<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 June 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 June 30, 1994 89,215,188 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 Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
------ ------ ------ ------
Revenues.............................. $1,192 $1,142 $2,402 $2,312
Costs and expenses:
Compensation and benefits........... 426 416 873 857
Fuel................................ 89 89 172 177
Materials........................... 70 74 155 154
Equipment rents..................... 111 96 217 188
Purchased services.................. 115 117 232 222
Depreciation........................ 89 86 176 172
Other............................... 114 116 217 226
------ ------ ------ ------
Total costs and expenses.......... 1,014 994 2,042 1,996
------ ------ ------ ------
Operating income...................... 178 148 360 316
Interest expense...................... 39 36 78 69
Other income (expense), net........... (5) 3 (6) -
------ ------ ------ ------
Income before income taxes and
cumulative effect of change in
accounting method................... 134 115 276 247
Income tax expense.................... 52 43 107 93
------ ------ ------ ------
Income before cumulative effect of
change in accounting method......... 82 72 169 154
Cumulative effect of change in
accounting method, net of tax....... - - (10) -
------ ------ ------ ------
Net income............................ $ 82 $ 72 $ 159 $ 154
====== ====== ====== ======
Earnings (loss) per common share:
Income before cumulative effect of
change in accounting method....... $ .85 $ .74 $ 1.75 $ 1.60
Cumulative effect of change in
accounting method................. - - (.11) -
------ ------ ------ ------
Earnings per common share............. $ .85 $ .74 $ 1.64 $ 1.60
====== ====== ====== ======
Number of shares used in computation
of earnings (loss) per common share
(in thousands)...................... 90,244 89,709 90,286 89,439
Dividends declared per common share... $ .30 $ .30 $ .60 $ .60
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Millions)
(Unaudited)
ASSETS June 30, December 31,
1994 1993
------ ------
Current assets:
Cash and cash equivalents.................. $ 18 $ 17
Accounts receivable, net................... 569 589
Materials and supplies..................... 117 91
Current portion of deferred income taxes... 170 167
Other current assets....................... 162 27
------ ------
Total current assets..................... 1,036 891
Property and equipment, net.................. 6,074 5,909
Other assets................................. 284 245
------ ------
Total assets............................. $7,394 $7,045
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 509 $ 492
Casualty and environmental reserves........ 274 286
Compensation and benefits payable.......... 254 271
Taxes payable.............................. 138 123
Accrued interest........................... 46 44
Other current liabilities.................. 79 102
Current portion of long-term debt.......... 36 185
Commercial paper........................... 204 26
------ ------
Total current liabilities................ 1,540 1,529
Long-term debt............................... 1,694 1,526
Deferred income taxes........................ 1,388 1,342
Casualty and environmental reserves.......... 410 426
Other liabilities............................ 332 303
------ ------
Total liabilities........................ 5,364 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;
89,311,412 shares and 88,881,675 shares
issued, respectively..................... 1 1
Additional paid-in capital................. 1,442 1,420
Retained earnings.......................... 293 198
Treasury stock, at cost, 96,224 shares and
85,536 shares, respectively.............. (5) (4)
Other...................................... (38) (33)
------ ------
Total stockholders' equity............... 2,030 1,919
------ ------
Total liabilities and stockholders'
equity................................. $7,394 $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)
Six Months Ended
June 30,
---------------------
1994 1993
------ ------
Cash flows from operating activities:
Net income........................................ $ 159 $ 154
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
method...................................... 10 -
Depreciation.................................. 176 172
Deferred income taxes......................... 50 43
Changes in current assets and liabilities:
Accounts receivable, net.................... 20 15
Materials and supplies...................... (27) 1
Other current assets........................ (135) (26)
Accounts payable............................ 17 (13)
Casualty and environmental reserves......... (12) 17
Compensation and benefits payable........... (15) (27)
Taxes payable............................... 17 16
Accrued interest............................ 2 4
Other current liabilities................... (23) (23)
Changes in long-term casualty and
environmental reserves...................... (16) (25)
Other, net.................................... (23) (29)
------ ------
Net cash provided by operating activities........... 200 279
------ ------
Cash flows from investing activities:
Additions to property and equipment............... (294) (283)
Proceeds from property and equipment dispositions 22 15
Other, net........................................ (13) (16)
------ ------
Net cash used in investing activities............... (285) (284)
------ ------
Cash flows from financing activities:
Net increase in commercial paper.................. 178 98
Proceeds from issuance of long-term debt.......... 149 -
Payments on long-term debt........................ (181) (72)
Dividends paid.................................... (64) (62)
