-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Uka+nJ0j9fv99t+TYheB4hHI0aaGGF7K9jgjh/5GTiR5w4hGSP+M6BpEreSfg8ZC cKZ+Jenox8Iakb77kEJ6Zg== 0000950109-95-000405.txt : 19950518 0000950109-95-000405.hdr.sgml : 19950518 ACCESSION NUMBER: 0000950109-95-000405 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950217 SROS: MSE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURLINGTON NORTHERN RAILROAD CO CENTRAL INDEX KEY: 0000015511 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 416034000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06324 FILM NUMBER: 95513439 BUSINESS ADDRESS: STREET 1: 3800 CONTINENTAL PLZ STREET 2: 777 MAIN ST CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8178782000 MAIL ADDRESS: STREET 1: 3800 CONTINENTAL PLAZA STREET 2: 777 MAIN STREET CITY: FORT WORTH STATE: TX ZIP: 76102-5384 FORMER COMPANY: FORMER CONFORMED NAME: BURLINGTON NORTHERN INC DATE OF NAME CHANGE: 19810602 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) XX ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to __________ _________ Commission file number 1-6324 --------------------- BURLINGTON NORTHERN RAILROAD COMPANY (Exact name of registrant as specified in its charter) Delaware 41-6034000 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3800 Continental Plaza, 777 Main St. Fort Worth, Texas 76102-5384 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (817) 333-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: ---------------------------------------------------------- The securities listed below are registered on the New York Stock Exchange. Title of each class ------------------- Burlington Northern Inc. Northern Pacific Railway Company (Now Burlington Northern Railroad Company) Prior Lien Railway and Land Consolidated Mortgage Bonds Grant 4% Bonds, due 1997 9 1/4 %, Series H, due 2006 General Lien Railway and Land 6.55%, Series K, due 2020 Grant 3% Bonds, due 2047 3.80%, Series L, due 2020 3.20%, Series M, due 2045 Great Northern Railway Company 8.15%, Series N, due 2020 General Mortgage Bonds 6.55%, Series O, due 2020 3 1/8%, Series O, due 2000 8.15%, Series P, due 2020 2 5/8%, Series Q, due 2010 St. Louis-San Francisco Railway Company First Mortgage Bonds, 4%, Series A, due 1997 Income Debentures, 5%, Series A, due 2006 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: ---------------------------------------------------------- None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months [or for such shorter period that the registrant was required to file such reports], and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Class Outstanding ----- ----------- Common Stock, without par value as of January 31, 1995* 1,000 shares *Burlington Northern Railroad Company is a wholly owned subsidiary of Burlington Northern Inc. (BNI) and there is no market data with respect to such shares. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- None REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT PERMITTED BY GENERAL INSTRUCTION J. Page 1 of 113 total pages. Exhibit index is located on page 51. Table of Contents -----------------
Item Page ---- ---- Part I 1. Business.......................................... 1 2. Properties........................................ 1 3. Legal Proceedings................................. 8 4. Submission of Matters to a Vote of Security Holders......................................... 11 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 11 6. Selected Financial Data........................... 11 7. Management's Narrative Analysis of Results of Operations...................................... 12 8. Financial Statements and Supplementary Data....... 21 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............. 43 Part III 10. Directors and Executive Officers of the Registrant 43 11. Executive Compensation............................ 43 12. Security Ownership of Certain Beneficial Owners and Management.................................. 43 13. Certain Relationships and Related Transactions.... 43 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 43
NOTE: Part I, Item Four; Part II, Item Six; Part III, Items Ten, Eleven, Twelve and Thirteen; and Part IV Exhibit 22 have been omitted pursuant to General Instruction J(1)(a) and (b) of Form 10-K relating to wholly owned subsidiaries. PART I Item 1. Business and Item 2. Properties Burlington Northern Railroad Company's (Railroad) principal business activity is railroad transportation. Railroad is the principal subsidiary of Burlington Northern Inc. (BNI). Railroad transportation Railroad operates the largest railroad system in the United States based on miles of road and second main track, with approximately 24,300 total miles at December 31, 1994. The principal cities served include Billings, Birmingham, Cheyenne, Chicago, Denver, Des Moines, Duluth/Superior, Fargo/Moorhead, Fort Worth/Dallas, Galveston, Houston, Kansas City, Lincoln, Memphis, Mobile, Omaha, Pensacola, Portland, St. Louis, St. Paul/Minneapolis, Seattle, Spokane, Springfield (Missouri), Tacoma, Tulsa, Wichita, Vancouver (British Columbia) and Winnipeg (Manitoba). The following table presents Railroad's revenue information by business unit and includes certain reclassifications of prior year information to conform to current year presentation. Percent of revenues was calculated before consideration of shortline payments and other miscellaneous revenues. The principal contributors to rail transportation revenues were as follows (revenues and revenue ton miles in millions, carloadings in thousands):
Year ended December 31, ---------------------------------- 1994 1993 1992 -------- -------- -------- Coal: Revenues................................ $ 1,669 $ 1,532 $ 1,520 Percent of revenues..................... 33% 32% 32% Revenue ton miles....................... 140,934 122,821 117,138 Revenues per revenue ton mile........... 1.18c 1.25c 1.30c Carloadings............................. 1,624 1,467 1,448 Agricultural Commodities: Revenues................................ $ 830 $ 784 $ 777 Percent of revenues..................... 16% 16% 16% Revenue ton miles....................... 35,130 35,454 36,831 Revenues per revenue ton mile........... 2.36c 2.21c 2.11c Carloadings............................. 436 423 454 Intermodal: Revenues................................ $ 772 $ 730 $ 711 Percent of revenues..................... 15% 15% 15% Revenue ton miles....................... 25,542 23,726 22,749 Revenues per revenue ton mile........... 3.02c 3.08c 3.13c Carloadings............................. 1,026 1,003 1,017
Year ended December 31 ---------------------------------- 1994 1993 1992 -------- -------- -------- Forest Products: Revenues................................ $ 498 $ 483 $ 489 Percent of revenues..................... 10% 10% 10% Revenue ton miles....................... 20,784 19,724 20,030 Revenues per revenue ton mile........... 2.40c 2.45c 2.44c Carloadings............................. 284 280 283 Chemicals: Revenues................................ $ 412 $ 406 $ 389 Percent of revenues..................... 8% 8% 8% Revenue ton miles....................... 14,853 14,655 14,167 Revenues per revenue ton mile........... 2.77c 2.77c 2.75c Carloadings............................. 291 263 244 Consumer Products: Revenues................................ $ 267 $ 257 $ 258 Percent of revenues..................... 5% 5% 5% Revenue ton miles....................... 9,477 9,049 9,098 Revenues per revenue ton mile........... 2.82c 2.84c 2.84c Carloadings............................. 150 145 146 Minerals Processors: Revenues................................ $ 208 $ 195 $ 180 Percent of revenues..................... 4% 4% 4% Revenue ton miles....................... 8,399 7,984 7,409 Revenues per revenue ton mile........... 2.48c 2.44c 2.43c Carloadings............................. 189 179 170 Vehicles & Machinery: Revenues................................ $ 190 $ 185 $ 165 Percent of revenues..................... 4% 4% 4% Revenue ton miles....................... 2,614 2,386 2,140 Revenues per revenue ton mile........... 7.27c 7.75c 7.71c Carloadings............................. 134 122 101 Iron & Steel: Revenues................................ $ 175 $ 173 $ 178 Percent of revenues..................... 3% 4% 4% Revenue ton miles....................... 8,270 8,189 8,088 Revenues per revenue ton mile........... 2.12c 2.11c 2.20c Carloadings............................. 230 225 244 Aluminum, Nonferrous Metals & Ores: Revenues................................ $ 102 $ 103 $ 108 Percent of revenues..................... 2% 2% 2% Revenue ton miles....................... 3,851 3,917 4,180 Revenues per revenue ton mile........... 2.65c 2.63c 2.58c Carloadings............................. 65 68 71
Coal The transportation of coal is Railroad's largest source of revenues, accounting for approximately one-third of the total. Based on carloadings and tons hauled, Railroad is the largest transporter of Western low-sulfur coal in the United States. Over 90 percent of Railroad's coal traffic originated in the Powder River Basin of Montana and Wyoming during the three years ended December 31, 1994. These coal shipments were destined for coal-fired electric generating stations located primarily in the North Central, South Central and Mountain regions of the United States with smaller quantities exported. Railroad also handles increasing amounts of low-sulfur coal from the Powder River Basin for delivery to markets in the eastern and southeastern portion of the United States. The low-sulfur coal from the Powder River Basin is -2- abundant, inexpensive to mine and clean-burning. Since the Clean Air Act of 1990 requires power plants to reduce harmful emissions either by burning coal with a lower sulfur content or by installing expensive scrubbing units, opportunities for increased shipments of this low-sulfur coal still exist. Agricultural Commodities Based on carloadings and tons hauled, Railroad is the largest rail transporter of grain in North America. Railroad's system is strategically located to serve the Midwest and Great Plains grain producing regions where Railroad serves most major terminal, storage, feeding and food-processing locations. Additionally, Railroad has access to major export markets in the Pacific Northwest, western Great Lakes and Texas Gulf regions. Intermodal Intermodal transportation consists of hauling freight containers or truck trailers by a combination of water, rail and motor carriers. The intermodal business has become highly service-driven, and in some cases motor carriers and railroads have begun to jointly market intermodal service. Railroad's intermodal transportation system integrates the movement of approximately 36 daily trains operating between 32 rail hubs and 27 satellite rail hubs (Railroad-operated marshalling points for trailer/container movements). These operations are strategically located across Railroad's rail network and also serve major distribution centers outside Railroad's system. Strategic alliances have been formed to enhance Railroad's market access both with other railroads and with major truck transportation providers. Forest Products The Forest Products business unit is primarily comprised of lumber, plywood, pulpmill feedstock, wood pulp and paper products. These products primarily come from the Pacific Northwest, upper Midwest and Southeast areas of the United States. Chemicals The Chemicals business unit is comprised of fertilizer, petroleum and chemical commodities as well as Railroad's environmental logistics business. Primary origin markets for Railroad include the Gulf Coast, the Pacific Northwest, and various Canadian ports of entry. Environmental logistics is an area of significant opportunity as municipalities exhaust their traditional disposal sources and must increasingly transport their waste over longer distances. Consumer Products Products included in Railroad's Consumer Products business unit represent a wide variety of commodities. Some of the major products in this group are food products, beverages, frozen foods, canned foods, appliances and electronics. Because this business unit handles a wide variety of consumer goods, the business unit performance typically mirrors the country's economy. Minerals Processors Commodities in this group include clays, cements, sands and other minerals and aggregates. This group services both the oil and construction industries. -3- Vehicles & Machinery The Vehicles & Machinery business unit is responsible for both domestic and international vehicle manufacturers as well as an assortment of primary and secondary markets for heavy machinery and aerospace products. Through the development and implementation of using containers to move motor vehicles, Railroad is redefining transit time and ride quality. Heavy machinery includes primary markets for aircraft, construction, farm and railroad equipment and secondary markets for used equipment. The business unit is also responsible for military and other miscellaneous traffic for the United States government. Iron & Steel The Iron & Steel business unit handles virtually all of the commodities included in or resulting from the production of steel. Taconite, an iron ore derivative produced in northern Minnesota, scrap steel and coal coke are the business unit's primary input products, while finished steel products range from structural beams and steel coils to wire and nails. Aluminum, Nonferrous Metals & Ores The Aluminum, Nonferrous Metals & Ores business unit handles alumina and aluminum products, petroleum coke and a variety of other metals and ores such as zinc, copper and lead. Operating factors Certain significant operating statistics were as follows:
Year ended December 31, ------------------------------------------------ 1994 1993 1992 1991 1990 ------- ------- ------- ------- -------- Carloadings (in thousands)..................... 4,429 4,175 4,178 4,149 4,335 Freight revenues per carload................... $1,101 $1,099 $1,080 $1,071 $1,052 Revenue ton miles (in millions)................ 260,574 237,339 232,799 232,441 234,291 Revenues per revenue ton mile.................. 1.92c 1.98c 1.99c 1.96c 1.99c Revenue tons per carload....................... 86 83 82 82 79 Revenue tons per train......................... 3,397 3,315 3,193 3,188 3,141 Freight train miles (in millions).............. 77 72 73 73 75 Average length of haul (miles)................. 793 778 764 770 766 Gross ton miles, excluding locomotives (in millions)................................ 443,440 409,808 400,917 402,527 409,991 Operating ratio (excluding the 1991 special charge)...................................... 83% 86% 87% 90% 87% Operating expense per gross ton mile (excluding the 1991 special charge)..................... .93c .99c 1.01c 1.02c .99c Gallons of fuel used (in millions)............. 631 588 560 562 593 Average fuel price per gallon.................. 58.4c 61.5c 62.2c 65.5c 69.5c Gross ton miles per gallon of fuel used........ 703 697 716 716 691 Revenue ton miles per employee (in thousands).. 8,485 7,781 7,461 7,317 7,120 Revenues per employee (in thousands)........... $163 $154 $148 $144 $142
-4- Properties In 1994, approximately 96 percent of the total ton miles, both revenue and non-revenue generating, carried by Railroad were handled on its main lines. At December 31, 1994, approximately 19,140 miles of Railroad's track consisted of 112-lb. per yard or heavier rail, including approximately 10,738 track miles of 132-lb. per yard or heavier rail. Additions and replacements to properties were as follows:
Year ended December 31, ---------------------------------------------- 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ Track miles of rail additions and replacements: New.......................................... 378 387 461 380 301 Used......................................... 253 356 299 281 299 Track miles surfaced or reballasted............ 8,183 7,854 7,610 7,710 7,119 Ties inserted (in thousands): Wood......................................... 1,435 1,914 1,684 1,515 1,331 Concrete..................................... 260 195 500 527 691
Equipment Railroad owned or leased, under both capital and operating leases, with an initial lease term in excess of one year, the following units of railroad rolling stock at December 31, 1994:
Number of Units -------------------------- Owned Leased Total ------ ------ ----- Locomotives: Freight...................................... 583 1,419 2,002 Passenger.................................... - - - Multi-purpose................................ 148 58 206 Switching.................................... 176 18 194 ------ ----- ----- Total locomotives.......................... 907 1,495 2,402 ====== ===== ===== Freight Cars: Box-general purpose.......................... 238 2,753 2,991 Box-specially equipped....................... 5,021 901 5,922 Gondola...................................... 4,729 2,613 7,342 Hopper-open top.............................. 7,349 791 8,140 Hopper-covered............................... 16,326 15,702 32,028 Refrigerator................................. 3,293 9 3,302 Flat......................................... 3,123 1,135 4,258 Caboose...................................... 458 - 458 Other........................................ 549 37 586 ------ ------ ------ Total freight cars......................... 41,086 23,941 65,027 ====== ====== ====== Commuter passenger cars........................ - 141 141 ====== ====== ======
