to record additional expenses in the fourth quarter of 1995
related to additional personnel and asset rationalizations resulting from the
Merger; however, the amount of these expenses are presently not known.
Additional expenses may be recorded in periods subsequent to 1995 for similar
items. At the present time, the timing of and amount of any such subsequent
expenses is not known.
5. Environmental reserves and other contingencies
BNRR's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNRR's operating
procedures include practices to protect the environment from the environmental
risks which are inherent in railroad operations which frequently involve
transporting chemicals and other hazardous materials. Amounts expended
relating to such practices are inextricably contained in the normal day-to-day
costs of BNRR's business operations.
Many of BNRR's land holdings are and have been used for industrial or
transportation related purposes or leased to commercial or industrial
companies whose activities may have resulted in discharges onto the property.
As a result, BNRR is subject to environmental cleanup and enforcement actions.
In particular, the Federal Comprehensive Environmental Response Compensation
and Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well
as similar state laws generally impose joint and several liability for
clean-up and enforcement costs without regard to fault or the legality of the
original conduct on current and former owners and operators of a site. BNRR
has been notified that it is a potentially responsible party (PRP) for study
and clean-up costs at approximately 22 Superfund sites for which investigation
and remediation payments are or will be made or are yet to be determined (the
Superfund sites) and, in many instances, is one of several PRPs. In addition,
BNRR may be considered a PRP under certain other laws. Accordingly, under
CERCLA and other federal and state statutes, BNRR may be held jointly and
severally liable for all environmental costs associated with a particular
site. If there are other PRPs, BNRR generally participates in the clean-up
of these sites through cost-sharing agreements with terms that vary from site
to site. Costs are typically allocated based on relative volumetric
contribution of material, the amount of time the site was owned or operated,
and/or the portion of the total site owned or operated by each PRP.
Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when BNRR'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. BNRR conducts an ongoing environmental contingency analysis, which
considers a combination of factors including independent consulting reports,
site visits, legal reviews, analysis of the likelihood of participation in and
the ability of other PRPs to pay for clean-up, and historical trend analyses.
BNRR is involved in a number of administrative and judicial proceedings and
other mandatory clean-up efforts at approximately 185 sites, including the
Superfund sites, at which it is being asked to participate in the study and/or
clean-up of the environmental contamination. BNRR paid approximately $20
million during the nine months ended September 30, 1995 relating to mandatory
clean-up efforts, including amounts expended under federal and state voluntary
clean-up programs. BNRR has accruals of approximately $120 million for
remediation and restoration of all known sites, including $110 million
pertaining to mandated sites, of which approximately $45 million relates to
the Superfund sites. BNRR anticipates that the majority of the accrued costs
at September 30, 1995 will be paid over the next five years, with
approximately $9 million of payments occurring during the remainder of the
year. No individual site is considered to be material. Recoveries received
from third parties, net of legal costs incurred, were approximately $27
million during the nine months ended September 30, 1995.
Liabilities for environmental costs represent BNRR's best estimates for
remediation and restoration of these sites and include both asserted and
unasserted claims. Unasserted claims are not considered to be a material
component of the liability. Although recorded liabilities include BNRR's
best estimates of all costs, without reduction for anticipated recoveries from
third parties, BNRR'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, future 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, and are therefore not expected to have a material
adverse effect on BNRR's consolidated financial position or liquidity.
BNRR expects it will become subject to future requirements regulating air
emissions from diesel locomotives that may increase its operating costs.
During 1995, the Environmental Protection Agency must issue regulations
applicable to new locomotive engines. It is anticipated that these regulations
will be effective for locomotive engines installed after 1999. Under some
interpretations of federal law, older locomotive engines may be regulated by
states based on standards and procedures which the State of California
ultimately adopts. At this time it is unknown whether California will adopt
any locomotive emission standards.
BNRR is a party to a number of legal actions and claims, various governmental
proceedings and private civil suits arising in the ordinary course of
business, including those related to environmental matters and personal injury
claims. While the final outcome of these items cannot be predicted with
certainty, considering among other things the meritorious legal defenses
available, it is the opinion of management that none of these items, when
finally resolved, will have a material adverse effect on the annual results of
operations, financial position or liquidity of BNRR, although an adverse
resolution of a number of these items in a single year could have a material
adverse effect on the results of operations for that year.