Proceeds from exercise of common stock options.... 5 9
Other, net........................................ (1) -
------ ------
Net cash provided by (used in) financing activities. 86 (27)
------ ------
Increase (decrease) in cash and cash equivalents.... 1 (32)
Cash and cash equivalents:
Beginning of period............................... 17 57
------ ------
End of period..................................... $ 18 $ 25
====== ======
Supplemental cash flow information:
Interest paid, net of amounts capitalized......... $ 74 $ 70
Income taxes paid, net of refunds................. 39 46
Supplemental noncash investing and financing
activities information:
Assets financed through a capital lease obligation $ 50 $ -
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 June 30, 1994 and December 31, 1993 and the
results of operations for the three-month and six-month periods ended June
30, 1994 and 1993 and cash flows for the six-month periods ended June 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. 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 55
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 $9 million during the six months ended
-4-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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 these sites, $110 million of which
pertains to mandated sites, of which approximately $55 million pertains to
the PRP sites. Of the $115 million, BN expects to spend $24 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.
In addition, 21 sites account for approximately $90 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 June 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 $5
million as of June 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
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 June 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 61 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
-5-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
67 million gallons at an average price of approximately 47 cents per gallon.
These contracts have expiration dates ranging from July 1994 to March 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 $50 million
notional amount interest rate swap 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 would decline 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
quarter ended June 30, 1994, the effect of this swap on interest expense
was immaterial and there were no deferred gains or losses on the balance
sheet at June 30, 1994.
4. Other income (expense), net
Other income (expense), net includes the following (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
------ ------ ------ ------
Gain (loss) on property dispositions $ (1) $ 4 $ 1 $ 4
Loss on sale of receivables......... (2) (2) (4) (5)
Interest income..................... - - 1 1
Miscellaneous, net.................. (2) 1 (4) -
------ ------ ------ ------
Total............................... $ (5) $ 3 $ (6) $ -
====== ====== ====== ======
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 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 six
months of 1994, cash provided by operating activities decreased $79 million
when compared with the first six months of 1993. This decrease was primarily
attributable to a $97 million increase in the purchase of assets held in
"Other current assets" pending final financing arrangements and an increase of
$14 million in incentive compensation paid. These items were partially offset
by a $42 million decrease in labor-related payments and a $14 million decline
in the level of accounts receivables sold during the six months ended June 30,
1993. 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. 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 63 locomotives and anticipates additional deliveries of
approximately 45 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
-7-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
currently scheduled to expire on May 5, 1995 and May 6, 1999, respectively.
The maturity value of commercial paper outstanding at June 30, 1994 was $205
million, leaving a total of $95 million of the short-term credit agreement
available and $500 million of the long-term credit agreement 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 June 30, 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 both June 30, 1994 and December 31, 1993,
accounts receivable were net of $100 million representing receivables sold.
Capital expenditures and resources
A breakdown of capital expenditures is set forth in the following table (in
millions):
Six months ended June 30, 1994 1993
- - - --------------------------------------------------------------------------
Road, roadway structures and real estate.......... $228 $200
Equipment......................................... 116 83
---- ----
Total............................................. $344 $283
==== ====
During the current year BN will continue to reinvest in its business through
capital expenditures. Capital spending should remain at a level comparable to
1993. The above capital expenditures for equipment includes $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.
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. BN had $111 million of equipment
held in "Other current assets" at June 30, 1994 pending final financing
arrangements which may include a sale and lease-back. Also, depending upon
current market conditions and other factors, a portion of the locomotives
discussed above may be obtained through operating leases rather than
purchases. In the first six months of 1994, BN renewed leases primarily for
locomotives and covered hoppers, while in the first six months of 1993,
renewals were primarily for containers and locomotives.
