UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8159
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 October 31, 1994 89,223,523 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 . . . . . . . . . . . . . . . . . . . . . . 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 25
(i)
<PAGE>1
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 Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Revenues............................... $1,249 $1,141 $3,651 $3,453
Costs and expenses:
Compensation and benefits............ 437 429 1,310 1,286
Fuel................................. 95 83 267 260
Materials............................ 70 73 225 227
Equipment rents...................... 97 100 314 288
Purchased services................... 120 120 352 342
Depreciation......................... 91 89 267 261
Other................................ 110 126 327 352
Total costs and expenses........... 1,020 1,020 3,062 3,016
Operating income....................... 229 121 589 437
Interest expense....................... 40 38 118 107
Other income (expense), net............ (1) 2 (7) 2
Income before income taxes and
cumulative effect of change in
accounting method.................... 188 85 464 332
Income tax expense..................... 73 61 180 154
Income before cumulative effect of
change in accounting method.......... 115 24 284 178
Cumulative effect of change in
accounting method, net of tax........ - - (10) -
Net income............................. 115 24 274 178
Preferred stock dividends.............. 5 5 16 16
Net income available for common
stockholders......................... $ 110 $ 19 $ 258 $ 162
Primary earnings (loss) per common share:
Income before cumulative effect of
change in accounting method........ $ 1.22 $ .21 $ 2.97 $ 1.81
Cumulative effect of change in
accounting method.................. - - (.11) -
Primary earnings per common share...... $ 1.22 $ .21 $ 2.86 $ 1.81
Shares used in computation (in
thousands)........................... 90,167 89,850 90,230 89,582
Fully diluted earnings (loss) per
common share:
Income before cumulative effect of
change in accounting method........ $ 1.18 $ .21 $ 2.92 $ 1.80
Cumulative effect of change in
accounting method.................. - - (.11) -
Fully diluted earnings per common share $ 1.18 $ .21 $ 2.81 $ 1.80
Shares used in computation (in
thousands)........................... 97,507 89,851 97,571 89,651
Dividends declared per common share.... $ .30 $ .30 $ .90 $ .90
See accompanying notes to consolidated financial statements.
<PAGE>2
BURLINGTON NORTHERN INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Millions)
(Unaudited)
ASSETS September 30, December 31,
1994 1993
Current assets:
Cash and cash equivalents.................. $ 17 $ 17
Accounts receivable, net................... 609 589
Materials and supplies..................... 117 91
Current portion of deferred income taxes... 180 167
Other current assets....................... 129 27
Total current assets..................... 1,052 891
Property and equipment, net.................. 6,203 5,909
Other assets................................. 281 245
Total assets............................. $7,536 $7,045
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 579 $ 492
Casualty and environmental reserves........ 259 286
Compensation and benefits payable.......... 272 271
Taxes payable.............................. 181 123
Accrued interest........................... 50 44
Other current liabilities.................. 104 102
Current portion of long-term debt.......... 33 185
Commercial paper........................... 70 26
Total current liabilities................ 1,548 1,529
Long-term debt............................... 1,688 1,526
Deferred income taxes........................ 1,422 1,342
Casualty and environmental reserves.......... 424 426
Other liabilities............................ 338 303
Total liabilities........................ 5,420 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;
89,322,415 shares and 88,881,675 shares
issued, respectively..................... 1 1
Additional paid-in capital................. 1,443 1,420
Retained earnings.......................... 376 198
Treasury stock, at cost, 98,911 shares and
85,536 shares, respectively.............. (5) (4)
Other...................................... (36) (33)
Total stockholders' equity............... 2,116 1,919
Total liabilities and stockholders'
equity................................. $7,536 $7,045
See accompanying notes to consolidated financial statements.
<PAGE>3
BURLINGTON NORTHERN INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Millions)
(Unaudited)
Nine Months Ended
September 30,
1994 1993
Cash flows from operating activities:
Net income........................................ $ 274 $ 178
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
method...................................... 10 -
Depreciation.................................. 267 261
Deferred income taxes......................... 73 90
Changes in current assets and liabilities:
Accounts receivable, net.................... (20) (25)
Materials and supplies...................... (28) 5
Other current assets........................ (102) (64)
Accounts payable............................ 85 16
Casualty and environmental reserves......... (27) 23
Compensation and benefits payable........... 5 (34)
Taxes payable............................... 60 29
Accrued interest............................ 6 15
Other current liabilities................... 2 1
Changes in long-term casualty and
environmental reserves...................... (2) (33)
Other, net.................................... (13) (45)
Net cash provided by operating activities........... 590 417
Cash flows from investing activities:
Additions to property and equipment............... (513) (473)
Proceeds from property and equipment dispositions 34 29
Other, net........................................ (21) (28)
Net cash used in investing activities............... (500) (472)
Cash flows from financing activities:
Net increase in commercial paper.................. 44 38
Proceeds from issuance of long-term debt.......... 149 146
Payments on long-term debt........................ (191) (79)
Dividends paid.................................... (96) (93)
Proceeds from exercise of common stock options.... 6 13
Redemption of redeemable preferred stock.......... - (9)
Other, net........................................ (2) -
Net cash provided by (used in) financing activities. (90) 16
Decrease in cash and cash equivalents............... - (39)
Cash and cash equivalents:
Beginning of period............................... 17 57
End of period..................................... $ 17 $ 18
Supplemental cash flow information:
Interest paid, net of amounts capitalized......... $ 108 $ 96
Income taxes paid, net of refunds................. 54 49
Supplemental noncash investing and financing
activities information:
Assets financed through a capital lease obligation $ 50 $ -
See accompanying notes to consolidated financial statements.
<PAGE>4
BURLINGTON NORTHERN INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting policies
The 1993 Annual Report on Forms 10-K and 10-K/A for Burlington Northern
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 September 30, 1994 and December 31,
1993 and the results of operations for the three-month and nine-month
periods ended September 30, 1994 and 1993 and cash flows for the
nine-month periods ended September 30, 1994 and 1993 have been included.
The results of operations for any interim period are not necessarily
indicative of the results of operations to be expected for the entire year.
2. Earnings (loss) per common share
Primary earnings (loss) per common share are computed by dividing net
income, after deduction of preferred stock dividends, by the weighted
average number of common shares and common share equivalents outstanding.
Common share equivalents are computed using the treasury stock method.
Under the treasury stock method, an average market price is used to
determine the number of common share equivalents for primary earnings per
common share. The higher of the average or end of period market price is
used to determine common share equivalents for fully diluted earnings per
common share. In addition, the if-converted method is used for
convertible preferred stock when computing fully diluted earnings per
common share. Convertible preferred stock was excluded from the fully
diluted earnings per common share computation for the three-month and
nine-month periods ended September 30, 1993 as it was anti-dilutive for
those periods.
