<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
+--+
|XX| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
+--+ ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
+--+
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
+--+ EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________ Commission file
number 1-6324
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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
incorporation or organization) Identification No.)
3800 Continental Plaza, 777 Main St.
Fort Worth, Texas 76102-5384
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(817) 333-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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The securities listed below are registered on the New York Stock Exchange.
Title of each class
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Burlington Northern Inc. Northern Pacific Railway Company
(Now Burlington Northern Railroad Company) Prior Lien Railway and Land
Consolidated Mortgage Bonds Grant 4% Bonds, due 1997
9.25%, Series H, due 2006 General Lien Railway and Land
6.55%, Series K, due 2020 Grant 3% Bonds, due 2047
3.80%, Series L, due 2020
3.20%, Series M, due 2045 Great Northern Railway Company
8.15%, Series N, due 2020 General Mortgage Bonds
6.55%, Series O, due 2020 3 1/8%, Series O, due 2000
8.15%, Series P, due 2020 2 5/8%, Series Q, due 2010
St. Louis-San Francisco Railway
Company
First Mortgage Bonds, 4%, Series
A, due 1997
Income Debentures, 5%, Series A,
due 2006
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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None
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
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Class Outstanding
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Common Stock, without par value
as of February 29, 1996* 1,000 shares
*Burlington Northern Railroad Company is a wholly owned subsidiary of Burlington
Northern Inc. (BNI) which is a wholly owned subsidiary of Burlington Northern
Santa Fe Corporation and there is no market data with respect to such shares.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE
FORMAT PERMITTED BY GENERAL INSTRUCTION J.
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Table of Contents
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<TABLE>
<CAPTION>
Item Page
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<S> <C>
Part I 1. Business ............................................. 1
2. Properties ........................................... 1
3. Legal Proceedings .................................... 7
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................. 9
7. Management's Narrative Analysis of Results of
Operations .......................................... 10
8. Financial Statements and Supplementary Data .......... 13
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ................. 30
Part IV 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ............................................ 30
</TABLE>
Note: Part I, Item Four; Part II, Item Six; Part III, Items Ten, Eleven, Twelve
and Thirteen; and Part IV Exhibit 21 have been omitted pursuant to General
Instructions J(1)(a) and (b) of Form 10-K relating to wholly-owned
subsidiaries.
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PART I
ITEMS 1 AND 2 BUSINESS AND PROPERTIES
Burlington Northern Railroad Company's (BNRR) principal business activity is
railroad transportation. BNRR is the principal subsidiary of Burlington Northern
Inc. (BNI) which became a wholly-owned subsidiary of Burlington Northern Santa
Fe Corporation (BNSF) on September 22, 1995. BNSF was incorporated in Delaware
in 1994 for the purpose of effecting a business combination between BNI and
Santa Fe Pacific Corporation (SFP).
RAILROAD TRANSPORTATION
BNRR operates the largest railroad system in the United States based on miles
of road and second main track, with approximately 24,400 total miles at December
31, 1995. The principal cities served include Billings, Birmingham, Cheyenne,
Chicago, Denver, Des Moines, Duluth/Superior, Fargo/Moorhead, Fort Worth/Dallas,
Galveston, Houston, Kansas City, Lincoln, Memphis, Mobile, Omaha, Pensacola,
Portland, St. Louis, St. Paul/Minneapolis, Seattle, Spokane, Springfield
(Missouri), Tacoma, Tulsa, Wichita, Vancouver (British Columbia) and Winnipeg
(Manitoba).
<TABLE>
<CAPTION>
REVENUES (IN MILLIONS)
YEAR ENDED DECEMBER 31,
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1995 1994 1993
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<S> <C> <C> <C>
Coal......................... $1,757 $1,669 $1,532
Agricultural Commodities..... 1,042 759 710
Intermodal................... 736 745 701
Forest Products.............. 427 440 419
Chemicals.................... 322 310 315
Consumer and Food Products... 304 304 291
Metals....................... 280 253 248
Minerals and Ores............ 242 244 230
Automotive................... 146 152 141
========== ========== ==========
Total Freight Revenue........ 5,256 4,876 4,587
Other Revenue................ 125 119 112
========== ========== ==========
TOTAL OPERATING REVENUES..... $5,381 $4,995 $4,699
========== ========== ==========
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</TABLE>
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<TABLE>
<CAPTION>
CARS/UNITS (IN THOUSANDS)
YEAR ENDED DECEMBER 31,
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1995 1994 1993
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<S> <C> <C> <C>
Coal......................... 1,687 1,624 1,468
Agricultural Commodities..... 519 436 423
Intermodal................... 1,021 1,027 1,003
Forest Products.............. 271 280 276
Chemicals.................... 208 199 197
Consumer and Food Products... 239 243 217
Metals....................... 315 292 287
Minerals and Ores............ 214 219 207
Automotive................... 106 109 97
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TOTAL CAR/UNITS.............. 4,580 4,429 4,175
========== ========== ==========
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</TABLE>
<TABLE>
<CAPTION>
AVERAGE REVENUE PER CAR/UNIT
YEAR ENDED DECEMBER 31,
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1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Coal......................... $1,042 $1,137 $1,153
Agricultural Commodities..... 2,008 1,770 1,702
Intermodal................... 720 729 730
Forest Products.............. 1,575 1,663 1,570
Chemicals.................... 1,550 1,666 1,713
Consumer and Food Products... 1,273 1,324 1,428
Metals....................... 887 881 881
Minerals and Ores............ 1,128 1,156 1,143
Automotive................... 1,380 1,465 1,519
AVERAGE REVENUE PER CAR/UNIT. $1,148 $1,160 $1,166
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</TABLE>
COAL
The transportation of coal is BNRR's largest source of revenues, accounting
for approximately one-third of the total. Based on carloadings and tons hauled,
BNRR is the largest transporter of western low-sulfur coal in the United States.
Over 90 percent of BNRR's coal traffic originated in the Powder River Basin of
Wyoming and Montana during the three years ended December 31, 1995. These coal
shipments were destined for coal-fired electric generating stations located
primarily in the North Central, South Central and Mountain regions of the United
States with smaller quantities exported.
BNRR also handles increasing amounts of low-sulfur coal from the Powder River
Basin for delivery to markets in the Eastern and Southeastern portion of the
United States. The low-sulfur coal from the Powder River Basin is abundant,
inexpensive to mine and clean-burning. Because the Clean Air Act of 1990
requires power plants to reduce harmful emissions either by burning coal with a
lower sulfur content or by installing expensive scrubbing units, opportunities
for increased shipments of this low-sulfur coal still exist.
AGRICULTURAL COMMODITIES
Agricultural Commodities include barley, corn, wheat, soybeans, oils, feeds,
flour and mill products, specialty grains, malts, and milo. Based on carloadings
and tons hauled, BNRR is the largest rail transporters of
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grain in North America. BNRR's system is strategically located to serve the
Midwest and Great Plains grain producing regions where BNRR serves most major
terminal, storage, feeding and food-processing locations. Additionally, BNRR has
access to major export markets in the Pacific Northwest, western Great Lakes and
Texas Gulf regions.
INTERMODAL
The Intermodal freight business consists of hauling freight containers or
truck trailers by a combination of water, rail and motor carriers. The
intermodal business is highly service-driven, and in many cases motor carriers
and railroads have begun to jointly market intermodal service. Intermodal
results include revenue from businesses such as direct marketing, truckload,
intermodal marketing companies and international.
FOREST PRODUCTS
The primary commodities in Forest Products are lumber, plywood, oriented
strand board, paper products, pulpmill feedstock, and wood pulp. Based on
carloadings and tonnage hauled, BNRR is the largest rail transporter of forest
products in the United States. Commodity origins are primarily from the Pacific
Northwest, upper Midwest and the Southeast for shipment mainly into domestic
markets. Customers served include the construction, furniture, photography,
publishing, newspaper, and industrial boxes industries.
CHEMICALS
The Chemicals business is comprised of fertilizer, petroleum and chemical
commodities. Chemicals and plastics resins are transported for industrial and
agricultural use. Industrial chemicals and plastic resins are used by the
automotive, housing, and packaging industries, as well as for feed stocks for
other chemical and plastic products.
CONSUMER AND FOOD PRODUCTS
Beverages, canned goods, and perishables are the principal food commodities
moved by BNRR. Other consumer products handled include sugars and sweeteners,
cotton, salt, rubber and tires, machinery, aircraft parts, military and
miscellaneous boxcar shipments. Heavy machinery includes primary markets for
aircraft, construction, farm and railroad equipment and secondary markets for
used equipment.