Dividends
Common stock dividends declared for the first six months of 1994 and 1993 were
$.60 per common share. Dividends paid on common and preferred stock were $64
million compared with $62 million during the prior year. 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 expenditure requirements, debt
service and other factors.
-8-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Capital structure
BN's ratio of total debt to total capital was 49 percent at June 30, 1994
compared to 48 percent at December 31, 1993.
Results of Operations
- - - ---------------------
Three months ended June 30, 1994 compared with three months ended June 30, 1993
BN recorded net income of $82 million, or $.85 per common share, on 90.2
million shares for the second quarter of 1994 compared with net income of $72
million, or $.74 per common share, on 89.7 million shares for the same period
in 1993.
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 June 30, 1994 1993 1994 1993 1994 1993
- - - -------------------------------------------------------------------------------------------------
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal.............................. $ 417 $ 373 35,030 29,950 1.19 1.25
Agricultural Commodities.......... 158 163 6,332 7,094 2.50 2.30
Intermodal........................ 172 181 5,784 5,813 2.97 3.11
Forest Products................... 126 119 5,310 4,788 2.37 2.49
Chemicals......................... 107 106 3,824 3,799 2.80 2.79
Consumer Products................. 64 61 2,231 2,105 2.87 2.90
Minerals Processors............... 52 50 2,067 2,023 2.52 2.47
Iron & Steel...................... 44 45 2,009 2,123 2.19 2.12
Vehicles & Machinery.............. 50 49 665 651 7.52 7.53
Aluminum, Nonferrous Metals & Ores 25 26 942 1,032 2.65 2.52
Shortlines and other.............. (23) (31) (2,054) (2,404) - -
------ ------ ------ ------
Total............................. $1,192 $1,142 62,140 56,974 1.92 2.00
====== ====== ====== ======
</TABLE>
Total revenues for the second quarter of 1994 were $1,192 million compared
with revenues of $1,142 million for the same period in 1993, an improvement of
$50 million. This increase was primarily due to improved Coal revenues.
Coal revenues for the second quarter of 1994 improved $44 million compared
with the same period in 1993. 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 17 percent increase in traffic was a decline in
revenues per revenue ton mile. Lower yields resulted from continuing
competitive pricing pressures in contract renegotiations and declining cost
indices.
Revenues from the transportation of Agricultural Commodities during the second
quarter of 1994 were $5 million less than the second quarter of 1993. This
-9-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
decrease was principally caused by a $12 million decline in corn revenues.
This volume related decline was largely attributable to reduced crop
production and lower export demand. Partially offsetting the decline in corn
revenues was an improvement in barley revenues. This improvement resulted
from strong domestic demand caused by favorable market conditions during the
second quarter of 1994. The impact of an overall volume decline was reduced
by an increase in yield which is a product of traffic mix, price and length of
haul.
Intermodal revenues for the second quarter of 1994 were $9 million less than
the second quarter of 1993. This decrease reflects BN's decision to close two
intermodal hub centers in Texas. BN has estimated lost revenues in excess of
$25 million during the second quarter of 1994 relating to the closure of these
hubs. Withdrawal from the Texas market, however, has helped improve operating
performance in BN's key intermodal lanes, boosting revenues from existing
customers and offsetting a portion of the lost revenues. Also offsetting lost
revenues was an increase in international-intermodal traffic which benefited
from escalated demand from a few of BN's large customers.
Forest Products revenues for the current quarter improved by $7 million when
compared with the same period in 1993. This improvement was due to an $8
million increase in lumber revenues caused by an increase in housing starts
during the current year.