3. Environmental reserves and other contingencies
BN's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. In order to
comply with such regulation and to be consistent with BN's corporate
environmental policy, BN's operating procedures include practices to
protect the environment. Amounts expended relating to such practices are
inextricably contained in the normal day-to-day costs of BN's business
operations.
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 60
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
<PAGE>5
BURLINGTON NORTHERN INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 160 sites, including the PRP
sites, for which it is being asked to participate in the clean-up of
contaminated material discharged into the environment. BN paid
approximately $13 million during the nine months ended September 30, 1994
relating to mandatory clean-up efforts, including amounts expended under
federal and state voluntary clean-up programs. At this time, BN expects
to spend approximately $115 million in future years to remediate and
restore all known sites, $105 million of which pertains to mandated sites,
of which approximately $65 million pertains to the PRP sites. Of the $115
million, BN expects to spend $6 million during the remainder of 1994.
Also, BN anticipates that the majority of the $115 million will be paid
out over a period of less than 7 years; however, some costs will be paid
out over a longer period, in some cases up to 40 years. At September 30,
1994, 22 sites were accountable for approximately $70 million of the
accrual and no individual site was considered to be material.
Liabilities for environmental costs represent BN's best estimates for
remediation and restoration of these sites and include asserted and
unasserted claims. At September 30, 1994, BN had accrued approximately
$115 million for estimated future environmental costs and believes it is
reasonably possible, although not probable, that actual environmental
costs could be lower than the recorded reserve or as much as 50 percent
higher. BN's best estimate of unasserted claims was approximately $10
million as of September 30, 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
<PAGE>6
BURLINGTON NORTHERN INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
4. 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 September 30, 1994,
BN had entered into agreements with fuel suppliers setting the price of
fuel to be obtained by taking physical delivery directly from such
suppliers at a future date. The average price of the approximately 67
million gallons which BN had committed to purchase was approximately 52
cents per gallon, exclusive of taxes, certain transportation costs and
other charges. In addition, BN held petroleum futures contracts
representing approximately 52 million gallons at an average price of
approximately 50 cents per gallon. These contracts have expiration dates
ranging from October 1994 to June 1995.
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 Mercantile Exchange). In order
to effectively monitor the fuel hedging activities, results of the program
are summarized and reported to senior management on a regular basis.
In the second quarter of 1994, BN entered into a three-year interest rate
swap on a notional amount of $50 million to hedge against interest rate
exposure on one of its debt issuances. Under the terms of this swap, BN
receives semiannual fixed-rate payments of 6.33 percent from a AA-rated
counterparty and makes semiannual floating rate payments tied to the
six-month London Interbank Offered Rate (LIBOR). The value of the swap to
BN declines if LIBOR increases. BN monitors the credit rating of its
counterparty and does not anticipate losses due to counterparty
nonperformance. The swap is accounted for as a hedge with realized gains
or losses being recognized as a component of interest expense. During the
<PAGE>7
BURLINGTON NORTHERN INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
first nine months of 1994, the effect of this swap on interest expense was
immaterial and there were no deferred gains or losses on the balance sheet
at September 30, 1994.
5. Other income (expense), net
Other income (expense), net includes the following (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Gain on property dispositions $ 6 $ 6 $ 7 $ 10
Loss on sale of receivables.. (3) (2) (7) (7)
Interest income.............. 1 1 2 2
Miscellaneous, net........... (5) (3) (9) (3)
Total........................ $ (1) $ 2 $ (7) $ 2
6. 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 income by $10 million, or $.11 per common share.
<PAGE>8
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 nine
months of 1994, cash provided by operating activities increased $173 million
when compared with the first nine months of 1993. This increase was primarily
attributable to a $96 million increase in net income and a $45 million
decrease in labor-related payments. These items were partially offset by a
$43 million increase in the purchase of assets held in "Other current assets"
pending final financing arrangements. While current year cash from operations
was sufficient to fund dividends, it was not sufficient to also completely
fund capital expenditures; therefore, some capital expenditures were financed
with debt. Available sources 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 87 locomotives and anticipates additional deliveries of
approximately 21 units in 1994 as well as deliveries of between approximately
60 and 100 units 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.
In May 1994, BNI issued $150 million of 7.4 percent notes due May 15, 1999 and
used the proceeds to retire $150 million aggregate principal amount of
Railroad Consolidated Mortgage Bonds, 8 7/8 percent, Series I, due May 30,
1994. The 7.4 percent notes were the initial offering under an effective
registration statement on Form S-3 covering the issuance, from time to time,
of up to $500 million aggregate principal amount of debt securities. This
issuance reduced the amount available for future issuance to $350 million.
Railroad maintains an effective program for the issuance, from time to time,
of commercial paper. These borrowings are supported by Railroad's bank credit
agreements. Outstanding commercial paper balances are considered as reducing
available borrowings under these agreements. The bank credit agreements allow
borrowings of up to $300 million on a short-term basis and $500 million on a
long-term basis. Annual facility fees are 0.125 and 0.1875 percent,
respectively. At Railroad's option, borrowing rates are based on prime,
certificate of deposit or London Interbank Offered rates. The agreements are
currently scheduled to expire on May 5, 1995 and May 6, 1999, respectively.
The maturity value of commercial paper outstanding at September 30, 1994 was
$70 million, leaving a total of $230 million of the short-term credit
agreement available and $500 million of the long-term credit agreement
<PAGE>9
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
available. The maturity value of commercial paper outstanding at December 31,
1993 was $27 million.
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 September 30, 1994, the agreement allowed for the
sale of accounts receivable up to a maximum of $175 million. At both
September 30, 1994 and December 31, 1993, accounts receivable were net of $100
million representing receivables sold. Currently there are no plans to renew
the accounts receivable financing arrangement upon its expiration in December
1994. No material impact upon liquidity is anticipated.
Capital expenditures and resources
A breakdown of capital expenditures is set forth in the following table (in
millions):
Nine months ended September 30, 1994 1993
Road, roadway structures and real estate.......... $400 $333
Equipment......................................... 163 140
Total............................................. $563 $473
During the current year BN will continue to reinvest in its business through
capital expenditures. The above capital expenditures include $50 million of
equipment acquired using a capital lease arrangement. 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.
This commitment 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. Also, BN will continue
its implementation of several strategic initiatives for transportation network
management using information systems technology which will require additional
capital expenditures.
In addition to capital expenditures, BN continues to utilize operating leases
to fulfill certain equipment requirements. In 1994, BN anticipates financing
approximately $200 million of equipment through long-term operating leases.
