<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8159
BURLINGTON NORTHERN INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1400580
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3800 Continental Plaza, 777 Main St.
Fort Worth, Texas 76102-5384
(Address of principal executive offices) (Zip Code)
(817) 333-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
____ ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding
----- -----------
Common stock, without par value
as of March 31, 1994 89,001,828 shares
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
____
Item 1. Financial Statements. . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 7
(i)
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BURLINGTON NORTHERN INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Millions, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
------------------
1994 1993
------ ------
Revenues............................................... $1,210 $1,170
Costs and expenses:
Compensation and benefits............................ 447 441
Fuel................................................. 83 88
Materials............................................ 85 80
Equipment rents...................................... 102 92
Purchased services................................... 117 105
Depreciation......................................... 87 86
Other................................................ 107 110
------ ------
Total costs and expenses........................... 1,028 1,002
------ ------
Operating income....................................... 182 168
Interest expense....................................... 39 33
Other expense, net..................................... (1) (3)
------ ------
Income before income taxes and cumulative effect of
change in accounting method.......................... 142 132
Income tax expense..................................... 55 50
------ ------
Income before cumulative effect of change in accounting
method............................................... 87 82
Cumulative effect of change in accounting for
postemployment benefits, net of tax.................. (10) -
------ ------
Net income............................................. $ 77 $ 82
====== ======
Earnings (loss) per common share:
Income before cumulative effect of change in
accounting method.................................. $ .90 $ .86
Cumulative effect of change in accounting for
postemployment benefits............................ (.11) -
------ ------
Earnings per common share.............................. $ .79 $ .86
====== ======
Number of shares used in computation of earnings (loss)
per common share (in thousands)...................... 90,290 89,142
Dividends declared per common share.................... $ .30 $ .30
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Millions)
(Unaudited)
ASSETS March 31, December 31,
1994 1993
------ ------
Current assets:
Cash and cash equivalents.................. $ 23 $ 17
Accounts receivable, net................... 590 589
Materials and supplies..................... 121 91
Current portion of deferred income taxes... 159 167
Other current assets....................... 98 27
------ ------
Total current assets..................... 991 891
Property and equipment, net.................. 5,929 5,909
Other assets................................. 270 245
------ ------
Total assets............................. $7,190 $7,045
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 513 $ 492
Casualty and environmental reserves........ 269 286
Compensation and benefits payable.......... 240 271
Taxes payable.............................. 140 123
Accrued interest........................... 51 44
Other current liabilities.................. 81 102
Current portion of long-term debt.......... 183 185
Commercial paper........................... 127 26
------ ------
Total current liabilities................ 1,604 1,529
Long-term debt............................... 1,515 1,526
Deferred income taxes........................ 1,348 1,342
Casualty and environmental reserves.......... 427 426
Other liabilities............................ 319 303
------ ------
Total liabilities........................ 5,213 5,126
------ ------
Stockholders' equity:
Convertible preferred stock, no par value,
$345 liquidation value; 25,000,000 shares
authorized; 6,900,000 shares issued...... 337 337
Common stock, without par value, at stated
value, 300,000,000 shares authorized;
89,088,403 shares and 88,881,675 shares
issued, respectively..................... 1 1
Additional paid-in capital................. 1,431 1,420
Retained earnings.......................... 243 198
Treasury stock, at cost, 86,575 shares and
85,536 shares, respectively.............. (4) (4)
Other...................................... (31) (33)
------ ------
Total stockholders' equity............... 1,977 1,919
------ ------
Total liabilities and stockholders'
equity................................. $7,190 $7,045
====== ======
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Millions)
(Unaudited)
Three Months Ended
March 31,
---------------------
1994 1993
------ ------
Cash flows from operating activities:
Net income....................................... $ 77 $ 82
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
method..................................... 10 -
Depreciation................................. 87 86
Deferred income taxes........................ 21 25