Second quarter revenues for Chemicals, Consumer Products, Minerals Processors,
Iron & Steel, Vehicles & Machinery and Aluminum, Nonferrous Metals & Ores were
relatively flat when compared with the second quarter of 1993.
Second quarter revenues also benefited from an $8 million reduction in
Shortlines and other. This reduction was primarily due to additional haulage
agreement revenues of $5 million.
Expenses
Total operating expenses for the second quarter of 1994 were $1,014 million
compared with expenses of $994 million for the same period in 1993. The
operating ratio was 85 percent, an improvement of 2 percentage points compared
with the second quarter of 1993.
Compensation and benefits expenses were $10 million greater compared with the
second quarter of 1993. Higher traffic volumes during 1994 and the three
percent basic wage increase for union represented employees, effective July
1993, caused an increase in excess of $9 million to 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 decrease of $7 million caused by reduced crew sizes
in the Northern tier, decreases for cost of living allowances and decreases in
railroad unemployment and annuity taxes.
Fuel expenses for the quarter were flat compared with 1993. The average price
paid for diesel fuel decreased to 57.6 cents per gallon in the second quarter
of 1994 from 63.0 cents per gallon in the second quarter of 1993 despite the
-10-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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. The
resulting favorable price variance of $9 million was offset by increased
consumption due to higher traffic volumes and a larger fleet size. 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 second quarter of 1994 decreased by $4 million
compared with the second quarter of 1993. Increased track material costs
resulting from higher maintenance levels were more than offset by a reduction
in expenditures for safety and protective equipment deployed in 1993 and
increased scrap sales.
Equipment rents expenses for the second quarter of 1994 were $15 million
greater when compared with the second quarter of 1993 principally due to
payments of $7 million for failure to achieve service commitments under
various transportation agreements. A 9 percent increase in traffic volumes
during 1994 resulted in a larger fleet of leased locomotives and rail cars on
a short-term basis, causing an increase in lease expenses.
Purchased services decreased $2 million from the second quarter of 1993. The
most significant contributing factor were payments received from The Atchison,
Topeka and Santa Fe Railway Company (ATSF) to reimburse BN for operating
services provided to ATSF. This decrease was partially offset by increases in
intermodal and automotive traffic-related costs and derailment-related costs.
Depreciation expense for the second quarter of 1994 increased $3 million when
compared to the second quarter of 1993, primarily due to higher traffic levels
and an increase in the asset base.
Other operating expenses were $2 million lower compared with the second
quarter of 1993. A $12 million decrease in costs associated with personal
injury claims was substantially offset by increases in derailment-related
expenses of approximately $6 million.
Interest expense for the quarter increased $3 million compared with the second
quarter in 1993, due to a higher average outstanding debt balance in 1994.
Other expense, net of income, increased $8 million from the second quarter of
1993 primarily due to a net loss on property dispositions occuring in the
second quarter of 1994 as compared with a net gain in 1993.
The effective tax rate was 38.7 percent for the second quarter of 1994
compared with 37.6 percent for the second 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. This
rate change was enacted in the third quarter of 1993 with retroactive
application. Previously issued financial statements were not adjusted.
-11-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Six months ended June 30, 1994 compared with six months ended June 30, 1993
BN had net income of $159 million, or $1.64 per common share, on 90.3 million
shares for the first six months of 1994 compared with net income of $154
million, or $1.60 per common share, on 89.4 million shares for the same period
in 1993.