METALS
The Metals business unit handles virtually all of the commodities included in
or resulting from the production of steel. Taconite, an iron ore derivative
produced in northern Minnesota, scrap steel and coal coke are BNRR's primary
input products, while finished steel products range from structural beams and
steel coils to wire and nails. BNRR also hauls both ferrous and non-ferrous
products including recyclable metals. Various non-ferrous products such as
copper, lead, and aluminum are transported for the beverage, automotive, and
telecommunications industries.
MINERALS AND ORES
Commodities in this group include clays, cements, aggregates, and other
industrial ores and agricultural minerals. Both the oil and the construction
industries are serviced. Potash is transported to domestic markets. Industrial
ores include various mined and processed commodities such as cement and
aggregates (sand and stone) that generally move to domestic markets for use in
general construction and public work projects, such as highway projects. Lime
and non-metallic ores most often move within domestic markets.
AUTOMOTIVE
The Automotive business unit is responsible for both assembled motor vehicles
and shipments of vehicle parts.
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OPERATING STATISTICS
Certain other operating statistics were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
- ------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue ton miles (in millions)............... 293,415 260,574 237,339 232,799 232,441
Freight revenue per thousand revenue
ton miles................................... $17.91 $18.71 $19.33 $19.82 $19.60
Average length of haul (miles)................ 835 793 778 764 770
Gross ton miles, excluding locomotives
(in millions)............................... 490,352 443,440 409,808 400,917 402,527
Operating ratio (excluding the 1995 and
1991 special charge)........................ 80% 83% 86% 87% 90%
Revenue ton miles per employee (in
thousands).................................. 9,567 8,485 7,781 7,461 7,317
</TABLE>
PROPERTIES
Additions and replacements to properties were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
- ------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Track miles of rail additions and
replacements:
New......................................... 593 378 387 461 380
Used........................................ 197 253 356 299 281
Track miles surfaced or reballasted........... 8,219 8,183 7,854 7,610 7,710
Ties inserted (in thousands):
Wood........................................ 1,395 1,435 1,914 1,684 1,515
Concrete.................................... 347 260 195 500 527
</TABLE>
EQUIPMENT
BNRR owned or leased, under both capital and operating leases, with an initial
lease term in excess of one year, the following units of railroad rolling stock
at December 31, 1995:
<TABLE>
<CAPTION>
Number of Units
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Owned Leased Total
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<S> <C> <C> <C>
Diesel Locomotives............................ 922 1,652 2,574
====== ====== ======
Freight Cars:
Box - general purpose....................... 369 2,304 2,673
Box - specically equipped................... 4,931 1,195 6,126
Gondola..................................... 4,672 3,573 8,245
Hopper-open top............................. 6,215 909 7,124
Hopper-covered.............................. 16,177 17,916 34,093
Refrigerator................................ 3,112 346 3,458
Flat........................................ 3,161 1,632 4,793
Tank........................................ 177 30 207
Caboose..................................... 404 - 404
Other....................................... 291 7 298
------ ------ ------
Total freight cars........................ 39,509 27,912 67,421
====== ====== =======
Commuter passenger cars....................... - 141 141
====== ====== ======
</TABLE>
In addition to the owned and leased locomotives identified above, BNRR
operates 197 freight locomotives under power purchase agreements.
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The average age of locomotives and freight cars was 15.5 years and 18.3 years,
respectively, at December 31, 1995, compared with 15.0 years and 18.6 years,
respectively, at December 31, 1994.
The average percentage of BNRR's locomotives and freight cars awaiting repairs
during 1995 was 6.5 and 2.7, respectively, compared with 7.7 and 3.1,
respectively, in 1994.
BNRR entered into an agreement to acquire 434 alternating current traction
motor locomotives. BNRR anticipates reduced locomotive operating costs as well
as an increase in both horsepower and traction, meaning fewer locomotives will
be needed for many freight operations. As of February 29, 1996, BNRR had
accepted delivery of 324 locomotives and anticipates deliveries under this
agreement of approximately 50 for the remainder of 1996 and 60 in 1997.
EMPLOYEES
BNRR employed an average of 30,671 employees in 1995 compared with 30,711 in
1994 and 30,502 in 1993. Approximately 90 percent of BNRR's employees are
covered by collective bargaining agreements with 13 different labor
organizations.
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 three 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, health and benefits, work rules and working conditions prior to November
1, 1994. BNRR joined with other major railroads to negotiate these issues 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
increasing wages and benefits and restoring many of the restrictive work rules
and practices that were modified or eliminated under the current agreements. One
union is also challenging the railroads' right to negotiate on a multi-employer
basis and the issue is currently pending in federal district court in
Washington, D.C. Under labor agreements currently in effect, a cost of living
allowance of nine cents per hour went into effect on July 1, 1995 for most of
the unionized work force. The cost of living allowance was dependent upon
changes in the Consumer Price Index not to exceed three percent.
In December 1995, BNRR's multi-employer bargaining representative, the
National Carriers' Conference Committee (NCCC), reached a tentative agreement
with the UTU, the largest single rail union, resolving wage, benefit and work
rule issues through 1999. A similar agreement was reached in February 1996 with
the Brotherhood of Locomotive Engineers ("BLE"). The UTU and BLE agreements are
subject to membership ratification, which process should be completed by May
1996.
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 and held meetings with the parties. One or more of the
unions could be released from mediation which would likely start a cooling-off
period and possibly lead to the establishment of a Presidential Emergency Board
before the parties could engage in self-help remedies. Although the ultimate
outcome of the negotiations cannot be predicted, the potential exists for one or
more work stoppages in the railroad industry during 1996 which may affect BNRR.
Existing labor agreements will remain in effect until new agreements are reached
or until the Railway Labor Act's procedures (which include mediation, cooling-
off periods, and the possibility of Presidential intervention) have been
exhausted.
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With respect to the permissive authority granted in the Interstate Commerce
Commission's (ICC) August 23, 1995 written decision to consolidate BNRR and The
Atchison, Topeka and Santa Fe Railway Company (ATSF), agreements resolving
operations consolidations issues with the BLE and UTU were finalized in February
and March of 1996. Discussions with the Transportation Communications Union
("TCU") resulted in an agreement resolving all operations consolidations and
other related issues covering BNRR's clerical employees. The TCU agreement will
enable BNRR to centralize most clerical functions. Operations consolidations
negotiations are ongoing with the carman and yardmaster unions.
BNRR is party to service interruption insurance agreements under which it
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.
COMPETITION
The business environment in which BNRR operates remains highly competitive.
Depending on the specific market, deregulated motor carriers, other railroads
and river barges exert pressure on various price and service combinations. The
presence of advanced, high service truck lines with expedited delivery,
subsidized infrastructure and minimal empty mileage continues to affect the
market for non-bulk, time sensitive freight. The potential expansion of long
combination vehicles could further encroach upon markets traditionally served by
railroads. In order to remain competitive, BNRR and other railroads continue to
develop and implement operating efficiencies to improve productivity.
As railroads streamline, rationalize and otherwise enhance their franchises,
competition among rail carriers intensifies. The primary rail competitors in the
Western region of the United States of BNRR and its affiliate ATSF consist of CP
Rail Systems; Southern Pacific Transportation Company (SP); and Union Pacific
Railroad Company (UP), which now includes the former Chicago & North Western
Transportation Company (C&NW). Numerous regional railroads and motor carriers
operate in parts of the same territories served by BNRR. Coal, one of BNRR's
primary commodities, has experienced significant pressure on rates due to
competition from the joint effort of C&NW/UP and from BNRR's effort to penetrate
new markets.
An application for approval of the proposed merger of the UP and SP is now
pending before the Department of Transportation's Surface Transportation Board.
Approval of that transaction would create an enhanced competitor to BNRR. BNRR
and ATSF have entered into a settlement agreement with UP and SP under which, if
the UP/SP combination is approved as proposed, BNSF would obtain overhead
access, and in some instances local access through trackage rights to over 3,500
route miles of the UP/SP system, and UP and SP would sell more than 300 miles of
track to BNRR or ATSF. This would provide BNRR and ATSF access to additional
shippers and would improve its route structures. A decision by the Surface
Transportation Board on the UP/SP transaction is scheduled in 1996.
ENVIRONMENTAL
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 inherent in railroad operations, which frequently involve transporting
chemicals and other hazardous materials.
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ITEM 3. LEGAL PROCEEDINGS
WHEAT AND BARLEY TRANSPORTATION RATES
In September 1980 a class action lawsuit was filed against BNRR in United
States District Court for the District of Montana (Montana District Court)
challenging the reasonableness of BNRR's export wheat and barley rates. The
class consists of Montana grain producers and elevators. The plaintiffs sought a
finding that BNRR'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 ICC. Subsequently, the State of
Montana filed a complaint at the ICC challenging BNRR'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 BNRR owed $9,685,918 in reparations plus interest. In its
last decision, dated November 26, 1991, the ICC found BNRR's total reparations
exposure to be $16,559,012 through July 1, 1991. The ICC also found that BNRR's
current rates were below a reasonable maximum and vacated its earlier rate
prescription order.
