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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/XX/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 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 1-6324
BURLINGTON NORTHERN RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-6034000
(State or other jurisdiction of (I.R.S. Employer 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:
-----------------------------------------------------------
The securities listed below are registered on the New York Stock Exchange.
Title of each class
-------------------
Burlington Northern Inc. Northern Pacific Railway Company
(Now Burlington Northern Railroad Company) Prior Lien Railway and Land
Consolidated Mortgage Bonds Grant 4% Bonds, due 1997
9 1/4 %, Series H, due 2006 General Lien Railway and Land
10%, Series J, due 1997 Grant 3% Bonds, due 2047
6.55%, Series K, due 2020
3.80%, Series L, due 2020 Great Northern Railway Company
3.20%, Series M, due 2045 General Mortgage Bonds
8.15%, Series N, due 2020 3 1/8%, Series O, due 2000
6.55%, Series O, due 2020 2 5/8%, Series Q, due 2010
8.15%, Series P, due 2020
St. Louis-San Francisco Railway
Company
First Mortgage Bonds, 4%,
Series A, due 1997
Income Debentures, 5%,
Series A, due 2006
2
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
--- ---
Class Outstanding
----- -----------
Common Stock, without par value
as of January 31, 1994* 1,000 shares
*Burlington Northern Railroad Company is a wholly owned subsidiary of
Burlington Northern Inc. (BNI) and there is no market data with respect to
such shares.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT PERMITTED BY GENERAL INSTRUCTION J.
3
Table of Contents
-----------------
Item Page
---- ----
Part I 1. Business.......................................... 1
2. Properties........................................ 1
3. Legal Proceedings................................. 8
4. Submission of Matters to a Vote of Security
Holders......................................... 9
Part II 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..................... 9
6. Selected Financial Data........................... 9
7. Management's Narrative Analysis of Results of
Operations...................................... 10
8. Financial Statements and Supplementary Data....... 17
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............. 36
Part III 10. Directors and Executive Officers of the Registrant 36
11. Executive Compensation............................ 36
12. Security Ownership of Certain Beneficial Owners
and Management.................................. 36
13. Certain Relationships and Related Transactions.... 36
Part IV 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 36
NOTE: Part I, Item Four; Part II, Item Six; Part III, Items Ten, Eleven,
Twelve and Thirteen; and Part IV Exhibit 22 have been omitted
pursuant to General Instruction J(1)(a) and (b) of Form 10-K relating
to wholy owned subsidaries.
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PART I
ITEM 1. BUSINESS
AND
ITEM 2. PROPERTIES
Burlington Northern Railroad Company's (Railroad) principal business
activity is railroad transportation. Railroad is the principal subsidiary of
Burlington Northern Inc. (BNI).
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, Railroad refined its customer oriented business units by
creating smaller, more focused business units. The following table presents
Railroad's revenue information by 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):
Year ended December 31,
------------------------------------------
1993 1992 1991
-------- -------- --------
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
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
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Year ended December 31,
------------------------------------------
1993 1992 1991
-------- -------- --------
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
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
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.
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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 Railroad'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.
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.
-3-
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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:
Year ended December 31,
---------------------------------------------------------------
1993 1992 1991 1990 1989*
------- ------- ------- ------- -------
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
*Beginning in 1990, Railroad reduced revenues and mileage for the effects of shortline railroads,
which complete hauls for Railroad. 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:
Year ended December 31,
----------------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
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
Equipment
Railroad 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:
Number of Units
-------------------------
Owned Leased Total
Locomotives: ----- ------ -----
Freight...................................... 581 1,334 1,915
Passenger.................................... - 2 2
Multi-purpose................................ 151 58 209
Switching.................................... 176 18 194
------ ------ ------
Total locomotives.......................... 908 1,412 2,320
====== ====== ======
Freight Cars:
Box-general purpose.......................... 776 2,813 3,589
Box-specially equipped....................... 4,587 689 5,276
Gondola...................................... 4,811 2,013 6,824
Hopper-open top.............................. 7,744 1,210 8,954
Hopper-covered............................... 16,528 12,640 29,168
Refrigerator................................. 3,347 9 3,356
Flat......................................... 3,280 494 3,774
Caboose...................................... 498 - 498
Other........................................ 552 7 559
------ ------ ------
Total freight cars......................... 42,123 19,875 61,998
====== ====== ======
Commuter passenger cars........................ - 141 141
====== ====== ======
In addition to the owned and leased locomotives identified above, Railroad
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.
The average percentage of Railroad'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.
-5-
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During 1993, Railroad entered into an agreement to acquire 350
new-technology alternating current traction motor locomotives. Railroad
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. Railroad accepted delivery of one locomotive during 1993
and anticipates delivery of between approximately 60 and 100 each year from
1994 through 1997.
EMPLOYEES
Railroad employed an average of 30,502 employees in 1993 compared with
31,204 in 1992 and 31,760 in 1991. Railroad'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 Railroad'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 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
-6-
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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 Railroad 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,
Railroad 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. Railroad'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). Coal, one of Railroad's primary commodities, has
experienced significant pressure on rates due to competition from the joint
effort of C&NW/UP and Railroad'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 Railroad.