6. Hedging activities
BNSF 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. Additionally, this program includes exchange-traded
petroleum futures contracts and various commodity swap and collar transactions
which 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 hedged fuel is
purchased and used.
As of September 30, 1995, BNRR had entered into agreements with fuel suppliers
setting the price of diesel fuel to be obtained by taking physical delivery
directly from such suppliers at a future date. The average price of the
approximately 85 million gallons which BNRR had committed to purchase was
approximately 49.5 cents per gallon. In addition, BNRR held petroleum futures
contracts representing approximately 80 million gallons at an average price of
approximately 49.1 cents per gallon. These contracts have expiration dates
ranging from October, 1995 to September, 1996. These prices do not include
taxes, fuel handling costs, certain transportation costs and any differences
which may occur from time to time between the prices of commodities hedged and
the purchase price of BNRR's diesel fuel.
BNRR's current fuel hedging program covers approximately 60 percent of BNRR's
projected fuel purchases for the fourth quarter of 1995 and approximately 15
percent of estimated 1996 fuel purchases. The current and future fuel delivery
prices are monitored continuously and hedge positions are adjusted
accordingly. Hedge positions are also closely monitored to ensure that they
will not exceed actual fuel requirements. Unrealized gains or losses from
BNRR's fuel hedging transactions were not material at September 30, 1995.
BNRR monitors its hedging positions and credit ratings of its counterparties
and does not anticipate losses due to counterparty nonperformance.
7. Other income, net
Other income, net includes the following (in millions):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Gain (loss) on property dispositions $ (1) $ 5 $ 9 $ 8
Interest income 4 2 12 7
Accounts receivable sale fees - (3) - (7)
Miscellaneous, net 1 1 - 1
------ ------ ----- ------
Total $ 4 $ 5 $ 21 $ 9
====== ====== ===== ======
</TABLE>
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Management's narrative analysis relates to the financial condition and results
of operations of Burlington Northern Railroad Corporation (BNRR) and its
majority-owned subsidiaries. BNRR is a wholly-owned subsidiary of Burlington
Northern Inc. (BNI) and BNI is a wholly-owned subsidiary of Burlington
Northern Santa Fe Corporation (BNSF).
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1994
BNRR recorded net income for the first nine months of 1995 of $431 million
compared with net income of $307 million for the same period in 1994. Results
for 1995 were reduced by $84 million of merger and severance expenses. The
corresponding reduction in net income was approximately $51 million. Results
for 1994 were reduced by a $10 million, net of tax, cumulative effect of an
accounting change for postemployment benefits. Excluding the above items, net
income for the first nine months of 1995 would have been $482 million compared
to $317 million for 1994.
REVENUES
The following table presents BNRR's revenue information by commodity for the
nine months ended September 30, 1995 and 1994 and includes certain
reclassifications of prior year information to conform to current year
presentation.
<TABLE>
<CAPTION>
Revenues
Revenue Per Thousand
Revenues Ton Miles Ton Miles
1995 1994 1995 1994 1995 1994
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C> <C>
Coal $1,329 $1,251 116,962 103,512 $11.36 $12.09
Agricultural Commodities 741 493 37,188 20,372 19.93 24.20
Intermodal 550 536 18,349 17,746 29.97 30.20
Minerals 251 254 9,780 10,060 25.66 25.25
Food & Consumer 218 215 7,108 7,184 30.67 29.93
Metals 211 188 9,072 8,402 23.26 22.38
Chemicals 194 182 6,740 6,545 28.78 27.81
Wood 185 199 8,699 9,706 21.27 20.50
Paper 133 131 3,983 4,181 33.39 31.33
Automotive 110 113 1,311 1,371 83.91 82.42
Other 96 89 - - - -
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Total $4,018 $3,651 219,192 189,079
====== ====== ======= =======
</TABLE>
Total revenues for the first nine months of 1995 were $4,018 million compared
with revenues of $3,651 million for the same period in 1994. The $367 million
increase was primarily due to improved Agricultural Commodities and Coal
revenues.
Coal revenues improved $78 million during the first nine 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
nine months of 1995 were $248 million greater than the first nine months of
1994. The increase was principally caused by improvements in corn and soybean
revenues of $234 million and $32 million, respectively, partially offset by
decreases in barley and wheat revenues. Corn and soybean revenues benefited
from increased crop production as well as higher traffic volumes to the
Pacific Northwest due to stronger export demand during the first nine months
of 1995. Barley and wheat revenues declined primarily 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 thousand revenue ton miles.
