<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________________ to ___________
Commission file number 1-8159
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)
Registrant's telephone number, including area code (817) 333-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------------
Common Stock, Without Par Value New York, Chicago and Pacific Stock Exchanges
6 1/4% Cumulative Convertible
Preferred Stock, Series A,
No Par Value New York, Chicago and Pacific Stock Exchanges
Preferred Stock Purchase Rights New York, Chicago and Pacific Stock Exchanges
9% Debentures due 2016 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
____ ____
Indicate by check mark if disclosure of deliquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the common stock on January
31, 1994 was approximately $5,702,932,001.
As of January 31, 1994, registrant had outstanding 88,890,276 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Burlington Northern Inc.'s definitive proxy statement, to be filed not
later than 120 days after the end of the fiscal year covered by this report, is
incorporated by reference into Part III.
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Table of Contents
-----------------
Item Page
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Part I 1. Business......................................... 1
2. Properties........................................ 1
Part II 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 9
8. Financial Statements and Supplementary Data....... 23
(i)
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PART I
Item 1. Business
and
Item 2. Properties
Burlington Northern Inc. (BNI) was incorporated in Delaware in 1981 as part
of a holding company reorganization. BNI and its majority-owned subsidiaries
(collectively BN) are primarily engaged in the rail transportation business.
The principal subsidiary is Burlington Northern Railroad Company (Railroad).
BN Leasing Corporation, a wholly owned subsidiary of BNI, was formed during
1989 to acquire railroad rolling stock and other equipment necessary for the
transportation and other business affairs of BN.
Railroad transportation
Railroad operates the largest railroad system in the United States based on
miles of road and second main track, with approximately 24,500 total miles at
December 31, 1993. The principal cities served include Chicago,
Minneapolis-St. Paul, Fargo-Moorhead, Billings, Spokane, Seattle, Portland,
St. Louis, Kansas City, Des Moines, Omaha, Lincoln, Cheyenne, Denver, Fort
Worth, Dallas, Houston, Galveston, Tulsa, Wichita, Springfield (Missouri),
Memphis, Birmingham, Mobile and Pensacola.
During 1993, BN refined Railroad's customer oriented business units by
creating smaller, more focused business units. The following table presents
BN's revenue information by Railroad business unit, and includes
reclassification of prior-year information to conform to current year
presentation.
Percent of revenues was calculated before consideration of shortline
payments and other miscellaneous revenues. The principal contributors to
rail transportation revenues were as follows (revenues and revenue ton miles
in millions, carloadings in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1993 1992 1991
------- ------- --------
<S> <C> <C> <C>
Coal:
Revenues................................ $ 1,532 $ 1,520 $ 1,554
Percent of revenues..................... 32% 32% 33%
Revenue ton miles....................... 122,832 117,139 119,028
Revenues per revenue ton mile........... 1.25cents 1.30cents 1.31cents
Carloadings............................. 1,468 1,448 1,472
Agricultural Commodities:
Revenues................................ $ 784 $ 777 $ 778
Percent of revenues..................... 16% 16% 17%
Revenue ton miles....................... 35,451 36,831 38,123
Revenues per revenue ton mile........... 2.21cents 2.11cents 2.04cents
Carloadings............................. 423 454 450
Intermodal:
Revenues................................ $ 730 $ 711 $ 687
Percent of revenues..................... 15% 15% 15%
Revenue ton miles....................... 23,726 22,749 22,191
Revenues per revenue ton mile........... 3.08cents 3.13cents 3.10cents
Carloadings............................. 1,003 1,017 1,018
</TABLE>
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<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1993 1992 1991
------- ------- --------
<S> <C> <C> <C>
Forest Products:
Revenues................................ $ 483 $ 489 $ 469
Percent of revenues..................... 10% 10% 10%
Revenue ton miles....................... 19,724 20,030 18,747
Revenues per revenue ton mile........... 2.45cents 2.44cents 2.50cents
Carloadings............................. 280 283 278
Chemicals:
Revenues................................ $ 405 $ 388 $ 346
Percent of revenues..................... 8% 8% 7%
Revenue ton miles....................... 14,625 14,142 12,952
Revenues per revenue ton mile........... 2.77cents 2.74cents 2.67cents
Carloadings............................. 262 244 218
Consumer Products:
Revenues................................ $ 257 $ 258 $ 250
Percent of revenues..................... 5% 5% 5%
Revenue ton miles....................... 9,052 9,098 8,879
Revenues per revenue ton mile........... 2.84cents 2.84cents 2.82cents
Carloadings............................. 145 146 141
Minerals Processors:
Revenues................................ $ 195 $ 180 $ 184
Percent of revenues..................... 4% 4% 4%
Revenue ton miles....................... 7,982 7,410 7,625
Revenues per revenue ton mile........... 2.44cents 2.43cents 2.41cents
Carloadings............................. 178 170 163
Iron & Steel:
Revenues................................ $ 172 $ 178 $ 170
Percent of revenues..................... 4% 4% 4%
Revenue ton miles....................... 8,178 8,086 7,615
Revenues per revenue ton mile........... 2.10cents 2.20cents 2.23cents
Carloadings............................. 225 244 238
Vehicles & Machinery:
Revenues................................ $ 187 $ 166 $ 166
Percent of revenues..................... 4% 4% 3%
Revenue ton miles....................... 2,416 2,165 2,209
Revenues per revenue ton mile........... 7.74cents 7.67cents 7.51cents
Carloadings............................. 123 101 102
Aluminum, Non-Ferrous Metals & Ores:
Revenues................................ $ 103 $ 108 $ 103
Percent of revenues..................... 2% 2% 2%
Revenue ton miles....................... 3,919 4,180 3,632
Revenues per revenue ton mile........... 2.63cents 2.58cents 2.84cents
Carloadings............................. 68 71 69
</TABLE>
Coal
The transportation of coal is Railroad's largest source of revenues,
accounting for approximately one-third of the total. Based on carloadings and
tons hauled, Railroad is the largest transporter of Western low-sulfur coal in
the United States. Over 90 percent of Railroad's coal traffic originated in
the Powder River Basin of Montana and Wyoming during the three years ended
December 31, 1993. These coal shipments were destined for coal-fired electric
generating stations primarily in the North Central, South Central and Mountain
regions of the United States with smaller quantities exported.
Railroad also handles increasing amounts of low-sulfur coal from the Powder
River Basin for delivery to markets in the eastern and southeastern portion of
the United States. The low-sulfur coal from the Powder River Basin is
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abundant, inexpensive to mine and clean-burning. Since the Clean Air Act of
1990 requires power plants to reduce harmful emissions either by burning coal
with a lower sulfur content or by installing expensive scrubbing units,
opportunities for increased shipments of this low-sulfur coal still exist.
Agricultural Commodities
Based on carloadings and tons hauled, Railroad is the largest rail
transporter of grain in North America. Railroad's system is strategically
located to serve the Midwest and Great Plains grain producing regions where
Railroad serves most major terminal, storage, feeding and food-processing
locations. Additionally, Railroad has access to major export markets in the
Pacific Northwest, western Great Lakes and Texas Gulf regions as well as
direct entry to consuming markets in southern Mexico through its Protexa
Burlington International affiliate.
Intermodal
Intermodal transportation moves traffic on specially designed flatcars or
doublestack equipment which competes with motor carriers. Railroad's
intermodal transportation system integrates the movement of approximately 46
daily trains operating between 30 rail hubs and 28 satellite rail hubs
(Railroad-operated marshalling points for trailer/container movements). These
operations are strategically located across Railroad's rail network and also
serve major distribution centers outside BN's system. Strategic alliances
have been formed to enhance Railroad's market access both with other railroads
and with major truck transportation providers.
Forest Products
The Forest Products business unit is primarily comprised of lumber, plywood,
pulpmill feedstock, wood pulp and paper products. These products primarily
come from the Pacific Northwest, upper Midwest and Southeast areas of the
United States.
Chemicals
The Chemicals business unit is comprised of fertilizer, petroleum and
chemical commodities as well as Railroad's environmental logistics business.
Primary origin markets for Railroad include the Gulf Coast, the Pacific
Northwest, and various Canadian ports of entry. Environmental logistics is an
area of significant opportunity as municipalities exhaust their traditional
disposal sources and must increasingly transport their waste longer distances.
Consumer Products
Products included in Railroad's Consumer Products business unit represent a
wide variety of commodities. Some of the major products in this group are
food products, beverages, frozen foods, canned foods, appliances and
electronics. Because this business unit handles a wide variety of consumer
goods, the business unit performance typically mirrors the country's economy.
Minerals Processors
Commodities in this group include clays, cements, sands and other minerals
and aggregates. This group services both the oil and construction industries.
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Iron & Steel
The Iron & Steel business unit handles virtually all of the commodities
included in or resulting from the production of steel. Taconite, an iron ore
derivative produced in northern Minnesota, scrap steel and coal coke are the
business unit's primary input products, while finished steel products range
from structural beams and coil to wire and nails.
Vehicles & Machinery
The Vehicles & Machinery business unit is responsible for both domestic and
international vehicle manufacturers as well as an assortment of primary and
secondary markets for heavy machinery. Through the development and
implementation of Autostack technology (using containers to move motor
vehicles), Railroad is redefining transit time and ride quality. Heavy
machinery includes primary markets for aircraft, construction, farm and
railroad equipment and secondary markets for used equipment. The business
unit is also responsible for military and other miscellaneous traffic for the
United States government.
Aluminum, Non-Ferrous Metals & Ores
The Aluminum, Non-Ferrous Metals & Ores business unit handles alumina and
aluminum products, petroleum coke and a variety of other metals and ores such
as zinc, copper and lead.
Operating factors
Certain significant operating statistics were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1993 1992 1991 1990 1989*
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Carloadings (in thousands)........................ 4,175 4,178 4,149 4,335 4,215
Freight revenues per carload...................... $1,099 $1,080 $1,071 $1,052 $1,063
Revenue ton miles (in millions)................... 237,339 232,799 232,441 234,291 232,527
Revenues per revenue ton mile..................... 1.98cents 1.99cents 1.96cents 1.99cents 1.98cents
Revenue tons per carload.......................... 83 82 82 79 75
Revenue tons per train............................ 3,315 3,193 3,188 3,141 3,032
Freight train miles (in millions)................. 72 73 73 75 77
Average length of haul (miles).................... 778 764 770 766 783
Gross ton miles, excluding locomotives
(in millions)................................... 409,808 400,917 402,527 409,991 395,878
Operating ratio (excluding the 1991 special
charge)......................................... 86% 87% 90% 87% 86%
Operating expense per gross ton mile (excluding
the 1991 special charge)........................ .99cents 1.01cents 1.02cents .99cents 1.00cents
Gallons of fuel used (in millions)................ 588 560 562 593 591
Average fuel price per gallon..................... 61.5cents 62.2cents 65.5cents 69.5cents 55.5cents
Gross ton miles per gallon of fuel used........... 697 716 716 691 670
Revenue ton miles per employee (in thousands)..... 7,781 7,461 7,317 7,120 7,060
Revenues per employee (in thousands).............. $154 $148 $144 $142 $140
</TABLE>
*Beginning in 1990, BN reduced revenues and mileage for the effects of
shortline railroads, which complete hauls for BN. In prior years, payments
to shortline railroads were classified in operating expenses.
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Properties
In 1993, approximately 96 percent of the total ton miles, both revenue and
non-revenue generating, carried by Railroad were handled on its main lines.
At December 31, 1993, approximately 18,828 miles of Railroad's track consisted
of 112-lb. per yard or heavier rail, including approximately 10,461 track
miles of 132-lb. per yard or heavier rail. Additions and replacements to
properties were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Track miles of rail additions and replacements:
New.......................................... 387 461 380 301 326
Used......................................... 356 299 281 299 208
Track miles surfaced or reballasted............ 7,854 7,610 7,710 7,119 6,974
Ties inserted (in thousands):
Wood......................................... 1,914 1,684 1,515 1,331 1,342
Concrete..................................... 195 500 527 691 651
</TABLE>
Equipment
BN owned or leased, under both capital and operating leases, with an initial
lease term in excess of one year, the following units of railroad rolling
stock at December 31, 1993:
<TABLE>
<CAPTION>
Number of Units
--------------------------
Owned Leased Total
------ ------ -----
<S> <C> <C> <C>
Locomotives:
Freight...................................... 753 1,162 1,915
Passenger.................................... - 2 2
Multi-purpose................................ 159 50 209
Switching.................................... 176 18 194
------ ------ ------
Total locomotives.......................... 1,088 1,232 2,320
====== ====== ======
Freight Cars:
Box-general purpose.......................... 947 2,642 3,589
Box-specially equipped....................... 4,587 689 5,276
Gondola...................................... 6,067 757 6,824
Hopper-open top.............................. 8,240 714 8,954
Hopper-covered............................... 17,528 11,640 29,168
Refrigerator................................. 3,347 9 3,356
Flat......................................... 3,407 367 3,774
Caboose...................................... 498 - 498
Other........................................ 559 - 559
------ ------ ------
Total freight cars......................... 45,180 16,818 61,998
====== ====== ======
Commuter passenger cars........................ - 141 141
====== ====== ======
</TABLE>
In addition to the owned and leased locomotives identified above, BN
operates 199 freight locomotives under power purchase agreements.
The average age of locomotives and freight cars was 14.5 years and 18.6
years, respectively, at December 31, 1993, compared with 13.5 years and 18.4
years, respectively, at December 31, 1992.