However, the method used to finance this equipment will depend upon market
conditions and other factors. As of September 30, 1994, approximately $100
million of equipment was financed through such leases. These leases, the
majority of which were for the new-technology alternating current traction
motor locomotives, also included covered hoppers and coal cars. During the
first nine months of 1993, the long-term operating leases were for covered
hoppers.
Dividends
Common stock dividends declared for the first nine months of 1994 and 1993
were $.90 per common share. Dividends paid on common and preferred stock were
$96 million compared with $93 million during the prior year. BNI expects to
<PAGE>10
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 expenditure requirements, debt
service and other factors.
Capital structure
BN's ratio of total debt to total capital was 46 percent at September 30, 1994
compared to 48 percent at December 31, 1993.
Results of Operations
Three months ended September 30, 1994 compared with three months ended
September 30, 1993
BN recorded net income for the third quarter of 1994 of $115 million ($1.22
per common share, primary on 90.2 million shares and $1.18 per common share,
fully diluted on 97.5 million shares) compared with net income of $24 million
($.21 per common share, primary and fully diluted on 89.9 million shares) for
the same period in 1993. The 1993 fully diluted earnings per common share
calculation excluded the convertible preferred stock as conversion would have
been anti-dilutive. Results for the third quarter of 1993 included the
effects of severe flooding in the Midwest. BN estimated that the flooding
reduced revenues during the quarter by $44 million and increased operating
expenses by $35 million, for a combined reduction of $79 million or $.55 per
common share, primary. Net income for the third quarter of 1993 also included
the retroactive effects of the Omnibus Budget Reconciliation Act of 1993 (the
Act), which was passed into law during August 1993. The Act increased the
corporate federal tax rate by one percent, effective January 1, 1993, which
reduced net income by $29 million, or $.32 per common share, primary, through
the date of enactment. BN recognized a one-time, non-cash charge of $28
million to income tax expense to adjust deferred taxes as of the enactment
date and a charge of $1 million to current income tax expense.
Revenues
The following table presents BN's revenue information by Railroad business
unit:
<TABLE>
<CAPTION>
Revenues Per
Revenues Revenue Ton Miles Revenue Ton Mile
Three months ended September 30, 1994 1993 1994 1993 1994 1993
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal.............................. $ 418 $ 367 36,051 29,939 1.16 1.23
Agricultural Commodities.......... 202 183 8,368 8,642 2.41 2.12
Intermodal........................ 206 185 6,806 6,083 3.03 3.04
Forest Products................... 128 120 5,341 4,810 2.40 2.49
Chemicals......................... 102 99 3,740 3,614 2.73 2.74
Consumer Products................. 66 62 2,446 2,261 2.70 2.74
Minerals Processors............... 57 54 2,304 2,227 2.47 2.42
Iron & Steel...................... 43 42 2,027 2,047 2.12 2.05
Vehicles & Machinery.............. 47 45 650 559 7.23 8.05
Aluminum, Nonferrous Metals & Ores 26 24 971 916 2.68 2.62
Shortlines and other.............. (46) (40) (2,270) (2,580) - -
Total............................. $1,249 $1,141 66,434 58,518 1.88 1.95
</TABLE>
<PAGE>11
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Total revenues for the third quarter of 1994 were $1,249 million compared with
revenues of $1,141 million for the same period in 1993, an improvement of $108
million. This increase was primarily due to higher Coal, Agricultural
Commodities and Intermodal revenues.
Coal revenues for the third quarter of 1994 improved $51 million compared with
the same period in 1993. This increase was primarily due to flood-related
problems which decreased 1993 third quarter Coal revenues by approximately $35
million. Higher traffic levels caused by a rise in the demand for electricity
also contributed to this increase. Partially offsetting the increase in
traffic was a decline in revenues per revenue ton mile. These lower yields
were largely due to customers meeting minimum tonnage requirements earlier in
1994 and therefore, receiving lower rates on subsequent moves. Continuing
competitive pricing pressures in contract renegotiations also contributed to
lower yields.
Revenues from the transportation of Agricultural Commodities during the third
quarter of 1994 were $19 million higher than the third quarter of 1993. This
increase was principally caused by an $18 million improvement in wheat
revenues and a $13 million improvement in barley revenues. The increase in
wheat resulted from strong export demand and a larger fleet. Barley revenues
benefited from strong domestic and export demand caused by favorable market
conditions during the third quarter of 1994. Partially offsetting these
increases was a $16 million decrease in corn revenues largely attributable to
reduced crop production and lower export demand. In addition, an increase in
overall yield, which is a product of commodity mix, price and length of haul,
offset a net decline in volume as measured by revenue ton miles.
Intermodal revenues for the third quarter of 1994 increased $21 million when
compared with the third quarter of 1993. Intermodal-international revenues,
which contributed $14 million of this increase, were boosted by a combination
of new business and growth in existing business. Additionally, BNA domestic
revenues were $6 million higher due to increased demand for intermodal
service. Increased traffic in BN's key intermodal lanes more than offset BN's
withdrawal from the Texas market.
Forest Products revenues for the current quarter improved by $8 million when
compared with the same period in 1993. This improvement was largely due to a
$6 million volume driven increase in lumber revenues.
Third quarter 1994 revenues for Chemicals, Consumer Products, Minerals
Processors, Iron & Steel, Vehicles & Machinery and Aluminum, Nonferrous Metals
& Ores were relatively flat when compared with the third quarter of 1993.
Shortlines and other increased $6 million compared with the third quarter of
1993 primarily due to an increase in amounts due to shortline railroads caused
by more BN traffic on their lines.
Expenses
Total operating expenses for both the third quarter of 1994 and 1993 were
$1,020 million; however, the operating ratio improved 7 percentage points to
82 percent from 89 percent. This improvement was due to higher revenues for
<PAGE>12
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
the third quarter of 1994 and the absence in 1994 of the adverse effects of
the 1993 third quarter Midwest flooding on operating expenses.
Compensation and benefits expenses were $8 million higher compared with the
third quarter of 1993. Higher traffic volumes during 1994 and a four percent
basic wage increase for union represented employees, effective July 1, 1994,
caused an increase in excess of $15 million to wages and related payroll
taxes. These increases were partially offset by decreases in cost of living
allowances and lower costs associated with union employees receiving reserve
status compensation in 1994. Increased pension expense, due to a reduction in
the discount rate used in determining the projected benefit obligation, also
contributed to higher compensation and benefits expenses.
Fuel expenses increased $12 million for the third quarter of 1994 compared
with the same period in 1993. Increased consumption due to higher traffic
volumes contributed $10 million to this increase. Additionally, the average
price paid for diesel fuel increased 1.8 cents per gallon to 59.5 cents in
1994 reflecting the 4.3 cents per gallon increase in the federal fuel tax,
effective October 1, 1993. 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 were $3 million lower than the third quarter of 1993 due to
the adverse effects of the Midwest flooding in the prior year. Locomotive
repair materials expense for the third quarter of 1994 increased slightly
compared with the prior year, after excluding the flood effects, due to a
larger fleet size in 1994 and the continuing efforts to improve locomotive
reliability.