In addition to the owned and leased locomotives identified above, Railroad operates 197 freight locomotives under power purchase agreements. The average age of locomotives and freight cars was 15.0 years and 18.6 years, respectively, at December 31, 1994, compared with 14.5 years and 18.6 years, respectively, at December 31, 1993. The average percentage of Railroad's locomotives and freight cars awaiting repairs during 1994 was 7.7 and 3.1, respectively, compared with 7.7 and 3.3, respectively, in 1993. The average time between locomotive failures was 71.1 days in 1994 compared with 67.9 days in 1993. -5- In 1993, Railroad entered into an agreement to acquire 350 alternating current traction motor locomotives. In December 1994, the number of locomotives to be acquired under this agreement was increased to 404. Railroad anticipates reduced locomotive operating costs as well as an increase in both horsepower and traction, meaning fewer locomotives will be needed for many freight operations. As of January 31, 1995, Railroad had accepted delivery of 147 locomotives and anticipates deliveries under this agreement of between approximately 60 and 140 each year from 1995 (including January 1995 deliveries) through 1997. Employees Railroad employed an average of 30,711 employees in 1994 compared with 30,502 in 1993 and 31,204 in 1992. Railroad's payroll and employee benefits costs, including capitalized labor costs, were approximately $2.0 billion for the year ended December 31, 1994 and $1.9 billion for each of the years ended December 31, 1993 and 1992. Almost 90 percent of Railroad's employees are covered by collective bargaining agreements with 14 different labor organizations. In December 1994, Railroad reached an agreement with the Railroad Yardmasters Division (Yardmasters) of the United Transportation Union which is effective through 1999 with respect to wages, work rules and all other matters except health and welfare benefits. Any changes negotiated with the other unions regarding health and welfare benefits on a national basis will also apply to the Railroad Yardmasters. Approximately 250 Yardmasters were affected by this agreement. Also during 1994, agreements were signed with all of the unions establishing non-contributory 401(k) plans for union employees. Labor agreements currently in effect for unions other than Yardmasters include provisions which prohibited the parties from serving notices to change wages, benefits, rules and working conditions prior to November 1, 1994. The next wage adjustment stipulated by the existing agreements is scheduled for July 1995 unless new agreements are reached by the parties prior to that time. The adjustment called for by the contract is a base wage increase dependent upon changes in the Consumer Price Index not to exceed three percent. These cost of living increases may be offset by increases in the cost of Railroad's payment rate for health and welfare benefits costs. Railroad joined with the other railroads to negotiate with the unions on a multi-employer basis on November 1, 1994. At that time, all unions were served proposals for productivity improvements as well as other changes. The unions also served notices on the railroads which proposed not only increasing wages and benefits but also 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 nationally on a multi-employer basis and the issue is currently pending in Federal District Court in Washington, D.C. At this time, negotiations on the proposals by both the railroads and the unions are in preliminary stages and the ultimate outcome of these negotiations cannot be predicted. In July 1993, the American Train Dispatchers Association ratified an April 1993 agreement which will facilitate the consolidation of all dispatching functions into a centralized train dispatching office in Fort Worth, Texas by the end of 1995. -6- Competition The general environment in which Railroad operates remains highly competitive. Depending on the specific market; deregulated motor carriers, other railroads and river barges exert pressure on various price and service combinations. The presence of advanced, high service truck lines with expedited delivery, subsidized infrastructure and minimal empty mileage continues to impact the market for non-bulk, time sensitive freight. The potential expansion of long combination vehicles could further encroach upon markets traditionally served by railroads. In order to remain competitive, Railroad and other railroads continue to develop and implement technologically supported operating efficiencies to improve productivity. As railroads streamline, rationalize and otherwise enhance their franchises, competition among rail carriers intensifies. Railroad's primary rail competitors in the western region of the United States consist of The Atchison, Topeka & Santa Fe Railway Company; Chicago & Northwestern Transportation Company (C&NW); CP Rail System; Southern Pacific Transportation Company; and Union Pacific Railroad Company (UP Rail). Coal, one of Railroad's primary commodities, has experienced significant pressure on rates due to competition from the joint effort of C&NW/UP Rail and Railroad's efforts to penetrate into new markets. In addition to the railroads discussed above, numerous regional railroads and motor carriers operate in parts of the same territory served by Railroad. Environmental Railroad's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. In order to comply with such regulation and to be consistent with Railroad's corporate environmental policy, Railroad's operating procedures include practices to protect the environment. Amounts expended relating to such practices are inextricably contained in the normal day-to-day costs of Railroad's business operations. -7- Item 3. Legal Proceedings Wheat and barley transportation rates In September 1980 a class action lawsuit was filed against Railroad in United States District Court for the District of Montana (District Court) challenging the reasonableness of Railroad's export wheat and barley rates. The class consists of Montana grain producers and elevators. The plaintiffs sought a finding that Railroad's single car export wheat and barley rates for shipments moving from Montana to the Pacific Northwest were unreasonably high and requested damages in the amount of $64 million. In March 1981 the District Court referred the rate reasonableness issue to the Interstate Commerce Commission (ICC). Subsequently, the State of Montana filed a complaint at the ICC challenging Railroad's multiple car rates for Montana wheat and barley movements occurring after October 1, 1980. The ICC issued a series of decisions in this case from 1988 to 1991. Under these decisions, the ICC applied a revenue to variable cost test to the rates and determined that Railroad owed $9,685,918 in reparations plus interest. In its last decision, dated November 26, 1991, the ICC found Railroad's total reparations exposure to be $16,559,012 through July 1, 1991. The ICC also found that Railroad's current rates were below a reasonable maximum and vacated its earlier rate prescription order. Railroad appealed to the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) those portions of the ICC's decisions concerning the post-October 1, 1980 rate levels. Railroad's primary contention on appeal was that the ICC erred in using the revenue to variable cost rate standard to judge the rates instead of Constrained Market Pricing/Stand Alone Cost principles. The limited portions of decisions that cover pre-October 1, 1980 rates were appealed to the Montana District Court. On March 24, 1992, the Montana District Court dismissed plaintiffs' case as to all aspects other than those relating to pre-October 1, 1980 rates. On February 9, 1993, the D.C. Circuit served its decision regarding the appeal of the several ICC decisions in this case. The Court held that the ICC did not adequately justify its use of the revenue to variable cost standard as Railroad had argued and remanded the case to the ICC for further administrative proceedings. On July 22, 1993, the ICC served an order in response to the D.C. Circuit's February 9, 1993 decision. In its order, the ICC stated it would use the Constrained Market Pricing/Stand Alone Cost Standards in assessing the reasonableness of Railroad's wheat and barley rates moving from Montana to Pacific Coast ports from 1978 forward. The ICC assigned the case to the Office of Hearings to develop a procedural schedule. On October 28, 1994, plaintiffs filed their opening evidence arguing that the revenue received by Railroad exceeded the stand alone costs of transporting that traffic and that Railroad's rates were unreasonably high. The ICC has issued a procedural schedule calling for the receipt of Railroad's evidence on February 27, 1995. Railroad sought reconsideration of that schedule and the ICC granted Railroad's request to extend the filing date until March 29, 1995 in a decision served February 13, 1995. On January 19, 1995, Railroad moved to dismiss the case on the basis that complainants had failed to state a prima facie case. The ICC denied the motion on February 13, 1995. -8- Coal Transportation Contract Litigation On April 26, 1991, an action was filed against Railroad in the 102nd Judicial District Court for Bowie County, Texas seeking a reduction of the transportation rates required to be paid under two contracts (Southwestern Electric Power --------------------------- Company v. Burlington Northern Railroad Company, No. D-102-CV-91-0720). The - ----------------------------------------------- plaintiff, Southwestern Electric Power Company (SWEPCO), was challenging the contract rates for transportation of coal to its electric generating facilities at Cason, Texas and Flint Creek, Arkansas. SWEPCO contended that productivity gains achieved by Railroad constituted unusual economic conditions giving rise to a "gross inequity" because Railroad's costs of providing service have been reduced over the contracts' terms. On August 2, 1994, plaintiff filed an amendment to its complaint to further allege that Railroad had been unjustly enriched by retaining differences between the rates actually charged and those that should have been charged. SWEPCO sought both prospective rate relief and recovery of alleged past overcharges. Railroad's primary contention was that both parties anticipated productivity gains in the rail industry when negotiating the contracts and agreed that Railroad would retain most of its productivity gains. Railroad further contended that there was no agreement that transportation rates paid by SWEPCO would be based on Railroad's costs of providing service. On November 18, 1994, the jury rendered a verdict denying plaintiff's request for prospective rate relief and that plaintiff take nothing on its principal claims of "gross inequity." However, Railroad was assessed damages approximating $56 million relating to plaintiff's alternative claim of unjust enrichment. On January 20, 1995, the trial court rendered a judgment on the verdict in an amount approximating $74 million, which included attorneys' fees and interest. The judgment further awarded post judgment interest at 10 percent per annum and issued declaratory orders pertaining to the two contracts. Railroad intends to appeal the judgment. In the opinion of outside counsel, Railroad has a substantial likelihood of prevailing on appeal, although no assurances can be given due to the uncertainties inherent in litigation. Railroad plans to file its Notice of Appeal in the case on February 17, 1995 and will post a bond to stay enforcement of the judgment pending prosecution of all appeals. In the event SWEPCO fails to file a motion for new trial on or before February 21, 1995, Railroad's appeal will be effective. If such a motion for new trial were timely filed, the trial court's jurisdiction would extend 75 days from the date of judgment to rule on SWEPCO's motion, and Railroad would refile its appeal at the appropriate time. Environmental Proceeding On May 25, 1994, the United States Department of Justice (Department) filed suit on behalf of the United States Environmental Protection Agency (EPA) against Railroad in United States District Court for the Eastern District of Wisconsin for the release of oil and hazardous substances into navigable waters of the United States in the course of three derailments. Specifically referenced are (1) the alleged release of hazardous substances into the Nemadji River and its shoreline near Superior, Wisconsin, on June 30, 1992, (2) the alleged release of oil into the North Platte River and its shoreline near Guernsey, Wyoming, on January 9, 1993, and (3) the alleged release of oil into a tributary of the Bighorn River near Worland, Wyoming, on May 6, 1993. The suit claims that pursuant to 33 U.S.C. Section 1321(b)(7), Railroad is liable to the United States for civil penalties of up to $25,000 per day of violation or $1,000 per barrel of oil or per reportable quantity of each hazardous substance discharged. The EPA initially calculated the statutory maximum penalty associated with these three spills to be $10,137,000. Railroad has answered the complaint and opposed the penalties sought by the EPA. -9- On February 13, 1995, Railroad attended a settlement conference with the Department. The settlement conference was called and conducted by the United States Judge Magistrate for the Western District of Wisconsin. At the conference, a settlement in principle was achieved. Pursuant to the compromise, Railroad will pay $1,500,000 to satisfy all claims by the United States for fines, penalties, response costs and natural resource damages. Railroad will also make a $100,000 contribution to a study (jointly approved by Railroad and the Department) regarding methods or procedures to improve rail safety and prevent derailments. In return for these payments, the United States will release Railroad from all claims arising out of the three derailments and provide Railroad contribution protection against claims by other responsible parties who may later be pursued by the government for their liability arising from the derailments. The settlement is subject to documentation, formal sign-off by various government officials and court approval. Railroad anticipates that the settlement will be executed, approved and implemented by March 30, 1995. There is no reason to believe that formal government and court approval will not be forthcoming. -10- Item 4. Submission of Matters to a Vote of Security Holders Not applicable - see Table of Contents note. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters All of Railroad's outstanding common stock is owned of record by BNI and therefore not traded on any market. Item 6. Selected Financial Data Not applicable - see Table of Contents note. -11- Item 7. Management's Narrative Analysis of Results of Operations Results of operations Year ended December 31, 1994 compared with year ended December 31, 1993 Railroad had net income of $459 million for the year ended December 31, 1994 compared with net income of $332 million 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. Results for 1993 included the effects of severe flooding in the Midwest, most notably in the third quarter. The floods slowed and often halted operations, forced extensive detours, increased car, locomotive and crew costs and resulted in extensive rebuilding of damaged track and bridges. Railroad estimated that the third quarter flooding reduced revenues during 1993 by $44 million and increased operating expenses by $35 million, for a combined reduction of $79 million. Net income for 1993 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 one percent, effective January 1, 1993, which reduced Railroad's net income by $28 million through the date of enactment. This included the recognition of a one-time, non-cash charge of $27 million to income tax expense to adjust deferred taxes as of the enactment date and a charge of $1 million to current income tax expense. Revenues The following table presents Railroad's revenue information by business unit and includes certain reclassifications of 1993 information to conform to the 1994 presentation:
Revenues Per Revenues Revenue Ton Miles Revenue Ton Mile --------------- ----------------- ------------------- Year ended December 31, 1994 1993 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------- (In millions) (In millions) (In cents) Coal.............................. $1,669 $1,532 140,934 122,821 1.18 1.25 Agricultural Commodities.......... 830 784 35,130 35,454 2.36 2.21 Intermodal........................ 772 730 25,542 23,726 3.02 3.08 Forest Products................... 498 483 20,784 19,724 2.40 2.45 Chemicals......................... 412 406 14,853 14,655 2.77 2.77 Consumer Products................. 267 257 9,477 9,049 2.82 2.84 Minerals Processors............... 208 195 8,399 7,984 2.48 2.44 Vehicles & Machinery.............. 190 185 2,614 2,386 7.27 7.75 Iron & Steel...................... 175 173 8,270 8,189 2.12 2.11 Aluminum, Nonferrous Metals & Ores 102 103 3,851 3,917 2.65 2.63 Shortlines and other.............. (128) (149) (9,280) (10,566) - - ------ ------ ------- ------- Total........................... $4,995 $4,699 260,574 237,339 1.92 1.98 ====== ====== ======= =======
Total revenues for 1994 were $4,995 million compared with revenues of $4,699 million for 1993. The $296 million improvement was primarily attributable to improvements in Coal ($137 million), Agricultural Commodities ($46 million) and Intermodal ($42 million) 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. Railroad estimated lost coal revenues of approximately $35 -12- million during 1993 as a result of this flooding. Partially offsetting the increase in 1994 traffic was a decline in revenues per revenue ton mile. These lower yields were largely due to 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. Revenues from the transportation of Agricultural Commodities during 1994 were $46 million higher than 1993. This increase was principally caused by a $31 million improvement in barley revenues, higher wheat revenues and improved feeds and minor 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 minor oilseeds revenues were favorably impacted by increased domestic feed demand. Partially offsetting these increases was an early 1994 decrease in corn revenues largely attributable to reduced crop production and lower export demand. Intermodal revenues increased $42 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. Additionally, BN AMERICA revenues increased due to Railroad's focus on traffic in its key intermodal lanes which resulted in improved yields. The traffic increases in Railroad's key intermodal lanes more than offset Railroad's withdrawal from the Texas market in April 1994. Forest Products, Consumer Products and Minerals Processors revenues for 1994 increased $15 million, $10 million and $13 million, respectively compared with 1993. The improvement in Forest Products revenues was largely due to increased housing starts during the year, while Consumer Products revenues were higher as a result of increased export demand. Minerals Processors revenues rose as a result of stronger clays and aggregates traffic caused by increases in both domestic and export demands. Revenues for Chemicals and Vehicles & Machinery increased $6 million and $5 million, respectively. Increased volumes for environmental logistics, chemicals and fertilizers contributed to higher Chemicals revenues, offset partially by a decline in petroleum products revenues. The increase in Vehicles & Machinery revenues resulted from increased volume in automotive-international traffic. Current year revenues for Iron & Steel and Aluminum, Nonferrous Metals & Ores were relatively flat compared with 1993. Shortlines and other, which are a net reduction of revenue, dropped $21 million compared with 1993 primarily due to additional haulage agreement revenues and increased miscellaneous revenues. Expenses Total operating expenses for 1994 were $4,164 million compared with $4,049 million for 1993. However, the operating ratio improved three percentage points to 83 percent from 86 percent, as increased revenues more than offset increased operating expenses. -13- Compensation and benefits expenses for 1994 were $68 million greater than for the prior year. Higher traffic volumes during 1994 as well as basic wage increases for union represented employees, three percent effective July 1993 and four percent effective July 1994, caused an increase in excess of $50 million to wages and related payroll taxes. Increased salaries and a higher pension expense, due to a reduction in the discount rate used in determining the net pension cost, also contributed to additional compensation and benefits expenses. 