Revenues
The following table presents BN's revenue information by Railroad business
unit:
<TABLE>
<CAPTION>
Revenues Per
Revenues Revenue Ton Miles Revenue Ton Mile
--------------- ------------------ ------------------
Six months ended June 30, 1994 1993 1994 1993 1994 1993
- - - -------------------------------------------------------------------------------------------------
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal............................... $ 835 $ 754 67,532 59,042 1.24 1.28
Agricultural Commodities........... 354 380 14,296 17,502 2.48 2.17
Intermodal......................... 350 357 11,681 11,537 3.00 3.09
Forest Products.................... 248 241 10,363 9,904 2.39 2.43
Chemicals.......................... 206 205 7,346 7,432 2.80 2.76
Consumer Products.................. 129 126 4,509 4,349 2.86 2.90
Minerals Processors................ 98 92 3,967 3,752 2.47 2.45
Iron & Steel...................... 84 87 3,994 4,048 2.10 2.15
Vehicles & Machinery............... 97 94 1,293 1,223 7.50 7.69
Aluminum, Nonferrous Metals & Ores 51 53 1,941 2,047 2.63 2.59
Shortlines and other............... (50) (77) (4,277) (5,468) - -
------ ------ ------- -------
Total.............................. $2,402 $2,312 122,645 115,368 1.96 2.00
====== ====== ======= =======
</TABLE>
Total revenues for the first six months of 1994 were $2,402 million compared
with revenues of $2,312 million for the same period in 1993. The $90 million
improvement was primarily attributable to Coal revenues. Lower Agricultural
Commodities revenues were offset by reduced Shortlines and other.
Coal revenues improved $81 million during the first six 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 which were partially depleted during the 1993 summer flooding.
Partially offsetting the increase in traffic was a decline in revenues per
revenue ton mile. Lower yields resulted from continuing competitive pricing
pressures in contract renegotiations and declining cost indices.
Revenues from the transportation of Agricultural Commodities during 1994 were
$26 million less than the first six months of 1993, primarily as a result of a
decline in volumes. This decrease was principally caused by corn and soybean
revenues which were less than prior year revenues by $31 million and $10
million, respectively. These volume related declines were largely
attributable to reduced crop production and lower export demand. A $13
million improvement in barley revenues, caused by favorable market conditions
during the first six months of 1994 partially offset corn and soybean
results. The impact of the overall volume decline was reduced by an increase
in yield which is a product of traffic mix, price and length of haul.
-12-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Revenues for Intermodal decreased $7 million, for the year, while Forest
Products and Minerals Processors revenues increased $7 million and $6 million,
respectively, when compared with the same period in 1993. Intermodal
revenues reflect BN's decision to close two intermodal hub centers in Texas
beginning in the second quarter of this year. BN has estimated lost revenues
in excess of $25 million for the first six months of 1994 relating to the
closure of these hubs. Withdrawal from the Texas market, however, has helped
improve operating performance in BN's key intermodal lanes, boosting revenues
from existing customers and offsetting a portion of the lost revenues.
Increased housing starts during the current year contributed to a $10 million
improvement in lumber revenues within Forest Products revenues, while improved
Minerals Processors revenues resulted from stronger clays and aggregates
traffic caused by an increase in export demand.
Current year revenues for Chemicals, Consumer Products, Iron & Steel, Vehicles
& Machinery and Aluminum, Nonferrous Metals & Ores were relatively flat
compared with the same period in 1993.
Total current year revenues also benefited from a $27 million reduction in
Shortlines and other. This decline was partially due to a decrease in amounts
due to shortline railroads caused by less BN traffic on their lines,
additional haulage agreement revenues and increased miscellaneous revenues.
Expenses
Total operating expenses for the first six months of 1994 were $2,042 million
compared with expenses of $1,996 million for the same period in 1993. The
operating ratio for the six months ended June 30, 1994 was 85 percent compared
with 86 percent for the same period in 1993.
Compensation and benefits expenses for the first six months of 1994 were $16
million greater when compared with 1993. The combination of higher traffic
volumes in 1994, the three percent basic wage increase for union represented
employees, effective July 1993, and severe winter weather in January and
February of 1994 caused an increase in excess of $18 million to wages and
related payroll taxes. Increases in salaries, related payroll taxes 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 $14 million
decrease due to reduced crew sizes in the Northern tier, decreases for cost of
living allowances and decreases in railroad unemployment and annuity taxes.