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ENVIRONMENTAL
Railroad'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 Railroad's corporate
environmental policy, Railroad'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 Railroad's business
operations.
ITEM 3. LEGAL PROCEEDINGS
WHEAT AND BARLEY TRANSPORTATION RATES
In September 1980 a class action lawsuit was filed against Railroad in
United States District Court for the District of Montana (District Court)
challenging the reasonableness of Railroad's export wheat and barley rates.
The class consists of Montana grain producers and elevators. The plaintiffs
sought a finding that Railroad's single car export wheat and barley rates for
shipments moving from Montana to the Pacific Northwest were unreasonably high
and requested damages in the amount of $64 million. In March 1981 the
District Court referred the rate reasonableness issue to the Interstate
Commerce Commission (ICC). Subsequently, the State of Montana filed a
complaint at the ICC challenging Railroad's multiple car rates for Montana
wheat and barley movements occurring after October 1, 1980.
The ICC issued a series of decisions in this case from 1988 to 1991. Under
these decisions, the ICC applied a revenue to variable cost test to the rates
and determined that Railroad owed $9,685,918 in reparations plus interest. In
its last decision, dated November 26, 1991, the ICC found Railroad's total
reparations exposure to be $16,559,012 through July 1, 1991. The ICC also
found that Railroad's current rates were below a reasonable maximum and
vacated its earlier rate prescription order.
Railroad appealed to the United States Court of Appeals for the District of
Columbia Circuit (D.C. Circuit) those portions of the ICC's decisions
concerning the post-October 1, 1980 rate levels. Railroad's primary
contention on appeal was that the ICC erred in using the revenue to variable
cost rate standard to judge the rates instead of Constrained Market
Pricing/Stand Alone Cost principles. The limited portions of decisions that
cover pre-October 1, 1980 rates were appealed to the Montana District Court.
On March 24, 1992, the Montana District Court dismissed plaintiffs' case as
to all aspects other than those relating to pre-October 1, 1980 rates. On
February 9, 1993, the D.C. Circuit served its decision regarding the appeal of
the several ICC decisions in this case. The Court held that the ICC did not
adequately justify its use of the revenue to variable cost standard as
Railroad had argued and remanded the case to the ICC for further
administrative proceedings.
On July 22, 1993, the ICC served an order in response to the D.C. Circuits'
February 9, 1993 decision. In its order, the ICC stated it would use the
Constrained Market Pricing/Stand Alone Cost standards in assessing the
reasonableness of Railroad wheat and barley rates moving from Montana to
Pacific Coast ports from 1978 forward. The ICC assigned the case to the
Office of Hearings to develop a procedural schedule. The parties are now
engaged in discovery.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable-see Table of Contents note.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the outstanding Common Stock of Railroad is owned of record by BNI
and therefore not traded on any market.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable-see Table of Contents note.
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993 COMPARED WITH YEAR ENDED DECEMBER 31, 1992
Railroad had net income of $332 million for 1993 compared with net income of
$334 million 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. Railroad 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. 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 $28 million through the date of
enactment. Railroad recognized a one-time, non-cash charge of $27 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 Railroad in connection with litigation filed by Energy
Transportation Systems, Inc., and others, and reimbursement of a portion of
the amount paid by Railroad in settlement of that action. The pre-tax amount
recorded in other income (expense), net was approximately $47 million. Also
during 1992, Railroad's net income included a $21 million cumulative
effect of changes in accounting methods and a $17 million favorable tax
settlement with the Internal Revenue Service (IRS).
REVENUES
During 1993, Railroad refined its customer oriented business units by
creating smaller, more focused business units. The following table presents
Railroad's revenue information by business unit, and includes reclassification
of prior-year information to conform to current year presentation:
Revenues Per
Revenues Revenue Ton Miles Revenue Ton Mile
--------------- ----------------- ------------------
1993 1992 1993 1992 1993 1992
------ ------ ------ ------ ------ ------
(In Millions) (In Millions) (In Cents)
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
====== ====== ======= =======
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, Railroad estimated lost coal revenues of
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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
Railroad, 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 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
Railroad 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.
Revenues for Minerals Processors increased $15 million when 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 $4,049 million compared with $4,043
million for 1992. Despite the adverse effects of the Midwest flooding on
operating expenses during the third quarter of 1993, Railroad's year-to-date
operating ratio improved one percentage point, to 86 percent, compared with 87
percent for 1992.
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Compensation and benefits expenses for 1993 decreased $3 million compared
with 1992. Cost of living allowances 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
also lowered expenses in 1993. The majority of 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 increase 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 Railroad's safety
programs. Offsetting these increases were lower car materials expenses.
Equipment rents expenses were $15 million higher in 1993 compared with 1992
due to increases in both car-hire expenses and locomotive rentals. Increased
equipment rentals from an affiliate also contributed to this increase. 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 $7 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 Railroad
track. These increases were partially offset by decreases in contracted
locomotive repairs and consultant fees.