Equipment rents expenses for the third quarter of 1994 decreased $3 million
compared with the same period of 1993 as flood-related problems had a $10
million negative impact on equipment rentals during the prior year. Equipment
rents expenses, after excluding the flood effects, reflected an increase in
the third quarter of 1994. This increase was primarily attributable to higher
lease expenses due to a larger fleet of leased rail cars as well as leasing
locomotives to meet power requirements.
Purchased services expenses were flat compared with the third quarter of
1993. Higher intermodal-related costs due to increased volumes, and higher
third party locomotive maintenance and repair costs were the most significant
contributing factors to increased purchased services expenses during the third
quarter of 1994. These increases were offset in part by increased Southern
Pacific Transportation Company traffic which was reduced during the third
quarter of 1993 due to the Midwest flooding. Also offsetting the increases
were haulage agreement-related reimbursements from The Atchison, Topeka and
Santa Fe Railroad (ATSF) for operating services provided by BN to ATSF.
Depreciation expense for the third quarter of 1994 increased $2 million when
compared with the prior year, due to an increase in the asset base and higher
traffic levels.
<PAGE>13
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Other operating expenses for the third quarter of 1994 were $16 million lower
compared with the prior year. The 1993 flood increased other operating
expenses during the third quarter of 1993 by approximately $11 million,
including $7 million of losses on premature retirement of property. An $8
million reduction in 1994 in costs associated with personal injury claims also
contributed to this year over year decline.
Interest expense for the quarter increased $2 million compared with the third
quarter of 1993, due to a higher average outstanding debt balance in 1994.
Other expense, net of income, was $3 million higher than the third quarter of
1993 due to a higher loss on sale of receivables and increases in other
miscellaneous expenses.
The effective tax rate was 38.7 percent for the third quarter of 1994 compared
with 71.6 percent for the third quarter of 1993. The higher effective tax
rate for the third quarter of 1993 resulted from the retroactive increase,
effective January 1, 1993, in tax rates pursuant to the provisions of the
Omnibus Budget Reconciliation Act of 1993 and the related impact on the
deferred tax liability at January 1, 1993.
Nine months ended September 30, 1994 compared with nine months ended September
30, 1993
BN had net income for the first nine months of 1994 of $274 million ($2.86 per
common share, primary on 90.2 million shares and $2.81 per common share, fully
diluted on 97.6 million shares) compared with net income of $178 million
($1.81 per common share, primary on 89.6 million shares and $1.80 per common
share, fully diluted on 89.7 million shares) for the same period in 1993. The
1993 fully diluted earnings per common share calculation excluded the
convertible preferred stock as conversion would have been anti-dilutive.
Results for 1993 included the effects of severe flooding in the Midwest, most
notably in the third quarter. BN estimated that the third quarter flooding
reduced revenues during 1993 by $44 million and increased operating expenses
by $35 million, for a combined reduction of $79 million or $.55 per common
share, primary. Net income for 1993 included the retroactive effects of the
Omnibus Budget Reconciliation Act of 1993 (the Act), which was passed into law
during August 1993. The Act increased the corporate federal income tax rate
by one percent, effective January 1, 1993, which reduced net income by $29
million, or $.32 per common share, primary, through the date of enactment. BN
recognized a one-time, non-cash charge of $28 million to income tax expense to
adjust deferred taxes as of the enactment date and a charge of $1 million to
current income tax expense.
<PAGE>14
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Revenues
The following table presents BN's revenue information by Railroad business
unit:
<TABLE>
<CAPTION>
Revenues Per
Revenues Revenue Ton Miles Revenue Ton Mile
Nine months ended September 30, 1994 1993 1994 1993 1994 1993
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal............................... $1,253 $1,121 103,583 88,981 1.21 1.26
Agricultural Commodities........... 556 563 22,664 26,144 2.45 2.15
Intermodal......................... 556 542 18,487 17,620 3.01 3.08
Forest Products.................... 376 361 15,704 14,714 2.39 2.45
Chemicals.......................... 308 304 11,086 11,046 2.78 2.75
Consumer Products.................. 195 188 6,955 6,610 2.80 2.84
Minerals Processors................ 155 146 6,271 5,979 2.47 2.44
Iron & Steel...................... 127 129 6,021 6,095 2.11 2.12
Vehicles & Machinery............... 144 139 1,943 1,782 7.41 7.80
Aluminum, Nonferrous Metals & Ores 77 77 2,912 2,963 2.64 2.60
Shortlines and other............... (96) (117) (6,547) (8,048) - -
Total.............................. $3,651 $3,453 189,079 173,886 1.93 1.99
</TABLE>
Total revenues for the first nine months of 1994 were $3,651 million compared
with revenues of $3,453 million for the same period in 1993. The $198 million
improvement was primarily attributable to a $132 million improvement in Coal
revenues.
Coal revenues improved $132 million during the first nine months of 1994 as a
result of increased traffic. This increase was primarily caused by a rise in
the demand for electricity as well as the need for utilities to replenish coal
stockpiles during the first half of 1994, which were partially depleted during
the 1993 summer flooding. BN estimated lost revenues of approximately $35
million during 1993 as a result of this flooding. Partially offsetting the
increase in 1994 traffic was a decline in revenues per revenue ton mile.
These lower yields were largely due to customers meeting minimum tonnage
requirements earlier in 1994 and therefore, receiving lower rates on
subsequent moves. Continuing competitive pricing pressures in contract
renegotiations also contributed to lower yields.
Revenues from the transportation of Agricultural Commodities during 1994 were
$7 million less than the first nine months of 1993, primarily as a result of a
decline in volumes. Volume related declines, which were largely attributable
to reduced crop production and lower export demand, caused a decrease of $47
million in corn revenues. A $25 million improvement in barley revenues and a
$21 million improvement in wheat revenues were caused by favorable market
conditions. The impact of the overall volume decline was reduced by an
increase in yield, which is a product of commodity mix, price and length of
haul.
Year-to-date Intermodal and Forest Products revenues increased $14 million and
$15 million, respectively, when compared with the same period in 1993.
Intermodal-international revenues were boosted $21 million by both new
business and growth in existing business. Partially offsetting this increase
<PAGE>15
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
was a decrease in domestic trailer revenues. Overall, increased traffic in
BN's key intermodal lanes more than offset BN's withdrawal from the Texas
market. Increased housing starts during the current year contributed to a $16
million improvement in lumber revenues within Forest Products revenues.