Intermodal and Metals revenues increased $14 million and $23 million,
respectively, when compared with the first nine 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 partially offset by a decrease in
intermodal domestic revenues. 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 1994 accounted for the majority of
the increase in taconite and coal coke revenues.
Current year revenues for Chemicals increased $12 million while Wood revenues
declined $14 million when compared to the first nine 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.
EXPENSES
Total operating expenses for the first nine months of 1995 were $3,267 million
compared with expenses of $3,079 million for the same period in 1994. Despite
the addition of $84 million of merger and severance expenses during the first
nine months of 1995, the operating ratio was 81 percent, an improvement of 3
percentage points compared with an operating ratio of 84 percent for the first
nine months of 1994. Excluding the merger and severance expenses, the
operating ratio for 1995 was 79 percent, an improvement of 5 percentage points
over the first nine months of 1994.
Compensation and benefits expenses were $80 million greater compared with the
first nine 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 $40 million. A $20
million increase in health and welfare costs for union employees due primarily
to an increase in insurance premium rates, and increased incentive
compensation expense also contributed to the higher compensation and benefits
expenses. These increases were partially offset by a $9 million payroll tax
refund in 1995.
Equipment rents expenses were $41 million higher than the first nine months of
1994 principally due to a $42 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 also contributed to the higher equipment rents
expenses.
Purchased services for the first nine months of 1995 decreased $34 million
from the first nine months of 1994. The most significant contributing factors
were lower derailment-related expenses and lower intermodal-related expenses.
Fuel expenses for 1995 were $34 million higher compared with 1994 primarily
due to a $26 million increase in consumption from higher traffic volumes in
1995. An increase in the average price paid for diesel fuel of 1.4 cents per
gallon to 59.0 cents per gallon in the first nine months of 1995 contributed
to the remainder of the increase.
Depreciation expense for the first nine months of 1995 was $31 million higher
than the same period in 1994 primarily due to an increase in BNRR's asset base
in 1995.
Materials expenses for the first nine months of 1995 was relatively flat
compared with 1994 as decreases in track materials costs in 1995 were offset
by increased locomotive materials expense.
Other operating expenses were $47 million lower compared with the first nine
months of 1994. These decreases were due to a $41 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 partially offset by increased employee moving expenses.
During the first nine months of 1995, expenses of $84 million were recorded
for merger and severance expenses.
Other income, net was $12 million higher in the first nine months of 1995
compared with the same period in 1994. This increase in income was due
primarily to interest income received on the settlement of a tax refund in
1995 and the elimination of fees on the sale of accounts receivable in 1995 as
the sales agreement expired in December 1994.
OTHER MATTERS
ACQUISITION OF SANTA FE PACIFIC CORPORATION (SFP)
On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger (as
amended by amendments as of October 26, 1994, December 18, 1994, January 24,
1995 and September 19, 1995, the Merger Agreement) pursuant to which, on the
terms and conditions set forth in the Merger Agreement, SFP would merge with
BNI (effected in the manner set forth below, the Merger). Stockholders of BNI
and SFP approved the Merger Agreement at special stockholders' meetings held
on February 7, 1995. On August 23, 1995, the Interstate Commerce Commission
(ICC) issued a written decision approving the Merger and on September 22, 1995
the Merger was consummated.
Pursuant to the Merger Agreement, on December 23, 1994, BNI and SFP commenced
tender offers (together, the Tender Offer) to acquire 25 million and 38
million shares of SFP common stock, respectively, at $20 per share in cash.
During the first quarter of 1995, BNI borrowed $500 million under a credit
facility (the Tender Offer Facility) of which the proceeds were used to
finance BNI's purchase of 25 million shares of SFP common stock in the Tender
Offer. Funding of the Tender Offer was completed on February 21, 1995.
Also, pursuant to the Merger Agreement, BNI and SFP were entitled to elect to
consummate the Merger through the use of one of two possible structures: (i)
a merger of SFP with and into BNI and (ii) the Holding Company Structure
described below. To ensure that the transaction contemplated by the Merger
Agreement qualified as a tax-free transaction for federal income tax purposes,
the parties utilized the Holding Company Structure.