BNRR 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. BNRR's primary contention on appeal was
that the ICC erred in using the revenue to variable cost rate standard to judge
the rates instead of Constrained Market Pricing/Stand Alone Cost principles.
The limited portions of decisions that cover pre-October 1, 1980 rates were
appealed to the Montana District Court.
On March 24, 1992, the Montana District Court dismissed plaintiffs' case as to
all aspects other than those relating to pre-October 1, 1980 rates. On February
9, 1993, the D.C. Circuit served its decision regarding the appeal of the
several ICC decisions in this case. The court held that the ICC did not
adequately justify its use of the revenue to variable cost standard as BNRR 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 BNRR'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 BNRR exceeded
the stand alone costs of transporting that traffic and that BNRR's rates were
unreasonably high. BNRR filed its evidence March 29, 1995 showing that the
stand alone costs of transporting the traffic exceeded the revenue derived by
BNRR or that consequently its rates were not unreasonably high. The parties
filed briefs simultaneously on August 16, 1995, and the proceeding awaits
decision by the Surface Transportation Board, successor to the ICC.
COAL TRANSPORTATION CONTRACT LITIGATION
On April 26, 1991, an action was filed against BNRR 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 BNRR constituted unusual economic conditions giving rise to a
"gross inequity" because BNRR's costs of providing service have been reduced
over the contracts' terms. On August 2, 1994, plaintiff amended its complaint
to further allege that BNRR had been unjustly enriched by retaining differences
between the rates actually charged and those that SWEPCO alleged should have
been charged. SWEPCO sought both prospective rate relief and recovery of
alleged past overcharges.
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BNRR's primary contention was that both parties anticipated productivity gains
in the rail industry when negotiating the contracts and agreed that BNRR would
retain most of its productivity gains. BNRR further contended that there was no
agreement that transportation rates paid by SWEPCO would be based on BNRR'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, BNRR 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. BNRR filed its
notice of appeal in the case on February 17, 1995 and posted a bond staying
enforcement of the judgment in the Court of Appeals for the Sixth Court of
Appeals District of Texas, Texarkana, Texas, (Burlington Northern Railroad
Company v. Southwestern Electric Power Company, No. 06-95-00024-CV). SWEPCO has
filed a notice of cross appeal and the case is awaiting review. In the opinion
of outside counsel, BNRR has a substantial likelihood of prevailing on appeal,
although no assurances can be given due to the uncertainties inherent in
litigation.
ENVIRONMENTAL PROCEEDINGS
By letter dated August 31, 1995, the Wisconsin Department of Justice, on
behalf of the State of Wisconsin 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. In State of Wisconsin v. Burlington Northern Railroad Company and Soo
Line Railroad Company (Case No. 96CV007), BNRR settled this matter for $106,580
pursuant to a stipulation and order for judgment entered on January 22, 1996 by
the Circuit Court for Ashland County, Wisconsin. This matter is now considered
terminated.
On December 18, 1995 the State of Illinois filed a Complaint captioned People
of the State of Illinois v. Burlington Northern Railroad Company, Beazer East,
Inc. and Koppers Industries, Inc. (PCB No. 96-132) before the Illinois Pollution
Control Board against BNRR, Beazer East, Inc. and Koppers Industries, Inc.,
alleging violations of the Illinois Environmental Protection Act with respect to
a facility in Galesburg, Illinois. This facility is not operated by BNRR. The
proceeding may result in monetary sanctions in excess of $100,000. BNRR and
Beazer East, Inc. have made an offer to the State of Illinois to settle this
matter.
CROW RESERVATION CROSSING ACCIDENT CASE
At approximately 10:15 a.m., on November 22, 1993, there was an accident at a
BNRR railroad crossing located within the boundaries of the Crow reservation in
which three members of the Crow tribe were killed. The crossing, which is
located on a rural gravel road just south of Lodge Grass, Montana, was protected
by crossbuck and advance warning signs.
A lawsuit was filed in the Crow Tribal Court (Estates of Red Wolf, Red Horse
and Bull Tail v. Burlington Northern Railroad Company, Case No. 94-31) on behalf
of the estates of the driver and the two passengers. One of the passenger cases
was severed and has yet to go to trial. The other two cases proceeded to trial
in January 1996 and, on February 6, 1996, a Crow Tribal Court jury rendered a
verdict against BNRR for compensatory damages in the total amount of $250
million.
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BNRR has filed an appeal to the Crow Court of Appeals in and for the Crow
Indian Reservation where it will seek, among other things, to have the case
dismissed on the basis that the Crow Tribal Court lacks subject matter
jurisdiction over these claims. If the appellate court fails to grant relief to
BNRR, BNRR will pursue its defenses in federal court. On February 26, 1996, the
Federal District Court for the District of Montana entered an order enjoining
any action by plaintiffs to enforce the judgment pending appeal through the
tribal court and federal court systems. BNRR was required to post a $5 million
bond with the federal court.
ICC MERGER CASE
On October 13, 1994, BNI, BNRR, SFP, and ATSF ("Applicants") filed a railroad
merger and control application with the 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 BNSF, the
consolidation of BNRR and ATSF by BNSF, the consolidation of BNRR and ATSF
operations, and the merger of BNRR and ATSF. The ICC approved the application in
its written decision served August 23, 1995, which decision was effective as of
September 22, 1995. Several petitions for reconsideration or to reopen the ICC's
decision were filed by parties to the proceeding and all of these have been
denied. Additionally, eight parties to the proceeding 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 challenge 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 acquisition of common control of BNRR and ATSF by BNSF.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of BNRR's outstanding common stock is owned of record by BNI and therefore
not traded on any market.
-9-
<PAGE>
ITEM 7. 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 Company and its majority-owned
subsidiaries (collectively BNRR or Company). BNRR is a wholly-owned subsidiary
of Burlington Northern Inc. (BNI) which became a wholly-owned subsidiary of
Burlington Northern Santa Fe Corporation (BNSF) on September 22, 1995 as a
result of the merger discussed below.
ACQUISITION OF SANTA FE PACIFIC CORPORATION (SFP)
- -------------------------------------------------
On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger (as
amended on October 26, 1994, December 18, 1994, January 24, 1995 and September
19, 1995, the Merger Agreement) pursuant to which SFP would merge with BNI 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. The business combination with SFP was accounted for by the purchase
method.
RESULTS OF OPERATIONS
- ---------------------
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
BNRR recorded net income for 1995 of $111 million compared with net income of
$459 million for 1994. Results for 1995 were reduced by $671 million of merger,
severance and asset charges (see Note 2: Merger, severance and asset charges).
The corresponding reduction in net income was approximately $414 million.
Results for 1995 were further reduced by $100 million (after tax) for the
cumulative effect of an accounting change for locomotive overhauls. Results for
1994 were reduced by $10 million (after tax) for the cumulative effect of an
accounting change for postemployment benefits. Excluding the above items, net
income for 1995 would have been $625 million compared to $469 million in 1994.
Revenue table
The following table presents BNRR's revenue information by commodity for the
years ended December 31, 1995 and 1994 and includes certain reclassifications of
prior year information to conform to current year presentation.
<TABLE>
<CAPTION>
Revenue
Revenue Per Thousand
Revenues Ton Miles (RTM) RTM
-------------- ---------------- -----------------
1995 1994 1995 1994 1995 1994
------ ------ ------- ------- ------ ------
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C> <C>
Coal.......................... $1,757 $1,669 150,335 136,164 $11.69 $12.26
Agricultural Commodities...... 1,042 759 52,185 33,922 19.97 22.37
Intermodal.................... 736 745 24,800 24,671 29.68 30.20
Forest Products............... 427 440 18,448 19,495 23.15 22.57
Chemicals..................... 322 310 12,438 11,695 25.89 26.51
Consumer and Food Products.... 304 304 10,392 10,341 29.25 29.40
Metals........................ 280 253 12,409 11,503 22.56 21.99
Minerals and Ores............. 242 244 10,448 10,752 23.16 22.69
Automotive.................... 146 152 1,960 2,031 74.49 74.84
Other......................... 125 119 - - - -
------ ------ ------- ------- ------ ------
Total......................... $5,381 $4,995 293,415 260,574 $17.91 $18.71
====== ====== ======= ======= ====== ======
</TABLE>
Revenues
Total revenues for 1995 were $5,381 million compared with revenues of $4,995
million for 1994. The increase of $386 million or 8 percent was primarily due to
improved Coal and Agricultural Commodities revenues.