Fuel expenses for the first six months of 1994 were $5 million lower compared
with 1993 primarily due to a favorable price variance of $16 million. The
average price paid for diesel fuel decreased to 56.6 cents per gallon in 1994
from 61.7 cents per gallon in 1993 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 savings were partially
offset by increased consumption due to higher traffic volumes and severe
weather experienced in January and February of 1994. BN has a program to
-13-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 six months of 1994 increased $1 million
compared with 1993, primarily due to higher track and locomotive materials
costs resulting from higher maintenance levels and severe winter weather
experienced in January and February of 1994. These costs were partially
offset by increased scrap sales due to the higher maintenance levels and a
reduction in expenditures for safety and protective equipment deployed in 1993.
Equipment rents expenses for the first six months of 1994 were $29 million
higher than the first six months of 1993. A significant factor was payments
of $11 million for failure to achieve service commitments under various
transportation agreements. Also contributing to the increase were higher
lease rentals, for both rail cars and locomotives, and higher car-hire
expenses. These increases were attributable to traffic volume growth coupled
with decreased train velocity. Slower performance resulted from severe
weather operating conditions in January and February of 1994 and general
equipment congestion caused by the additional rail cars in service.
Year-to-date purchased services expenses increased $10 million compared with
the same period in 1993. The most significant contributing factors were
higher intermodal and automotive traffic-related costs. These increases were
partially offset by payments received from the ATSF for the reimbursement of
operating services provided by BN to ATSF.
Depreciation expense for the first six months of 1994 was $4 million higher
than the same period in 1993, due to higher traffic levels and an increase in
BN's asset base.
Other operating expenses were $9 million less compared with the first six
months of 1993. A $23 million decrease in costs associated with personal
injury claims was substantially offset by an increase in derailment-related
expenses of approximately $10 million and higher property taxes.
Interest expense for the year increased $9 million compared with 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 of income, was $6 million higher in 1994 compared with the
same period in 1993. This primarily resulted from lower net gains on property
dispositions occurring in 1994 as compared with 1993.
The effective tax rate was 38.7 percent for the first six months of 1994
compared with 37.6 percent for the same period in 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. This rate change was
enacted in the third quarter of 1993 with retroactive application. Previously
issued financial statements were not adjusted.
-14-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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
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 55 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 $9 million during the six months ended June 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 these sites, $110 million
of which pertains to mandated sites, of which approximately $55 million pertains
to the PRP sites. Of the $115 million, BN expects to spend $24 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. In
addition, 21 sites account for approximately $90 million of the accrual;
however, no individual site is considered to be material.
-15-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liabilities for environmental costs represent BN's best estimates for
remediation and restoration of these sites and include asserted and unasserted
claims. At June 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 $5 million as of June 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
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 June 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 61 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 47 cents per gallon. These contracts have expiration
dates ranging from July 1994 to March 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.
-16-
<PAGE>
BURLINGTON NORTHERN INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In the second quarter of 1994, BN entered into a three-year $50 million
notional amount interest rate swap 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 would decline 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 quarter ended June 30, 1994, the
effect of this swap on interest expense was immaterial and there were no
deferred gains or losses on the balance sheet at June 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 Agreement) pursuant to which, on the
terms and conditions set forth in the Agreement, Santa Fe will merge (the
Merger) with and into BNI, and BNI will be the surviving corporation. On June
30, 1994, BNI and Santa Fe issued a joint press release announcing, among
other things, the execution of the Agreement and describing the conversion of
each Santa Fe share into 0.27 of a share of BNI common stock to be effected
upon consummation of the proposed Merger. Consummation of the Merger is
subject to approval by the stockholders of BNI and Santa Fe, approval by the
Interstate Commerce Commission, approval under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, and other customary conditions. As is typical in
the context of a merger, upon stockholder approval, certain benefits of BN
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 June
30, 1994 such unearned compensation relating to restricted stock was
approximately $27 million. BN is currently evaluating alternatives pursuant
to which such restrictions would continue to remain in effect by the voluntary
action of certain BN officers and employees and accordingly, may delay the
timing of recognition of the unearned compensation as expense and the amount
thereof. 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.
-17-
<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
-18-