Minerals Processors revenues increased $9 million and Consumer Products
revenues increased $7 million when compared with the first nine months of
1993. Improved Minerals Processors revenues resulted primarily from stronger
clays and aggregates traffic caused by increases in both domestic and export
demands. Consumer Products revenues increased primarily from increased export
demand.
Current year revenues for Chemicals, Iron & Steel, and Vehicles & Machinery
were relatively flat compared with the same period in 1993 while Aluminum,
Nonferrous Metals & Ores remained unchanged.
Total current year revenues also benefited from a $21 million reduction in
Shortlines and other. This decline was partially due to additional haulage
agreement revenues and increased miscellaneous revenues.
Expenses
Total operating expenses for the first nine months of 1994 were $3,062 million
compared with $3,016 million for the same period in 1993. However, the
operating ratio improved 3 percentage points to 84 percent from 87 percent, as
increased revenues more than offset increased operating expenses.
Compensation and benefits expenses for year-to-date 1994 were $24 million
greater than last year. Higher traffic volumes during 1994 as well as the
basic wage increases for union represented employees, 3 percent effective July
1993 and 4 percent effective July 1994, caused an increase in excess of $30
million to wages and related payroll taxes. These increases were partially
offset by decreases in cost of living allowances and lower costs associated
with union employees receiving reserve status compensation in 1994. Increased
pension expense, due to a reduction in the discount rate used in determining
the projected benefit obligation, also contributed to higher compensation and
benefits expenses.
Fuel expenses were $7 million higher during the first nine months of 1994 as
compared with 1993. The average price paid for diesel fuel decreased 2.7
cents per gallon in 1994 to 57.6 cents despite the 4.3 cents per gallon
increase in the federal fuel tax, effective October 1, 1993, enacted as part
of the Omnibus Budget Reconciliation Act of 1993. These price savings were
more than offset by a $19 million increase in consumption due to higher
traffic volumes. 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 nine months of 1994 were relatively flat
compared with 1993. Track and locomotive repair materials costs increased due
to higher maintenance levels and a larger fleet size in 1994. Partially
offsetting this increase were greater scrap sales due to the higher
maintenance levels and a reduction in expenditures for safety and protective
equipment deployed in 1993.
<PAGE>16
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Equipment rents expenses were $26 million higher than the first nine months of
1993. This increase was primarily attributable to higher lease expenses due
to a larger fleet of leased rail cars as well as leasing locomotives to meet
power requirements. Also contributing to the increase were payments for
failure to achieve service commitments in the first half of 1994 under various
transportation agreements.
Year-to-date purchased services expenses increased $10 million compared with
the same period in 1993. Higher intermodal-related costs, due to increased
volumes, and higher third party locomotive maintenance and repair costs were
the most significant contributing factors to this increase. These increases
were partially offset by haulage agreement-related reimbursements from the
ATSF for operating services provided by BN to ATSF.
Depreciation expense for the first nine months of 1994 was $6 million higher
than the same period in 1993, due to an increase in the asset base and higher
traffic levels.
Other operating expenses were $25 million less compared with the first nine
months of 1993. A $31 million decrease in costs associated with personal
injury claims and the absence in 1994 of costs associated with the 1993 third
quarter floods was partially offset by an increase in derailment-related
expenses.
Interest expense for the year increased $11 million compared with 1993,
primarily due to a higher average outstanding debt balance in 1994.
Other expense, net of income, was $9 million higher in 1994 compared with the
first nine months of 1993. This resulted from lower net gains on property
dispositions occurring in 1994 as compared with 1993, as well as increases in
other miscellaneous expenses.
The effective tax rate was 38.7 percent for the first nine months of 1994
compared with 46.3 percent for the same period in 1993. The higher effective
tax rate for 1993 resulted from the retroactive increase, effective January 1,
1993, in tax rates pursuant to the provisions of the Omnibus Budget
Reconciliation Act of 1993 and the related impact on the deferred tax
liability at January 1, 1993.
Other Matters
Environmental issues
BN's operations, as well as those of its competitors, are subject to extensive
federal, state and local environmental regulation. In order to comply with
such regulation and to be consistent with BN's corporate environmental policy,
BN's operating procedures include practices to protect the environment.
Amounts expended relating to such practices are inextricably contained in the
normal day-to-day costs of BN's business operations.
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
<PAGE>17
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 60 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 a number of administrative and judicial proceedings and
other mandatory clean-up efforts at approximately 160 sites, including the PRP
sites, for which it is being asked to participate in the clean-up of sites
contaminated by material discharged into the environment. BN paid
approximately $13 million during the nine months ended September 30, 1994
relating to mandatory clean-up efforts, including amounts expended under
federal and state voluntary clean-up programs. At this time, BN expects to
spend approximately $115 million in future years to remediate and restore all
known sites, $105 million of which pertains to mandated sites, of which
approximately $65 million pertains to the PRP sites. Of the $115 million, BN
expects to spend $6 million during the remainder of 1994. Also, BN
anticipates that the majority of the $115 million will be paid out over a
period of less than 7 years; however, some costs will be paid out over a
longer period, in some cases up to 40 years. At September 30, 1994, 22 sites
were accountable for approximately $70 million of the accrual and no
individual site was considered to be material.
Liabilities for environmental costs represent BN's best estimates for
remediation and restoration of these sites and include asserted and unasserted
claims. At September 30, 1994, BN had accrued approximately $115 million for
estimated future environmental costs and believes it is reasonably possible,
although not probable, that actual environmental costs could be lower than the
recorded reserve or as much as 50 percent higher. BN's best estimate of
unasserted claims was approximately $10 million as of September 30, 1994.
Although recorded liabilities include BN's best estimates of all costs,
without reduction for anticipated recovery from insurance, BN'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,
<PAGE>18
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 September 30, 1994, BN had entered
into agreements with fuel suppliers setting the price of fuel to be obtained
by taking physical delivery directly from such suppliers at a future date.
The average price of the approximately 67 million gallons which BN had
committed to purchase was approximately 52 cents per gallon, exclusive of
taxes, certain transportation costs and other charges. In addition, BN held
petroleum futures contracts representing approximately 52 million gallons at
an average price of approximately 50 cents per gallon. These contracts have
expiration dates ranging from October 1994 to June 1995.
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 Mercantile Exchange). In order to effectively monitor the fuel
hedging activities, results of the program are summarized and reported to
senior management on a regular basis.
In the second quarter of 1994, BN entered into a three-year interest rate swap
on a notional amount of $50 million to hedge against interest rate exposure on
one of its debt issuances. Under the terms of this swap, BN receives
semiannual fixed-rate payments of 6.33 percent from a AA-rated counterparty
and makes semiannual floating rate payments tied to the six-month London
Interbank Offered Rate (LIBOR). The value of the swap to BN declines if LIBOR
increases. BN monitors the credit rating of its counterparty and does not
<PAGE>19
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
anticipate losses due to counterparty nonperformance. The swap is accounted
for as a hedge with realized gains or losses being recognized as a component
of interest expense. During the first nine months of 1994 the effect of this
swap on interest expense was immaterial and there were no deferred gains or
losses on the balance sheet at September 30, 1994.