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The average percentage of BN's locomotives and freight cars awaiting repairs
during 1993 was 7.4 and 3.3, respectively, compared with 7.4 and 4.1,
respectively, in 1992. The average time between locomotive failures was 67.9
days in 1993 compared with 71 days in 1992.
During 1993, BN entered into an agreement to acquire 350 new-technology
alternating current traction motor locomotives. BN anticipates reduced
locomotive operating costs as well as an increase in both horsepower and
traction, meaning fewer locomotives will be needed for many freight
operations. BN accepted delivery of one locomotive during 1993 and
anticipates delivery of between approximately 60 and 100 each year from 1994
through 1997.
Employees
BN employed an average of 30,502 employees in 1993 compared with 31,204 in
1992 and 31,760 in 1991. BN's payroll and employee benefits costs, including
capitalized labor costs, were approximately $1.9 billion for each of the years
ended December 31, 1993, 1992 and 1991. Almost 90 percent of BN's employees
are covered by collective bargaining agreements with 14 different labor
organizations.
In October 1991, Railroad entered into an agreement (Crew Consist Agreement
No. 1) with the United Transportation Union (UTU) covering the southern
portion of Railroad's system. Crew Consist Agreement No. 1 provided for crews
on most through-freight trains to consist of one conductor and one engineer
and for crews on all other trains to consist of one brakeman, one conductor
and one engineer.
Under the terms of Crew Consist Agreement No. 1, Railroad offered the
opportunity for voluntary separation from employment in return for severance
payments of up to $60,000 per employee. Remaining conductors or brakemen who,
as a result of Crew Consist Agreement No. 1, were unable to hold a position in
active service, due to relative seniority, were placed on a reserve board.
Employees in reserve status received compensation at a rate equal to either 75
percent of their previous 12-month earnings, or 75 percent of the basic
five-day yard helper rate of pay, whichever is greater, and are required to be
available for return to active service on 15 days' notice. Each UTU member on
the southern portion of Railroad's system received a lump-sum payment of
$1,000 upon ratification of Crew Consist Agreement No. 1.
In May 1993, Railroad entered into an agreement (Crew Consist Agreement No.
2) with the UTU covering approximately 3,400 UTU members in the northern
portion of Railroad's system. Crew Consist Agreement No. 2, which represents
the culmination of the program to eliminate surplus crew positions, was
accrued for in the $185 million restructuring component of the June 1991
special charge. Crew Consist Agreement No. 2 provides for crews on most
through-freight trains to consist of one conductor and one engineer and for
crews on all other trains to consist of one brakeman, one conductor and one
engineer. It is similar to Crew Consist Agreement No. 1, covering the
southern portion of Railroad's system. Each UTU member on the northern
portion of Railroad's system received a one-time lump-sum payment of $5,000,
pursuant to Crew Consist Agreement No. 2.
Under the terms of Crew Consist Agreement No. 2, Railroad offered the
opportunity for voluntary separation from employment in return for severance
payments of up to $80,000 per employee. Conductors and brakemen who choose
not to accept the voluntary separation offer can elect volunteer surplus
status pursuant to which they will receive $60,000 to be paid out over a
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period of 18 to 48 months, as each selects. If such employee has not been
recalled to active service by the time such payments cease upon expiration of
the selected period, such employee will remain in volunteer surplus status,
without further compensation or benefits, until recalled to active service.
Employees in volunteer surplus status may be called back to service only after
the individuals in reserve status, within their own subdivided seniority
district, have been recalled. Remaining conductors and brakemen who, as a
result of Crew Consist Agreement No. 2, are not needed in train service, and
who do not elect one of the above severance options, will be placed on a
reserve board.
Employees in reserve status will receive compensation equal to either 75
percent of their previous 12-month earnings, or 75 percent of the basic
five-day yard helper rate of pay, whichever is greater, and are required to be
available for return to active service on 15 days' notice.
In October 1993, the UTU elected to adopt Crew Consist Agreement No. 2 for
those southern portion UTU members who were previously covered by Crew Consist
Agreement No. 1. Crew Consist Agreement No. 2 was implemented on the southern
portion of the Railroad's system during the fourth quarter of 1993. Upon
implementation, each of the approximately 3,300 UTU members on the southern
portion of Railroad's system received a one-time lump-sum payment of $4,000,
which was the incremental difference between the $1,000 lump-sum payment
received following ratification of Crew Consist Agreement No. 1 and the amount
received by UTU members following adoption of Crew Consist Agreement No. 2.
Railroad will continue to remove excess positions from train service through
the implementation of Crew Consist Agreement No. 2. Approximately 1,350
excess positions have been removed as a result of employees accepting
severance or voluntary surplus payments. Other excess positions have been
eliminated and personnel formerly in those positions have been assigned to
reserve boards, absorbed through additional train starts and/or utilized in
quality and safety initiatives. Based upon its experience under Crew Consist
Agreement No. 1, Railroad anticipates that the number of employees on reserve
status will decline over time.
In July 1993, the American Train Dispatchers Association ratified an April
agreement which will facilitate the consolidation of all dispatching functions
into a centralized train dispatching office in Fort Worth, Texas by the end of
1995.
Competition
The general environment in which BN operates remains highly competitive.
Depending on the specific market, deregulated motor carriers, other railroads
and river barges exert pressure on various price and service combinations.
The presence of advanced, high service truck lines with expedited delivery,
subsidized infrastructure and minimal empty mileage continues to impact the
market for non-bulk, time sensitive freight. The potential expansion of long
combination vehicles could further encroach upon markets traditionally served
by railroads. In order to remain competitive, BN and other railroads continue
to develop and implement technologically supported operating efficiencies to
improve productivity.
As railroads streamline, rationalize and otherwise enhance their franchises,
competition among rail carriers intensifies. BN's primary rail competitors in
the western region of the United States consist of Atchison, Topeka & Santa Fe
Railway Company; Chicago & Northwestern Transportation Company (C&NW);
Southern Pacific Transportation Company; and Union Pacific Railroad Company
(UP).
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Coal, one of BN's primary commodities, has experienced significant pressure on
rates due to competition from the joint effort of C&NW/UP and BN's efforts to
penetrate into new markets. In addition to the railroads discussed above,
numerous regional railroads and motor carriers operate in parts of the same
territory served by BN.
Environmental
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.
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PART II
Item 7. 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 principal source of liquidity and is
primarily used for dividends and capital expenditures. Operating activities
provided cash of $578 million in 1993, compared with $680 million in 1992 and
$368 million in 1991. The decrease in cash from operations in 1993 compared
with 1992 was primarily attributable to an $81 million increase in
labor-related payments, a decline in the level of accounts receivables sold
and a one-time settlement agreement payment received in 1992. These items
were partially offset by a decrease in interest paid during 1993. The
increase in cash from operations in 1992 over 1991 was primarily due to
increased profitability, a smaller decline in the level of accounts receivable
sold and the one-time settlement agreement payment received in 1992. While
operating cash flows for 1993 and 1991 were sufficient to fund dividends, such
cash flows were not sufficient to completely fund capital expenditures. In
1992, operating cash flows were sufficient to fund both dividends and capital
expenditures. Cash shortfalls as a result of these cash outlays are generally
financed with debt. Sources available for such financing are discussed below.
During the first quarter of 1993, BN entered into an agreement to acquire
350 new-technology alternating current traction motor locomotives. BN
accepted delivery of one locomotive during 1993 and anticipates delivery of
between approximately 60 and 100 each year from 1994 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.
During December 1993, BNI filed a registration statement with the Securities
and Exchange Commission for the issuance, from time to time, of up to $500
million aggregate principal amount of debt securities. Net proceeds from the
sale of the debt securities, if any are offered and sold, will be used to pay
down debt or for other general corporate purposes.
BNI acquired equipment which was financed in December 1993 through the
issuance of $78 million of 6.32 percent notes due 1994 to 2012.
In July 1993, BNI issued $150 million of 7 1/2 percent senior unsecured
debentures due 2023 and used the proceeds for general corporate purposes,
including working capital. These debentures were the final borrowing under
the registration statement filed on September 24, 1991 covering the issuance,
from time to time, of up to $500 million aggregate principal amount of debt
securities.
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Railroad maintains an effective program for the issuance, from time to time,
of commercial paper. These borrowings are supported by Railroad's bank
credit agreement, thus outstanding commercial paper balances reduce available
borrowings under this agreement. The bank credit agreement allows borrowings
of up to $500 million on a short-term basis. The agreement is currently
scheduled to expire in November 1994. At Railroad's option, borrowing rates
are based on prime, certificate of deposit or London Interbank Offered rates.
Annual facility fees are 0.25 percent. The maturity value of commercial paper
outstanding at December 31, 1993 was $27 million, leaving a total of $473
million of the credit agreement available, while no commercial paper was
outstanding at December 31, 1992.
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 December 31, 1993, 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 December 31, 1993 and 1992, accounts
receivable were net of $100 million and $189 million, respectively,
representing receivables sold.
In November 1992, BNI completed a public offering of 6,900,000 shares of
6 1/4 percent cumulative convertible preferred stock at $50 per share. Most
of the $337 million net proceeds from the offering were placed in trust to
fund the redemption of BNI's $300 million 9 5/8 percent notes due 1996. Under
the terms of the indenture, the 9 5/8 percent notes were redeemable at par,
commencing February 1, 1993. The notification for redemption of the 9 5/8
percent notes was issued to holders of the notes in December 1992 with a
redemption date of February 1, 1993. The debt was considered to be
extinguished as of December 31, 1992, because BNI had irrevocably placed
assets in trust, prior to such date, to be used solely to satisfy scheduled
payments of both the interest on and principal of the $300 million 9 5/8
percent notes. The difference between BNI's redemption price and the net
carrying value resulted in an immaterial loss which was recorded in other
income (expense), net in 1992.
In July 1992, BNI issued $150 million of 7 percent senior unsecured notes
due 2002. The proceeds were used to retire $100 million of 14 3/4 percent
notes due August 15, 1992 and to reduce outstanding commercial paper
balances. In February 1992, BNI issued $200 million of 8 3/4 percent senior
unsecured debentures due 2022 and used the proceeds to reduce outstanding
commercial paper balances. These debt instruments provided favorable
long-term interest rates and matched long-term borrowing to the long-lived
assets of BN's capital program.
In November 1991, BNI completed a public offering of 10,350,000 shares of
common stock. The transaction resulted in net proceeds of $359 million which
were used primarily to retire $250 million of 11 5/8 percent subordinated
debentures.
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Capital expenditures and resources
A breakdown of capital expenditures is set forth in the following table (in
millions):
Year ended December 31, 1993 1992 1991
- - - -----------------------------------------------------------------------------
Road, roadway structures and real estate.......... $459 $403 $317
Equipment......................................... 217 84 192
---- ---- ----
Total capital expenditures...................... $676 $487 $509
==== ==== ====
Equipment expenditures for 1993 increased primarily as a result of acquiring
freight cars through purchases rather than through operating leases and
increased information system purchases. Capital roadway expenditures for 1993
increased compared with 1992 primarily due to spending related to the severe
flooding in the Midwest. Spending for signal and communication projects and
new strategic initiatives for transportation network management further
contributed to this increase. The average age of locomotives and freight cars
at year-end 1993 was 14.5 years and 18.6 years compared to 13.5 years and 18.4
years at year-end 1992.
Capital roadway spending in 1992 reflects an increase in track programs in
the Powder River Basin to support BN's coal unit train service, as well as
additional signal and communication projects. Equipment expenditures were
lower in 1992 primarily due to the 1991 purchase of 50 high horsepower
locomotives at a cost of $76 million.
BN projects capital spending for the next few years to be higher than in
previous years partially as a result of certain strategic investments, with a
projection for 1994 of approximately $650 million. 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.
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 operating leases.
BN also anticipates that the majority of the equipment to be financed through
operating leases will consist of the new-technology alternating current
traction motor locomotives. The method used to finance this equipment will
depend upon current market conditions and other factors. During 1993, BN
renewed leases primarily for intermodal doublestack cars and containers, and
locomotives. In 1992, renewals were primarily for covered hoppers,
locomotives and coal cars.
Dividends
Common stock dividends declared have remained constant at $1.20 per common
share for 1993, 1992 and 1991. Dividends paid on common and preferred stock
during these periods were $125 million, $106 million and $92 million,
respectively. The increase in 1993 dividends was primarily attributable to
the issuance of 6,900,000 shares of 6 1/4 percent cumulative convertible
preferred stock in November 1992. The increase in 1992 was due in large part
-11-
<PAGE>
to the issuance of 10,350,000 shares of common stock in November 1991. 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.
Capital structure
BN's ratio of total debt to total capital, excluding redeemable preferred
stock, was 48 percent at the end of both 1993 and 1992 and 62 percent at the
end of 1991. In 1992, the total debt to total capital ratio improved from
1991 because debt was reduced, the 6 1/4 percent cumulative convertible
preferred stock was issued and net income exceeded dividend requirements.
Results of operations
Year ended December 31, 1993 compared with year ended December 31, 1992
BN had net income of $296 million, or $3.06 per common share, on 89.7
million shares for 1993 compared with net income of $278 million, or $3.11 per
common share, on 88.6 million shares for 1992. Results for 1993 included the
effects of severe flooding in the Midwest, most notably in the third quarter.