Changes in current assets and liabilities:
Accounts receivable, net................... (1) 10
Materials and supplies..................... (29) (20)
Other current assets....................... (71) (5)
Accounts payable........................... 21 (2)
Casualty and environmental reserves........ (17) (11)
Compensation and benefits payable.......... (29) (19)
Taxes payable.............................. 19 26
Accrued interest........................... 7 14
Other current liabilities.................. (21) (20)
Changes in long-term casualty and
environmental reserves..................... 1 6
Other, net................................... (26) (14)
------ ------
Net cash provided by operating activities.......... 49 158
------ ------
Cash flows from investing activities:
Additions to property and equipment.............. (104) (106)
Proceeds from property and equipment dispositions 5 8
Other, net....................................... (4) (5)
------ ------
Net cash used in investing activities.............. (103) (103)
------ ------
Cash flows from financing activities:
Net increase in commercial paper................. 101 -
Payments on long-term debt....................... (14) (35)
Dividends paid................................... (32) (29)
Proceeds from exercise of common stock options... 5 5
------ ------
Net cash provided by (used in) financing activities 60 (59)
------ ------
Increase (decrease) in cash and cash equivalents... 6 (4)
Cash and cash equivalents:
Beginning of period.............................. 17 57
------ ------
End of period.................................... $ 23 $ 53
====== ======
Supplemental cash flow information:
Interest paid.................................... $ (30) $ (26)
Income tax (paid) refund received, net........... (1) 1
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting policies
The 1993 Annual Report on Form 10-K for Burlington Northern Inc. (BNI) and
its majority-owned subsidiaries (collectively BN) includes a summary of
significant accounting policies and should be read in conjunction with
this Form 10-Q. The principal subsidiary is Burlington Northern Railroad
Company (Railroad). The statements for the periods presented are
condensed and do not contain all information required by generally
accepted accounting principles to be included in a full set of financial
statements. In the opinion of management, all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly BN's
financial position as of March 31, 1994 and December 31, 1993 and the
results of operations and cash flows for the three months ended March 31,
1994 and 1993 have been included. The results of operations for any
interim period are not necessarily indicative of the results of operations
to be expected for the entire year.
2. Environmental reserves and other contingencies
Under the requirements of the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund) and certain other laws,
BN is potentially liable for the cost of clean-up of various contaminated
sites identified by the U.S. Environmental Protection Agency and other
agencies. BN has been notified that it is a potentially responsible party
(PRP) for study and clean-up costs at approximately 50 sites (the PRP sites)
and, in many instances, is one of several PRPs. BN generally participates in
the clean-up of these sites through cost-sharing agreements with terms that
vary from site to site. Costs are typically allocated based on relative
volumetric contribution of material, the amount of time the site was owned
or operated, and/or the portion of the total site owned or operated by each
PRP. However, under Superfund and certain other laws, as a PRP, BN can be
held jointly and severally liable for all environmental costs associated
with a site.
Environmental costs include initial site surveys and environmental studies
of potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when BN'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. BN conducts an ongoing environmental contingency
analysis, which considers a combination of factors, including independent
consulting reports, site visits, legal reviews, analysis of the likelihood
of participation in and ability to pay for clean-up by other PRPs, and
historical trend analysis.
BN is involved in administrative and judicial proceedings and other
mandatory clean-up efforts at approximately 150 sites for which it is being
asked to participate in the clean-up of contaminated material discharged
into the environment. These approximate 150 sites include the PRP sites. BN
paid approximately $5 million during the three months ended
-4-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1994 relating to mandatory clean-up efforts, including amounts
expended under federal and state voluntary clean-up programs. At this time,
BN expects to spend approximately $120 million in future years to remediate
and restore these sites, $115 million of which pertains to mandated sites,
of which approximately $60 million pertains to the PRP sites. Of the $120
million, BN expects to spend $33 million during the remainder of 1994. Also,
BN anticipates that the majority of the $120 million will be paid out over a
period of less than 7 years; however, some costs will be paid out over a
longer period, in some cases up to 40 years. In addition, 21 sites account
for approximately $100 million of the accrual; however, no individual site
is considered to be material.