Proposed merger
As of June 29, 1994, BNI and Santa Fe Pacific Corporation (Santa Fe) entered
into an Agreement and Plan of Merger (the Original Agreement) pursuant to
which, on the terms and conditions set forth in the Original Agreement, Santa
Fe will merge (the "Merger") with and into BNI, and BNI will be the surviving
corporation and each share of Santa Fe common stock will be converted into
0.27 of a share of BNI common stock. As of October 26, 1994, BNI and Santa Fe
entered into an Amendment to the Original Agreement (as so amended, the
Agreement) to increase the exchange ratio in the proposed merger to 0.34 of a
share of BNI common stock per share of Santa Fe common stock. All other terms
of the Agreement are identical to those set forth in the Original Agreement.
Consummation of the Merger is subject to approval by the stockholders of BNI
and Santa Fe, approval by the Interstate Commerce Commission (ICC), approval
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other
customary conditions. Meetings of the stockholders of BNI and Santa Fe to
consider and vote upon the Agreement are scheduled for November 18, 1994. In
addition, the ICC has adopted a schedule calling for a final ICC determination
with respect to the Merger during the first quarter of 1996. Notwithstanding
this schedule, there can be no assurance that the ICC will issue a decision
any sooner than the second quarter of 1997, the last period within which the
ICC is permitted to issue a final decision under applicable law. As is
typical in the context of a merger, upon approval by the stockholders of both
BNI and Santa Fe, certain benefits of officers and employees will vest. In
particular, restrictions placed upon certain BNI stock grants will lapse and
the previously unearned compensation relating to such restricted stock,
included in BNI stockholders' equity, will then be a non-cash charge to
compensation and benefits expense. As of September 30, 1994, such unearned
compensation relating to restricted stock was approximately $25 million.
While BN expects to incur additional costs related to the Merger, it is
anticipated that the combined company will realize significant business and
economic advantages not available to either company on a stand alone basis.
On October 5, 1994, Union Pacific Corporation (UP) submitted a proposal to
Santa Fe pursuant to which UP would acquire Santa Fe for 0.344 shares of UP
common stock per share of Santa Fe common stock, and on October 30, 1994 UP
announced an increased proposal to 0.407 shares of UP common stock per share
of Santa Fe common stock. Santa Fe's Board of Directors considered both of
these UP proposals and reiterated its support of the BNI Agreement. On
November 8, 1994, UP submitted a new proposal to Santa Fe pursuant to which UP
would acquire up to 57 percent of Santa Fe's common stock for $17.50 per share
in cash in a cash tender offer and would acquire the remaining 43 percent of
Santa Fe's common stock in a second-step merger for 0.354 shares of UP common
stock for each share of Santa Fe common stock. On November 9, 1994, UP
commenced the cash tender offer, which is scheduled to expire on December 8,
<PAGE>20
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
1994, unless extended. UP's proposal (including the tender offer) is subject
to a number of conditions, including termination of the BNI-Santa Fe merger
agreement, but contemplates use of an ICC "voting trust" and is therefore not
subject to ICC approval. The Santa Fe Board of Directors has not taken a
public position with respect to the November 8, 1994 UP proposal. In the
November 8, 1994 proposal, UP indicated that, alternatively, if preferred by
the Santa Fe Board of Directors, UP would be prepared to proceed with its
prior proposal to acquire Santa Fe for 0.407 shares of UP common stock per
share of Santa Fe common stock without the use of a voting trust. UP has also
disseminated proxy materials soliciting proxies from Santa Fe stockholders in
opposition to the BNI-Santa Fe Merger.
<PAGE>21
BURLINGTON NORTHERN INC. and SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Wheat and Barley Transportation Rates
In September 1980 a class action lawsuit was filed against Railroad in United
States District Court for the District of Montana ("District Court")
challenging the reasonableness of Railroad's export wheat and barley rates.
The class consists of Montana grain producers and elevators. The plaintiffs
sought a finding that Railroad's single car export wheat and barley rates for
shipments moving from Montana to the Pacific Northwest were unreasonably high
and requested damages in the amount of $64 million. In March 1981 the District
Court referred the rate reasonableness issue to the Interstate Commerce
Commission ("ICC"). Subsequently, the State of Montana filed a complaint at
the ICC challenging Railroad's multiple car rates for Montana wheat and barley
movements occurring after October 1, 1980.
The ICC issued a series of decisions in this case from 1988 to 1991. Under
these decisions, the ICC applied a revenue to variable cost test to the rates
and determined that Railroad owed $9,685,918 in reparations plus interest. In
its last decision, dated November 26, 1991, the ICC found Railroad's total
reparations exposure to be $16,559,012 through July 1, 1991. The ICC also
found that Railroad's current rates were below a reasonable maximum and vacated
its earlier rate prescription order.
Railroad appealed to the United States Court of Appeals for the District of
Columbia Circuit ("D.C. Circuit") those portions of the ICC's decisions
concerning the post-October 1, 1980 rate levels. Railroad's primary contention
on appeal was that the ICC erred in using the revenue to variable cost rate
standard to judge the rates instead of Constrained Market Pricing/Stand Alone
Cost principles. The limited portions of decisions that cover pre-October 1,
1980 rates were appealed to the Montana District Court.
On March 24, 1992, the Montana District Court dismissed plaintiffs' case as to
all aspects other than those relating to pre-October 1, 1980 rates. On
February 9, 1993, the D.C. Circuit served its decision regarding the appeal of
the several ICC decisions in this case. The Court held that the ICC did not
adequately justify its use of the revenue to variable cost standard as Railroad
had argued and remanded the case to the ICC for further administrative
proceedings.
On July 22, 1993, the ICC served an order in response to the D.C. Circuits'
February 9, 1993 decision. In its order, the ICC stated it would use the
Constrained Market Pricing/Stand Alone Cost Standards in assessing the
reasonableness of Railroad's wheat and barley rates moving from Montana to
Pacific Coast ports from 1978 forward. The ICC assigned the case to the Office
of Hearings to develop a procedural schedule. On October 28, 1994, plaintiff's
filed their opening evidence arguing that the revenue received by Railroad
exceeded the stand alone costs of transporting that traffic and that Railroad's
rates were unreasonably high. Although no procedural schedule has been
established for the receipt of Railroad's evidence, Railroad, on November 7,
1994, filed a petition with the ICC requesting that a procedural schedule be
set allowing Railroad to file six months after the close of discovery. The ICC
has issued a procedural schedule calling for the receipt of Railroad's evidence
<PAGE>22
BURLINGTON NORTHERN INC. and SUBSIDIARIES
PART II OTHER INFORMATION
on February 27, 1995. However, Railroad has sought reconsideration of that
schedule and under Railroad's proposal its evidence would not be due until June
1995.