The floods slowed and often halted operations, forced extensive detours,
increased car, locomotive and crew costs and resulted in extensive rebuilding
of damaged track and bridges. 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. 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, 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. Net income for 1992 included settlement payments received
for the reimbursement of attorneys' fees and costs incurred by BN in
connection with litigation filed by Energy Transportation Systems, Inc., and
others, and reimbursement of a portion of the amount paid by BN in settlement
of that action. The pre-tax amount recorded in other income (expense), net
was approximately $47 million. Also during 1992, BN's net income included a
$21 million, or $.24 per common share, cumulative effect of changes in
accounting methods and a $17 million, or $.19 per common share, favorable tax
settlement with the Internal Revenue Service (IRS).
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<PAGE>
Revenues
During 1993, BN refined Railroad's customer oriented business units by
creating smaller, more focused business units. The following table presents
BN's revenue information by Railroad business unit, and includes
reclassification of prior-year information to conform to current year
presentation:
<TABLE>
<CAPTION>
Revenues Per
Revenues Revenue Ton Miles Revenue Ton Mile
--------------- ------------------ ----------------
1993 1992 1993 1992 1993 1992
------ ------ ------- ------- ---- ----
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal................................. $1,532 $1,520 122,832 117,139 1.25 1.30
Agricultural Commodities............. 784 777 35,451 36,831 2.21 2.11
Intermodal........................... 730 711 23,726 22,749 3.08 3.13
Forest Products...................... 483 489 19,724 20,030 2.45 2.44
Chemicals............................ 405 388 14,625 14,142 2.77 2.74
Consumer Products.................... 257 258 9,052 9,098 2.84 2.84
Minerals Processors.................. 195 180 7,982 7,410 2.44 2.43
Iron & Steel......................... 172 178 8,178 8,086 2.10 2.20
Vehicles & Machinery................. 187 166 2,416 2,165 7.74 7.67
Aluminum, Non-Ferrous Metals & Ores.. 103 108 3,919 4,180 2.63 2.58
Shortlines and other................. (149) (145) (10,566) (9,031) - -
------ ------ ------- -------
Total.............................. $4,699 $4,630 237,339 232,799 1.98 1.99
====== ====== ======= =======
</TABLE>
Coal revenues improved $12 million compared with 1992, primarily as a result
of increased traffic caused by a rise in the demand for electricity. Higher
revenues resulting from volume increases were partially offset by lower yields
arising from competitive pricing pressures in contract renegotiations, traffic
mix and other factors. Additionally, BN estimated lost coal revenues of
approximately $35 million for the third quarter of 1993 as a result of
flood-related problems in July and August which interrupted service to several
utilities.
Agricultural Commodities revenues were $7 million higher than 1992 as
stronger yields were partially offset by lower volumes. Improved yields
resulted from a traffic mix with a greater portion of wheat traffic in 1993.
Stronger export demand, for high-quality wheat grown in regions served by BN,
contributed to a $74 million improvement in wheat revenues. Reduced crop
quality and production problems, stemming from poor planting and growing
conditions, resulted in lower corn volumes and produced a year-over-year
decline in corn revenues of $45 million.
Intermodal revenues were $19 million higher in 1993 compared with 1992. BN
AMERICA (BNA) revenues in 1993 surpassed revenues in 1992 as a result of
continued escalating demand for containerized transportation and an increased
demand for intermodal service due generally to a shortage in truck capacity.
As import traffic expanded and shifted from ports in California to ports
served by BN in the Pacific Northwest, intermodal-international revenues
increased. Domestic trailer revenues declined as trailer traffic continued to
convert to containers, partially offsetting other Intermodal increases.
Chemicals revenues for 1993 were $17 million greater than in 1992.
Increased plastics shipments for existing customers led improvements in
overall Chemicals revenues. Environmental logistics and fertilizer traffic in
1993 surpassed 1992 levels, also contributing to the higher revenues for
Chemicals.
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<PAGE>
Revenues for Minerals Processors increased $15 million compared with 1992.
As drilling activity increased, export traffic for clays and aggregates
expanded, contributing to greater revenues in 1993 than in 1992. Glass
minerals and cement revenues exceeded 1992 levels. This increase was due to
expanded sand traffic, which also benefited from increased drilling activity,
and increased cement traffic, related to certain highway and airport
construction projects.
Vehicles & Machinery revenues were $21 million greater than in 1992. This
improvement was due in part to growth in production and sales of light
vehicles which increased domestic traffic volumes. A rise in demand for heavy
machinery also contributed to greater revenues. Yields increased in 1993
primarily as a result of a decline in the average length of haul.
Forest Products, Iron & Steel and Aluminum, Non-Ferrous Metals & Ores had
lower revenues in 1993 compared with 1992. Current year Forest Products
revenues were $6 million less than in 1992 because of reduced lumber traffic,
resulting from a weak timber industry market, which was partially offset by
increased particle and construction board traffic. Iron & Steel revenues
declined $6 million compared with 1992, primarily due to lower taconite
traffic caused by labor strikes at two large customers. Aluminum, Non-Ferrous
Metals & Ores revenues decreased by $5 million as aluminum production
declined. Revenues for Consumer Products were relatively flat compared with
1992.
Expenses
Total operating expenses for 1993 were $4,038 million compared with $4,033
million for 1992. Despite the adverse effects of the Midwest flooding on
operating expenses during the third quarter of 1993, BN's year-to-date
operating ratio improved one percentage point, to 86 percent, compared with 87
percent for 1992.
Overall compensation and benefits expenses for 1993 remained constant with
1992. Cost of living allowances (COLAs) for union employees were $24 million
lower during 1993 compared with 1992 due to timing differences of vesting
periods. Work force reductions and a decrease in railroad unemployment taxes
lowered expenses in 1993. These savings were offset by increases in incentive
compensation, wages and salaries, and higher costs for union health, welfare
and life insurance benefits. Increased wages were partially caused by a
scheduled three percent basic wage increase effective July 1993 and
inefficiencies associated with the Midwest flooding during 1993.
Fuel expenses were $14 million higher during 1993 compared with 1992,
primarily due to weather-related reductions in fuel efficiency. Increased
fuel consumption due to higher traffic volume was substantially offset by the
decrease in the average price paid for diesel fuel, 61.5 cents per gallon in
1993 compared with 62.2 cents per gallon in 1992. Included in the 1993
average price per gallon is a 4.3 cents per gallon increase in the federal
fuel tax effective October 1, 1993, as part of the Omnibus Budget
Reconciliation Act of 1993. This increased tax added approximately $7 million
to expense in the fourth quarter.
Materials expenses for 1993 increased $5 million compared with 1992. The
combination of flood-related problems and a larger fleet size increased
materials costs for locomotive repairs. Also, safety and protective equipment
expenditures were higher due to continued emphasis of BN's safety programs.
Offsetting these increases were lower car materials expenses.
-14-
<PAGE>
Equipment rents expenses were $6 million higher in 1993 compared with 1992
due to increases in both car-hire expenses and locomotive rentals. A
reduction in car-hire expenses during the first half of 1993, due to improved
utilization of equipment, was more than offset by flood-related inefficiencies
which increased car-hire expenses during the second half of 1993.
Purchased services expenses for 1993 were $8 million higher than in 1992.
Contributing to this increase were cost increases for intermodal logistics,
training, moving and derailments. Lower trackage rights credits, which
reduces purchased services expenses, were received from the Southern Pacific
Transportation Company (SPTC) as the floods reduced SPTC volumes over BN
track. These increases were partially offset by decreases in contracted
locomotive repairs and consultant fees.
Depreciation expense for 1993 was $14 million higher compared with 1992
primarily due to an increase in the asset base.
The $42 million decrease in other operating expenses compared with 1992 was
primarily due to a $35 million decline in costs associated with personal
injury claims. BN has introduced a number of programs to improve worker
safety and counter increasing personal injury costs. Reductions in bad debt
expense and various other costs were partially offset by losses on property
retired due to flood damages and increased moving expenses.
Interest expense declined $41 million in 1993 compared with 1992. This
decline was mainly due to a lower average long-term debt balance outstanding
during 1993 and the refinancing of higher interest rate debt throughout 1992.
Other income (expense), net was $36 million lower in 1993 than in 1992. The
higher 1992 income was due to a first quarter net gain of $47 million for
payments and reimbursements received for the settlement of prior litigation.
This decline was partially offset by an increase in the net gain on property
dispositions in 1993 compared with 1992.
The effective tax rate was 43.2 percent for 1993 compared with 33.8 percent
for 1992. This increase resulted primarily from the retroactive increase,
effective January 1, 1993, in tax rates as part of the Omnibus Budget
Reconciliation Act of 1993. Excluding the retroactive effect of the tax rate
change on deferred tax balances at January 1, 1993, BN's effective tax rate
was 38.2 percent for 1993. Additionally, a favorable tax settlement with the
IRS reduced the 1992 effective tax rate by 3.8 percent.
Year ended December 31, 1992 compared with year ended December 31, 1991
BN had net income of $278 million, or $3.11 per common share, on 88.6
million shares for 1992 compared with a net loss of $320 million, or $4.14 per
common share, on 77.5 million shares for 1991. Results for 1992 were reduced
by $11 million, or $.13 per common share, net of tax, cumulative effect of an
accounting change in revenue recognition method and $10 million, or $.11 per
common share, net of tax, cumulative effect of an accounting change for
postretirement benefits. Results for 1991 included an after-tax special
charge of $442 million, or $5.79 per common share, related to railroad
restructuring costs and increases in liabilities for casualty and
environmental clean-up costs, and an extraordinary loss of $14 million, or
$.18 per common share, net of tax benefits, as a result of early retirement of
debt.
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<PAGE>
The 1991 special charge included the following pre-tax components (in
millions):
Restructuring
Surplus crew position reduction program................ $185
Separation pay program................................. 40
Other
Increase in estimated personal injury costs............ $350
Increase in estimated environmental clean-up costs..... 133
Revenues
During 1993, BN refined Railroad's customer oriented business units by
creating smaller, more focused business units. The following table presents
BN's revenue information by Railroad business unit, and includes
reclassification of prior-year information to conform to current year
presentation:
<TABLE>
<CAPTION>
Revenues Per
Revenues Revenue Ton Miles Revenue Ton Mile
--------------- ------------------ ----------------
1992 1991 1992 1991 1992 1991
------ ------ ------- ------- ---- ----
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal................................. $1,520 $1,554 117,139 119,028 1.30 1.31
Agricultural Commodities............. 777 778 36,831 38,123 2.11 2.04
Intermodal........................... 711 687 22,749 22,191 3.13 3.10
Forest Products...................... 489 469 20,030 18,747 2.44 2.50
Chemicals............................ 388 346 14,142 12,952 2.74 2.67
Consumer Products.................... 258 250 9,098 8,879 2.84 2.82
Minerals Processors.................. 180 184 7,410 7,625 2.43 2.41
Iron & Steel......................... 178 170 8,086 7,615 2.20 2.23
Vehicles & Machinery................. 166 166 2,165 2,209 7.67 7.51
Aluminum, Non-Ferrous Metals & Ores.. 108 103 4,180 3,632 2.58 2.84
Shortlines and other................. (145) (148) (9,031) (8,560) - -
------ ------ ------- -------
Total.............................. $4,630 $4,559 232,799 232,441 1.99 1.96
====== ====== ======= =======
</TABLE>
Coal revenues in 1992 were $34 million below 1991. The decrease included
the effects of a two-day work stoppage during the second quarter. The effects
of the work stoppage were not recovered later in 1992 because of continued
weak demand. Mild weather during the first three quarters of 1992 decreased
demand for coal and slowed traffic compared with the prior year. In addition,
competitive pricing pressures in contract renegotiations and declining cost
indices, on which many coal contract rates are based, also contributed to
lower 1992 revenues.
Revenues for Agricultural Commodities were $1 million less in 1992 than in
1991. The decrease was primarily due to weak export demand for corn in the
latter three quarters of 1992 which contributed to a $36 million reduction
compared with 1991. This decrease was substantially offset by a $34 million
increase in wheat that resulted from strong export shipments during 1992.
The $24 million increase in Intermodal revenues was driven by a $59 million
increase in BNA traffic that was attributable to increased demand for
containerized transportation. A portion of the increase in containerized
transportation was due to a conversion from trailer transportation which
decreased by $24 million compared with 1991.
-16-
<PAGE>
Forest Products revenues increased $20 million compared with 1991. The
increase reflects an improvement in lumber revenues that resulted from good
spring building conditions, favorable movements because of product pricing
pressures and increased demand caused by Hurricane Andrew's destruction.
Pulpmill feedstock revenues also increased because of higher demand for
woodchips. These increases were slightly offset by a decreased demand for
paper and paper products during 1992, partly due to excess supplies of
newsprint.
Revenues for Chemicals were $42 million greater in 1992 than in 1991. The
increase was primarily due to increased plastics shipments from new
contracts. Higher fertilizer and petroleum products revenues were also
contributing factors. Fertilizer traffic improved due to a strong spring
application season and increased shipments at the beginning of the year to
replenish low inventory levels from the fall of 1991. Petroleum products
benefited from a stronger economy in 1992 than in 1991.
Revenues in 1992 for Consumer Products and Iron & Steel both improved by $8
million compared with 1991. The improvement for Consumer Products resulted
from higher bulk food products revenues, due largely from an increased
movement of sugar, and higher frozen foods revenues. Frozen foods revenues
improved over the prior year due largely to increased french fry traffic
resulting from favorable product prices. Iron & Steel revenues improved due
to increased traffic because of two new pipe projects.
Revenues for Minerals Processors, Vehicles & Machinery and Aluminum,
Non-Ferrous Metals & Ores were relatively flat in 1992 compared with 1991.
