EXHIBIT 10.31 TRUST AGREEMENT TRUST AGREEMENT made and entered into as of the __________ day of _______________, 199 _____, by and between Santa Fe Pacific Corporation, a corporation organized under the laws of the State of Delaware hereinafter referred to as the ("Company") and THE BANK OF NEW YORK, a New York banking corporation (hereinafter referred to as the "Trustee"). WHEREAS, the Company has established the Santa Fe Pacific Supplemental Retirement and Savings Plan (as from time to time amended, the "Plan") as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees from time to time participating in the Plan; and WHEREAS, under the Plan, the Company is required to pay Benefits to the Participants or their Beneficiaries; and WHEREAS, the Company intends from time to time to contribute cash (or other property reasonably acceptable to the Trustee), which cash or property will, as and when received by the Trustee, constitute a trust fund to aid the Company in meeting its obligations to make payments of Benefits to Participants and Beneficiaries under the Plan and to assure that such obligations are met after a Change in Control; and WHEREAS, the establishment of this Trust shall not affect the Company's continuing obligation to make payments to Participants and Beneficiaries under the Plan except that the Company's liability thereunder shall be offset by actual payments made on its behalf by the Trustee hereunder; and WHEREAS, the Company intends that the Trust Fund shall be held by the Trustee and invested, reinvested and distributed all in accordance with the provisions of this Trust Agreement; and WHEREAS, the Plan provides, and the Company intends, that the assets of the Trust Fund shall be and remain subject to the claims of the Company's creditors as herein provided and that the plan not be deemed funded solely by virtue of the existence of this Trust; and WHEREAS, the Trust is intended to be a "grantor trust" with the result that the corpus and income of the Trust are treated as assets and income of the Company pursuant to Sections 671 through 679 of the Code; and WHEREAS, the Company intends that the Plan not be deemed funded within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), despite the existence of this Trust; and WHEREAS, the Trust shall initially be revocable but shall become irrevocable upon the occurrence of a Change in Control.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Trustee declare and agree as follows: 1. DEFINITIONS; ESTABLISHMENT OF TRUST 1.1. Definitions. Whenever used in this Trust Agreement, unless otherwise provided or the context otherwise requires. (a) "Account" shall mean the account established in the Trust Fund with respect to a Participant in accordance with Section 3.1 hereof. (b) "Administrator" shall mean the individual, individuals or committee appointed by the Board of Directors of the
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Trustee declare and agree as follows: 1. DEFINITIONS; ESTABLISHMENT OF TRUST 1.1. Definitions. Whenever used in this Trust Agreement, unless otherwise provided or the context otherwise requires. (a) "Account" shall mean the account established in the Trust Fund with respect to a Participant in accordance with Section 3.1 hereof. (b) "Administrator" shall mean the individual, individuals or committee appointed by the Board of Directors of the Company to control and manage the operation and administration of the plan. (c) "Affiliate" shall mean any person, corporation or other entity which the Company shall have advised the Trustee in writing is a subsidiary or affiliate of the Company or its successor which owns 20% or more of the voting securities of the Company. (d) "Authorized Officer" shall mean the Chairman, President, and Vice President, the Secretary or the Treasurer of the Company or any other person or persons as may be designated by any such officer. (e) "Beneficiary" shall mean the beneficiary of a Participant as set forth on the Payment Schedule or as thereafter changed in accordance with this Trust Agreement and which is in effect on the date of the Participant's death. If no designated beneficiary survives the Participant or if no Beneficiary is designated as provided herein, the legal representative of the Participant's estate shall be the Beneficiary. If a designated beneficiary survives the Participant but dies before payment in full of Benefits from the Trust has been made, the legal representative of such beneficiary's estate shall become the Beneficiary. References to a Participant in this Trust Agreement in connection with payments hereunder shall also refer to such Participant's Beneficiary unless the context clearly requires otherwise. (f) "Benefits" shall mean the payments required to be made to a Participant or his Beneficiary pursuant to a Payment Schedule. (g) "Change in Control" shall have the meaning assigned to such term by Section 6.2 hereof. (h) "Code" shall mean the Internal Revenue Code of 1986 as from time to time amended. (i) "Company" shall mean Santa Fe Pacific Corporation or its successors. (j) "Final Determination" shall mean (i) an assessment of tax by the Internal Revenue Service addressed to the Participant of his Beneficiary which is not timely appealed to
the courts; (ii) a final determination by the United States Tax Court or any other Federal Court, the time for an appeal thereof having expired or been waived; or (iii) an opinion by the Company's counsel, addressed to the Company and the Trustee and in form and substance satisfactory to the Trustee, to the effect that amounts held in the Trust are subject to Federal income tax tot he Participant or his Beneficiary prior to payment. Notwithstanding the foregoing, no Final Determination shall be deemed to have occurred until the Trustee has actually received a copy of the assessment, court order or opinion which forms the basis thereof and such other documents as it may reasonably request. (k) "Incumbency Certificate" shall mean a certificate of the Secretary of any Assistant Secretary of the Company identifying the Administrator (or every meager thereof if the Administrator consists of more than one person) and each Authorized Officer, which certificate shall include the name, title and specimen signature of each such person and any changes thereto. (l) "Insolvent" with respect to the Company means that (i) the Company is unable to pay its debts generally as
the courts; (ii) a final determination by the United States Tax Court or any other Federal Court, the time for an appeal thereof having expired or been waived; or (iii) an opinion by the Company's counsel, addressed to the Company and the Trustee and in form and substance satisfactory to the Trustee, to the effect that amounts held in the Trust are subject to Federal income tax tot he Participant or his Beneficiary prior to payment. Notwithstanding the foregoing, no Final Determination shall be deemed to have occurred until the Trustee has actually received a copy of the assessment, court order or opinion which forms the basis thereof and such other documents as it may reasonably request. (k) "Incumbency Certificate" shall mean a certificate of the Secretary of any Assistant Secretary of the Company identifying the Administrator (or every meager thereof if the Administrator consists of more than one person) and each Authorized Officer, which certificate shall include the name, title and specimen signature of each such person and any changes thereto. (l) "Insolvent" with respect to the Company means that (i) the Company is unable to pay its debts generally as they come due and/or (ii) the Company is subject to a pending proceedings as a debtor under the Federal Bankruptcy Code or any successor statute. (m) "Investment Guideline" shall mean the Investment Guidelines in effect pursuant to Section 2.2. (n) "Participant" shall mean at the time of determination, an employee of the Company participating in the Plan with respect to whom a Payment Schedule is then in effect and for whom an Account is then in existence. (o) "Payment Schedule" shall mean, collectively, the list of Participants in the form of Exhibit A and the schedule of Benefits payable from the Trust Fund to such Participants in the form of Exhibit A-1 or any amendment or substitution thereof as may be provided to the Trustee by the Company prior to a Change in Control in accordance with Section 4.5 of this Trust Agreement. (p) "Plan Year" shall mean the fiscal year ending on the last day of the calendar year. (q) "Potential Change in Control" shall exist during any period in which any of the following circumstances described in items (i), (ii), (iii) or (iv), below, exist (provided, however, that a Potential Change in Control shall cease to exist not later than the occurrence of a Change in Control): (i) The Company or any successor or assign thereof enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; provided that a Potential Change in Control described in this item (i) shall cease to exist upon the expiration or other termination of all such agreements.
(ii) Any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control; provided that a Potential Change in Control described in this item (ii) shall cease to exist upon the withdrawal of such intention, or upon a reasonable determination by the directors that there is no reasonable chance that such actions would be consummated. (iii) Any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (other than the Company or The Atchison, Topeka and Santa Fe Railway Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or The Atchison, Topeka and Santa Fe Railway Company, or any corporation, owned, directly or indirectly, by the stockholders of the Company or The Atchison, Topeka and Santa Fe Railway Company in substantially the same proportions as their ownership of stock of the Company or The Atchison, Topeka and Santa Fe Railway company) is the beneficiary owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities. However, a Potential Change in Control shall not be deemed to exist by reason of ownership of securities of the Company by any person, to the extent that such securities of the Company are acquired pursuant to a reorganization, recapitalization, spin-off or other similar transactions (including a series of prearranged related transactions) to the extent that immediately after such transaction or transactions, such securities are directly or indirectly owned in substantially the same proportions as the proportions of ownership of the company's securities immediately prior to the transaction or
(ii) Any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control; provided that a Potential Change in Control described in this item (ii) shall cease to exist upon the withdrawal of such intention, or upon a reasonable determination by the directors that there is no reasonable chance that such actions would be consummated. (iii) Any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (other than the Company or The Atchison, Topeka and Santa Fe Railway Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or The Atchison, Topeka and Santa Fe Railway Company, or any corporation, owned, directly or indirectly, by the stockholders of the Company or The Atchison, Topeka and Santa Fe Railway Company in substantially the same proportions as their ownership of stock of the Company or The Atchison, Topeka and Santa Fe Railway company) is the beneficiary owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities. However, a Potential Change in Control shall not be deemed to exist by reason of ownership of securities of the Company by any person, to the extent that such securities of the Company are acquired pursuant to a reorganization, recapitalization, spin-off or other similar transactions (including a series of prearranged related transactions) to the extent that immediately after such transaction or transactions, such securities are directly or indirectly owned in substantially the same proportions as the proportions of ownership of the company's securities immediately prior to the transaction or transactions. (iv) The Board adopts a resolution to the effect that, for purposes of this Trust, a Potential Change in Control exists; provided that a Potential Change in Control described in this item (iv) shall cease to exist upon a reasonable determination by the Board that the reasons that gave rise to the resolution providing for the existence of a Potential Change in Control have expired or no longer exist. Notwithstanding the foregoing definition, no Potential Change in Control shall be deemed to have occurred for purposes of this Trust Agreement unless and until the Trustee has actual knowledge from a Reliable Source, not including a Participant, of such Potential Change in Control. (r) "Reliable Source" shall mean (i) a report filed with the Securities and Exchange Commission, (ii) a public statement issued by the Company, or a periodical of general circulation, including, but not limited to, The New York Times or The Wall Street Journal, or (iii) a certificate of the Company signed by the Chief Executive Officer or by the Chairman of the Board of Directors. (s) "Termination" shall mean a Participant's termination of employment with
the Company or its affiliates. (t) "Termination Affidavit" shall mean an affidavit of a Participant in the form annexed hereto as Exhibit C. (u) "Trust" shall mean the Trust established under this Trust Agreement. (v) "Trust Agreement" shall mean this trust agreement as from time to time amended. (w) "Trust Fund" shall mean the trust fund held from time to time by the Trustee hereunder consisting of all contributions received by the Trustee together with the investments and reinvestments made therewith and all net profits and earnings thereon less all payments and charges therefrom. 1.2. Establishment and Title of the Trust. The Company hereby established with the Trustee a trust to be known as the "SFP Trust", consisting of such sums of money (and other property reasonably acceptable to the Trustee) as from time to time shall be paid or delivered to the Trustee. The Trustee acknowledges the receipt of $1,000.00 (the property listed on Schedule A) representing the initial contribution to the Trust. The Trust Fund shall be held by the trustee in trust and shall be dealt with in accordance with the provisions of this Trust Agreement. The Company shall at all times have the power to reacquire the Trust Fund by substituting readily marketable securities of equivalent value, net of any
the Company or its affiliates. (t) "Termination Affidavit" shall mean an affidavit of a Participant in the form annexed hereto as Exhibit C. (u) "Trust" shall mean the Trust established under this Trust Agreement. (v) "Trust Agreement" shall mean this trust agreement as from time to time amended. (w) "Trust Fund" shall mean the trust fund held from time to time by the Trustee hereunder consisting of all contributions received by the Trustee together with the investments and reinvestments made therewith and all net profits and earnings thereon less all payments and charges therefrom. 1.2. Establishment and Title of the Trust. The Company hereby established with the Trustee a trust to be known as the "SFP Trust", consisting of such sums of money (and other property reasonably acceptable to the Trustee) as from time to time shall be paid or delivered to the Trustee. The Trustee acknowledges the receipt of $1,000.00 (the property listed on Schedule A) representing the initial contribution to the Trust. The Trust Fund shall be held by the trustee in trust and shall be dealt with in accordance with the provisions of this Trust Agreement. The Company shall at all times have the power to reacquire the Trust Fund by substituting readily marketable securities of equivalent value, net of any costs of disposition (other than securities issued by the Company or any Affiliate), and such other property shall, following such substitution, constitute the Trust Fund. 1.3. Acceptable by the Trustee. The Trustee accepts the Trust established hereunder on the terms and conditions set forth herein and agrees to perform the duties imposed on it by this Trust Agreement. 1.4. Incumbency Certificates. The Secretary or any Assistant Secretary of the Company, pursuant to authorization of the Board of Directors of the Company, will promptly deliver an Incumbency Certificate to the Trustee with respect to the Administrator (or every member thereof if the Administrator consists of more than one person) and each Authorized Officer and any changes thereto. The Trustee shall be entitled to rely on the identity of the Administrator and any Authorized Officer until it receives written notice tot he contrary. 1.5. Effective Date. This Trust Agreement shall be effective as of the date and year first above-written provided that the Trustee shall have received an opinion of counsel to the Company.
2. INVESTMENT AND ADMINISTRATION OF THE TRUST FUND 2.1 Powers and Duties of the Trustee. In addition to every power and discretion conferred upon the Trustee by any other provision of this Trust Agreement, the Trustee will have the following express powers with respect tot he Trust Fund: (a) Subject tot he Investment Guidelines set forth in Section 2.2 hereof, to make investments and reinvestments of the assets of the Trust Fund, without distinction between principal and income; and in making and holding investments, the Trustee will not be restricted to those investments which are authorized by the law of the State of New York for the investment of trust funds, provided, however, that no investment shall be made in any securities or other obligations of the Company or of any Affiliate. The Trustee is further authorized and empowered to invest and reinvest all or any part of such assets through the medium of any common, collective or commingled trust fund or pool maintained by it as the same may have heretofore been or may hereafter be established or amended.
2. INVESTMENT AND ADMINISTRATION OF THE TRUST FUND 2.1 Powers and Duties of the Trustee. In addition to every power and discretion conferred upon the Trustee by any other provision of this Trust Agreement, the Trustee will have the following express powers with respect tot he Trust Fund: (a) Subject tot he Investment Guidelines set forth in Section 2.2 hereof, to make investments and reinvestments of the assets of the Trust Fund, without distinction between principal and income; and in making and holding investments, the Trustee will not be restricted to those investments which are authorized by the law of the State of New York for the investment of trust funds, provided, however, that no investment shall be made in any securities or other obligations of the Company or of any Affiliate. The Trustee is further authorized and empowered to invest and reinvest all or any part of such assets through the medium of any common, collective or commingled trust fund or pool maintained by it as the same may have heretofore been or may hereafter be established or amended. (b) To retain, to exchange for any other property, to sell in any manner and at any time, any property, and to grant options to sell any such property, without regard to restrictions and without the approval of any court. (c) To vote personally or by proxy and to delegate power and discretion to such proxy. (d) To exercise subscription, conversion and other rights and options, and to make payments from the Trust Fund in connection therewith. (e) To take any action and to abstain from taking any action with respect to any reorganization, consolidation, merger, dissolution, recapitalization, refinancing and any other plan or change affecting any property, and in connection therewith, to delegate its discretionary powers and to pay assessments, subscriptions and other charges from the Trust Fund. (f) In any manner, and to any extent, to waive, modify, reduce, compromise, release, settle and extend the time of payment of any claim of whatsoever nature in favor of or against the Trustee or all or any part of the Trust Fund and to commence or defend suits or other legal proceedings in connection therewith. (g) To make executory contracts and to grant options for any purposed, and to make such contracts and options binding on the Trust and enforceable against any property of the Trust Fund. (h) Upon any terms, to borrow money from any person (including, to the extent permitted by applicable law, the Trustee in its individual capacity) and to pledge assets of the Trust Fund as security for repayment.
(i) To retain in cash without any obligation to earn any income (pending investment, reinvestment or payment of benefits) any reasonable portion of the Trust Fund and to deposit cash in any depository selected by the Trustee including the banking department of any bank acting as Trustee. (j) To hold assets in time or demand deposits (including deposits with the Trustee in its individual capacity which pay a reasonable rate of interest). (k) To employ agents, experts and counsel, to delegate discretionary powers to, and rely upon information and advice furnished by, such agents, experts and counsel and to pay their reasonable fees and disbursements. (l) From time to time to register any property in the name of its nominee or in its own name, or to hold it unregistered or in such form that title shall pass by delivery or to cause the name to be deposited in a depository or clearing corporation or system established to settle transfers of securities and to cause such securities to be merged and held in bulk by the nominee of such depository or clearing corporation or system. (m) The Trustee shall, at the written direction of the Company, accept as a contribution to the Trust from the Company or otherwise purchase, retain or sell those individual cash value insurance policy contracts specified by
(i) To retain in cash without any obligation to earn any income (pending investment, reinvestment or payment of benefits) any reasonable portion of the Trust Fund and to deposit cash in any depository selected by the Trustee including the banking department of any bank acting as Trustee. (j) To hold assets in time or demand deposits (including deposits with the Trustee in its individual capacity which pay a reasonable rate of interest). (k) To employ agents, experts and counsel, to delegate discretionary powers to, and rely upon information and advice furnished by, such agents, experts and counsel and to pay their reasonable fees and disbursements. (l) From time to time to register any property in the name of its nominee or in its own name, or to hold it unregistered or in such form that title shall pass by delivery or to cause the name to be deposited in a depository or clearing corporation or system established to settle transfers of securities and to cause such securities to be merged and held in bulk by the nominee of such depository or clearing corporation or system. (m) The Trustee shall, at the written direction of the Company, accept as a contribution to the Trust from the Company or otherwise purchase, retain or sell those individual cash value insurance policy contracts specified by the Company which are on the lives of one or more of the Executives from mutual or stock life insurance companies organized and existing under the laws of the United States of America or any state thereof, and holding a rating of not less than "A" as designated by A. M. Best Insurance Rating Service. The Trust shall be the owner of and beneficiary under such insurance policy contract. The issuer of each such insurance policy contract is authorized to make payments to Trustee, to act solely on the instructions of Trustee, and in every respect to deal solely on the instructions of Trustee as the absolute owner of such insurance policy contract. (i) Notwithstanding anything in this Agreement to the contrary, insurance policy contracts held in the Trust shall be dealt with in accordance with the provisions of this Section 2.1(m). (1) The premiums on each insurance policy contract held in the Trust as may be due from time to time shall be paid from the general assets of the Company or shall be paid by the Trustee from the Trust Corpus upon the written direction of the Corporation to the Trustee. When the Company directs the Trustee to pay insurance policy contracts from the Trust Corpus, it shall simultaneously indicate to the Trustee the specific assets to be used and/or liquidated to pay the insurance policy contract premiums. The Trustee shall exercise its powers with respect to an insurance policy contract in accordance with the instructions of the Company. The Trustee will deliver a copy of any premium notice which is receives from the insurer of an insurance policy contract to the Company as soon as practicable after the receipt
thereof. (2) In the event that the Trustee actually receives written notice that an insurance policy contract lapses for any reason and notwithstanding any provisions herein to the contrary, the Trustee shall surrender such insurance policy contract to the issuer thereto in exchange for its cash surrender value. Any amounts received by the Trustee upon the surrender of an insurance policy contract shall become a part of the unallocated Trust. (3) To the extent permitted by law, neither the Company nor the Trustee shall be liable for the refusal of any insurance company to issue, modify or convey any such insurance policy contract, to take any other action requested by the Company or the Trustee, as the case may be, nor be liable for the form, genuineness, validity, sufficiency or effect of any such insurance policy contract, nor for the act of any person or persons that may render such contract null and void; nor for the failure of any issuer of any insurance policy contract to pay the proceeds and avails of such insurance policy contract as and when the same shall become due and payable; nor for any delay in payment resulting from any provision contained in nay such insurance policy contract; nor for the fact that for any reason whatsoever any such insurance policy contract shall lapse or otherwise be uncollectible (including, without limitation, as a result of the failure of the company to pay any premium when due). The Company hereby agrees to indemnify the Trustee and hold it harmless from and against any claim or liability which may be asserted against the Trustee by reason of its acting on any direction from the Company pursuant to this Section 2.1(m) or failing to act in the absence of any such direction with respect to any such insurance policy contract or the acquisition of any insurance policy contract or exercise or nonexercise of any right or option
thereof. (2) In the event that the Trustee actually receives written notice that an insurance policy contract lapses for any reason and notwithstanding any provisions herein to the contrary, the Trustee shall surrender such insurance policy contract to the issuer thereto in exchange for its cash surrender value. Any amounts received by the Trustee upon the surrender of an insurance policy contract shall become a part of the unallocated Trust. (3) To the extent permitted by law, neither the Company nor the Trustee shall be liable for the refusal of any insurance company to issue, modify or convey any such insurance policy contract, to take any other action requested by the Company or the Trustee, as the case may be, nor be liable for the form, genuineness, validity, sufficiency or effect of any such insurance policy contract, nor for the act of any person or persons that may render such contract null and void; nor for the failure of any issuer of any insurance policy contract to pay the proceeds and avails of such insurance policy contract as and when the same shall become due and payable; nor for any delay in payment resulting from any provision contained in nay such insurance policy contract; nor for the fact that for any reason whatsoever any such insurance policy contract shall lapse or otherwise be uncollectible (including, without limitation, as a result of the failure of the company to pay any premium when due). The Company hereby agrees to indemnify the Trustee and hold it harmless from and against any claim or liability which may be asserted against the Trustee by reason of its acting on any direction from the Company pursuant to this Section 2.1(m) or failing to act in the absence of any such direction with respect to any such insurance policy contract or the acquisition of any insurance policy contract or exercise or nonexercise of any right or option thereunder. 2.2. Investment Guidelines. (a) Establishment of Investment Guidelines Prior to a Change in Control. For periods prior to the occurrence of a Change in Control, the Company shall establish Investment Guidelines from time to time, to provide guidance to the Trustee with respect to the investment, retention, disposition and reinvestment of the assets of the Trust Fund. In establishing the Investment Guidelines, the Company shall exercise such discretion with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Company may from time to time amend the Investment Guidelines then in effect or substitute new Investment Guidelines. The Investment Guidelines, and any amendments
thereto, shall be in writing, shall be signed by an Authorized Officer of the Company, and shall be filed with the Trustee. (b) Compliance with Investment Guidelines. Prior to the occurrence of a Change in Control, and subject to the provisions of Section 2.2(c), in exercising its powers under Section 2.1 hereof, the Trustee shall invest and reinvest the Trust Fund in accordance with the Investment Guidelines delivered to the Trustee in writing by the Company. Until the Trustee receives new Investment Guidelines, the Trustee may rely and shall be fully protected in relying on the last Investment Guidelines it has received. (c) Investment Guidelines On and After Change in Control, and Absence of Effective Investment Guidelines. On and after the occurrence of a Change in Control, and prior to a Change in Control if the Company has not delivered Investment Guidelines to the Trustee or there are no such Investment Guidelines then in effect, in exercising its powers under Section 2.1 hereof, the Trustee shall invest the Trust Fund in a manner that is consistent with the overall objective of preservation of capital, and shall invest and reinvest the Trust Fund in short-term investments,including, without limitation, obligations issued or guaranteed by the United States of America or any agency thereof, proportionate interests in any such obligations held by any bank or trust company organized under the laws of the United States of America or any state thereof as a custodian, commercial paper rated A-1 by Standard & Poors Corporation or P-1 by Moddy's Investment Services, Master Notes of corporations with commercial a per ratings of A-1 or P-1, time or savings deposits and certificates of deposit. (d) Exercise of Trustee's Duties. Subject to the foregoing provisions of this Section 2, and the provisions of the applicable Investment Guidelines (if any), the Trustee shall discharge its duties hereunder with the same amount of reasonable care as it uses with respect to its own funds and pursuant to the standard of care applicable under
thereto, shall be in writing, shall be signed by an Authorized Officer of the Company, and shall be filed with the Trustee. (b) Compliance with Investment Guidelines. Prior to the occurrence of a Change in Control, and subject to the provisions of Section 2.2(c), in exercising its powers under Section 2.1 hereof, the Trustee shall invest and reinvest the Trust Fund in accordance with the Investment Guidelines delivered to the Trustee in writing by the Company. Until the Trustee receives new Investment Guidelines, the Trustee may rely and shall be fully protected in relying on the last Investment Guidelines it has received. (c) Investment Guidelines On and After Change in Control, and Absence of Effective Investment Guidelines. On and after the occurrence of a Change in Control, and prior to a Change in Control if the Company has not delivered Investment Guidelines to the Trustee or there are no such Investment Guidelines then in effect, in exercising its powers under Section 2.1 hereof, the Trustee shall invest the Trust Fund in a manner that is consistent with the overall objective of preservation of capital, and shall invest and reinvest the Trust Fund in short-term investments,including, without limitation, obligations issued or guaranteed by the United States of America or any agency thereof, proportionate interests in any such obligations held by any bank or trust company organized under the laws of the United States of America or any state thereof as a custodian, commercial paper rated A-1 by Standard & Poors Corporation or P-1 by Moddy's Investment Services, Master Notes of corporations with commercial a per ratings of A-1 or P-1, time or savings deposits and certificates of deposit. (d) Exercise of Trustee's Duties. Subject to the foregoing provisions of this Section 2, and the provisions of the applicable Investment Guidelines (if any), the Trustee shall discharge its duties hereunder with the same amount of reasonable care as it uses with respect to its own funds and pursuant to the standard of care applicable under New York law to a Trustee in a like capacity familiar with the conduct of like enterprise. 3. ACCOUNTS: CONTRIBUTIONS 3.1. Establishment of Accounts. The Trustee shall create in the Trust Fund a separate Account for each Participant for whom a contribution has been made in accordance with the Payment Schedule provided to the Trustee. All contributions received by the Trustee and all other receipts of the Trustee, whether by way of dividends, interest or otherwise for the account of the Trust Fund, may be commingled, held, invested and, with all disbursements therefrom, accounted for by the Trustee as a single fund. However, if the Trust acquires any policy of insurance on the life of a Participant, such policy, so long as it is held by the Trust, and at the direction of the Company shall be allocated to an Account maintained in the name of the Participant. The Trust Fund shall be revalued by the Trustee as of the last business day of each calendar quarter at current market values, as determined by the Trustee. Net income and net investment gains and losses (including gains and losses on the amounts contributed pursuant to Section 3.2(b)) shall be allocated by the Trustee proportionately among Participants' Accounts as of the end of each calendar quarter based on the value of Participants' Accounts as of the last business day of the preceding calendar
quarter. The Trustee shall maintain a record of the value of each Participant's Account based solely on the aggregate value of the Trust Fund, the information provided by the Company as to its contributions with respect to each Participant's Account and any payments therefrom. 3.2. Contributions by the Company. (a) The Trustee shall receive from the Company such amounts in cash (and other property reasonably acceptable to the Trustee) as the Company may from time to time determine. The Trustee shall be under no obligation to collect any such contribution. All responsibility for the determination of the amount, timing and type of payments made to the Trustee, or otherwise establishing a funding policy consistent with the objectives of the Plan shall be on the Company or its designee. The Company will certify to the Trustee in writing with respect to each such contribution the amount of the contribution being made with respect to each participant's Account and the Trustee shall allocate the contribution among such Accounts accordingly. (b) In addition to contributions made to the Trust pursuant to
quarter. The Trustee shall maintain a record of the value of each Participant's Account based solely on the aggregate value of the Trust Fund, the information provided by the Company as to its contributions with respect to each Participant's Account and any payments therefrom. 3.2. Contributions by the Company. (a) The Trustee shall receive from the Company such amounts in cash (and other property reasonably acceptable to the Trustee) as the Company may from time to time determine. The Trustee shall be under no obligation to collect any such contribution. All responsibility for the determination of the amount, timing and type of payments made to the Trustee, or otherwise establishing a funding policy consistent with the objectives of the Plan shall be on the Company or its designee. The Company will certify to the Trustee in writing with respect to each such contribution the amount of the contribution being made with respect to each participant's Account and the Trustee shall allocate the contribution among such Accounts accordingly. (b) In addition to contributions made to the Trust pursuant to Section 3.2(a), the Company may from time to time deliver the Trustee such other amounts as may be considered necessary or appropriate to provide for the payment of expenses of the Trust. 3.3. Contribution Schedule. Following the occurrence of a Change in Control, contributions under the Plan shall be due from the Company in accordance with the following schedule: (a) Contributions to fund Participant deferrals under the Plan shall be due not more than 10 days after the last day of the payroll period with respect to which such Participant deferrals apply. (b) Contributions to fund Employer matching contributions under the Plan shall be due not more than 10 days after the last of the calendar month with respect to which the matching Contributions are made. (c) Reimbursement of fees and expenses from the Company (including, without limitation, fees and expenses that are incurred by Participants and Beneficiaries and that are to be reimbursed by the Trustee in accordance with Section 4.10) shall be due not more than 15 days after the date a statement for such fees is submitted to the Company in accordance with this Section 3. (d) Notwithstanding the foregoing provisions of this Section 3.3, in no event shall contributions described in this Section 3.3 become due and payable prior to the 10th day following the date of the Change in Control. 3.4. Letter of Credit.
To the extent provided by the written direction of the Company, the Trustee shall obtain, for the benefit of the Trust, one or more letters of credit chosen and negotiated by the Company (or other similar arrangements, with any one or more letters of credit or other similar arrangements referred to collectively in this Trust Agreement as a "Letter of Credit") with respect to contributions that may otherwise be due from the Company under the foregoing provisions of this Section 3, subject to the following: (a) The cost of establishing and maintaining the Letter of Credit shall be paid from the Trust Fund to the extent that such cost is not satisfied through payments by the Company or otherwise. (b) Although the Company and not the Trustee shall exercise all rights under the Letter of Credit prior to a Change in Control, the rights under the Letter of Credit shall inure to the benefit of the Trust, provided that the Company shall be relieved of its obligation to contribute to the Trust under this Section 3 to the extent that the obligation to make such contributions is in fact satisfied pursuant to the Letter of Credit; and further provided that the Letter of Credit and all proceeds of any sale, assignment or surrender thereof shall be held by the Trustee in and shall be treated as part of the Trust Fund and shall be subject to the claims of creditors to the extent provided in Section 6.3.