Coal Transportation Contract Litigation
On April 26, 1991, an action was filed against Railroad in the 102nd Judicial
District Court for Bowie County, Texas seeking a reduction of the
transportation rates required to be paid under two contracts (Southwestern
Electric Power Company v. Burlington Northern Railroad Company, No.
D-102-CV-91-0720). The plaintiff, Southwestern Electric Power Company
("SWEPCO"), is challenging the contract rates for transportation of coal to its
electric generating facilities at Cason, Texas and Flint Creek, Arkansas.
SWEPCO contends that productivity gains achieved by Railroad constitute unusual
economic conditions giving rise to a "gross inequity" because Railroad's costs
of providing service have been reduced over the contracts' terms. SWEPCO seeks
both prospective rate relief and recovery of alleged past overcharges.
Railroad's primary contention is that both parties anticipated productivity
gains in the rail industry when negotiating the contracts and agreed that
Railroad would retain most of its productivity gains. Railroad further
contends that there was no agreement that transportation rates paid by SWEPCO
would be based on Railroad's costs of providing service.
The case is currently in litigation. Due to uncertainties inherent in
presenting the case to the jury, it is not possible for Railroad to predict the
likely outcome of the trial or Railroad's potential exposure under the jury's
verdict.
Environmental Proceeding
On May 25, 1994, the United States Department of Justice ("Department") filed
suit on behalf of the United States Environmental Protection Agency ("EPA")
against Railroad in United States District Court for the Eastern District of
Wisconsin for the release of oil and hazardous substances into navigable waters
of the United States in the course of three derailments. Specifically
referenced are (1) the alleged release of hazardous substances into the Nemadji
River and its shoreline near Superior, Wisconsin, on June 30, 1992, (2) the
alleged release of oil into the North Platte River and its shoreline near
Guernsey, Wyoming, on January 9, 1993, and (3) the alleged release of oil into
a tributary of the Bighorn River near Worland, Wyoming, on May 6, 1993. The
suit claims that pursuant to 33 U.S.C. Section 1321(b)(7), Railroad is liable
to the United States for civil penalties of up to $25,000 per day of violation
or $1,000 per barrel of oil or per reportable quantity of each hazardous
substance discharged. The EPA calculates the statutory maximum penalty
associated with these three spills to be $10,137,000. Railroad has answered
the complaint and opposed the penalties sought by the EPA.
Under the applicable water pollution statutes it appears that some fine against
Railroad is likely. However, such statutes, specifically 33 U.S.C. Section
1321(b)(8), provide that penalties shall be mitigated based upon factors such
as the seriousness of the violation, the economic benefit to the violator, the
degree of culpability, the history of violation and the response of the
<PAGE>23
BURLINGTON NORTHERN INC. and SUBSIDIARIES
PART II OTHER INFORMATION
violator to minimize or mitigate the adverse effects of the spill.
Furthermore, issues concerning whether the Worland spill occurred in navigable
waters of the United States and whether the EPA's calculations for the Nemadji
spill are proper will significantly affect the amount of any fine. Based upon
the facts of these spills and Railroad's conduct, all of the above-referenced
mitigation factors favor a substantially lower fine than that calculated by the
EPA and the Department.
Settlement meetings with the Department have involved discussions of the basis
for the Department's claims and penalty calculations, and Railroad has
presented mitigating factors in the context of the allegations. Settlement
discussions are ongoing. Discovery, however, has begun and the case has been
set for trial in June 1995. If a compromise is not reached, Railroad believes
that it has substantial defenses to, and evidence to mitigate the severity of
any fines which could be imposed. Railroad also believes it can demonstrate
that the amounts claimed by the government are out of proportion to any
reasonable assessment. Accordingly, in litigation, Railroad believes it should
be successful in significantly reducing the amount of any fine from the above
calculated statutory maximum.
Merger-Related Litigation
Several complaints have been filed arising out of BNI's proposed participation
in the Merger with Santa Fe. Between June 30, 1994, shortly after announcement
of the proposed merger, and October 14, 1994, twelve purported stockholder
class action suits were filed on behalf of Santa Fe stockholders in the Court
of Chancery of the State of Delaware. On October 14, 1994, plaintiffs filed a
class action complaint which consolidated and superseded all of the pending
stockholder complaints (In re Santa Fe Pacific Corporation Shareholder
Litigation, Consol. C.A. No. 13587). The Consolidated and Amended Complaint
names as defendants Santa Fe, the individual members of the Board of Directors
of Santa Fe, and BNI. Plaintiffs seek certification of a class action on
behalf of stockholders of Santa Fe as of June 30, 1994.
The Consolidated and Amended Complaint, in addition to making allegations
against Santa Fe and Santa Fe's directors, alleges that BNI aided and abetted
Santa Fe's directors in breaches of their fiduciary duties, including their
fiduciary duties of good faith, loyalty, care and disclosure. The Consolidated
and Amended Complaint alleges that BNI aided and abetted various acts or
omissions by Santa Fe's directors in respect of the proposed merger with BNI,
including their allegedly material misrepresentations in and failure to
completely disclose all material information in the joint proxy
statement/prospectus dated October 12, 1994 (the "Joint Proxy
Statement/Prospectus").
In the Consolidated and Amended Complaint, plaintiffs ask the court to order
Santa Fe's directors to carry out their fiduciary duties to plaintiffs; enjoin
consummation of the Merger; order the Santa Fe directors to explore alternative
transactions and to negotiate in good faith with all interested persons,
including UP; order the Santa Fe directors to provide access to information
concerning Santa Fe or the Merger to any bona fide bidder, including UP; in the
event the Merger is consummated, rescind the Merger and award rescissory
damages; decree that the Original Agreement has an implied right of termination
<PAGE>24
BURLINGTON NORTHERN INC. and SUBSIDIARIES
PART II OTHER INFORMATION
in response to a superior offer for Santa Fe or, in the alternative, invalidate
the Original Agreement as unlawful for failing to include such a termination
provision; award damages; order an accounting by defendants of all profits
realized by them as a result of these wrongful actions and to hold these
profits in a constructive trust pending the accounting; and award costs and
disbursements including reasonable attorneys' and experts' fees.
On October 26, 1994, BNI filed a Motion to Dismiss the Consolidated Amended
Complaint.