Under the Holding Company Structure, BNSF created two subsidiaries. One such
subsidiary merged with and into BNI, and the other such subsidiary merged with
and into SFP. Each holder of one share of BNI common stock received one share
of BNSF common stock and each holder of one share of SFP common stock,
excluding the SFP common stock acquired by BNI in the Tender Offer and the SFP
common stock held by SFP as treasury stock, received 0.41143945 shares of BNSF
common stock. The SFP common stock acquired by BNI in the Tender Offer
remains outstanding and the SFP common stock held by SFP as treasury stock
will be canceled. The rights of each stockholder of BNSF are substantially
identical to the rights of a stockholder of BNI, and the Holding Company
Structure has the same economic effect with respect to the stockholders of BNI
and SFP as would a direct merger of BNI and SFP.
The August 23, 1995, ICC decision authorized the Merger, the resulting common
control of BNRR and The Atchison, Topeka and Santa Fe Railway Company (ATSF)
by the merged company, the consolidation of BNRR and ATSF by the merged
company, the consolidation of BNRR and ATSF operations, and the merger of BNRR
and ATSF. As of this date, BNSF is giving consideration to a plan to
merge the BNRR and ATSF legal entities. The final decision to merge BNRR and
ATSF, as well as the timing of any such merger, depends upon the resolution of
various business, tax and legal factors now under consideration.
In the third quarter of 1995, BNRR recorded merger and severance expenses of
$72 million. BNRR expects to record additional expenses in the fourth quarter
of 1995 related to additional personnel and asset rationalizations resulting
from the Merger; however, the amount of these expenses are presently not
known. Additional expenses may be recorded in periods subsequent to 1995 for
similar items. At the present time, the timing of and amount of any such
subsequent expenses is not known.
ENVIRONMENTAL ISSUES
BNRR's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNRR's operating
procedures include practices to protect the environment from the environmental
risks which are inherent in railroad operations which frequently involve
transporting chemicals and other hazardous materials. Amounts expended
relating to such practices are inextricably contained in the normal day-to-day
costs of BNRR's business operations.
Many of BNRR's land holdings are and have been used for industrial or
transportation related purposes or leased to commercial or industrial
companies whose activities may have resulted in discharges onto the property.
As a result, BNRR is subject to environmental cleanup and enforcement actions.
In particular, the Federal Comprehensive Environmental Response Compensation
and Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well
as similar state laws generally impose joint and several liability for
clean-up and enforcement costs without regard to fault or the legality of the
original conduct on current and former owners and operators of a site. BNRR
has been notified that it is a potentially responsible party (PRP) for study
and clean-up costs at approximately 22 Superfund sites for which investigation
and remediation payments are or will be made or are yet to be determined (the
Superfund sites) and, in many instances, is one of several PRPs. In addition,
BNRR may be considered a PRP under certain other laws. Accordingly, under
CERCLA and other federal and state statutes, BNRR may be held jointly and
severally liable for all environmental costs associated with a particular
site. If there are other PRPs, BNRR generally participates in the clean-up of
these sites through cost-sharing agreements with terms that vary from site to
site. Costs are typically allocated based on relative volumetric contribution
of material, the amount of time the site was owned or operated, and/or the
portion of the total site owned or operated by each PRP.
Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when BNRR'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. BNRR conducts an ongoing environmental contingency analysis, which
considers a combination of factors including independent consulting reports,
site visits, legal reviews, analysis of the likelihood of participation in and
the ability of other PRPs to pay for clean-up, and historical trend analyses.
BNRR is involved in a number of administrative and judicial proceedings and
other mandatory clean-up efforts at approximately 185 sites, including the
Superfund sites, at which it is being asked to participate in the study and/or
clean-up of the environmental contamination. BNRR paid approximately $20
million during the nine months ended September 30, 1995 relating to mandatory
clean-up efforts, including amounts expended under federal and state voluntary
clean-up programs. BNRR has accruals of approximately $120 million for
remediation and restoration of all known sites, including $110 million
pertaining to mandated sites, of which approximately $45 million relates to
the Superfund sites. BNRR anticipates that the majority of the accrued costs
at September 30, 1995 will be paid over the next five years, with
approximately $9 million of payments occurring during the remainder of the
year. No individual site is considered to be material. Recoveries received
from third parties, net of legal costs incurred, were approximately $27
million during the nine months ended September 30, 1995.