To the extent provided by the written direction of the Company, the Trustee shall obtain, for the benefit of the Trust, one or more letters of credit chosen and negotiated by the Company (or other similar arrangements, with any one or more letters of credit or other similar arrangements referred to collectively in this Trust Agreement as a "Letter of Credit") with respect to contributions that may otherwise be due from the Company under the foregoing provisions of this Section 3, subject to the following: (a) The cost of establishing and maintaining the Letter of Credit shall be paid from the Trust Fund to the extent that such cost is not satisfied through payments by the Company or otherwise. (b) Although the Company and not the Trustee shall exercise all rights under the Letter of Credit prior to a Change in Control, the rights under the Letter of Credit shall inure to the benefit of the Trust, provided that the Company shall be relieved of its obligation to contribute to the Trust under this Section 3 to the extent that the obligation to make such contributions is in fact satisfied pursuant to the Letter of Credit; and further provided that the Letter of Credit and all proceeds of any sale, assignment or surrender thereof shall be held by the Trustee in and shall be treated as part of the Trust Fund and shall be subject to the claims of creditors to the extent provided in Section 6.3. (c) The Participants may take such action as may be necessary to compel payment under the terms of the Letter of Credit. Participants shall be entitled to reimbursement for such actions as set forth in Section 4.10. (d) The Trustee shall only acquire such specific Letter or Letters of Credit only to the extent directed by the Company, and nothing in this Section 3.4 shall be construed to require the Company to issue any such direction. The form of such Letter of Credit shall be as prescribed by the Company. Prior to a Change in Control, the Trustee shall only execute such rights under a Letter of Credit as directed in writing by the Company. (e) The acquisition and maintenance of a Letter of Credit in accordance with this Section 3.4 shall be treated as a use of Trust Assets that is permitted under this Agreement. 4. PAYMENT OF BENEFITS 4.1. Payments Prior to a Change in Control. Prior to a Change in Control, solely out of the Trust Fund and with no obligation otherwise to make any payment, the Trustee shall make such payments as shall be directed by the Company in writing. Such directions shall specify the Accounts to be charged in connection therewith. The Trustee may rely and shall be fully protected in relying on such directions. 4.2. Payments On and After Change in Control. (a) On and after the occurrence of a Change in Control in the event of a Participant's Termination, such Participant shall provide the Trustee with a Termination
Affidavit. If the Participant is deceased, the Termination Affidavit shall be provided by the Beneficiary is the legal representative of the estate of a Beneficiary who shall also supply the Trustee with a certified copy of the death certificate of the Participant (and, where the Beneficiary who survives the Participant but dies before all benefits have been paid, a certified copy of the death certificate of such Beneficiary), an inheritance tax waiver and such other documents as the Trustee may require (including, without limitation, certified copies of letters testamentary). Promptly upon receipt thereof, the Trustee shall mail a copy of the Termination Affidavit to the Company. The Trustee, solely out of the Trust Fund and with no obligation otherwise to make any payment, shall, as soon as administratively practicable and in conformity with the instructions set forth in the Payment Schedule, make payments to such Participant or Beneficiary at the times and in the manner set forth in the Payment Schedule last received by the Trustee with respect to such Participant or Beneficiary and consistent with the information set forth in the Termination Affidavit. Except as otherwise provided in Section 4.10, the amount payable to a Participant or Beneficiary may not exceed the balance credited to such participant's Account. The Trustee may rely and shall be fully protected in relying on the contents of a Termination Affidavit and all documentation and other information provided to it by the Company or the Administrator for all purposes under this Trust Agreement
Affidavit. If the Participant is deceased, the Termination Affidavit shall be provided by the Beneficiary is the legal representative of the estate of a Beneficiary who shall also supply the Trustee with a certified copy of the death certificate of the Participant (and, where the Beneficiary who survives the Participant but dies before all benefits have been paid, a certified copy of the death certificate of such Beneficiary), an inheritance tax waiver and such other documents as the Trustee may require (including, without limitation, certified copies of letters testamentary). Promptly upon receipt thereof, the Trustee shall mail a copy of the Termination Affidavit to the Company. The Trustee, solely out of the Trust Fund and with no obligation otherwise to make any payment, shall, as soon as administratively practicable and in conformity with the instructions set forth in the Payment Schedule, make payments to such Participant or Beneficiary at the times and in the manner set forth in the Payment Schedule last received by the Trustee with respect to such Participant or Beneficiary and consistent with the information set forth in the Termination Affidavit. Except as otherwise provided in Section 4.10, the amount payable to a Participant or Beneficiary may not exceed the balance credited to such participant's Account. The Trustee may rely and shall be fully protected in relying on the contents of a Termination Affidavit and all documentation and other information provided to it by the Company or the Administrator for all purposes under this Trust Agreement as if the Plan were deemed funded and the Company and the Administrator were :named fiduciaries" as such term is defined in ERISA. (b) Payments to Participants shall be made in the order of the receipt of Termination Affidavits. In the event that the Trustee receives more than one Termination Affidavit on the same day and the Trust Fund is not sufficient to make all of the payments otherwise required as a result of the receipt of such Termination Affidavits, the Trustee, after the payment of all of its unpaid compensation and expenses, shall distribute the balance of the Trust Fund to the Participants who have submitted such Termination Affidavits on a pro rate basis. 4.3. Payments in the Event of a Final Determination. Notwithstanding anything contained in Section 4 of this Trust Agreement to the contrary, if any time (i) a Final Determination is made that the income of the Trust Fund is taxable to the Trust as a entity and not to the Company, or (ii) if a tax, as a result of a Final Determination, is payable by one or more Participants in respect of any interest in the Trust Fund prior to payment of such interest to such Participant or Participants, then (a) in case of the occurrence of the event described in clause (i), the Trust shall terminate and the assets thereof shall be paid to the Company, (b) in the event of the occurrence of the event described in clause (ii), the Trustee, solely out of the Trust Funds and with no obligation otherwise to make any payment, shall pay to the affected Participant and charge his Account accordingly the amount of the tax so payable, and (c) in the event of the occurrence of the events described in both clauses (i) and (ii), the Trustee shall first pay to the affected Participant or Participants the amount of tax so payable, and then the Trust shall terminate and the remaining assets thereof shall be paid to the Company. Notwithstanding any other provision of this Trust Agreement, if any amounts held in the Trust are found in a Final Determination to have been includible in gross income of a Participant prior to payment of such amounts from the Trust, the Trustee shall, as soon as practicable, pay such amounts to such Participant and charge his Account
accordingly. For purposes of this Section 4.3, the Trustee shall be entitled to rely on an affidavit from a Participant (substantially in the form annexed hereto as Exhibit D) to the effect that a Final Determination described in clause (ii) above has occurred. 4.4. Rules Governing Payments. The Trustee shall not make any payments to Participants or Beneficiaries from the Trust Fund except as provided in Sections 4.1, 4.2 or 4.3 even though the Trustee may be informed from another source that payments are due under the Plan. The Trustee shall have no duty to determine the propriety or amount of such payments or the rights of any person in the Trust Fund. Any amount paid under Section 4.1, 4.2 or 4.3 shall be charged against such Participant's Account and no payment with respect to a Participant's Account shall be made in excess of the amount then credited to such participant's Account. The Administrator or the Company shall provide the Trustee with sufficient information to enable it to so charge a Participant's Account. The Company shall on a timely basis provide the Trustee with written instructions for the reporting and withholding of any federal, state and local taxes that may be required to be reported and withheld with respect to any amount paid under Section 4.1, 4.2 or 4.3, and the Trustee shall comply with such written instructions and shall pay any taxes
accordingly. For purposes of this Section 4.3, the Trustee shall be entitled to rely on an affidavit from a Participant (substantially in the form annexed hereto as Exhibit D) to the effect that a Final Determination described in clause (ii) above has occurred. 4.4. Rules Governing Payments. The Trustee shall not make any payments to Participants or Beneficiaries from the Trust Fund except as provided in Sections 4.1, 4.2 or 4.3 even though the Trustee may be informed from another source that payments are due under the Plan. The Trustee shall have no duty to determine the propriety or amount of such payments or the rights of any person in the Trust Fund. Any amount paid under Section 4.1, 4.2 or 4.3 shall be charged against such Participant's Account and no payment with respect to a Participant's Account shall be made in excess of the amount then credited to such participant's Account. The Administrator or the Company shall provide the Trustee with sufficient information to enable it to so charge a Participant's Account. The Company shall on a timely basis provide the Trustee with written instructions for the reporting and withholding of any federal, state and local taxes that may be required to be reported and withheld with respect to any amount paid under Section 4.1, 4.2 or 4.3, and the Trustee shall comply with such written instructions and shall pay any taxes withheld to the appropriate taxing authorities. The Trustee may rely conclusively (and shall be fully protected in such reliance) on the written instructions of the Company as to all tax reporting and withholding requirements. 4.5. Payment Schedules. (a) Upon the execution of this Trust Agreement, the Company shall deliver to the Trustee a list of current Participants substantially in the form of Exhibit A and the initial Payment Schedules substantially in the form of Exhibit A-1; with the portion of the schedule, as applied to the benefits of each Participant, being delivered to such Participant not later than 60 days after the establishment of the Trust. (b) As of the last day of each calendar year (beginning with calendar year 1994), the Company shall prepare an updated Payment schedule, which shall reflect benefit accruals under the Plan for all Participants through such date. The updated Payment Schedule reflecting benefit accruals as of the last day of any calendar year shall be delivered to the Trustee not later than the 60th day following the end of such calendar year; with the portion of the updated schedule, as applied to the benefits of each Participant, being delivered to such Participant not later than such 60th day. (c) With respect to Payment Schedules reflecting benefits as of a date either before or after a Change in Control, a Participant (or, in the event of the Participant's death or disability, the Participant's Beneficiary) may in accordance with the terms of the Plan file a protest with respect to the determination of such Participant's benefits. The Participant shall file such protest with the administrator of the Plan and, after the occurrence of a Change in Control, the Participant shall file a copy of the protest with the Trustee. (d) A Participant (and the Beneficiaries of such Participant) shall be eligible for
reimbursement for fees and expenses incurred in connection with the protest of the Payment Schedule as applied to the Participant to the extent provided in accordance with Section 4.10. (e) Subject to the following provisions of this paragraph (e), the Trustee may rely and shall be fully protected in relying on the contents of a Payment Schedule for all purposes under this Trust Agreement without inquiry until it received an amendment thereto or a new Payment Schedule in substitution thereof to the extent permitted hereunder. 4.6. Designation of Beneficiaries. Amounts payable to the Participant's Beneficiary following the Participant's death shall be paid in accordance with the terms of the Plan. The Trustee may rely and shall be fully protected in relying on the Company's certification as to the identity of any Participant's Beneficiary. The Trustee will not make any distribution to a Beneficiary unless and until receipt of such certification.
reimbursement for fees and expenses incurred in connection with the protest of the Payment Schedule as applied to the Participant to the extent provided in accordance with Section 4.10. (e) Subject to the following provisions of this paragraph (e), the Trustee may rely and shall be fully protected in relying on the contents of a Payment Schedule for all purposes under this Trust Agreement without inquiry until it received an amendment thereto or a new Payment Schedule in substitution thereof to the extent permitted hereunder. 4.6. Designation of Beneficiaries. Amounts payable to the Participant's Beneficiary following the Participant's death shall be paid in accordance with the terms of the Plan. The Trustee may rely and shall be fully protected in relying on the Company's certification as to the identity of any Participant's Beneficiary. The Trustee will not make any distribution to a Beneficiary unless and until receipt of such certification. 4.7. Company's Continuing Obligations. Notwithstanding any provision of this Trust Agreement to the Contrary, the Company shall remain obligated to pay the Benefits under the Plan. To the extent the amount in a Participant's Account is not sufficient to pay any Benefit when due, the Company shall pay such deficiency directly to the Participant (or, after the Participant's death, the Participant's Beneficiary). Nothing in this Trust Agreement shall relieve the Company of its liabilities to pay the Benefits except to the extent such liabilities are met by the application of Trust Fund assets. 4.8. Excess Amounts. To the extent there remains an amount credited to a Participant's Account after his Benefits have been paid in full, such exceed shall be reallocated as of the end of that calendar quarter to the remaining Accounts of all other Participants who then have an Account in the Trust Fund in proportion of their respective Accounting balances. After all of the Benefits have been paid in full, the Trust shall terminate and, after the payment of any unpaid expenses, the assets of the Trust fund (if any) shall be transferred to the Company. 4.9. Company's Intent. It is the intention of the Company to have each Account established hereunder treated as a separate account designed to satisfy the Company;s legal liability under the applicable Agreement in respect of the Participant for whom such Account has been established, and to have the balance, if any, in each such Account revert to the Company after all of the Company's legal liabilities with respect to Benefits under all of the Plan have been met. The Company, therefore, agrees that all income, deductions and credits of each such Account belong to it as owner for income tax purposes and will be included on the Company's income tax returns. 4.10. Reimbursement of Participants and Beneficiaries.
The Trustee upon written notification from either the Compensation and Benefits Committee of the Board or Employee Benefits Committee as set forth herein, shall reimburse the Participants and Beneficiaries for reasonable fees and expenses (including, without limitation, reasonable attorney fees) incurred in connection with a collection of contested benefits under the Plan to the extent that the expenses are incurred in connection with amounts payable after a Change in Control upon obtaining the approval of the Compensation and Benefits Committee of the Board of Directors of the Company as constituted immediately prior to the Change in Control; provided, if that group fails to take action, upon the approval of the Employee Benefits Committee of the SFP Supplemental Retirement and Savings Plan as constituted immediately prior to the Change in Control; provided further, however, that to the extent that (a) more than one Participant or Beneficiary assets a claim against the Company with respect to benefits; (b) the fees and expenses are reimbursable under this Section 4.10; and (c) the fees and expenses attributable to such claims are related and could be consolidated without a material loss of protection to any Participant, then Company may require such consolidation. 5. CONCERNING THE TRUSTEE
The Trustee upon written notification from either the Compensation and Benefits Committee of the Board or Employee Benefits Committee as set forth herein, shall reimburse the Participants and Beneficiaries for reasonable fees and expenses (including, without limitation, reasonable attorney fees) incurred in connection with a collection of contested benefits under the Plan to the extent that the expenses are incurred in connection with amounts payable after a Change in Control upon obtaining the approval of the Compensation and Benefits Committee of the Board of Directors of the Company as constituted immediately prior to the Change in Control; provided, if that group fails to take action, upon the approval of the Employee Benefits Committee of the SFP Supplemental Retirement and Savings Plan as constituted immediately prior to the Change in Control; provided further, however, that to the extent that (a) more than one Participant or Beneficiary assets a claim against the Company with respect to benefits; (b) the fees and expenses are reimbursable under this Section 4.10; and (c) the fees and expenses attributable to such claims are related and could be consolidated without a material loss of protection to any Participant, then Company may require such consolidation. 5. CONCERNING THE TRUSTEE 5.1. Notice to the Trustee. The Trustee may rely on the authenticity, truth and accuracy of, and will be fully protected in acting upon: (a) any notice, direction, certification, approval or other writing of the Company, if evidenced by an instrument signed in the name of the Company by an Authorized Officer; and (b) any copy of a resolution of the Board of Directors for the Company, if certified by the Secretary or an Assistant Secretary of the Company under its corporate seal; or (c) any notice, direction, certification, approval or other writing, oral or other transmitted form of instruction received by the Trustee and believed by it to be genuine and to be sent by or on behalf of the Administrator. (d) any notice, direction, certification, approval or other writing of the Compensation and Benefits Committee of the Board or Employee Benefits Committee. 5.2. Expenses of the Trust Fund. (a) The Trustee is authorized to pay out of the Trust Fund: (i) all brokerage fees and transfer tax expenses and other expenses incurred in connection with the sale or purchase of investment; (ii) all real and personal property taxes, income taxes and other taxes of any kind at any time levied or assessed under any present or future law upon, of with respect to, the Trust Fund or any property included in the Trust Fund; (iii) the Trustee's compensation and expenses as provided in Section 5.3 hereof; and (iv) all other expenses of administering the Trust, unless promptly paid to the Trustee by the Company. To the extent charged against the Trust Fund, all expenses described in this Section 5.2 shall be charged proportionately against, and paid from, all Accounts in existence at the time of such payment.
(b) In addition to its obligations under paragraph (a) next above, for periods after a Change in Control, the Company shall be obligated to pay all expenses (if any) incurred by the Trustee in connection with the operation of the Plan to the extent that the expenses are incurred pursuant to the terms of this Trust Agreement. For periods after a Change in Control, the Trustee shall submit a statement reflecting expenses owed to the Trustee by the Company not less frequently than quarterly. To the extent that the Trustee incurs such expenses attributable to goods and services provided by persons not affiliated with the Trustee, then the Trustee shall take reasonable steps to assure that a statement for such expenses is submitted to the Company not more than 180 days after the date such expenses are incurred. As soon as practicable after the occurrence of a Change in Control, the Trustee shall submit a statement reflecting outstanding expenses incurred prior the Change in Control. (c) The Trustee shall be reimbursed by the Company for payments made to Participants and Beneficiaries under Section 4.10; provided that to the extent that the Company fails to reimburse the Trustee in accordance with this Section 5.2, the Trustee may charge such amounts against the Trust Fund. However, such charge against the Trust Fund with respect to any fees and expenses shall not relieve the Company of its obligations to reimburse the
(b) In addition to its obligations under paragraph (a) next above, for periods after a Change in Control, the Company shall be obligated to pay all expenses (if any) incurred by the Trustee in connection with the operation of the Plan to the extent that the expenses are incurred pursuant to the terms of this Trust Agreement. For periods after a Change in Control, the Trustee shall submit a statement reflecting expenses owed to the Trustee by the Company not less frequently than quarterly. To the extent that the Trustee incurs such expenses attributable to goods and services provided by persons not affiliated with the Trustee, then the Trustee shall take reasonable steps to assure that a statement for such expenses is submitted to the Company not more than 180 days after the date such expenses are incurred. As soon as practicable after the occurrence of a Change in Control, the Trustee shall submit a statement reflecting outstanding expenses incurred prior the Change in Control. (c) The Trustee shall be reimbursed by the Company for payments made to Participants and Beneficiaries under Section 4.10; provided that to the extent that the Company fails to reimburse the Trustee in accordance with this Section 5.2, the Trustee may charge such amounts against the Trust Fund. However, such charge against the Trust Fund with respect to any fees and expenses shall not relieve the Company of its obligations to reimburse the Trustee for such fees and expenses under this Section 5.2. 5.3. Compensation of the Trustee. The Company will pay to the Trustee such compensation for its services as set forth in Exhibit B as from time to time amended by the Company and the Trustee and will reimburse the Trustee for all expenses (including reasonable attorney's fees) incurred by the Trustee in the administration of the Trust. If not promptly paid on request, the Trustee may charge such fees and expenses to and pay the same from the Trust Fund. In such event, such fees and expenses shall be charged pro rate to the Accounts in existence on the date of such payment. The compensation and expenses of the Trustee shall constitute a lien on the Trust Fund. 5.4. Protection of the Trustee. The Company shall pay and shall protect, indemnify and save harmless the Trustee and its officers, employees and agents from and against any and all losses, liabilities (including liabilities for penalties), actions, suites, judgments, demands, damages, costs and expenses (including without limitation, attorneys' fees and expenses) of any nature arising from or relating to any action or any failure to act by the Trustee, its officers, employees and agents or the transactions contemplated by this Trust Agreement, including but not limited to, any claim made by a Participant or his beneficiary with respect to payments made or to be made by the Trustee, any claim made by the Company or its successor, whether pursuant to a sale of assets, merger, consolidation, liquidation or otherwise, that this Trust Agreement is invalid or ultra vires, except to the extent that any such loss, liability, action, suite, judgment, demand, damage, cost or expense has been determined by a final judgment of a count of competent jurisdiction to be solely the result of the gross negligence or wilful misconduct of the Trustee, its officers, employees or agents. To the extent that the Company has not fulfilled its obligations under the foregoing provisions of this Section, the Trustee shall be reimbursed out of the assets of the
Trust Fund or may set up reasonable reserves for the payment of such obligations. The Trustee assumes no obligation or responsibility with respect to any action required by this Trust Agreement on the part of the Company or the Administrator. 5.5. Duties of the Trustee. (a) The Trustee will be under no duties except such duties as are specifically set forth as such in this Trust Agreement, and no implied covenant or obligation will be read into this Trust Agreement against the Trustee. The Trustee will not be liable for any action or failure to act except if such action or failure to act constitutes gross negligence or wilful misconduct. The Trustee will not be compelled to take any action toward the execution or enforcement of the Trust or to prosecute or deed any suit in respect thereof, unless indemnified to its satisfaction against loss, cost, liability and expense; and the Trustee will be under no liability or obligation to anyone with respect to any failure on the part of the Company, the Administrator or a Participant to perform any of their respective obligations under the Plan. Nothing in this Trust Agreement shall be construed as requiring the Trustee to make any payment in excess of the amounts held in the Trust Fund at the item of such payment or otherwise to risk its own funds.
Trust Fund or may set up reasonable reserves for the payment of such obligations. The Trustee assumes no obligation or responsibility with respect to any action required by this Trust Agreement on the part of the Company or the Administrator. 5.5. Duties of the Trustee. (a) The Trustee will be under no duties except such duties as are specifically set forth as such in this Trust Agreement, and no implied covenant or obligation will be read into this Trust Agreement against the Trustee. The Trustee will not be liable for any action or failure to act except if such action or failure to act constitutes gross negligence or wilful misconduct. The Trustee will not be compelled to take any action toward the execution or enforcement of the Trust or to prosecute or deed any suit in respect thereof, unless indemnified to its satisfaction against loss, cost, liability and expense; and the Trustee will be under no liability or obligation to anyone with respect to any failure on the part of the Company, the Administrator or a Participant to perform any of their respective obligations under the Plan. Nothing in this Trust Agreement shall be construed as requiring the Trustee to make any payment in excess of the amounts held in the Trust Fund at the item of such payment or otherwise to risk its own funds. 5.6. Settlement of Accounts of the Trustee. The Trustee shall keep or cause to be kept accurate and detailed amounts of all investments, receipts, disbursements and other transactions hereunder. Such accounts shall be open to inspection and audit at all reasonable times during normal business hours by any person designated by the Company or the Administrator. At the request of the Company, the Trustee shall furnish to the Company such other information which it possesses and which the Company reasonably requires for the administration of the Plan. At least annually after the end of each Plan Year, the Trustee shall file with the Company and the Administrator a written account, listing the investments of the Trust Fund and any uninvested cash balance thereof, and setting forth all receipts, disbursements, payments, and other transactions respecting the Trust Fund not included in any such previous account. Any account, when approved by the Company and the Administrator, will be binding and conclusive on the Company, the Administrator and all Participants, and the Trustee will thereby be released and discharged from any liability or accountability to the Company, the Administrator and all Participants with respect to all matters set forth therein. Omission by the Company or the Administrator to object in writing to any specific items in any such account within sixty (60) days after its delivery will constitute approval of the account by the Company and the Administrator. No other accounts or reports shall be required to be given to the Company, the Administrator or a Participant except as stated herein or except as otherwise agreed to in writing by the Trustee. The Trustee shall not be required to file, and no Participant or Beneficiary shall have right to compel, an accounting, judicial or otherwise, by the Trustee. 5.7. Right to Judicial Settlement. Nothing contained in this Trust Agreement shall be construed as depriving the Trustee of the right to have a judicial settlement of its accounts, and upon any proceeding for
a judicial settlement of the Trustee's accounts or for instructions the only necessary parties thereof in addition to the Trustee shall be the Company, in the case of a proceeding commenced prior to a Change in Control, or the Company and the Participants for whom Accounts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect (or, in the case of a deceased Participant still entitled to Benefits from the Trust Fund, this Beneficiary), in the case of a proceeding commenced on or after a Change in Control. 5.8. Resignation or Removal of the Trustee. (a) The Trustee may at any time resign and may at any time be removed by the Company upon sixty (60) days' notice in writing; provided, however, that following a Change in Control, the Company shall have the right to remove the Trustee only with the written consent of two-thirds of the Participants for whom Accounts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect.
a judicial settlement of the Trustee's accounts or for instructions the only necessary parties thereof in addition to the Trustee shall be the Company, in the case of a proceeding commenced prior to a Change in Control, or the Company and the Participants for whom Accounts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect (or, in the case of a deceased Participant still entitled to Benefits from the Trust Fund, this Beneficiary), in the case of a proceeding commenced on or after a Change in Control. 5.8. Resignation or Removal of the Trustee. (a) The Trustee may at any time resign and may at any time be removed by the Company upon sixty (60) days' notice in writing; provided, however, that following a Change in Control, the Company shall have the right to remove the Trustee only with the written consent of two-thirds of the Participants for whom Accounts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect. (b) For purposes of this Trust Agreement, if a vote or the approval of the Participants is required, determination of the Participants eligible to vote shall be made as of the time of the vote, or as of a date not more than 30 days prior to the vote, but excluding any Participants who then have no earned benefits under the Plan. For purposes of such vote, each Participant shall have one vote. If any Participant is deceased, his Beneficiary shall vote for the Participant, provided that the votes of all beneficiaries with respect to any deceased Participant shall together count for but one vote. If a Participant is incapacitated so that he is unable to vote in a timely manner, his guardian or person responsible for his care shall vote for the Participant. 5.9. Appointment of Successor Trustee. In the event of the resignation of removal of the Trustee, or in any other event in which the Trustee ceases to act, a successor trustee may be appointed by the Company by instrument in writing delivered to and accepted by the successor trustee; provided, however, that following a Change in Control, the designation of a successor trustee shall be approved in writing by two- thirds of the Participants for whom Accounts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect. Notice of such appointment and approval, if applicable, will be given by the Company to the retiring trustee, and the successor trustee will deliver to the retiring trustee an instrument in writing accepting such appointment. Notwithstanding the foregoing, if not appointment and approval, if applicable, of a successor trustee is made by the Company within a reasonable time after such a resignation, removal or other event, any court of competent jurisdiction may appoint a successor trustee after such notice, if any, solely to the Company and the retiring trustee, as such court may deem suitable and property. In the event of such resignation, removal or other event, the retiring trustee or its successors and assigns shall file with the Company a final account to which the provisions of Section 5.6 hereof relating to annual account shall apply. In the event of the appointment of a successor trustee, such successor trustee will succeed
to all the right, title and estate of, and will be, the Trustee; and the retiring trustee will after the settlement of its final account and the receipt of any compensation or expenses due it, deliver the Trust Fund to the successor trustee together with all such instruments of transfer, conveyance, assignment and further assurance as the successor trustee may reasonably require. The retiring trustee will retain a lien upon the Trust Fund to secure all amounts due the retiring trustee pursuant to the provisions of this Trust Agreement. 5.10. Merger or Consolidation of the Trustee. Any corporation continuing as the result of any merger or resulting from any consolidation to which merger or consolidation the Trustee is a party, or any corporation to which substantially all the business and assets of the Trustee may be transferred, will be deemed automatically to be continuing as the Trustee. 6. ENFORCEMENT; CHANGE IN CONTROL; CREDITORS
to all the right, title and estate of, and will be, the Trustee; and the retiring trustee will after the settlement of its final account and the receipt of any compensation or expenses due it, deliver the Trust Fund to the successor trustee together with all such instruments of transfer, conveyance, assignment and further assurance as the successor trustee may reasonably require. The retiring trustee will retain a lien upon the Trust Fund to secure all amounts due the retiring trustee pursuant to the provisions of this Trust Agreement. 5.10. Merger or Consolidation of the Trustee. Any corporation continuing as the result of any merger or resulting from any consolidation to which merger or consolidation the Trustee is a party, or any corporation to which substantially all the business and assets of the Trustee may be transferred, will be deemed automatically to be continuing as the Trustee. 6. ENFORCEMENT; CHANGE IN CONTROL; CREDITORS 6.1. Enforcement of Trust Agreement and Legal Proceedings. The Company shall have the right to enforce any provision of this Trust Agreement, and on or after a Change in Control, any Participant (or if such participant is deceased, his Beneficiary) shall have the right as a beneficiary of the Trust to enforce any provision of this Trust Agreement that affects the right, title and interest of such Participant in the Trust. Except as otherwise provided in Sections 5.6 and 5.7 hereof, in any action or proceeding affecting the Trust, the only necessary parties shall be the Company, the Trustee and the Participants with respect to whom Accounts are then in existence in the Trust Fund and, except as otherwise required by applicable law, no other person shall be entitled to any notice or service of process. Any judgment entered in such an action or proceeding shall, to the maximum extent permitted by applicable law, be binding and conclusive on all persons having or claiming to have any interest in the Trust.