While Vehicles & Machinery revenues were flat overall, automotive revenues
increased as higher traffic volume more than offset lower yields. Declining
yields reflect the rates used in late 1991 and 1992 long-term contract
renewals, which were influenced by competitive pricing pressures. This
increase in automotive revenues was offset by declines in heavy machinery and
government traffic revenues. The slight decrease in Minerals Processors
revenues was attributable to a weaker demand for glass minerals and cement
products related to the construction and automobile industries. Aluminum,
Non-Ferrous Metals & Ores benefited from a stronger economy in 1992 than in
1991.
Expenses
Total operating expenses for 1992 were $4,033 million compared with expenses
of $4,798 million in 1991. The operating ratio for 1992 was 87 percent
compared with the 1991 ratio of 105 percent. The improvement in operating
expenses was partially attributable to savings in compensation and benefits
and fuel costs. In addition, 1992 results do not include the $708 million (15
percent operating ratio effect in 1991) special charge which was included in
BN's 1991 operating expenses.
Compensation and benefits expenses decreased by $47 million compared with
1991. During 1991, BN recorded a $77 million accrual for union employees'
signing bonuses and for COLAs. The 1992 COLA accruals were $58 million.
Current-year savings of $22 million were also noted in health, welfare and
life insurance benefits due to union contract modifications. Smaller crew
sizes and a full year of reduced pay rates for employees on reserve boards,
which were established in the second half of 1991, also contributed to lower
wages and salaries in 1992. These combined savings were somewhat offset by
increases in mechanical, maintenance crew and other wages. Also, increasing
use of the wage continuation program for injured employees, which was phased
in during 1991, served to further offset the savings.
-17-
<PAGE>
Fuel expenses were $20 million lower than in 1991. In 1992, BN paid 62.2
cents per gallon compared with 65.5 cents in 1991. This lower average fuel
price per gallon resulted in approximately $19 million of the overall
savings. Reduced consumption also contributed slightly to the overall
decrease.
Materials expenses for 1992 were $12 million higher than in 1991. Materials
costs were higher due to increased locomotive repairs during 1992. Increasing
track repair cost and related work equipment repair cost also contributed to
the overall increase.
The $12 million decrease in equipment rents expenses compared with 1991 was
largely due to a decline in locomotive related expenses. Locomotive cost
savings resulted from a renegotiated purchased power agreement and the
expiration, during 1992, of several locomotive leases which were not renewed.
These cost savings were somewhat offset by an increase in car-hire expenses
due to lower 1992 than 1991 recoveries for prior period car-hire overpayments,
which offset car-hire expenses in the period recovered.
Purchased services expenses increased $7 million in 1992 compared with
1991. The increases over 1991 were a result of higher expenses related to
computer programming costs associated with the implementation of several
strategic initiatives, the expansion of a BNA customer service center due to
increased BNA traffic, payments for car repairs and intermodal logistics
costs. These increases were somewhat offset by lower environmental clean-up
expenses, decreased relocation costs, fewer locomotive overhauls and increased
payments from SPTC for trackage rights.
Depreciation expense for 1992 was $9 million lower than in 1991. The
decrease was primarily attributable to reduced depreciation for rail
subsequent to the current-year implementation of an Interstate Commerce
Commission required service life study for rail. The effect of the study on
rail depreciation was to reduce 1992 expense by $28 million. This decrease
was partially offset by increased depreciation, due to a larger asset base.
Other expenses for 1992 was $12 million greater than in 1991. Although
reported injury claims decreased, personal injury expense, excluding wage
continuation costs discussed in compensation and benefits, increased by
approximately $18 million as settlement costs for claims settled increased,
and hearing loss claims continued to develop. Bad debt accruals also
contributed to this increase. Lower derailment expenses and a decline in
moving expenses partially offset this increase.
Interest expense decreased $40 million in 1992 compared with 1991. Lower
market interest rates and reduced commercial paper balances were significant
contributors to this decrease. The reduction of long-term debt and the
refinancing of high interest rate debt, during 1992 and late 1991, added to
the current-year savings. Also, 1991 interest expense included an interest
accrual related to a rate litigation case.
In 1992, BN recorded other income, net of expense, of $41 million versus
other expense, net of income, of $25 million in 1991. The 1992 income is due
primarily to a first quarter net gain of $47 million for payments and
reimbursements received for the settlement of prior litigation. Loss on
investment and loss on sale of receivables were also lower in 1992 than in
1991.
The effective tax rate was 33.8 percent and 37.6 percent in 1992 and 1991,
respectively. The lower 1992 rate was the result of a fourth quarter Appeals
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<PAGE>
Division settlement of IRS audits for the years 1981 through 1985. The total
tax benefit recorded in 1992 was $17 million which reduced the effective tax
rate by 3.8 percent.
Other matters
In October 1991, Railroad entered into an agreement (Crew Consist Agreement
No. 1) with the United Transportation Union (UTU) covering the southern
portion of Railroad's system. Crew Consist Agreement No. 1 provided for crews
on most through-freight trains to consist of one conductor and one engineer
and for crews on all other trains to consist of one brakeman, one conductor
and one engineer.
Under the terms of Crew Consist Agreement No. 1, Railroad offered the
opportunity for voluntary separation from employment in return for severance
payments of up to $60,000 per employee. Remaining conductors or brakemen who,
as a result of Crew Consist Agreement No. 1, were unable to hold a position in
active service, due to relative seniority, were placed on a reserve board.
Employees in reserve status received compensation at a rate equal to either 75
percent of their previous 12-month earnings, or 75 percent of the basic
five-day yard helper rate of pay, whichever is greater, and are required to be
available for return to active service on 15 days' notice. Each UTU member on
the southern portion of Railroad's system received a lump-sum payment of
$1,000 upon ratification of Crew Consist Agreement No. 1.
In May 1993, Railroad entered into an agreement (Crew Consist Agreement No.
2) with the UTU covering approximately 3,400 UTU members in the northern
portion of Railroad's system. Crew Consist Agreement No. 2, which represents
the culmination of the program to eliminate surplus crew positions, was
accrued for in the $185 million restructuring component of the June 1991
special charge. Crew Consist Agreement No. 2 provides for crews on most
through-freight trains to consist of one conductor and one engineer and for
crews on all other trains to consist of one brakeman, one conductor and one
engineer. It is similar to Crew Consist Agreement No. 1, covering the
southern portion of Railroad's system. Each UTU member on the northern
portion of Railroad's system received a one-time lump-sum payment of $5,000,
pursuant to Crew Consist Agreement No. 2.
Under the terms of Crew Consist Agreement No. 2, Railroad offered the
opportunity for voluntary separation from employment in return for severance
payments of up to $80,000 per employee. Conductors and brakemen who choose
not to accept the voluntary separation offer can elect volunteer surplus
status pursuant to which they will receive $60,000 to be paid out over a
period of 18 to 48 months, as each selects. If such employee has not been
recalled to active service by the time such payments cease upon expiration of
the selected period, such employee will remain in volunteer surplus status,
without further compensation or benefits, until recalled to active service.
Employees in volunteer surplus status may be called back to service only after
the individuals in reserve status, within their own subdivided seniority
district, have been recalled. Remaining conductors and brakemen who, as a
result of Crew Consist Agreement No. 2, are not needed in train service, and
who do not elect one of the above severance options, will be placed on a
reserve board.
Employees in reserve status will receive compensation equal to either 75
percent of their previous 12-month earnings, or 75 percent of the basic
five-day yard helper rate of pay, whichever is greater, and are required to be
available for return to active service on 15 days' notice.
-19-
<PAGE>
In October 1993, the UTU elected to adopt Crew Consist Agreement No. 2 for
those southern portion UTU members who were previously covered by Crew Consist
Agreement No. 1. Crew Consist Agreement No. 2 was implemented on the southern
portion of the Railroad's system during the fourth quarter of 1993. Upon
implementation, each of the approximately 3,300 UTU members on the southern
portion of Railroad's system received a one-time lump-sum payment of $4,000,
which was the incremental difference between the $1,000 lump-sum payment
received following ratification of Crew Consist Agreement No. 1 and the amount
received by UTU members following adoption of Crew Consist Agreement No. 2.
Railroad will continue to remove excess positions from train service through
the implementation of Crew Consist Agreement No. 2. Approximately 1,350
excess positions have been removed as a result of employees accepting
severance or voluntary surplus payments. Other excess positions have been
eliminated and personnel formerly in those positions have been assigned to
reserve boards, absorbed through additional train starts and/or utilized in
quality and safety initiatives. Based upon its experience under Crew Consist
Agreement No. 1, Railroad anticipates that the number of employees on reserve
status will decline over time.
In July 1993, the American Train Dispatchers Association ratified an April
agreement which will facilitate the consolidation of all dispatching functions
into a centralized train dispatching office in Fort Worth, Texas by the end of
1995.
Since 1935, BN has participated in the national railroad retirement system
which is separate from the national social security system. Under this
system, an independent Railroad Retirement Board administers the determination
and payment of benefits to all railroad workers. Both BN and its employees
are subject to a tax on employee earnings which is above the normal social
security rate assessed to those who are employed outside the railroad
industry.
Personal injury claims, including work-related injuries to employees, are a
significant expense for the railroad industry. Employees of BN are
compensated for work-related injuries according to the provisions of the
Federal Employers' Liability Act (FELA). FELA's system of requiring finding
of fault, coupled with unscheduled awards and reliance on the jury system, has
resulted in significant increases in expense. The result has been a trend
during the last several years of significant increases in BN's personal injury
expense which reflects the combined effects of increasing medical expenses,
legal judgments and settlements. To improve worker safety and counter
increasing costs, BN has introduced a number of programs to reduce the number
of personal injury claims and the dollar amount of claims settlements which
helped reduce cost in 1993. If these efforts continue to be successful,
future expenses could be further reduced. The total amount of personal injury
expenses (including wage continuation payments) were $216 million, $253
million and $224 million in 1993, 1992 and 1991, respectively. BN is also
working with others through the Association of American Railroads to seek
changes in legislation to provide a more equitable program for injury
compensation in the railroad industry.
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.
-20-
<PAGE>
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 170 sites for which it is being
asked to participate in the clean-up of contaminated material discharged into
the environment. These approximate 170 sites include the PRP sites. BN paid $27
million, $20 million and $21 million during 1993, 1992 and 1991, respectively,
relating to mandatory clean-up efforts, including amounts expended under federal
and state voluntary clean-up programs. At this time, BN expects to spend
approximately $120 million in future years to remediate and restore these sites,
$115 million of which pertains to mandated sites, of which approximately $55
million pertains to the PRP sites. Of the $120 million accrued, BN expects to
spend $38 million during 1994. Also, BN anticipates that the majority of the
$120 million will be paid out over a period of less than 7 years; however, some
costs will be paid out over a longer period, in some cases up to 40 years. In
addition, 19 sites account for approximately $95 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 December 31, 1993, BN had accrued $120 million for estimated
future environmental costs and believes it is reasonably possible, although
not probable, that actual environmental costs could be lower than the recorded
reserve or as much as 50 percent higher. BN's best estimate of unasserted
claims was approximately $5 million as of the end of 1993. 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
-21-
<PAGE>
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.
In November 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 112, "Employers'
Accounting for Postemployment Benefits." This standard requires employers to
recognize benefits provided to former or inactive employees after employment
but before retirement, if certain conditions are met. In the first quarter of
1994, BN will adopt SFAS No. 112. The principal effect of adopting this
standard will be to establish liabilities for long-term and short-term
disability plans. The effect upon earnings to adopt this standard is expected
to be approximately $15 to $20 million. The initial effect of applying this
standard will be reported as the effect of a change in accounting method and
previously issued financial statements will not be restated.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 addresses the
accounting and reporting requirements for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities, and is effective for fiscal years beginning after December 15,
1993. The initial effect of applying this standard is to be reported as the
effect of a change in accounting method and previously issued financial
statements may not be restated. No material effect on BN's financial
condition or results of operations is anticipated from the adoption of SFAS
No. 115.
-22-
<PAGE>
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Operations
Burlington Northern Inc. and Subsidiaries
(Dollars in millions, except per share data)
Year ended December 31, 1993 1992 1991
- - - -----------------------------------------------------------------------------
Revenues........................................... $4,699 $4,630 $4,559
Costs and expenses:
Compensation and benefits........................ 1,709 1,709 1,756
Fuel............................................. 362 348 368
Materials........................................ 300 295 283
Equipment rents.................................. 395 389 401
Purchased services............................... 457 449 442
Depreciation..................................... 352 338 347
Other............................................ 463 505 493
Special charge................................... - - 708
------ ------ ------
Total costs and expenses..................... 4,038 4,033 4,798
------ ------ ------
Operating income (loss)............................ 661 597 (239)
Interest expense................................... 145 186 226
Other income (expense), net........................ 5 41 (25)
------ ------ ------
Income (loss) before income taxes,
extraordinary item and cumulative effect of
changes in accounting methods.................... 521 452 (490)
Income tax expense (benefit)....................... 225 153 (184)
------ ------ ------
Income (loss) before extraordinary item and
cumulative effect of changes in accounting methods 296 299 (306)
Extraordinary item, loss on extinguishment
of debt, net of tax.............................. - - (14)
------ ------ ------
Income (loss) before cumulative effect of changes
in accounting methods............................ 296 299 (320)
Cumulative effect of changes in accounting methods,
net of tax....................................... - (21) -
------ ------ ------
Net income (loss)........................... $ 296 $ 278 $ (320)
====== ====== ======
Earnings (loss) per common share:
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
methods........................................ $ 3.06 $ 3.35 $(3.96)
Extraordinary item............................... - - (.18)
Cumulative effect of changes in accounting methods - (.24) -
------ ------ ------
Earnings (loss) per common share............. $ 3.06 $ 3.11 $(4.14)
====== ====== ======
Number of shares used in computation of earnings
(loss) per common share (in thousands)........... 89,672 88,617 77,462
See accompanying notes to consolidated financial statements.