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 to 58.4 cents despite the 4.3 cents per gallon increase in the federal fuel tax, effective October 1, 1993, enacted as part of the Omnibus Budget Reconciliation Act of 1993. These price savings were more than offset by a $30 million increase in consumption 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. Equipment rents expenses were $53 million higher than 1993. This increase was primarily attributable to higher lease expenses due to a larger fleet of leased rail cars as well as leasing locomotives to meet power requirements. Increased equipment rentals from an affiliate and payments for failure to achieve service commitments in the first half of 1994 under various transportation agreements also contributed to this increase. 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. Purchased services expenses increased $14 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. These increases were partially offset by haulage agreement-related reimbursements from The Atchison, Topeka and Santa Fe Railway Company and Southern Pacific Transportation Company for operating services provided by Railroad. Depreciation expense for 1994 was $1 million higher than 1993, primarily due to an increase in the asset base and higher traffic levels. Other operating expenses were $33 million less when compared with 1993. A $43 million decrease in costs associated with personal injury claims, excluding wage continuation payments, 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 decreased $7 million compared with 1993, primarily due to a lower average outstanding debt balance in 1994. Other income, net was $5 million higher in 1994 compared with 1993, due primarily to a reduction in other miscellaneous expenses. -14- The effective tax rate was 39.0 percent for 1994 compared with 42.4 percent for 1993. The higher effective tax rate for 1993 resulted from the retroactive increase, effective January 1, 1993, in tax rates pursuant to the provisions of the Omnibus Budget Reconciliation Act of 1993 and the related impact on the deferred tax liability at January 1, 1993. Other matters Casualty and environmental Personal injury claims, including work-related injuries to employees, are a significant expense for the railroad industry. Employees of Railroad are compensated for work-related injuries according to the provisions of the Federal Employers' Liability Act (FELA). FELA's system of requiring finding of fault, coupled with unscheduled awards and reliance on the jury system, resulted in significant increases in expense. For several years prior to 1992, the trend of significant increases in Railroad'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, Railroad implemented a number of programs to reduce the number of personal injury claims and the dollar amount of claim settlements, and reverse the trend of rising expense. If these efforts continue to be successful, future expenses could be further reduced. The total amount of personal injury costs (including wage continuation payments) were $170 million, $216 million and $253 million in 1994, 1993 and 1992, respectively. Railroad is also working with others, through the Association of American Railroads, to seek changes in legislation to provide a more equitable program for injury compensation in the railroad industry. Railroad's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. In order to comply with such regulation and to be consistent with Railroad's corporate environmental policy, Railroad's operating procedures include practices to protect the environment. Amounts expended relating to such practices are inextricably contained in the normal day-to-day costs of Railroad's business operations. Under the requirements of the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund) and certain other laws, Railroad is potentially liable for the cost of clean-up of various contaminated sites identified by the United States Environmental Protection Agency and other agencies. Railroad has been notified that it is a potentially responsible party (PRP) for study and clean-up costs at approximately 75 sites (the PRP sites) and, in many instances, is one of several PRPs. Railroad generally participates in the clean-up of these sites through cost-sharing agreements with terms that vary from site to site. Costs are typically allocated based on relative volumetric contribution of material, the amount of time the site was owned or operated, and/or the portion of the total site owned or operated by each PRP. However, under Superfund and certain other laws, as a PRP, Railroad can be held jointly and severally liable for all environmental costs associated with a site. Environmental costs include initial site surveys and environmental studies of potentially contaminated sites as well as costs for remediation and restoration of sites determined to be contaminated. Liabilities for environmental clean-up costs are initially recorded when Railroad's liability for environmental clean- up is both probable and a reasonable estimate of associated costs can be made. Adjustments to initial estimates are recorded -15- as necessary based upon additional information developed in subsequent periods. Railroad conducts an ongoing environmental contingency analysis, which considers a combination of factors, including independent consulting reports, site visits, legal reviews, analysis of the likelihood of participation in and ability to pay for clean-up by other PRPs and historical trend analyses. Railroad is involved in a number of administrative and judicial proceedings and other mandatory clean-up efforts at approximately 160 sites, including the PRP sites, for which it is being asked to participate in the clean-up of sites contaminated by material discharged into the environment. Railroad paid approximately $21 million, $27 million and $20 million during 1994, 1993 and 1992, respectively, relating to mandatory clean-up efforts, including amounts expended under federal and state voluntary clean-up programs. At this time, Railroad expects to spend approximately $110 million in future years to remediate and restore all known sites, including $105 million pertaining to mandated sites, of which approximately $70 million relates to the PRP sites. Of the $110 million, Railroad expects to spend $33 million during 1995. Also, Railroad anticipates that the majority of the $110 million will be paid out over a period of less than seven years; however, some costs will be paid out over a longer period, in some cases up to 40 years. At December 31, 1994, 23 sites accounted for approximately $75 million of the accrual and no individual site was considered to be material. Liabilities for environmental costs represent Railroad's best estimates for remediation and restoration of these sites and include asserted and unasserted claims. At December 31, 1994, Railroad had accrued approximately $110 million for estimated future environmental costs and believes it is reasonably possible, although not probable, that actual environmental costs could be lower than the recorded reserve or as much as 50 percent higher. Railroad's best estimate of unasserted claims was approximately $5 million as of December 31, 1994. Although recorded liabilities include Railroad's best estimates of all costs, without reduction for anticipated recovery from insurance, Railroad's total clean-up costs at these sites cannot be predicted with certainty due to various factors such as the extent of corrective actions that may be required, evolving environmental laws and regulations, advances in environmental technology, the extent of other PRPs' participation in clean-up efforts, developments in ongoing environmental analyses related to sites determined to be contaminated, and developments in environmental surveys and studies of potentially contaminated sites. As a result, charges to income for environmental liabilities could possibly have a significant effect on results of operations in a particular quarter or fiscal year as individual site studies and remediation and restoration efforts proceed or as new sites arise. However, expenditures associated with such liabilities are typically paid out over a long period, in some cases up to 40 years, and are therefore not expected to have a material adverse effect on Railroad's consolidated financial position, cash flow or liquidity. Hedging activities Railroad has a program to hedge against fluctuations in the price of its diesel fuel purchases. This program includes forward purchases for delivery at fueling facilities and exchange-traded petroleum futures contracts. The futures contracts are accounted for as hedges which are marked to market with any gains or losses associated with changes in market value being deferred and recognized as a component of fuel expense in the period in which the designated fuel is purchased and used. At December 31, 1994, Railroad had entered into agreements with fuel suppliers setting the price of fuel to be -16- obtained by taking physical delivery directly from such suppliers at a future date. The average price of the approximately 79 million gallons which Railroad had committed to purchase was approximately 52 cents per gallon, exclusive of taxes, certain transportation costs and other charges. In addition, Railroad held petroleum futures contracts representing approximately 53 million gallons at an average price of approximately 49 cents per gallon. These contracts have expiration dates ranging from January to October 1995. Railroad's current fuel hedging program is designed to cover no more than 50 percent of projected fuel requirements for the subsequent 12-month period; therefore, hedge positions will not exceed actual fuel requirements. The current and future fuel delivery prices are monitored continuously and hedge positions are adjusted accordingly. In order to reduce risk associated with market movements, fuel hedging transactions do not extend beyond a 12-month period. Railroad purchases petroleum futures contracts only through regulated exchanges (e.g. New York Mercantile Exchange). In order to effectively monitor the fuel hedging activities, results of the program are summarized and reported to senior management on a regular basis. In the second quarter of 1994, Railroad entered into a three year interest rate swap on a notional amount of $50 million to hedge against interest rate exposure on one of its debt issuances. Railroad's position in this swap was subsequently closed during the fourth quarter of the year. Under the terms of this swap, Railroad received semiannual fixed-rate payments of 6.33 percent from a AA-rated counterparty and made semiannual floating rate payments tied to the six-month LIBOR. The swap was accounted for as a hedge with realized gains or losses being recognized as a component of interest expense. During 1994, the resulting decrease in interest expense was not significant. Proposed merger As of June 29, 1994, BNI and Santa Fe entered into an Agreement and Plan of Merger (the Original Agreement) pursuant to which, on the terms and conditions set forth in the Original Agreement, Santa Fe would merge (the Merger) with and into BNI, and BNI would be the surviving corporation and each share of Santa Fe common stock would be converted into 0.27 of a share of BNI common stock. The Original Agreement was subsequently amended as of October 26, 1994, December 18, 1994 and January 24, 1995. The Original Agreement, as so amended, is referred to as the Merger Agreement. Pursuant to the Merger Agreement, Santa Fe is to merge with and into BNI with each share of Santa Fe common stock to be exchanged for not less than 0.40 and not more than 0.4347 shares of BNI common stock. The exchange ratio will vary based on the number of shares of Santa Fe common stock repurchased by Santa Fe in the repurchase program referred to below (the Repurchase Program). Stockholders of BNI and Santa Fe approved the Merger Agreement at special stockholders' meetings held on February 7, 1995. Also pursuant to the Merger Agreement, on December 23, 1994, BNI and Santa Fe commenced tender offers (together, the Tender Offer) to acquire up to 63 million shares of Santa Fe common stock in the aggregate at $20 per share in cash (with Santa Fe severally obligated to purchase up to 38 million shares of Santa Fe common stock in the Tender Offer and BNI severally obligated to purchase up to 25 million shares of Santa Fe common stock in the Tender Offer). The Tender Offer expired at midnight, Eastern Standard Time, on February 8, 1995, with approximately 112.6 million shares of Santa Fe common stock tendered (based on a preliminary count). As 63 million shares of Santa Fe common stock have been accepted for payment by BNI and Santa Fe, tenders by -17- Santa Fe stockholders are subject to proration. Payment for tendered shares will be made promptly after the final proration factor is determined, which determination is expected to be made on or about February 17, 1995. Santa Fe will purchase 38 million shares of Santa Fe common stock in the Tender Offer, and BNI will purchase the remaining 25 million shares accepted for payment. On February 6,1995, BNI entered into a five-year $500 million unsecured bank credit facility (the Tender Offer Facility), whereby a group of banks will finance BNI's obligations to purchase shares of Santa Fe common stock in the Tender Offer. At BNI's option, borrowings can be obtained either through a competitive bid or a standby procedure. Rates for borrowing under the standby procedure are, at BNI's option, based upon the selected term of LIBOR or certificate of deposit rate, plus in either case, a spread based upon BNI's senior unsecured debt ratings and the amount borrowed under the Tender Offer Facility, or an alternative base rate. Santa Fe anticipates borrowing up to $1,110 million (of which approximately $200 million will be used to replace existing Santa Fe debt) in connection with the Santa Fe tender offer and related matters from a syndicate of financial institutions under a new Santa Fe credit agreement. Santa Fe may also borrow an additional $200 million under its new credit agreement to retire $200 million of existing Santa Fe debt. Under the Repurchase Program as set forth in the Merger Agreement, Santa Fe is permitted, at its discretion and subject to certain financial and performance criteria of Santa Fe set forth in its credit agreements and the Merger Agreement (including minimum cash flows, cash capital expenditures and maximum total debt), to repurchase up to 10 million shares of Santa Fe common stock prior to consummation of the Merger. The number of shares of BNI common stock to be issued in the Merger will not be affected by the number of shares of Santa Fe common stock repurchased by Santa Fe under the Repurchase Program. Accordingly, the exchange ratio of BNI common shares to be offered for each share of outstanding Santa Fe common stock upon consummation of the Merger would be set at not less than 0.40 and not more than 0.4347 shares. Pursuant to the Merger Agreement, two possible structures are available to complete the Merger. Using the current structure, each issued and outstanding share of Santa Fe common stock (other than shares of Santa Fe common stock held by Santa Fe as treasury stock or shares held by BNI, all of which will be cancelled) will be exchanged for not less than 0.40 and not more than 0.4347 shares of BNI common stock depending upon the number of additional shares of Santa Fe common stock repurchased by Santa Fe under the Repurchase Program. BNI will be the surviving corporation. The Merger Agreement provides that either BNI or Santa Fe may elect to effect the Merger through the use of a holding company (the Alternative Transaction Structure) as described below. BNI and Santa Fe have established BNSF Corporation (BNSF), a Delaware corporation, for such purpose. Under the Alternative Transaction Structure, BNSF would create two subsidiaries and one subsidiary would merge into BNI and one into Santa Fe. Each holder of BNI common stock would receive one share of BNSF common stock and each holder of Santa Fe common stock, excluding the Santa Fe common stock acquired by BNI in the Tender Offer and the Santa Fe common stock held by Santa Fe as treasury stock, would receive not less than 0.40 and not more than 0.4347 shares of BNSF common stock depending upon the number of shares of Santa Fe common stock repurchased by Santa Fe under the Repurchase Program. The Santa Fe common stock acquired by BNI in the Tender Offer would remain outstanding and the Santa Fe common stock held by Santa Fe as treasury stock would be cancelled. The rights of each stockholder of BNSF would be substantially identical to the rights of a stockholder of BNI, and the Alternative Transaction Structure would have the same economic effect with respect to the stockholders of BNI and Santa Fe as the Merger in its current structure. The Merger will be accounted for under the purchase method of accounting upon consummation, and BNI's $500 million investment will be included in the purchase price. -18- As is typical in the context of a merger, certain benefits of officers and employees vested upon approval of the Merger by the stockholders of BNI and Santa Fe. In particular, on February 7, 1995, restrictions previously placed upon certain BNI stock grants lapsed and the previously unearned compensation relating to such restricted stock, included in BNI stockholders' equity, was charged to compensation and benefits expense. As of December 31, 1994, such unearned compensation relating to restricted stock was approximately $23 million. BNI expects to incur other costs related to the Merger some of which will be included in the determination of the total purchase price. Consummation of the Merger is subject to approval by the Interstate Commerce Commission (ICC), approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other customary conditions. In connection with the ICC proceedings, on January 27, 1995, BNI and Santa Fe requested the ICC to adopt an expedited procedural schedule for reviewing the merger, based on a timetable the ICC has recently proposed to adopt for all major railroad mergers, and on February 3, 1995, the ICC issued a notice requesting comments on the proposed schedule by February 21, 1995. That schedule calls for the ICC to issue its decision on the merger within 165 days from the date on which the ICC publishes a notice formally advising parties that the BNI and Santa Fe stockholders have voted to approve the transaction. The ICC has not yet issued a notice regarding stockholder approval nor taken any further action on the proposed schedule. On October 5, 1994, Union Pacific Corporation (UP) submitted a proposal to Santa Fe pursuant to which UP would acquire Santa Fe. UP modified its proposal on several occasions and, on January 31, 1995, withdrew its acquisition proposal for Santa Fe. Other Since 1935, Railroad has participated in the national railroad retirement system which is separate from the national social security system. Under this system, an independent Railroad Retirement Board administers the determination and payment of benefits to all railroad workers. Both Railroad and its employees are subject to a tax on employee earnings which is above the normal social security rate assessed to those who are employed outside the railroad industry. In December 1994, Railroad reached an agreement with the Railroad Yardmasters Division (Yardmasters) of the United Transportation Union which is effective through 1999 with respect to wages, work rules and all other matters except health and welfare benefits. Any changes negotiated with the other unions regarding health and welfare benefits on a national basis will also apply to the Railroad Yardmasters. Approximately 250 Yardmasters were affected by this agreement. Also during 1994, agreements were signed with all of the unions establishing non-contributory 401(k) plans for union employees. Labor agreements currently in effect for unions other than Yardmasters include provisions which prohibited the parties from serving notices to change wages, benefits, rules and working conditions prior to November 1, 1994. The next wage adjustment stipulated by the existing agreements is scheduled for July 1995 unless new agreements are reached by the parties prior to that time. The adjustment called for by the contract is a base wage increase dependent upon changes in the Consumer Price Index not to exceed three percent. These cost of living increases may be offset by increases in the cost of Railroad's payment rate for health and welfare benefits costs. -19- Railroad joined with the other railroads to negotiate with the unions on a multi-employer basis on November 1, 1994. At that time, all unions were served proposals for productivity improvements as well as other changes. The unions also served notices on the railroads which proposed not only increasing wages and benefits but also 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 nationally on a multi-employer basis and the issue is currently pending in Federal District Court in Washington, D.C. At this time, negotiations on the proposals by both the railroads and the unions are in preliminary stages and the ultimate outcome of these negotiations cannot be predicted. In July 1993, the American Train Dispatchers Association ratified an April 1993 agreement which will facilitate the consolidation of all dispatching functions into a centralized train dispatching office in Fort Worth, Texas by the end of 1995. -20- Item 8. Financial Statements and Supplementary Data Consolidated Statements of Income Burlington Northern Railroad Company and Subsidiaries (Dollars in millions)