Coal revenues improved $88 million during 1995 due to higher traffic levels
caused primarily by new business, favorable weather conditions early in the
-10-
<PAGE>
year and increased demand for low-sulfur coal from the Powder River Basin.
Revenue per thousand revenue ton miles declined as a result of continuing
competitive pricing pressures and a change in traffic mix.
Agricultural Commodities revenues during 1995 were $283 million greater than
1994. The increase was principally caused by improvements in corn and soybean
revenues of $259 million and $41 million, respectively. 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 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 revenue per thousand revenue ton miles.
Metals revenues increased $27 million when compared with 1994 primarily due to
increased taconite, aluminum and steel products revenues.
Current year revenues for Forest Products decreased $13 million and Chemicals
revenues increased $12 million when compared to 1994. The decrease in Forest
Product revenues was attributable to lower traffic levels for lumber while the
increase in Chemicals revenues was due to strong petroleum products demand.
Expenses
As discussed in Note 2: Merger, severance and asset charges, BNRR recorded $671
million for merger, severance and asset charges in 1995. The principal
components of the charge were $287 million related to BNRR's plan to centralize
the majority of its union clerical functions and $190 million related to
salaried employee costs for severance, pension and other employee benefits and
costs for employee relocations during the period. Additionally, $105 million
was recorded for planned branch line dispositions, while the remaining $89
million included obligations for vacating leased facilities and the write-off of
duplicate and excess assets. When its plans are completed, BNRR expects to have
eliminated approximately 2,600 positions and disposed of approximately 3,300
miles of low density track. Also as described in Note 2, costs related to union
employee relocation as well as certain costs for separation and severances were
not included in the charge; therefore, these costs will be future operating
expenses. Both the timing and magnitude of any future expense is currently
unknown.
Total operating expenses for 1995, including $671 million of merger, severance
and asset charges, were $4,968 million compared with expenses of $4,164 million
for 1994. Excluding the merger, severance and asset charges the operating ratio
for 1995 was 80 percent, an improvement of three percentage points over the
operating ratio of 83 percent for 1994.
Effective January 1, 1995, BNRR changed its method of accounting for periodic
major locomotive overhauls. Under the new method, overhauls on owned units are
capitalized and depreciated ratably until the next anticipated overhaul. In
addition, estimated costs for overhauls on leased units are accrued on a
straight-line basis over the life of the leases. BNRR previously expensed
locomotive overhauls when the costs were incurred. The cumulative effect of
this change for years prior to 1995 was a reduction in net income of $100
million (after tax) while the effect of this change for the year ended December
31, 1995 was to reduce net income by $26 million (after tax).
Compensation and benefits expenses of $1,831 million were $62 million above
1994. The increase was due to higher traffic levels, a wage increase for union
represented employees effective July 1994, an increase in health and welfare
costs for union employees due primarily to an increase in insurance premium
rates, and increased incentive compensation expense. These increases were
partially offset by operating efficiencies.
Equipment rents expenses were $49 million higher than 1994 primarily due to an
increase in lease rental expense as a result of a larger fleet of leased freight
cars and an increase in the leasing of locomotives to meet power requirements in
1995.
-11-
<PAGE>
Purchased services expenses decreased $48 million for 1995 compared with 1994,
primarily attributable to lower intermodal-related expenses.
Depreciation and amortization expense for 1995 was $59 million higher than 1994.
The increase reflects $19 million attributable to the 1995 effect of a change in
accounting for locomotive overhauls. The remainder of the increase was due to
capital additions which increased the Company's asset base.
Fuel expenses for 1995 were $36 million higher compared with 1994 primarily due
to a $29 million increase in consumption resulting from higher traffic volumes
in 1995. An increase in the average price paid per gallon of 1.2 cents in 1995
contributed to the remainder of the increase.
Materials expenses for 1995 decreased $39 million compared with 1994 which was
primarily attributable to the change in accounting for locomotive overhauls in
1995.
Other operating expenses were $14 million higher in 1995 as compared with 1994.
The increase reflects $65 million of expenses associated with the change in
accounting for locomotive overhauls, largely offset by a decrease in personal
injury and other expenses.
Other income (expense), net was $14 million favorable in 1995 as compared with
1994. This increase was primarily due to interest income on the settlement of a
tax refund and lower fees on the sale of accounts receivable in 1995.
-12-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
Burlington Northern Railroad Company and Subsidiaries
(Dollars in millions)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- ---------------------------------------- ------- ------- ------
<S> <C> <C> <C>
Revenues..................................$5,381 $4,995 $4,699
Operating expenses:
Compensation and benefits................ 1,831 1,769 1,701
Equipment rents.......................... 527 478 425
Purchased services....................... 430 478 464
Fuel..................................... 405 369 362
Depreciation and amortization............ 394 335 334
Materials................................ 266 305 300
Other.................................... 444 430 463
Merger, severance and asset charges...... 671 - -
------ ------ ------
Total operating expenses............... 4,968 4,164 4,049
------ ------ ------
Operating income.......................... 413 831 650
Interest expense.......................... 86 79 86
Other income (expense), net............... 31 17 12
------ ------ ------
Income before income taxes................ 358 769 576
Income tax expense........................ 147 300 244
------ ------ ------
Income before cumulative effect of
change in accounting method.............. 211 469 332
Cumulative effect of change in
accounting method, net of tax............ (100) (10) -
------ ------ ------
Net income................................$ 111 $ 459 $ 332
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
-13-
<PAGE>
CONSOLIDATED BALANCE SHEETS
Burlington Northern Railroad Company and Subsidiaries
(Dollars in millions)
December 31, 1995 1994
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents........................... $ 41 $ 27
Accounts receivable, net............................ 567 702
Materials and supplies.............................. 136 100
Current portion of deferred income taxes............ 174 157
Other current assets................................ 25 27
------ ------
Total current assets.............................. 943 1,013
Property and equipment, net......................... 6,148 5,848
Advances to parent.................................. 290 -
Investments in and advances to affiliates........... 134 94
Other assets........................................ 137 133
------ ------
Total assets...................................... $7,652 $7,088
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current
liabilities....................................... $1,398 $1,263
Long-term debt and commercial paper due
within one year................................... 26 115
------ ------
Total current liabilities......................... 1,424 1,378
Long-term debt and commercial paper................. 880 719
Deferred income taxes............................... 1,226 1,421
Casualty and environmental reserves................. 416 415
Employee merger and separation costs................ 257 -
Other liabilities................................... 409 202
------ ------
Total liabilities................................. 4,612 4,135
------ ------
Commitments and contingencies (see Note
11 and 12)
Stockholder's equity:
Common stock, without par value, 1,000
shares authorized, issued and
outstanding....................................... 1,191 1,191
Retained earnings.................................. 1,849 1,762
------ ------
Total stockholder's equity........................ 3,040 2,953
------ ------
Total liabilities and stockholder's
equity.......................................... $7,652 $7,088
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
-14-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Burlington Northern Railroad Company and Subsidiaries
(Dollars in millions)
Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 111 $ 459 $ 332
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of change in
accounting method.................................. 100 10 -
Depreciation and amortization....................... 394 335 334
Deferred income taxes............................... (134) 109 128
Merger, severance and asset charges................. 671 - -
Employee merger and separation
costs paid......................................... (69) - -
Other, net.......................................... 38 (24) (116)
Changes in current assets and
liabilities:
Accounts receivable, net.......................... 39 (111) (117)
Materials and supplies............................ (37) (13) 6
Other current assets.............................. 2 (4) (1)
Accounts payable and other current
liabilities...................................... 42 (14) 9
----- ----- -----
Net cash provided by operating activities............... 1,157 747 575
----- ----- -----
INVESTING ACTIVITIES
Cash used for capital expenditures.................... (699) (626) (530)
Collections from (advances to)
affiliates, net...................................... 4 10 29
Other, net............................................ (35) 4 19
----- ----- -----
Net cash used for investing activities.................. (730) (612) (482)
----- ----- -----
FINANCING ACTIVITIES
Net increase in commercial paper...................... 134 64 26
Proceeds from issuance of long-term debt.............. - 150 -
Payments on long-term debt............................ (205) (336) (83)
Advances to parent, net............................... (290) - -
Dividends paid........................................ (50) - (75)
Other, net............................................ (2) (3) (1)
----- ----- -----
Net cash used for financing
activities............................................. (413) (125) (133)
----- ----- -----
Increase (decrease) in cash and cash
equivalents............................................ 14 10 (40)
Cash and cash equivalents:
Beginning of year..................................... 27 17 57
----- ----- -----
End of year........................................... $ 41 $ 27 $ 17
===== ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts
capitalized.......................................... $ 81 $ 78 $ 92
Income taxes paid, net of refunds..................... 281 192 109
Assets financed through capital lease
obligations.......................................... 140 50 -
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Burlington Northern Railroad Company and Subsidiaries
(Dollars in millions)
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------ -------- -----
<S> <C> <C> <C>
Balance at December 31, 1992............... $1,190 $1,046 $2,236
Net income................................. - 332 332
Dividends.................................. - (75) (75)
Capital contribution from parent........... 1 - 1
------ ------ ------
Balance at December 31, 1993............... 1,191 1,303 2,494
Net income................................. - 459 459
------ ------ ------
Balance at December 31, 1994............... 1,191 1,762 2,953
Net income................................. - 111 111
Dividends.................................. - (50) (50)
Cost to equity investment adjustment....... - 26 26
------ ------ ------
Balance at December 31, 1995............... $1,191 $1,849 $3,040
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
-16-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Burlington Northern Railroad Company and Subsidiaries
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Burlington
Northern Railroad Company and its majority-owned subsidiaries (collectively BNRR
or Company). BNRR is a wholly-owned subsidiary of Burlington Northern Inc. (BNI)
which became a wholly-owned subsidiary of Burlington Northern Santa Fe
Corporation (BNSF) on September 22, 1995. All significant intercompany accounts
and transactions have been eliminated. The preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the periods presented.