Depreciation expense for 1993 was $10 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. Railroad 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 $17 million in 1993 compared with 1992. This
decline was mainly due to a lower average long-term debt balance outstanding
during 1993.
Other income (expense), net was $45 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.
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The effective tax rate was 42.4 percent for 1993 compared with 34.4 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, Railroad's effective tax
rate was 37.9 percent for 1993. Additionally, a favorable tax settlement with
the IRS reduced the 1992 effective tax rate by 3.1 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 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.
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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, Railroad 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 Railroad 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 Railroad 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 Railroad'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, Railroad 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.
Railroad 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.
Railroad'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 Railroad's corporate
environmental policy, Railroad'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 Railroad's business
operations.
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Under the requirements of the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund) and certain other laws,
Railroad is potentially liable for the cost of clean-up of various
contaminated sites identified by the U.S. Environmental Protection Agency and
other agencies. Railroad has been notified that it is a potentially
responsible party (PRP) for study and clean-up costs at a number of sites and,
in many instances, is one of several PRPs. Railroad 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, Railroad 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 Railroad'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. Railroad 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.
Railroad is involved in a number of administrative and judicial proceedings
in which it is being asked to participate in the clean-up of sites
contaminated by material discharged into the environment. Railroad 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, Railroad expects
to spend approximately $120 million in future years to remediate and restore
these sites.
Liabilities for environmental costs represent Railroad's best estimates for
remediation and restoration of these sites and include asserted and unasserted
claims. Railroad's best estimate of unasserted claims was approximately $5
million as of the end of 1993. Although recorded liabilities include
Railroad's best estimates of all costs, without reduction for anticipated
recovery from insurance, Railroad's total clean-up costs at these sites
cannot be predicted with certainty due to various factors such as the extent
of corrective actions that may be required, evolving environmental laws and
regulations, advances in environmental technology, the extent of other PRPs
participation in clean-up efforts, developments in ongoing environmental
analyses related to sites determined to be contaminated, and developments in
environmental surveys and studies of potentially contaminated sites. As a
result, 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
Railroad's consolidated financial position, cash flow or liquidity.
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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, Railroad 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 Railroad's financial
condition or results of operations is anticipated from the adoption of SFAS
No. 115.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
Burlington Northern Railroad Company and Subsidiaries
(Dollars in millions)
Year ended December 31, 1993 1992 1991
- ----------------------- ------ ------ ------
Revenues............................................ $4,699 $4,630 $4,559
Costs and expenses:
Compensation and benefits......................... 1,701 1,704 1,753
Fuel.............................................. 362 348 368
Materials......................................... 300 295 283
Equipment rents................................... 425 410 413
Purchased services................................ 464 457 444
Depreciation...................................... 334 324 340
Other............................................. 463 505 489
Special charge.................................... - - 708
------ ------ ------
Total costs and expenses........................ 4,049 4,043 4,798
------ ------ ------
Operating income (loss)............................. 650 587 (239)
Interest expense.................................... 86 103 136
Other income (expense), net......................... 12 57 (10)
------ ------ ------
Income (loss) before income taxes and cumulative
effect of changes in accounting methods........... 576 541 (385)
Income tax expense (benefit)........................ 244 186 (140)
------ ------ ------
Income (loss) before cumulative effect of changes
in accounting methods............................. 332 355 (245)
Cumulative effect of change in accounting methods,
net of tax........................................ - (21) -
------ ------ ------
Net income (loss)............................. $ 332 $ 334 $ (245)
====== ====== ======
See accompanying notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
Burlington Northern Railroad Company and Subsidiaries
(Dollars in millions)
December 31, 1993 1992
- ------------ ------ ------
ASSETS
Current assets:
Cash and cash equivalents....................... $ 17 $ 57
Accounts receivable, net........................ 591 474
Materials and supplies.......................... 91 106
Current portion of deferred income taxes........ 167 144
Other current assets............................ 23 22
------ ------
Total current assets.......................... 889 803
Property and equipment, net....................... 5,488 5,285
Investments in and advances to affiliates......... 104 133
Other assets...................................... 130 116
------ ------
Total assets.............................. $6,611 $6,337
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................ $ 498 $ 479
Casualty and environmental reserves............. 286 249
Compensation and benefits payable............... 269 319
Taxes payable................................... 131 124
Accrued interest................................ 22 24
Other current liabilities....................... 69 71
Current portion of long-term debt............... 177 37
Commercial paper................................ 26 -
------ ------
Total current liabilities..................... 1,478 1,303
Long-term debt.................................... 702 921
Deferred income taxes............................. 1,329 1,178
Casualty and environmental reserves............... 426 482
Other liabilities................................. 182 217
------ ------