Year ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------ Revenues........................................... $4,995 $4,699 $4,630 Costs and expenses: Compensation and benefits........................ 1,769 1,701 1,704 Fuel............................................. 369 362 348 Materials........................................ 305 300 295 Equipment rents.................................. 478 425 410 Purchased services............................... 478 464 457 Depreciation..................................... 335 334 324 Other............................................ 430 463 505 ------ ------ ------ Total costs and expenses....................... 4,164 4,049 4,043 ------ ------ ------ Operating income................................... 831 650 587 Interest expense................................... 79 86 103 Other income, net.................................. 17 12 57 ------ ------ ------ Income before income taxes and cumulative effect of changes in accounting methods................. 769 576 541 Income tax expense................................. 300 244 186 ------ ------ ------ Income before cumulative effect of changes in accounting methods............................... 469 332 355 Cumulative effect of changes in accounting methods, net of tax....................................... (10) - (21) ------ ------ ------ Net income................................... $ 459 $ 332 $ 334
====== ====== ====== See accompanying notes to consolidated financial statements. -21- Consolidated Balance Sheets Burlington Northern Railroad Company and Subsidiaries (Dollars in millions)
December 31, 1994 1993 - ----------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents....................... $ 27 $ 17 Accounts receivable, net........................ 702 591 Materials and supplies.......................... 100 91 Current portion of deferred income taxes........ 157 167 Other current assets............................ 27 23 ------ ------ Total current assets.......................... 1,013 889 Property and equipment, net....................... 5,848 5,488 Investments in and advances to affiliates......... 94 104 Other assets...................................... 133 130 ------ ------ Total assets.............................. $7,088 $6,611 ------ ------ Liabilities and Stockholder's Equity Current liabilities: Accounts payable................................ $ 539 $ 498 Compensation and benefits payable............... 263 269 Casualty and environmental reserves............. 248 286 Taxes payable................................... 130 131 Accrued interest................................ 19 22 Other current liabilities....................... 64 69 Commercial paper................................ 90 26 Current portion of long-term debt............... 25 177 ------ ------ Total current liabilities..................... 1,378 1,478 Long-term debt.................................... 719 702 Deferred income taxes............................. 1,421 1,329 Casualty and environmental reserves............... 415 426 Other liabilities................................. 202 182 ------ ------ Total liabilities............................. 4,135 4,117 ------ ------ Common stockholder's equity: Common stock, without par value (1,000 shares authorized, issued and outstanding)........... 1,191 1,191 Retained earnings............................... 1,762 1,303 ------ ------ Total common stockholder's equity............. 2,953 2,494 ------ ------ Total liabilities and stockholder's equity $7,088 $6,611 ====== ======
See accompanying notes to consolidated financial statements. -22- Consolidated Statements of Cash Flows Burlington Northern Railroad Company and Subsidiaries (Dollars in millions)
Year ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------ Cash flows from operating activities: Net income..................................... $ 459 $ 332 $ 334 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of changes in accounting methods.................................... 10 - 21 Depreciation................................. 335 334 324 Deferred income taxes........................ 109 128 25 Changes in current assets and liabilities: Accounts receivable, net................... (111) (117) (30) Materials and supplies..................... (13) 6 2 Other current assets....................... (4) (1) 1 Accounts payable........................... 41 19 19 Compensation and benefits payable.......... (8) (50) 16 Casualty and environmental reserves........ (38) 37 2 Taxes payable.............................. (1) 7 4 Accrued interest........................... (3) (2) (9) Other current liabilities.................. (5) (2) 3 Changes in long-term casualty and environmental reserves..................... (11) (56) 16 Other, net................................... (13) (60) (22) ------ ------ ------ Net cash provided by operating activities.. 747 575 706 ------ ------ ------ Cash flows from investing activities: Additions to property and equipment............ (626) (530) (469) Collections from affiliates, net............... 10 29 266 Proceeds from property and equipment dispositions................................. 35 35 33 Other, net..................................... (31) (16) (19) ------ ------ ------ Net cash used in investing activities...... (612) (482) (189) ------ ------ ------ Cash flows from financing activities: Net increase (decrease) in commercial paper.... 64 26 (353) Proceeds from issuance of long-term debt 150 - - Payments on long-term debt..................... (336) (83) (71) Dividends paid................................. - (75) (50) Other, net..................................... (3) (1) (2) ------ ------ ------ Net cash used in financing activities...... (125) (133) (476) ------ ------ ------ Increase (decrease) in cash and cash equivalents.............................. 10 (40) 41 Cash and cash equivalents: Beginning of year.............................. 17 57 16 ------ ------ ------ End of year.................................... $ 27 $ 17 $ 57 ====== ====== ====== Supplemental cash flow information: Interest paid, net of amounts capitalized...... $ 78 $ 92 $ 110 Income taxes paid, net of refunds.............. 192 109 163 Supplemental noncash investing and financing activities information: Assets financed through a capital lease obligation................................... $ 50 - -
See accompanying notes to consolidated financial statements. -23- Consolidated Statements of Changes in Common Stockholder's Equity Burlington Northern Railroad Company and Subsidiaries (Dollars in millions)
Amount Number of --------------------------------------- Common Common Retained Three years ended December 31, 1994 Shares Stock Earnings Total - --------------------------------------------------------------------------------------------------- Balance at December 31, 1991....... 1,000 $1,190 $ 762 $1,952 Net income......................... 334 334 Dividends.......................... (50) (50) ------ ------ ------ ------ Balance at December 31, 1992....... 1,000 1,190 1,046 2,236 Net income......................... 332 332 Dividends.......................... (75) (75) Capital contribution from parent... 1 1 ------ ------ ------ ------ Balance at December 31, 1993....... 1,000 1,191 1,303 2,494 Net income......................... 459 459 ------ ------ ------ ------ Balance at December 31, 1994....... 1,000 $1,191 $1,762 $2,953 ====== ====== ====== ======
See accompanying notes to consolidated financial statements. -24- Notes to Consolidated Financial Statements Burlington Northern Railroad Company and Subsidiaries 1. Accounting policies Principles of consolidation Burlington Northern Railroad Company (Railroad) is a wholly owned subsidiary of Burlington Northern Inc. (BNI). The consolidated financial statements include the accounts of Railroad and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash and cash equivalents All short-term investments with original maturities of less than 90 days are considered cash equivalents for purposes of disclosure in the consolidated balance sheets and consolidated statements of cash flows. Cash equivalents are stated at cost, which approximates market value. Property and equipment Main line track is depreciated on a group basis using a units-of-production method. All other property and equipment are depreciated on a straight-line basis over their estimated useful lives. Interstate Commerce Commission (ICC) regulations require periodic formal studies of ultimate service lives for all railroad assets. Resulting service life estimates are subject to review and approval by the ICC. An annual review of rates and accumulated depreciation is performed and appropriate adjustments are recorded. Significant premature retirements, which would include major casualty losses, abandonments, sales and obsolescence of assets; 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. All properties are stated at cost. Materials and supplies Materials and supplies consist mainly of diesel fuel, repair parts for equipment and other railroad property and are valued at average cost. Revenue recognition Transportation revenues are recognized proportionately as a shipment moves from origin to destination. Income taxes Railroad's operations are included in the consolidated federal income tax return of BNI. Income tax expense is provided based on earnings reported as if Railroad filed a separate income tax return. In addition, the provision for income taxes includes deferred tax expense determined by the change in the net deferred tax liability, which is computed based on the differences between the financial statement and tax basis of assets and liabilities as measured by applying enacted tax laws and rates. Investment tax credits were accounted for under the "flow-through" method. -25- 2. Accounts receivable, net Railroad's agreement to sell, on a revolving basis, an undivided percentage ownership interest in a designated pool of accounts receivable with limited recourse expired in December 1994. At December 31, 1993, accounts receivable were net of $100 million, representing receivables sold. Average monthly proceeds from the sale of accounts receivable were $162 million, $182 million and $190 million in 1994, 1993 and 1992, respectively. Included in other income, net were expenses of $9 million in 1994 and 1993 and $11 million in 1992, relating to the sale. Railroad maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable, which at December 31, 1993 included receivables sold with recourse. Allowances for doubtful accounts of $20 million and $17 million have been recorded at December 31, 1994 and 1993, respectively. 3. Property and equipment, net Property and equipment, net was as follows (in millions):
December 31, 1994 1993 - ---------------------------------------------------------------------------- Road, roadway structures and real estate.......... $7,690 $7,342 Equipment......................................... 1,913 1,784 ------ ------ Total cost..................................... 9,603 9,126 Less accumulated depreciation..................... 3,755 3,638 ------ ------ Property and equipment, net.................. $5,848 $5,488 ====== ======
The consolidated balance sheets at December 31, 1994 and 1993 included $86 million and $36 million, respectively, of property and equipment under capital leases. The related depreciation was included in depreciation expense. Accumulated depreciation for property and equipment under capital leases was $34 million and $31 million at December 31, 1994 and 1993, respectively. Main line track is depreciated on a group basis using a units-of-production method. The accumulated depreciation and annual depreciation accrual rates for railroad assets other than main line track are calculated using a straight-line method and statistical group measurement techniques. The group techniques project depreciation expense and estimated accumulated depreciation utilizing historical experience and expected future conditions relating to the timing of asset retirements, cost of removal, salvage proceeds, maintenance practices and technological changes. The net book value of reported assets reflects estimated remaining asset utility on a historical cost basis. Due to the imprecision of annual reviews using statistical group measurement techniques for long-term asset retirement, replacement and deterioration patterns, Railroad adjusts accumulated depreciation for significant differences between recorded accumulated depreciation and computed requirements. Differences between recorded accumulated depreciation and computed requirements are recognized prospectively on a straight-line basis. Under ICC regulations, Railroad conducts service life studies on a periodic basis. Results of service life studies are recorded over the remaining life -26- of the asset group studied. No service life studies were scheduled for 1994. In future periods, service life studies will be conducted as required. However, the impact of such studies is not determinable at this time. Capitalization of certain software development costs has increased as a result of new strategic initiatives. Capitalization of software development costs begins upon establishment of technological feasibility. The establishment of technological feasibility is based upon completion of planning, design and other technical performance requirements. Capitalized software development costs are amortized over a seven-year estimated useful life using the straight-line method. Amortization expense was $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 $20 million and $6 million as of December 31, 1994 and 1993, respectively. 4. Debt Debt outstanding was as follows (in millions):
December 31, 1994 1993 - ----------------------------------------------------------------------------- Consolidated mortgage bonds, 3 1/5% to 9 1/4%, due serially to 2045................................. 321 622 Variable rate term loan facility, weighted average rate of 6.32%, due 1997................................... 150 - Equipment and other obligations, weighted average rate of 8.94% and 9.30%, respectively, due serially to 2009..................................... 91 113 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........... 22 24 Capitalized lease obligations, weighted average rate of 7.27% and 8.01%, respectively, expiring 1996 and 2008............................................. 46 10 Income debentures, series A, 5%, due 2006.............. 8 8 Commercial paper....................................... 90 26 Unamortized discount..................................... (48) (52) ---- ---- Total................................................ 834 905 Less: Commercial paper....................................... 90 26 Current portion of long-term debt...................... 25 177 ---- ---- Long-term debt..................................... $719 $702 ==== ====
Railroad maintains an effective program for the issuance, from time to time, of commercial paper. These borrowings are supported by Railroad's 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 $300 million on a short-term basis and $500 million on a long-term basis. Annual facility fees are currently 0.125 and 0.1875 percent, respectively, and are subject to change based upon changes in Railroad's senior secured debt ratings. At -27- Railroad's option, borrowings can be obtained through either a competitive bid or a standby procedure. Rates for borrowings under the standby procedure are, at Railroad's option, based upon the London Interbank Offered Rate (LIBOR) or certificate of deposit rate, plus in either case, a spread based upon Railroad's senior secured debt ratings, or an alternate base rate. The agreements are currently scheduled to expire on May 5, 1995 and May 6, 1999, respectively. The maturity value of commercial paper outstanding at December 31, 1994 was $91 million, leaving a total of $209 million of the short-term revolving credit agreement available and $500 million of the long-term revolving credit agreement available. The maturity value of commercial paper outstanding at December 31, 1993 was $27 million. In November 1994, Railroad 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 percent, Series J, due November 1, 1997. Under the terms of the indenture, the 10 percent mortgage bonds were redeemable at par, commencing November 1, 1994. The difference between Railroad's redemption price and the net carrying value resulted in an insignificant loss. The three year term loans bear interest at rates equal to the selected LIBOR, which may vary during the term of the loans, plus each lender's interest rate margin. The financial covenants of the two bank revolving credit agreements and the three year term loan facility agreement require that Railroad's consolidated tangible net worth, as defined in the agreements, be at least $1.7 billion, and that its debt, as defined in the agreements, cannot exceed the lesser of 140 percent of its consolidated tangible net worth and $3 billion. Each of the agreements contain an event of default arising out of the occurrence and continuance of a "Change in Control." A "Change in Control" is generally defined as the acquisition of more than 50 percent of the voting securities of BNI which has not been approved by the BNI Board of Directors, a change in the control relationship between BNI and Railroad, and finally, a "Change in Control" is deemed to occur when a majority of the seats on the BNI Board of Directors is occupied by persons who are neither nominated by the BNI Board of Directors nor appointed by directors so nominated. The proposed merger between BNI and Santa Fe Pacific Corporation (Santa Fe) will not constitute a "Change in Control" under such agreements. In April 1994, Railroad completed a $50 million cross-border leveraged lease of equipment which is recorded as a capital lease obligation. The transaction included the issuance of $40 million of equipment secured debt at a weighted average yield of 7.27 percent and the receipt of an up front cash benefit. The up front benefit reduces the effective interest rate on the debt to 6.64 percent. The commercial paper program is further summarized as follows (dollars in millions):