Liabilities for environmental costs represent BN's best estimates for
remediation and restoration of these sites and include asserted and
unasserted claims. At March 31, 1994, BN had accrued approximately $120
million for estimated future environmental costs and believes it is
reasonably possible, although not probable, that actual environmental
costs could be lower than the recorded reserve or as much as 50 percent
higher. BN's best estimate of unasserted claims was approximately $5
million as of March 31, 1994. Although recorded liabilities include BN's
best estimates of all costs, without reduction for anticipated recovery
from insurance, BN's total clean-up cost at these sites cannot be
predicted with certainty due to various factors such as the extent of
corrective actions that may be required, evolving environmental laws and
regulations, advances in environmental technology, the extent of other
PRPs participation in clean-up efforts, developments in ongoing
environmental analyses related to sites determined to be contaminated, and
developments in environmental surveys and studies of potentially
contaminated sites. As a result, charges to income for environmental
liabilities could possibly have a significant effect on results of
operations in a particular quarter or fiscal year as individual site
studies and remediation and restoration efforts proceed or as new sites
arise. However, expenditures associated with such liabilities are
typically paid out over a long period, in some cases up to 40 years, and
are therefore not expected to have a material adverse effect on BN's
consolidated financial position, cash flow or liquidity.
3. Hedging activities
BN has a program to hedge against fluctuations in the price of its diesel
fuel purchases. This program includes forward purchases for delivery at
fueling facilities and exchange-traded petroleum futures contracts. The
futures contracts are accounted for as hedges which are marked to market
with any gains or losses associated with changes in market value being
deferred and recognized as a component of fuel expense in the period in
which the designated fuel is purchased and used. At March 31, 1994, BN
had entered into agreements with fuel suppliers setting the price of
certain quantities of fuel to be obtained by taking physical delivery
directly from such suppliers at a future date. The average price of the
approximately 98 million gallons which BN had committed to purchase was
approximately 49 cents per gallon, exclusive of taxes, certain
-5-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
transportation costs, and other charges. In addition, BN held petroleum
futures contracts representing approximately 67 million gallons at an
average price of approximately 46 cents per gallon. These contracts have
expiration dates ranging from April to December 1994.
BN's current fuel hedging program is designed to cover no more than 50
percent of projected fuel requirements for the subsequent 12-month period;
therefore, hedge positions will not exceed actual fuel requirements. The
current and future fuel delivery prices are monitored continuously and
hedge positions are adjusted accordingly. In order to reduce risk
associated with market movements, fuel hedging transactions do not extend
beyond a 12-month period. BN purchases petroleum futures contracts only
through regulated exchanges (e.g. New York Merchantile Exchange). In
order to effectively monitor the fuel hedging activities, results of the
program are summarized and reported to senior management on a regular
basis.
4. Other expense, net
Other income (expense), net includes the following (in millions):
Three Months Ended
March 31,
------------------
1994 1993
------ ------
Gain on property dispositions............. $ 2 $ -
Interest income........................... 1 1
Loss on sale of receivables............... (2) (3)
Miscellaneous, net........................ (2) (1)
------ ------
Total..................................... $ (1) $ (3)
====== ======
5. Accounting change
Effective January 1, 1994, BN adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits."
The cumulative effect, net of $7 million income tax benefit, of this
change in accounting attributable to years prior to 1994, at the time of
adoption, was to decrease 1994 first quarter income by $10 million, or
$.11 per common share.
-6-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis relates to the financial condition and
results of operations of Burlington Northern Inc. (BNI) and its majority-owned
subsidiaries (collectively BN). The principal subsidiary is Burlington
Northern Railroad Company (Railroad).
Capital Resources and Liquidity
- - - -------------------------------
Cash from operations and other resources
Cash generated from operations is BN's primary source of liquidity and is
primarily used for dividends and capital expenditures. For the first three
months of 1994 cash provided by operating activities decreased $109 million
when compared with the first three months of 1993. This decrease was
primarily attributable to $53 million of assets purchased in 1994 which were
held in "Other current assets" pending final financing arrangements and an
increase of $14 million in incentive compensation paid. While current year
cash from operations was sufficient to fund dividends, it was not sufficient
to completely fund capital expenditures; therefore, the balance was financed
with debt. Other sources available for financing needs are discussed below.