-23-
<PAGE>
Consolidated Balance Sheets
Burlington Northern Inc. and Subsidiaries
(Dollars in millions)
December 31, 1993 1992
- - - ----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents......................... $ 17 $ 57
Accounts receivable, net.......................... 589 473
Materials and supplies............................ 91 106
Current portion of deferred income taxes.......... 167 144
Other current assets.............................. 27 23
------ ------
Total current assets............................ 891 803
Property and equipment, net......................... 5,909 5,568
Other assets........................................ 245 192
------ ------
Total assets.................................. $7,045 $6,563
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. $ 492 $ 473
Casualty and environmental reserves............... 286 249
Compensation and benefits payable................. 271 321
Taxes payable..................................... 123 128
Accrued interest.................................. 44 41
Other current liabilities......................... 102 101
Current portion of long-term debt................. 185 40
Commercial paper.................................. 26 -
------ ------
Total current liabilities....................... 1,529 1,353
Long-term debt...................................... 1,526 1,527
Deferred income taxes............................... 1,342 1,167
Casualty and environmental reserves................. 426 483
Other liabilities................................... 303 296
------ ------
Total liabilities............................... 5,126 4,826
------ ------
Redeemable preferred stock.......................... - 9
------ ------
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; 88,881,675 shares
and 88,085,632 shares issued, respectively...... 1 1
Additional paid-in capital........................ 1,420 1,385
Retained earnings................................. 198 30
Treasury stock, at cost, 85,536 shares and 61,743
shares, respectively............................ (4) (2)
Other............................................. (33) (23)
------ ------
Total stockholders' equity...................... 1,919 1,728
------ ------
Total liabilities and stockholders' equity...... $7,045 $6,563
====== ======
See accompanying notes to consolidated financial statements.
-24-
<PAGE>
Consolidated Statements of Cash Flows
Burlington Northern Inc. and Subsidiaries
(Dollars in millions)
Year ended December 31, 1993 1992 1991
- - - -----------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss)............................... $ 296 $ 278 $ (320)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary loss............................ - - 14
Cumulative effect of changes in accounting
methods..................................... - 21 -
Depreciation.................................. 352 338 347
Deferred income taxes......................... 156 56 (238)
Special charge................................ - - 708
Changes in current assets and liabilities:
Accounts receivable, net.................... (116) (29) (104)
Materials and supplies...................... 6 2 9
Other current assets........................ (4) 2 (7)
Accounts payable............................ 19 6 (1)
Casualty and environmental reserves......... 32 2 10
Compensation and benefits payable........... (47) 14 (58)
Taxes payable............................... - 28 8
Accrued interest............................ 3 (14) (27)
Other current liabilities................... (2) 4 24
Changes in long-term casualty and environmental
reserves.................................... (57) 16 (14)
Other, net.................................... (60) (44) 17
------ ------ ------
Net cash provided by operating activities... 578 680 368
------ ------ ------
Cash flows from investing activities:
Additions to property and equipment............. (676) (487) (509)
Proceeds from property and equipment
dispositions.................................. 35 34 10
Other, net...................................... (18) (17) (10)
------ ------ ------
Net cash used in investing activities....... (659) (470) (509)
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of preferred stock....... - 337 -
Proceeds from issuance of common stock.......... - - 359
Net increase (decrease) in commercial paper..... 26 (353) 118
Proceeds from issuance of long-term debt........ 224 416 51
Payments on long-term debt...................... (88) (470) (343)
Dividends paid.................................. (125) (106) (92)
Proceeds from exercise of common stock options.. 15 11 12
Redemption of redeemable preferred stock........ (9) (2) (1)
Other, net...................................... (2) (2) (3)
------ ------ ------
Net cash provided by (used in) financing
activities................................ 41 (169) 101
------ ------ ------
Increase (decrease) in cash and cash
equivalents............................. (40) 41 (40)
Cash and cash equivalents:
Beginning of year............................... 57 16 56
------ ------ ------
End of year..................................... $ 17 $ 57 $ 16
====== ====== ======
Supplemental cash flow information:
Interest paid, net of amounts capitalized....... $ 144 $ 197 $ 246
Income taxes paid, net of refunds............... 70 76 52
See accompanying notes to consolidated financial statements.
-25-
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
Burlington Northern Inc. and Subsidiaries
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
Convertible Additional Retained
Preferred Common Paid-in Earnings
Three years ended December 31, 1993 Stock Stock Capital (Deficit)
- - - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1990........................ $ - $ 965 $ - $ 276
Net loss.......................................... (320)
Dividends:
Common stock, $1.20 per share..................... (95)
Redeemable preferred stock, $.55 per share........ (1)
Issuance of common stock (10,350,000 shares)........ 359
Adjustments associated with unearned compensation,
restricted stock (223,850 shares)................. 5
Exercise of stock options and related tax benefit
(573,521 shares).................................. 15
Transfer capital in excess of stated value of
common stock to additional paid-in capital........ (1,343) 1,343
Transfer restricted stock deferred compensation
to unearned compensation, restricted stock........ 14
Other (24,726 shares)............................... (1)
----- ------- ------ -----
Balance at December 31, 1991........................ - 1 1,356 (140)
Net income........................................ 278
Dividends:
Common stock, $1.20 per share..................... (105)
Redeemable preferred stock, $.55 per share........ (1)
Convertible preferred stock, $3.125 per share..... (2)
Issuance of convertible preferred stock (6,900,000
shares)........................................... 337
Adjustments associated with unearned compensation,
restricted stock (214,475 shares)................. 12
Exercise of stock options and related tax benefit
(438,139 shares).................................. 14
Equity adjustment from minimum pension liability....
Other (15,253 shares)............................... 3
----- ------- ------ -----
Balance at December 31, 1992........................ 337 1 1,385 30
Net income.......................................... 296
Dividends:
Common stock, $1.20 per share..................... (106)
Convertible preferred stock, $3.125 per share..... (22)
Adjustments associated with unearned compensation,
restricted stock (232,354 shares)................. 12
Exercise of stock options and related tax benefit
(499,779 shares).................................. 20
Equity adjustment from minimum pension liability....
Other (40,117 shares)............................... 3
----- ------- ------ -----
Balance at December 31, 1993........................ $ 337 $ 1 $1,420 $ 198
===== ======= ====== =====
<CAPTION>
Other
----------------------
Unearned
Compensation, Minimum
Treasury Restricted Pension
Three years ended December 31, 1993 Stock Stock Liability Total
- - - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1990........................ $ - $ - $ - $1,241
Net loss.......................................... (320)
Dividends:
Common stock, $1.20 per share..................... (95)
Redeemable preferred stock, $.55 per share........ (1)
Issuance of common stock (10,350,000 shares)........ 359
Adjustments associated with unearned compensation,
restricted stock (223,850 shares)................. (1) 4
Exercise of stock options and related tax benefit
(573,521 shares).................................. 15
Transfer capital in excess of stated value of
common stock to additional paid-in capital........ -
Transfer restricted stock deferred compensation
to unearned compensation, restricted stock........ (14) -
Other (24,726 shares)............................... (1)
--- ---- ---- ------
Balance at December 31, 1991........................ (1) (14) - 1,202
Net income........................................ 278
Dividends:
Common stock, $1.20 per share..................... (105)
Redeemable preferred stock, $.55 per share........ (1)
Convertible preferred stock, $3.125 per share..... (2)
Issuance of convertible preferred stock (6,900,000
shares)........................................... 337
Adjustments associated with unearned compensation,
restricted stock (214,475 shares)................. (1) (5) 6
Exercise of stock options and related tax benefit
(438,139 shares).................................. 14
Equity adjustment from minimum pension liability.... (4) (4)
Other (15,253 shares)............................... 3
--- ---- ---- ------
Balance at December 31, 1992........................ (2) (19) (4) 1,728
Net income.......................................... 296
Dividends:
Common stock, $1.20 per share..................... (106)
Convertible preferred stock, $3.125 per share..... (22)
Adjustments associated with unearned compensation,
restricted stock (232,354 shares)................. (2) (4) 6
Exercise of stock options and related tax benefit
(499,779 shares).................................. 20
Equity adjustment from minimum pension liability.... (6) (6)
Other (40,117 shares)............................... 3
--- ---- ---- ------
Balance at December 31, 1993........................ $(4) $(23) $(10) $1,919
=== ==== ==== ======
</TABLE>
See accompanying notes to consolidated financial statements.
-26-
<PAGE>
Notes to Consolidated Financial Statements
Burlington Northern Inc. and Subsidiaries
1. Accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of Burlington
Northern Inc. (BNI) and its majority-owned subsidiaries (collectively BN).
The principal subsidiary is Burlington Northern Railroad Company (Railroad).
All significant intercompany accounts and transactions have been eliminated.
Property and equipment
Main line track is depreciated on a group basis using a units-of-production
method. All other property and equipment are depreciated on a straight-line
basis over estimated useful lives. Interstate Commerce Commission (ICC)
regulations require periodic formal studies of ultimate service lives for all
railroad assets. Resulting service life estimates are subject to review and
approval by the ICC. An annual review of rates and accumulated depreciation
is performed and appropriate adjustments are recorded. Significant premature
retirements are recorded as gains or losses at the time of their occurrence,
which would include major casualty losses, abandonments, sales and
obsolescence of assets. Expenditures which significantly increase asset
values or extend useful lives are capitalized. Repair and maintenance
expenditures are charged to operating expense when the work is performed. All
properties are stated at cost.
Materials and supplies
Materials and supplies consist mainly of diesel fuel, repair parts for
equipment and other railroad property and are valued at average cost.
Revenue recognition
Transportation revenues are recognized proportionately as a shipment moves
from origin to destination.
Income taxes
Income taxes are provided based on earnings reported for tax return
purposes in addition to a provision for deferred income taxes. The provision
for income taxes includes deferred taxes determined by the change in the
deferred tax liability, which is computed based on the differences between the
financial statement and tax basis of assets and liabilities as measured by
applying enacted tax laws and rates. Deferred tax expense is the result of
changes in the net liability for deferred taxes. Investment tax credits were
accounted for under the "flow-through" method.
Earnings (loss) per common share
Earnings (loss) per common share are determined by dividing net income,
after deduction of preferred stock dividends, by the weighted average number
of common shares outstanding and common share equivalents. Common share
equivalents were not included in the computation of the loss per common share
in 1991 since their effect would have been antidilutive.
-27-
<PAGE>
Cash and cash equivalents
All short-term investments which mature in less than 90 days when purchased
are considered cash equivalents for purposes of disclosure in the consolidated
balance sheets and consolidated statements of cash flows. Cash equivalents
are stated at cost, which approximates market value.
Reclassifications
Certain prior year data has been reclassified to conform to the current
year presentation. These reclassifications had no effect on previously
reported net income, stockholders' equity or cash flows.
2. Accounts receivable, net
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 December 31, 1993, the agreement allowed for the sale
of accounts receivable up to a maximum of $175 million. The agreement expires
not later than December 1994. Average monthly proceeds from the sale of
accounts receivable were $182 million, $190 million and $269 million in 1993,
1992 and 1991, respectively. At December 31, 1993 and 1992, accounts
receivable were net of $100 million and $189 million, respectively,
representing receivables sold. Included in other income (expense), net were
expenses of $9 million, $11 million and $20 million in 1993, 1992 and 1991,
respectively, relating to the sale. BN maintains an allowance for doubtful
accounts based upon the expected collectibility of all trade accounts
receivable, including receivables sold with recourse. Allowances for doubtful
accounts and recourse on receivables sold of $17 million and $16 million have
been recorded at December 31, 1993 and 1992.
3. Property and equipment, net
Property and equipment, net was as follows (in millions):
December 31, 1993 1992
- - - ----------------------------------------------------------------------------
Road, roadway structures and real estate.......... $7,493 $7,161
Equipment......................................... 2,143 1,965
------ ------
Total cost..................................... 9,636 9,126
Less accumulated depreciation..................... 3,727 3,558
------ ------
Property and equipment, net.................. $5,909 $5,568
====== ======
Certain noncancellable leases were classified as capital leases and were
included in property and equipment. The consolidated balance sheets at
December 31, 1993 and 1992 included $36 million and $35 million, respectively,
of property and equipment under capital leases. The related depreciation was
included in depreciation expense. Accumulated depreciation for property and
equipment under capital leases was $31 million and $29 million at December 31,
1993 and 1992, respectively.
Main line track is depreciated on a group basis using a units-of-production
method. The accumulated depreciation and annual depreciation accrual rates
for railroad assets other than main line track are calculated using a
straight-line method and statistical group measurement techniques, which
closely approximate unit depreciation. The group techniques project
depreciation expense and estimated accumulated depreciation utilizing
-28-
<PAGE>
historical experience and expected future conditions relating to the timing of
asset retirements, cost of removal, salvage proceeds, maintenance practices
and technological changes. In this manner, the net book value of reported
assets reflects estimated remaining asset utility on a historical cost basis.