6.2. Change in Control. For purposes of this Trust, a Change in Control of the Company shall be deemed to have occurred if the circumstances in paragraph (a), paragraph (b), paragraph (c) or paragraph (d) occur: (a) any "person," as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or The Atchison, Topeka and Santa Fe Railway Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or The Atchison, Topeka and Santa Fe Railway Company, or any corporation owned, directly or indirectly, by the stockholders of the Company or the Atchison, Topeka and Santa Fe Railway Company in substantially the same proportions as their ownership of stock of the Company or The Atchison, Topeka and Santa Fe Railway Company), is or become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or The Atchison, Topeka and Santa Fe Railway Company representing 25% or more of the combined voting power of the Company's or The Atchison, Topeka and Santa Fe Railway Company's then outstanding securities; (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the person who has entered into an agreement with the Company to effect a transaction described in clause (a), (b) or (c) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whole election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company or The Atchison, Topeka and Santa Fe Railway Company approve a merger or consolidation of the Company or The Atchison, Topeka, Santa Fe Railway Company with any other corporation, other than (a) a merger or consolidation which would result in the voting securities of the Company or The Atchison, Topeka and Santa Fe Railway Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or The Atchison, Topeka
6.2. Change in Control. For purposes of this Trust, a Change in Control of the Company shall be deemed to have occurred if the circumstances in paragraph (a), paragraph (b), paragraph (c) or paragraph (d) occur: (a) any "person," as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or The Atchison, Topeka and Santa Fe Railway Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or The Atchison, Topeka and Santa Fe Railway Company, or any corporation owned, directly or indirectly, by the stockholders of the Company or the Atchison, Topeka and Santa Fe Railway Company in substantially the same proportions as their ownership of stock of the Company or The Atchison, Topeka and Santa Fe Railway Company), is or become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or The Atchison, Topeka and Santa Fe Railway Company representing 25% or more of the combined voting power of the Company's or The Atchison, Topeka and Santa Fe Railway Company's then outstanding securities; (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the person who has entered into an agreement with the Company to effect a transaction described in clause (a), (b) or (c) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whole election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company or The Atchison, Topeka and Santa Fe Railway Company approve a merger or consolidation of the Company or The Atchison, Topeka, Santa Fe Railway Company with any other corporation, other than (a) a merger or consolidation which would result in the voting securities of the Company or The Atchison, Topeka and Santa Fe Railway Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or The Atchison, Topeka and Santa Fe Railway Company (or such surviving entity) outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company or The Atchison, Topeka and Santa Fe Railway Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's or The Atchison, Topeka and Santa Fe Railway Company's then outstanding securities; or (d) the stockholders of the Company or The Atchison, Topeka and the Santa Fe Railway Company approve a plan of complete liquidation of the Company or The Atchison, Topeka and Santa Fe Railway Company or an agreement for the sale or disposition by the Company or The Atchison, Topeka and Santa Fe Railway Company of all or substantially all
of the Company's or The Atchison, Topeka and Santa Fe Railway Company's assets. For purposes of this clause (d), the term "the sale or disposition by the Company or The Atchison, Topeka and Santa Fe Railway Company of all or substantially all of the Company's or The Atchison, Topeka and Santa Fe Railway Company's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of the Company or The Atchison, Topeka and Santa Fe Railway Company or of any direct or indirect subsidiary of the Company or The Atchison, Topeka and Santa Fe Railway Company (including the stock of any direct or indirect subsidiary of the Company or The Atchison, Topeka and Santa Fe Railway Company) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of the Company or The Atchison, Topeka and Santa Fe Railway Company determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the fair market value of the Company or The Atchison, Topeka and Santa Fe Railway Company (as hereinafter defined). For purposes of the preceding sentence, the fair market value of the Company or The Atchison, Topeka and Santa Fe Railway Company (as hereinafter defined). For purposes of the preceding sentence, the "fair market value of the Company or The Atchison, Topeka and Santa Fe Railway
of the Company's or The Atchison, Topeka and Santa Fe Railway Company's assets. For purposes of this clause (d), the term "the sale or disposition by the Company or The Atchison, Topeka and Santa Fe Railway Company of all or substantially all of the Company's or The Atchison, Topeka and Santa Fe Railway Company's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of the Company or The Atchison, Topeka and Santa Fe Railway Company or of any direct or indirect subsidiary of the Company or The Atchison, Topeka and Santa Fe Railway Company (including the stock of any direct or indirect subsidiary of the Company or The Atchison, Topeka and Santa Fe Railway Company) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of the Company or The Atchison, Topeka and Santa Fe Railway Company determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the fair market value of the Company or The Atchison, Topeka and Santa Fe Railway Company (as hereinafter defined). For purposes of the preceding sentence, the fair market value of the Company or The Atchison, Topeka and Santa Fe Railway Company (as hereinafter defined). For purposes of the preceding sentence, the "fair market value of the Company or The Atchison, Topeka and Santa Fe Railway Company" shall be the aggregate market value of the Company's or The Atchison, Topeka and Santa Fe Railway Company's outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Company's or The Atchison, Topeka and Santa Fe Railway Company's other outstanding equity securities. The aggregate market value of the Company's or The Atchison, Topeka and Santa Fe Railway Company's common stock shall be determined by multiplying the number of shares of the Company's or The Atchison, Topeka and Santa Fe Railway Company's common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement with respect to the transaction or series of related transactions (the "Transaction Date") by the average closing price for the Company's or The Atchison, Topeka and Santa Fe Railway Company's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of The Atchison, Topeka and Santa Fe Railway Company or any other equity securities of the Company shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of the Company's or The Atchison, Topeka and Santa Fe Railway Company's common stock (in the event such common stock is not publicly traded) or by such other method as the Board of Directors of the Company or The Atchison, Topeka and Santa Fe Railway Company shall determine is appropriate. (e) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any one or more transactions contemplated by a certain agreement known as the Agreement and Plan of Merger dated as of June 29, 1994 between Burlington Northern Inc. and Santa Fe Pacific Corporation (referred to as the "Merger Transactions"), or any events or transactions that form a part of, or are in furtherance of, the Merger Transactions, or the execution of any agreement in furtherance of the Merger Transactions, be treated as a "Change in Control" or a "Potential Change in Control" for purposes of this Agreement. (f) Notwithstanding the foregoing definition, no Change in Control shall be deemed to have occurred for purposes of this Trust Agreement unless and until the Trustee has actual knowledge from a Reliable Source, not including a Participant, of such Change in
Control. 6.3 Insolvency of the Company. (a) If at any time (i) the Company or a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, (ii) the Trustee is served with any order, process or paper from which it appears that an allegation to the effect that the Company is Insolvent has been made in a judicial proceeding or (iii) the Trustee has actual knowledge of a current report or statement from a nationally recognized credit reporting agency or from a Reliable Source to the effect that the Company is Insolvent, the Trustee shall discontinue payment of benefits under this Trust Agreement, shall hold the Trust Fund for the benefit of the Company's creditors, and shall resume payment of Benefits under this Trust Agreement in accordance with Section 4 hereof only upon receipt of an order of a court of competent jurisdiction requiring such payment or if the Trustee has actual knowledge of a current report or statement from a nationally recognized credit reporting agency or other Reliable Source (other than a Reliable Source described in clause (iii) of the definition thereof) to the effect that the Company is not Insolvent; provided, however, that in the event that payment of Benefits was
Control. 6.3 Insolvency of the Company. (a) If at any time (i) the Company or a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, (ii) the Trustee is served with any order, process or paper from which it appears that an allegation to the effect that the Company is Insolvent has been made in a judicial proceeding or (iii) the Trustee has actual knowledge of a current report or statement from a nationally recognized credit reporting agency or from a Reliable Source to the effect that the Company is Insolvent, the Trustee shall discontinue payment of benefits under this Trust Agreement, shall hold the Trust Fund for the benefit of the Company's creditors, and shall resume payment of Benefits under this Trust Agreement in accordance with Section 4 hereof only upon receipt of an order of a court of competent jurisdiction requiring such payment or if the Trustee has actual knowledge of a current report or statement from a nationally recognized credit reporting agency or other Reliable Source (other than a Reliable Source described in clause (iii) of the definition thereof) to the effect that the Company is not Insolvent; provided, however, that in the event that payment of Benefits was discontinued by reason of a court order or injunction, the Trustee shall resume payment of Benefits only upon receipt of an order of a court of competent jurisdiction requiring such payment. The Company and its Chief Executive Officer shall be obligated to give the Trustee prompt written notice in the event that the Company becomes Insolvent. The Trustee shall not be liable to anyone in the event Benefits are discontinued pursuant to this Section 6.3. (b) If the Trustee discontinue payment of Benefits pursuant to Section 6.3(a) and subsequently resumes such payment, the first payment to the Participant for his Account following such discontinuance shall include an aggregate amount equal to the difference between the payments which would have been made to such Participant under this Trust Agreement but for Section 6.2(a) and the aggregate payments actually made to such Participant by the Company (as certified to the Trustee by the Participant in writing) during any such period of discontinuance, plus interest on such amount at a rate equivalent to the net rate of return earned by the Trust Fund during the period of such discontinuance. (c) In the event that at any time any amount is paid from the Trust Fund to creditors of the Company, the Company shall upon demand by the Trustee deposit into the Trust Fund a sum equal to the amount paid by the Trust Fund to such creditors. The Trustee shall be under no obligation to collect any such deposit. 7. AMENDMENT, REVOCATION AND TERMINATION 7.1. Amendment. (a) Prior to the occurrence of a Change in Control, the Company may from time to time amend in writing, in whole or in part, any or all of the provisions of this trust Agreement with the written consent of the Trustee but without the consent of any Participant; except that the Trust Agreement may not be amended in accordance with this paragraph (a)
during a Potential Change in Control. (b) At any time upon or after the occurrence of a Change in Control, and during a Potential Change in Control, the Company may from time to time amend in writing, in whole or in part, any or all of the provisions of this Trust Agreement with the written consent of the Trustee and two-thirds of the Participants for whom Accosts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect. In addition, the Trust Agreement may be amended by the Company at any time with the written consent of the Trustee, but only to the extent such amendment is required by law or is necessary or desirable to prevent adverse tax consequences to Participants. In the event that the Company proposes to adopt an amendment to the Trust Agreement pursuant to the preceding sentence, the Company shall provide the Trustee with an opinion of counsel reasonably acceptable to the Trustee and in form and substance satisfactory to the Trustee to the effect that such amendment is required by law or is necessary or desirable to prevent adverse tax consequences to Participants. The Trustee may rely and shall be fully protected in relying on such opinion without inquiry.
during a Potential Change in Control. (b) At any time upon or after the occurrence of a Change in Control, and during a Potential Change in Control, the Company may from time to time amend in writing, in whole or in part, any or all of the provisions of this Trust Agreement with the written consent of the Trustee and two-thirds of the Participants for whom Accosts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect. In addition, the Trust Agreement may be amended by the Company at any time with the written consent of the Trustee, but only to the extent such amendment is required by law or is necessary or desirable to prevent adverse tax consequences to Participants. In the event that the Company proposes to adopt an amendment to the Trust Agreement pursuant to the preceding sentence, the Company shall provide the Trustee with an opinion of counsel reasonably acceptable to the Trustee and in form and substance satisfactory to the Trustee to the effect that such amendment is required by law or is necessary or desirable to prevent adverse tax consequences to Participants. The Trustee may rely and shall be fully protected in relying on such opinion without inquiry. 7.2. Revocability. (a) Prior to a Change in Control, the Trust shall be revocable by the Company, all or any part of the trust Fund shall be recoverable by the Company (with or without revocation of the Trust), and the Participants shall have no right to any part of the Trust Fund. However, during a Potential Change in Control, the trust may not be revoked in accordance with this paragraph (a); provided that during a Potential Change in Control (and prior to a Change in Control), all or any part of the trust Fund shall be recoverable by the Company. (b) Upon a Change in Control, the Trust shall become irrevocable, and shall be held for the exclusive purpose of providing the Benefits to Participants and their beneficiaries and defraying expenses of the Trust in accordance with the provisions of this Trust Agreement. Once the Trust has become irrevocable in accordance with this paragraph (b), no part of the income or corpus of the Trust Fund shall be recoverable by the Company. (c) During a Potential Change in Control, the Trust shall not revocable. The Trust may be revoked after a Potential Change in Control ceases. However, the Trust may not be revoked if the Potential Change in Control and, in such circumstances, the Trust shall be subject to paragraph (b) next above. (d) Notwithstanding anything in this Trust Agreement to the contrary, the Trust Fund shall at all times be subject to the claims of creditors of the Company as provided in Section 6.3 of this Trust Agreement. 7.3 Termination. (a) Prior to a Change in Control, the Company may revoke and terminate the Trust at any time, in its sole discretion, without the approval of any Participant, upon notice in writing to the trustee. As soon as practicable following the Trustee's receipt of such notice, the
Trustee shall settle its final accounts in accordance with Section 5.6 hereof and, after the receipt of any unpaid fees and expenses, shall distribute the balance of the Trust Fund as directed by the Company. (b) Following a Change in Control the Trust shall terminate after the Trustee shall have made all payments required by Section 4, and, after the Trustee's final accounts have been settled in accordance with Section 5.6 hereof and after the receipt of any unpaid fees and expenses, the Trustee shall distribute the balance of the Trust Fund as directed by the Company. 8. MISCELLANEOUS PROVISIONS 8.1. Successors. This Trust Agreement shall be binding upon and inure to the benefit of the Company and the Trustee and their respective successors and assigns. 8.2. Nonalienation.
Trustee shall settle its final accounts in accordance with Section 5.6 hereof and, after the receipt of any unpaid fees and expenses, shall distribute the balance of the Trust Fund as directed by the Company. (b) Following a Change in Control the Trust shall terminate after the Trustee shall have made all payments required by Section 4, and, after the Trustee's final accounts have been settled in accordance with Section 5.6 hereof and after the receipt of any unpaid fees and expenses, the Trustee shall distribute the balance of the Trust Fund as directed by the Company. 8. MISCELLANEOUS PROVISIONS 8.1. Successors. This Trust Agreement shall be binding upon and inure to the benefit of the Company and the Trustee and their respective successors and assigns. 8.2. Nonalienation. Except insofar as applicable law may otherwise require, (a) no amount payable to or in respect of any Participant at any time under the Trust shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind, and any attempt to so alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber any such amount, whether presently or thereafter payable, shall be void; and (b) the Trust Fund shall in no manner be liable for or subject to the debts or liabilities of any Participant. 8.3. Communications. (a) Communications to the Company shall be addressed to the Company at 1700 E. Golf Road, Schaumburg, Illinois 60173, Attn: Carol Beerbaum, provided, however, that upon the Company's written request, such communications shall be sent to such other address as the Company may specify. (b) Communications to the Trustee shall be addressed to it at One Wall Street, New York, New York 10286, Attn: Division Head, Master Trust/Custody Division; provided, however, that upon the Trustee's written request, such communications shall be sent to such other address as the Trustee may specify. (c) No communication shall be binding on the Trustee until it is received by officer the Trustee having primary responsibility for this Trust, and no communication shall be binding on the Company until it is received by the Company, 8.4. Headings. Titles to the Sections of this Trust Agreement are included for convenience only and shall not control the meaning or interpretation of any provision of this Trust Agreement.
8.5. Third Parties. A third party dealing with the Trustee shall not be required to make inquiry as to the authority of the Trustee to take any action nor be under any obligation to follow the proper application by the Trustee of the proceeds of sale of any property sold by the Trustee or to inquire into the validity or propriety of any act of the Trustee. 8.6. Governing Law. This Trust Agreement and the Trust established hereunder shall be governed by and construed, enforced, and administered in accordance with the internal laws of the State of New York without regard to principles of conflicts of laws and the Trustee shall be liable to account only in the courts of that state. 8.7. Counterparts.
8.5. Third Parties. A third party dealing with the Trustee shall not be required to make inquiry as to the authority of the Trustee to take any action nor be under any obligation to follow the proper application by the Trustee of the proceeds of sale of any property sold by the Trustee or to inquire into the validity or propriety of any act of the Trustee. 8.6. Governing Law. This Trust Agreement and the Trust established hereunder shall be governed by and construed, enforced, and administered in accordance with the internal laws of the State of New York without regard to principles of conflicts of laws and the Trustee shall be liable to account only in the courts of that state. 8.7. Counterparts. This Trust Agreement may be executed in any number of counterparts, each of which shall be deemed to be the original although the others shall not be produced.
IN WITNESS WHEREOF, This Trust Agreement has been duly executed by the parties hereto a of the day and year first above written. SANTA FE PACIFIC CORPORATION
By: ------------------------------Attest - ------------------------THE BANK OF NEW YORK, as TRUSTEE By:
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Exhibit 10.38 BURLINGTON NORTHERN SANTA FE CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS ARTICLE 1 PURPOSE 1.01 The purpose of this Deferred Compensation Plan (Plan) is to attract and retain highly qualified individuals to serve as members of the Company's Board of Directors. ARTICLE II ADMINISTRATION 2.01 The Plan shall be administered by the Compensation Committee (Committee) of the Board of Directors. The Committee shall interpret the Plan, prescribe, amend and rescind rules relating to it from time to time as it deems proper and in the best interests of the Company, and to take any other action necessary for the administration of the Plan. Any decision or interpretation adopted by the Committee shall be final and conclusive and shall be binding upon all participants.
IN WITNESS WHEREOF, This Trust Agreement has been duly executed by the parties hereto a of the day and year first above written. SANTA FE PACIFIC CORPORATION
By: ------------------------------Attest - ------------------------THE BANK OF NEW YORK, as TRUSTEE By:
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Exhibit 10.38 BURLINGTON NORTHERN SANTA FE CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS ARTICLE 1 PURPOSE 1.01 The purpose of this Deferred Compensation Plan (Plan) is to attract and retain highly qualified individuals to serve as members of the Company's Board of Directors. ARTICLE II ADMINISTRATION 2.01 The Plan shall be administered by the Compensation Committee (Committee) of the Board of Directors. The Committee shall interpret the Plan, prescribe, amend and rescind rules relating to it from time to time as it deems proper and in the best interests of the Company, and to take any other action necessary for the administration of the Plan. Any decision or interpretation adopted by the Committee shall be final and conclusive and shall be binding upon all participants. ARTICLE III PARTICIPATION 3.01 Participation in this Plan is voluntary. Each director of the Company may elect to participate in the Plan by written notice to the Company upon his election to the Board of Directors. 3.02 The election, which shall be irrevocable, shall remain in effect for one year which shall begin on the day of the annual stockholder's meeting and shall terminate the day before the succeeding annual stockholder's meeting. The last day of a calendar quarter shall be used to calculate and credit interest and to make compensation payments due under the Plan. 3.03 The election by a director who is elected to the Board at other than an annual stockholders' meeting shall remain in effect until the next annual stockholders' meeting.
ARTICLE IV
Exhibit 10.38 BURLINGTON NORTHERN SANTA FE CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS ARTICLE 1 PURPOSE 1.01 The purpose of this Deferred Compensation Plan (Plan) is to attract and retain highly qualified individuals to serve as members of the Company's Board of Directors. ARTICLE II ADMINISTRATION 2.01 The Plan shall be administered by the Compensation Committee (Committee) of the Board of Directors. The Committee shall interpret the Plan, prescribe, amend and rescind rules relating to it from time to time as it deems proper and in the best interests of the Company, and to take any other action necessary for the administration of the Plan. Any decision or interpretation adopted by the Committee shall be final and conclusive and shall be binding upon all participants. ARTICLE III PARTICIPATION 3.01 Participation in this Plan is voluntary. Each director of the Company may elect to participate in the Plan by written notice to the Company upon his election to the Board of Directors. 3.02 The election, which shall be irrevocable, shall remain in effect for one year which shall begin on the day of the annual stockholder's meeting and shall terminate the day before the succeeding annual stockholder's meeting. The last day of a calendar quarter shall be used to calculate and credit interest and to make compensation payments due under the Plan. 3.03 The election by a director who is elected to the Board at other than an annual stockholders' meeting shall remain in effect until the next annual stockholders' meeting.
ARTICLE IV COMPENSATION 4.01 Each Participant may elect to have all or a specified percentage of his Compensation deferred until he ceases to be a director. 4.02 "Compensation" shall mean the annual retainer and meeting fees of Board and Board Committee meetings. 4.03 The Company shall establish a memorandum account for each Participant who has elected to defer a portion of his Compensation for any year and shall credit such account for the Compensation due at the end of each quarter. 4.04 Interest shall be credited to each memorandum account at the end of each quarter or such other periods as may be determined by the Committee. The interest rate to be credited shall be the Prime Rate as published in the Wall Street Journal at the end of each quarter. 4.05 Distribution of a Participants' memorandum account shall be as follows:
ARTICLE IV COMPENSATION 4.01 Each Participant may elect to have all or a specified percentage of his Compensation deferred until he ceases to be a director. 4.02 "Compensation" shall mean the annual retainer and meeting fees of Board and Board Committee meetings. 4.03 The Company shall establish a memorandum account for each Participant who has elected to defer a portion of his Compensation for any year and shall credit such account for the Compensation due at the end of each quarter. 4.04 Interest shall be credited to each memorandum account at the end of each quarter or such other periods as may be determined by the Committee. The interest rate to be credited shall be the Prime Rate as published in the Wall Street Journal at the end of each quarter. 4.05 Distribution of a Participants' memorandum account shall be as follows: (a) In five equal annual installments in January of each year following the year in which the Participant ceases to be a director; (b) If approved by the Committee, in some other number of equal annual installments, not to exceed ten, commencing in January of the year following the year in which the Participant ceases to be a director; (c) If approved by the Committee, in a lump sum on a date within the ten year period following the year in which the Participant ceases to be a director. 4.06 Interest shall accrue on the outstanding memorandum account balance to the date of distribution. 4.07 If a Participant dies or becomes permanently disabled prior to payment of all amounts due under the Plan, the balance of the amount due shall be payable to the Participant or his estate, at the discretion of the Committee, in a lump sum as soon as is practicable or in some number of equal annual installments, not to exceed ten, commencing in January of the year following the year in which the Participant died or became permanently disabled. 4.08 The Committee shall distribute periodic earnings reports to the Participants under the Plan.
ARTICLE V GENERAL PROVISIONS 5.01 The deferred compensation to be paid to the Participants pursuant to this Plan is an unfunded obligation of the Company. Nothing herein contained shall require the Company to segregate any monies from its general funds, or to create any trusts, or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any funds invested or reinvested, including the income or profits therefrom, which the Company may make to fulfill its obligations under this Plan shall at all times remain in the Company. A Participant's right to receive the payment of any deferred compensation may not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. 5.02 The Board of Directors may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Board may reinstate any or all of its provisions.
ARTICLE V GENERAL PROVISIONS 5.01 The deferred compensation to be paid to the Participants pursuant to this Plan is an unfunded obligation of the Company. Nothing herein contained shall require the Company to segregate any monies from its general funds, or to create any trusts, or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any funds invested or reinvested, including the income or profits therefrom, which the Company may make to fulfill its obligations under this Plan shall at all times remain in the Company. A Participant's right to receive the payment of any deferred compensation may not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. 5.02 The Board of Directors may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Board may reinstate any or all of its provisions.
EXHIBIT 11 BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 1995 1994 1993 - ---------------------------------------------------------------Net income - ---------Primary: Net income........................... $ 92 $ 416 $ 296 Convertible and mandatory redeemable preferred stock dividends..................... (21) (22) (22) -------------Net income available for common shareholders........................ $ 71 $ 394 $ 274 ====== ===== ===== Fully diluted: Net income........................... $ 71 $ 416 $ 296 ====== ===== ===== Weighted average number of shares - --------------------------------Primary: Average common shares outstanding.... Common share equivalents resulting from assumed exercise of stock options.............................
104.4
89.1
88.6
2.3 -----106.7 ======
1.1 ----90.2 =====
1.1 ----89.7 =====
Fully diluted (1): Average common shares outstanding.... Common share equivalents resulting from assumed conversion of convertible preferred stock......... Common share equivalents resulting from assumed exercise of stock options assuming full dilution......
106.7
89.1
88.6
-
7.4
7.4
-----106.7 ======
1.0 ----97.5 =====
1.2 ----97.2 =====
EXHIBIT 11 BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 1995 1994 1993 - ---------------------------------------------------------------Net income - ---------Primary: Net income........................... $ 92 $ 416 $ 296 Convertible and mandatory redeemable preferred stock dividends..................... (21) (22) (22) -------------Net income available for common shareholders........................ $ 71 $ 394 $ 274 ====== ===== ===== Fully diluted: Net income........................... $ 71 $ 416 $ 296 ====== ===== ===== Weighted average number of shares - --------------------------------Primary: Average common shares outstanding.... Common share equivalents resulting from assumed exercise of stock options.............................
104.4
89.1
88.6
2.3 -----106.7 ======
1.1 ----90.2 =====
1.1 ----89.7 =====
Fully diluted (1): Average common shares outstanding.... Common share equivalents resulting from assumed conversion of convertible preferred stock......... Common share equivalents resulting from assumed exercise of stock options assuming full dilution......
106.7
89.1
88.6
-
7.4
7.4
-----106.7 ======
1.0 ----97.5 =====
1.2 ----97.2 =====
Earnings per common share - ------------------------Primary................................ $ Fully diluted.......................... .67 .67 $4.37 4.27 $3.06 3.04
Primary earnings per common share are computed by dividing net income, after deduction of preferred stock dividends, by the weighted average number of common shares and common share equivalents outstanding. Fully diluted earnings per common share are computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents are computed using the treasury stock method. An average market price is used to determine the number of common share equivalents for primary earnings per common share. The higher of the average or end-of-period market price is used to determine common share equivalents for fully diluted earnings per common share. In addition, the if-converted method is used for convertible preferred stock when computing fully diluted earnings per common share. The average number of common shares used for earnings per share calculations through December 31, 1995 reflect the effect of common shares issued in connection with the merger with Santa Fe Pacific Corporation (SFP) as outstanding for the period from September 22, 1995 through December 31, 1995. Future calculations will therefore reflect a significant increase in the number of outstanding common shares.
Earnings per common share may not compute due to the level of rounding in this exhibit. (1) For the year ended December 31, 1995, the computation of fully diluted earnings per share was antidilutive; therefore, the amounts reported for primary and fully diluted earnings per share are the same.
EXHIBIT 12 BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN MILLIONS, EXCEPT RATIO AMOUNTS)
Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------Earnings: Pre-tax income........................ Add: Interest and fixed charges, excluding capitalized interest..... Portion of rent under long-term operating leases representative of an interest factor.............. Amortization of capitalized interest........................... Less: Undistributed equity in earnings of investments accounted for under the equity method............. $334 $695 $521
220
155
145
129 1
98 -
92 -
27 ----
4 ----
3 ----
Total Earnings Available for Fixed Charges........................
$657 ====
$944 ====
$755 ====
Fixed Charges: Interest and Fixed Charges............ Portion of rent under long-term operating leases representative of an interest factor................ $227 $157 $145
129 ---$356 ====
98 ---$255 ==== 3.70x
92 ---$237 ==== 3.19x
Total Fixed Charges...................
Ratio of Earnings to Fixed Charges...... 1.85x (1)
(1) Earnings for the year ended December 31, 1995, include merger, severance and asset charges of $735 million. Excluding these costs, the ratio would have been 3.91x.
CONSOLIDATED FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data) The selected financial data shown below include BNI results for each of the five years ended December 31, 1995 and SFP results from September 22, 1995 to December 31, 1995. - ------------------------------------------------------------------------------------------------------Year ended December 31, 1995 1994 1993 19 - ------------------------------------------------------------------------------------------------------For the Year Revenues $ 6,183 $ 4,995 $ 4,699 $ 4,6 Operating income (loss)/(1)/ 526 853 661 5
EXHIBIT 12 BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN MILLIONS, EXCEPT RATIO AMOUNTS)
Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------Earnings: Pre-tax income........................ Add: Interest and fixed charges, excluding capitalized interest..... Portion of rent under long-term operating leases representative of an interest factor.............. Amortization of capitalized interest........................... Less: Undistributed equity in earnings of investments accounted for under the equity method............. $334 $695 $521
220
155
145
129 1
98 -
92 -
27 ----
4 ----
3 ----
Total Earnings Available for Fixed Charges........................
$657 ====
$944 ====
$755 ====
Fixed Charges: Interest and Fixed Charges............ Portion of rent under long-term operating leases representative of an interest factor................ $227 $157 $145
129 ---$356 ====
98 ---$255 ==== 3.70x
92 ---$237 ==== 3.19x
Total Fixed Charges...................
Ratio of Earnings to Fixed Charges...... 1.85x (1)
(1) Earnings for the year ended December 31, 1995, include merger, severance and asset charges of $735 million. Excluding these costs, the ratio would have been 3.91x.
CONSOLIDATED FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data) The selected financial data shown below include BNI results for each of the five years ended December 31, 1995 and SFP results from September 22, 1995 to December 31, 1995. - ------------------------------------------------------------------------------------------------------Year ended December 31, 1995 1994 1993 19 - ------------------------------------------------------------------------------------------------------For the Year Revenues $ 6,183 $ 4,995 $ 4,699 $ 4,6 Operating income (loss)/(1)/ 526 853 661 5 Income (loss) before extraordinary item and cumulative effect of change in accounting method 198 426 296 2 Accounting change/Extraordinary item/(2)//(3)//(4)//(5)/ (106) (10) -( Net income (loss) $ 92 $ 416 $ 296 $ 2 Earnings (loss) available for common stockholders $ 71 $ 394 $ 274 $ 2 Primary earnings (loss) per share: Before extraordinary item and change in accounting method $ 1.66 $ 4.48 $ 3.06 $ 3.
CONSOLIDATED FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data) The selected financial data shown below include BNI results for each of the five years ended December 31, 1995 and SFP results from September 22, 1995 to December 31, 1995. - ------------------------------------------------------------------------------------------------------Year ended December 31, 1995 1994 1993 19 - ------------------------------------------------------------------------------------------------------For the Year Revenues $ 6,183 $ 4,995 $ 4,699 $ 4,6 Operating income (loss)/(1)/ 526 853 661 5 Income (loss) before extraordinary item and cumulative effect of change in accounting method 198 426 296 2 Accounting change/Extraordinary item/(2)//(3)//(4)//(5)/ (106) (10) -( Net income (loss) $ 92 $ 416 $ 296 $ 2 Earnings (loss) available for common stockholders $ 71 $ 394 $ 274 $ 2 Primary earnings (loss) per share: Before extraordinary item and change in accounting method $ 1.66 $ 4.48 $ 3.06 $ 3. Accounting change/Extraordinary item (.99) (.11) -(. Primary earnings (loss) per share $ .67 $ 4.37 $ 3.06 $ 3. Average shares (in thousands) 106,730 90,187 89,672 88,6 Fully diluted earnings (loss) per share: Before extraordinary item and change in accounting method $ 1.66 $ 4.38 $ 3.04 $ 3. Accounting change/Extraordinary item (.99) (.11) -(. Fully diluted earnings (loss) per share $ .67 $ 4.27 $ 3.04 $ 3. Average shares (in thousands) 106,730 97,528 97,189 89,4 Dividends declared per common share $ 1.20 $ 1.20 $ 1.20 $ 1. - ------------------------------------------------------------------------------------------------------At year end Total assets $ 18,269 $ 7,592 $ 7,045 $ 6,5 Long-term debt, including current portion and commercial paper 4,233 1,819 1,737 1,5 Redeemable preferred stock ---Stockholders' equity 5,037 2,237 1,919 1,7 - ------------------------------------------------------------------------------------------------------Other Total capital expenditures $ 1,042 $ 753 $ 676 $ 4 Depreciation and amortization 520 362 352 3 Operating ratio/(6)/ 80% 83% 86% Total debt to total capital, excluding redeemable preferred stock 46% 45% 48% - ------------------------------------------------------------------------------------------------------(1) 1995 includes $735 million before taxes related to merger, severance and asset charges as discussed statements. 1991 includes pre-tax charge of $708 million related to: (i) costs for reducing surplus management separation pay program, (ii) increases in estimated personal injury costs and (iii) incre environmental clean-up costs. (2) 1995 includes the cumulative effect of the change in accounting method for locomotive overhauls whic $100 million, or $.94 per common share. Additionally, 1995 includes an extraordinary loss on retirem (after tax), or $.05 per common share. (3) 1994 includes the cumulative effect of the implementation of the accounting standard for postemploym (4) 1992 includes the cumulative effect of the change in accounting method for revenue recognition and t implementation of the accounting standard for postretirement benefits. (5) 1991 includes extraordinary loss on retirement of debt. (6) 1995 and 1991 operating ratios exclude the pre-tax charges discussed in note (1) above.