Liabilities for environmental costs represent BNRR's best estimates for
remediation and restoration of these sites and include both asserted and
unasserted claims. Unasserted claims are not considered to be a material
component of the liability. Although recorded liabilities include BNRR's
best estimates of all costs, without reduction for anticipated recoveries from
third parties, BNRR'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, future 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, and are therefore not expected to have a material
adverse effect on BNRR's consolidated financial position or liquidity.
BNRR expects it will become subject to future requirements regulating air
emissions from diesel locomotives that may increase its operating costs.
During 1995, the Environmental Protection Agency must issue regulations
applicable to new locomotive engines. It is anticipated that these regulations
will be effective for locomotive engines installed after 1999. Under some
interpretations of federal law, older locomotive engines may be regulated by
states based on standards and procedures which the State of California
ultimately adopts. At this time it is unknown whether California will adopt
any locomotive emission standards.
HEDGING ACTIVITIES
BNSF 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. Additionally, this program includes exchange-traded
petroleum futures contracts and various commodity swap and collar transactions
which 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 hedged fuel is
purchased and used.
As of September 30, 1995, BNRR had entered into agreements with fuel suppliers
setting the price of diesel fuel to be obtained by taking physical delivery
directly from such suppliers at a future date. The average price of the
approximately 85 million gallons which BNRR had committed to purchase was
approximately 49.5 cents per gallon. In addition, BNRR held petroleum futures
contracts representing approximately 80 million gallons at an average price of
approximately 49.1 cents per gallon. These contracts have expiration dates
ranging from October, 1995 to September, 1996. These prices do not include
taxes, fuel handling costs, certain transportation costs and any differences
which may occur from time to time between the prices of commodities hedged and
the purchase price of BNRR's diesel fuel.
BNRR's current fuel hedging program covers approximately 60 percent of BNRR's
projected fuel purchases for the fourth quarter of 1995 and approximately 15
percent of estimated 1996 fuel purchases. The current and future fuel delivery
prices are monitored continuously and hedge positions are adjusted
accordingly. Hedge positions are also closely monitored to ensure that they
will not exceed actual fuel requirements. Unrealized gains or losses from
BNRR's fuel hedging transactions were not material at September 30, 1995.
BNRR monitors its hedging positions and credit ratings of its counterparties
and does not anticipate losses due to counterparty nonperformance.
LABOR
In December 1994, BNRR reached an agreement with the Railroad Yardmasters
Division (Yardmasters) of the United Transportation Union (UTU) 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 BNRR'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. BNRR
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 court in Washington, D.C.
At this time, the railroads and most of the unions are proceeding in direct
negotiations on the proposals with many in mediation. The National Mediation
Board has scheduled meetings with the parties. 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.
Notices have been served and negotiations are ongoing with the Brotherhood of
Locomotive Engineers, UTU and the carmen unions to reach merger implementing
agreements under Article I Section 4 of the New York Dock conditions
involving changes in operations between BNRR and ATSF. Discussions with the
Transportation Communications Union involving the railroads' clerical
employees are also continuing.
BNRR is party to service interruption insurance agreements under which BNRR
would be required to pay premiums of up to a maximum of approximately $70
million in the event of work stoppages on other railroads related to ongoing
national bargaining. BNRR is also entitled to receive payments under certain
conditions if a work stoppage occurs on its property.
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS
United States v. Burlington Northern Railroad Company (BNRR)
On May 25, 1994, the United States Department of Justice (Department) filed
suit on behalf of the United States Environmental Protection Agency (EPA)
against BNRR 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), BNRR 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. BNRR answered
the complaint and opposed the penalties sought by the EPA.
In February 1995, BNRR and the EPA settled the case. Pursuant to the
compromise, BNRR agreed to pay $1,500,000 to satisfy all claims by the United
States for fines, penalties, response costs and natural resource damages.
BNRR also agreed to make a $100,000 contribution to a study (jointly approved
by BNRR and the Department) regarding methods or procedures to improve rail
safety and prevent derailments. In return for these payments, the United
States will release BNRR from all claims arising out of the three derailments
and provide BNRR 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. The cash payments were made by BNRR prior to August 17, 1995, and
this matter is now considered terminated.