Due to the imprecision of annual reviews using statistical group
measurement techniques for long-term asset retirement, replacement and
deterioration patterns, BN adjusts accumulated depreciation for significant
differences between recorded accumulated depreciation and computed
requirements. Differences between recorded accumulated depreciation and
computed requirements are recognized prospectively on a straight-line basis.
Under ICC regulations, BN conducts service life studies on an annual basis.
Results of service life studies are recorded over the remaining life of the
asset group studied. During 1993, BN completed service life studies of
equipment and road property. During 1992, the service life studies consisted
of rail. The effect of implementing the results of new service life studies
and similar rate adjustments were to decrease depreciation expense in 1993 by
$2 million compared with 1992 and to decrease depreciation expense in 1992 by
$28 million compared with 1991. In future periods, service life studies will
be conducted on other asset groups as well as these same assets under ICC
requirements. However, the impact of such studies is not determinable at this
time.
In 1993, capitalization of certain software development costs increased as
a result of new strategic initiatives. Capitalization of software development
costs begins upon establishment of technological feasibility. The
establishment of technological feasibility is based upon completion of
planning, design and other technical performance requirements.
Capitalized software development costs are amortized over a seven-year
estimated useful life using the straight-line method. No amortization was
recorded for the year ended December 31, 1993. Unamortized capitalized
software costs were $6 million as of December 31, 1993.
-29-
<PAGE>
4. Debt
Debt outstanding was as follows (in millions):
December 31, 1993 1992
- - - -----------------------------------------------------------------------------
Long-term debt
BNI:
7 1/2% debentures, due 2023........................... $ 150 $ -
8 3/4% debentures, due 2022........................... 200 200
9% debentures, due 1997 to 2016....................... 157 158
7% notes, due 2002.................................... 150 150
Equipment obligations, weighted average rate
of 7.21% and 8.59%, respectively, due 1994 to 2013.. 191 117
Railroad:
Consolidated mortgage bonds, 3 1/5% to 10%,
due serially to 2045................................ 622 673
Equipment and other obligations, weighted
average rate of 7.33% and 7.72%, respectively, due
serially to 2009.................................... 113 139
General mortgage bonds, 3 1/8% and 2 5/8%, due 2000
and 2010, respectively.............................. 62 62
Prior lien railway and land grant bonds, 4%, due 1997 57 57
General lien railway and land grant bonds, 3%,
due 2047............................................ 35 35
First mortgage bonds, series A, 4%, due 1997.......... 24 26
Capitalized lease obligations, weighted average
rate of 8.20% and 7.92%, respectively, expiring 1996
and 2003............................................ 10 13
Income debentures, series A, 5%, due 2006............. 8 8
Commercial paper...................................... 26 -
Unamortized discount.................................... (68) (71)
------ ------
Total............................................... 1,737 1,567
Less:
Current portion of long-term debt..................... 185 40
Commercial paper...................................... 26 -
------ ------
Long-term debt.................................... $1,526 $1,527
====== ======
Railroad maintains an effective program for the issuance, from time to
time, of commercial paper. These borrowings are supported by Railroad's bank
credit agreement, thus outstanding commercial paper balances reduce available
borrowings under this agreement. The bank credit agreement allows borrowings
of up to $500 million on a short-term basis. The agreement is currently
scheduled to expire in November 1994. At Railroad's option, borrowing rates
are based on prime, certificate of deposit or London Interbank Offered rates.
Annual facility fees are 0.25 percent. The maturity value of commercial paper
outstanding at December 31, 1993 was $27 million, leaving a total of $473
million of the credit agreement available, while no commercial paper was
outstanding at December 31, 1992.
The financial covenants of the bank credit agreement require that
Railroad's consolidated tangible net worth, as defined in the agreement, be at
least $1.4 billion, and its debt, as defined in the agreement, cannot exceed
the lesser of 140 percent of its consolidated tangible net worth or $2.5
billion.
-30-
<PAGE>
The agreement contains an event of default arising out of the occurrence
and continuance of a "Change in Control." A "Change in Control" is generally
defined as the acquisition of more than 50 percent of the voting securities of
BNI, which has not been approved by the BNI Board of Directors, a change in
the control relationship between BNI and Railroad, and finally, a "Change in
Control" is deemed to occur when a majority of the seats on the BNI Board of
Directors is occupied by persons who are neither nominated by BNI management
nor appointed by directors so nominated.
The commercial paper program is further summarized as follows (dollars in
millions):
December 31, 1993 1992
- - - -----------------------------------------------------------------------------
Balance at year end............................... $ 26 $ -
Weighted average interest rate.................... 3.55% -
Maximum outstanding during the year............... $ 179 $ 427
Average daily amount outstanding during the year.. $ 41 $ 129
Weighted daily average interest rate during the
year........................................... 3.27% 4.07%
Maturities of commercial paper averaged 4 and 14 days in 1993 and 1992,
respectively.
During December 1993, BNI filed a registration statement with the
Securities and Exchange Commission for the issuance, from time to time, of up
to $500 million aggregate principal amount of debt securities. Net proceeds
from the sale of the debt securities, if any are offered and sold, will be
used to pay down debt or for other general corporate purposes.
BNI acquired equipment which was financed in December 1993 through the
issuance of $78 million of 6.32 percent notes due 1994 to 2012.
In July 1993, BNI issued $150 million of 7 1/2 percent senior unsecured
debentures due 2023 and used the proceeds for general corporate purposes,
including working capital. These debentures were the final borrowing under
the registration statement filed on September 24, 1991 covering the issuance,
from time to time, of up to $500 million aggregate principal amount of debt
securities.
In November 1992, BNI completed a public offering of 6,900,000 shares of
6 1/4 percent cumulative convertible preferred stock at $50 per share. Most
of the $337 million net proceeds from the offering were placed in trust to
fund the redemption of BNI's $300 million 9 5/8 percent notes due 1996. Under
the terms of the indenture, the 9 5/8 percent notes were redeemable at par,
commencing February 1, 1993. The notification for redemption of the 9 5/8
percent notes was issued to holders of the notes in December 1992 with a
redemption date of February 1, 1993. The debt was considered to be
extinguished as of December 31, 1992, because BNI had irrevocably placed
assets in trust, prior to such date, to be used solely to satisfy scheduled
payments of both the interest on and principal of the $300 million 9 5/8
percent notes. The difference between BNI's redemption price and the net
carrying value resulted in an immaterial loss which was recorded in other
income (expense), net in 1992.
-31-
<PAGE>
In July 1992, BNI issued $150 million of 7 percent senior unsecured notes
due 2002. The proceeds were used to retire $100 million of 14 3/4 percent
notes due August 15, 1992 and to reduce outstanding commercial paper
balances. In February 1992, BNI issued $200 million of 8 3/4 percent senior
unsecured debentures due 2022 and used the proceeds to reduce outstanding
commercial paper balances.
Aggregate long-term debt scheduled maturities for 1994 through 1998 and
thereafter are $185 million, $31 million, $25 million, $248 million, $24
million and $1,266 million, respectively.
Substantially all Railroad properties and certain other assets are pledged
as collateral to or are otherwise restricted under the various Railroad
long-term debt agreements.
5. Disclosures about fair value of financial instruments
The estimated fair values of BN's financial instruments at December 31,
1993 and 1992 and the methods and assumptions used to estimate the fair value
of each class of financial instruments held by BN, were as follows:
Cash and short-term investments
The carrying amount approximated fair value because of the short maturity
of these instruments.
Notes receivable
The fair value of notes receivable was estimated by discounting the
anticipated cash flows. Discount rates of 8.7 percent and 10 percent at
December 31, 1993 and 1992, were determined to be appropriate when considering
current U.S. Treasury rates and the credit risk associated with these notes.
Accrued interest payable
The carrying amount approximated fair value as the majority of interest
payments are made semiannually.
Long-term debt and commercial paper
The fair value of BN's long-term debt, excluding unamortized discount, was
primarily based on secondary market indicators. For those issues not actively
quoted, estimates were based on each obligation's characteristics. Among the
factors considered were the maturity, interest rate, credit rating,
collateral, amortization schedule, liquidity and option features such as
optional redemption or optional sinking funds. These features were compared
to other similar outstanding obligations to determine an appropriate increment
or spread, above U.S. Treasury rates, at which the cash flows were discounted
to determine the fair value. The carrying amount of commercial paper
approximated fair value because of the short maturity of these instruments.
Redeemable preferred stock
The fair value of BN's redeemable preferred stock represented the market
value as shown on the New York Stock Exchange at December 31, 1992.
Recourse liability from sale of receivables
It is unlikely that BN would be able to pay a second entity to assume its
recourse obligation. Therefore, the carrying value of the allowance for
doubtful accounts on receivables sold approximated the fair value of the
recourse liability related to those receivables.
-32-
<PAGE>
The carrying amount and estimated fair values of BN's financial instruments
were as follows (in millions):
December 31, 1993 1992
- - - -----------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Cash and short-term investments...... $ 17 $ 17 $ 57 $ 57
Notes receivable..................... 9 11 9 9
Accrued interest payable............. 44 44 41 41
Long-term debt and commercial paper.. 1,805 1,884 1,638 1,646
Redeemable preferred stock........... - - 9 8
Recourse liability from sale of
receivables........................ 4 4 5 5
BN also holds investments in, and has advances to, several unconsolidated
transportation affiliates. It was not practicable to estimate the fair value
of these financial instruments, which were carried at their original cost of
$19 million and $22 million in the December 31, 1993 and 1992 consolidated
balance sheets. There were no quoted market prices available for the shares
held in the affiliated entities, and the cost of obtaining an independent
valuation would have been excessive considering the materiality of these
investments to BN.
In addition, BN has a note receivable, from a shortline railroad, that has
principal payments which are based on traffic volume over a segment of line.
The carrying value of the note was $5 million at December 31, 1993 and 1992.
As it is not practicable to forecast the traffic volume over the remaining
life of the note, it was not included in the notes receivable amount shown
above.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses
the accounting and reporting requirements for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities, and is effective for fiscal years beginning after December 15,
1993. The initial effect of applying this standard is to be reported as the
effect of a change in accounting method and previously issued financial
statements may not be restated. No material effect on BN's financial
condition or results of operations is anticipated from the adoption of SFAS
No. 115.
6. Income taxes
Effective January 1, 1993, BN adopted SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 modifies SFAS No. 96, which established the liability
method of accounting for income taxes, and had been adopted by BN effective
January 1, 1986. BN adopted SFAS No. 109 consistent with the transitional
guidelines of SFAS No. 109. The effect of the adoption was to increase the
current portion of the deferred income tax asset with a corresponding increase
in the noncurrent deferred income tax liability of $26 million at January 1,
1993. There was no effect on net income, stockholders' equity or cash flows.
-33-
<PAGE>
Income tax expense (benefit), excluding the effect of the extraordinary
item and the cumulative effect of changes in accounting methods, was as
follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31, 1993 1992 1991
- - - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ................................... $ 61 $ 82 $ 48
State ..................................... 8 15 6
---- ---- -----
69 97 54
---- ---- -----
Deferred:
Federal ................................... 136 52 (207)
State ..................................... 20 4 (31)
---- ---- -----
156 56 (238)
---- ---- -----
Total.................................... $225 $153 $(184)
==== ==== =====
</TABLE>
Reconciliation of the federal statutory income tax rate to the effective
tax rate, excluding the extraordinary item and the cumulative effect of
changes in accounting methods, was as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1993 1992 1991
- - - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate................. 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit.... 3.4 3.4 3.4
Effect of one percent federal tax rate increase on
deferred tax balances at January 1, 1993........ 5.0 - -
Internal Revenue Service settlement............... - (3.8) -
Other, net........................................ (.2) .2 .2
---- ---- ----
Effective tax rate................................ 43.2% 33.8% 37.6%
==== ==== ====
</TABLE>
The components of deferred tax assets and liabilities were as follows (in
millions):
<TABLE>
<CAPTION>
December 31, 1993 1992
- - - --------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation and amortization....... $(1,667) $(1,540)
Other........................................... (96) (87)
------- -------
Total deferred tax liabilities................ (1,763) (1,627)
------- -------
Deferred tax assets:
Casualty and environmental reserves............. 270 278
Pensions........................................ 45 39
Other........................................... 273 287
------- -------
Total deferred tax assets..................... 588 604
------- -------
Valuation allowance............................. - -
------- -------
Net deferred tax liability.................... $(1,175) $(1,023)
======= =======
Noncurrent deferred income tax liability........ $(1,342) $(1,167)
Current deferred income tax asset............... 167 144
------- -------
Net deferred tax liability.................... $(1,175) $(1,023)
======= =======
</TABLE>
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<PAGE>
As of December 31, 1993, approximately $5 million of alternative minimum
tax credit carryovers with no expiration date are available to offset future
tax liabilities. The alternative minimum tax credits have been fully
recognized for financial accounting purposes. In 1993, tax benefits of $4
million related to the adjustment to recognize a minimum pension liability
were allocated directly to stockholders' equity.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act)
was signed into law. 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, through the date of enactment. A one-time,
non-cash charge of $28 million to income tax expense was recorded as an
adjustment to deferred taxes as of the enactment date and a charge of $1
million to income tax expense was recorded as an adjustment to current income
taxes.