December 31, 1994 1993 - ----------------------------------------------------------------------------- Balance at year end................................. $ 90 $ 26 Weighted average interest rate...................... 6.43% 3.55% Maximum outstanding during the year................. $ 243 $ 179 Average daily amount outstanding during the year.... $ 97 $ 41 Weighted daily average interest rate during the year 4.29% 3.27%
Maturities of commercial paper averaged 7 days and 4 days in 1994 and 1993, respectively. -28- Aggregate long-term debt scheduled maturities for 1995 through 1999 and thereafter are $25 million, $21 million, $240 million, $14 million, $10 million and $482 million, respectively. Substantially all Railroad properties and certain other assets are pledged as collateral to or are otherwise restricted under the various Railroad long-term debt agreements. 5. Disclosures about fair value of financial instruments The estimated fair values of Railroad's financial instruments at December 31, 1994 and 1993 and the methods and assumptions used to estimate the fair value of each class of financial instruments held by Railroad, were as follows: Cash and cash equivalents The carrying amount approximated fair value because of the short maturity of these instruments. Notes receivable The fair value of notes receivable was estimated by discounting the anticipated cash flows. Discount rates of 10.8 percent and 8.7 percent at December 31, 1994 and 1993, respectively, were determined to be appropriate when considering current United States Treasury rates and the credit risk associated with these notes. Accrued interest payable The carrying amount approximated fair value as the majority of interest payments are made semiannually. Long-term debt and commercial paper The fair value of Railroad's long-term debt, excluding unamortized discount, was primarily based on secondary market indicators. For those issues not actively quoted, estimates were based on each obligation's characteristics. Among the factors considered were the maturity, interest rate, credit rating, collateral, amortization schedule, liquidity and option features such as optional redemption or optional sinking funds. These features were compared to other similar outstanding obligations to determine an appropriate increment or spread, above United States Treasury rates, at which the cash flows were discounted to determine the fair value. The carrying amount of commercial paper approximated fair value because of the short maturity of these instruments. Recourse liability from sale of receivables Railroad's agreement to sell, on a revolving basis, an undivided percentage interest in a designated pool of accounts receivable with limited recourse expired in December 1994. At December 31, 1993, the carrying value of the allowance for doubtful accounts on receivables sold approximated the fair value of the recourse liability related to those receivables. -29- The carrying amount and estimated fair values of Railroad's financial instruments were as follows (in millions):
December 31, 1994 1993 - ------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Assets: Cash and cash equivalents.......... $ 27 $ 27 $ 17 $ 17 Notes receivable................... 5 5 9 11 Liabilities: Accrued interest payable........... 19 19 22 22 Long-term debt and commercial paper 882 811 957 978 Recourse liability from sale of receivables...................... - - 4 4
Railroad also holds investments in, and has advances to, several unconsolidated transportation affiliates. It was not practicable to estimate the fair value of these financial instruments, which were carried at their original cost of $17 million in the December 31, 1994 and 1993 consolidated balance sheets. There were no quoted market prices available for the shares held in the affiliated entities, and the cost of obtaining an independent valuation would have been excessive considering the materiality of these investments to Railroad. In addition, Railroad has a note receivable, from a shortline railroad, that has principal payments which are based on traffic volume over a segment of line. The carrying value of the note was $5 million at December 31, 1994 and 1993. As it is not practicable to forecast the traffic volume over the remaining life of the note, it was not included in the notes receivable amount shown above. 6. Hedging activities Railroad has a program to hedge against fluctuations in the price of its diesel fuel purchases. This program includes forward purchases for delivery at fueling facilities and exchange-traded petroleum futures contracts. The futures contracts are accounted for as hedges which are marked to market with any gains or losses associated with changes in market value being deferred and recognized as a component of fuel expense in the period in which the designated fuel is purchased and used. At December 31, 1994, Railroad had entered into agreements with fuel suppliers setting the price of fuel to be obtained by taking physical delivery directly from such suppliers at a future date. The average price of the approximately 79 million gallons which Railroad had committed to purchase was approximately 52 cents per gallon, exclusive of taxes, certain transportation costs and other charges. In addition, Railroad held petroleum futures contracts representing approximately 53 million gallons at an average price of approximately 49 cents per gallon. These contracts have expiration dates ranging from January to October 1995. Railroad's current fuel hedging program is designed to cover no more than 50 percent of projected fuel requirements for the subsequent 12-month period; therefore, hedge positions will not exceed actual fuel requirements. The current and future fuel delivery prices are monitored continuously and hedge positions are adjusted accordingly. In order to reduce risk associated with market movements, fuel hedging transactions do not extend beyond a 12-month period. Railroad purchases petroleum futures contracts only through regulated -30- exchanges (e.g. New York Mercantile Exchange). In order to effectively monitor the fuel hedging activities, results of the program are summarized and reported to senior management on a regular basis. In the second quarter of 1994, Railroad entered into a three year interest rate swap on a notional amount of $50 million to hedge against interest rate exposure on one of its debt issuances. Railroad's position in this swap was subsequently closed during the fourth quarter of the year. Under the terms of this swap, Railroad received semiannual fixed-rate payments of 6.33 percent from a AA-rated counterparty and made semiannual floating rate payments tied to the six-month LIBOR. The swap was accounted for as a hedge with realized gains or losses being recognized as a component of interest expense. During 1994, the resulting decrease in interest expense was not significant. 7. Income Taxes Effective January 1, 1993, Railroad adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 modifies SFAS No. 96, which established the liability method of accounting for income taxes, and had been adopted by Railroad effective January 1, 1986. Railroad adopted SFAS No. 109 consistent with the transitional guidelines of SFAS No. 109. The effect of the adoption was to increase the current portion of the deferred income tax asset with a corresponding increase in the noncurrent deferred income tax liability of $26 million at January 1, 1993. There was no effect on net income, stockholder's equity or cash flows. Income tax expense, excluding the cumulative effect of changes in accounting methods, was as follows (in millions):
Year ended December 31, 1994 1993 1992 - ----------------------------------------------------------------------------- Current: Federal ................................... $ 167 $102 $138 State ..................................... 24 14 23 ----- ---- ---- 191 116 161 ----- ---- ---- Deferred: Federal ................................... 93 111 24 State ..................................... 16 17 1 ----- ---- ---- 109 128 25 ----- ---- ---- Total.................................... $ 300 $244 $186 ===== ==== ====
Reconciliation of the federal statutory income tax rate to the effective tax rate, excluding the cumulative effect of changes in accounting methods, was as follows:
Year ended December 31, 1994 1993 1992 - ----------------------------------------------------------------------------- Federal statutory income tax rate................. 35.0% 35.0% 34.0% State income taxes, net of federal tax benefit.... 3.4 3.5 3.3 Effect of one percent federal tax rate increase on deferred tax balances at January 1, 1993....... - 4.5 - Internal Revenue Service settlement............... - - (3.1) Other, net........................................ .6 (.6) .2 ---- ---- ---- Effective tax rate................................ 39.0% 42.4% 34.4% ==== ==== ====
-31- The components of deferred tax assets and liabilities were as follows (in millions):
December 31, 1994 1993 - ----------------------------------------------------------------------------- Deferred tax liabilities: Accelerated depreciation and amortization...... $(1,716) $(1,616) Other.......................................... (98) (89) ------- ------- Total deferred tax liabilities............... (1,814) (1,705) ------- ------- Deferred tax assets: Casualty and environmental reserves............ 257 267 Pensions....................................... 39 29 Other.......................................... 254 247 ------- ------- Total deferred tax assets.................... 550 543 ------- ------- Valuation allowance............................ - - ------- ------- Net deferred tax liability................. $(1,264) $(1,162) ======= ======= Noncurrent deferred income tax liability........ $(1,421) $(1,329) Current deferred income tax asset............... 157 167 ------- ------- Net deferred tax liability................. $(1,264) $(1,162) ======= =======
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 one percent, effective January 1, 1993, which reduced net income by $28 million through the date of enactment. A one-time, non-cash charge of $27 million to income tax expense was recorded as an adjustment to deferred taxes as of the enactment date and a charge of $1 million to income tax expense was recorded as an adjustment to current income taxes. In December 1992, Railroad received notification that an Appeals Division settlement of the Internal Revenue Service audits for the years 1981 through 1985 had been approved by the Joint Committee on Taxation. This action settled all unagreed issues for those years. The tax effect of the settlement was included in the 1992 tax provision as shown below (in millions):
Current tax expense........................... $ 2 Deferred tax benefit.......................... (19) ---- Total tax benefit........................... $(17) ====
8. Retirement plans Railroad participates in BNI's pension plans, which are non-contributory defined benefit plans covering substantially all non-union employees. The benefits are based on years of credited service and the highest five-year average compensation levels. Contributions to the plans are determined by BNI and are limited to amounts that are currently deductible for tax purposes. Railroad's pension expense was $36 million, $26 million and $31 million in 1994, 1993 and 1992, respectively. The following data relates to BNI's plans in which Railroad is the principal participant. -32- The funded status of BNI's plans and the net accrued pension cost reflected in BNI's consolidated balance sheets were as follows (in millions):
December 31, 1994 1993 - -------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation.................................................. $ 481 $ 539 ===== ===== Accumulated benefit obligation............................................. $ 553 $ 604 ===== ===== Projected benefit obligation............................................... $ 628 $ 740 Plan assets, primarily marketable equity and debt securities, at fair value (467) (490) ----- ----- Projected benefit obligation in excess of plan assets...................... 161 250 Unrecognized net loss...................................................... (41) (153) Unrecognized prior service cost............................................ (5) (6) Unamortized net transition obligation...................................... (29) (33) Adjustment required to recognize minimum liability......................... 12 56 ----- ----- Net accrued pension cost................................................. $ 98 $ 114 ===== =====
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the benefit obligations were 9 percent and 5.5 percent at December 31, 1994 and 7 percent and 5.5 percent at December 31, 1993. The expected long-term rate of return on assets was 9.5 percent for 1994 and 1993 and 10 percent for 1992. Components of the net pension cost were as follows (in millions):
Year ended December 31, 1994 1993 1992 - --------------------------------------------------------------------------------------------------- Service cost, benefits earned during the period.............................. $ 12 $ 9 $ 10 Interest cost on projected benefit obligation................................ 50 50 52 Actual return on plan assets................................................. (25) (57) (36) Net amortization and deferred amounts........................................ (1) 24 5 ---- ---- ---- Net pension cost........................................................... $ 36 $ 26 $ 31 ---- ---- ----
Net pension cost, which is based upon a discount rate as of January 1, was higher for 1994 than 1993 primarily due to a decrease in the discount rate from 8.5 percent at January 1, 1993 to 7 percent at January 1, 1994. The decrease in net pension cost for 1993 as compared with 1992 was primarily due to a decrease in the rate of future compensation growth from 6 percent at January 1, 1993 to 5.5 percent at January 1, 1994. Railroad participates in a 401(k) thrift and profit sharing plan, sponsored by BNI, which covers substantially all non-union employees. BNI matches 35 percent of the first 6 percent of the employees' contributions, which is subject to certain percentage limits of the employees' earnings, at the end of each quarter. Depending on BNI's consolidated performance, an additional matching contribution of 20 or 40 percent can be made at the end of the year. Railroad's expense was $8 million, $6 million and $4 million in 1994, 1993 and 1992, respectively. Effective January 1, 1994, Railroad also sponsors a non- contributory 401(k) retirement savings plan covering substantially all union employees. -33- 9. Other benefit plans Postretirement benefits Effective January 1, 1992, Railroad adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." BNI provides certain postretirement health care benefits, payable until age 65, for a small number of retirees who were at least 55 years of age and who retired on or before March 1986. BNI also provides life insurance benefits for eligible non- union employees. Railroad participates in these plans and adopted accrual accounting for the expense of these plans in 1992 by taking a $16 million cumulative effect charge to income in order to establish a liability for those benefits. Railroad pays benefits as claims are processed. The following data relates to BNI's plans in which Railroad is the principal participant. The status of BNI's plans and the accrued postretirement benefit cost reflected in the consolidated balance sheets of BNI are as follows (in millions):
December 31, 1994 1993 - ------------------------------------------------------------------------------ Health Life Health Life ------ ---- ------ ---- Accumulated postretirement benefit obligation: Retirees....................... $- $11 $1 $13 Fully eligible active participants................. - 1 - 2 Other active participants...... - 2 - 1 -- --- -- --- - 14 1 16 Unrecognized net gain.............. - 4 - - -- --- -- --- Accrued postretirement benefit cost $- $18 $1 $16 == === == ===
Components of the postretirement benefit cost were as follows (in millions):
Year ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------- Health Life Health Life Health Life ------ ---- ------ ---- ------ ---- Service cost....................... $- $- $- $- $- $- Interest cost...................... - 1 - 1 - 1 -- -- -- -- -- -- Net postretirement benefit cost $- $1 $- $1 $- $1 == == == == == ==