In 1993 BN entered into an agreement to acquire 350 new-technology alternating
current traction motor locomotives. To date BN has accepted delivery of 29
locomotives and anticipates additional deliveries of approximately 80 units in
1994 as well as deliveries of between approximately 60 and 100 each year from
1995 through 1997. Future cash from operations during this strategic
investment period may not, at times, be sufficient to completely fund
dividends as well as capital expenditures and strategic investments.
Therefore, these requirements will likely be financed using a combination of
sources including, but not limited to, cash from operations, operating leases,
debt issuances and other miscellaneous sources. Each financing decision will
be based upon the most appropriate alternative available.
Railroad maintains an effective program for the issuance, from time to time,
of commercial paper. These borrowings are supported by Railroad's bank credit
agreement, thus outstanding commercial paper balances reduce available
borrowings under this agreement. The bank credit agreement allows borrowings
of up to $500 million on a short-term basis. At Railroad's option, borrowing
rates are based on prime, certificate of deposit or London Interbank Offered
rates. Annual facility fees are 0.25 percent. The agreement is currently
scheduled to expire in November 1994; however, Railroad is currently
negotiating two new agreements that would allow borrowings of up to $300
million on a short-term basis and $500 million on a long-term basis. The
maturity value of commercial paper outstanding at March 31, 1994 was $127
million, leaving a total of $373 million of the credit agreement available,
while $27 million of commercial paper was outstanding at December 31, 1993.
Railroad has an agreement to sell, on a revolving basis, an undivided
percentage ownership interest in a designated pool of accounts receivable with
limited recourse. As of March 31, 1994, the agreement allowed for the sale of
accounts receivable up to a maximum of $175 million. The agreement expires
not later than December 1994. At March 31, 1994 and December 31, 1993,
accounts receivable were each net of $100 million representing receivables
sold.
-7-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
BNI continues to maintain an effective registration statement on Form S-3 with
the Securities and Exchange Commission covering the issuance from time to time
of up to $500 million aggregate principal amount of debt securities.
Capital expenditures and resources
A breakdown of capital expenditures is set forth in the following table (in
millions):
Three months ended March 31, 1994 1993
- - - --------------------------------------------------------------------------
Road, roadway structures and real estate.......... $ 83 $ 66
Equipment......................................... 21 40
---- ----
Total............................................. $104 $106
==== ====
During the current year BN will continue to reinvest in its business through
capital expenditures; therefore, capital spending should remain at a level
comparable to 1993. In addition to the above capital expenditures, in the
first quarter of 1994 BN purchased $53 of assets which were held in "Other
current assets" pending final financing arrangements which may possibly
include a sale and lease-back. As discussed in "Cash from operations and
other resources," BN has a commitment to acquire 350 new-technology
alternating current traction motor locomotives through 1997. Also, BN will
continue its implementation of several strategic initiatives for
transportation network management using information systems technology.
In addition to capital expenditures, BN continues to utilize operating leases
to fulfill certain equipment requirements. Depending upon current market
conditions and other miscellaneous factors, a portion of the locomotives
discussed above may be obtained through operating leases rather than
purchases. In the first quarter of 1994, BN renewed leases for locomotives
and covered hoppers, while in the first quarter of 1993, renewals were
primarily for boxcars and covered hoppers.
Dividends
Common stock dividends declared for the first quarter of 1994 and 1993
remained constant at $.30 per common share. Dividends paid on common and
preferred stock were $32 million compared with $29 million during the prior
year's quarter. BNI expects to continue its current policy of paying regular
quarterly dividends on its common and preferred stock; however, dividends are
declared by the Board of Directors based on profitability, capital
expenditures requirements, debt service and other factors.
Capital structure
BN's ratio of total debt to total capital was 48 percent at March 31, 1994 and
December 31, 1993.
-8-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- - - ---------------------
Three months ended March 31, 1994 compared with three months ended March 31,
1993
BN recorded net income of $77 million, or $.79 per common share, on 90.3
million shares for the first quarter of 1994 compared with net income of $82
million, or $.86 per common share, on 89.1 million shares for the same period
in 1993. Results for 1994 were reduced by a $10 million or $.11 per common
share, net of tax, cumulative effect of an accounting change for
postemployment benefits.