On October 6, 1994, UP filed in the Court of Chancery of the State of Delaware
a lawsuit against Santa Fe, Santa Fe's directors and BNI (Union Pacific
Corporation v. Santa Fe Pacific Corporation, C.A. No. 13778). On October 19,
1994, UP filed a First Amended and Supplemental Complaint alleging that BNI and
Santa Fe jointly engaged in a wrongful campaign to mislead Santa Fe's
stockholders. The complaint further alleges that defendants engaged in a
wrongful course of conduct designed to deprive Santa Fe stockholders of the
opportunity to consider and receive a merger proposal from UP, that Santa Fe's
directors have breached their fiduciary duties by rejecting UP's merger
proposal "out of hand", by refusing to negotiate with UP, and by making false
and misleading statements in the Joint Proxy Statement/Prospectus.
UP seeks a declaration that the Original Agreement permits Santa Fe to
terminate the Original Agreement in order to accept UP's merger proposal or, in
the alternative, that the Original Agreement is invalid and unenforceable for
failing to include such a provision; a declaration that the Joint Proxy
Statement/Prospectus is false and misleading and an injunction against Santa Fe
and its directors from making any additional materially false and misleading
disclosures relating to the Merger or UP's merger proposal; an injunction
against the November 18, 1994 special meeting of the Santa Fe stockholders;
injunctive relief mandating Santa Fe to negotiate with UP regarding UP's merger
proposal; a declaration that UP has not tortiously interfered with defendants'
contractual or other legal rights; an injunction against defendants from
bringing or maintaining any action against UP alleging that UP has tortiously
interfered with defendants' contractual or other legal rights; and an award of
UP's costs in bringing its lawsuit, including reasonable legal fees.
On October 7, 1994, both UP and the stockholder plaintiffs moved the court for
expedited discovery and an expedited hearing on their motions for a preliminary
injunction on a schedule that would enable the motion to be heard and decided
before Santa Fe's stockholders voted at a stockholders' meeting on November 18,
1994. On October 18, 1994, after receiving submissions from the parties, Vice
Chancellor Jacobs denied plaintiffs' motion for expedited proceedings because
plaintiffs had "failed to demonstrate a need for this Court to involve itself
in this dispute before Santa Fe's stockholders decide whether or not to approve
the Santa Fe-BNI merger."
Defendants believe that all of these lawsuits are without merit and intend to
oppose them vigorously.
<PAGE>25
BURLINGTON NORTHERN INC. and SUBSIDIARIES
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
The following exhibits are filed as part of this report:
Designation Nature of Exhibit
4 BN has either previously filed with the
Securities and Exchange Commission or upon
request will furnish a copy of any
instrument with respect to long-term debt
of BN.
11 Computation of earnings per common share.
12 Computation of ratio of earnings to fixed
charges.
27 Financial Data Schedule.
B. Reports on Form 8-K
During the quarter covered by this report, there were no reports on
Form 8-K filed.
Items 2, 3, 4 and 5 of Part II were not applicable and have been
omitted.
<PAGE>26
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/ David C. Anderson
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
Date: November 10, 1994
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Exhibit Index
Sequentially
Exhibit Numbered
Number Description Page
11 Computation of earnings per
common share
12 Computation of ratio of
earnings to fixed charges
27 Financial Data Schedule
EXHIBIT 11
BURLINGTON NORTHERN INC. and SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In Millions, Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Net income
Primary:
Net income.......................... $ 115 $ 24 $ 274 $ 178
Convertible and mandatory redeemable
preferred stock dividends......... (5) (5) (16) (16)
$ 110 $ 19 $ 258 $ 162
Fully diluted:
Net income available for common
stockholders...................... $ 110 $ 19 $ 258 $ 162
Dividends on convertible preferred
stock, assuming conversion........ 5 - 16 -
$ 115 $ 19 $ 274 $ 162
Weighted average number of shares
Primary:
Average common shares outstanding... 89.2 88.7 89.1 88.5
Common share equivalents resulting
from assumed exercise of stock
options........................... 1.0 1.2 1.1 1.1
90.2 89.9 90.2 89.6
Fully diluted:
Average common shares outstanding... 89.2 88.7 89.1 88.5
Common shares resulting from assumed
conversion of convertible preferred
stock.............................. 7.4 - 7.4 -
Common share equivalents resulting
from assumed exercise of stock
options assuming full dilution..... .9 1.2 1.1 1.2
97.5 89.9 97.6 89.7
Earnings per common share:
Primary................................ $1.22 $ .21 $2.86 $1.81
Fully diluted.......................... 1.18 .21 2.81 1.80
Primary earnings per common share are computed by dividing net income, after
deduction of preferred stock dividends, by the weighted average number of
common shares and common share equivalents outstanding. Common share
equivalents are computed using the treasury stock method. Under the treasury
stock method, an average market price is used to determine the number of
common share equivalents for primary earnings per common share. The higher of
the average or end of period market price is used to determine common share
equivalents for fully diluted earnings per common share. In addition, the
if-converted method is used for convertible preferred stock when computing
fully diluted earnings per common share. Convertible preferred stock was
excluded from the fully diluted earnings per common share computation for the
three and nine months ended September 30, 1993 as it was anti-dilutive for
those periods. No redeemable preferred stock was outstanding during 1994 and
the redeemable preferred stock dividends for the nine months ended September
30, 1993 were not significant.
Earnings per common share may not compute due to the level of rounding in this
exhibit.
EXHIBIT 12
BURLINGTON NORTHERN INC. and SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions, Except Ratio Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Earnings:
Pre-tax income..................... $188 $ 85 $464 $332
Add:
Interest, excluding capitalized
interest....................... 40 38 118 107
Portion of rent under long-term
operating leases representative
of an interest factor.......... 25 25 77 75
Total earnings available for
fixed charges.................... $253 $148 $659 $514
Fixed charges:
Interest........................... $ 40 $ 38 $119 $107
Portion of rent under long-term
operating leases representative
of an interest factor............ 25 25 77 75
Total fixed charges................ $ 65 $ 63 $196 $182
Ratio of earnings to fixed charges... 3.89x 2.35x 3.36x 2.82x
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON
NORTHERN INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 17
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<RECEIVABLES> 631
<ALLOWANCES> 22
<INVENTORY> 0
<CURRENT-ASSETS> 1052
<PP&E> 10038
<DEPRECIATION> 3835
<TOTAL-ASSETS> 7536
<CURRENT-LIABILITIES> 1548
<BONDS> 1688
<COMMON> 1
0
337
<OTHER-SE> 1778
<TOTAL-LIABILITY-AND-EQUITY> 7536
<SALES> 0
<TOTAL-REVENUES> 3651
<CGS> 0
<TOTAL-COSTS> 3062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> 464
<INCOME-TAX> 180
<INCOME-CONTINUING> 284
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<CHANGES> (10)
<NET-INCOME> 274
<EPS-PRIMARY> 2.86
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