BURLINGTON NORTHERN SANTA FE FINANCIAL CONTENTS 13 Management's Discussion and Analysis 21 Report of Management 21 Report of Independent Accountants 22 Consolidated Statements of Income
BURLINGTON NORTHERN SANTA FE FINANCIAL CONTENTS 13 Management's Discussion and Analysis 21 Report of Management 21 Report of Independent Accountants 22 Consolidated Statements of Income 23 Consolidated Balance Sheets 24 Consolidated Statements of Cash Flows 25 Consolidated Statements of Changes in Stockholders' Equity 26 Notes to Consolidated Financial Statements MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis relates to the financial condition and results of operations of Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries (collectively BNSF or Company). The principal subsidiaries are Burlington Northern Inc. (BNI), Burlington Northern Railroad Company (BNRR), Santa Fe Pacific Corporation (SFP) and The Atchison, Topeka and Santa Fe Railway Company (ATSF). Acquisition of SFP On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger (as amended on October 26, 1994, December 18, 1994, January 24, 1995 and September 19, 1995, the Merger Agreement) pursuant to which SFP would merge with BNI in the manner set forth below (the Merger). Stockholders of BNI and SFP approved the Merger Agreement at special stockholders' meetings held on February 7, 1995. On August 23, 1995, the Interstate Commerce Commission (ICC) issued a written decision approving the Merger and on September 22, 1995 the Merger was consummated. As discussed in Note 2, the business combination with SFP was accounted for by the purchase method. Pursuant to the Merger Agreement, on December 23, 1994, BNI and SFP commenced tender offers (together, the Tender Offer) to acquire 25 million and 38 million shares of SFP common stock, respectively, at $20 per share in cash. During the first quarter of 1995, SFP borrowed $1.0 billion under a credit facility of which $760 million of the proceeds were used to purchase the 38 million shares pursuant to the Tender Offer. In addition, BNI borrowed $500 million under a credit facility of which the proceeds were used to finance BNI's purchase of SFP common stock in the Tender Offer. The Tender Offer was completed on February 21, 1995. Also, pursuant to the Merger Agreement, BNI and SFP were entitled to elect to consummate the Merger through the use of one of two possible structures: (i) a merger of SFP with and into BNI or (ii) the Holding Company Structure described below. To ensure that the transaction contemplated by the Merger Agreement qualified as a tax-free transaction for federal income tax purposes, the parties utilized the Holding Company Structure. Under the Holding Company Structure, BNSF created two subsidiaries. One subsidiary merged with and into BNI, and the other subsidiary merged with and into SFP. Each holder of one share of BNI common stock received one share of BNSF common stock and each holder of one share of SFP common stock, excluding the SFP common stock acquired by BNI in the Tender Offer and the SFP common stock held by SFP as treasury stock, received 0.41143945 shares of BNSF common stock, which reflects the effects of the repurchase program discussed below. The rights of each stockholder of BNSF are substantially identical to the rights of a stockholder of BNI, and the Holding Company Structure has the same economic effect with respect to the stockholders of BNI and SFP as would a direct merger of BNI and SFP.
In the Merger Agreement, the exchange ratio of BNSF common shares for each share of outstanding SFP common stock upon consummation of the Merger was set at not less than 0.40 shares to not more than 0.4347 shares, with repurchases of SFP common stock by SFP increasing the exchange ratio pro rata. SFP repurchased approximately 3.6 million shares which, along with the effect of SFP stock options exercised, resulted in the final exchange ratio of 0.41143945 shares. Results of operations The results of operations discussed below include BNI results for the years ended December 31, 1995, 1994 and 1993 and SFP results from September 22, 1995 through December 31, 1995. Year ended December 31, 1995 compared with year ended December 31, 1994 BNSF recorded net income for 1995 of $92 million ($.67 per common share, primary and fully diluted) compared with net income of $416 million ($4.37 per common share, primary, and $4.27 per common share, fully diluted) for 1994. Results for 1995 were reduced by $735 million of merger, severance and asset charges (see Note 3: Merger, severance and asset charges). The corresponding reduction in net income was approximately $453 million, or $4.24 per common share. Results for 1995 were further reduced by $100 million (after tax), or $.94 per common share, for the cumulative effect of an accounting change for locomotive overhauls and $6 million (after tax), or $.05 per common share, for an extraordinary loss on early retirement of debt. Results for 1994 were reduced by $10 million (after tax), or $.11 per common share, for the cumulative effect of an accounting change for postemployment benefits. Excluding the above items, net income for 1995 would have been $651 million compared to $426 million in 1994. P A G E 13
BURLINGTON NORTHERN SANTA FE Revenue table The following table presents BNSF's revenue information by commodity for the years ended December 31, 1995, 1994 and 1993 and includes certain reclassifications of prior year information to conform to current year presentation. SFP results are included only for the period of September 22, 1995 to December 31, 1995.
- ------------------------------------------------------------------------------------------------------Revenue Revenues Ton Miles (RTM) 1995 1994 1993 1995 1994 1993 1 -----------------------------------------------------------------------(IN MILLIONS) (IN MILLIONS) - ------------------------------------------------------------------------------------------------------Coal $1,815 $1,669 $1,532 153,169 136,164 117,654 $1 Intermodal 1,118 745 701 38,516 24,671 22,718 2 Agricultural Commodities 1,101 759 710 55,356 33,922 33,945 1 Forest Products 459 440 419 19,828 19,495 18,329 2 Chemicals/Plastics 402 310 315 15,127 11,695 11,862 2 Food 347 304 291 12,332 10,341 9,711 2 Metals 308 253 248 13,804 11,503 11,233 2 Minerals and Ores 285 244 230 12,147 10,752 10,136 2 Automotive 210 152 141 3,158 2,031 1,751 6 Other 138 119 112 - ------------------------------------------------------------------------------------------------------Total $6,183 $4,995 $4,699 323,437 260,574 237,339 $1 - ---------------------------------======================================================================
Revenues Total revenues for 1995 were $6,183 million compared with revenues of $4,995 million for 1994. The $1,188 million increase reflects $802 million of SFP revenues for the period of September 22, 1995 to December 31, 1995. Excluding SFP, revenues increased by $386 million or 8 percent primarily due to improved Coal and Agricultural Commodities revenues.
BURLINGTON NORTHERN SANTA FE Revenue table The following table presents BNSF's revenue information by commodity for the years ended December 31, 1995, 1994 and 1993 and includes certain reclassifications of prior year information to conform to current year presentation. SFP results are included only for the period of September 22, 1995 to December 31, 1995.
- ------------------------------------------------------------------------------------------------------Revenue Revenues Ton Miles (RTM) 1995 1994 1993 1995 1994 1993 1 -----------------------------------------------------------------------(IN MILLIONS) (IN MILLIONS) - ------------------------------------------------------------------------------------------------------Coal $1,815 $1,669 $1,532 153,169 136,164 117,654 $1 Intermodal 1,118 745 701 38,516 24,671 22,718 2 Agricultural Commodities 1,101 759 710 55,356 33,922 33,945 1 Forest Products 459 440 419 19,828 19,495 18,329 2 Chemicals/Plastics 402 310 315 15,127 11,695 11,862 2 Food 347 304 291 12,332 10,341 9,711 2 Metals 308 253 248 13,804 11,503 11,233 2 Minerals and Ores 285 244 230 12,147 10,752 10,136 2 Automotive 210 152 141 3,158 2,031 1,751 6 Other 138 119 112 - ------------------------------------------------------------------------------------------------------Total $6,183 $4,995 $4,699 323,437 260,574 237,339 $1 - ---------------------------------======================================================================
Revenues Total revenues for 1995 were $6,183 million compared with revenues of $4,995 million for 1994. The $1,188 million increase reflects $802 million of SFP revenues for the period of September 22, 1995 to December 31, 1995. Excluding SFP, revenues increased by $386 million or 8 percent primarily due to improved Coal and Agricultural Commodities revenues. Coal revenues improved $146 million during 1995 due to higher traffic levels caused primarily by new business, favorable weather conditions early in the year and increased demand for low-sulfur coal from the Powder River Basin as well as the addition of $58 million of SFP revenues in 1995. Revenue per thousand revenue ton miles declined as a result of continuing competitive pricing pressures and a change in traffic mix. Agricultural Commodities revenues during 1995 were $342 million greater than 1994. The increase was principally caused by improvements in corn and soybean revenues of $259 million and $41 million, respectively. Corn and soybean revenues benefited from increased crop production as well as higher traffic volumes to the Pacific Northwest due to stronger export demand during 1995. Barley and wheat revenues declined primarily due to weaker export demand when compared with the strong demand in 1994. Additionally, Agricultural Commodities revenues included $59 million of SFP revenues during 1995. The shift in commodities to lower yielding corn and soybeans from higher yielding wheat led to the aggregate decrease in revenue per thousand revenue ton miles. Intermodal revenues increased $373 million when compared with 1994, almost exclusively due to the inclusion of SFP revenues in 1995. Metals revenues increased $55 million due to increased taconite, aluminum and steel products revenues as well as the addition of $28 million of SFP revenues in 1995. Current year revenues for Forest Products increased $19 million and Chemicals/Plastics revenues increased $92 million when compared to 1994. The increase in Forest Product revenues was due to the addition of $32 million of SFP revenues and was partially offset by lower traffic levels for lumber. The addition of $80 million of SFP revenues along with strong petroleum products demand contributed to the increase in Chemicals/Plastics revenues. Revenue increases in all other commodity groups are principally due to the inclusion of SFP revenues from September 22, 1995.
Expenses As discussed in Note 3: Merger, severance and asset charges, the Company recorded $735 million for merger, severance and asset charges in 1995. The principal components of the charge were $287 million related to BNSF's plan to centralize the majority of its union clerical functions and $254 million related to salaried employee costs for severance, pension and other employee benefits and costs for employee relocations during the period. Additionally, $105 million was recorded for planned branch line dispositions, while the remaining $89 million included obligations for vacating leased facilities and the write-off of duplicate and excess assets. Additional accruals of $138 million were recorded through purchase accounting related to former SFP employees and assets. When its plans are completed, BNSF expects to have eliminated approximately 3,000 positions and disposed of approximately 4,000 miles of low density track. Total annual savings related to these plans, when fully implemented, are expected to exceed $250 million. Insignificant savings were recognized in 1995 due to timing of severances. A significant portion of the savings will be recognized in 1996 and the full benefit of savings are anticipated to be realized by the end of 1998, when the plan is fully implemented. Also, as described in Note 3, costs related to union employee relocation as well as P A G E 14
BURLINGTON NORTHERN SANTA FE certain costs for separation and severances were not included in the charge; therefore, these costs will be recorded as future operating expenses. Both the timing and magnitude of any future expense is currently unknown. Total operating expenses for 1995, including $664 million of SFP operating expenses and $735 million of merger, severance and asset charges, were $5,657 million compared with expenses of $4,142 million for 1994. Excluding the merger, severance and asset charges the operating ratio for 1995 was 80 percent, an improvement of three percentage points over the operating ratio of 83 percent for 1994. Effective January 1, 1995, BNSF changed its method of accounting for periodic major locomotive overhauls. Under the new method, overhauls on owned units are capitalized and depreciated ratably until the next anticipated overhaul. In addition, estimated costs for overhauls on leased units are accrued on a straight-line basis over the life of the leases. BNSF previously expensed locomotive overhauls when the costs were incurred. The cumulative effect of this change for years prior to 1995 was a reduction in net income of $100 million (after tax) while the effect of this change for the year ended December 31, 1995 was to reduce net income by $25 million (after tax). Compensation and benefits expenses of $2,065 million were $286 million above 1994 and included $233 million of SFP compensation and benefits expense. The remaining $53 million of the increase was due to higher traffic levels, a wage increase for union represented employees effective July 1994, an increase in health and welfare costs for union employees due primarily to an increase in insurance premium rates, and increased incentive compensation expense. These increases were partially offset by operating efficiencies. Purchased services expenses increased $54 million for 1995 compared with 1994, principally reflecting the addition of SFP expenses. Equipment rents expenses were $111 million higher than 1994 due to the inclusion of $70 million of SFP equipment rents expense in 1995 as well as a $46 million increase in lease rental expense as a result of a larger fleet of leased freight cars and an increase in the leasing of locomotives to meet power requirements in 1995. Depreciation and amortization expense for 1995 was $158 million higher than 1994 primarily due to the inclusion of $86 million of SFP depreciation and amortization expense for 1995. Additionally, the increase reflects $30 million attributable to the 1995 effect of a change in accounting for locomotive overhauls. The remainder of the increase was due to capital additions which increased the Company's asset base.
BURLINGTON NORTHERN SANTA FE certain costs for separation and severances were not included in the charge; therefore, these costs will be recorded as future operating expenses. Both the timing and magnitude of any future expense is currently unknown. Total operating expenses for 1995, including $664 million of SFP operating expenses and $735 million of merger, severance and asset charges, were $5,657 million compared with expenses of $4,142 million for 1994. Excluding the merger, severance and asset charges the operating ratio for 1995 was 80 percent, an improvement of three percentage points over the operating ratio of 83 percent for 1994. Effective January 1, 1995, BNSF changed its method of accounting for periodic major locomotive overhauls. Under the new method, overhauls on owned units are capitalized and depreciated ratably until the next anticipated overhaul. In addition, estimated costs for overhauls on leased units are accrued on a straight-line basis over the life of the leases. BNSF previously expensed locomotive overhauls when the costs were incurred. The cumulative effect of this change for years prior to 1995 was a reduction in net income of $100 million (after tax) while the effect of this change for the year ended December 31, 1995 was to reduce net income by $25 million (after tax). Compensation and benefits expenses of $2,065 million were $286 million above 1994 and included $233 million of SFP compensation and benefits expense. The remaining $53 million of the increase was due to higher traffic levels, a wage increase for union represented employees effective July 1994, an increase in health and welfare costs for union employees due primarily to an increase in insurance premium rates, and increased incentive compensation expense. These increases were partially offset by operating efficiencies. Purchased services expenses increased $54 million for 1995 compared with 1994, principally reflecting the addition of SFP expenses. Equipment rents expenses were $111 million higher than 1994 due to the inclusion of $70 million of SFP equipment rents expense in 1995 as well as a $46 million increase in lease rental expense as a result of a larger fleet of leased freight cars and an increase in the leasing of locomotives to meet power requirements in 1995. Depreciation and amortization expense for 1995 was $158 million higher than 1994 primarily due to the inclusion of $86 million of SFP depreciation and amortization expense for 1995. Additionally, the increase reflects $30 million attributable to the 1995 effect of a change in accounting for locomotive overhauls. The remainder of the increase was due to capital additions which increased the Company's asset base. Fuel expenses for 1995 were $111 million higher compared with 1994 primarily due to the addition of $74 million of SFP expenses along with a $29 million increase in consumption resulting from higher traffic volumes in 1995. An increase in the average price paid per gallon of 1.2 cents in 1995 contributed to the remainder of the increase. Materials expenses for 1995 decreased $5 million compared with 1994. A $39 million reduction was attributable to the change in accounting for locomotive overhauls in 1995 primarily offset by $35 million of SFP expenses. Other operating expenses were $65 million higher in 1995 as compared with 1994. The increase reflects the inclusion of SFP expenses of $60 million and $65 million of expenses associated with the change in accounting for locomotive overhauls, partially offset by a decrease in personal injury expenses. Interest expense increased $65 million compared with 1994, principally due to the addition of $26 million of SFP expense in 1995 as well as interest on the $500 million unsecured debt incurred in 1995 to finance BNI's investment in SFP. Other income (expense), net was $31 million favorable in 1995 as compared with 1994. This increase was due to BNI's equity in earnings of SFP of $16 million from February 21, 1995, the date of BNI's initial investment in SFP, to September 22, 1995, the date of merger consummation. Additionally, other income includes income from SFP's 44 percent equity investment in Santa Fe Pacific Pipeline Partners, L.P. The remainder of the increase in other income was due to interest income on the settlement of a tax refund and lower fees on the sale
of accounts receivable in 1995. In December 1995, BNSF defeased BNI's 9% debentures due 2016, by placing $166 million of U.S. government securities into an irrevocable trust for the purpose of repaying the debentures in April 1996. The defeasance resulted in an extraordinary charge of $6 million (after tax), principally reflecting the call premium on the debt. Year ended December 31, 1994 compared with year ended December 31, 1993 BNSF had net income of $416 million ($4.37 per common share, primary, and $4.27 per common share, fully diluted) for the year ended December 31, 1994 compared with net income of $296 million ($3.06 per common share, primary, and $3.04 per common share, fully diluted) for 1993. Results for 1994 included the cumulative effect of the implementation of Statement of Financial Accounting Standards (SFAS) No. 112 "Employers' Accounting for Postemployment Benefits" which decreased 1994 net income by $10 million, or $.11 per common share. Results for 1993 included the effects of severe flooding in the Midwest, most notably in the third quarter. Net income for 1993 also included the retroactive effects of the Omnibus Budget Reconciliation Act of 1993 (the Act), which was passed into law during August 1993. The Act increased the corporate federal income tax rate by 1 percent, effective January 1, 1993, which reduced BNSF's net income by $28 million, or $.31 per common share, to adjust the January 1, 1993 deferred tax liability. P A G E 15
BURLINGTON NORTHERN SANTA FE Revenues Total revenues for 1994 were $4,995 million compared with revenues of $4,699 million for 1993. The $296 million increase was primarily attributable to improvements in Coal, Agricultural Commodities and Intermodal revenues. Coal revenues improved $137 million during 1994 as a result of increased traffic. This increase was primarily caused by a rise in the demand for electricity as well as the need for utilities to replenish coal stockpiles during the first half of 1994, which were partially depleted during the 1993 summer flooding. Partially offsetting the increase in 1994 traffic was a decline in revenue per thousand revenue ton miles. These lower yields were largely due to the transportation in 1994 of greater volumes above contractual minimum tonnage requirements on which customers received lower rates. Continuing competitive pricing pressures in contract renegotiations also contributed to lower yields. Intermodal revenues increased $44 million during 1994 when compared with 1993. Intermodal-international revenues accounted for the majority of the increase with a $37 million improvement over 1993 caused by both new business and growth in existing business. The traffic increases more than offset BNSF's withdrawal from the Texas market in April 1994. Revenues from the transportation of Agricultural Commodities during 1994 were $49 million higher than 1993. This increase was principally caused by a $31 million improvement in barley revenues, as well as higher wheat, feeds and oilseeds revenues. Barley revenues benefited from strong domestic and export demand caused by favorable market conditions during 1994. Higher wheat revenues resulted from an increase in yield, which is a product of commodity mix, price and length of haul. Feeds and oilseeds revenues grew because of increased domestic feed demand. Partially offsetting these increases was a decrease in corn revenues largely attributable to reduced crop production and lower export demand. Forest Products revenues for 1994 increased $21 million compared with 1993 primarily due to increased housing starts during the year, while Food revenues for 1994 were $13 million higher than 1993 as a result of increased export demand. Minerals and Ores revenues rose $14 million over 1993 as a result of stronger clays and aggregates traffic caused by increases in both domestic and export demands, and Automotive revenues were $11 million higher than 1993 as a result of increased volume in automotive-international traffic.
BURLINGTON NORTHERN SANTA FE Revenues Total revenues for 1994 were $4,995 million compared with revenues of $4,699 million for 1993. The $296 million increase was primarily attributable to improvements in Coal, Agricultural Commodities and Intermodal revenues. Coal revenues improved $137 million during 1994 as a result of increased traffic. This increase was primarily caused by a rise in the demand for electricity as well as the need for utilities to replenish coal stockpiles during the first half of 1994, which were partially depleted during the 1993 summer flooding. Partially offsetting the increase in 1994 traffic was a decline in revenue per thousand revenue ton miles. These lower yields were largely due to the transportation in 1994 of greater volumes above contractual minimum tonnage requirements on which customers received lower rates. Continuing competitive pricing pressures in contract renegotiations also contributed to lower yields. Intermodal revenues increased $44 million during 1994 when compared with 1993. Intermodal-international revenues accounted for the majority of the increase with a $37 million improvement over 1993 caused by both new business and growth in existing business. The traffic increases more than offset BNSF's withdrawal from the Texas market in April 1994. Revenues from the transportation of Agricultural Commodities during 1994 were $49 million higher than 1993. This increase was principally caused by a $31 million improvement in barley revenues, as well as higher wheat, feeds and oilseeds revenues. Barley revenues benefited from strong domestic and export demand caused by favorable market conditions during 1994. Higher wheat revenues resulted from an increase in yield, which is a product of commodity mix, price and length of haul. Feeds and oilseeds revenues grew because of increased domestic feed demand. Partially offsetting these increases was a decrease in corn revenues largely attributable to reduced crop production and lower export demand. Forest Products revenues for 1994 increased $21 million compared with 1993 primarily due to increased housing starts during the year, while Food revenues for 1994 were $13 million higher than 1993 as a result of increased export demand. Minerals and Ores revenues rose $14 million over 1993 as a result of stronger clays and aggregates traffic caused by increases in both domestic and export demands, and Automotive revenues were $11 million higher than 1993 as a result of increased volume in automotive-international traffic. Expenses Total operating expenses for 1994 were $4,142 million compared with $4,038 million for 1993. The operating ratio improved three percentage points to 83 percent from 86 percent. Compensation and benefits expenses for 1994 were $70 million greater than for 1993. Higher traffic volumes during 1994 as well as wage increases for union represented employees caused an increase in excess of $50 million to wages and related payroll taxes. Also contributing to the increase in compensation and benefits expenses were increased salaries and a higher pension expense, due to a reduction in the discount rate (driven by lower market interest rates) used in determining the net pension cost. Purchased services expenses increased $15 million compared with 1993. Higher intermodal-related costs, due to increased volumes, and higher third party locomotive maintenance and repair costs were the most significant contributing factors to this increase. Equipment rents expenses were $34 million higher in 1994. This increase was primarily attributable to higher lease expenses due to a larger fleet of leased rail cars as well as leasing locomotives to meet power requirements. Also contributing to the increase were payments for failure to achieve service commitments in the first half of 1994 under various transportation agreements. These increases were partially offset by decreased car hire expenses in 1994 compared with 1993, due to the adverse effects of the Midwest flooding in 1993. Depreciation and amortization expense for 1994 was $10 million higher than 1993, due to an increase in the asset base and higher traffic levels.