Total liabilities............................. 4,117 4,101
------ ------
Common stockholder's equity:
Common stock, without par value (1,000 shares
authorized, issued and outstanding)........... 1,191 1,190
Retained earnings............................... 1,303 1,046
------ ------
Total common stockholder's equity............. 2,494 2,236
------ ------
Total liabilities and stockholder's equity $6,611 $6,337
====== ======
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Burlington Northern Railroad Company and Subsidiaries
(Dollars in millions)
Year ended December 31, 1993 1992 1991
- ----------------------- ------ ------ ------
Cash flows from operating activities:
Net income (loss)............................... $ 332 $ 334 $(245)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative effect of changes in accounting
methods..................................... - 21 -
Depreciation.................................. 334 324 340
Deferred income taxes......................... 128 25 (259)
Special charge................................ - - 708
Changes in current assets and liabilities:
Accounts receivable, net.................... (117) (30) (104)
Materials and supplies...................... 6 2 9
Other current assets........................ (1) 1 (9)
Accounts payable............................ 19 19 (14)
Casualty and environmental reserves......... 37 2 10
Compensation and benefits payable........... (50) 16 (58)
Taxes payable............................... 7 4 7
Accrued interest............................ (2) (9) (2)
Other current liabilities................... (2) 3 24
Changes in long-term casualty and
environmental reserves...................... (56) 16 (13)
Other, net.................................... (60) (22) (1)
----- ----- -----
Net cash provided by operating activities... 575 706 393
----- ----- -----
Cash flows from investing activities:
Additions to property and equipment............. (530) (469) (355)
Collections from (advances to) affiliates, net.. 29 266 (48)
Proceeds from property and equipment
dispositions.................................. 35 33 57
Other, net...................................... (16) (19) (10)
----- ----- -----
Net cash used in investing activities....... (482) (189) (356)
----- ----- -----
Cash flows from financing activities:
Net increase (decrease) in commercial paper..... 26 (353) 118
Payments on long-term debt...................... (83) (71) (70)
Dividends paid.................................. (75) (50) (125)
Other, net...................................... (1) (2) -
----- ----- -----
Net cash used in financing activities....... (133) (476) (77)
----- ----- -----
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....... $ 92 $ 110 $ 131
Income taxes paid, net of refunds............... 109 163 102
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S EQUITY
Burlington Northern Railroad Company and Subsidiaries
(Dollars in millions)
Amount
Number of -------------------------------------------
Common Common Retained
Three years ended December 31, 1993 Shares Stock Earnings Total
- ----------------------------------- --------- ------ -------- ------
Balance at December 31, 1990........ 1,000 $1,190 $1,132 $2,322
Net loss............................ (245) (245)
Dividends........................... (125) (125)
----- ------ ------ ------
Balance at December 31, 1991........ 1,000 1,190 762 1,952
Net income.......................... 334 334
Dividends........................... (50) (50)
----- ------ ------ ------
Balance at December 31, 1992........ 1,000 1,190 1,046 2,236
Net income.......................... 332 332
Dividends........................... (75) (75)
Capital contribution from parent.... 1 1
----- ------ ------ ------
Balance at December 31, 1993........ 1,000 $1,191 $1,303 $2,494
===== ====== ====== ======
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Burlington Northern Railroad Company and Subsidiaries
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Burlington Northern Railroad Company (Railroad) is a wholly owned
subsidiary of Burlington Northern Inc. (BNI). The consolidated financial
statements include the accounts of Railroad and its majority-owned
subsidiaries. All significant intercompany accounts and transactions between
Railroad and its affiliates 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.
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.
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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, stockholder's 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. Railroad 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.......... $7,342 $7,024
Equipment......................................... 1,784 1,744
------ ------
Total cost..................................... 9,126 8,768
Less accumulated depreciation..................... 3,638 3,483
------ ------
Property and equipment, net.................. $5,488 $5,285
====== ======
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
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, Railroad adjusts accumulated depreciation for
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26
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, Railroad 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, Railroad 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.
4. DEBT
Debt outstanding was as follows (in millions):
December 31, 1993 1992
- ------------ ---- ----
LONG-TERM DEBT
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.................................... (52) (55)
---- ----
Total.............................................. 905 958
Less:
Current portion of long-term debt.................... 177 37
Commercial paper..................................... 26 -
---- ----
Long-term debt................................... $702 $921
==== ====
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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.
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.
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.
Aggregate long-term debt scheduled maturities for 1994 through 1998 and
thereafter are $177 million, $24 million, $18 million, $235 million, $11
million and $466 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 Railroad'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 Railroad, were as follows:
CASH AND SHORT-TERM INVESTMENTS
The carrying amount approximated fair value because of the short maturity
of these instruments.
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28
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 Railroad'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.
RECOURSE LIABILITY FROM SALE OF RECEIVABLES
It is unlikely that Railroad 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.
The carrying amount and estimated fair values of Railroad'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............. 22 22 24 24
Long-term debt and commercial paper.. 957 978 1,013 1,007
Recourse liability from sale of
receivables....................... 4 4 5 5
Railroad 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 $17 million and $16 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 Railroad.
In addition, Railroad 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.