RECLASSIFICATIONS
Certain comparative prior year amounts in the consolidated financial statements
and notes have been reclassified to conform with the current year presentation.
CASH AND CASH EQUIVALENTS
All short-term investments with original maturities of less than 90 days are
considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value.
MATERIALS AND SUPPLIES
Materials and supplies consist mainly of diesel fuel, repair parts for equipment
and other railroad property and are valued at the lower of average cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment are
depreciated and amortized on a straight-line basis over their estimated useful
lives. Upon normal sale or retirement of depreciable railroad property, cost
less net salvage is charged to accumulated depreciation and no gain or loss is
recognized. Significant premature retirements are recorded as gains or losses at
the time of their occurrence. Expenditures which significantly increase asset
values or extend useful lives are capitalized. Repair and maintenance
expenditures are charged to operating expense when the work is performed. The
weighted average annual depreciation rate in effect at December 31, 1995 was
3.84 percent for track structure, 5.82 percent for equipment and 2.86 percent
for other road properties.
REVENUE RECOGNITION
Transportation revenues are recognized based upon the proportion of service
provided.
2. MERGER, SEVERANCE AND ASSET CHARGES
Included on the Statement of Income for 1995 are operating expenses of $671
million related to merger, severance and asset costs. Significant components
included in these costs are described below.
Employee-related costs of $287 million were recorded related to BNRR's plan to
centralize the majority of its union clerical functions which was approved in
1995. This plan includes the reduction of approximately 1,600 employees which,
among other things, requires installation of common information systems. The
Company and the union have entered into an implementation agreement which allows
the Company to abolish the positions and provides separation benefits to
-17-
<PAGE>
impacted employees. It will take several years to fully implement this plan due
to the geographical complexity of the new combined rail system, and the time
required to develop and install common systems. Most of the position reductions
are expected to occur during 1996 and 1997, and the entire plan is expected to
be completed by the end of 1998. No provision for clerical relocations was
included in the 1995 expense as employees have yet to commit to relocate. As
such, these costs, as well as any separation and severance costs above those
provided will be recorded as operating expenses of future periods. Both the
timing and magnitude of any such future expense is presently unknown.
Costs of $190 million were recorded for salaried employees and reflect
severance, pension and other employee benefits, and costs for employee
relocations incurred during the period. Severance, pension and other employee
benefit costs reflect the elimination of approximately 1,000 former BNRR
employees. Most of these positions were eliminated in the third and fourth
quarters of 1995; remaining positions will be eliminated in 1996. Additional
components of salaried employee costs include special termination benefits to be
received under the Company's retirement plan. Relocation expenses of $23 million
reflect costs incurred in 1995 for relocating approximately 300 former BNRR
employees.
Costs of $105 million are included for branch line dispositions reflecting the
write-off of the net book value of the lines at the anticipated disposal date,
less estimated net proceeds. Approximately 75 line segments, covering 3,300
miles of former BNRR lines are included. Remaining costs of $89 million include
obligations at leased facilities which expected to be vacated and the write-off
of duplicate and excess assets including computer hardware and software and
certain facilities.
Current and long-term employee merger and separation liabilities totaling $379
million are included in the consolidated balance sheet and represent employee-
related components of the above costs.
At December 31, 1995, approximately $122 million of the above total is included
within current liabilities for anticipated costs to be paid in 1996. The
remaining costs are anticipated to be paid over the next five years.
3. ACCOUNTING CHANGES
Effective January 1, 1995, BNRR changed its method of accounting for periodic
major locomotive overhauls. Under the new method, costs of owned locomotives
relating to components requiring major overhaul are depreciated, on a straight-
line basis, to the first major overhaul date. The remaining cost of the owned
locomotive is depreciated, on a straight-line basis, over the estimated economic
life of the locomotive. The cost of overhauls on owned units are then
capitalized when incurred and depreciated, on a straight-line basis, until the
next anticipated overhaul. In addition, estimated costs for major overhauls on
leased units are accrued on a straight-line basis over the life of the leases.
BNRR previously expensed locomotive overhauls when the costs were incurred. BNRR
believes that this change is preferable because it improves the matching of
expenses incurred to revenues earned. The cumulative effect of this change on
years prior to 1995 was a reduction in net income of $100 million (net of a $63
million income tax benefit). The effect of this change for the year ended
December 31, 1995, was to reduce income before the cumulative effect of change
in accounting method by $26 million. The pro forma effect of this change on 1994
and 1993 would have been to reduce net income by $26 million and $21 million,
respectively and would have reduced net income to $433 million and $311 million,
respectively.
Effective January 1, 1994, BNRR adopted Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits."
The cumulative effect, net of $7 million income tax benefit, of this change in
accounting attributable to years prior to 1994, at the time of adoption, was to
decrease 1994 net income by $10 million.
In 1994, BNRR adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The adoption of this standard had no effect on net
income and no material effect on stockholders' equity.
-18-
<PAGE>
4. OTHER INCOME (EXPENSE), NET
Other income (expense), net includes the following (in millions):
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- ---------------------------------------------------------
<S> <C> <C> <C>
Interest income......................... $21 $10 $ 9
Gain on property dispositions........... 11 17 19
Accounts receivable sale fees........... - (9) (9)
Miscellaneous, net...................... (1) (1) (7)
--- --- ---
Total................................ $31 $17 $12
=== === ===
</TABLE>
5. INCOME TAXES
Income tax expense, excluding the cumulative effect of change in accounting
method, was as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- ---------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal.............................. $ 243 $167 $102
State................................ 38 24 14
----- ---- ----
281 191 116
----- ---- ----
Deferred:
Federal.............................. (117) 93 111
State................................ (17) 16 17
----- ---- ----
(134) 109 128
----- ---- ----
Total.............................. $ 147 $300 $244
===== ==== ====
</TABLE>
Reconciliation of the federal statutory income tax rate to the effective tax
rate, excluding the cumulative effect of change in accounting method, was as
follows:
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- ---------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate...... 35.0% 35.0% 35.0%
State income taxes, net of federal
tax benefit........................... 3.8 3.4 3.5
Effect of 1 percent federal tax
rate increase on deferred tax
balances at January 1, 1993........... - - 4.5
Other, net............................. 2.6 0.6 (.6)
---- ---- ----
Effective tax rate..................... 41.4% 39.0% 42.4%
==== ==== ====
</TABLE>
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act) was
signed into law. The Act increased the corporate federal income tax rate by 1
percent, effective January 1, 1993. BNRR recorded $27 million to income tax
expense representing the impact of the 1 percent increase on BNRR's beginning of
the year deferred tax liability.
-19-
<PAGE>
The components of deferred tax assets and liabilities were as follows (in
millions):
<TABLE>
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization................. $(1,653) $(1,716)
Other......................................... (91) (98)
------- -------
Total deferred tax liabilities............. (1,744) (1,814)
------- -------
Deferred tax assets:
Casualty and environmental reserves........... 237 257
Employee merger and separation costs.......... 201 -
Pensions...................................... 45 39
Other......................................... 209 254
------- -------
Total deferred tax assets................... 692 550
------- -------
Net deferred tax liability.................. $(1,052) $(1,264)
======= =======
Noncurrent deferred income tax liability....... (1,226) $(1,421)
Current deferred income tax asset.............. 174 157
------- -------
Net deferred tax liability.................. $(1,052) $(1,264)
======= =======
</TABLE>
BNRR's federal income tax returns have been examined through 1991. All years
prior to 1986 are closed. Issues relating to the years 1986-1991 are being
contested through various stages of administrative appeal. In addition, BNRR
has various state income tax returns in the process of examination,
administrative appeal or litigation. Management believes that adequate
provision has been made for any adjustment that might be assessed for open years
through 1995.