Fuel expenses were $7 million higher during 1994 as compared with 1993. The average price paid for diesel fuel decreased 3.1 cents per gallon in 1994 despite the 4.3 cents per gallon increase in the federal fuel tax, effective October 1, 1993. These price savings were more than offset by a $30 million increase in expense due to higher traffic volumes. Materials expenses were $5 million higher during 1994 as compared with 1993. Track and locomotive repair materials costs increased due to higher maintenance levels and a larger fleet size in 1994. Partially offsetting these increases were greater scrap sales due to the higher maintenance levels and a reduction in expenditures for safety and protective equipment deployed in 1993. Other operating expenses were $37 million less when compared with 1993. A $46 million decrease in personal injury expenses and the absence in 1994 of costs associated with the 1993 third quarter floods were partially offset by increases in derailment-related expenses and property taxes. Interest expense for the year increased $10 million compared with 1993, primarily due to a higher average outstanding debt balance in 1994. Other income (expense), net was $8 million lower in 1994 compared with 1993. This resulted primarily from losses related to international ventures. P A G E 16
BURLINGTON NORTHERN SANTA FE The effective tax rate was 38.7 percent for 1994 compared with 43.2 percent for 1993. The higher effective tax rate for 1993 resulted from the increase in tax rates pursuant to the Act and the related impact on the deferred tax liability at January 1, 1993. Capital resources and liquidity Cash from operations Cash generated from operations is BNSF's principal source of liquidity and is primarily used for dividends and capital expenditures. To the extent cash outflows exceed cash provided by operations, BNSF would generally fund the excess through the issuance of debt or financing through capital or operating leases. Operating activities provided cash of $1,416 million in 1995, compared with $808 million in 1994 and $578 million in 1993. The increase in cash from operations in 1995 was attributable primarily to a $421 million increase in net earnings excluding net noncash charges. An increase of $263 million from working capital activities, including additional cash from the collection of accounts receivable and favorable activity in accounts payable and other current liabilities also contributed to the increase. The above were partially offset by cash used in 1995 to pay employee merger and separation costs. The increase in cash from operations in 1994 over 1993 was primarily attributable to increased net income and a $68 million decrease in labor-related payments. BNSF's cash outflows from investing and financing activities principally relate to dividends and capital expenditures. Additionally, in 1995 the Company had expenditures of $500 million related to the Tender Offer. Other capital resources BNSF maintains a program for the issuance, from time to time, of commercial paper. These borrowings are supported by bank revolving credit agreements. Outstanding commercial paper balances are considered as reducing available borrowings under these agreements. The bank revolving credit agreements allow borrowings of up to $1.0 billion on a short-term basis and $1.5 billion on a long-term basis. Annual facility fees are currently .08 percent and .125 percent, respectively, and are subject to change based upon changes in BNSF's senior unsecured debt ratings. Borrowings are based upon LIBOR plus a spread based upon BNSF's senior unsecured debt ratings, money market rates as offered by the lenders, or an alternate base rate. The commitment of the banks to make loans are currently scheduled to expire on November 19, 1996 and November 21, 2000, respectively. At December 31, 1995, borrowings against the long-term revolving credit agreement were $85 million and the maturity value of commercial paper outstanding was $996 million, leaving a total of $419 million of
BURLINGTON NORTHERN SANTA FE The effective tax rate was 38.7 percent for 1994 compared with 43.2 percent for 1993. The higher effective tax rate for 1993 resulted from the increase in tax rates pursuant to the Act and the related impact on the deferred tax liability at January 1, 1993. Capital resources and liquidity Cash from operations Cash generated from operations is BNSF's principal source of liquidity and is primarily used for dividends and capital expenditures. To the extent cash outflows exceed cash provided by operations, BNSF would generally fund the excess through the issuance of debt or financing through capital or operating leases. Operating activities provided cash of $1,416 million in 1995, compared with $808 million in 1994 and $578 million in 1993. The increase in cash from operations in 1995 was attributable primarily to a $421 million increase in net earnings excluding net noncash charges. An increase of $263 million from working capital activities, including additional cash from the collection of accounts receivable and favorable activity in accounts payable and other current liabilities also contributed to the increase. The above were partially offset by cash used in 1995 to pay employee merger and separation costs. The increase in cash from operations in 1994 over 1993 was primarily attributable to increased net income and a $68 million decrease in labor-related payments. BNSF's cash outflows from investing and financing activities principally relate to dividends and capital expenditures. Additionally, in 1995 the Company had expenditures of $500 million related to the Tender Offer. Other capital resources BNSF maintains a program for the issuance, from time to time, of commercial paper. These borrowings are supported by bank revolving credit agreements. Outstanding commercial paper balances are considered as reducing available borrowings under these agreements. The bank revolving credit agreements allow borrowings of up to $1.0 billion on a short-term basis and $1.5 billion on a long-term basis. Annual facility fees are currently .08 percent and .125 percent, respectively, and are subject to change based upon changes in BNSF's senior unsecured debt ratings. Borrowings are based upon LIBOR plus a spread based upon BNSF's senior unsecured debt ratings, money market rates as offered by the lenders, or an alternate base rate. The commitment of the banks to make loans are currently scheduled to expire on November 19, 1996 and November 21, 2000, respectively. At December 31, 1995, borrowings against the long-term revolving credit agreement were $85 million and the maturity value of commercial paper outstanding was $996 million, leaving a total of $419 million of the long- term revolving credit agreement available and $1.0 billion of the short-term revolving credit agreement available. The maturity value of commercial paper outstanding at December 31, 1994 was $91 million. In December 1995, BNSF issued $300 million of 6 3/8% Notes due December 15, 2005 and $350 million of 7% Debentures due December 15, 2025 under a registration statement filed by BNSF on November 22, 1995 covering the issuance, from time to time, of up to $1 billion aggregate principal amount of debt securities. The net proceeds from the sale of the notes and debentures were primarily used for general corporate purposes, including but not limited to the repayment of commercial paper and short-term bank loans having an average interest rate of approximately 6 percent. During the course of 1995, the Company entered into various interest rate swap agreements with a principal amount of $500 million, for the purpose of establishing rates in anticipation of debt issuances under a shelf registration statement (see Note 10: Debt). In conjunction with the fourth quarter 1995 issuance of 10 year 6 3/8% notes and 30 year 7% debentures, the Company closed out the swap transactions which resulted in losses of $13 million and $15 million, respectively. The losses were deferred and will be recognized over the term of the borrowings. Additionally, in December 1995, BNSF defeased BNI's 9% debentures due 2016, by placing $166 million of U.S. government securities into an irrevocable trust for the purpose of repaying the debentures in April 1996. The defeasance of debt resulted in an extraordinary charge of $6 million, net of applicable income tax benefits of $3 million, principally reflecting the call premium on the debt. Capital expenditures and resources A breakdown of cash capital expenditures is set forth in the following table (in millions):
- ------------------------------------------------------------------------------Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------Road, roadway structures and real estate $ 706 $ 544 $ 459 Equipment 184 154 217 - ------------------------------------------------------------------------------Total capital expenditures $ 890 $ 698 $ 676 - -------------------------------------------------------------------------------
The above capital expenditures exclude $136 million and $50 million of equipment acquired under cross-border capital lease arrangements in 1995 and 1994, respectively. Capital roadway expenditures in 1995 increased when compared with 1994 as a result of extensive capacity expansion projects, primarily located in the Powder River Basin as well as the inclusion of $115 million of SFP capital expenditures from September 22, 1995 through December 31, 1995. Capital roadway expenditures for 1994 increased compared with 1993 primarily due to spending related to strategic initiatives for transportation network management and extensive roadway improvements. Capital equipment expenditures for 1995 also increased when compared with 1994 due to the inclusion of $34 million of SFP capital expenditures. Capital equipment expenditures for P A G E 17
BURLINGTON NORTHERN SANTA FE 1994 declined when compared to 1993 primarily as a result of acquiring more equipment through operating leases rather than through purchases. Capital expenditures in 1996 are expected to approximate $1.7 billion, including noncash capital expenditures of approximately $200 million primarily for either directly financed or leased equipment acquisitions, and reimbursed projects. BNSF has a commitment to acquire 149 locomotives during 1996 and 1997. Nineteen locomotives were financed in February 1996 through a capital lease. The remaining commitment will be financed from one or a combination of sources including cash from operations, capital or operating leases, debt issuances and other miscellaneous sources. The decision on the method used to finance equipment depends upon current market conditions and other factors and will be based upon the most appropriate alternative available at such time. In both 1995 and 1994, BNSF financed new equipment through long-term capital and operating leases. During
BURLINGTON NORTHERN SANTA FE 1994 declined when compared to 1993 primarily as a result of acquiring more equipment through operating leases rather than through purchases. Capital expenditures in 1996 are expected to approximate $1.7 billion, including noncash capital expenditures of approximately $200 million primarily for either directly financed or leased equipment acquisitions, and reimbursed projects. BNSF has a commitment to acquire 149 locomotives during 1996 and 1997. Nineteen locomotives were financed in February 1996 through a capital lease. The remaining commitment will be financed from one or a combination of sources including cash from operations, capital or operating leases, debt issuances and other miscellaneous sources. The decision on the method used to finance equipment depends upon current market conditions and other factors and will be based upon the most appropriate alternative available at such time. In both 1995 and 1994, BNSF financed new equipment through long-term capital and operating leases. During 1993, equipment was financed through debt issuance and long-term operating leases. Inflation Because of the capital intensive nature of BNSF's businesses and because depreciation is based on historical costs, the full effect of inflation is not reflected in operating expenses. An assumption that all operating assets were replaced at current price levels would result in depreciation charges substantially greater than historically reported amounts. Dividends Common stock dividends declared were $1.20 per common share annually for 1995, 1994 and 1993. Dividends paid on common and preferred stock during 1995 and 1994 were $129 million and during 1993 were $125 million. On January 18, 1996, the BNSF board of directors declared a dividend of 30 cents per share upon its outstanding shares of Common Stock, $.01 par value, payable April 1, 1996, to stockholders of record on March 11, 1996. Capital structure BNSF's ratio of total debt to total capital was 46 percent at the end of 1995 compared with 45 and 48 percent at the end of 1994 and 1993, respectively. Other matters Casualty and environmental Personal injury claims, including work-related injuries to employees, are a significant expense for the railroad industry. Employees of BNSF 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, resulted in significant increases in expense in past years. For several years prior to 1992, the trend of significant increases in BNSF's personal injury expense reflected the combined effects of increasing frequency of claims, rising medical expenses, legal judgments and settlements. To improve worker safety and counter increasing costs, BNSF implemented a number of programs to reduce the number of personal injury claims and the dollar amount of claim settlements. The total amount of personal injury expenses were $143 million, $170 million and $216 million in 1995, 1994 and 1993, respectively, including SFP expenses from only September 22, 1995 through December 31, 1995. BNSF 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. BNSF's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF's operating procedures include practices to protect the environment from the environmental risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF's land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto
the property. As a result, BNSF is subject to environmental clean-up and enforcement actions. In particular, the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well as similar state laws generally impose joint and several liability for clean-up and enforcement costs without regard to fault or the legality of the original conduct on current and former owners and operators of a site. BNSF has been notified that it is a potentially responsible party (PRP) for study and clean-up costs at approximately 30 Superfund sites for which investigation and remediation payments are or will be made or are yet to be determined (the Superfund sites) and, in many instances, is one of several PRPs. In addition, BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF 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. PAGE18
BURLINGTON NORTHERN SANTA FE 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 BNSF'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. BNSF 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 the ability of other PRPs to pay for clean-up, and historical trend analyses. BNSF is involved in a number of administrative and judicial proceedings and other mandatory clean-up efforts at approximately 320 sites, including the Superfund sites, at which it is being asked to participate in the study or clean-up, or both, of alleged environmental contamination. BNSF paid approximately $31 million, $21 million and $27 million during 1995, 1994 and 1993, respectively relating to mandatory clean-up efforts, including amounts expended under federal and state voluntary clean-up programs. BNSF has accruals of approximately $235 million for remediation and restoration of all known sites, including $225 million pertaining to mandated sites, of which approximately $60 million relates to the Superfund sites. BNSF anticipates that the majority of the accrued costs at December 31, 1995 will be paid over the next five years. No individual site is considered to be material. Recoveries received from third parties, net of legal costs incurred, were approximately $31 million during the year ended December 31, 1995 and were not significant in prior years. Liabilities recorded for environmental costs represent BNSF's best estimates for remediation and restoration of these sites and include both asserted and unasserted claims. Unasserted claims are not considered to be a material component of the liability. Although recorded liabilities include BNSF's best estimates of all costs, without reduction for anticipated recoveries from third parties, BNSF'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, future charges to income for environmental liabilities could 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; therefore, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on BNSF's consolidated financial position or liquidity. BNSF expects it will become subject to future requirements regulating air emissions from diesel locomotives that may increase its operating costs. Regulations applicable to new locomotive engines are expected to be issued by the Environmental Protection Agency soon. It is anticipated that these regulations will be effective for locomotive engines installed after 1999. Under some interpretations of federal law, older locomotive engines may be regulated by states based on standards and procedures which the State of California ultimately adopts. At this time it is unknown whether California will adopt locomotive emission standards that may differ from federal
BURLINGTON NORTHERN SANTA FE 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 BNSF'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. BNSF 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 the ability of other PRPs to pay for clean-up, and historical trend analyses. BNSF is involved in a number of administrative and judicial proceedings and other mandatory clean-up efforts at approximately 320 sites, including the Superfund sites, at which it is being asked to participate in the study or clean-up, or both, of alleged environmental contamination. BNSF paid approximately $31 million, $21 million and $27 million during 1995, 1994 and 1993, respectively relating to mandatory clean-up efforts, including amounts expended under federal and state voluntary clean-up programs. BNSF has accruals of approximately $235 million for remediation and restoration of all known sites, including $225 million pertaining to mandated sites, of which approximately $60 million relates to the Superfund sites. BNSF anticipates that the majority of the accrued costs at December 31, 1995 will be paid over the next five years. No individual site is considered to be material. Recoveries received from third parties, net of legal costs incurred, were approximately $31 million during the year ended December 31, 1995 and were not significant in prior years. Liabilities recorded for environmental costs represent BNSF's best estimates for remediation and restoration of these sites and include both asserted and unasserted claims. Unasserted claims are not considered to be a material component of the liability. Although recorded liabilities include BNSF's best estimates of all costs, without reduction for anticipated recoveries from third parties, BNSF'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, future charges to income for environmental liabilities could 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; therefore, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on BNSF's consolidated financial position or liquidity. BNSF expects it will become subject to future requirements regulating air emissions from diesel locomotives that may increase its operating costs. Regulations applicable to new locomotive engines are expected to be issued by the Environmental Protection Agency soon. It is anticipated that these regulations will be effective for locomotive engines installed after 1999. Under some interpretations of federal law, older locomotive engines may be regulated by states based on standards and procedures which the State of California ultimately adopts. At this time it is unknown whether California will adopt locomotive emission standards that may differ from federal standards. Other claims and litigation BNSF and its subsidiaries are parties to a number of legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters and personal injury claims. While the final outcome of these items cannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of management that none of these items, when finally resolved, will have a material adverse effect on the annual results of operations, financial position or liquidity of BNSF, although an adverse resolution of a number of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. Labor Rail union employees represent approximately 87 percent of BNSF's workforce. In December 1994, BNRR reached an agreement with the Railroad Yardmasters Division of the United Transportation Union (UTU) which is effective through 1999 with respect to wages, work rules and all other matters except health and welfare
benefits. Health and welfare issues are being addressed at the national level and will apply to BNRR's approximately 250 yardmasters. Effective July 1, 1995, the yardmasters received a 3 percent base wage increase under the agreement. Labor agreements currently in effect for unions other than the yardmasters include provisions which prohibited the parties from serving notices to change wages, benefits, rules and working conditions prior to November 1, 1994. BNSF's railroad operating subsidiaries joined with the other railroads to negotiate with the unions on a multiemployer basis on November 1, 1994. At that time, all unions were served proposals for productivity improvements as well as other changes. P A G E 19
BURLINGTON NORTHERN SANTA FE Thereafter, unions also served notices on the railroads which proposed increasing wages and benefits and restoring many of the restrictive work rules and practices that were modified or eliminated under the current agreements. A number of the unions are also challenging the railroads' right to negotiate on a multi-employer basis and the issue is currently pending in federal district court in Washington, D.C. In December 1995, BNSF's multi-employer bargaining representative, the National Carriers' Conference Committee (NCCC), reached a tentative agreement with the UTU resolving wage, benefit and work rule issues through 1999. The agreement is subject to ratification, the results of which should be known in March 1996. At this time, the railroads and most of the other unions are proceeding in direct negotiations on the parties' proposals with many in mediation. The National Mediation Board has scheduled and held meetings with the parties. The ultimate outcome of the negotiations cannot be predicted. Under labor agreements currently in effect for most of the unionized work force, a cost of living allowance of 9 cents per hour went into effect on July 1, 1995. The cost of living allowance was dependent upon changes in the Consumer Price Index not to exceed 3 percent. Tentative agreements resolving merger-related issues were reached with the Brotherhood of Locomotive Engineers and UTU in December 1995. These agreements are subject to ratification, the results of which should be known in March 1996. Merger implementing negotiations are ongoing with the carman and yardmaster unions. Discussions with the Transportation Communications Union resulted in an agreement resolving all merger-related and other issues covering railroads' clerical employees. BNRR and ATSF are each parties to service interruption insurance agreements under which on a combined basis they would be required to pay premiums of up to a maximum of approximately $106 million in the event of work stoppages on other railroads related to ongoing national bargaining. BNRR and ATSF are also entitled to receive payments under certain conditions if a work stoppage occurs on either property. Hedging Activities Fuel BNSF has a program to hedge against fluctuations in the price of its diesel fuel purchases. This program includes forward purchases for delivery at fueling facilities. Additionally, this program includes exchange-traded petroleum futures contracts and various commodity swap and collar transactions which are accounted for as hedges. Any gains or losses associated with changes in market value of these hedges are deferred and recognized as a component of fuel expense in the period in which the hedged fuel is purchased and used. To the extent BNSF hedges portions of its fuel purchases, it may not fully benefit from decreases in fuel prices. As of December 31, 1995, BNSF had entered into forward purchases for approximately 69 million gallons at an average price of approximately 49 cents per gallon. In addition, BNSF held petroleum futures contracts representing approximately 60 million gallons at an average price of approximately 48 cents per gallon. These contracts have expiration dates ranging from January 1996 to October 1996.
BURLINGTON NORTHERN SANTA FE Thereafter, unions also served notices on the railroads which proposed increasing wages and benefits and restoring many of the restrictive work rules and practices that were modified or eliminated under the current agreements. A number of the unions are also challenging the railroads' right to negotiate on a multi-employer basis and the issue is currently pending in federal district court in Washington, D.C. In December 1995, BNSF's multi-employer bargaining representative, the National Carriers' Conference Committee (NCCC), reached a tentative agreement with the UTU resolving wage, benefit and work rule issues through 1999. The agreement is subject to ratification, the results of which should be known in March 1996. At this time, the railroads and most of the other unions are proceeding in direct negotiations on the parties' proposals with many in mediation. The National Mediation Board has scheduled and held meetings with the parties. The ultimate outcome of the negotiations cannot be predicted. Under labor agreements currently in effect for most of the unionized work force, a cost of living allowance of 9 cents per hour went into effect on July 1, 1995. The cost of living allowance was dependent upon changes in the Consumer Price Index not to exceed 3 percent. Tentative agreements resolving merger-related issues were reached with the Brotherhood of Locomotive Engineers and UTU in December 1995. These agreements are subject to ratification, the results of which should be known in March 1996. Merger implementing negotiations are ongoing with the carman and yardmaster unions. Discussions with the Transportation Communications Union resulted in an agreement resolving all merger-related and other issues covering railroads' clerical employees. BNRR and ATSF are each parties to service interruption insurance agreements under which on a combined basis they would be required to pay premiums of up to a maximum of approximately $106 million in the event of work stoppages on other railroads related to ongoing national bargaining. BNRR and ATSF are also entitled to receive payments under certain conditions if a work stoppage occurs on either property. Hedging Activities Fuel BNSF has a program to hedge against fluctuations in the price of its diesel fuel purchases. This program includes forward purchases for delivery at fueling facilities. Additionally, this program includes exchange-traded petroleum futures contracts and various commodity swap and collar transactions which are accounted for as hedges. Any gains or losses associated with changes in market value of these hedges are deferred and recognized as a component of fuel expense in the period in which the hedged fuel is purchased and used. To the extent BNSF hedges portions of its fuel purchases, it may not fully benefit from decreases in fuel prices. As of December 31, 1995, BNSF had entered into forward purchases for approximately 69 million gallons at an average price of approximately 49 cents per gallon. In addition, BNSF held petroleum futures contracts representing approximately 60 million gallons at an average price of approximately 48 cents per gallon. These contracts have expiration dates ranging from January 1996 to October 1996. The above prices do not include taxes, fuel handling costs, certain transportation costs and, except for forward contracts, any differences which may occur from time to time between the prices of commodities hedged and the purchase price of BNSF's diesel fuel. BNSF's current fuel hedging program covers approximately 12 percent of estimated 1996 fuel purchases. The current and future fuel delivery prices are monitored continuously and hedge positions are adjusted accordingly. Hedge positions are also closely monitored to ensure that they will not exceed actual fuel requirements. Unrealized gains or losses from BNSF's fuel hedging transactions were not material at December 31, 1995 and 1994. BNSF monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. Interest rate
From time to time, the Company enters into interest rate transactions for the purpose of establishing rates on anticipated debt transactions or fixing interest rates on floating rate debt. As of December 31, 1995, no interest rate hedging transactions were outstanding, although in February 1996, the Company entered into interest rate transactions to fix interest rates on floating rate debt with a total principal amount of $225 million. The transactions call for the payment of fixed rates of 4.8 percent and receipt of a floating rate based on commercial paper rates over a period of 12 to 18 months. Recent accounting pronouncements In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, "Accounting for Stock-Based Compensation." The Company believes that it will continue to use Accounting Principle Board Opinion No. 25 to measure and recognize employee stock-based transactions and will provide required additional disclosures commencing in 1996. In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which establishes the accounting and reporting requirements for recognizing and measuring impairment of long-lived assets to be either held and used or held for disposal. BNSF is currently evaluating the financial impact of adopting this standard, however, the impact is not anticipated to be significant. P A G E 20
REPORT OF MANAGEMENT To the Stockholders of Burlington Northern Santa Fe Corporation The accompanying consolidated financial statements of Burlington Northern Santa Fe Corporation and subsidiary companies were prepared by management, who are responsible for their integrity and objectivity. They were prepared in accordance with generally accepted accounting principles and properly include amounts that are based on management's best judgments and estimates. Other financial information included in this annual report is consistent with that in the consolidated financial statements. The Company maintains a system of internal accounting controls, supported by adequate documentation, to provide reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company. Limitations exist in any system of internal accounting controls based upon the recognition that the cost of the system should not exceed the benefits derived. The Company believes its system of internal accounting controls, augmented by its internal auditing function, appropriately balances the cost/benefit relationship. Independent accountants provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures as they deem necessary to express an opinion on the fairness of the consolidated financial statements. The Board of Directors pursues its responsibility for the Company's financial statements through its Audit Committee which is composed solely of directors who are not officers or employees of the Company. The Audit Committee meets regularly with the independent accountants, management and internal auditors. The independent accountants and the Company's internal auditors have direct access to the Audit Committee, with and without the presence of management representatives, to discuss the scope and results of their work and their comments on the adequacy of internal accounting controls and the quality of financial reporting.
/s/ ROBERT D. KREBS Robert D. Krebs
REPORT OF MANAGEMENT To the Stockholders of Burlington Northern Santa Fe Corporation The accompanying consolidated financial statements of Burlington Northern Santa Fe Corporation and subsidiary companies were prepared by management, who are responsible for their integrity and objectivity. They were prepared in accordance with generally accepted accounting principles and properly include amounts that are based on management's best judgments and estimates. Other financial information included in this annual report is consistent with that in the consolidated financial statements. The Company maintains a system of internal accounting controls, supported by adequate documentation, to provide reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company. Limitations exist in any system of internal accounting controls based upon the recognition that the cost of the system should not exceed the benefits derived. The Company believes its system of internal accounting controls, augmented by its internal auditing function, appropriately balances the cost/benefit relationship. Independent accountants provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures as they deem necessary to express an opinion on the fairness of the consolidated financial statements. The Board of Directors pursues its responsibility for the Company's financial statements through its Audit Committee which is composed solely of directors who are not officers or employees of the Company. The Audit Committee meets regularly with the independent accountants, management and internal auditors. The independent accountants and the Company's internal auditors have direct access to the Audit Committee, with and without the presence of management representatives, to discuss the scope and results of their work and their comments on the adequacy of internal accounting controls and the quality of financial reporting.
/s/ ROBERT D. KREBS Robert D. Krebs
President and Chief Executive Officer
/s/ DENIS E. SPRINGER Denis E. Springer
Senior Vice President and Chief Financial Officer
/s/ THOMAS N. HUND Thomas N. Hund
Vice President and Controller REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Burlington Northern Santa Fe Corporation and Subsidiaries We have audited the consolidated balance sheets of Burlington Northern Santa Fe Corporation and Subsidiaries
as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with 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 Santa Fe Corporation and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for periodic major locomotive overhauls in 1995 and for postemployment benefits and investments in debt and equity securities in 1994.
/s/ COOPERS & LYBRAND L.L.P. Coopers & Lybrand L.L.P. Fort Worth, Texas February 15, 1996
P A G E 21
CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data) - ------------------------------------------------------------------------------------------------------Year ended December 31, 1995 1994 1 - ------------------------------------------------------------------------------------------------------Revenues $ 6,183 $ 4,995 $ 4, Operating expenses: Compensation and benefits 2,065 1,779 1, Purchased services 526 472 Equipment rents 540 429 Depreciation and amortization 520 362 Fuel 480 369 Materials 300 305 Other 491 426 Merger, severance and asset charges 735 - ------------------------------------------------------------------------------------------------------Total operating expenses 5,657 4,142 4, - ------------------------------------------------------------------------------------------------------Operating income 526 853 Interest expense 220 155 Other income (expense), net 28 (3) - ------------------------------------------------------------------------------------------------------Income before income taxes 334 695 Income tax expense 136 269 - ------------------------------------------------------------------------------------------------------Income before extraordinary item and cumulative effect of change in accounting method 198 426 Extraordinary item, loss on early retirement of debt, net of tax (6) - ------------------------------------------------------------------------------------------------------Income before cumulative effect of change in accounting method 192 426 Cumulative effect of change in accounting method, net of tax (100) (10) - ------------------------------------------------------------------------------------------------------Net income $ 92 $ 416 $ - --------------------------------------------------------------------------============================= Primary earnings per common share: Income before extraordinary item and change in accounting method $ 1.66 $ 4.48 $ 3
CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data) - ------------------------------------------------------------------------------------------------------Year ended December 31, 1995 1994 1 - ------------------------------------------------------------------------------------------------------Revenues $ 6,183 $ 4,995 $ 4, Operating expenses: Compensation and benefits 2,065 1,779 1, Purchased services 526 472 Equipment rents 540 429 Depreciation and amortization 520 362 Fuel 480 369 Materials 300 305 Other 491 426 Merger, severance and asset charges 735 - ------------------------------------------------------------------------------------------------------Total operating expenses 5,657 4,142 4, - ------------------------------------------------------------------------------------------------------Operating income 526 853 Interest expense 220 155 Other income (expense), net 28 (3) - ------------------------------------------------------------------------------------------------------Income before income taxes 334 695 Income tax expense 136 269 - ------------------------------------------------------------------------------------------------------Income before extraordinary item and cumulative effect of change in accounting method 198 426 Extraordinary item, loss on early retirement of debt, net of tax (6) - ------------------------------------------------------------------------------------------------------Income before cumulative effect of change in accounting method 192 426 Cumulative effect of change in accounting method, net of tax (100) (10) - ------------------------------------------------------------------------------------------------------Net income $ 92 $ 416 $ - --------------------------------------------------------------------------============================= Primary earnings per common share: Income before extraordinary item and change in accounting method $ 1.66 $ 4.48 $ 3 Extraordinary item (.05) Change in accounting method (.94) (.11) - ------------------------------------------------------------------------------------------------------Primary earnings per common share $ .67 $ 4.37 $ 3 - --------------------------------------------------------------------------============================= Average shares (in thousands) 106,730 90,187 89, - ------------------------------------------------------------------------------------------------------Fully diluted earnings per common share: Income before extraordinary item and change in accounting method $ 1.66 $ 4.38 $ 3 Extraordinary item (.05) Change in accounting method (.94) (.11) - ------------------------------------------------------------------------------------------------------Fully diluted earnings per common share $ .67 $ 4.27 $ 3 - --------------------------------------------------------------------------============================= Average shares (in thousands) 106,730 97,528 97, - -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. PAGE22
CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions) - ---------------------------------------------------------------------------------------------------December 31, 1995 1994 - ---------------------------------------------------------------------------------------------------Assets Current assets: Cash and cash equivalents $ 50 $ 27 Accounts receivable, net 620 697 Materials and supplies 220 100 Current portion of deferred income taxes 320 156 Other current assets 54 32
CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions) - ---------------------------------------------------------------------------------------------------December 31, 1995 1994 - ---------------------------------------------------------------------------------------------------Assets Current assets: Cash and cash equivalents $ 50 $ 27 Accounts receivable, net 620 697 Materials and supplies 220 100 Current portion of deferred income taxes 320 156 Other current assets 54 32 - ---------------------------------------------------------------------------------------------------Total current assets 1,264 1,012 Property and equipment, net 16,001 6,311 Other assets 1,004 269 - ---------------------------------------------------------------------------------------------------Total assets $18,269 $7,592 - ------------------------------------------------------------------------------------================
Liabilities and Stockholders' Equity Current liabilities: Accounts payable and other current liabilities $ 2,289 $1,325 Long-term debt and commercial paper due within one year 80 122 - ---------------------------------------------------------------------------------------------------Total current liabilities 2,369 1,447 Long-term debt and commercial paper 4,153 1,697 Deferred income taxes 4,233 1,456 Casualty and environmental reserves 626 416 Employee merger and separation costs 530 Other liabilities 1,321 339 - ---------------------------------------------------------------------------------------------------Total liabilities 13,232 5,355 - ---------------------------------------------------------------------------------------------------Commitments and contingencies (see Note 12 and 13) - ---------------------------------------------------------------------------------------------------Stockholders' equity: Convertible preferred stock and additional paid-in capital, $.01 par value; 25,000,000 shares authorized; 6,900,000 shares issued; 0 shares and 6,900,000 shares outstanding, respectively -337 Common stock, $.01 par value, 300,000,000 shares authorized; 149,649,930 shares and 89,329,259 shares issued, respectively 1 1 Additional paid-in capital 4,606 1,443 Retained earnings 459 485 Treasury stock, at cost, 44,713 shares and 105,438 shares, respectively (3) (5) Other (26) (24) - ---------------------------------------------------------------------------------------------------Total stockholders' equity 5,037 2,237 - ---------------------------------------------------------------------------------------------------Total liabilities and stockholders' equity $18,269 $7,592 - ------------------------------------------------------------------------------------================
See accompanying notes to consolidated financial statements. P A G E 23
CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions) - --------------------------------------------------------------------------------------Year ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions) - --------------------------------------------------------------------------------------Year ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------Operating Activities Net income $ 92 $ 416 $ 296 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting method 100 10 Depreciation and amortization 520 362 352 Deferred income taxes (112) 126 156 Merger, severance and asset charges 735 Employee merger and separation costs paid (118) Other, net 51 9 (117) Changes in current assets and liabilities, excluding SFP assets/liabilities acquired: Accounts receivable, net 63 (108) (116) Materials and supplies (42) (13) 6 Other current assets (5) (5) (4) Accounts payable and other current liabilities 132 11 5 - --------------------------------------------------------------------------------------Net cash provided by operating activities 1,416 808 578 - --------------------------------------------------------------------------------------Investing Activities Purchase of SFP, net of cash acquired (488) (18) Cash used for capital expenditures (890) (698) (676) Other, net 12 16 17 - --------------------------------------------------------------------------------------Net cash used for investing activities (1,366) (700) (659) - --------------------------------------------------------------------------------------Financing Activities Net increase in commercial paper 895 64 26 Proceeds from issuance of long-term debt 1,294 310 224 Payments on long-term debt (2,071) (346) (88) Dividends paid (129) (129) (125) Other, net (16) 3 4 - --------------------------------------------------------------------------------------Net cash flow provided by (used for) financing activities (27) (98) 41 - --------------------------------------------------------------------------------------Increase (decrease) in cash and cash equivalents 23 10 (40) Cash and cash equivalents: Beginning of year 27 17 57 - --------------------------------------------------------------------------------------End of year $ 50 $ 27 $ 17 - ----------------------------------------------------------------======================= Supplemental Cash Flow Information Interest paid, net of amounts capitalized $ 228 $ 149 $ 144 Income taxes paid, net of refunds 250 128 70 Assets financed through capital lease obligations 140 50 Noncash consideration for purchase of SFP: Net assets acquired $ 3,319 Cash paid (532) Cash acquired 26 - --------------------------------------------------------------------------------------Noncash consideration $ 2,813 - ----------------------------------------------------------------=======----------------
See accompanying notes to consolidated financial statements. PAGE24
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Shares in thousands. Dollars in millions, except per share data.) - ------------------------------------------------------------------------------------------------------Convertible O
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------Burlington Northern Santa Fe Corporation and Subsidiaries (Shares in thousands. Dollars in millions, except per share data.) - ------------------------------------------------------------------------------------------------------Convertible O Preferred Common ---------Stock and Stock and Unearne Additional Additional Compensati Outstanding Paid-in Paid-in Retained Treasury Restrict Common Shares Capital Capital Earnings Stock Stock - ------------------------------------------------------------------------------------------------------Balance at December 31, 1992 88,024 $ 337 $1,386 $ 30 $(2) $ Net income 296 Dividends: Common stock, $1.20 per share (106) Convertible preferred stock, $3.125 per share (22) Adjustments associated with unearned compensation, restricted stock 232 12 (2) Exercise of stock options and related tax benefit 500 20 Equity adjustment from minimum pension liability Other 40 3 - ------------------------------------------------------------------------------------------------------Balance at December 31, 1993 88,796 337 1,421 198 (4) Net income 416 Dividends: Common stock, $1.20 per share (107) Convertible preferred stock, $3.125 per share (22) Adjustments associated with unearned compensation, restricted stock 178 12 (1) Exercise of stock options and related tax benefit 184 8 Equity adjustment from minimum pension liability Other 66 3 - ------------------------------------------------------------------------------------------------------Balance at December 31, 1994 89,224 337 1,444 485 (5) Net income 92 Purchase of SFP: Common stock issued 52,004 2,652 Value of outstanding SFP stock options 119 Conversion and redemption of convertible preferred stock for common stock 7,313 (337) 335 Dividends: Common stock, $1.20 per share (123) Convertible preferred stock, $3.125 per share (21) Adjustments associated with unearned compensation, restricted stock 243 13 2 Exercise of stock options and related tax benefit 778 39 (3) Equity adjustment from minimum pension liability Cost to equity investment adjustment 26 Other 43 5 3 - ------------------------------------------------------------------------------------------------------Balance at December 31, 1995 149,605 $ $4,607 $ 459 $(3) $ - --------------------------------------=================================================================
See accompanying notes to consolidated financial statements. PAGE25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES 1 Accounting policies Principles of consolidation The consolidated financial statements include the accounts of Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries (collectively BNSF or Company). BNSF was incorporated in Delaware on December 16, 1994, for the purpose of effecting a business combination between Burlington Northern Inc. (BNI) and Santa Fe Pacific Corporation (SFP). The accompanying BNSF consolidated statements of income and cash flows for the years ended December 31, 1995, 1994 and 1993 reflect BNI's historical results and cash flows for such periods and SFP's results and cash flows from September 22, 1995 (the date of its acquisition by BNI) through December 31, 1995. The accompanying BNSF consolidated balance sheet at December 31, 1994 reflects only BNI historical amounts while the BNSF consolidated balance sheet at December 31, 1995 also includes the fair value adjustments of SFP's assets and liabilities resulting from applying purchase accounting. The principal subsidiaries of BNSF are BNI, Burlington Northern Railroad (BNRR), SFP and The Atchison, Topeka and Santa Fe Railway Company (ATSF). All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Reclassifications Certain comparative prior year amounts in the consolidated financial statements and notes have been reclassified to conform with the current year presentation. Cash and cash equivalents All short-term investments with original maturities of less than 90 days are considered cash equivalents. Cash equivalents are stated at cost, which approximates market value. Materials and supplies Materials and supplies consist mainly of diesel fuel, repair parts for equipment and other railroad property and are valued at the lower of average cost or market. Property and equipment Property and equipment are depreciated and amortized on a straight-line basis over their estimated useful lives. Upon normal sale or retirement of depreciable railroad property, cost less net salvage is generally charged to accumulated depreciation and no gain or loss is recognized. Significant premature retirements are recorded as gains or losses at the time of their occurrence. 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. Property and equipment are stated at cost including property values of SFP, which were adjusted in applying purchase accounting. The weighted average annual depreciation rate in effect at December 31, 1995 was 3.7 percent for track structure, 4.8 percent for equipment and 2.5 percent for other road properties. Revenue recognition Transportation revenues are recognized based upon the proportion of service provided. Earnings per common share Primary earnings per common share are computed by dividing net income, after deduction of preferred stock