-25-
29
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 Railroad's financial
condition or results of operations is anticipated from the adoption of SFAS
No. 115.
6. INCOME TAXES
Effective January 1, 1993, Railroad 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
Railroad effective January 1, 1986. Railroad 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, stockholder's
equity or cash flows.
Income tax expense (benefit), excluding the cumulative effect of changes in
accounting methods, was as follows (in millions):
Year ended December 31, 1993 1992 1991
- ----------------------- ----- ---- -----
Current:
Federal ................................... $ 102 $138 $ 107
State ..................................... 14 23 12
----- ---- -----
116 161 119
----- ---- -----
Deferred:
Federal ................................... 111 24 (227)
State ..................................... 18 1 (32)
----- ---- -----
129 25 (259)
----- ---- -----
Total.................................... $ 244 $186 $(140)
===== ==== =====
Reconciliation of the federal statutory income tax rate to the effective
tax rate, excluding the cumulative effect of changes in accounting methods,
was as follows:
Year ended December 31, 1993 1992 1991
- ----------------------- ----- ---- -----
Federal statutory income tax rate................. 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit.... 3.5 3.3 3.4
Effect of one percent federal tax rate increase on
deferred tax balances at January 1, 1993....... 4.5 - -
Internal Revenue Service settlement............... - (3.1) -
Other, net........................................ (.6) .2 (1.0)
----- ---- -----
Effective tax rate............................. 42.4% 34.4% 36.4%
===== ==== =====
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30
The components of deferred tax assets and liabilities were as follows (in
millions):
December 31, 1993 1992
- ------------ ------- -------
Deferred tax liabilities:
Accelerated depreciation and amortization...... $(1,616) $(1,510)
Other.......................................... (89) (81)
------- -------
Total deferred tax liabilities............... (1,705) (1,591)
------- -------
Deferred tax assets:
Casualty and environmental reserves............ 267 270
Pensions....................................... 29 28
Other.......................................... 247 259
------- -------
Total deferred tax assets.................... 543 557
------- -------
Valuation allowance............................ - -
------- -------
Net deferred tax liability................. $(1,162) $(1,034)
======= =======
Noncurrent deferred income tax liability........ $(1,329) $(1,178)
Current deferred income tax asset............... 167 144
------- -------
Net deferred tax liability................. $(1,162) $(1,034)
======= =======
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 $28
million through the date of enactment. A one-time, non-cash charge of $27
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, Railroad 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):
Current tax expense.............................. $ 2
Deferred tax benefit............................. (19)
----
Total tax benefit.............................. $(17)
====
7. RETIREMENT PLANS
Railroad participates in BNI's pension plans, which are non-contributory
defined benefit 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 determined by BNI
and are limited to amounts that are currently deductible for tax purposes.
Railroad's pension expense was $26 million, $31 million and $23 million in
1993, 1992 and 1991, respectively. 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.
-27-
31
Railroad participates in a 401(k) thrift and profit sharing plan, sponsored
by BNI, which covers substantially all non-union employees. BNI 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 BNI's consolidated performance, an additional
matching contribution of 20 or 40 percent can be made at the end of the year.
Railroad's expense was $6 million, $4 million and $6 million in 1993, 1992
and 1991, respectively. Effective January 1, 1994, Railroad also participates
in a 401(k) retirement savings plan, sponsored by BNI, which covers
substantially all union employees which is non-contributory on the part of
Railroad.
8. OTHER BENEFIT PLANS
POSTRETIREMENT BENEFITS
Effective January 1, 1992, Railroad adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." BNI provides
certain postretirement health care benefits, payable until age 65, for a small
number of retirees who retired on or before March 1986.
BNI provides life insurance benefits for eligible non-union employees.
Railroad participates in these plans and 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.
Railroad pays benefits as claims are processed. In addition, Railroad's
expense for these plans was approximately $1 million in both 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.
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,
Railroad 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.
9. CASUALTY AND ENVIRONMENTAL RESERVES
Casualty reserves consist primarily of personal injury claims, including
work-related injuries to employees. Employees of Railroad 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. Railroad 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
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32
accruals they will not materially affect Railroad'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, Railroad is potentially liable for the cost of clean-up of various
contaminated sites identified by the U.S. Environmental Protection Agency and
other agencies. Railroad has been notified that it is a potentially
responsible party (PRP) for study and clean-up costs at a number of sites and,
in many instances, is one of several PRPs. Railroad 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, Railroad 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 Railroad'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. Railroad 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.
Liabilities for environmental costs represent Railroad's best estimates
for remediation and restoration of these sites and include asserted and
unasserted claims. Railroad's best estimate of unasserted claims was
approximately $5 million as of the end of 1993. Although recorded liabilities
include Railroad's best estimates of all costs, without reduction for
anticipated recovery from insurance, Railroad'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
Railroad's consolidated financial position, cash flow or liquidity.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Railroad 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.
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33
Lease rental expense for operating leases was $205 million, $222 million
and $211 million for the years ended December 31, 1993, 1992 and 1991,
respectively.