Revenues
The following table presents BN's revenue information by Railroad business
unit for the three months ended March 31:
<TABLE>
<CAPTION>
Revenues Per
Revenues Revenue Ton Miles Revenue Ton Mile
-------------- ----------------- ----------------
Three months ended March 31, 1994 1993 1994 1993 1994 1993
- - - ------------------------------------------------------------------------------------------------
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal.............................. $ 418 $ 381 32,502 29,092 1.29 1.31
Agricultural Commodities.......... 196 217 7,964 10,408 2.46 2.08
Intermodal........................ 178 176 5,897 5,724 3.02 3.07
Forest Products................... 122 122 5,053 5,116 2.41 2.38
Chemicals......................... 99 99 3,522 3,633 2.81 2.73
Consumer Products................. 65 65 2,278 2,244 2.85 2.90
Minerals Processors............... 46 42 1,900 1,729 2.42 2.43
Iron & Steel...................... 40 42 1,985 1,925 2.02 2.18
Vehicles & Machinery.............. 47 45 628 572 7.48 7.87
Aluminum, Nonferrous Metals & Ores 26 27 999 1,015 2.60 2.66
Shortlines and other.............. (27) (46) (2,223) (3,064) - -
------ ------ ------ ------
Total............................. $1,210 $1,170 60,505 58,394 2.00 2.00
====== ====== ====== ======
</TABLE>
Total revenues for the first quarter of 1994 were $1,210 million compared with
$1,170 million for the same period in 1993. The $40 million increase was
primarily due to improved Coal revenues. Lower Agricultural Commodities
revenues were partially offset by reduced shortlines and other.
Coal revenues improved $37 million during the first quarter of 1994 as a
result of increased traffic. This increase was primarily caused by a rise in
the demand for electricity as well as the need for utilities to replenish coal
stockpiles which were partially depleted during the 1993 summer flooding.
Partially offsetting the increase in traffic was a decline in yields. Lower
yields resulted from continuing competitive pricing pressures in contract
renegotiations and declining cost indices.
Revenues from the transportation of Agricultural Commodities during the first
quarter of 1994 were $21 million less than the first quarter of 1993,
-9-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
primarily as a result of a decline in volumes. This traffic decrease was
caused by numerous factors including adverse weather conditions that
constrained both Railroad and customer operations, and reduced crop
production. Corn and soybean revenues were less than prior year revenues by
$19 million and $9 million, respectively. These declines were primarily
volume related, and were mostly attributable to reduced crop production and
lower export demand. Flour/mill products and milo revenues also experienced
year-over-year decreases. Partially offsetting the decline in volumes was an
increase in yield, caused by traffic mix, price and length of haul, as well as
a $9 million improvement in barley revenues. The increase in barley revenues
was due to strong domestic demand, caused by favorable market conditions
during the first quarter of 1994.
Current quarter revenues for Minerals Processors improved by $4 million when
compared with the first quarter of 1993. Stronger clays and aggregates
traffic, primarily related to increased export demand for bentonite clay,
caused the majority of the increase in revenues for the quarter. Also, a rise
in construction activity boosted glass minerals and cement revenues.
First quarter revenues for Intermodal, Forest Products, Chemicals, Consumer
Products, Iron & Steel, Vehicles & Machinery and Aluminum, Nonferrous Metals &
Ores were relatively flat compared with the first quarter of 1993. Intermodal
revenues will reflect BN's decision to close two Intermodal hub centers in
Texas beginning with the second quarter.
Total current year revenues also benefited from a $19 million reduction in
shortlines and other. This decline was partially due to increased
miscellaneous revenue of $8 million, additional haulage agreement revenues and
a $6 million decrease in payments to shortline railroads caused by less BN
traffic on their lines.
Expenses
Total operating expenses for the first quarter of 1994 were $1,028 million
compared with expenses of $1,002 million for the same period in 1993. The
operating ratio was 85 percent, an improvement of 1 percentage point compared
with the first quarter of 1993, as increased revenues more than offset
increased operating expenses.