The discount rate used in determining the benefit obligation was 9 percent at December 31, 1994 and 7 percent at December 31, 1993. The health care cost trend rate is assumed to decrease gradually from 14 percent in 1995 to 6 percent in 2003 and thereafter. Increasing the assumed health care cost trend rate by one percentage point in each year would have an insignificant effect on the accumulated postretirement benefit obligation at December 31, 1994 and 1993 as well as the aggregate of the service and interest cost components for the three years ended December 31, 1994. Under collective bargaining agreements, Railroad participates in multi- employer benefit plans which provide certain postretirement health care and life insurance benefits for eligible union employees. Insurance premiums attributable to retirees, which are expensed as incurred, were $10 million in both 1994 and 1993 and $11 million in 1992. -34- 10. Commitments and contingencies Casualty and environmental reserves Casualty reserves consist primarily of personal injury claims, including work-related injuries to employees. Employees of Railroad are compensated for work-related injuries according to the provisions of the Federal Employers' Liability Act. Liabilities for personal injury claims are estimated through an actuarial model that considers historical data and trends and is designed to record those costs in the period of occurrence. Railroad conducts an ongoing review and analysis of claims and other information to ensure the continued adequacy of casualty reserves. To the extent costs may exceed recorded accruals, they are not anticipated to materially affect Railroad's financial condition, results of operations or liquidity. Railroad's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. In order to comply with such regulation and to be consistent with Railroad's corporate environmental policy, Railroad's operating procedures include practices to protect the environment. Amounts expended relating to such practices are inextricably contained in the normal day-to-day costs of Railroad's business operations. Under the requirements of the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund) and certain other laws, Railroad is potentially liable for the cost of clean-up of various contaminated sites identified by the United States Environmental Protection Agency and other agencies. Railroad has been notified that it is a potentially responsible party (PRP) for study and clean-up costs at approximately 75 sites (the PRP sites) and, in many instances, is one of several PRPs. Railroad generally participates in the clean-up of these sites through cost-sharing agreements with terms that vary from site to site. Costs are typically allocated based on relative volumetric contribution of material, the amount of time the site was owned or operated, and/or the portion of the total site owned or operated by each PRP. However, under Superfund and certain other laws, as a PRP, Railroad can be held jointly and severally liable for all environmental costs associated with a site. Environmental costs include initial site surveys and environmental studies of potentially contaminated sites as well as costs for remediation and restoration of sites determined to be contaminated. Liabilities for environmental clean-up costs are initially recorded when Railroad's liability for environmental clean-up is both probable and a reasonable estimate of associated costs can be made. Adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. Railroad conducts an ongoing environmental contingency analysis, which considers a combination of factors, including independent consulting reports, site visits, legal reviews, analysis of the likelihood of participation in and ability to pay for clean-up by other PRPs, and historical trend analyses. Railroad is involved in a number of administrative and judicial proceedings and other mandatory clean-up efforts at approximately 160 sites, including the PRP sites, for which it is being asked to participate in the clean-up of sites contaminated by material discharged into the environment. Railroad paid approximately $21 million, $27 million and $20 million during 1994, 1993 and 1992, respectively, relating to mandatory clean-up efforts, -35- including amounts expended under federal and state voluntary clean-up programs. At this time, Railroad expects to spend approximately $110 million in future years to remediate and restore all known sites, including $105 million pertaining to mandated sites, of which approximately $70 million relates to the PRP sites. Of the $110 million, Railroad expects to spend $33 million during 1995. Also, Railroad anticipates that the majority of the $110 million will be paid out over a period of less than seven years; however, some costs will be paid out over a longer period, in some cases up to 40 years. At December 31, 1994, 23 sites accounted for approximately $75 million of the accrual and no individual site was considered to be material. Liabilities for environmental costs represent Railroad's best estimates for remediation and restoration of these sites and include asserted and unasserted claims. At December 31, 1994, Railroad had accrued approximately $110 million for estimated future environmental costs and believes it is reasonably possible, although not probable, that actual environmental costs could be lower than the recorded reserve or as much as 50 percent higher. Railroad's best estimate of unasserted claims was approximately $5 million as of December 31, 1994. Although recorded liabilities include Railroad's best estimates of all costs, without reduction for anticipated recovery from insurance, Railroad's total clean-up costs at these sites cannot be predicted with certainty due to various factors such as the extent of corrective actions that may be required, evolving environmental laws and regulations, advances in environmental technology, the extent of other PRPs' participation in clean-up efforts, developments in ongoing environmental analyses related to sites determined to be contaminated, and developments in environmental surveys and studies of potentially contaminated sites. As a result, charges to income for environmental liabilities could possibly have a significant effect on results of operations in a particular quarter or fiscal year as individual site studies and remediation and restoration efforts proceed or as new sites arise. However, expenditures associated with such liabilities are typically paid out over a long period, in some cases up to 40 years, and are therefore not expected to have a material adverse effect on Railroad's consolidated financial position, cash flow or liquidity. Lease commitments Railroad has substantial lease commitments for railroad, highway equipment, office buildings and a taconite dock facility. Most of these leases provide the option to purchase the equipment at fair market value at the end of the lease. However, some provide fixed price purchase options. Lease rental expense for operating leases was $286 million, $233 million and $222 million for the years ended December 31, 1994, 1993 and 1992, respectively. -36- Minimum annual rental commitments were as follows (in millions):
Capital Operating Year ended December 31, Leases Leases - ------------------------------------------------------------------------- 1995....................................... $ 9 $ 223 1996....................................... 7 210 1997....................................... 5 184 1998....................................... 5 169 1999....................................... 5 154 Thereafter................................. 37 1,230 --- ------ Total.................................. 68 $2,170 --- ====== Less amount representing interest.......... 22 Present value of minimum lease payments $46 ===
In addition to the above, Railroad also receives and pays rents for railroad equipment on a per diem basis, which is included in equipment rents. Other commitments and contingencies In 1993, Railroad entered into an agreement to acquire 350 alternating current traction motor locomotives. In December 1994, the number of locomotives to be acquired under this agreement was increased to 404. As of January 31, 1995, Railroad had accepted delivery of 147 locomotives and anticipates deliveries under this agreement of between approximately 60 and 140 each year from 1995, (including January 1995 deliveries) through 1997. Railroad has two locomotive electrical power purchase agreements, expiring in 1998 and 2001, that currently involve 197 locomotives. Payments required by the agreements are based upon the number of megawatt hours of energy consumed, subject to specified take-or-pay minimums. The rates specified in the two agreements are renegotiable every two years. Railroad's 1995 minimum commitment obligation is $53 million. Based on projected locomotive power requirements, Railroad's payments in 1995 are expected to be in excess of the minimum. Payments under the agreements totaled $47 million, $53 million and $56 million in 1994, 1993 and 1992, respectively. In 1990, Railroad entered into a letter of credit for the benefit of a vendor. This letter of credit is a performance guarantee for up to $15 million in major overhauls to be performed on the power purchase equipment. In connection with its program to transfer certain rail lines to independent operators, Railroad has agreed to make certain payments for services performed by the operators in connection with traffic that involves the shortlines and Railroad as carriers. These payments will vary with such factors as traffic volumes and shortline costs and are not expected to exceed normal business requirements for services received. These payments are reflected as reductions to revenue to conform with reporting to the ICC. Revenues for these joint moves, including amounts applicable to the independent operator portion of the line haul, are reflected by Railroad as revenue from operations. Railroad is party to various claims and lawsuits, some of which are for substantial amounts. While these claims and actions are being contested, the outcome of individual matters is not certain. Although actual liability on an aggregate basis is similarly not determinable with certainty, as of December 31, 1994, Railroad believes that any liability resulting from these matters, after taking into consideration Railroad's insurance coverages and amounts already provided for, should not have a material adverse effect on Railroad's financial position. -37- There are no other commitments or contingent liabilities which Railroad believes would have a material adverse effect on the consolidated financial position, results of operations or liquidity. 11. Other income, net Other income, net includes the following (in millions):
Year ended December 31, 1994 1993 1992 - ----------------------------------------------------------------------------- Gain on property dispositions..................... $17 $19 $ 9 Interest income................................... 10 9 11 Loss on sale of receivables....................... (9) (9) (11) Litigation settlement agreement................... - - 47 Miscellaneous, net................................ (1) (7) 1 --- --- ---- Total......................................... $17 $12 $ 57 === === ====
In the first quarter of 1992, both Railroad and BNI were parties to a settlement agreement relating to the reimbursement of attorneys' fees and costs incurred by Railroad in connection with litigation filed by Energy Transportation Systems, Inc., and others, and reimbursement of a portion of the amount paid in prior years by Railroad in settlement of that action. Under the terms of the settlement, Railroad received approximately $50 million before legal fees. 12. Accounting changes Effective January 1, 1994, Railroad adopted 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. Effective January 1, 1993, Railroad adopted SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 modifies SFAS No. 96, which established the liability method of accounting for income taxes, and had been adopted by Railroad effective January 1, 1986. Railroad adopted SFAS No. 109 consistent with the transitional guidelines of SFAS No. 109. The effect of the adoption was to increase the current portion of the deferred income tax asset with a corresponding increase in the noncurrent deferred income tax liability of $26 million at January 1, 1993. There was no effect on net income, stockholder's equity or cash flows. In January 1992, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus that origination of service revenue recognition was not an acceptable accounting method beginning in 1992 for the freight services industry. Accordingly, effective January 1, 1992, Railroad changed its method of revenue recognition from one which recognized transportation revenue at the origination point, to a method whereby transportation revenue is recognized proportionately as a shipment moves from origin to destination. The cumulative effect, net of a $7 million income tax benefit, of the change on the prior year's revenue, at the time of adoption, decreased 1992 net income by $11 million. -38- In the fourth quarter of 1992, effective January 1, 1992, Railroad adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and elected immediate recognition of the $16 million transition obligation. The cumulative effect, net of a $6 million income tax benefit, of the change on prior years', at the time of adoption, decreased 1992 net income by $10 million. 13. Related party transactions In addition to various corporate-related transactions with its parent, BNI, Railroad also rents, under operating leases, rolling stock and other property from BN Leasing Corporation (BNLC), a wholly owned subsidiary of BNI. The following is a summary of balances representing the result of transactions with related parties (in millions):
December 31, 1994 1993 - ---------------------------------------------------------------------------- Short-term: Payable to BNLC for rent associated with property and equipment....................... $10 $ 8 Payable to BNI, representing net settlement account for dividends, taxes and other.................... 3 - --- ---- Total short-term payables to related parties...... $13 $ 8 === ==== Receivable from BNLC for accrued interest associated with the notes receivable for hub centers and rail facilities........................................ $ 2 $ 2 === ==== Long-term: Receivable from BNI, representing net settlement account for dividends, taxes and other............ $ - $ 9 Notes receivable from BNLC for hub centers.......... 28 28 Note receivable from BNLC for rail facilities....... 41 41 Investments in non-consolidated subsidiaries........ 6 7 Receivables from non-consolidated subsidiaries and other affiliates.............................. 19 19 --- ---- Total long-term investments in and advances to related parties................................. $94 $104 === ====
Railroad recorded the following amounts for transactions with related parties (in millions):
Year ended December 31, 1994 1993 1992 - ----------------------------------------------------------------------------- Rental expense.......................... $ 57 $ 39 $ 32 Interest income......................... 7 7 8
In prior years, Railroad transferred the Denver and Houston hub centers to Burlington Northern Railroad Holdings, Inc. (BNRRHI), a wholly owned subsidiary of Railroad. BNRRHI subsequently sold the hub centers to BNLC. The hub centers, with a combined book value of $22 million, were sold for the fair market value of $28 million. BNRRHI received two promissory notes due October 31, 2000, with interest at 10.05 percent from BNLC for the total sale price. The notes will be paid off using proceeds generated from rental payments from Railroad to BNLC for use of the facilities at the rate of $3 million per year. No gain was recorded on the sale of the property. -39- In prior years, Railroad purchased certain rail facilities at and between Ortonville, Minnesota and Terry, Montana from the South Dakota Rail Authority. These properties were subsequently sold to BNLC for the recorded net book value of the property. Railroad received a promissory note from BNLC for the purchase price of $41 million. Interest at a rate of 10.0 percent is due annually. Principal is due at maturity on August 31, 2001. Railroad will make rental payments of $5 million per year until 2001 for use of these facilities. No gain or loss was recorded on the sale of the property. -40- Report of Independent Accountants To the Stockholder and Directors of Burlington Northern Railroad Company and Subsidiaries We have audited the consolidated financial statements and financial statement schedule of Burlington Northern Railroad Company and Subsidiaries listed in Item 14 of this Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 Railroad Company and Subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. As discussed in Note 12 to the consolidated financial statements, the Company changed its method of accounting for postemployment benefits in 1994, for income taxes in 1993 and for revenue recognition and postretirement benefits other than pensions in 1992. COOPERS & LYBRAND L.L.P. Fort Worth, Texas January 16, 1995 -41- Quarterly Financial Data-unaudited
(Dollars in millions) QUARTER - --------------------------------------------------------------------------------------------------- Fourth Third Second First ------ ----- ------ ----- 1994 Revenues................................. $1,344 $1,249 $1,192 $1,210 Operating income......................... 259 220 174 178 Income before cumulative effect of change in accounting method................... 152 125 95 97 Cumulative effect of change in accounting method, net of tax (1)................. - - - (10) ------ ------ ------ ------ Net income............................... $ 152 $ 125 $ 95 $ 87 ====== ====== ====== ====== 1993 Revenues................................. $1,246 $1,141 $1,142 $1,170 Operating income......................... 220 118 146 166 Net income (2)........................... 125 34 81 92
(1) Effective January 1, 1994, Railroad adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect, net of $7 million income tax benefit, of this change in accounting attributable to years prior to 1994, at the time of adoption, was to decrease 1994 net income by $10 million. (2) Results for the third quarter of 1993 included the effects of the Omnibus Budget Reconciliation Act of 1993 (the Act) which was signed into law in August 1993. The Act increased the corporate federal income tax rate by one percent, effective January 1, 1993, which reduced net income by $28 million through the date of enactment. Results for the third quarter of 1993 also included the effects of the severe flooding in the Midwest. Railroad estimated that the flooding reduced revenues and operating income during the quarter by $44 million and $79 million, respectively, and reduced net income by $49 million. -42- Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None PART III Items Ten, Eleven, Twelve and Thirteen Directors and Executive Officers of the Registrant; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management; and Certain Relationships and Related Transactions Not applicable - see Table of Contents note. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page ---- Financial Statements: Consolidated Statements of Income for the three years ended December 31, 1994................................ 21 Consolidated Balance Sheets at December 31, 1994 and 1993 22 Consolidated Statements of Cash Flows for the three years ended December 31, 1994................................ 23 Consolidated Statements of Changes in Common Stockholder's Equity for the three years ended December 31, 1994.................................... 24 Notes to Consolidated Financial Statements............... 25 Report of Independent Accountants.......................... 41 Quarterly Financial Data-unaudited......................... 42 Consolidated Financial Statement Schedule for the three years ended December 31, 1994: Schedule II-Valuation and Qualifying Accounts............ 47
Schedules other than those listed above are omitted because they are not required or not applicable, or the required information is included in the consolidated financial statements or related notes. -43- Exhibit Index The following exhibits are filed as part of this report.