dividends, by the weighted average number of common shares and common share equivalents outstanding. Fully diluted earnings per common share are computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents are computed using the treasury stock method. An average market price is used to determine the number of common share equivalents for primary earnings per common share. The higher of the average or end-of-period market price is used to determine common share equivalents for fully diluted earnings per common share. In addition, the if-converted method is used for convertible preferred stock when computing fully diluted earnings per common share. For the year ended December 31, 1995, the computation of fully diluted earnings per share was antidilutive; therefore, the amounts reported for primary and fully diluted earnings per share are the same. The average number of common shares used for earnings per share calculations through December 31, 1995 reflect the effect of common shares issued in connection with the merger with SFP as outstanding for the period from September 22, 1995 through December 31, 1995. Future calculations will therefore reflect a significant increase in the number of outstanding common shares. 2 Acquisition of SFP On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger (as amended on October 26, 1994, December 18, 1994, January 24, 1995 and September 19, 1995, the Merger Agreement) pursuant to which SFP would merge with BNI in the manner set forth below (the Merger). Stockholders of BNI and SFP approved the Merger Agreement PAGE26
BURLINGTON NORTHERN SANTA FE at special stockholders' meetings held on February 7, 1995. On August 23, 1995, the Interstate Commerce Commission issued a written decision approving the Merger and on September 22, 1995 the Merger was consummated. Pursuant to the Merger Agreement, on December 23, 1994, BNI and SFP commenced tender offers (together, the Tender Offer) to acquire 25 million and 38 million shares of SFP common stock, respectively, at $20 per share in cash. During the first quarter of 1995, SFP borrowed $1.0 billion under a credit facility of which $760 million of the proceeds were used to purchase the 38 million shares pursuant to the Tender Offer. In addition, BNI borrowed $500 million under a credit facility of which the proceeds were used to finance BNI's purchase of SFP common stock in the Tender Offer. The Tender Offer was completed on February 21, 1995. Prior to consummation of the Merger, BNI accounted for the $500 million investment in SFP under the cost method. Upon consummation of the Merger, BNI's equity in earnings of SFP prior to the Merger of $16 million was recorded as other income. Also, pursuant to the Merger Agreement, BNI and SFP were entitled to elect to consummate the Merger through the use of one of two possible structures: (i) a merger of SFP with and into BNI or (ii) the Holding Company Structure described below. To ensure that the transaction contemplated by the Merger Agreement qualified as a tax-free transaction for federal income tax purposes, the parties utilized the Holding Company Structure. Under the Holding Company Structure, BNSF created two subsidiaries. One subsidiary merged with and into BNI, and the other subsidiary merged with and into SFP. Each holder of one share of BNI common stock received one share of BNSF common stock and each holder of one share of SFP common stock, excluding the SFP common stock acquired by BNI in the Tender Offer and the SFP common stock held by SFP as treasury stock, received 0.41143945 shares of BNSF common stock, which reflects the effects of the repurchase program discussed below. The rights of each stockholder of BNSF are substantially identical to the rights of a stockholder of BNI, and the Holding Company Structure has the same economic effect with respect to the stockholders of BNI and SFP as would a direct merger of BNI and SFP. In the Merger Agreement, the exchange ratio of BNSF common shares for each share of outstanding SFP common stock upon consummation of the Merger was set at not less than 0.40 shares to not more than 0.4347 shares, with repurchases of SFP common stock by SFP increasing the exchange ratio pro rata. SFP repurchased
BURLINGTON NORTHERN SANTA FE at special stockholders' meetings held on February 7, 1995. On August 23, 1995, the Interstate Commerce Commission issued a written decision approving the Merger and on September 22, 1995 the Merger was consummated. Pursuant to the Merger Agreement, on December 23, 1994, BNI and SFP commenced tender offers (together, the Tender Offer) to acquire 25 million and 38 million shares of SFP common stock, respectively, at $20 per share in cash. During the first quarter of 1995, SFP borrowed $1.0 billion under a credit facility of which $760 million of the proceeds were used to purchase the 38 million shares pursuant to the Tender Offer. In addition, BNI borrowed $500 million under a credit facility of which the proceeds were used to finance BNI's purchase of SFP common stock in the Tender Offer. The Tender Offer was completed on February 21, 1995. Prior to consummation of the Merger, BNI accounted for the $500 million investment in SFP under the cost method. Upon consummation of the Merger, BNI's equity in earnings of SFP prior to the Merger of $16 million was recorded as other income. Also, pursuant to the Merger Agreement, BNI and SFP were entitled to elect to consummate the Merger through the use of one of two possible structures: (i) a merger of SFP with and into BNI or (ii) the Holding Company Structure described below. To ensure that the transaction contemplated by the Merger Agreement qualified as a tax-free transaction for federal income tax purposes, the parties utilized the Holding Company Structure. Under the Holding Company Structure, BNSF created two subsidiaries. One subsidiary merged with and into BNI, and the other subsidiary merged with and into SFP. Each holder of one share of BNI common stock received one share of BNSF common stock and each holder of one share of SFP common stock, excluding the SFP common stock acquired by BNI in the Tender Offer and the SFP common stock held by SFP as treasury stock, received 0.41143945 shares of BNSF common stock, which reflects the effects of the repurchase program discussed below. The rights of each stockholder of BNSF are substantially identical to the rights of a stockholder of BNI, and the Holding Company Structure has the same economic effect with respect to the stockholders of BNI and SFP as would a direct merger of BNI and SFP. In the Merger Agreement, the exchange ratio of BNSF common shares for each share of outstanding SFP common stock upon consummation of the Merger was set at not less than 0.40 shares to not more than 0.4347 shares, with repurchases of SFP common stock by SFP increasing the exchange ratio pro rata. SFP repurchased approximately 3.6 million shares which, along with the effect of SFP stock options exercised, resulted in the final exchange ratio of 0.41143945 shares. The business combination with SFP was accounted for by the purchase method. As such, the accompanying consolidated financial statements include assets, liabilities and financial results of SFP after Merger consummation. The following summarizes the purchase price (dollars in millions, except per share data, and shares in thousands):
- --------------------------------------------------------------------BNI investment in SFP $ 516 Shares of SFP common stock outstanding at September 22, 1995 151,396 Less SFP shares held by BNI (25,000) -------Remaining SFP shares outstanding 126,396 Exchange Ratio .4114 -------Shares of BNSF common stock issued 52,000 Per share value of BNSF common stock $ 51 -------Total value of BNSF common stock issued 2,652 Value of outstanding SFP stock options 119 BNI direct acquisition costs 32 - --------------------------------------------------------------------Purchase price $3,319 - ---------------------------------------------------------------======
The purchase price was calculated based on an estimated fair value of BNSF common stock of $51 per share. The fair value was determined from the average of the daily closing prices of BNI common stock for the five
trading days immediately preceding and the five trading days immediately following approval of the Merger by BNI and SFP shareholders which occurred on February 7, 1995. The effects of the acquisition on the consolidated balance sheet, including the fair value adjustments, were as follows (dollars in millions):
- ---------------------------------------------------------------------Property and equipment, net $ 9,409 Other assets 886 Deferred income taxes (2,936) Long-term debt (2,034) Other liabilities (2,006) - ---------------------------------------------------------------------Net assets acquired $ 3,319 - ---------------------------------------------------------------=======
The purchase price allocation included $138 million for anticipated nonrecurring costs and expenses for severance and relocation of prior SFP employees and the planned disposition of excess SFP office space and other SFP assets. The consolidated pro forma results presented below were prepared as if the Merger had occurred on January 1, 1994 and include the historical results of BNI and SFP, excluding the after tax effect of $309 million for mergerrelated charges recorded by BNI in 1995. Additionally, the consolidated pro forma results for both periods include the estimated effects of purchase accounting adjustments and the Tender Offer. Pro forma adjustments reflecting anticipated merger benefits are not included. This unaudited consolidated pro forma information is not necessarily indicative of the results of operations that might have occurred had the Merger actually taken place on P A G E 27
BURLINGTON NORTHERN SANTA FE the date indicated, or of future results of operations of the combined entities (dollars in millions, except per share data):
Year ended December 31, 1995 1994 - ---------------------------------------------------Revenues $8,170 $7,676 Operating expenses 6,844 6,484 Income before extraordinary items 605 536 Net income(1) 499 549 Primary earnings per share: Income before extraordinary items $ 4.00 $ 3.63 Net income 3.27 3.72 Fully diluted earnings per share: Income before extraordinary items $ 3.94 $ 3.59 Net income 3.25 3.67
(1) Pro forma results for 1995 include approximately $230 million (pre-tax) related to the merger, severance and asset charge which are not considered directly attributable to the Merger. Additionally, 1995 pro forma net income includes the $100 million cumulative effect for the change in accounting for locomotive overhauls for years prior to 1995 and a $25 million reduction for the effect of the change on 1995. Also, 1995 pro forma net income includes the $6 million extraordinary charge for retirement of debt. Pro forma 1994 net income includes a $10 million reduction for a change in accounting. 3 Merger, severance and asset charges Included in the Statement of Income for 1995 are operating expenses of $735 million related to merger, severance and asset costs. Significant components included in these costs are described below. Employee-related costs of $287 million were recorded related to BNSF's plan to centralize the majority of its union clerical functions which was approved in 1995. This plan includes the reduction of approximately 1,600 employees which, among other things, requires installation of common information systems. The Company and
BURLINGTON NORTHERN SANTA FE the date indicated, or of future results of operations of the combined entities (dollars in millions, except per share data):
Year ended December 31, 1995 1994 - ---------------------------------------------------Revenues $8,170 $7,676 Operating expenses 6,844 6,484 Income before extraordinary items 605 536 Net income(1) 499 549 Primary earnings per share: Income before extraordinary items $ 4.00 $ 3.63 Net income 3.27 3.72 Fully diluted earnings per share: Income before extraordinary items $ 3.94 $ 3.59 Net income 3.25 3.67
(1) Pro forma results for 1995 include approximately $230 million (pre-tax) related to the merger, severance and asset charge which are not considered directly attributable to the Merger. Additionally, 1995 pro forma net income includes the $100 million cumulative effect for the change in accounting for locomotive overhauls for years prior to 1995 and a $25 million reduction for the effect of the change on 1995. Also, 1995 pro forma net income includes the $6 million extraordinary charge for retirement of debt. Pro forma 1994 net income includes a $10 million reduction for a change in accounting. 3 Merger, severance and asset charges Included in the Statement of Income for 1995 are operating expenses of $735 million related to merger, severance and asset costs. Significant components included in these costs are described below. Employee-related costs of $287 million were recorded related to BNSF's plan to centralize the majority of its union clerical functions which was approved in 1995. This plan includes the reduction of approximately 1,600 employees which, among other things, requires installation of common information systems. The Company and the union have entered into an implementation agreement which allows the Company to abolish the positions and provides separation benefits to impacted employees. It will take several years to fully implement this plan due to the geographical complexity of the new combined rail system, and the time required to develop and install common systems. Most of the position reductions are expected to occur during 1996 and 1997, and the entire plan is expected to be completed by the end of 1998. No comparable costs were accrued in applying purchase accounting, as ATSF's operations had previously been centralized. Also, no provision for clerical relocations was included in the 1995 expense as employees have yet to commit to relocate. As such, these costs, as well as any separation and severance costs above those provided, will be recorded as operating expenses of future periods. Both the timing and magnitude of any such future expense is presently unknown. Costs of $254 million were recorded for salaried employees and reflect severance, pension and other employee benefits, and costs for employee relocations incurred during the period. Severance, pension and other employee benefit costs of $231 million reflect the elimination of approximately 1,000 former BNI employees. Most of these positions were eliminated in the third and fourth quarters of 1995; remaining positions will be eliminated in 1996. Additional components of salaried employee costs include special termination benefits to be received under the Company's retirement plan and expenses related to restricted stock which vested upon approval of the Merger. Relocation expenses of $23 million reflect costs incurred in 1995 for relocating approximately 300 former BNI employees. Costs of $105 million are included for branch line dispositions reflecting the write-off of the net book value of the lines at the anticipated disposal date, less estimated net proceeds. Approximately 75 line segments covering 3,300 miles of former BNI lines are included. Remaining costs of $89 million include obligations at leased facilities which are expected to be vacated and the write- off of duplicate and excess assets including computer hardware and software and certain facilities. Additional accruals of $138 million were recorded through purchase accounting related to former SFP employees and assets. Approximately $105 million of these costs related to termination of approximately 500
salaried employees for severance payments and special termination benefits to be received under the Company's retirement and health and welfare plans. Salaried employee costs also include amounts to relocate approximately 500 former SFP employees. The remaining $33 million of costs relate to the sale or abandonment of 500 miles of branch lines, rents on vacated leased facilities and the write-off of excess assets. Current and long-term employee merger and separation liabilities totaling $745 million are included in the consolidated balance sheet and represent employee- related components of the above costs, as well as remaining liabilities for actions taken by ATSF in prior periods. The majority of these prior ATSF costs are associated with deferred benefits payable upon separation or retirement to certain active conductors and trainmen, incurred in connection with an agreement which, among other things, reduced crew sizes. Additionally, certain locomotive engineers are eligible for a deferred benefit payable upon separation or retirement, associated with an agreement reached in 1990 with ATSF which allowed for more flexible work rules. At December 31, 1995, approximately $215 million of the above is included within current liabilities for anticipated costs to be paid in 1996. The remaining costs are anticipated to be paid over the next five years, except for certain costs related to conductors, trainmen and locomotive engineers of ATSF will be paid upon the employees separation or retirement. P A G E 28
BURLINGTON NORTHERN SANTA FE 4 Accounting changes Effective January 1, 1995, BNSF changed its method of accounting for periodic major locomotive overhauls. Under the new method, costs of owned locomotives relating to components requiring major overhaul are depreciated, on a straight- line basis, to the first major overhaul date. The remaining cost of the owned locomotive is depreciated, on a straight-line basis, over the estimated economic life of the locomotive. The cost of overhauls on owned units are then capitalized when incurred and depreciated, on a straight-line basis, until the next anticipated overhaul. In addition, estimated costs for major overhauls on leased units are accrued on a straight-line basis over the life of the leases. BNSF previously expensed locomotive overhauls when the costs were incurred. BNSF believes that this change is preferable because it improves the matching of expenses incurred to revenues earned. The cumulative effect of this change on years prior to 1995 was a reduction in net income of $100 million (net of a $63 million income tax benefit) or $.94 per share (primary and fully diluted). The effect of this change for the year ended December 31, 1995, was to reduce income before extraordinary item and cumulative effect of change in accounting method by $25 million or $.23 per share (primary and fully diluted). The pro forma effect of this change on 1994 and 1993 would have been to reduce net income to $390 million or $4.08 per share (primary) and $275 million or $2.82 per share (primary), respectively. Effective January 1, 1994, BNSF adopted Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect, net of $7 million income tax benefit, of this change in accounting attributable to years prior to 1994, at the time of adoption, was to decrease 1994 net income by $10 million, or $.11 per common share. In 1994, BNSF adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of this standard had no effect on net income and no material effect on stockholders' equity. 5 Other income (expense), net Other income (expense), net includes the following (in millions):
- ------------------------------------------------------------------Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------BNI's equity in earnings of SFP prior to consummation of the Merger $ 16 $ $ Gain on property dispositions 12 15 17 Equity in earnings of pipeline partnership 9 Interest income 8 3 6 Accounts receivable sale fees (4) (9) (9)
BURLINGTON NORTHERN SANTA FE 4 Accounting changes Effective January 1, 1995, BNSF changed its method of accounting for periodic major locomotive overhauls. Under the new method, costs of owned locomotives relating to components requiring major overhaul are depreciated, on a straight- line basis, to the first major overhaul date. The remaining cost of the owned locomotive is depreciated, on a straight-line basis, over the estimated economic life of the locomotive. The cost of overhauls on owned units are then capitalized when incurred and depreciated, on a straight-line basis, until the next anticipated overhaul. In addition, estimated costs for major overhauls on leased units are accrued on a straight-line basis over the life of the leases. BNSF previously expensed locomotive overhauls when the costs were incurred. BNSF believes that this change is preferable because it improves the matching of expenses incurred to revenues earned. The cumulative effect of this change on years prior to 1995 was a reduction in net income of $100 million (net of a $63 million income tax benefit) or $.94 per share (primary and fully diluted). The effect of this change for the year ended December 31, 1995, was to reduce income before extraordinary item and cumulative effect of change in accounting method by $25 million or $.23 per share (primary and fully diluted). The pro forma effect of this change on 1994 and 1993 would have been to reduce net income to $390 million or $4.08 per share (primary) and $275 million or $2.82 per share (primary), respectively. Effective January 1, 1994, BNSF adopted Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect, net of $7 million income tax benefit, of this change in accounting attributable to years prior to 1994, at the time of adoption, was to decrease 1994 net income by $10 million, or $.11 per common share. In 1994, BNSF adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of this standard had no effect on net income and no material effect on stockholders' equity. 5 Other income (expense), net Other income (expense), net includes the following (in millions):
- ------------------------------------------------------------------Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------BNI's equity in earnings of SFP prior to consummation of the Merger $ 16 $ $ Gain on property dispositions 12 15 17 Equity in earnings of pipeline partnership 9 Interest income 8 3 6 Accounts receivable sale fees (4) (9) (9) Miscellaneous, net (13) (12) (9) - ------------------------------------------------------------------Total $ 28 $ (3) $ 5 - ----------------------------------------------=====================
6 Income taxes Income tax expense, excluding the cumulative effect of change in accounting method and extraordinary item, was as follows (in millions):
- -----------------------------------------------------------------Year ended December 31, 1995 1994 1993 - -----------------------------------------------------------------Current: Federal $ 216 $ 124 $ 61 State 32 19 8 - -----------------------------------------------------------------248 143 69 - -----------------------------------------------------------------Deferred: Federal (101) 109 136 State (11) 17 20 - ------------------------------------------------------------------
(112) 126 156 - -----------------------------------------------------------------Total $ 136 $ 269 $225 - ----------------------------------------------====================
Reconciliation of the federal statutory income tax rate to the effective tax rate, excluding the cumulative effect of change in accounting method and extraordinary item, was as follows:
- -----------------------------------------------------------------Year ended December 31, 1995 1994 1993 - -----------------------------------------------------------------Federal statutory income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 4.0 3.4 3.4 Effect of 1 percent federal tax rate increase on deferred tax balances at January 1, 1993 5.0 Other, net 1.7 0.3 (.2) - -----------------------------------------------------------------Effective tax rate 40.7% 38.7% 43.2% - -----------------------------------------------===================
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act) was signed into law. The Act increased the corporate federal income tax rate by 1 percent, effective January 1, 1993. BNSF recorded $28 million to income tax expense representing the impact of the 1 percent increase on BNSF's beginning of the year deferred income tax liability. The components of deferred tax assets and liabilities were as follows (in millions):
- -----------------------------------------------------------------December 31, 1995 1994 - -----------------------------------------------------------------Deferred tax liabilities: Depreciation and amortization $(5,076) $(1,785) Other (249) (106) - -----------------------------------------------------------------Total deferred tax liabilities (5,325) (1,891) - -----------------------------------------------------------------Deferred tax assets: Casualty and environmental reserves 360 255 Employee merger and separation costs 359 Non-expiring AMT credit carryforwards 124 Postretirement benefits 88 Pensions 69 49 Other 412 287 - -----------------------------------------------------------------Total deferred tax assets 1,412 591 - -----------------------------------------------------------------Net deferred tax liability $(3,913) $(1,300) - -------------------------------------------------================= Noncurrent deferred income tax liability $(4,233) $(1,456) Current deferred income tax asset 320 156 - -----------------------------------------------------------------Net deferred tax liability $(3,913) $(1,300) - -------------------------------------------------=================
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BURLINGTON NORTHERN SANTA FE In 1995 and 1993, tax benefits of $11 million and $4 million, respectively, related to the adjustment to recognize the minimum pension liability was allocated directly to stockholders' equity. In 1994, tax expense of $6 million related to the adjustment to reduce the minimum pension liability was allocated directly to stockholders' equity.
BURLINGTON NORTHERN SANTA FE In 1995 and 1993, tax benefits of $11 million and $4 million, respectively, related to the adjustment to recognize the minimum pension liability was allocated directly to stockholders' equity. In 1994, tax expense of $6 million related to the adjustment to reduce the minimum pension liability was allocated directly to stockholders' equity. BNSF will file its first federal consolidated income tax return for 1995. BNI's and SFP's federal income tax returns have been examined through 1991 and 1990, respectively. All years prior to 1986 are closed for BNI and SFP. Issues relating to the years 1986-1991 are being contested through various stages of administrative appeal. In addition, BNSF and its subsidiaries have various state income tax returns in the process of examination, administrative appeal or litigation. Management believes that adequate provision has been made for any adjustment that might be assessed for open years through 1995. 7 Accounts receivable, net A special purpose subsidiary of ATSF has sold, with limited recourse, variable rate certificates which mature in December 1999 evidencing undivided interests in an accounts receivable master trust. The master trust's assets include an ownership interest in a revolving portfolio of ATSF's accounts receivable which are used to support the certificates. At December 31, 1995, $240 million of certificates sold were outstanding and were supported by receivables in the master trust of $308 million. A maximum of $300 million of certificates can be sold if the master trust balance is increased by receivables which are eligible for sale. ATSF has retained the collection responsibility with respect to the accounts receivable held in trust. ATSF is exposed to credit loss related to collection of accounts receivable to the extent that the amount of receivables in the master trust exceeds the amount of certificates sold. BNRR's agreement to sell accounts receivable with limited recourse expired in December 1994. Costs related to such agreements vary on a monthly basis and are generally related to certain interest rates. Costs related to accounts receivable sales, which are included in Other income (expense), net were $4 million in 1995 and $9 million in both 1994 and 1993. BNSF maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable, including accounts receivable sold. Allowances for doubtful accounts of $50 million and $20 million have been recorded at December 31, 1995 and 1994, respectively. 8 Property and equipment, net Property and equipment, net was as follows (in millions):
- ------------------------------------------------------------December 31, 1995 1994 - ------------------------------------------------------------Road, roadway structures and real estate $15,951 $ 7,875 Equipment 4,383 2,304 - ------------------------------------------------------------Total cost 20,334 10,179 Less accumulated depreciation and amortization (4,333) (3,868) - ------------------------------------------------------------Property and equipment, net $16,001 $ 6,311 - --------------------------------------------=================
The consolidated balance sheets at December 31, 1995 and 1994 included $200 million and $77 million, respectively, for property and equipment under capital leases. The related depreciation was included in depreciation expense. Accumulated depreciation for property and equipment under capital leases was $46 million and $34 million at December 31, 1995 and 1994, respectively. Capitalized software development costs are generally amortized over a five- to seven-year estimated useful life using the straight-line method. Amortization expense was $9 million for the year ended December 31, 1995, $2 million for the year ended December 31, 1994 and no amortization was recorded for the year ended December 31, 1993. Unamortized capitalized software costs were $69 million and $20 million as of December 31, 1995 and 1994, respectively.
9 Accounts payable and other current liabilities Accounts payable and other current liabilities consisted of the following (in millions):
- -----------------------------------------------------December 31, 1995 1994 - -----------------------------------------------------Accounts and wages payable $ 519 $ 264 Casualty and environmental reserves 290 221 Employee merger and separation costs 215 Taxes other than income taxes 143 118 Accrued vacations 141 89 Other 981 633 - -----------------------------------------------------Total $2,289 $1,325 - ----------------------------------------==============
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BURLINGTON NORTHERN SANTA FE 10 Debt Debt outstanding was as follows (in millions):
- ----------------------------------------------------------------December 31, 1995 1994 - ----------------------------------------------------------------BNSF: 6 3/8% notes, due 2005 $ 300 $ 7% debentures, due 2025 350 Credit facility borrowings, 6.0% (variable) 85 Commercial paper, 6.0% (variable) 761 BNI: 8 3/4% debentures, due 2022 200 200 7 1/2% debentures, due 2023 150 150 7% notes, due 2002 150 150 7.40% notes, due 1999 150 150 9% debentures 156 Equipment obligations, weighted average rate of 7.20% and 7.08%, respectively, due serially to 2013 200 194 BNRR: Consolidated mortgage bonds, 3 1/5% to 9 1/4%, due 2006 to 2045 321 321 Capitalized lease obligations, weighted average rate of 6.59% and 8.01%, respectively, expiring 1996 to 2008 150 46 Equipment and other obligations, weighted average rate of 8.44% and 9.30%, respectively, due serially to 2009 74 91 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 20 22 Other 9 158 Commercial paper, 6.1% (variable) 224 90 SFP/ATSF: Equipment obligations, weighted average rate of 8.43%, due serially to 2009 427 Pipeline exchangeable debentures, 10.4% (variable), due 2010 219 Senior notes, 8 3/8% and 8 5/8%, due 2001 and 2004, respectively 200 Mortgage notes, 10.325%, due 1996 to 2014 32 Capitalized lease obligations 4 Unamortized purchase accounting adjustment 114 -
BURLINGTON NORTHERN SANTA FE 10 Debt Debt outstanding was as follows (in millions):
- ----------------------------------------------------------------December 31, 1995 1994 - ----------------------------------------------------------------BNSF: 6 3/8% notes, due 2005 $ 300 $ 7% debentures, due 2025 350 Credit facility borrowings, 6.0% (variable) 85 Commercial paper, 6.0% (variable) 761 BNI: 8 3/4% debentures, due 2022 200 200 7 1/2% debentures, due 2023 150 150 7% notes, due 2002 150 150 7.40% notes, due 1999 150 150 9% debentures 156 Equipment obligations, weighted average rate of 7.20% and 7.08%, respectively, due serially to 2013 200 194 BNRR: Consolidated mortgage bonds, 3 1/5% to 9 1/4%, due 2006 to 2045 321 321 Capitalized lease obligations, weighted average rate of 6.59% and 8.01%, respectively, expiring 1996 to 2008 150 46 Equipment and other obligations, weighted average rate of 8.44% and 9.30%, respectively, due serially to 2009 74 91 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 20 22 Other 9 158 Commercial paper, 6.1% (variable) 224 90 SFP/ATSF: Equipment obligations, weighted average rate of 8.43%, due serially to 2009 427 Pipeline exchangeable debentures, 10.4% (variable), due 2010 219 Senior notes, 8 3/8% and 8 5/8%, due 2001 and 2004, respectively 200 Mortgage notes, 10.325%, due 1996 to 2014 32 Capitalized lease obligations 4 Unamortized purchase accounting adjustment 114 Unamortized discount (61) (63) - ----------------------------------------------------------------Total 4,233 1,819 Less: Current portion of long-term debt and commercial paper (80) (122) - ----------------------------------------------------------------Long-term debt $4,153 $1,697 - --------------------------------------------------===============
BNSF maintains a program for the issuance, from time to time, of commercial paper. These borrowings are supported by bank revolving credit agreements. Outstanding commercial paper balances are considered as reducing available borrowings under these agreements. The bank revolving credit agreements allow borrowings of up to $1.0 billion on a short-term basis and $1.5 billion on a long-term basis. Annual facility fees are currently .08 percent and .125 percent, respectively, and are subject to change based upon changes in BNSF's senior unsecured debt ratings. Borrowings are based upon LIBOR plus a spread based upon BNSF's senior unsecured debt ratings, money market rates offered at the option of the lenders, or an alternate base rate. The commitments of the lenders to make loans are currently scheduled to expire on November 19, 1996 and November 21, 2000, respectively. At December 31, 1995, borrowings against the long-term revolving credit
agreement were $85 million and the maturity value of commercial paper outstanding was $996 million, leaving a total of $419 million of the long-term revolving credit agreement available and $1.0 billion of the short-term revolving credit agreement available. The maturity value of commercial paper outstanding at December 31, 1994 was $91 million. The financial covenants of the bank revolving credit agreements require that BNSF's consolidated tangible net worth, as defined in the agreements, be at least $4.5 billion, and that its debt, as defined in the agreements, cannot exceed 55 percent of its consolidated total capital. In December 1995, BNSF issued $300 million of 6 3/8% Notes due December 15, 2005 and $350 million of 7% Debentures due December 15, 2025 under a registration statement filed by BNSF on November 22, 1995 covering the issuance, from time to time, of up to $1 billion aggregate principal amount of debt securities. The net proceeds from the sale of the notes and debentures were primarily used for general corporate purposes, including but not limited to the repayment of commercial paper and short-term bank loans having an average interest rate of approximately 6 percent. During the course of 1995, the Company entered into various interest rate swap agreements with a principal amount of $500 million, for the purpose of establishing rates in anticipation of debt issuances under a shelf registration statement. The swaps were anticipated to hedge $250 million of 10 year debt and $250 million of 30 year debt. The swaps relating to the 10 year issuance called for the payment of a fixed interest rate of 6.6 percent which was based upon 10 year treasury notes, and the receipt of a variable interest rate. The swaps relating to the 30 year issuance called for the payment of a fixed interest rate of 6.8 percent which was based upon 30 year treasury bonds, and the receipt of a variable interest rate. In conjunction with the fourth quarter 1995 issuance of 10 PAGE31
BURLINGTON NORTHERN SANTA FE year 6 3/8% notes and 30 year 7% debentures, the Company closed out the swap transactions which resulted in losses of $13 million and $15 million, respectively. The losses were deferred and will be recognized over the term of the borrowings. Additionally, in December 1995, BNSF defeased its 9% debentures by placing $166 million of U.S. government securities into an irrevocable trust for the purpose of repaying the debentures in April 1996. The defeasance of debt resulted in an extraordinary charge of $6 million, net of applicable income tax benefits of $3 million, principally reflecting the call premium on the debt. In 1995, BNRR completed cross-border leveraged leases of equipment for a total amount of $136 million which were recorded as capital lease obligations. These transactions included the issuance of $108 million of equipment secured debt at a weighted average yield of 6.39 percent and the receipt of an up front cash benefit. The up front benefit reduces the effective interest rate on the debt to 5.76 percent. In November 1994, BNRR entered into a $150 million three year term loan facility agreement with a group of commercial banks and used the proceeds to redeem $150 million aggregate principal amount of Railroad Consolidated Mortgage Bonds, 10%, Series J, due November 1, 1997. In November 1995, this debt was repaid through the issuance of commercial paper by BNRR. In May 1994, BNI issued $150 million of 7.4% notes due May 15, 1999 and used the proceeds to retire $150 million aggregate principal amount of Railroad Consolidated Mortgage Bonds, 8 7/8%, Series I, due May 30, 1994. Aggregate long-term debt scheduled maturities are $80 million, $149 million, $75 million, $215 million and $1,168 million for 1996 through 2000, respectively. Substantially all BNRR properties and certain other assets are pledged as collateral to or are otherwise restricted under the various BNRR long-term debt agreements. Equipment obligations are secured by the underlying equipment. In addition, a subsidiary of SFP is contingently liable as general partner for $355 million of long-term debt held by
BURLINGTON NORTHERN SANTA FE year 6 3/8% notes and 30 year 7% debentures, the Company closed out the swap transactions which resulted in losses of $13 million and $15 million, respectively. The losses were deferred and will be recognized over the term of the borrowings. Additionally, in December 1995, BNSF defeased its 9% debentures by placing $166 million of U.S. government securities into an irrevocable trust for the purpose of repaying the debentures in April 1996. The defeasance of debt resulted in an extraordinary charge of $6 million, net of applicable income tax benefits of $3 million, principally reflecting the call premium on the debt. In 1995, BNRR completed cross-border leveraged leases of equipment for a total amount of $136 million which were recorded as capital lease obligations. These transactions included the issuance of $108 million of equipment secured debt at a weighted average yield of 6.39 percent and the receipt of an up front cash benefit. The up front benefit reduces the effective interest rate on the debt to 5.76 percent. In November 1994, BNRR entered into a $150 million three year term loan facility agreement with a group of commercial banks and used the proceeds to redeem $150 million aggregate principal amount of Railroad Consolidated Mortgage Bonds, 10%, Series J, due November 1, 1997. In November 1995, this debt was repaid through the issuance of commercial paper by BNRR. In May 1994, BNI issued $150 million of 7.4% notes due May 15, 1999 and used the proceeds to retire $150 million aggregate principal amount of Railroad Consolidated Mortgage Bonds, 8 7/8%, Series I, due May 30, 1994. Aggregate long-term debt scheduled maturities are $80 million, $149 million, $75 million, $215 million and $1,168 million for 1996 through 2000, respectively. Substantially all BNRR properties and certain other assets are pledged as collateral to or are otherwise restricted under the various BNRR long-term debt agreements. Equipment obligations are secured by the underlying equipment. In addition, a subsidiary of SFP is contingently liable as general partner for $355 million of long-term debt held by Santa Fe Pacific Pipeline Partners, L.P. (Pipeline Partnership). The SFP subsidiary holds a 44 percent interest in the Pipeline Partnership which it accounts for under the equity method. The pipeline exchangeable debentures are exchangeable for BNSF's limited partnership interest in the Pipeline Partnership. 11 Disclosures about fair value of financial instruments The estimated fair values of BNSF's financial instruments at December 31, 1995 and 1994 and the methods and assumptions used to estimate the fair value of each class of financial instruments held by BNSF, were as follows: Cash and cash equivalents The carrying amount approximated fair value because of the short maturity of these instruments. Marketable securities Marketable securities, which are used to fund liabilities of certain employee benefit plans, consist of corporate bonds (47 percent of carrying amount) and United States government or agency issues (53 percent of carrying amount) and are classified as available for sale. The carrying value of available for sale securities is adjusted for changes in fair value and any unrealized gains or losses are recorded as a component of stockholders' equity. At December 31, 1995, the unrealized gains and losses were immaterial. Realized gains or losses from the sales of marketable securities were also immaterial for 1995. The fair value for these securities was based on market. 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 BNSF's long-term debt was primarily based on quoted market prices for the same or similar issues, or on the current rates that would be offered to BNSF for debt of the same remaining maturities. The carrying amount of commercial paper approximated fair value because of the short maturity of these instruments. The carrying amount and estimated fair values of BNSF's financial instruments were as follows (in millions):
- --------------------------------------------------------------December 31, 1995 1994 - --------------------------------------------------------------Carrying Fair Carrying Fair Amount Value Amount Value ---------------------------------Assets: Cash and cash equivalents $ 50 $ 50 $ 27 $ 27 Marketable securities 20 20 20 20 Liabilities: Accrued interest payable 71 71 45 45 Long-term debt and commercial paper 4,233 4,412 1,819 1,742 - ---------------------------------------------------------------
BNSF 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 $45 million and $16 million in the December 31, 1995 and 1994 consolidated balance sheets. PAGE32
BURLINGTON NORTHERN SANTA FE 12 Hedging activities, leases and other commitments Hedging activities Fuel BNSF has a program to hedge against fluctuations in the price of its diesel fuel purchases. This program includes forward purchases for delivery at fueling facilities. Additionally, this program includes exchange-traded petroleum futures contracts and various commodity swap and collar transactions which are accounted for as hedges. Any gains or losses associated with changes in market value of these hedges are deferred and recognized as a component of fuel expense in the period in which the hedged fuel is purchased and used. To the extent BNSF hedges portions of its fuel purchases, it may not fully benefit from decreases in fuel prices. As of December 31, 1995, BNSF had entered into forward purchases for approximately 69 million gallons at an average price of approximately 49 cents per gallon. In addition, BNSF held petroleum futures contracts representing approximately 60 million gallons at an average price of approximately 48 cents per gallon. These contracts have expiration dates ranging from January, 1996 to October, 1996. The above prices do not include taxes, fuel handling costs, certain transportation costs and, except for forward contracts, any differences which may occur from time to time between the prices of commodities hedged and the purchase price of BNSF's diesel fuel. BNSF's current fuel hedging program covers approximately 12 percent of estimated 1996 fuel purchases. The current and future fuel delivery prices are monitored continuously and hedge positions are adjusted accordingly. Hedge positions are also closely monitored to ensure that they will not exceed actual fuel requirements in any period. Unrealized gains or losses from BNSF's fuel hedging transactions were not material at December 31, 1995 and 1994. BNSF monitors its hedging positions and credit ratings of its counterparties and does not
BURLINGTON NORTHERN SANTA FE 12 Hedging activities, leases and other commitments Hedging activities Fuel BNSF has a program to hedge against fluctuations in the price of its diesel fuel purchases. This program includes forward purchases for delivery at fueling facilities. Additionally, this program includes exchange-traded petroleum futures contracts and various commodity swap and collar transactions which are accounted for as hedges. Any gains or losses associated with changes in market value of these hedges are deferred and recognized as a component of fuel expense in the period in which the hedged fuel is purchased and used. To the extent BNSF hedges portions of its fuel purchases, it may not fully benefit from decreases in fuel prices. As of December 31, 1995, BNSF had entered into forward purchases for approximately 69 million gallons at an average price of approximately 49 cents per gallon. In addition, BNSF held petroleum futures contracts representing approximately 60 million gallons at an average price of approximately 48 cents per gallon. These contracts have expiration dates ranging from January, 1996 to October, 1996. The above prices do not include taxes, fuel handling costs, certain transportation costs and, except for forward contracts, any differences which may occur from time to time between the prices of commodities hedged and the purchase price of BNSF's diesel fuel. BNSF's current fuel hedging program covers approximately 12 percent of estimated 1996 fuel purchases. The current and future fuel delivery prices are monitored continuously and hedge positions are adjusted accordingly. Hedge positions are also closely monitored to ensure that they will not exceed actual fuel requirements in any period. Unrealized gains or losses from BNSF's fuel hedging transactions were not material at December 31, 1995 and 1994. BNSF monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. Interest rate From time to time, the Company enters into various interest rate hedging transactions for the purpose of managing exposure to fluctuations in interest rates and establishing rates in anticipation of future debt issuances. During 1995, the Company closed out interest rate swap transactions in conjunction with the issuance of debt (see Note 10: Debt). No contracts were outstanding at December 31, 1995. Leases BNSF has substantial lease commitments for locomotives, freight cars, trailers, office buildings and other property. 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 price purchase options. Future minimum lease payments (which reflect leases having non-cancelable lease terms in excess of one year) as of December 31, 1995 are summarized as follows (in millions):
- ------------------------------------------------------------Capital Operating Year ended December 31 Leases Leases - ------------------------------------------------------------1996 $ 22 $ 274 1997 22 263 1998 22 220 1999 20 185 2000 19 159 Thereafter 112 1,425 - ------------------------------------------------------------Total 217 $2,526 - -------------------------------------------------------====== Less amount representing interest 63
- -------------------------------------------------Present value of minimum lease payments $154 - ----------------------------------------------====
Lease rental expense for all operating leases was $303 million, $229 million and $194 million for the years ended December 31, 1995, 1994 and 1993, respectively. Contingent rentals and sublease rentals were not significant. Other commitments BNSF has entered into commitments to acquire 149 locomotives during 1996 and 1997. In addition, BNSF has two power purchase agreements, expiring in 1998 and 2001, that currently involve 197 locomotives. Payments required by the agreements are based upon usage, subject to specified take-or-pay minimums. The rates specified in the two agreements are renegotiable every two years. BNSF's 1996 minimum commitment obligation is $51 million. Based on projected locomotive power requirements, BNSF's payments in 1996 are expected to be in excess of the minimum. Payments under the agreements totaled $49 million, $47 million and $53 million in 1995, 1994 and 1993, respectively. In 1990, BNI 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 for locomotive overhauls. In connection with the closing of the sale of rail lines in southern California in 1992 and 1993, BNSF has entered into various shared use agreements with the agencies, which require BNSF to pay the agencies approximately $6 million annually to maintain track structure and facilities. Additionally, BNSF recorded a $50 million liability in 1993 for an obligation retained by BNSF, which under certain conditions requires a repurchase of a portion of the properties sold. PAGE33
BURLINGTON NORTHERN SANTA FE BNRR and ATSF are each parties to service interruption insurance agreements under which on a combined basis they would be required to pay premiums of up to a maximum of approximately $106 million in the event of work stoppages on other railroads related to ongoing national bargaining. BNRR and ATSF are also entitled to receive payments under certain conditions if a work stoppage occurs on either property. 13 Environmental and other contingencies Environmental BNSF's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF's operating procedures include practices to protect the environment from the environmental risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF's land holdings are and have been used for industrial or transportation related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental cleanup and enforcement actions. In particular, the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well as similar state laws generally impose joint and several liability for clean-up and enforcement costs without regard to fault or the legality of the original conduct on current and former owners and operators of a site. BNSF has been notified that it is a potentially responsible party (PRP) for study and clean-up costs at approximately 30 Superfund sites for which investigation and remediation payments are or will be made or are yet to be determined (the Superfund sites) and, in many instances, is one of several PRPs. In addition, BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF 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.