6. ACCOUNTS RECEIVABLE, NET
BNRR maintains an allowance for doubtful accounts based upon the expected
collectibility of all accounts receivable. Allowances for doubtful accounts of
$24 million and $20 million have been recorded at December 31, 1995 and 1994,
respectively.
7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net was as follows (in millions):
<TABLE>
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Road, roadway structures and real estate....... $ 8,115 $ 7,690
Equipment...................................... 2,152 1,913
------- -------
Total cost................................... 10,267 9,603
Less accumulated depreciation.................. (4,119) (3,755)
------- -------
Property and equipment, net................... $ 6,148 $ 5,848
======= =======
</TABLE>
The consolidated balance sheets at December 31, 1995 and 1994 included $222
million and $86 million, respectively, for property and equipment under capital
leases. The related depreciation was included in depreciation expense.
Accumulated depreciation for property and equipment under capital leases was $38
million and $34 million at December 31, 1995 and 1994, respectively.
Capitalized software development costs are generally amortized over a five to
seven-year estimated useful life using the straight-line method. Amortization
expense was $6 million for the year ended December 31, 1995, $2 million for the
year ended December 31, 1994 and no amortization was recorded for the year ended
December 31, 1993. Unamortized capitalized software costs were $22 million and
$20 million as of December 31, 1995 and 1994, respectively.
-20-
<PAGE>
8. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of the following (in
millions):
<TABLE>
<CAPTION>
December 31, 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Accounts and wages payable........................................ $ 300 $ 264
Casualty and environmental reserves............................... 184 221
Employee merger and separation costs.............................. 122 -
Taxes other than income taxes..................................... 106 117
Accrued vacations................................................. 88 89
Other............................................................. 598 572
------ ------
Total.......................................................... $1,398 $1,263
====== ======
</TABLE>
9. DEBT
Debt outstanding was as follows (in millions):
<TABLE>
<CAPTION>
December 31, 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Consolidated mortgage bonds, 3 1/5% to 9 1/4%, due
2006 to 2045.................................................... $ 321 $ 321
Capitalized lease obligations, weighted average
rate of 6.59% and 8.01%, respectively, expiring 1996
to 2008......................................................... 150 46
Equipment and other obligations, weighted
average rate of 8.44% and 9.30%, respectively, due
serially to 2009................................................ 74 91
General mortgage bonds, 3 1/8% and 2 5/8%, due 2000
and 2010, respectively.......................................... 62 62
Prior lien railway and land grant bonds, 4%, due 1997............. 57 57
General lien railway and land grant bonds, 3%,
due 2047........................................................ 35 35
First mortgage bonds, series A, 4%, due 1997...................... 20 22
Other............................................................. 9 158
Commercial paper, 6.1% (variable)................................. 224 90
Unamortized discount............................................... (46) (48)
----- -----
Total........................................................... 906 834
Less:
Current portion of long-term debt and commercial paper........... (26) (115)
----- -----
Long-term debt.................................................. $ 880 $ 719
===== =====
</TABLE>
In 1995, BNRR completed cross-border leveraged leases of equipment for a total
amount of $136 million which were recorded as capital lease obligations. These
transactions included the issuance of $108 million of equipment secured debt at
a weighted average yield of 6.39 percent and the receipt of an up front cash
benefit. The up front benefit reduces the effective interest rate on the debt
to 5.76 percent.
In November 1994, BNRR entered into a $150 million three year term loan facility
agreement with a group of commercial banks and used the proceeds to redeem $150
million aggregate principal amount of Railroad Consolidated Mortgage Bonds, 10%,
Series J, due November 1, 1997. In November 1995, this debt was repaid through
the issuance of commercial paper by BNRR.
Aggregate long-term debt scheduled maturities are $26 million, $99 million, $23
million, $19 million and $277 million for 1996 through 2000, respectively.
Substantially all BNRR properties and certain other assets are pledged as
collateral to or are otherwise restricted under the various BNRR long-term debt
agreements. Equipment obligations are secured by the underlying equipment.
-21-
<PAGE>
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of BNRR's financial instruments at December 31, 1995
and 1994 and the methods and assumptions used to estimate the fair value of each
class of financial instruments held by BNRR, were as follows:
CASH AND CASH EQUIVALENTS
The carrying amount approximated fair value because of the short maturity of
these instruments.
ACCRUED INTEREST PAYABLE
The carrying amount approximated fair value as the majority of interest payments
are made semiannually.
LONG-TERM DEBT AND COMMERCIAL PAPER
The fair value of BNRR's long-term debt was primarily based on quoted market
prices for the same or similar issues, or on the current rates that would be
offered to BNRR for debt of the same remaining maturities. The carrying amount
of commercial paper approximated fair value because of the short maturity of
these instruments.
The carrying amount and estimated fair values of BNRR's financial instruments
were as follows (in millions):
<TABLE>
<CAPTION>
December 31, 1995 1994
- ----------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- --------- -----
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................... $ 41 $ 41 $ 27 $ 27
Liabilities:
Accrued interest payable.................... 20 20 19 19
Long-term debt and commercial paper......... 906 967 834 811
</TABLE>
BNRR also holds investments in, and has advances to, several unconsolidated
transportation affiliates. It was not practicable to estimate the fair value of
these financial instruments, which were carried at their original cost of $10
million and $17 million in the December 31, 1995 and 1994 consolidated balance
sheets.
11. HEDGING ACTIVITIES, LEASES AND OTHER COMMITMENTS
Hedging activities
BNRR 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. Any gains or losses associated with changes in market
value of these hedges are deferred and recognized as a component of fuel expense
in the period in which the hedged fuel is purchased and used. To the extent
BNRR hedges portions of its fuel purchases, it may not fully benefit from
decreases in fuel prices.
As of December 31, 1995, BNRR had entered into forward purchases for
approximately 69 million gallons at an average price of approximately 49 cents
per gallon. In addition, BNRR held petroleum futures contracts representing
approximately 60 million gallons at an average price of approximately 48 cents
per gallon. These contracts have expiration dates ranging from January, 1996 to
October, 1996.
The above prices do not include taxes, fuel handling costs, certain
transportation costs and, except forward contracts, any differences which may
occur from time to time between the prices of commodities hedged and the
purchase price of BNRR's diesel fuel.
-22-
<PAGE>
BNRR's current fuel hedging program covers approximately 20 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 in any period. Unrealized gains or losses from BNRR's fuel hedging
transactions were not material at December 31, 1995 and 1994. BNRR monitors its
hedging positions and credit ratings of its counterparties and does not
anticipate losses due to counterparty nonperformance.
Leases
BNRR has substantial lease commitments for locomotives, freight cars, trailers,
office buildings and other property. Most of these leases provide the option to
purchase the equipment at fair market value at the end of the lease. However,
some provide fixed price purchase options. Future minimum lease payments (which
reflect leases having non-cancelable lease terms in excess of one year) as of
December 31, 1995 are summarized as follows (in millions):
<TABLE>
<CAPTION>
Capital Operating
Year ended December 31, Leases
- ------------------------------------------------------------
<S> <C> <C>
1996.................................... $ 20 $ 266
1997.................................... 21 264
1998.................................... 20 229
1999.................................... 19 193
2000.................................... 19 173
Thereafter.............................. 114 1,590
---- ------
Total................................... 213 $2,715
======
Less amount representing interest....... 63
----
Present value of minimum lease payments. $150
====
</TABLE>
Lease rental expense for all operating leases was $341 million, $286 million and
$233 million for the years ended December 31, 1995, 1994 and 1993, respectively.
Contingent rentals and sublease rentals were not significant.
Other commitments
BNRR has entered into a commitment to acquire 124 locomotives during 1996 and
1997. In addition, BNRR has two power purchase agreements, expiring in 1998 and
2001, that currently involve 197 locomotives. Payments required by the
agreements are based upon usage, subject to specified take-or-pay minimums. The
rates specified in the two agreements are renegotiable every two years. BNRR's
1996 minimum commitment obligation is $51 million. Based on projected
locomotive power requirements, BNRR's payments in 1996 are expected to be in
excess of the minimum. Payments under the agreements totaled $49 million, $47
million and $53 million in 1995, 1994 and 1993, respectively. In 1990, BNRR
entered into a letter of credit for the benefit of a vendor. This letter of
credit is a performance guarantee for up to $15 million for locomotive
overhauls.
BNRR is party to service interruption insurance agreements under which it 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.