In December 1992, BN received notification that an Appeals Division
settlement of the Internal Revenue Service audits for the years 1981 through
1985 had been approved by the Joint Committee on Taxation. This action
settled all unagreed issues for those years. The tax effect of the settlement
was included in the 1992 tax provision as shown below (in millions, except per
share data):
Current tax expense.............................. $ 2
Deferred tax benefit............................. (19)
----
Total tax benefit.............................. $(17)
====
Increase in earnings per common share............ $.19
====
7. Redeemable preferred stock
On July 15, 1993, BNI redeemed all of the outstanding shares of its $10 Par
Value 5 1/2 percent Cumulative Redeemable Preferred Stock. BNI purchased the
shares for $10.067222 per share or for a total of $9 million, representing the
redemption price of $10 per share plus accrued dividends for the period from
June 2, 1993 to July 15, 1993.
Redeemable preferred stock activity was as follows (dollars in millions):
<TABLE>
<CAPTION>
December 31, 1993 1992 1991
- - - ---------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- - - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year... 899,009 $ 9 1,076,734 $ 11 1,227,673 $ 12
Acquired during year........... 899,009 9 177,725 2 150,939 1
------- -------- --------- -------- --------- --------
Balance at end of year...... - $ - 899,009 $ 9 1,076,734 $ 11
======= ======== ========= ======== ========= ========
</TABLE>
8. Preferred capital stock
No Par Value Preferred Stock, authorized 25,000,000 shares - 6,900,000 shares
issued
In November 1992, BNI issued 6,900,000 shares of 6 1/4 percent Cumulative
Convertible Preferred Stock, Series A No Par Value. The convertible preferred
stock is not redeemable prior to December 26, 1995. Thereafter, the shares
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<PAGE>
may be redeemed at BNI's option, in whole or in part, during the twelve months
beginning November 24 of each year except for 1995 which commences December
26, at the following redemption prices per share: $52.1875 in 1995, $51.875 in
1996, $51.5625 in 1997, $51.25 in 1998, $50.9375 in 1999, $50.625 in 2000,
$50.3125 in 2001, and $50 in 2002 and thereafter. The convertible preferred
stock may be converted, at the option of the holder at any time, into the
number of shares of BNI's common stock equal to the liquidation preference of
each share of convertible preferred stock, $50, divided by the conversion
price of $47 per share of common stock. The convertible preferred
stockholders have no voting rights unless six quarterly dividend payments are
in default. In a default, such stockholders may vote separately as a class
with all other series of the No Par Value Preferred Stock to elect two
additional directors. Voting rights will continue until all arrearages have
been paid. As of December 31, 1993, there had been no such defaults.
Class A Preferred Stock Without Par Value, authorized 50,000,000 shares -
unissued
At December 31, 1993, BNI had available for issuance 50,000,000 shares of
Class A Preferred Stock Without Par Value. The Board of Directors has the
authority to issue such stock in one or more series, to fix the number of
shares and to fix the designations and the powers. On July 10, 1986, the
Board of Directors designated a series of 800,000 shares of Class A Preferred
Stock Without Par Value as Series A Junior Participating Class A Preferred
Stock. On December 19, 1991, the Board of Directors increased the Series A
Junior Participating Class A Preferred Stock designation to 3,000,000 shares.
Each one one-hundredth of a share will have dividend and voting rights
approximately equal to those of one share of common stock of BNI. In
addition, on July 10, 1986, the Board of Directors declared a dividend
distribution of one right for each outstanding share of common stock of BNI.
The rights become exercisable if, without BNI's prior consent, a person or
group acquires securities having 20 percent or more of the voting power of all
of BNI's voting securities or announces a tender offer which would result in
such ownership. Each right, when exercisable, entitles the registered holder
to purchase from BNI one one-hundredth of a share of Series A Junior
Participating Class A Preferred Stock at a price of $190 per one one-hundredth
of a share, subject to adjustment. If, after the rights become exercisable,
BNI were to be acquired through a merger, each right would permit the holder
to purchase, for the exercise price, stock of the acquiring company having a
value of twice the exercise price. In addition, if any person acquires 25
percent or more of BNI (other than as a result of a cash offer for all
shares), each right not owned by the holder of such 25 percent would permit
the purchase, for the exercise price, of stock of BNI having a value of twice
the exercise price. The rights may be redeemed by BNI under certain
circumstances until their expiration date for $.05 per right.
9. Common stock and additional paid-in capital
BNI is authorized to issue 300,000,000 shares of Common Stock Without Par
Value. At December 31, 1993, there were 88,796,139 shares of common stock
outstanding. Each holder of common stock is entitled to one vote per share in
the election of directors and on all matters submitted to a vote of
stockholders. Subject to the rights and preferences of the convertible
preferred stock and any future issuance of additional preferred stock, each
share of common stock is entitled to receive dividends as may be declared by
the Board of Directors out of funds legally available and to share ratably in
all assets available for distribution to stockholders upon dissolution or
liquidation. No holder of common stock has any preemptive right to subscribe
for any securities of BNI.
-36-
<PAGE>
Effective December 1991, the Board of Directors of BNI authorized the
transfer, to additional paid-in capital, of $1,343 million representing
capital in excess of the stated value of common stock.
10. Stock options and other capital stock
Stock options
Under BN's stock option plans, options may be granted to officers and key
salaried employees at fair market value on the date of grant. All options
expire within ten years after the date of grant. BN may also grant stock
appreciation rights (SARs) in tandem with stock options which would be
exercisable during the same period as the options. SARs entitle an option
holder to receive a payment equal to the difference between the option price
and the fair market value of the common stock at the date of exercise of the
SAR. To the extent the SAR is exercised, the related option is cancelled and
to the extent the option is exercised the related SAR is cancelled. Any
change in the current market value over the SARs exercise price would be
recognized at such time as an adjustment to compensation expense. During the
third quarter of 1991, following a change in rules 16(a) and 16(b) promulgated
under the Securities and Exchange Act of 1934, as amended, substantially all
holders of SARs relinquished those rights. As a result, there were no further
adjustments to compensation expense in times of changing market prices after
the year ended December 31, 1991. Adjustments to compensation expense during
the year ended December 31, 1991 were not significant.
Activity in stock option plans was as follows:
Exercise
Options SARs Price per Share
- - - ------------------------------------------------------------------------------
Balance at December 31, 1990...... 2,687,298 1,173,747 $ 6.48 to $34.88
Granted......................... 947,788 45,150 29.88 to 39.88
Exercised....................... (573,533) (86,128) 9.59 to 34.88
Cancelled....................... (158,733) (1,078,543) 15.26 to 34.88
--------- ----------
Balance at December 31, 1991...... 2,902,820 54,226 6.48 to 39.88
Granted......................... 984,515 - 40.88 to 44.24
Exercised....................... (438,500) (54,226) 6.48 to 34.88
Cancelled....................... (197,511) - 20.48 to 44.24
--------- ----------
Balance at December 31, 1992...... 3,251,324 - 10.32 to 44.24
Granted......................... 947,125 - 55.56 to 55.94
Exercised....................... (508,476) - 10.32 to 44.24
Cancelled....................... (54,882) - 22.50 to 55.94
--------- ----------
Balance at December 31, 1993...... 3,635,091 - 12.49 to 55.94
Exercisable at December 31:
1993 2,153,170 - $12.49 to $44.24
1992 1,711,726 - 10.32 to 44.24
1991 1,427,987 31,051 6.48 to 34.88
Available for future grants at December 31:
1993 5,151,315
1992 5,995,545
1991 1,365,314
Shares issued upon exercise of options may be issued from treasury shares
or from authorized but unissued shares.
-37-
<PAGE>
Other capital stock
BN has restricted stock award plans under which up to 1,700,000 common
shares may be awarded to eligible employees and directors of BN. No cash
payment is required by the individual. Shares awarded under the plan may not
be sold, transferred or used as collateral by the holder until the shares
awarded become free of the restrictions, generally by one-thirds on the third,
fourth and fifth anniversaries of the date of grant. All shares still subject
to restrictions are generally forfeited and returned to the plan if the
employee or director's relationship with BN is terminated. If the employee or
director retires, becomes disabled or dies, the restrictions will lapse at
that time. The compensation expense resulting from the award of restricted
stock is valued at the average of the high and low market prices of BNI common
stock on the date of the award, recorded as a reduction of stockholders'
equity, and charged to expense evenly over the service period. Restricted
stock awards under these plans, net of forfeitures, were 232,354, 214,475 and
223,850 shares in 1993, 1992 and 1991, respectively. A total of 870,525,
824,877 and 757,565 restricted common shares were outstanding at December 31,
1993, 1992 and 1991, respectively. Compensation expense was not significantly
affected for all periods presented.
BN also has a stock award plan which provides for grants of shares of
BNI's common stock to full-time employees, excluding officers, based upon
performance. A total of 100,000 shares of common stock has been authorized
for these awards. The shares awarded contain no restrictions and the
recipients have full shareholder rights and privileges. Compensation expense
is based upon the average of the high and low market prices of BNI common
stock on the date of grant. During the years ended December 31, 1993, 1992
and 1991, 5,540, 11,720 and 7,790 shares were awarded under this plan. The
related compensation expense was not significant.
An employee stock purchase plan was adopted in 1992 effective in 1993 as a
means to encourage employee ownership of BNI common stock. A total of 500,000
shares of common stock were authorized for distribution under this plan. The
plan allows eligible BN employees to use the proceeds of incentive
compensation awards to purchase shares of BNI common stock at a discount, as
determined by the BNI Board of Directors, from the market price and may
require that the shares purchased be held for a specific time period as also
determined by the Board of Directors. The difference between the market price
and the employees' purchase price is recorded as additional compensation
expense. During the year ended December 31, 1993, 34,629 shares were awarded
under this plan. The related compensation expense was not significant.
11. Retirement plans
BN has non-contributory defined benefit pension plans covering
substantially all non-union employees. The benefits are based on years of
credited service and the highest five-year average compensation levels.
Contributions to the plans are based upon the projected unit credit actuarial
funding method and are limited to amounts that are currently deductible for
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
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<PAGE>
The funded status of BN plans and the net accrued pension cost reflected
in the consolidated balance sheets were as follows (in millions):
<TABLE>
<CAPTION>
December 31, 1993 1992
- - - -------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................. $ 539 $ 476
===== =====
Accumulated benefit obligation............................................. $ 604 $ 523
===== =====
Projected benefit obligation............................................... $ 740 $ 622
Plan assets, primarily marketable equity and debt securities, at fair value (490) (452)
----- -----
Projected benefit obligation in excess of plan assets...................... 250 170
Unrecognized net loss...................................................... (153) (68)
Unrecognized prior service cost............................................ (6) (6)
Unamortized net transition obligation...................................... (33) (38)
Adjustment required to recognize minimum liability......................... 56 14
----- -----
Net accrued pension cost................................................. $ 114 $ 72
===== =====
</TABLE>
Components of the net pension cost were as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31, 1993 1992 1991
- - - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost, benefits earned during the period.............................. $ 9 $ 10 $ 8
Interest cost on projected benefit obligation................................ 50 52 49
Actual return on plan assets................................................. (57) (36) (66)
Net amortization and deferred amounts........................................ 24 5 32
---- ---- ----
Net pension cost........................................................... $ 26 $ 31 $ 23
==== ==== ====
</TABLE>
Net pension cost for 1993 was lower than 1992 primarily due to a decrease
in the rate of future compensation growth from 6 percent to 5.5 percent. The
changes in pension cost for the two years ended December 31, 1992 were
primarily attributable to the expected year-to-year changes in the discount
rates.
The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the benefit obligations were 7
percent and 5.5 percent at December 31, 1993 and 8.5 percent and 5.5 percent
at December 31, 1992. The expected long-term rate of return on assets was 9.5
percent for 1993 and 10 percent for the other years presented.
BN sponsors a 401(k) thrift and profit sharing plan which covers
substantially all non-union employees. BN matches 35 percent of the first 6
percent of the employees' contributions, which is subject to certain
percentage limits of the employees' earnings, at the end of each quarter.
Depending on BN's performance, an additional matching contribution of 20 to 40
percent can be made at the end of the year. BN's expense was $6 million, $4
million and $6 million in 1993, 1992 and 1991, respectively. Effective
January 1, 1994, BN also sponsors a 401(k) retirement savings plan covering
substantially all union employees which is non-contributory on the part of BN.
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<PAGE>
12. Other benefit plans
Postretirement benefits
Effective January 1, 1992, BN adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." BN provides certain
postretirement health care benefits, payable until age 65, for a small number
of retirees who retired on or before March 1986.
Both the accumulated postretirement benefits obligation and cost
associated with this plan were insignificant. Life insurance benefits are
provided for eligible non-union employees. BN adopted accrual accounting for
the expense of these plans in 1992 by taking a $16 million cumulative effect
charge to income in order to establish a liability for those benefits. BN
pays benefits as claims are processed.
The following table presents the status of the plans and the accrued
postretirement benefit cost reflected in the consolidated balance sheets (in
millions):
December 31, 1993 1992
- - - ------------------------------------------------------------------------------
Health Life Health Life
------ ---- ------ ----
Accumulated postretirement
benefit obligation:
Retirees....................... $1 $13 $2 $12
Fully eligible active
participants................. - 2 - 1
Other active participants...... - 1 - 1
-- --- -- ---
Accrued postretirement benefit cost $1 $16 $2 $14
== === == ===
Components of the postretirement benefit cost were as follows (in
millions):
Year ended December 31, 1993 1992
- - - ------------------------------------------------------------------------------
Health Life Health Life
------ ---- ------ ----
Service cost....................... $- $- $- $-
Interest cost...................... - 1 - 1
-- -- -- --
Net postretirement benefit cost $- $1 $- $1
== == == ==
The discount rate used in determining the benefit obligation was 7 percent
at December 31, 1993 and 8.5 percent at December 31, 1992. The health care
cost trend rate is assumed to decrease gradually from 15 percent in 1994 to 6
percent in 2003 and thereafter. Increasing the assumed health care cost trend
rate by one percentage point in each year would have an insignificant effect
on the accumulated postretirement benefit obligation at December 31, 1993 and
1992 as well as the aggregate of the service and interest cost components in
1993 and 1992.