BURLINGTON NORTHERN SANTA FE BNRR and ATSF are each parties to service interruption insurance agreements under which on a combined basis they would be required to pay premiums of up to a maximum of approximately $106 million in the event of work stoppages on other railroads related to ongoing national bargaining. BNRR and ATSF are also entitled to receive payments under certain conditions if a work stoppage occurs on either property. 13 Environmental and other contingencies Environmental BNSF's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF's operating procedures include practices to protect the environment from the environmental risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF's land holdings are and have been used for industrial or transportation related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental cleanup and enforcement actions. In particular, the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well as similar state laws generally impose joint and several liability for clean-up and enforcement costs without regard to fault or the legality of the original conduct on current and former owners and operators of a site. BNSF has been notified that it is a potentially responsible party (PRP) for study and clean-up costs at approximately 30 Superfund sites for which investigation and remediation payments are or will be made or are yet to be determined (the Superfund sites) and, in many instances, is one of several PRPs. In addition, BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF 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. 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 BNSF'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. BNSF 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 the ability of other PRPs to pay for clean-up, and historical trend analyses. BNSF is involved in a number of administrative and judicial proceedings and other mandatory clean-up efforts at approximately 320 sites, including the Superfund sites, at which it is being asked to participate in the study and/or clean-up of the environmental contamination. BNSF paid approximately $31 million, $21 million and $27 million during 1995, 1994 and 1993, respectively relating to mandatory clean-up efforts, including amounts expended under federal and state voluntary clean-up programs. BNSF has accruals of approximately $235 million for remediation and restoration of all known sites, including $225 million pertaining to mandated sites, of which approximately $60 million relates to the Superfund sites. BNSF anticipates that the majority of the accrued costs at December 31, 1995 will be paid over the next five years. No individual site is considered to be material. Recoveries received from third parties, net of legal costs incurred, were approximately $31 million during the year ended December 31, 1995 and were not significant in prior years. Liabilities recorded for environmental costs represent BNSF's best estimates for remediation and restoration of these sites and include both asserted and unasserted claims. Unasserted claims are not considered to be a material component of the liability. Although recorded liabilities include BNSF's best estimates of all costs, without reduction for anticipated recoveries from third parties, BNSF'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, future charges to income for environmental liabilities could 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; therefore, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on BNSF's consolidated financial position or liquidity. PAGE34
BURLINGTON NORTHERN SANTA FE BNSF expects it will become subject to future requirements regulating air emissions from diesel locomotives that may increase its operating costs. Regulations applicable to new locomotive engines are expected to be issued by the Environmental Protection Agency soon. It is anticipated that these regulations will be effective for locomotive engines installed after 1999. Under some interpretations of federal law, older locomotive engines may be regulated by states based on standards and procedures which the State of California ultimately adopts. At this time it is unknown whether California will adopt locomotive emission standards that may differ from federal standards. Other claims and litigation BNSF and its subsidiaries are parties to a number of legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters and personal injury claims. While the final outcome of these items cannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of management that none of these items, when finally resolved, will have a material adverse effect on the annual results of operations, financial position or liquidity of BNSF, although an adverse resolution of a number of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. 14 Retirement plans BNSF has noncontributory defined benefit pension plans through its subsidiaries, BNI and SFP, covering substantially all non-union employees. BNI and SFP also have nonqualified defined benefit plans for certain officers and other employees. The benefits under BNSF's plans are based on years of credited service and the highest five-year average compensation levels. BNSF's funding policy is to contribute annually not less than the regulatory minimum, and not more than the maximum amount deductible for income tax purposes. Components of the net pension cost for BNI's plans were as follows (in millions):
- -------------------------------------------------------------------------Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------Service cost, benefits earned during the period $ 9 $ 12 $ 9 Interest cost on projected benefit obligation 54 50 50 Actual return on plan assets (93) (25) (57) Net amortization and deferred amounts 57 (1) 24 Curtailment costs 10 Cost of special termination benefits 32 - -------------------------------------------------------------------------Net pension cost $ 69 $ 36 $ 26 - --------------------------------------------------========================
The following table shows the reconciliation of BNI's funded status of the plans with amounts recorded in the consolidated balance sheets (in millions):
- --------------------------------------------------------------------------December 31, 1995 1994 - --------------------------------------------------------------------------Actuarial present value of benefit obligations: Vested benefit obligation $(641) $(481)
BURLINGTON NORTHERN SANTA FE BNSF expects it will become subject to future requirements regulating air emissions from diesel locomotives that may increase its operating costs. Regulations applicable to new locomotive engines are expected to be issued by the Environmental Protection Agency soon. It is anticipated that these regulations will be effective for locomotive engines installed after 1999. Under some interpretations of federal law, older locomotive engines may be regulated by states based on standards and procedures which the State of California ultimately adopts. At this time it is unknown whether California will adopt locomotive emission standards that may differ from federal standards. Other claims and litigation BNSF and its subsidiaries are parties to a number of legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters and personal injury claims. While the final outcome of these items cannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of management that none of these items, when finally resolved, will have a material adverse effect on the annual results of operations, financial position or liquidity of BNSF, although an adverse resolution of a number of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. 14 Retirement plans BNSF has noncontributory defined benefit pension plans through its subsidiaries, BNI and SFP, covering substantially all non-union employees. BNI and SFP also have nonqualified defined benefit plans for certain officers and other employees. The benefits under BNSF's plans are based on years of credited service and the highest five-year average compensation levels. BNSF's funding policy is to contribute annually not less than the regulatory minimum, and not more than the maximum amount deductible for income tax purposes. Components of the net pension cost for BNI's plans were as follows (in millions):
- -------------------------------------------------------------------------Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------Service cost, benefits earned during the period $ 9 $ 12 $ 9 Interest cost on projected benefit obligation 54 50 50 Actual return on plan assets (93) (25) (57) Net amortization and deferred amounts 57 (1) 24 Curtailment costs 10 Cost of special termination benefits 32 - -------------------------------------------------------------------------Net pension cost $ 69 $ 36 $ 26 - --------------------------------------------------========================
The following table shows the reconciliation of BNI's funded status of the plans with amounts recorded in the consolidated balance sheets (in millions):
- --------------------------------------------------------------------------December 31, 1995 1994 - --------------------------------------------------------------------------Actuarial present value of benefit obligations: Vested benefit obligation $(641) $(481) - ------------------------------------------------------------=============== Accumulated benefit obligation $(696) $(553) - ------------------------------------------------------------=============== Projected benefit obligation $(758) $(628) Plan assets at fair value, primarily marketable equity and debt securities 534 467 - --------------------------------------------------------------------------Projected benefit obligation in excess of plan assets (224) (161) Unrecognized net loss 93 41 Unrecognized prior service cost 2 5 Unamortized net transition obligation 20 29
Adjustment required to recognize minimum liability (53) (12) - --------------------------------------------------------------------------Accrued pension liability $(162) $ (98) - ------------------------------------------------------------===============
BNI uses a December 31 measurement date. The assumptions used in accounting for BNI's plans were as follows:
- --------------------------------------------------------------------------December 31, 1995 1994 1993 - --------------------------------------------------------------------------Discount rate 7.0% 9.0% 7.0% Rate of increase in compensation levels 4.0% 5.5% 5.5% Expected long-term rate of return on plan assets 9.5% 9.5% 9.5% - ---------------------------------------------------------------------------
Components of net pension income for SFP's plans from September 22, 1995 through December 31, 1995 were as follows (in millions):
- --------------------------------------------------------------------------Service cost, benefits earned during the period $ 2 Interest cost on projected benefit obligation 11 Actual return on plan assets (21) Net amortization and deferred amounts 4 - -------------------------------------------------------------------------Net pension income $ (4) - ----------------------------------------------------------------------====
The following table shows the reconciliation of SFP's funded status of the plans with amounts recorded in the consolidated balance sheet at December 31, 1995 (in millions):
- ----------------------------------------------------------------------------------Assets Exceed Accumulated Accumulated Benefits Benefits Exceed Assets - ----------------------------------------------------------------------------------Actuarial present value of benefit obligations: Vested benefit obligation $(547) $ (7) - ------------------------------------------------------------======================= Accumulated benefit obligation $(575) $ (8) - ------------------------------------------------------------======================= Projected benefit obligation $(614) $(11) Plan assets at fair value, primarily common stock, and U.S. and corporate bonds 718 - ----------------------------------------------------------------------------------Plan assets in excess of (less than) projected benefit obligation 104 (11) Unrecognized net loss 3 - ----------------------------------------------------------------------------------Prepaid (accrued) pension asset (liability) $ 104 $ (8) - ------------------------------------------------------------=======================
P A G E 35
BURLINGTON NORTHERN SANTA FE SFP uses a September 30 measurement date. The assumptions used in accounting for SFP's plans for 1995 were as follows:
- ---------------------------------------------------------------
BURLINGTON NORTHERN SANTA FE SFP uses a September 30 measurement date. The assumptions used in accounting for SFP's plans for 1995 were as follows:
- --------------------------------------------------------------Discount rate 7.5 % Rate of increase in compensation levels 4.0 % Expected long-term rate of return on plan assets 9.75% - ---------------------------------------------------------------
BNSF sponsors 401(k) thrift and profit sharing plans through its subsidiaries, BNI and SFP, which cover substantially all non-union employees and certain union employees. BNI matches 35 percent of the first 6 percent of non-union employees' contributions, which is subject to certain percentage limits of the employees' earnings, at the end of each quarter. Depending on BNI's performance, an additional matching contribution of 20 to 40 percent can be made following the end of the year. SFP matches 100 percent of the first 4 percent of non-union employees' contributions and 25 percent of the first 4 percent of union employees' contributions. BNSF's expense was $13 million, $8 million and $6 million in 1995, 1994 and 1993, respectively. 15 Other postemployment benefit plans BNI provides life insurance benefits to eligible non-union employees. The life insurance plan is noncontributory and covers retirees only. Components of BNI's postretirement benefit cost were $1 million in each of three years ended December 31, 1995, 1994 and 1993, respectively. BNI's policy is to fund benefits payable under the life insurance plan as they come due. The following table presents the status of BNI's life insurance plan and the accrued postretirement benefit cost reflected in the consolidated balance sheets (in millions). BNI uses a December 31 measurement date.
- -------------------------------------------------------------December 31, 1995 1994 - -------------------------------------------------------------Accumulated postretirement benefit obligation: Retirees $14 $11 Fully eligible active participants 1 1 Other active participants 2 2 - -------------------------------------------------------------17 14 Unrecognized net gain 1 4 - -------------------------------------------------------------Accrued postretirement benefit cost $18 $18 - ----------------------------------------------------==========
The discount rate used in determining the benefit obligation was 7 percent at December 31, 1995 and 9 percent at December 31, 1994. Salaried employees of SFP who have rendered 10 years of service after attaining age 45 are eligible for both medical benefits and life insurance coverage during retirement. The retiree medical plan is contributory and provides benefits to retirees, their covered dependents and beneficiaries. Retiree contributions are adjusted annually. The plan also contains fixed deductibles, coinsurance and out-of-pocket limitations. The life insurance plan is noncontributory and covers retirees only. Components of the SFP's postretirement benefit cost from September 22, 1995 to December 31, 1995 relating to its medical and life insurance plans were as follows (in millions):
- ------------------------------------------------------------------Life Insurance Medical Plan Plan - ------------------------------------------------------------------Service cost $$ 1 Interest cost 1 3 Net amortization and deferred amounts (2) - ------------------------------------------------------------------Net postretirement benefit cost $1 $ 2
- -----------------------------------------------------==============
SFP's policy is to fund benefits payable under the medical and life insurance plans as they come due. The following table shows the reconciliation of the plans' obligations to amounts accrued at December 31, 1995 (in millions). SFP uses a September 30 measurement date.
- ------------------------------------------------------------------Life Insurance Medical Plan Plan - ------------------------------------------------------------------Accumulated postretirement benefit obligation: Retirees $45 $130 Fully eligible active participants 15 Other active participants 4 40 - ------------------------------------------------------------------49 185 Unrecognized net loss (2) (8) - ------------------------------------------------------------------Accrued postretirement benefit cost $47 $177 - ----------------------------------------------------===============
For 1995, the assumed health care cost trend rate for managed care medical costs is 11 percent and is assumed to decrease gradually to 5 percent by 2006 and remain constant thereafter. For medical costs not in managed care, the assumed health care cost trend rate is 13 percent and is assumed to decrease gradually to 5 percent by 2006 and remain constant thereafter. Increasing the assumed health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation for the medical plan by $16 million and the combined service and interest components of net periodic postretirement benefit cost recognized in 1995 by $2 million. For 1995, the weighted-average discount rate assumed in determining the accumulated postretirement benefit obligation was 7.5 percent and the assumed weighted-average salary increase was 4.0 percent. Other Plans Under collective bargaining agreements, BNSF participates in multiemployer benefit plans which provide certain postretirement health care and life insurance benefits for eligible union employees. Insurance premiums paid attributable to retirees, which are generally expensed as incurred, were $11 million in 1995 and $10 million in both 1994 and 1993. PAGE36
BURLINGTON NORTHERN SANTA FE 16 Preferred capital stock 6 1/4% Cumulative Convertible Preferred Stock, Series A, $.01 Par Value, authorized 25,000,000 shares-6,900,000 shares issued In November 1992, BNI issued 6,900,000 shares of 6 1/4% Cumulative Convertible Preferred Stock, Series A, No Par Value. The convertible preferred stock was not redeemable prior to December 26, 1995. On September 22, 1995, the outstanding BNI shares were converted to 6,878,607 shares of BNSF 6 1/4% Cumulative Convertible Preferred Stock, $.01 par value. On October 19, 1995, the BNSF board of directors voted to redeem BNSF's 6 1/4% Cumulative Convertible Preferred Stock, Series A, $.01 par value, effective December 26, 1995, at the redemption price of $52.1875 per share and declared a dividend which, when paid, was 74.65 cents per share (representing the normal quarterly dividend of 78.125 cents per share pro rated up to the effective redemption date) to holders of record on December 7, 1995. The dividend was paid on January 2, 1996. The majority of the holders of this preferred
BURLINGTON NORTHERN SANTA FE 16 Preferred capital stock 6 1/4% Cumulative Convertible Preferred Stock, Series A, $.01 Par Value, authorized 25,000,000 shares-6,900,000 shares issued In November 1992, BNI issued 6,900,000 shares of 6 1/4% Cumulative Convertible Preferred Stock, Series A, No Par Value. The convertible preferred stock was not redeemable prior to December 26, 1995. On September 22, 1995, the outstanding BNI shares were converted to 6,878,607 shares of BNSF 6 1/4% Cumulative Convertible Preferred Stock, $.01 par value. On October 19, 1995, the BNSF board of directors voted to redeem BNSF's 6 1/4% Cumulative Convertible Preferred Stock, Series A, $.01 par value, effective December 26, 1995, at the redemption price of $52.1875 per share and declared a dividend which, when paid, was 74.65 cents per share (representing the normal quarterly dividend of 78.125 cents per share pro rated up to the effective redemption date) to holders of record on December 7, 1995. The dividend was paid on January 2, 1996. The majority of the holders of this preferred stock elected to convert their shares into BNSF common stock as BNSF's common stock price was significantly higher than the redemption price. As such, the cash payment for shares redeemed was not significant. Class A Preferred Stock, $.01 Par Value, Authorized 50,000,000 shares--Unissued At December 31, 1995, BNSF had available for issuance 50,000,000 shares of Class A Preferred Stock, $.01 Par Value. The Board of Directors has the authority to issue such stock in one or more series, to fix the number of shares and to fix the designations and the powers. 17 Common stock and additional paid-in capital BNSF is authorized to issue 300,000,000 shares of Common Stock, $.01 Par Value. At December 31, 1995, there were 149,605,217 shares of common stock outstanding. Each holder of common stock is entitled to one vote per share in the election of directors and on all matters submitted to a vote of stockholders. Subject to the rights and preferences of any future issuance of preferred stock, each share of common stock is entitled to receive dividends as may be declared by the Board of Directors out of funds legally available and to share ratably in all assets available for distribution to stockholders upon dissolution or liquidation. No holder of common stock has any preemptive right to subscribe for any securities of BNSF. Pursuant to the terms of the Merger Agreement, on September 22, 1995, BNSF issued 141,866,851 shares of common stock, $.01 par value, of which 89,862,751 shares were exchanged for the outstanding shares of BNI common stock and 52,004,100 were exchanged for the outstanding shares of SFP common stock, excluding the SFP common stock acquired by BNI in the Tender Offer. 18 Stock options, other incentive plans and other stockholders' equity Stock options Under BNSF's stock option plans, options may be granted to officers and salaried employees at fair market value on the date of grant. Approximately 4.3 million shares were available for future grant at December 31, 1995. All options expire within 10 years after the date of grant.
Activity in stock option plans was as follows: - --------------------------------------------------------------------------Exercise Price Options per Share - --------------------------------------------------------------------------Balance at December 31, 1992 3,251,324 $10.32 to $44.24 Granted 947,125 55.56 to 55.94 Exercised (508,476) 10.32 to 44.24 Cancelled (54,882) 22.50 to 55.94 - ------------------------------------------------Balance at December 31, 1993 3,635,091 12.49 to 55.94
Granted 752,690 Exercised (184,088) Cancelled (83,962) - ------------------------------------------------Balance at December 31, 1994 4,119,731 Granted 1,026,414 Conversion of SFP stock options 5,342,024 Exercised (821,769) Cancelled (67,747) - ------------------------------------------------Balance at December 31, 1995 9,598,653
53.69 to 12.49 to 20.48 to
55.94 55.94 55.94
15.26 to 52.00 to 7.36 to 7.36 to 12.69 to
55.94 82.25 73.88 59.38 59.38
7.36 to
82.25
Exercisable at December 31: 1995 7,465,135 $ 7.36 to $59.38 1994 2,950,427 15.26 to 55.94 1993 2,153,170 12.49 to 44.24 - ---------------------------------------------------------------------------
Shares issued upon exercise of options may be issued from treasury shares or from authorized but unissued shares. All stock options outstanding at February 7, 1995 became exercisable upon approval of the Merger by BNI and SFP stockholders. PAGE37
BURLINGTON NORTHERN SANTA FE Other incentive plans BNI and SFP have various other incentive plans, in addition to stock options, which are administered separately on behalf of employees from each of the combined companies. BNI has restricted stock award plans under which up to 1,700,000 common shares may be awarded to eligible employees and directors. No cash payment is required by the individual. Shares awarded under the plan may not be sold, transferred or used as collateral by the holder until the shares awarded become free of the restrictions, generally by one-third on the third, fourth and fifth anniversaries of the date of grant. All shares still subject to restrictions are generally forfeited and returned to the plan if the employee or director's relationship is terminated. If the employee or director retires, becomes disabled or dies, the restrictions will lapse at that time. Restricted stock awards under these plans, net of forfeitures, were 243,631, 177,670 and 232,354 shares in 1995, 1994 and 1993, respectively. A total of 141,621, 780,694 and 870,525 restricted common shares were outstanding at December 31, 1995, 1994 and 1993, respectively. As a result of the Merger, outstanding restricted shares became fully vested in February 1995 resulting in $24 million operating expense reflected in merger, severance and asset charges. Compensation expense for 1994 and 1993 was not significant. Additionally, BNI adopted an employee stock purchase plan in 1992, effective in 1993, as a means to encourage employee ownership of BNSF common stock. A total of 500,000 shares of common stock were authorized for distribution under this plan. The plan allows eligible BNSF employees to use the proceeds of incentive compensation awards to purchase shares of BNSF common stock at a discount from the market price and may require that the shares purchased be held for a specific time period. The difference between the market price and the employees' purchase price is recorded as additional compensation expense. During the years ended December 31, 1995, 1994 and 1993, 39,421, 31,832 and 34,629 shares were purchased under this plan. The related compensation expense was not significant. BNI also has a stock award plan which provides for grants of shares of BNSF's common stock to full-time employees, excluding officers, based upon performance. A total of 100,000 shares of common stock has been authorized for these awards. During the years ended December 31, 1995, 1994 and 1993, 2,965, 3,900 and 5,540 shares were awarded under this plan. The related compensation expense was not significant.