State of Wisconsin v. BNRR
By letter dated August 31, 1995, the Wisconsin Department of Justice, on
behalf of the State of Wisconsin (State) notified BNRR of its intent to file a
complaint by the end of September 1995 seeking penalties of $200 per day, a
penalty assessment, and an environmental assessment for BNRR's alleged
failure, for 964 days, to submit a remedial action plan for the Ashland
Railyard, Ashland, Wisconsin, by May 7, 1993, as established by the Wisconsin
Department of Natural Resources. BNRR undertook groundwater monitoring and
removed and disposed of all former railroad structures on the property, but
because of the existence of contamination from offsite and upgradient sources,
did not believe that it would be prudent or technically reasonable to
accomplish site remediation until all upgradient and contributing sources were
properly considered. The property had been leased for many years to another
railroad which operated the railyard facility. It is possible that this
matter may result in monetary sanctions of $100,000 or more.
ICC MERGER CASE
On October 13, 1994, Burlington Northern Inc. (BNI), BNRR, Santa Fe Pacific
Corporation (SFP), and The Atchison, Topeka and Santa Fe Railway Company
(ATSF) (Applicants) filed a railroad merger and control application with the
Interstate Commerce Commission (ICC), Finance Docket No. 32549, Burlington
Northern Inc. and Burlington Northern Railroad Company--Control and
Merger--Santa Fe Pacific Corporation and The Atchison, Topeka and Santa Fe
Railway Company. Applicants sought an order, pursuant to 49 U.S.C. Sections
11343-11347 (1988), approving and authorizing BNI's acquisition of control of
and merger with SFP, the resulting common control of BNRR and ATSF by the
merged company, the consolidation of BNRR and ATSF by the merged company, the
consolidation of BNRR and ATSF operations, and the merger of BNRR and ATSF.
The ICC approved the Merger in its written decision served August 23, 1995,
which decision was effective as of September 22, 1995. Petitions for
reconsideration or to reopen the ICC's decision were filed by five parties to
that proceeding. The ICC has denied two of those petitions, and three of the
petitions remain pending before the ICC. Additionally, six parties to the
proceeding have filed Petitions for Review of the ICC's approval decision with
the United States Court of Appeals for the District of Columbia, which
petitions are now pending before that court. Each of the petitions for
reconsideration or to reopen and for review challenges various aspects of the
ICC's decision, including the extent of conditions imposed on its approval.
None of these petitions is expected to affect materially the benefits to be
realized by the transaction.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
See Index to Exhibits on page E-1 for a description of the exhibits filed as
part of this report.
B. Reports on Form 8-K
During the period, registrant filed a Current Report on Form 8-K (date of
earliest event reported: September 22, 1995) reporting under Item 2, the
consummation of the business combination between Burlington Northern Inc. and
Santa Fe Pacific Corporation effective September 22, 1995 pursuant to which
each became a direct or indirect wholly-owned subsidiary of a new
publicly-held company, Burlington Northern Santa Fe Corporation, and
including, under Item 7, historical financial statements for BNI and SFP.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BURLINGTON NORTHERN RAILROAD COMPANY
(Registrant)
By: /s/ Thomas N. Hund
Thomas N. Hund
Vice President and Controller
(On behalf the Registrant and as
principal accounting officer)
Schaumburg, Illinois
November 13, 1995
<PAGE>
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Nature of Exhibit
27 Financial Data Schedule
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information from Burlington Northern Railroad
Company's financial statements as of and for the nine month period ended
September 30, 1995 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-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 29
<SECURITIES> 0
<RECEIVABLES> 747
<ALLOWANCES> 29
<INVENTORY> 139
<CURRENT-ASSETS> 1108
<PP&E> 9961
<DEPRECIATION> 3846
<TOTAL-ASSETS> 8232
<CURRENT-LIABILITIES> 1401
<BONDS> 1320
<COMMON> 1191
0
0
<OTHER-SE> 2170
<TOTAL-LIABILITY-AND-EQUITY> 8232
<SALES> 0
<TOTAL-REVENUES> 4018
<CGS> 0
<TOTAL-COSTS> 3267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 701
<INCOME-TAX> 279
<INCOME-CONTINUING> 431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 431
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Provision for doubtful accounts is included in total costs.
</FN>
</TABLE>