Minimum annual rental commitments were as follows (in millions):
Capital Operating
Year ended December 31, Leases Leases
- ----------------------- ------- ---------
1994......................................... $ 5 $ 209
1995......................................... 4 185
1996......................................... 2 162
1997......................................... - 146
1998......................................... - 145
Thereafter................................... 1 911
--- ------
Total.................................... 12 $1,758
Less amount representing interest............ 2 ======
---
Present value of minimum lease payments.. $10
===
In addition to the above, Railroad 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, Railroad entered into an agreement to acquire 350
new-technology alternating current traction motor locomotives. Railroad
accepted delivery of one locomotive in 1993 and anticipates delivery of
between approximately 60 and 100 each year from 1994 through 1997.
Railroad 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. Railroad's 1994 minimum
commitment obligation is $48 million. Based on projected locomotive power
requirements, Railroad'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, Railroad 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, Railroad 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 Railroad as revenue from operations.
There are no other commitments or contingent liabilities which Railroad
believes would have a material adverse effect on the consolidated financial
position, results of operations or liquidity.
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34
11. OTHER INCOME (EXPENSE), NET
Other income (expense), net includes the following (in millions):
Year ended December 31, 1993 1992 1991
- ----------------------- ---- ---- ----
Gain on property dispositions..................... $19 $ 9 $ 4
Interest income................................... 9 11 5
Loss on sale of receivables....................... (9) (11) (20)
Litigation settlement agreement................... - 47 -
Miscellaneous, net................................ (7) 1 1
--- ---- ----
Total......................................... $12 $ 57 $(10)
=== ==== ====
In the first quarter of 1992, both Railroad and BNI were parties to a
settlement agreement relating to the reimbursement of attorneys' fees and
costs incurred by Railroad 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 Railroad in settlement of that action.
Under the terms of the settlement, Railroad received approximately $50 million
before legal fees.
12. ACCOUNTING CHANGES
Effective January 1, 1993, Railroad 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
Railroad effective January 1, 1986. Railroad 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, stockholder's
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, Railroad 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.
In the fourth quarter of 1992, effective January 1, 1992, Railroad 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.
-31-
35
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.
13. 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 special charge reduced 1991 net income by $442 million.
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14. RELATED PARTY TRANSACTIONS
In addition to various corporate-related transactions with its parent,
BNI, Railroad also rents under operating leases rolling stock and other
property from BN Leasing Corporation (BNLC), a wholly owned subsidiary of
BNI. The following is a summary of balances representing the result of
transactions with related parties (in millions):
December 31, 1993 1992
- ------------ ---- ----
Short-term:
Payable to BNLC for rent associated
with property and equipment....................... $ 8 $ 6
==== ====
Receivable from BNLC for accrued interest associated
with the notes receivable for hub centers and rail
facilities........................................ $ 2 $ 2
==== ====
Long-term:
Receivable from BNI, representing net settlement
account for dividends, taxes and other............ $ 9 $ 43
Notes receivable from BNLC for hub centers.......... 28 28
Note receivable from BNLC for rail facilities....... 41 41
Investments in affiliates........................... 7 7
Receivable from other affiliates.................... 19 14
---- ----
Total investments in and advances to affiliates... $104 $133
==== ====
Railroad recorded the following amounts for transactions with related
parties (in millions):
Year ended December 31, 1993 1992 1991
- ----------------------- ---- ---- ----
Rental expense.......................... $ 39 $ 32 $ 18
Interest income......................... 7 8 3
In prior years, Railroad transferred the Denver and Houston hub centers to
Burlington Northern Railroad Holdings, Inc. (BNRRHI), a wholly owned
subsidiary of Railroad. BNRRHI subsequently sold the hub centers to BNLC.
The hub centers, with a combined book value of $22 million, were sold for the
fair market value of $28 million. BNRRHI received two promissory notes due
October 31, 2000, with interest at 10.05 percent from BNLC for the total sale
price. The notes will be paid off using proceeds generated from rental
payments from Railroad to BNLC for use of the facilities at the rate of $3
million per year. No gain was recorded on the sale of the property.
In prior years, Railroad purchased certain rail facilities at and between
Ortonville, Minnesota and Terry, Montana from the South Dakota Rail
Authority. These properties were subsequently sold to BNLC for the recorded
net book value of the property. Railroad received a promissory note from BNLC
for the purchase price of $41 million. Interest at a rate of 10.0 percent is
due annually. Principal is due at maturity on August 31, 2001. Railroad will
make rental payments of $5 million per year until 2001 for use of these
facilities. No gain or loss was recorded on the sale of the property.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Directors of
Burlington Northern Railroad Company and Subsidiaries
We have audited the consolidated financial statements and financial
statement schedules of Burlington Northern Railroad Company and Subsidiaries
listed in Item 14 of this Form 10-K. These consolidated financial statements
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 Railroad Company 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 12 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
Fort Worth, Texas
January 17, 1994
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QUARTERLY FINANCIAL DATA-UNAUDITED
(Dollars in millions) QUARTER
- --------------------- -------------------------------------------
Fourth Third Second First
------ ----- ------ -----
1993
Revenues.................................. $1,246 $1,141 $1,142 $1,170
Operating income.......................... 220 118 146 166
Net income (1)............................ 125 34 81 92
1992
Revenues.................................. $1,196 $1,158 $1,091 $1,185
Operating income.......................... 196 145 102 144
Income before cumulative effect of changes
in accounting methods (2)............... 128 75 50 102
Cumulative effect of changes in accounting
methods, net of tax..................... - - - (21)
------ ------ ------ ------
Net income (3)............................ $ 128 $ 75 $ 50 $ 81
====== ====== ====== ======
(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 $28 million through the date of enactment. Results for the third
quarter of 1993 also include the effects of the severe flooding in the Midwest. Railroad
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.