Compensation and benefits expenses were $6 million greater compared with the
first quarter of 1993. The combination of severe winter weather, the three
percent basic wage increase for union represented employees effective July
1993 and higher traffic volumes caused increased wages and related payroll
taxes. Increases in salaries and pension expense, due to a reduction in the
discount rate used in determining the projected benefit obligation, also
contributed to higher compensation and benefits expenses. These increases
were partially offset by a $7 million decrease caused by reduced crew sizes in
the Northern tier, decreases for cost of living allowances and decreases in an
annuity tax.
Fuel expenses for the quarter were $5 million lower compared with 1993
primarily due to a $7 million price variance. The average price paid for
diesel fuel decreased from 60.4 cents per gallon in the first quarter of 1993
-10-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
to 55.5 cents per gallon in the first quarter of 1994 despite the 4.3 cents
per gallon increase in the federal fuel tax, effective October 1, 1993, as
part of the Omnibus Budget Reconciliation Act of 1993. These savings were
partially offset by increased consumption due to a higher traffic volume and
the severe weather experienced in January and February 1994. BN has a program
to hedge against fluctuations in the price of its diesel fuel purchases. This
program includes forward purchases for delivery at fueling facilities and
petroleum futures contracts.
Materials expenses for the first quarter of 1994 increased $5 million compared
with 1993, primarily due to higher locomotive and track materials costs which
partially resulted from the severe winter weather. Repairs for locomotives
increased due to weather-induced equipment failures, a larger fleet size in
1994 and a demand for locomotive power necessitating a higher in-service
status for the fleet.
Equipment rents expenses were $10 million higher than the first quarter of
1993 principally due to an increase in car-hire expenses of $6 million.
Expanded automotive traffic increased rentals of flat cars and autoracks, and
strong chemicals shipments increased rentals of tank cars. Decreased train
velocity caused by severe weather operating conditions also resulted in higher
car-hire expenses. Higher costs were further attributable to a larger leased
covered hopper fleet size and increased lease rates as well as the leasing of
locomotives to meet power requirements.
Purchased services for the quarter increased $12 million from the first
quarter of 1993. The most significant contributing factors were higher
intermodal and automotive traffic related costs and third party locomotive
maintenance and repairs costs. These increases were partially offset by
haulage agreement related payments from the Atchison, Topeka and Santa Fe
Railroad (ATSF) for services provided by BN to ATSF.
Depreciation expense for the first three months of 1994 was slightly higher
than the same period in 1993.
Other operating expenses were $3 million lower compared with the first quarter
of 1993. An $11 million decrease in costs associated with personal injury
claims was substantially offset by increases in derailment-related expenses
and property taxes.
Interest expense for the quarter increased $6 million compared with the first
quarter in 1993, due to a higher average outstanding debt balance in 1994 and
a favorable court ruling in 1993 which reduced interest expense for the 1993
period.
Other expense, net was $2 million lower in the first quarter of 1994 compared
with the same period in 1993. This resulted primarily from the net gain on
property dispositions occurring in the first quarter of 1994.
The effective tax rate was 38.7 percent for 1994 compared with 37.6 percent
for the first quarter of 1993. This increase resulted primarily from the 1
percent increase in the corporate federal income tax rate as a part of the
Omnibus Budget Reconciliation Act of 1993.
-11-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Other Matters
Environmental issues
Under the requirements of the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund) and certain other laws, BN is
potentially liable for the cost of clean-up of various contaminated sites
identified by the U.S. Environmental Protection Agency and other agencies. BN
has been notified that it is a potentially responsible party (PRP) for study and
clean-up costs at approximately 50 sites (the PRP sites) and, in many instances,
is one of several PRPs. BN generally participates in the clean-up of these sites
through cost-sharing agreements with terms that vary from site to site. Costs
are typically allocated based on relative volumetric contribution of material,
the amount of time the site was owned or operated, and/or the portion of the
total site owned or operated by each PRP. However, under Superfund and certain
other laws, as a PRP, BN can be held jointly and severally liable for all
environmental costs associated with a site.
Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when BN'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. BN conducts an ongoing environmental contingency analysis, which
considers a combination of factors, including independent consulting reports,
site visits, legal reviews, analysis of the likelihood of participation in and
ability to pay for clean-up by other PRPs, and historical trend analysis.
BN is involved in administrative and judicial proceedings and other mandatory
clean-up efforts at approximately 150 sites for which it is being asked to
participate in the clean-up of contaminated material discharged into the
environment. These approximate 150 sites include the PRP sites. BN paid
approximately $5 million during the three months ended March 31, 1994 relating
to mandatory clean-up efforts, including amounts expended under federal and
state voluntary clean-up programs. At this time, BN expects to spend
approximately $120 million in future years to remediate and restore these sites,
$115 million of which pertains to mandated sites, of which approximately $60
million pertains to the PRP sites. Of the $120 million, BN expects to spend $33
million during the remainder of 1994. Also, BN anticipates that the majority of
the $120 million will be paid out over a period of less than 7 years; however,
some costs will be paid out over a longer period, in some cases up to 40 years.
In addition, approximately 21 sites account for approximately $100 million of
the accrual; however, no individual site is considered to be material.
Liabilities for environmental costs represent BN's best estimates for
remediation and restoration of these sites and include asserted and unasserted
claims. At March 31, 1994, BN had accrued approximately $120 million for
estimated future environmental costs and believes it is reasonably possible,
although not probable, that actual environmental costs could be lower than the
recorded reserve or as much as 50 percent higher. BN's best estimate of
-12-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
unasserted claims was approximately $5 million as of March 31, 1994. Although
recorded liabilities include BN's best estimates of all costs, without
reduction for anticipated recovery from insurance, BN's total clean-up cost at
these sites cannot be predicted with certainty due to various factors such as
the extent of corrective actions that may be required, evolving environmental
laws and regulations, advances in environmental technology, the extent of
other PRPs participation in clean-up efforts, developments in ongoing
environmental analyses related to sites determined to be contaminated, and
developments in environmental surveys and studies of potentially contaminated
sites. As a result, charges to income for environmental liabilities could
possibly have a significant effect on results of operations in a particular
quarter or fiscal year as individual site studies and remediation and
restoration efforts proceed or as new sites arise. However, expenditures
associated with such liabilities are typically paid out over a long period, in
some cases up to 40 years, and are therefore not expected to have a material
adverse effect on BN's consolidated financial position, cash flow or liquidity.
Hedging activities
BN has a program to hedge against fluctuations in the price of its diesel fuel
purchases. This program includes forward purchases for delivery at fueling
facilities and exchange-traded petroleum futures contracts. The futures
contracts are accounted for as hedges which are marked to market with any
gains or losses associated with changes in market value being deferred and
recognized as a component of fuel expense in the period in which the
designated fuel is purchased and used. At March 31, 1994, BN had entered into
agreements with fuel suppliers setting the price of certain quantities of fuel
to be obtained by taking physical delivery directly from such suppliers at a
future date. The average price of the approximately 98 million gallons which
BN had committed to purchase was approximately 49 cents per gallon, exclusive
of taxes, certain transportation costs, and other charges. In addition, BN
held petroleum futures contracts representing approximately 67 million gallons
at an average price of approximately 46 cents per gallon. These contracts
have expiration dates ranging from April to December 1994.
BN's current fuel hedging program is designed to cover no more than 50 percent
of projected fuel requirements for the subsequent 12-month period; therefore,
hedge positions will not exceed actual fuel requirements. The current and
future fuel delivery prices are monitored continuously and hedge positions are
adjusted accordingly. In order to reduce risk associated with market
movements, fuel hedging transactions do not extend beyond a 12-month period.
BN purchases petroleum futures contracts only through regulated exchanges
(e.g. New York Merchantile Exchange). In order to effectively monitor the
fuel hedging activities, results of the program are summarized and reported to
senior management on a regular basis.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BURLINGTON NORTHERN INC.
(Registrant)
By: /s/ Edmund W. Burke
---------------------------------
Executive Vice President,
Law and Secretary
Date: October 5, 1994
-14-