12. ENVIRONMENTAL AND OTHER CONTINGENCIES
Environmental
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
inherent in railroad operations, which frequently involve transporting chemicals
and other hazardous materials.
Additionally, many of BNRR's land holdings are and have been used for industrial
or transportation-related purposes or leased to commercial or
-23-
<PAGE>
industrial companies whose activities may have resulted in discharges onto the
property. As a result, BNRR is subject to environmental clean-up 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 180 sites, including the
Superfund sites, at which it is being asked to participate in the study and, or
both, clean-up of alleged environmental contamination. BNRR paid approximately
$28 million, $21 million and $27 million during 1995, 1994 and 1993,
respectively relating to mandatory clean-up efforts, including amounts expended
under federal and state voluntary clean-up programs. BNRR has accruals of
approximately $115 million for remediation and restoration of all known sites,
including $105 million pertaining to mandated sites, of which approximately
$40 million relates to the Superfund sites. BNRR anticipates that the majority
of the accrued costs at December 31, 1995 will be paid over the next five years.
No individual site is considered to be material. Recoveries received from third
parties, net of legal costs incurred, were approximately $31 million during the
year ended December 31, 1995 and were not significant in prior years.
Liabilities recorded 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 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; therefore, management believes that it is unlikely that any identified
matters, either individually or in the aggregate, will have a material adverse
effect on BNRR's consolidated financial position or liquidity.
-24-
<PAGE>
BNRR expects it will become subject to future requirements regulating air
emissions from diesel locomotives that may increase its operating costs.
Regulations applicable to new locomotive engines are expected to be issued by
the Environmental Protection Agency soon. 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 locomotive emission standards that may differ from federal standards.
Other claims and litigation
BNRR and its subsidiaries are parties 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 could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.
13. RETIREMENT PLANS
BNRR participates in BNI's pension plans which consist of a noncontributory
defined benefit pension plan covering substantially all non-union employees and
a nonqualified defined benefit plan for certain officers and other employees.
The benefits are based on years of credited service and the highest five-year
average compensation levels. BNI's funding policy is to contribute annually not
less than the regulatory minimum, and not more than the maximum amount
deductible for income tax purposes.
Components of the net pension cost were as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Service cost, benefits earned during
the period............................... $ 9 $ 12 $ 9
Interest cost on projected benefit
obligation............................... 54 50 50
Actual return on plan assets.............. (93) (25) (57)
Net amortization and deferred amounts..... 57 (1) 24
Curtailment costs......................... 10 - -
Cost of special termination benefits...... 32 - -
---- ---- ----
Net pension cost......................... $ 69 $ 36 $ 26
==== ==== ====
</TABLE>
-25-
<PAGE>
The following table shows the reconciliation of BNI's funded status of the plans
with amounts recorded in the consolidated balance sheets (in millions):
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation...................... $(641) $(481)
===== =====
Accumulated benefit obligation................. $(696) $(553)
===== =====
Projected benefit obligation................... $(758) $(628)
Plan assets at fair value, primarily
marketable equity and debt securities......... 534 467
----- -----
Projected benefit obligation in excess
of plan assets................................ (224) (161)
Unrecognized net loss.......................... 93 41
Unrecognized prior service cost................ 2 5
Unamortized net transition obligation.......... 20 29
Adjustment required to recognize
minimum liability............................. (53) (12)
----- -----
Accrued pension liability..................... $(162) $ (98)
===== =====
</TABLE>
BNI uses a December 31 measurement date. The assumptions used in accounting for
BNI's plans were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Discount rate.............................. 7.0% 9.0% 7.0%
Rate of increase in compensation levels.... 4.0% 5.5% 5.5%
Expected long-term rate of return on
plan assets............................... 9.5% 9.5% 9.5%
</TABLE>
BNRR participates in 401(k) thrift and profit sharing plans sponsored by BNI
which cover substantially all non-union employees. BNRR matches 35 percent of
the first 6 percent of the employees' contributions, which is subject to certain
percentage limits of the employees' earnings, at the end of each quarter.
Depending on BNRR's performance, an additional matching contribution of 20 to 40
percent can be made at the end of the year. BNRR's expense was $12 million, $8
million and $6 million in 1995, 1994 and 1993, respectively.
14. OTHER POSTEMPLOYMENT BENEFIT PLANS
BNI provides life insurance benefits to eligible BNRR non-union employees. The
life insurance plan is noncontributory and covers retirees only. Components of
BNI's postretirement benefit cost were $1 million in each of the three years
ended December 31, 1995, 1994 and 1993, respectively.
BNI's policy is to fund benefits payable under the life insurance plan as they
come due. The following table presents the status of BNI's life insurance plan
and the accrued postretirement benefit cost reflected in the consolidated
balance sheets (in millions). BNI uses a December 31 measurement date.
<TABLE>
<CAPTION>
December 31,
1995 1994
- --------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................... $14 $11
Fully eligible active participants........... 1 1
Other active participants.................... 2 2
--- ---
17 14
Unrecognized net gain........................... 1 4
--- ---
Accrued postretirement benefit cost............ $18 $18
=== ===
</TABLE>
The discount rate used in determining the benefit obligation was 7 percent at
December 31, 1995 and 9 percent at December 31, 1994.
Other Plans
Under collective bargaining agreements, BNRR participates in multiemployer
benefit plans which provide certain postretirement health care and life
insurance benefits for eligible union employees. Insurance premiums paid
-26-
<PAGE>
attributable to retirees, which are generally expensed as incurred, were $10
million in 1995, 1994 and 1993.
15. RELATED PARTY TRANSACTIONS
In addition to various corporate-related transactions with its parent, BNI,
BNRR rents, under operating leases, rolling stock and other property from BN
Leasing Corporation (BNLC), a wholly owned subsidiary of BNI. The following is
a summary of balances representing the result of transactions with related
parties (in millions):
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------
<S> <C> <C>
Short-term:
Payable to BNLC for rent associated with
property and equipment.............................. $ 12 $10
Payable to BNI, representing net settlement
account for dividends, taxes and other.............. - 3
---- ---
Total short-term payables to related parties........ $ 12 $13
==== ===
Receivable from BNLC for accrued interest
associated with the notes receivable for
hub centers and rail facilities..................... $ 2 $ 2
==== ===
Long-term:
Receivable from BNI, representing net
settlement account for dividends, taxes and
other............................................... $290 $ -
Notes receivable from BNLC for hub centers........... 28 28
Note receivable from BNLC for rail facilities........ 41 41
Investments in non-consolidated subsidiaries......... 50 6
Receivables from non-consolidated subsidiaries
and other affiliates................................ 15 19
---- ---
Total long-term investments in and advances
to related parties................................. $424 $94
==== ===
</TABLE>
BNRR recorded the following amounts for transactions with related parties (in
millions):
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- ----------------------------------------------------------
<S> <C> <C> <C>
Rental expense.......................... $65 $57 $39
Interest income......................... 7 7 7
</TABLE>
In prior years, BNRR tranferred the Denver and Houston hub centers to
Burlington Northern Holdings,Inc.(BNRRHI), a wholly owned subsidiary of BNRR.
BNRRHI subsequently sold the hub centers to BNLC. The hub centers, with a
combined book value of $22 million, were sold for the fair market value of $28
million. BNRRHI received two promissory notes due October 31, 2000, with
interest at 10.05 percent from BNLC for the total sale price. The notes will be
repaid using proceeds from rental payments from BNRR to BNLC for use of the
facilities at the rate of $3 million per year. No gain was recorded on the sale
of the property.
In prior years, BNRR purchased certain rail facilities at and between
Ortonville, Minnesota and Terry, Montana from the South Dakota Rail Authority.
These properties were subsequently sold to BNLC for the recorded net book value
of the property. BNRR received a promissory note from BNLC for the purchase
price of $41 million. Interest at a rate of 10.0 percent is due annually.
Principal is due at maturity on August 31, 2001. BNRR will make rental payments
of $5 million per year until 2001 for use of these facilities. No gain or loss
was recorded on the sale of the property.
As a result of the Merger, certain investments in third parties held by both
BNRR and Santa Fe Pacific Corporation which were previously recorded on the cost
method, were converted to the equity method due to BNSF's combined ownership
position and BNRR's ability to exercise significant influence. As
-27-
<PAGE>
such, $26 million, which is net of deferred taxes of $17 million, was recorded
as an increase to retained earnings to reflect BNRR's undistributed equity in
earnings and initial investment.