(2) 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. The cumulative effect of the change in accounting method for
postretirement benefits decreased 1992 net income by $10 million and had no immediate effect
on cash flows.
(3) 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 Railroad to
recognize additional depreciation deductions for income taxes.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEMS TEN, ELEVEN, TWELVE AND THIRTEEN
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION;
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable - see Table of Contents note.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
Financial Statements:
Consolidated Statements of Operations for the three years
ended December 31, 1993................................ 17
Consolidated Balance Sheets at December 31, 1993 and 1992 18
Consolidated Statements of Cash Flows for the three years
ended December 31, 1993................................ 19
Consolidated Statements of Changes in Common
Stockholder's Equity for the three years ended
December 31, 1993.................................... 20
Notes to Consolidated Financial Statements............... 21
Report of Independent Accountants.......................... 34
Quarterly financial data-unaudited......................... 35
Consolidated Financial Statement Schedules for the three
years ended December 31, 1993:
Schedule V-Property, Plant And Equipment................. 40
Schedule VI-Accumulated Depreciation, Depletion,
And Amortization of Property, Plant And Equipment...... 41
Schedule VIII-Valuation And Qualifying Accounts.......... 42
Schedule X-Supplementary Income Statement Information.... 43
Schedules other than those listed above are omitted for the reason that they
are not required or not applicable, or the required information is included in
the consolidated financial statements or related notes.
-36-
40
Exhibit Index
The following exhibits are filed as part of this report.
Exhibit Page
Number Description Number
- ------- ----------- ------
3.1 Certificate of Incorporation of Burlington Northern **
Railroad Company as amended through July 20, 1987.
3.2 By-Laws of Burlington Northern Railroad Company **
as amended through July 17, 1991.
4.1 The Company has either previously filed with the *
Securities and Exchange Commission or upon request will
furnish a copy of any instrument with respect to the
long-term debt of the Company (1989 Form 10-K, filed
March 1990).
10.1 Trade Receivables Purchase and Sale Agreement, dated as *
of December 15, 1989, as amended by Amendment dated as
of December 15, 1989, by and among Burlington Northern
Railroad Company, Corporate Asset Funding Company, Inc.
and Citicorp North America, Inc. (1989 Form 10-K
Amendment No. 1, filed March 1990).
10.2 Trade Receivables Purchase and Sale Agreement, dated as *
of December 15, 1989, as amended by Amendment dated
as of December 15, 1989, by and among Burlington
Northern Railroad Company, the banks parties thereto and
Citicorp North America, Inc. (1989 Form 10-K
Amendment No. 1, filed March 1990).
10.3 $500,000,000 Competitive Advance Facility and Revolving *
Credit Facility Agreement, dated October 18, 1991,
between Burlington Northern Railroad Company and a
consortium of lenders (Form 10-Q for the quarter ended
September 30, 1991, filed October 1991).
10.4 Employment Agreement, dated as of September 4, 1990, by *
and between Burlington Northern Railroad Company
and Mr. John T. Chain (1990 Form 10-K, filed
March 1991).
10.5 Employment Agreement, dated as of September 18, 1991, by *
and between Burlington Northern Railroad Company
and Mr. Richard A. Russack (1991 Form 10-K, filed
February 1992).
* Exhibit is incorporated by reference as indicated.
** Exhibit is filed with Form 10-K for the year ended December 31, 1993.
-37-
41
REPORTS ON FORM 8-K
During the fourth quarter of 1993, there were no reports filed on Form
8-K.
-38-
42
SIGNATURES
Pursuant to the requirements of 13 or 15(d) of the Securities Exchange Act
of 1934, Burlington Northern Railroad Company has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
BURLINGTON NORTHERN RAILROAD COMPANY
By /s/ GERALD GRINSTEIN
------------------------------------
Gerald Grinstein,
Chairman and Chief Executive Officer
Date February 14, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Burlington
Northern Railroad Company and in the capacities and on the dates indicated.