Under collective bargaining agreements, Railroad participates in
multi-employer benefit plans which provide certain postretirement health care
and life insurance benefits for eligible union employees. Insurance premiums
attributable to retirees, which are expensed as incurred, were $10 million in
1993 and $11 million in both 1992 and 1991.
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<PAGE>
Postemployment benefits
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." This standard requires employers to recognize
benefits provided to former or inactive employees after employment but before
retirement, if certain conditions are met. In the first quarter of 1994, BN
will adopt SFAS No. 112. The principal effect of adopting this standard will
be to establish liabilities for long-term and short-term disability plans.
The effect upon earnings to adopt this standard is expected to be
approximately $15 to $20 million. The initial effect of applying this
standard will be reported as the effect of a change in accounting method and
previously issued financial statements will not be restated.
13. Casualty and environmental reserves
Casualty reserves consist primarily of personal injury claims, including
work-related injuries to employees. Employees of BN are compensated for
work-related injuries according to the provisions of the Federal Employers'
Liability Act. Liabilities for personal injury claims are estimated through
an actuarial model that considers historical data and trends and is designed
to record those costs in the period of occurrence. BN conducts an ongoing
review and analysis of claims and other information to ensure the continued
adequacy of casualty reserves. To the extent costs exceed recorded accruals
they will not materially affect BN's financial condition, results of
operations or liquidity.
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 170 sites for which it is being
asked to participate in the clean-up of contaminated material discharged into
the environment. These approximate 170 sites include the PRP sites. BN paid $27
million, $20 million and $21 million during 1993, 1992 and 1991, respectively,
relating to mandatory clean-up efforts, including amounts
-41-
<PAGE>
expended under federal and state voluntary clean-up programs. At this time, BN
expects to spend approximately $120 million in future years to remediate and
restore these sites, $115 million of which pertains to mandated sites, of which
approximately $55 million pertains to the PRP sites. Of the $120 million
accrued, BN expects to spend $38 million during 1994. Also, BN anticipates that
the majority of the $120 million will be paid out over a period of less than 7
years; however, some costs will be paid out over a longer period, in some cases
up to 40 years. In addition, 19 sites account for approximately $95 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 December 31, 1993, BN had accrued $120 million for estimated
future environmental costs and believes it is reasonably possible, although
not probable, that actual environmental costs could be lower than the recorded
reserve or as much as 50 percent higher. BN's best estimate of unasserted
claims was approximately $5 million as of the end of 1993. 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.
14. Commitments and contingencies
Lease commitments
BN has substantial lease commitments for railroad, highway and data
processing equipment, office buildings and a taconite dock facility. Most of
these leases provide the option to purchase the equipment at fair market value
at the end of the lease. However, some provide fixed purchase price options.
Lease rental expense for operating leases was $175 million, $189 million
and $195 million for the years ended December 31, 1993, 1992 and 1991,
respectively.
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<PAGE>
Minimum annual rental commitments were as follows (in millions):
Capital Operating
Year ended December 31, Leases Leases
- - - --------------------------------------------------------------------
1994......................................... $ 5 $ 169
1995......................................... 4 140
1996......................................... 2 117
1997......................................... - 102
1998......................................... - 101
Thereafter................................... 1 565
--- ------
Total.................................... 12 $1,194
======
Less amount representing interest............ 2
---
Present value of minimum lease payments.. $10
===
In addition to the above, BN also receives and pays rents for railroad
equipment on a per diem basis, which is included in equipment rents.
Other commitments and contingencies
During 1993, BN entered into an agreement to acquire 350 new-technology
alternating current traction motor locomotives. BN accepted delivery of one
locomotive in 1993 and anticipates delivery of between approximately 60 and
100 each year from 1994 through 1997.
BN has two locomotive electrical power purchase agreements, expiring in
1998 and 2001, that currently involve 199 locomotives. Payments required by
the agreements are based upon the number of megawatt hours of energy consumed,
subject to specified take-or-pay minimums. The rates specified in the two
agreements are renegotiable every two years. BN's 1994 minimum commitment
obligation is $48 million. Based on projected locomotive power requirements,
BN's payments in 1994 are expected to be in excess of the minimum. Payments
under the agreements totaled $53 million, $56 million and $55 million in 1993,
1992 and 1991, respectively, which exceeded the applicable minimums in each
year. In 1990, BN entered into a letter of credit for the benefit of a
vendor. This letter of credit is a performance guarantee for up to $15
million in major overhauls to be performed on the power purchase equipment.
In connection with its program to transfer certain rail lines to
independent operators, BN has agreed to make certain payments for services
performed by the operators in connection with traffic that involves the
shortlines and Railroad as carriers. These payments are not fixed in amount,
will vary with such factors as traffic volumes and shortline costs and are not
expected to exceed normal business requirements for services received. These
payments are reflected as reductions to revenue to conform with reporting to
the ICC. Revenues for these joint moves, including amounts applicable to the
independent operator portion of the line haul, are reflected by BN as revenue
from operations.
At December 31, 1993, BN had entered into agreements with fuel suppliers
setting the price of certain quantities of fuel to be obtained by taking
physical delivery from such suppliers in 1994. The average price per gallon
of the approximately 78 million gallons which BN had committed to purchase was
approximately 50 cents per gallon, exclusive of taxes, certain transportation
costs and other charges.
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<PAGE>
There are no other commitments or contingent liabilities which BN believes
would have a material adverse effect on the consolidated financial position,
results of operations or liquidity.
15. Other income (expense), net
Other income (expense), net includes the following (in millions):
Year ended December 31, 1993 1992 1991
- - - -----------------------------------------------------------------------------
Gain on property dispositions..................... $17 $ 3 $ 4
Interest income................................... 6 4 5
Loss on sale of receivables....................... (9) (11) (20)
Litigation settlement agreement................... - 47 -
Loss on investment................................ - - (14)
Miscellaneous, net................................ (9) (2) -
--- ---- ----
Total......................................... $ 5 $ 41 $(25)
=== ==== ====
In the first quarter of 1992, BN entered into a settlement agreement
relating to the reimbursement of attorneys' fees and costs incurred by BN in
connection with litigation filed by Energy Transportation Systems, Inc., and
others, and reimbursement of a portion of the amount paid in prior years by BN
in settlement of that action. Under the terms of the settlement, BN received
approximately $50 million before legal fees.
16. Accounting changes
Effective January 1, 1993, BN adopted SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 modifies SFAS No. 96, which established the liability
method of accounting for income taxes, and had been adopted by BN effective
January 1, 1986. BN adopted SFAS No. 109 consistent with the transitional
guidelines of SFAS No. 109. The effect of the adoption was to increase the
current portion of the deferred income tax asset with a corresponding increase
in the noncurrent deferred income tax liability of $26 million at January 1,
1993. There was no effect on net income, stockholders' equity or cash flows.
In January 1992, the Emerging Issues Task Force of the FASB reached a
consensus that origination of service revenue recognition was not an
acceptable method beginning in 1992 for the freight services industry.
Accordingly, effective January 1, 1992, BN changed its method of revenue
recognition from one which recognized transportation revenue at the
origination point, to a method whereby transportation revenue is recognized
proportionately as a shipment moves from origin to destination. The
cumulative effect, net of a $7 million income tax benefit, of the change on
the prior year's revenue, at the time of adoption, decreased 1992 net income
by $11 million, or $.13 per common share.
In the fourth quarter of 1992, effective January 1, 1992, BN adopted SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and elected immediate recognition of the $16 million transition
obligation. The cumulative effect, net of a $6 million income tax benefit, of
the change on prior years', at the time of adoption, decreased 1992 net income
by $10 million, or $.11 per common share.
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<PAGE>
Financial results for the first quarter of 1992 have previously been
restated for the cumulative effect of the change in accounting method for
revenue recognition, which had previously been reported in other income
(expense), net and for the cumulative effect of the implementation of the
accounting standard for postretirement benefits. There was no material effect
on the second and third quarter, and those quarters were not restated for the
adoption of SFAS No. 106.
17. 1991 Special charge
Included in 1991 results was a pre-tax special charge of $708 million
related to railroad restructuring costs and increases in liabilities for
casualty claims and environmental clean-up costs. The 1991 special charge
included the following components:
Restructuring
This program provided for work force reduction of employees. The
restructuring program and related charge had two components:
. $185 million to provide for employee related costs for the elimination of
surplus crew positions.
. $40 million to provide for employee related costs for a separation program.
Other
. $350 million to increase casualty reserves based on an actuarial valuation
and escalations in both the cost and number of projected hearing loss
claims.
. $133 million to increase environmental reserves based on studies and
analyses of potential environmental clean-up and restoration costs.
The $185 million restructuring component of the special charge was
determined utilizing models projecting traffic, crew starts, through trains
and crew sizes in accordance with the parameters prescribed by the reports of
Presidential Emergency Board #219.
The special charge reduced 1991 net income by $442 million, or $5.79 per
common share.
18. Extraordinary item
The extraordinary loss for 1991 of $14 million, $.18 per common share,
resulted from the loss on redemption of 11 5/8 percent debentures, net of an
$8 million income tax benefit. The 1991 redemption of the 11 5/8 percent
debentures was completed using proceeds from the issuance of common stock.
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<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors of
Burlington Northern Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Burlington
Northern Inc. and Subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1993. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits according to generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Burlington Northern Inc. and Subsidiaries as of December 31, 1993 and 1992,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1993 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
As discussed in Note 16 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1993 and for revenue
recognition and postretirement benefits other than pensions in 1992.
COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
January 17, 1994
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<PAGE>
Quarterly financial data-unaudited
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) QUARTER
- - - -----------------------------------------------------------------------------------------
Fourth Third Second First
------ ------ ------ ------
<S> <C> <C> <C> <C>
1993
Revenues...................................... $1,246 $1,141 $1,142 $1,170
Operating income.............................. 224 121 148 168
Net income (1)................................ 118 24 72 82
Primary earnings per common share (2)......... $ 1.25 $ .21 $ .74 $ .86
Fully diluted earnings per common share (2)(3) 1.21 .21 .74 .85
Dividends declared per common share........... .30 .30 .30 .30
Common stock price:
High........................................ $ 58 $57 1/2 $58 5/8 $ 52
Low......................................... 48 3/4 51 1/8 50 42 1/4
1992
Revenues...................................... $1,196 $1,158 $1,091 $1,185
Operating income.............................. 198 147 104 148
Income before cumulative effect of changes
in accounting methods....................... 111 61 36 91
Cumulative effect of changes in accounting
methods, net of tax (4)..................... - - - (21)
------ ------ ------ ------
Net income (5)................................ $ 111 $ 61 $ 36 $ 70
====== ====== ====== ======
Earnings (loss) per common share: (2)
Income before cumulative effect of
changes in accounting methods............. $ 1.23 $ .68 $ .40 $ 1.04
Cumulative effect of changes in accounting
methods................................... - - - (.24)
------ ------ ------ ------
Primary earnings per common share........... $ 1.23 $ .68 $ .40 $ .80
====== ====== ====== ======
Fully diluted earnings per common share (3). $ 1.22 $ .68 $ .40 $ .80
Dividends declared per common share........... .30 .30 .30 .30
Common stock price:
High........................................ $43 7/8 $39 5/8 $47 1/4 $44 3/4
Low......................................... 35 7/8 33 1/2 36 1/8 38 1/8
</TABLE>
(1) Results for the third quarter of 1993 include the effects of the Omnibus
Budget Reconciliation Act of 1993 (the Act) which was signed into law on
August 10, 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, through the date of enactment. Results
for the third quarter of 1993 also include the effects of the severe
flooding in the Midwest. BN estimates the flooding reduced revenues and
operating income during the quarter by $44 million and $79 million,
respectively, and reduced net income by $49 million, or $.55 per common
share.
(2) Amounts may not total to the annual earnings per share because each quarter
and the year are calculated separately based on average outstanding shares
and common share equivalents during that period.
(3) The higher of average or end of period market price is used to determine
common share equivalents for fully diluted earnings per share. In addition,
the if-converted method is used for convertible preferred stock when
computing fully diluted earnings per common share.
(4) Results for 1992 reflect the cumulative effect of the change in accounting
method for revenue recognition, and the cumulative effect of the
implementation of the accounting standard for postretirement benefits
(Statement of Financial Accounting Standards No. 106). The cumulative
effect of the change in accounting method for revenue recognition decreased
1992 net income by $11 million, or $.13 per common share. The cumulative
effect of the change in accounting method for postretirement benefits
decreased 1992 net income by $10 million, or $.11 per common share, and had
no immediate effect on cash flows.
(5) Results for the fourth quarter of 1992 include a $17 million reduction in
income tax expense as a result of a favorable Internal Revenue Service
settlement which allowed BN to recognize additional depreciation deductions
for income taxes.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Burlington Northern Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
BURLINGTON NORTHERN INC.
By: /s/ GERALD GRINSTEIN
----------------------------------
(Authorized Officer)
Date: October 5, 1994
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