BURLINGTON NORTHERN SANTA FE Other incentive plans BNI and SFP have various other incentive plans, in addition to stock options, which are administered separately on behalf of employees from each of the combined companies. BNI has restricted stock award plans under which up to 1,700,000 common shares may be awarded to eligible employees and directors. No cash payment is required by the individual. Shares awarded under the plan may not be sold, transferred or used as collateral by the holder until the shares awarded become free of the restrictions, generally by one-third on the third, fourth and fifth anniversaries of the date of grant. All shares still subject to restrictions are generally forfeited and returned to the plan if the employee or director's relationship is terminated. If the employee or director retires, becomes disabled or dies, the restrictions will lapse at that time. Restricted stock awards under these plans, net of forfeitures, were 243,631, 177,670 and 232,354 shares in 1995, 1994 and 1993, respectively. A total of 141,621, 780,694 and 870,525 restricted common shares were outstanding at December 31, 1995, 1994 and 1993, respectively. As a result of the Merger, outstanding restricted shares became fully vested in February 1995 resulting in $24 million operating expense reflected in merger, severance and asset charges. Compensation expense for 1994 and 1993 was not significant. Additionally, BNI adopted an employee stock purchase plan in 1992, effective in 1993, as a means to encourage employee ownership of BNSF common stock. A total of 500,000 shares of common stock were authorized for distribution under this plan. The plan allows eligible BNSF employees to use the proceeds of incentive compensation awards to purchase shares of BNSF common stock at a discount from the market price and may require that the shares purchased be held for a specific time period. The difference between the market price and the employees' purchase price is recorded as additional compensation expense. During the years ended December 31, 1995, 1994 and 1993, 39,421, 31,832 and 34,629 shares were purchased under this plan. The related compensation expense was not significant. BNI also has a stock award plan which provides for grants of shares of BNSF's common stock to full-time employees, excluding officers, based upon performance. A total of 100,000 shares of common stock has been authorized for these awards. During the years ended December 31, 1995, 1994 and 1993, 2,965, 3,900 and 5,540 shares were awarded under this plan. The related compensation expense was not significant. Under the SFP Long Term Incentive Stock Plan (Long Term Plan), 67,632 restricted shares of BNSF common stock resulted from the conversion of existing SFP restricted shares upon consummation of the Merger. No new grants were awarded and forfeitures of 1,254 shares occurred during the period from September 22, 1995 to December 31, 1995. The restrictions on these shares generally lapse upon attaining certain corporate performance objectives, completing a required vesting period. A total of 64,477 restricted common shares were outstanding at December 31, 1995. Other stockholders' equity As a result of the Merger, certain investments in third parties held by both BNI and SFP, which were previously recorded on the cost method, were converted to the equity method due to BNSF's combined ownership position and ability to exercise significant influence. As such, $26 million, which is net of deferred taxes of $17 million, was recorded as an increase to retained earnings to reflect BNI's undistributed equity in earnings since initial investment. SFP's investments were adjusted to fair value upon the application of purchase accounting. PAGE38
BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------------------------------19 Quarterly financial data unaudited (Dollars in millions, except per share data) Fourth Third S 1995 Revenues $ 2,092 $ 1,460 $ Operating income (loss)/(1)(3)/ (175) 254 Income (loss) before extraordinary item and cumulative effect of change in accounting method (160) 133 Extraordinary item, loss on early retirement of debt, net of tax/(2)/ (6) -Cumulative effect of change in accounting method, net of tax/(3)/ ---
BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------------------------------19 Quarterly financial data unaudited (Dollars in millions, except per share data) Fourth Third S 1995 Revenues $ 2,092 $ 1,460 $ Operating income (loss)/(1)(3)/ (175) 254 Income (loss) before extraordinary item and cumulative effect of change in accounting method (160) 133 Extraordinary item, loss on early retirement of debt, net of tax/(2)/ (6) -Cumulative effect of change in accounting method, net of tax/(3)/ --- ------------------------------------------------------------------------------------------------------Net income (loss) $ (166) $ 133 $ - ------------------------------------------------------------------------------------------------------Primary earnings (loss) per common share:/(4)/ Income (loss) before extraordinary item and change in accounting method $ (1.15) $ 1.32 $ Extraordinary item (0.04) -Change in accounting method --- ------------------------------------------------------------------------------------------------------Primary earnings (loss) per common share $ (1.19) $ 1.32 $ - ------------------------------------------------------------------------------------------------------Fully diluted earnings (loss) per common share:/(4)/ Income (loss) before extraordinary item and change in accounting method $ (1.15) $ 1.28 $ Extraordinary item (0.04) -Change in accounting method --- ------------------------------------------------------------------------------------------------------Fully diluted earnings (loss) per common share $ (1.19) $ 1.28 $ - ------------------------------------------------------------------------------------------------------Dividends declared per common share $ .30 $ .30 $ Common stock price: High $83 7/8 $76 1/4 $ Low 71 1/4 62 5/8 - ------------------------------------------------------------------------------------------------------1994 Revenues $ 1,344 $ 1,249 $ Operating income 264 229 Income before cumulative effect of change in accounting method 142 115 Cumulative effect of change in accounting method, net of tax/(5)/ --- ------------------------------------------------------------------------------------------------------Net income $ 142 $ 115 $ - ------------------------------------------------------------------------------------------------------Primary earnings (loss) per common share: Income before change in accounting method $ 1.51 $ 1.22 $ Change in accounting method --- ------------------------------------------------------------------------------------------------------Primary earnings per common share $ 1.51 $ 1.22 $ - ------------------------------------------------------------------------------------------------------Fully diluted earnings (loss) per common share: Income before change in accounting method $ 1.46 $ 1.18 $ Change in accounting method --- ------------------------------------------------------------------------------------------------------Fully diluted earnings per common share $ 1.46 $ 1.18 $ - ------------------------------------------------------------------------------------------------------Dividends declared per common share $ .30 $ .30 $ Common stock price: High $51 5/8 $53 5/8 $ Low 46 5/8 48 1/4 - -------------------------------------------------------------------------------------------------------
(1) Results include pre-tax charges of $587 million, $106 million, $10 million and $32 million for the fourth, third, second and first quarters of 1995, respectively related to merger, severance and asset charges as discussed in Note 3. (2) Results for the fourth quarter include the loss on defeasance of BNI 9% debentures of $6 million, net of $3 million income tax benefit, or $.04 per share, treated as an extraordinary item. (3) Effective January 1, 1995, BNSF changed its accounting for locomotive overhauls. The cumulative effect of this change attributable to years prior to 1995 was to decrease net income by $100 million, or $1.11 per share. Additionally, first, second and third quarter results were restated for the impact of the change on 1995 by reducing operating income, net income and both primary and fully diluted per share amounts as follows: first quarter--$12 million, $7 million and $.09; second quarter--$9 million, $6 million and $.06; and third quarter-$11 million, $6 million and $.06, respectively.
$11 million, $6 million and $.06, respectively. (4) Fully diluted earnings per share are antidilutive for the first and fourth quarters of 1995; therefore, the amounts reported for primary and fully diluted earnings per share are the same. Amounts may not total to the annual earnings per share because each quarter and the year are calculated separately based on average outstanding shares and common share equivalents during that period. (5) Effective January 1, 1994, BNSF adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of this change attributable to years prior to 1994, was to decrease net income by $10 million, or $.11 per common share. P A G E 39
Exhibit 18 February 15, 1996 Mr. Denis E. Springer
Exhibit 18 February 15, 1996 Mr. Denis E. Springer Senior Vice President and Chief Financial Officer Burlington Northern Santa Fe Corporation 1700 East Golf Road Schaumburg, Illinois 60173-5860 Dear Mr. Springer: We are providing this letter to you for inclusion as an exhibit to the Burlington Northern Santa Fe Company (the Company) Form 10-K filing pursuant to Item 601(18) of Regulation S-K. We have read management's justification for the change in accounting from the expensing of locomotive overhaul costs as incurred to the capitalization/accrual of such costs and depreciating/amortizing them over their estimated period of future benefit as contained in the Company's Report on Form 10-K for the year ended December 31, 1995. Based on our reading of the data and discussions with Company officials of the business judgment relating to the change, we believe management's justification to be reasonable. Accordingly, in reliance on management's determination as regards elements of business judgment, we concur that the newly adopted accounting principle described above is preferable in the Company's circumstances to the method previously applied. Very truly yours, COOPERS & LYBRAND L.L.P.
Exhibit 21 BURLINGTON NORTHERN SANTA FE CORPORATION BURLINGTON NORTHERN INC. SANTA FE PACIFIC CORPORATION SUBSIDIARIES OF BURLINGTON NORTHERN INC.
BN LEASING CORPORATION (DE) - ---------------------BURLINGTON NORTHERN INTERNATIONAL SERVICES, INC. (DE) - -----------------------------------------------BURLINGTON NORTHERN - MEXICO INC. (DE) - --------------------------------BURLINGTON NORTHERN RAILROAD COMPANY (DE) - -----------------------------------THE BELT RAILWAY COMPANY OF CHICAGO (IL) BURLINGTON NORTHERN DOCK CORPORATION (DE) BURLINGTON NORTHERN (MANITOBA) LIMITED (MANITOBA) BURLINGTON NORTHERN RAILROAD HOLDINGS, INC. (DE) BURLINGTON NORTHERN WORLDWIDE, INC. (DE) CAMAS PRAIRIE RAILROAD COMPANY (OR) ELECTRO NORTHERN, INC. (DE) HOUSTON BELT & TERMINAL RAILWAY COMPANY (TX) IOWA TRANSFER RAILWAY COMPANY (IA) KANSAS CITY TERMINAL RAILWAY COMPANY (MO) LONGVIEW SWITCHING COMPANY (WA) M T PROPERTIES, INC. (MN) NORTHERN RADIO LIMITED (BRITISH COLUMBIA) PADUCAH & ILLINOIS RAILROAD COMPANY (KY) PORTLAND TERMINAL RAILROAD COMPANY (OR) TERMINAL RAILROAD ASSOCIATION OF ST. LOUIS (MO) 100%
100%
100%
100%
8.3% 100% 100% 100% 100% 50% 100% 24% 25% 16.67% 50% 37.8% 100% 33.3% 40% 14.3%
Exhibit 21 BURLINGTON NORTHERN SANTA FE CORPORATION BURLINGTON NORTHERN INC. SANTA FE PACIFIC CORPORATION SUBSIDIARIES OF BURLINGTON NORTHERN INC.
BN LEASING CORPORATION (DE) - ---------------------BURLINGTON NORTHERN INTERNATIONAL SERVICES, INC. (DE) - -----------------------------------------------BURLINGTON NORTHERN - MEXICO INC. (DE) - --------------------------------BURLINGTON NORTHERN RAILROAD COMPANY (DE) - -----------------------------------THE BELT RAILWAY COMPANY OF CHICAGO (IL) BURLINGTON NORTHERN DOCK CORPORATION (DE) BURLINGTON NORTHERN (MANITOBA) LIMITED (MANITOBA) BURLINGTON NORTHERN RAILROAD HOLDINGS, INC. (DE) BURLINGTON NORTHERN WORLDWIDE, INC. (DE) CAMAS PRAIRIE RAILROAD COMPANY (OR) ELECTRO NORTHERN, INC. (DE) HOUSTON BELT & TERMINAL RAILWAY COMPANY (TX) IOWA TRANSFER RAILWAY COMPANY (IA) KANSAS CITY TERMINAL RAILWAY COMPANY (MO) LONGVIEW SWITCHING COMPANY (WA) M T PROPERTIES, INC. (MN) NORTHERN RADIO LIMITED (BRITISH COLUMBIA) PADUCAH & ILLINOIS RAILROAD COMPANY (KY) PORTLAND TERMINAL RAILROAD COMPANY (OR) TERMINAL RAILROAD ASSOCIATION OF ST. LOUIS (MO) TTX COMPANY (DE) WESTERN FRUIT EXPRESS COMPANY (DE) THE WICHITA UNION TERMINAL RAILWAY COMPANY (KS) WINONA BRIDGE RAILWAY COMPANY (MN) BURLINGTON NORTHERN RELOCATION SERVICES INC. (TX) - -------------------------------------------INB CORP. (NV) - --------M-R HOLDINGS ACQUISITION COMPANY (DE) - -------------------------------MIDWEST/NORTHWEST PROPERTIES INC. (DE) - --------------------------------100%
100%
100%
100%
8.3% 100% 100% 100% 100% 50% 100% 24% 25% 16.67% 50% 37.8% 100% 33.3% 40% 14.3% 6.2% 100% 33% 100% 100%
100%
100%
100%
SUBSIDIARIES OF SANTA FE PACIFIC CORPORATION
PINE CANYON LAND COMPANY (DE) - -----------------------SANTA FE PACIFIC INSURANCE COMPANY (VT) - ----------------------------------THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY (DE) - ------------------------------------------------ALAMEDA BELT LINE (CA) AUBREY WATER COMPANY (DE) THE BELT RAILWAY COMPANY OF CHICAGO (IL) CENTRAL CALIFORNIA TRACTION COMPANY (CA) THE DODGE CITY AND CIMARRON VALLEY RAILWAY COMPANY (KS) 100%
100%
100% 50% 100% 8.33% 33.3% 100%
SUBSIDIARIES OF SANTA FE PACIFIC CORPORATION
PINE CANYON LAND COMPANY (DE) - -----------------------SANTA FE PACIFIC INSURANCE COMPANY (VT) - ----------------------------------THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY (DE) - ------------------------------------------------ALAMEDA BELT LINE (CA) AUBREY WATER COMPANY (DE) THE BELT RAILWAY COMPANY OF CHICAGO (IL) CENTRAL CALIFORNIA TRACTION COMPANY (CA) THE DODGE CITY AND CIMARRON VALLEY RAILWAY COMPANY (KS) THE GULF AND INTER-STATE RAILWAY COMPANY OF TEXAS (TX) HOUSTON BELT & TERMINAL RAILWAY COMPANY (TX) KANSAS CITY TERMINAL RAILWAY COMPANY (MO) LOS ANGELES JUNCTION RAILWAY COMPANY (CA) THE OAKLAND TERMINAL RAILWAY (CA) OKLAHOMA CITY JUNCTION RAILWAY COMPANY (OK) RIO GRANDE, EL PASO AND SANTA FE RAILROAD COMPANY (TX) ST. JOSEPH TERMINAL RAILROAD COMPANY (MO) SANTA FE FORWARDING COMPANY (DE) SANTA FE RAIL EQUIPMENT COMPANY (DE) SANTA FE RECEIVABLES CORPORATION (DE) SANTA FE TERMINAL SERVICES, INC. (DE) STAR LAKE RAILROAD COMPANY (DE) SUNSET RAILWAY COMPANY (CA) TEXAS CITY TERMINAL RAILWAY COMPANY (TX) TTX COMPANY (DE) THE WICHITA UNION TERMINAL RAILWAY COMPANY (KS) CONSTELLATION 130, INC. (CA) - ----------------------LIMITED PARTNERSHIP MANAGEMENT,INC. (DE) - ----------------------------------SANTA FE PACIFIC RAILROAD COMPANY (ACT OF CONGRESS) - --------------------------------SFP PIPELINE HOLDINGS, INC. (DE) - --------------------------SANTA FE PACIFIC PIPELINES, INC. (DE) SUNSET COMMUNICATIONS COMPANY (DE) - ----------------------------WALKER-KURTH LUMBER COMPANY (TX) - --------------------------THE ZIA COMPANY (DE) - --------------100%
100%
100% 50% 100% 8.33% 33.3% 100% 100% 25% 8.33% 100% 50% 100% 100% 50% 100% 100% 100% 100% 100% 50% 33.3% 10.9% 33.3% 100%
100%
100%
100% 100% 100%
100%
100%
Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Burlington Northern Santa Fe Corporation on Form S-8 (File Nos. 33-62823, 33-62825, 33-62827, 33-62829, 33-62831, 33-62833, 3362835, 33-62837, 33-62839, 33-62841, 33-62943, 33-63247, 33-63249, 33-63253, 33-63255) and Form S-3 (File No. 33-64209) of our reports dated February 15, 1996, on our audits of the consolidated financial statements and financial statement schedule of Burlington Northern Santa Fe Corporation as of December 31, 1995, 1994 and 1993, which reports are included in or incorporated by reference in this Annual Report on Form
Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Burlington Northern Santa Fe Corporation on Form S-8 (File Nos. 33-62823, 33-62825, 33-62827, 33-62829, 33-62831, 33-62833, 3362835, 33-62837, 33-62839, 33-62841, 33-62943, 33-63247, 33-63249, 33-63253, 33-63255) and Form S-3 (File No. 33-64209) of our reports dated February 15, 1996, on our audits of the consolidated financial statements and financial statement schedule of Burlington Northern Santa Fe Corporation as of December 31, 1995, 1994 and 1993, which reports are included in or incorporated by reference in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Fort Worth, Texas March 29, 1996
Exhibit 24 POWER OF ATTORNEY WHEREAS, BURLINGTON NORTHERN SANTA FE CORPORATION, a Delaware corporation (the "Company"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995; and WHEREAS, the undersigned serve the Company in the capacity indicated; NOW, THEREFORE the undersigned hereby constitutes and appoints DENIS E. SPRINGER and JEFFREY R. MORELAND, his attorney with full power to act for him in his name, place and stead, to sign his name in the capacity set forth below, to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1995, and to any and all amendments to such Annual Report on Form 10-K, and hereby ratifies and confirms all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been executed by the undersigned this 22nd day of March, 1996.
/s/ Joseph F. Alibrandi - --------------------------------Joseph F. Alibrandi, Director /s/ Jack S. Blanton -------------------------------Jack S. Blanton, Director
/s/ John J. Burns, Jr. - --------------------------------John J. Burns, Jr., Director
/s/ Daniel P. Davison -------------------------------Daniel P. Davison Chairman of the Board, Director
/s/ George Deukmejian - --------------------------------George Deukmejian, Director
/s/ Daniel J. Evans -------------------------------Daniel J. Evans, Director
/s/ Robert D. Krebs - --------------------------------Robert D. Krebs, President and Chief Executive Officer, and Director
/s/ Bill M. Lindig -------------------------------Bill M. Lindig, Director
Exhibit 24 POWER OF ATTORNEY WHEREAS, BURLINGTON NORTHERN SANTA FE CORPORATION, a Delaware corporation (the "Company"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995; and WHEREAS, the undersigned serve the Company in the capacity indicated; NOW, THEREFORE the undersigned hereby constitutes and appoints DENIS E. SPRINGER and JEFFREY R. MORELAND, his attorney with full power to act for him in his name, place and stead, to sign his name in the capacity set forth below, to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1995, and to any and all amendments to such Annual Report on Form 10-K, and hereby ratifies and confirms all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been executed by the undersigned this 22nd day of March, 1996.
/s/ Joseph F. Alibrandi - --------------------------------Joseph F. Alibrandi, Director /s/ Jack S. Blanton -------------------------------Jack S. Blanton, Director
/s/ John J. Burns, Jr. - --------------------------------John J. Burns, Jr., Director
/s/ Daniel P. Davison -------------------------------Daniel P. Davison Chairman of the Board, Director
/s/ George Deukmejian - --------------------------------George Deukmejian, Director
/s/ Daniel J. Evans -------------------------------Daniel J. Evans, Director
/s/ Robert D. Krebs - --------------------------------Robert D. Krebs, President and Chief Executive Officer, and Director
/s/ Bill M. Lindig -------------------------------Bill M. Lindig, Director
/s/ Ben F. Love - --------------------------------Ben F. Love, Director
/s/ Roy S. Roberts -------------------------------Roy S. Roberts, Director
/s/ Marc J. Shapiro - --------------------------------Marc J. Shapiro, Director
/s/ Arnold R. Weber -------------------------------Arnold R. Weber, Director
/s/ Robert H. West - --------------------------------Robert H. West, Director
/s/ J. Steven Whisler -------------------------------J. Steven Whisler, Director
/s/ Robert H. West - --------------------------------Robert H. West, Director
/s/ J. Steven Whisler -------------------------------J. Steven Whisler, Director
/s/ Edward E. Whitacre, Jr. - --------------------------------Edward E. Whitacre, Jr., Director
/s/ Ronald B. Woodard -------------------------------Ronald B. Woodard, Director
/s/ Michael B. Yanney - --------------------------------Michael B. Yanney, Director
ARTICLE 5 This schedule contains summary financial information extracted from Burlington Northern Santa Fe Corporation's Consolidated Financial Statements and is qualified in its entirety by reference to such financial statements. MULTIPLIER: 1,000,000
PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS COMMON PREFERRED MANDATORY PREFERRED OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS TOTAL COSTS OTHER EXPENSES LOSS PROVISION INTEREST EXPENSE INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED
12 MOS DEC 31 1995 JAN 01 1995 DEC 31 1995 50 0 670 50 220 1,264 20,334 4,333 18,269 2,369 4,153 1 0 0 5,036 18,269 0 6,183 0 5,657 0 0 220 334 136 198 0 (6) (100) 92 .67 .67
EXHIBIT 99 ITEM 3. LEGAL PROCEEDINGS. EAST LINE CIVIL LITIGATION AND FERC PROCEEDING In August 1992, two East Line refiners, Navajo Refining Company ("Navajo") and El Paso Refinery, L.P. ("El
ARTICLE 5 This schedule contains summary financial information extracted from Burlington Northern Santa Fe Corporation's Consolidated Financial Statements and is qualified in its entirety by reference to such financial statements. MULTIPLIER: 1,000,000
PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS COMMON PREFERRED MANDATORY PREFERRED OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS TOTAL COSTS OTHER EXPENSES LOSS PROVISION INTEREST EXPENSE INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED
12 MOS DEC 31 1995 JAN 01 1995 DEC 31 1995 50 0 670 50 220 1,264 20,334 4,333 18,269 2,369 4,153 1 0 0 5,036 18,269 0 6,183 0 5,657 0 0 220 334 136 198 0 (6) (100) 92 .67 .67
EXHIBIT 99 ITEM 3. LEGAL PROCEEDINGS. EAST LINE CIVIL LITIGATION AND FERC PROCEEDING In August 1992, two East Line refiners, Navajo Refining Company ("Navajo") and El Paso Refinery, L.P. ("El Paso"), filed separate, though similar, civil lawsuits (the "East Line Civil Litigation") against the Partnership arising from the Partnership's alleged failure to provide additional pipeline capacity to Phoenix and Tucson, Arizona from El Paso, Texas. The Navajo action also sought an injunction to prohibit the Partnership from reversing the direction of flow (from westbound to eastbound) of its six-inch diameter pipeline between Phoenix and Tucson. In addition, El Paso filed a protest/complaint with the FERC in September 1992 seeking to block the reversal of the six-inch pipeline and challenging the Partnership's proration policy as well as the Partnership's existing East Line rates (the "FERC Proceeding"). EAST LINE CIVIL LITIGATION The civil actions brought by Navajo and El Paso (El Paso Refining, Inc., and El Paso Refinery, L.P. v. Santa Fe Pacific Pipelines, Inc. and Santa Fe Pacific Pipeline Partners, L.P., No. 92-9144, County Court No. 5, El Paso County, filed August 1992) were filed in New Mexico and Texas, respectively, seeking actual, punitive and consequential damages arising from the Partnership's alleged failure to provide additional pipeline capacity to Phoenix and Tucson from El Paso. Generally, the lawsuits allege that the refiners proceeded with significant refinery expansions under the belief that the Partnership would provide additional pipeline capacity to transport
EXHIBIT 99 ITEM 3. LEGAL PROCEEDINGS. EAST LINE CIVIL LITIGATION AND FERC PROCEEDING In August 1992, two East Line refiners, Navajo Refining Company ("Navajo") and El Paso Refinery, L.P. ("El Paso"), filed separate, though similar, civil lawsuits (the "East Line Civil Litigation") against the Partnership arising from the Partnership's alleged failure to provide additional pipeline capacity to Phoenix and Tucson, Arizona from El Paso, Texas. The Navajo action also sought an injunction to prohibit the Partnership from reversing the direction of flow (from westbound to eastbound) of its six-inch diameter pipeline between Phoenix and Tucson. In addition, El Paso filed a protest/complaint with the FERC in September 1992 seeking to block the reversal of the six-inch pipeline and challenging the Partnership's proration policy as well as the Partnership's existing East Line rates (the "FERC Proceeding"). EAST LINE CIVIL LITIGATION The civil actions brought by Navajo and El Paso (El Paso Refining, Inc., and El Paso Refinery, L.P. v. Santa Fe Pacific Pipelines, Inc. and Santa Fe Pacific Pipeline Partners, L.P., No. 92-9144, County Court No. 5, El Paso County, filed August 1992) were filed in New Mexico and Texas, respectively, seeking actual, punitive and consequential damages arising from the Partnership's alleged failure to provide additional pipeline capacity to Phoenix and Tucson from El Paso. Generally, the lawsuits allege that the refiners proceeded with significant refinery expansions under the belief that the Partnership would provide additional pipeline capacity to transport their product into Arizona, and that they were damaged by their inability to ship additional volumes into that highly competitive market. This belief of Navajo and El Paso was purportedly based on alleged oral representations made by General Partner personnel and from language contained in a January 1989 settlement agreement with Navajo, relating to a 1985 FERC rate case. On July 28, 1993, the Partnership reached a settlement with Navajo whereby Navajo agreed to dismiss its pending civil litigation in New Mexico and to withdraw any challenge to the direction of flow of the six-inch pipeline, including any such challenge in the FERC proceeding. The Partnership agreed to make certain cash payments to Navajo over three years and to undertake and complete an additional pipeline capacity expansion between El Paso and Phoenix if certain events related to volume levels and proration of pipeline capacity should occur within five years of the date of the agreement. El Paso's August 1992 civil action, as amended, claims unspecified actual damages, which appear to include the $190 million cost of its refinery expansion, plus punitive and consequential damages. In addition, on October 4, 1995, El Paso's general partner, El Paso Refining, Inc. ("EPRI"), filed a Second Amended Petition seeking unspecified damages arising from alleged unfulfilled representations of Partnership management with respect to future East Line capacity, alleging that such representations had been relied upon in negotiating the terms by which EPRI exchanged its refinery assets for ownership interests in El Paso in 1989. In October 1992, El Paso filed a petition for reorganization under Chapter 11 of the federal bankruptcy laws and halted refinery operations. In November 1993, the El Paso bankruptcy was converted from a Chapter 11 to a Chapter 7 proceeding. During 1994, the bankruptcy trustee for El Paso retained legal counsel for purposes of pursuing this litigation. Initial rounds of written
discovery and witness depositions were conducted by both parties in late-1994 and in 1995, and discovery will continue in 1996. To date, there have been no hearings before the court and there is no pre-trial schedule. Management anticipates that this matter will not come to trial prior to mid-1997. The Partnership believes that the allegations of El Paso and EPRI are without merit and intends to vigorously defend itself in this action. FERC PROCEEDING
discovery and witness depositions were conducted by both parties in late-1994 and in 1995, and discovery will continue in 1996. To date, there have been no hearings before the court and there is no pre-trial schedule. Management anticipates that this matter will not come to trial prior to mid-1997. The Partnership believes that the allegations of El Paso and EPRI are without merit and intends to vigorously defend itself in this action. FERC PROCEEDING At various points following El Paso's September 1992 filing, other customers of the Partnership, including Chevron U.S.A. Products Company ("Chevron"), Navajo, ARCO Products Company ("ARCO"), Texaco Refining and Marketing Inc. ("Texaco"), Refinery Holding Company, L.P. (a partnership formed by El Paso's long-term secured creditors that purchased El Paso's refinery in May 1993), Mobil Oil Corporation and Tosco Corporation, have filed separate complaints challenging, and/or motions to intervene in proceedings initiated by others challenging, the Partnership's rates on its East and West Lines and, in certain cases, also claiming that a gathering enhancement charge at the Partnership's Watson, California pump station is in violation of the Interstate Commerce Act. In subsequent procedural rulings, the FERC has consolidated these challenges and ruled that they must proceed as a complaint proceeding, with the burden of proof being placed on the complaining parties, who must show that the Partnership's rates and practices at issue violate the requirements of the Interstate Commerce Act. In December 1995, Texaco filed a new complaint concerning charges associated with the use of the Partnership's Watson, California gathering enhancement facilities and of certain lines upstream of its Watson station origin point, and ARCO filed a similar complaint on January 16, 1996. Texaco and ARCO have asked that these complaints not be consolidated with the other proceedings described above. The Partnership has denied the allegations in these complaints. In June 1994, the complainants filed their cases-in-chief with the FERC, seeking reparations for shipments between 1990 and 1993 aggregating in the range of $15 million to $20 million, as well as tariff rate reductions of between 40% and 50% for future shipments. In August 1994, the FERC Staff submitted its case-in-chief in the FERC proceeding, employing rate-making methodologies similar in several respects to those presented by the complainants. In subsequent filings, the complainants revised their requested relief to seek reparations for shipments between 1990 and 1994 aggregating approximately $35 million, as well as rate reductions of between 30% and 40% for shipments in 1995 and thereafter. Both the FERC Staff and several of the complainants argued, among other things, against the Partnership's entitlement to an income tax allowance in its cost of service. They also utilized the Partnership's capital structure at the time of its formation in December 1988, or a hypothetical capital structure, for the purpose of establishing the Partnership's 1985 starting rate base under FERC Opinion 154-B. In addition, the FERC Staff and the complainants would generally exclude most or all of the Partnership's civil and regulatory litigation expense from its cost of service calculations. Each of these positions is adverse to the Partnership's position regarding its existing rate structure.
On June 15, 1995, the FERC issued a decision in an unrelated rate proceeding involving Lakehead Pipe Line Company, Limited Partnership ("Lakehead"), ruling that Lakehead, which is also a publicly traded partnership engaged in oil pipeline transportation, may not include an income tax allowance in its cost of service with respect to partnership income that is attributable to limited partnership interests held by individuals. In July 1995, Lakehead requested rehearing of the decision by the FERC, and that request is currently pending. Should this ruling be upheld and applied in the Partnership's rate proceeding, the Partnership believes it would currently allow the Partnership to include a substantial portion of the Partnership's income tax allowance in its cost of service, rather than the full entitlement that was reflected in the Partnership's case-in-chief and subsequent testimony in its FERC proceeding. Management intends to vigorously defend its entitlement to a full income tax allowance in its cost of service. Successive rounds of testimony have been filed by the respective parties, including the Partnership, regarding the above summarized issues and other matters relevant to the appropriateness of the Partnership's tariffs and rates.
On June 15, 1995, the FERC issued a decision in an unrelated rate proceeding involving Lakehead Pipe Line Company, Limited Partnership ("Lakehead"), ruling that Lakehead, which is also a publicly traded partnership engaged in oil pipeline transportation, may not include an income tax allowance in its cost of service with respect to partnership income that is attributable to limited partnership interests held by individuals. In July 1995, Lakehead requested rehearing of the decision by the FERC, and that request is currently pending. Should this ruling be upheld and applied in the Partnership's rate proceeding, the Partnership believes it would currently allow the Partnership to include a substantial portion of the Partnership's income tax allowance in its cost of service, rather than the full entitlement that was reflected in the Partnership's case-in-chief and subsequent testimony in its FERC proceeding. Management intends to vigorously defend its entitlement to a full income tax allowance in its cost of service. Successive rounds of testimony have been filed by the respective parties, including the Partnership, regarding the above summarized issues and other matters relevant to the appropriateness of the Partnership's tariffs and rates. Among other things, certain of the parties submitted revised cases based on the Partnership's 1994 costs and revenues. The Partnership's surrebuttal presentation responded to those cases, defending the Partnership's current rates based on 1994 data, with certain normalizing adjustments including a significant adjustment to reflect an extensive pipe reconditioning program that was begun in 1994. The present procedural schedule calls for hearings before the FERC Administrative Law Judge to commence in April 1996, with an initial decision not expected before late 1996 or early 1997. The Energy Policy Act of 1992 ("EPACT") established as "just and reasonable" existing oil pipeline rates that were in effect without challenge for 365 days prior to the bill's enactment in October 1992, with an exception being allowed for parties, such as Navajo, that were prohibited from filing challenges during that period due to the terms of settlement agreements. In October 1993, with respect to Chevron's complaint, the FERC ruled that the Partnership's West Line rates are deemed "just and reasonable" under EPACT (i.e., are "grandfathered") and may only be challenged upon a showing of a substantial change in the economic circumstances which were a basis for the rate ("changed circumstances"). In December 1994, ARCO, Texaco and Chevron filed testimony in which they sought to demonstrate the required "changed circumstances" in order to challenge the Partnership's West Line rates, citing such factors as increased West Line volumes. On April 20, 1995, the United States Court of Appeals for the District of Columbia Circuit dismissed petitions for review of the FERC's grandfathering rulings that had been filed by ARCO and Texaco, on the ground that those rulings are not yet final orders and, therefore, are not yet subject to judicial review. The Partnership believes that its rates and practices are lawful under FERC precedent and will continue its vigorous defense of that position. However, because of the complexity of the issues involved and the nature of FERC rate- making methodology, which is subject to interpretation and leaves certain issues for determination on a case-by-case basis, it is possible that the rates at issue in the FERC proceeding will not ultimately be upheld. If the FERC were to reach adverse decisions on the issues in the proceeding which result in significant reparations being paid and a significant reduction in the Partnership's current tariffs, such adverse outcome could have a material adverse effect on the Partnership's results of operations, financial condition and ability to maintain its quarterly cash distribution at the current level.