/s/ GERALD GRINSTEIN Chairman and
- ------------------------- Chief Executive Officer February 14, 1994
Gerald Grinstein
/s/ DAVID C. ANDERSON Executive Vice President and
- ------------------------- Chief Financial Officer February 14, 1994
David C. Anderson
/s/ DON S. SNYDER Vice President, Controller and
- ------------------------- Chief Accounting Officer February 14, 1994
Don S. Snyder
/s/ EDMUND W. BURKE Director
- ------------------------- February 14, 1994
Edmund W. Burke
/s/ WILLIAM E. GREENWOOD Director
- ------------------------- February 14, 1994
William E. Greenwood
-39-
43
SCHEDULE V
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN MILLIONS)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Balance Balance
at Beginning Additions at End
Classification of Period at Cost Retirements Other(1) of Period
-------------- ------------ --------- ----------- -------- ---------
DECEMBER 31, 1993:
Road, roadway structures and real estate... $7,024 $455 $145 $ 8 $7,342
Equipment.................................. 1,744 75 40 5 1,784
------ ---- ---- --- ------
Total...................................... $8,768 $530 $185 $13 $9,126
====== ==== ==== === ======
DECEMBER 31, 1992:
Road, roadway structures and real estate... $6,759 $401 $152 $16 $7,024
Equipment.................................. 1,748 68 73 1 1,744
------ ---- ---- --- ------
Total...................................... $8,507 $469 $225 $17 $8,768
====== ==== ==== === ======
DECEMBER 31, 1991:
Road, roadway structures and real estate... $6,713 $313 $279 $12 $6,759
Equipment.................................. 1,757 42 52 1 1,748
------ ---- ---- --- ------
Total...................................... $8,470 $355 $331 $13 $8,507
====== ==== ==== === ======
(1) Relates primarily to reused track materials from Materials and Supplies inventory used for additions to
property.
See accompanying notes to consolidated financial statements
for information regarding depreciation methods and other matters.
-40-
44
SCHEDULE VI
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN MILLIONS)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Balance Additions Balance
at Beginning Charged at End
Classification of Period to Income Retirements Other(1) of Period
-------------- ------------ --------- ----------- -------- ---------
DECEMBER 31, 1993:
Road, roadway structures and real estate.. $2,565 $257 $ 83 $(62) $2,677
Equipment................................. 918 77 28 (6) 961
------ ---- ---- ---- ------
Total..................................... $3,483 $334 $111 $(68) $3,638
====== ==== ==== ==== ======
DECEMBER 31, 1992:
Road, roadway structures and real estate.. $2,483 $241 $ 88 $(71) $2,565
Equipment................................. 896 83 53 (8) 918
------ ---- ---- ---- ------
Total..................................... $3,379 $324 $141 $(79) $3,483
====== ==== ==== ==== ======
DECEMBER 31, 1991:
Road, roadway structures and real estate.. $2,464 $265 $158 $(88) $2,483
Equipment................................. 867 75 38 (8) 896
------ ---- ---- ---- ------
Total..................................... $3,331 $340 $196 $(96) $3,379
====== ==== ==== ==== ======
(1) Relates primarily to estimated net book value of retirements plus the cost to remove property before
determination of excess depreciation on assets retained.
See accompanying notes to consolidated financial statements
for information regarding depreciation methods and other matters.
-41-
45
SCHEDULE VIII
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN MILLIONS)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions Charged Balance at
Description Beginning of Period to Income Deductions(1) End of Period(2)
----------- ------------------- ----------------- ------------- ----------------
DECEMBER 31, 1993:
Casualty and environmental reserves.. $731 $261 $280 $712
==== ==== ==== ====
DECEMBER 31, 1992:
Casualty and environmental reserves.. $713 $312 $294 $731
==== ==== ==== ====
DECEMBER 31, 1991:
Casualty and environmental reserves.. $219 $798 $304 $713
==== ==== ==== ====
Notes:
(1) Principally represents cash payments.
(2) Classified in the consolidated balance sheets as follows:
1993 1992 1991
---- ---- ----
Casualty and environmental reserves
(current liabilities)............ $286 $249 $247
Casualty and environmental reserves
(noncurrent liabilities)......... 426 482 466
---- ---- ----
$712 $731 $713
==== ==== ====
-42-
46
SCHEDULE X
BURLINGTON NORTHERN RAILROAD COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN MILLIONS)
Column A Column B
-------- --------
Charged to
Costs and
Item Expenses
---- ----------
1993:
Maintenance and repairs.......................... $1,765
Taxes, other than payroll and income taxes:
Property....................................... 73
Other.......................................... 31
1992:
Maintenance and repairs.......................... $1,748
Taxes, other than payroll and income taxes:
Property....................................... 72
Other.......................................... 33
1991:
Maintenance and repairs.......................... $1,781
Taxes, other than payroll and income taxes:
Property....................................... 71
Other.......................................... 37
Note: Items omitted are either less than one percent of consolidated revenues or are disclosed elsewhere
in the consolidated financial statements or notes thereto.
-43-
47
Exhibit Index
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
3.1 Certificate of Incorporation of Burlington Northern
Railroad Company as amended through July 20, 1987.
3.2 By-Laws of Burlington Northern Railroad Company
as amended through July 17, 1991.