16. QUARTERLY FINANCIAL DATA-UNAUDITED
<TABLE>
<CAPTION>
(Dollars in millions, except per share data)
- ------------------------------------------------------------------------------------------------
Fourth Third Second First
------- ------ ------ ------
<S> <C> <C> <C> <C>
1995
Revenues........................................................ $1,363 $1,387 $1,284 $1,347
Operating income (loss) (1)(2).................................. (306) 260 234 225
Income (loss) before cumulative effect of
change in accounting method.................................. (200) 146 137 128
Cumulative effect of change in accounting
method, net of tax (2)....................................... - - - (100)
------ ------ ------ ------
Net income (loss)............................................... $ (200) $ 146 $ 137 $ 28
====== ====== ====== ======
1994
Revenues........................................................ $1,344 $1,249 $1,192 $1,210
Operating income................................................ 259 220 174 178
Income before cumulative effect of change in
accounting method............................................ 152 125 95 97
Cumulative effect of change in accounting
method, net of tax (3)....................................... - - - (10)
------ ------ ------ ------
Net income...................................................... $ 152 $ 125 $ 95 $ 87
====== ====== ====== ======
</TABLE>
(1) Results include pre-tax charges of $587 million and $84 million for the
fourth and third quarters of 1995, respectively related to merger,
severance and asset charges as discussed in Note 2.
(2) Effective January 1, 1995, BNRR changed its accounting for locomotive
overhauls. The cumulative effect of this change attributable to years prior
to 1995 was to decrease net income by $100 million. Additionally, first,
second and third quarter results were restated for the impact of the change
on 1995 by reducing operating income and net income as follows: first
quarter-$12 million and $7 million; second quarter-$9 million and $6
million; and third quarter-$11 million and $7 million, respectively.
(3) Effective January 1, 1994, BNRR adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits." The
cumulative effect of this change attributable to years prior to 1994, was
to decrease net income by $10 million.
-28-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors of
Burlington Northern Railroad Company and Subsidiaries
We have audited the consolidated financial statements and financial statement
schedule of Burlington Northern Railroad Company and Subsidiaries listed in Item
14 of this Form 10-K. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Burlington Northern Railroad Company and Subsidiaries as of December 31, 1995
and 1994, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for periodic major locomotive overhauls in
1995, and for postemployment benefits and investments in debt and equity
securities in 1994.
COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
February 15, 1996
-29-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements Page
----
Consolidated Statements of Income for the three years ended
December 31, 1995................................................. 13
Consolidated Balance Sheets at December 31, 1995 and 1994.......... 14
Consolidated Statements of Cash Flows for the three years ended
December 31, 1995................................................. 15
Consolidated Statements of Changes in Stockholder's Equity for
the three years ended December 31, 1995........................... 16
Notes to Consolidated Financial Statements......................... 17
Report of Independent Accountants..................................... 29
Consolidated Financial Statement Schedule for the three years
ended December 31, 1995:
Schedule II-Valuation and Qualifying Accounts....................... 33
Schedules other than those listed above are omitted because they are not
required or not applicable, or the required information is included in the
consolidated financial statements or related notes.
-30-
<PAGE>
Exhibit Index
Exhibit
Number Description
- ------- -----------
2 Agreement and Plan of Merger dated as of June 29, 1994 between
Burlington Northern Inc. and Santa Fe Pacific Corporation as amended
by Amendments 1 and 2 thereto, together with Amendments 3 and 4
thereto. Schedules have been omitted. Schedules will be furnished
supplementally to the Securities and Exchange Commission upon
request. Incorporated by reference to Exhibit 2.1 to BNSF's Report
on Form 8-K (Date of earliest event reported: September 22, 1995).
3.1 Amended and Restated Certificate of Incorporation of BNRR (amended
as of July 20, 1987). Incorporated by reference to Exhibit 3.1 to
BNRR's Report on Form 10-K for the fiscal year ended December 31,
1989.
3.2 By-Laws of BNRR. Incorporated by reference to Exhibit 3.2 to BNRR's
Report on Form 10-K for the fiscal year ended December 31, 1991.
4.1 BNI is not filing any instruments evidencing indebtedness because
the total amount of securities authorized under any single such
instrument does not exceed 10% of BNI's total assets. BNI will
furnish copies of any material instruments upon request of the
Securities and Exchange Commission.
18 Letter Regarding Change in Accounting Principles
24 Powers of Attorney
27 Financial Data Schedule
REPORTS ON FORM 8-K
NONE
-31-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
29th day of March, 1996.
BURLINGTON NORTHERN RAILROAD COMPANY
/s/ THOMAS N. HUND
-----------------------------
Thomas N. Hund
Vice President and Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Burlington
Northern Railroad Company and in the capacities and on the dates indicated.
/s/ ROBERT D. KREBS Chairman, President and Chief
- --------------------------- Executive Officer
Robert D. Krebs (Principal Executive Officer)
and Director March 29, 1996
/s/ DENIS E. SPRINGER Senior Vice President and
- --------------------------- Chief Financial Officer
Denis E. Springer (Principal Financial Officer) March 29, 1996
/s/ THOMAS N. HUND Vice President and Controller
- --------------------------- (Principal Accounting Officer) March 29, 1996
Thomas N. Hund
/s/ DOUGLAS J. BABB Director March 29, 1996
- -----------------------------
Douglas J. Babb
-32-
<PAGE>
SCHEDULE II
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN MILLIONS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions Balance at
Beginning Charged to End of
Description of Period Income Deductions (1) Period (2)
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Casualty and
environmental reserves $636 $159 $195 $600
==== ==== ==== ====
DECEMBER 31, 1994
Casualty and
environmental reserves $689 $183 $236 $636
==== ==== ==== ====
DECEMBER 31, 1993
Casualty and
environmental reserves $713 $227 $251 $689
==== ==== ==== ====
</TABLE>
(1) Principally represents cash payments
(2) Classified in the consolidated balance sheet as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Casualty and environmental reserves (current liabilities) $ 184 $ 221 $ 263
Casualty and environmental reserves (noncurrent liabilities) 416 415 426
----- ----- -----
$ 600 $ 636 $ 689
===== ===== =====
</TABLE>
-33-
<PAGE>
EXHIBIT 18
February 15, 1996
Mr. Denis E. Springer
Senior Vice President and Chief Financial Officer
Burlington Northern Railroad Company
1700 East Golf Road
Schaumburg, Illinois 60173-5860
Dear Mr. Springer:
We are providing this letter to you for inclusion as an exhibit to the
Burlington Northern Railroad Company (the Company) Form 10-K filing pursuant to
Item 601 of Regulation S-K.
We have read management's justification for the change in accounting from the
expensing of locomotive overhaul costs as incurred to the capitalization/
accrual of such costs and depreciating/amortizing them over their estimated
period of future benefit as contained in the Company's Form 10-K for the year
ended December 31, 1995. Based on our reading of the data and discussions with
Company officials of the business judgment relating to the change, we believe
management's justification to be reasonable. Accordingly, in reliance on
management's determination as regards elements of business judgment, we concur
that the newly adopted accounting principle described above is preferable in the
Company's circumstances to the method previously applied.
Very truly yours,
COOPERS & LYBRAND L.L.P.
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, BURLINGTON NORTHERN RAILROAD COMPANY ("BNRR") will file with the
Securities and Exchange Commission, under the provisions of the Securities
Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal
year ended December 31, 1995; and
WHEREAS, the undersigned serve BNRR in the capacity indicated;
NOW, THEREFORE, the undersigned hereby constitute and appoint each of DENIS
E. SPRINGER, THOMAS N. HUND and JEFFREY R. MORELAND, his attorney, with full
power to act for him in his name, place and stead, to sign his name in the
capacity set forth below, to the Annual Report on Form 10-K of BNRR for the
fiscal year ended December 31, 1995, and to any and all amendments to such
Annual Report on Form 10-K, and hereby ratifies and confirms all that said
attorney may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney
this 27th day of March, 1996.
/s/ ROBERT D. KREBS
------------------------------------
Robert D. Krebs, Director,
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ DENIS E. SPRINGER
------------------------------------
Denis E. Springer, Director,
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ DOUGLAS J. BABB
------------------------------------
Douglas J. Babb, Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Burlington Northern Railroad Company's Consolidated Financial Statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 41
<SECURITIES> 0
<RECEIVABLES> 591
<ALLOWANCES> 24
<INVENTORY> 136
<CURRENT-ASSETS> 943
<PP&E> 10,267
<DEPRECIATION> 4,119
<TOTAL-ASSETS> 7,652
<CURRENT-LIABILITIES> 1,424
<BONDS> 880
<COMMON> 1,191
0
0
<OTHER-SE> 1,849
<TOTAL-LIABILITY-AND-EQUITY> 7,652
<SALES> 0
<TOTAL-REVENUES> 5,381
<CGS> 0
<TOTAL-COSTS> 4,968
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> 358
<INCOME-TAX> 147
<INCOME-CONTINUING> 211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (100)
<NET-INCOME> 111
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