Exhibit Page Number Description Number - ------- ----------- ------ 3.1 Certificate of Incorporation of Burlington Northern * Railroad Company as amended through July 20, 1987. 3.2 By-Laws of Burlington Northern Railroad Company * as amended through July 17, 1991. 4.1 The Company has either previously filed with the * Securities and Exchange Commission or upon request will furnish a copy of any instrument with respect to the long-term debt of the Company (1989 Form 10-K, filed March 1990). 10.1 364-Day Competitive Advance and Revolving Credit * Facility Agreement, dated as of May 6, 1994, between Burlington Northern Railroad Company and a consortium of lenders (Form 10-Q for the quarter ended June 30, 1994, filed August 1994). 10.2 5-Year Competitive Advance and Revolving Credit * Facility Agreement, dated as of May 6, 1994, between Burlington Northern Railroad Company and a consortium of lenders (Form 10-Q for the quarter ended June 30, 1994, filed August 1994). 10.3 3-Year Term Loan Facility Agreement, dated as of ** November 14, 1994, between Burlington Northern Railroad Company and a consortium of lenders. 10.4 Employment Agreement, dated September 4, 1990, * by and between Burlington Northern Railroad Company and Mr. John T. Chain (1990 Form 10-K, filed March 1991). 10.5 Employment Agreement, dated September 18, 1991, * by and between Burlington Northern Railroad Company and Mr. Richard A. Russack (1991 Form 10-K, filed February 1992). 10.6 Employment Agreement, dated April 18, 1994, between * Burlington Northern Railroad Company and Mr. Greg Swienton (Form 10-Q for the quarter ended June 30, 1994, filed August 1994). 10.7 Employment Agreement, dated April 22, 1994, between * Burlington Northern Railroad Company and Mr. Ronald A. Rittenmeyer (Form 10-Q for the quarter ended June 30, 1994, filed August 1994). 27 Financial Data Schedule. **
* Exhibit is incorporated by reference as indicated. ** Exhibit is filed with Form 10-K for the year ended December 31, 1994. -44- REPORTS ON FORM 8-K During the period, a report on Form 8-K, dated October 26, 1994, was filed attaching an Amendment dated as of October 26, 1994 to the Agreement and Plan of Merger dated as of June 29, 1994 between Burlington Northern Inc. (BNI) and Santa Fe Pacific Corporation (Santa Fe) and further attaching the press release of BNI dated October 27, 1994 announcing the execution of said Amendment. During the period, a report on Form 8-K, dated November 18, 1994, was filed concerning a litigation development related to a coal transportation contract. During the period, a report on Form 8-K, dated December 18, 1994, was filed attaching Amendment No. 2 dated as of December 18, 1994 to the Agreement and Plan of Merger dated as of June 29, 1994 between BNI and Santa Fe and further attaching the press release of BNI dated December 18, 1994 announcing the execution of said Amendment No. 2. -45- SIGNATURES Pursuant to the requirements of 13 or 15(d) of the Securities Exchange Act of 1934, Burlington Northern Railroad Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 17th day of February, 1995. BURLINGTON NORTHERN RAILROAD COMPANY By /s/ GERALD GRINSTEIN ------------------------------------------ Gerald Grinstein, Chairman, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Burlington Northern Railroad Company and in the capacities and on the dates indicated. /s/ GERALD GRINSTEIN Chairman, - ----------------------- Chief Executive Officer and Gerald Grinstein Director February 17, 1995 /s/ DAVID C. ANDERSON Executive Vice President, - ----------------------- Chief Financial Officer and David C. Anderson Director February 17, 1995 /s/ DON S. SNYDER Vice President, Controller and - ----------------------- Chief Accounting Officer Don S. Snyder February 17, 1995 /s/ EDMUND W. BURKE Director - ----------------------- Edmund W. Burke February 17, 1995 -46- Schedule II Burlington Northern Railroad Company and Subsidiaries Valuation and Qualifying Accounts For the years ended December 31, 1994, 1993 and 1992 (In millions)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at Additions Charged Balance at Description Beginning of Period to Income Deductions(1) End of Period(2) ----------- ------------------- ----------------- ---------- ------------- December 31, 1994: Casualty and environmental reserves.. $712 $223 $272 $663 ==== ==== ==== ==== December 31, 1993: Casualty and environmental reserves.. $731 $261 $280 $712 ==== ==== ==== ==== December 31, 1992: Casualty and environmental reserves.. $713 $312 $294 $731 ==== ==== ==== ====
Notes: (1) Principally represents cash payments. (2) Classified in the consolidated balance sheets as follows:
1994 1993 1992 ---- ---- ---- Casualty and environmental reserves (current liabilities)............ $248 $286 $249 Casualty and environmental reserves (noncurrent liabilities)......... 415 426 482 --- --- --- $663 $712 $731 ==== ==== ====
-47- Exhibit Index Sequentially Exhibit Numbered Number Description Page - ------- ----------- ------------ 10.3 3-Year Term Loan Facility Agreement, dated as of November 14, 1994, between Burlington Northern Railroad Company and a consortium of lenders. 27 Financial Data Schedule. EX-10.3 2 3-YEAR TERM LOAN AGREEMENT EXHIBIT 10.3 ================================================================================ 3-YEAR TERM LOAN FACILITY AGREEMENT Dated as of November 14, 1994 among BURLINGTON NORTHERN RAILROAD COMPANY, THE LENDERS NAMED HEREIN and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Administrative Agent ================================================================================ [CS&M Ref. No. 6700-227] TABLE OF CONTENTS Article Section Page - ------- ------- ---- I. DEFINITIONS 1.01 Defined Terms ......................................... 1 1.02 Terms Generally ....................................... 12 II. THE CREDITS 2.01 Commitments ........................................... 12 2.02 Term Loans ............................................ 12 2.03 Fees .................................................. 13 2.04 Repayment of Term Loans ............................... 13 2.05 Interest on Term Loans ................................ 14 2.06 Default Interest ...................................... 15 2.07 Alternate Rate of Interest ............................ 15 2.08 Conversion and Continuation of Borrowings ............. 16 2.09 Prepayment ............................................ 17 2.10 Reserve Requirements; Change in Circumstances ......... 17 2.11 Change in Legality .................................... 19 2.12 Indemnity ............................................. 20 2.13 Pro Rata Treatment .................................... 21 2.14 Sharing of Setoffs .................................... 21 2.15 Payments .............................................. 22 2.16 Taxes ................................................. 23 2.17 Assignment or Prepayment of Term Loans Under Certain Circumstances .............................. 26 III. REPRESENTATIONS AND WARRANTIES .............................. 27 IV. CONDITIONS OF LENDING ....................................... 31 V. AFFIRMATIVE COVENANTS 5.01 Existence; Businesses and Properties .................. 32 5.02 Insurance ............................................. 33 5.03 Reporting Requirements ................................ 33 5.04 Consolidated Tangible Net Worth ....................... 36 5.05 Taxes ................................................. 36 Contents, p. 2 Article Section Page - ------- ------- ---- VI. NEGATIVE COVENANTS 6.01 Debt .................................................. 36 6.02 Sale, etc., of Assets ................................. 37 6.03 Mergers, etc. ......................................... 38 6.04 Liens ................................................. 38 6.05 Sales of Accounts Receivable .......................... 39 VII. EVENTS OF DEFAULT ........................................... 40 VIII. THE AGENT ................................................... 43 IX. MISCELLANEOUS 9.01 Notices ............................................... 46 9.02 Survival of Agreement ................................. 47 9.03 Binding Effect ........................................ 47 9.04 Successors and Assigns ................................ 48 9.05 Expenses; Indemnity ................................... 51 9.06 Right of Setoff ....................................... 52 9.07 Applicable Law ........................................ 53 9.08 Waivers; Amendment .................................... 53 9.09 Interest Rate Limitation .............................. 54 9.10 Entire Agreement ...................................... 54 9.11 Severability .......................................... 54 9.12 Counterparts .......................................... 55 9.13 Headings .............................................. 55 9.14 Jurisdiction; Consent to Service of Process ........... 55 Exhibit A Administrative Questionnaire Exhibit B Form of Assignment and Acceptance Exhibit C Form of Opinion of Francis T. Kelly, Esq., Counsel for the Borrower Exhibit D Form of Opinion of Douglas J. Babb, Vice President and General Counsel of the Borrower Schedule 2.01 Commitments Schedule 6.04(a) Existing Liens 3-YEAR TERM LOAN FACILITY AGREEMENT dated as of November 14, 1994, among BURLINGTON NORTHERN RAILROAD COMPANY, a Delaware corporation (the "Borrower"); the lenders listed in Schedule 2.01 hereto (the "Lenders"); and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as administrative agent (in such capacity, the "Administrative Agent"). The Borrower has requested the Lenders to extend credit to the Borrower in order to enable it to borrow on a term basis, on the Funding Date (as defined below), an aggregate principal amount of $150,000,000. The proceeds of such borrowing will be used by the Borrower to redeem the Series J Mortgage Bonds (as defined below) or will be used to reimburse the Borrower for payments made in connection with the redemption of such Bonds on the Funding Date. The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions herein set forth. Accordingly, the Borrower, the Lenders, and the Administrative Agent agree as follows: ARTICLE I. DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following ------------- terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Term Loans. ------------- "ABR Period" shall mean any period during which the Term Loans ---------- bear interest at the Alternate Base Rate. "ABR Term Loan" shall mean any Term Loan bearing interest at a rate ------------- determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Administrative Questionnaire" shall mean an Administrative ---------------------------- Questionnaire in the form of Exhibit A hereto. "Affiliate" shall mean, when used with respect to a specified --------- person, another person that directly, or 2 indirectly through one or more intermediaries, controls or is controlled by or is under common control with the person specified. "Agent Fees" shall have the meaning given such term in Section 2.03. ---------- "Agent" shall mean the Administrative Agent. ----- "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded ------------------- upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, "Prime Rate" shall mean as of a particular date, the ---------- prime rate most recently announced by the Administrative Agent and thereafter entered in the minutes of the Administrative Agent's Loan and Discount Committee, automatically fluctuating upward and downward with and at the time specified in each such announcement without notice to the Borrower or any other person, which prime rate may not necessarily represent the lowest or best rate actually charged to a customer. "Base CD Rate" shall mean the sum of (a) the ------------ product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate. "Three-Month Secondary CD Rate" shall mean, for any ----------------------------- day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 9:00 a.m., Houston time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "Federal Funds Effective Rate" shall mean, for any day, the weighted ---------------------------- average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal 3 Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "Assessment Rate" shall mean for any date the annual rate (rounded --------------- upwards, if necessary, to the next 1/100 of 1%) most recently estimated by the Administrative agent as the then current net annual assessment rate that will be employed in determining amounts payable by the Administrative Agent to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or such successor) of time deposits made in dollars at the Administrative Agent's domestic offices. "Assignment and Acceptance" shall mean an assignment and acceptance ------------------------- entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit B hereto. "Board" shall mean the Board of Governors of the Federal Reserve System ----- of the United States. "Borrowing" shall mean a group of Term Loans of a single Type as to --------- which a single Interest Period is in effect. "Business Day" shall mean any day (other than a day which is a Saturday, ------------ Sunday or legal holiday in the State of Texas or New York) on which banks are open for business in Houston and New York City; provided, however, that, when -------- ------- used in connection with a Eurodollar Term Loan, 4 the term "Business Day" shall also exclude any day on which banks are not open ------------ for dealings in dollar deposits in the London interbank market. A "Change in Control" shall be deemed to have occurred if (a) any person ----------------- or group (within the meaning of Rule 13d-5 of the Securities and Exchange commission as in effect on the date hereof) shall own directly or indirectly, beneficially or of record, shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Parent (other than as the result of a transaction approved by the Parent's Board of Directors), (b) a majority of the seats (other than vacant seats) on the Board of Directors of the Parent shall at any time have been occupied by persons who were neither (i) nominated by the Board of Directors of the Parent, nor (ii) appointed by Directors so nominated, (c) any person or group shall otherwise directly or indirectly obtain control of the Parent (other than in a transaction approved by the Parent's Board of Directors) or (d) the Parent shall cease to control the Borrower. "Closing Date" shall mean the date hereof. ------------ "Code" shall mean the Internal Revenue Code of 1986, as the same may be ---- amended from time to time. "Commitment" shall mean, with respect to each Lender, the commitment of ---------- such Lender hereunder as set forth in Schedule 2.01 hereto to make one or more Term Loans pursuant to Section 2.01. The Commitments shall automatically and permanently terminate at 5:00 p.m., New York City time, on the Funding Date. "Consolidated Tangible Net Worth" shall mean preferred stockholder's and ------------------------------- common stockholder's equity of the Borrower (other than mandatorily redeemable preferred stock) minus intangible assets of the Borrower and its consolidated Subsidiaries. "Debt" shall mean, without duplication, (i) indebtedness for borrowed ---- money or for the deferred purchase price of property or services whether evidenced by bonds, debentures, notes or similar instruments or otherwise (but excluding, in any case, liabilities by endorsement of negotiable instruments for deposit or collection and liabilities with respect to accounts payable incurred in the ordinary course of business), (ii) obligations as lessee 5 under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases and (iii) obligations under direct or indirect guarantees in respect of, and obligations to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness on obligations of persons (other than the Borrower and its consolidated Subsidiaries) of the kinds referred to in clauses (i) and (ii) above. "Default" shall mean any event or condition which upon notice, lapse of ------- time or both would constitute an Event of Default. "dollars" or "$" shall mean lawful money of the United States of ------- - America. "Engagement Letter" shall mean the engagement letter dated November 3, ----------------- 1994, among the Borrower, the Administrative Agent and Chemical Securities Inc. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, ----- as the same may be amended from time to time. "ERISA Affiliate" shall mean any person who for purposes of Title IV of --------------- ERISA is a member of the Borrower's controlled group, or is under common control with the Borrower, within the meaning of Section 414 of the Code and the regulations promulgated and rulings issued thereunder. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar -------------------- Term Loans. "Eurodollar Period" shall mean any period during which the Term Loans ----------------- bear interest at rates determined by reference to the LIBO Rate. "Eurodollar Term Loan" shall mean any Term Loan bearing interest at a -------------------- rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning given such term in Article ---------------- VII. "Existing Facility" shall mean the 5-year Competitive Advance and ----------------- Revolving Credit Facility Agreement dated as of May 6, 1994, and the 364-day Competitive Advance 6 and Revolving Credit Facility Agreement dated as of May 6, 1994, both among the Borrower, the lenders named therein, Texas Commerce Bank National Association, as administrative agent, and Chemical Bank Agency Services Corporation, as competitive advance facility agent. "Existing Liens" shall mean Liens existing on the date hereof and -------------- described on Schedule 6.04(a) hereto and any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by such Lien, but only to the extent the amount of such Debt shall not be increased. "Existing Mortgages" shall mean each security or other agreement of ------------------ whatever nature described within the Burlington Northern Railroad Company Long-Term Debt Book dated December 31, 1993, a copy of which has been delivered by the Borrower to the Administrative Agent, as such agreements may have been amended or modified to the date hereof or as they may be amended, supplemented, replaced or modified from time to time hereafter. "Federal Funds Effective Rate" shall have the meaning assigned thereto ---------------------------- in the definition of Alternate Base Rate. "Fees" shall mean the Agent Fees. ---- "Funding Date" shall mean November 15, 1994. ------------ "GAAP" shall mean United States generally accepted accounting ---- principles, applied on a basis consistent with the financial statements referred to in paragraph (e) of Article III hereof. "Governmental Authority" shall mean any Federal, state, local or foreign ---------------------- court or governmental agency, authority, instrumentality or regulatory body. "ICC" shall mean the Interstate Commerce Commission or any successor --- thereto. "Insufficiency" shall mean, with respect to any Plan, the amount, if ------------- any, by which the present value of the benefit liabilities under such Plan exceeds the fair market value of the assets of such Plan. "Interest Payment Date" shall mean, with respect to any Term Loan, the --------------------- last day of the Interest Period 7 applicable to the Borrowing of which such Term Loan is part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date for such Borrowing had successive Interest Periods of three months' duration been applicable to such Borrowing and, in addition, the date of any conversion of such Borrowing with or to a Borrowing of a different Type. "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the --------------- period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 3 or 6 months thereafter, as the Borrower may elect, and (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the date 90 days thereafter or, if earlier, on the Maturity Date or the date of repayment, prepayment or conversion of such Borrowing; provided, however, that if any Interest Period would end on a day -------- ------- other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "Interest Rate Margin" shall mean, with respect to each Term Loan of -------------------- each Lender, the margin (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places), as set forth in a letter dated the date hereof from the Borrower to each such Lender accepting the Commitment of such Lender and confirming such margin, to be added to or subtracted from the LIBO Rate in order to determine the interest rate per annum applicable to such Term Loan during a Eurodollar Period. "LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for any --------- Interest Period, an interest rate per annum equal to the average (rounded upwards, if necessary, to the next 1/16 of 1%) of the rates per annum at which dollar deposits for a maturity comparable to such 8 Interest Period are offered by the principal London offices of the Reference Banks (or, if any Reference Bank does not at the time maintain a London office, the principal London office of any Affiliate of such Reference Bank) in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period in amounts approximately equal to the amount of such Borrowing. "Lien" shall mean any lien, security interest or other charge or ---- encumbrance, or any assignment of the right to receive income, or any other type of preferential arrangement, in each case to secure any obligation of any person. "Loan Documents" shall mean this Agreement and the Fee Letter dated -------------- November 3, 1994, among the Administrative Agent and the Borrower. "Margin Stock" shall have the meaning given such term under ------------ Regulation U. "Material Adverse Effect" shall mean a material adverse effect on the ----------------------- financial condition or operations of the Borrower and its consolidated Subsidiaries on a consolidated basis. "Material Plan" shall mean any Plan the assets of which exceed ------------- $50,000,000 or the liabilities of which for unfunded benefit liabilities exceed $15,000,000. "Maturity Date" shall mean November 15, 1997. ------------- "Moody's" shall mean Moody's Investors Service. ------- "Mortgage Indenture" shall mean the Consolidated Mortgage, dated ------------------ March 2, 1970, by Burlington Northern Inc. (the former name of the Borrower) to Morgan Guaranty Trust Company of New York and Jacob M. Ford II, as trustees, as amended to the date hereof and as amended, supplemented or modified from time to time hereafter. "Multiemployer Plan" shall mean a multiemployer plan as defined in ------------------ Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) is making or accruing an obligation to make contributions, or has within any of the preceding 9 five plan years made or accrued an obligation to make contributions, such plan being maintained pursuant to one or more collective bargaining agreements. "Multiple Employer Plan" shall mean a single employer plan, as defined ---------------------- in Section 4001(a)(15) of ERISA, which (i) is maintained for employees of the Borrower or an ERISA Affiliate and at least one person other than the Borrower and its ERISA Affiliates or (ii) was so maintained and in respect of which the Borrower or an ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "Parent" shall mean Burlington Northern Inc., a Delaware corporation. ------ "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to ---- and defined in ERISA, or any successor thereto. "person" shall mean any natural person, corporation, business trust, ------ joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Plan" shall mean any pension plan (other than a Multiemployer Plan) ---- subject to the provisions of Title IV of ERISA or Section 412 of the Code which is maintained for employees of the Borrower or any ERISA Affiliate. "Reference Banks" shall mean Texas Commerce Bank National Association, --------------- Mellon Bank, N.A. and The Sanwa Bank, Limited. "Register" shall have the meaning given such term in Section 9.04(d). -------- "Regulation D" shall mean Regulation D of the Board as from time to time ------------ in effect and all official rulings and interpretations thereunder or thereof. "Regulation G" shall mean Regulation G of the Board as from time to time ------------ in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board as from time to ------------ time in effect and all official rulings and interpretations thereunder or thereof. 10 "Regulation X" shall mean Regulation X of the Board as from time to time ------------ in effect and all official rulings and interpretations thereunder or thereof. "Required Lenders" shall mean, at any time, Lenders having Commitments ---------------- representing at least 55% of the Total Commitment or, after the Commitments shall have terminated or for purposes of acceleration pursuant to clause (ii) of Article VII, Lenders holding Term Loans representing at least 55% of the aggregate principal amount of the Term Loans outstanding. "Responsible Officer" shall mean with respect to the subject matter of ------------------- any covenant, agreement, or obligation of the Borrower contained in this Agreement, the president, any vice president, treasurer, assistant treasurer or other officer of the Borrower who in the normal performance of his or her operational responsibility would have knowledge of such subject matter and the requirements of such covenants, agreements or obligations of the Borrower with respect thereto. "Series J Mortgage Bonds" shall mean the outstanding $150,000,000 in ----------------------- principal amount of 10% Consolidated Mortgage Bonds, Series J, due November 1, 1997, issued by the Borrower. "Statutory Reserves" shall mean a fraction (expressed as a decimal), the ------------------ numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves), expressed as a decimal established by the Board and any other banking authority to which the Administrative Agent is subject for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months, in the case of the Base CD Rate (as such term is used in the definition of "Alternate Base Rate"). Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "subsidiary" shall mean, with respect to any person (herein referred to ---------- as the "parent"), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general 11 partnership interests are, at the time any determination is being made, owned, controlled or held, or (b) which is, at the time any determination is made, otherwise controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean any subsidiary of the Borrower. ---------- "Termination Event" shall mean (i) a "reportable event," as such term is ----------------- described in Section 4043 of ERISA, (ii) the withdrawal of the Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a "substantial employer," as such term is defined in Section 4001(a)(2) of ERISA, or the incurrence of liability by the Borrower or any ERISA Affiliate under Section 4064 of ERISA upon the termination of a Multiple Employer Plan, (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, (iv) the institution of proceedings to terminate a Plan by the PBGC under Section 4042 of ERISA, (v) a failure to make a required installment or other payment (within the meaning of Section 412(n)(1) of the Code) with respect to any Plan or (vi) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Term Loans" shall mean term loans made pursuant to Section 2.01. Each ---------- Term Loan shall be either a Eurodollar Term Loan or an ABR Term Loan. "Total Commitment" shall mean at any time the aggregate amount of the ---------------- Lenders' Commitments, as in effect at such time. "Transfer" shall have the meaning given such term in Section 6.02. -------- "Type", when used in respect of any Term Loan or Borrowing, shall refer ---- to the Rate by reference to which interest on such Term Loan or on the Term Loans comprising such Borrowing is determined. For purposes hereof, "Rate" shall include the LIBO Rate and the Alternate Base Rate. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a -------------------- result of a complete or partial 12 withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall ---------------- apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, -------- however, that, for purposes of determining compliance with any covenant set - ------- forth in Section 5.04 or Article VI, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a basis consistent with the application used in preparing the Borrower's audited financial statements referred to in paragraph (e) of Article III. ARTICLE II. THE CREDITS SECTION 2.01 Commitments. On the terms, subject to the conditions and ------------ relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make one or more Term Loans which shall be Eurodollar Term Loans to the Borrower on the Funding Date in an aggregate principal amount equal to such Lender's Commitment as set forth opposite such Lender's name on Schedule 2.01 and with an initial Interest Period of 6 months. Amounts prepaid in respect of Term Loans may not be reborrowed. SECTION 2.02. Term Loans. (a) Each Term Loan shall be made as part of ----------- a Borrowing consisting of Term Loans made by the Lenders ratably in accordance with their respective Commitments; provided, however, that the failure of any -------- ------- Lender to make any Term Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Term Loan required to be made by such other Lender). 13 (b) Each Lender shall make one or more Term Loans in an aggregate principal amount equal to its Commitment hereunder on the Funding Date by wire transfer of immediately available funds to the Administrative Agent in Houston, Texas, not later than 11:00 a.m., Houston time, and the Administrative Agent shall by 2:00 p.m., Houston time, credit the amounts so received to the general deposit account of the Borrower with the Administrative Agent or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Unless the Administrative Agent shall have received notice from a Lender prior to the Funding Date that such Lender will not make available to the Administrative Agent such Lender's portion of the Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (b) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, the interest rate that would have been applicable at the time to such Term Loan or Loans and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Term Loan or Loans as part of such Borrowing for purposes of this Agreement. SECTION 2.03. Fees. The Borrower agrees to pay the Agent, for the ----- Agent's own account, the fees set forth in the Engagement Letter dated November 3, 1994, among the Administrative Agent, Chemical Securities Inc. and the Borrower, and in the Fee Letter dated November 3, 1994, among the Administrative Agent and the Borrower, at the times and in the amounts set forth therein (the "Agent Fees"). SECTION 2.04. Repayment of Term Loans. (a) The Borrower agrees to pay ------------------------ the outstanding principal balance of each Term Loan on the Maturity Date. Each Term Loan shall 14 bear interest from and including the Funding Date on the outstanding principal balance thereof as set forth in Section 2.05. (b) Each Lender shall, and is hereby authorized by the Borrower to, maintain, in accordance with its usual practice, records evidencing the indebtedness of the Borrower to such Lender hereunder from time to time, including the amount and Type at any time of and the Interest Period at any time applicable to the Term Loan or Loans made by such Lender and the amounts of principal and interest paid to such Lender from time to time in respect of such Term Loan or Loans. (c) The entries made in the records maintained pursuant to paragraph (b) of this Section 2.04 and in the Register maintained by the Administrative Agent pursuant to Section 9.04(d) shall be prima facie evidence of the existence and amounts of the obligations of the Borrower to which such entries relate; provided, however, that the failure of any Lender or the Administrative Agent to - -------- ------- maintain or to make any entry in such records or the Register, as applicable, or any error therein shall not in any manner affect the obligation of the Borrower to repay the Term Loans in accordance with the terms of this Agreement. SECTION 2.05. Interest on Term Loans. (a) Subject to the provisions ----------------------- of Section 2.06, each Term Loan of each Lender shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) during any Eurodollar Period at a rate per annum equal to the LIBO Rate for the Interest Period in effect for such Borrowing plus the Interest Rate Margin applicable to such Term Loan by such Lender. (b) Subject to the provisions of Section 2.06, each Term Loan of each Lender shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as appropriate, when determined by reference to the Prime Rate and over a year of 360 days at all other times) during any ABR Period at a rate per annum equal to the Alternate Base Rate. (c) Interest on each Term Loan shall be payable in arrears on each Interest Payment Date applicable to such Term Loan except as otherwise provided in this Agreement. The applicable LIBO Rate or Alternate Base Rate for each 15 Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. The Administrative Agent shall promptly advise the Borrower and each Lender, as appropriate, of such determination. SECTION 2.06. Default Interest. If the Borrower shall default in the ----------------- payment of the principal of or interest on any Term Loan or any other amount becoming due hereunder, whether by scheduled maturity, notice of prepayment, acceleration or otherwise, the Borrower shall on demand from time to time from the Administrative Agent pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as appropriate, when determined by reference to the Prime Rate and over a year of 360 days at all other times) equal to the Alternate Base Rate plus 1%. SECTION 2.07. Alternate Rate of Interest. In the event, and on each --------------------------- occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined (i) that dollar deposits in the principal amounts of the Eurodollar Term loans comprising such Borrowing are not generally available in the London interbank market, or (ii) that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to any Lender of making or maintaining its Eurodollar Term Loan or Loans during such Interest Period, or (iii) that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telecopy notice of such determination to the Borrower and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, any request by the Borrower pursuant to Section 2.08 to convert the Term Loans into Eurodollar Term Loans or to continue the Term Loans as Eurodollar Term Loans shall be deemed to be a request for ABR Term Loans (x) as to all Lenders, in the event the circumstances referred to in (i) or (iii) above are applicable, or (y) as to each affected Lender, in the event only the circumstances referred to in (ii) above are applicable. In the event the circumstances referred to in (ii) above are applicable, all payments and 16 prepayments of principal which would otherwise have been made on account of the Eurodollar Term Loan or Loans of the affected Lender shall instead be applied to repay the ABR Term Loan or Loans made by such Lender in lieu of such Eurodollar Term Loan or Loans. Each determination by the Administrative Agent hereunder shall be conclusive absent demonstrable error. SECTION 2.08. Conversion and Continuation of Borrowings. The Borrower ------------------------------------------ shall have the right at any time (subject to Section 2.07) upon prior irrevocable notice to the Agent (i) not later than 11:00 a.m., Houston time, one Business Day prior to conversion, to convert the Term Loans, in whole but not in part, into ABR Term Loans, (ii) not later than 11:00 a.m., Houston time, three Business Days prior to conversion or continuation, to convert the Term Loans, in whole but not in part, into Eurodollar Term Loans or to continue the Term Loans, in whole but not in part, as Eurodollar Term Loans for an additional Interest Period and (iii) not later than 11:00 a.m., Houston time, three Business Days prior to conversion, to convert the Interest Period with respect to the Term Loans, in whole but not in part, to another permissible Interest Period, subject in each case to the following: (a) accrued interest on the Term Loans shall be paid by the Borrower at the time of any conversion; (b) if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.12; (c) the Term Loans may not be converted into or continued as Eurodollar Term Loans if the Interest Period with respect thereto would extend beyond the Maturity Date; and (d) if the Term Loans cannot be converted into or continued as Eurodollar Term Loans by reason of subparagraph (c) above they shall be automatically converted at the end of the Interest Period in effect into ABR Term Loans. Each notice pursuant to this Section 2.08 shall be irrevocable and shall refer to this Agreement and specify (i) whether the Term Loans are to be converted to or 17 continued as Eurodollar Term Loans or ABR Term Loans, (ii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (iii) if the Term Loans are to be converted to or continued as Eurodollar Term Loans, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as Eurodollar Term Loans, the Borrower shall be deemed to have selected an Interest Period of three months' duration. The Agent shall advise the other Lenders of any notice given pursuant to this Section 2.08. If the Borrower shall not have given notice in accordance with this Section 2.08 to continue the Term Loans into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section 2.08 to convert the Term Loans), the Term Loans shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued into a new Interest Period as ABR Term Loans. SECTION 2.09. Prepayment. (a) The Borrower shall have the right at ----------- any time and from time to time to prepay any Borrowing, in whole or in part, upon giving written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) to the Administrative Agent: (i) before 11:00 a.m., Houston time, three Business Days prior to prepayment, in the case of a Eurodollar Borrowing, and (ii) before 11:00 a.m., Houston time, one Business Day prior to prepayment, in the case of an ABR Borrowing; provided, however, that -------- ------- each partial prepayment shall be in an amount which is an integral multiple of $1,000,000 and not less than $10,000,000. (b) Each notice of prepayment shall specify the prepayment date and the principal amount of the Borrowing to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section 2.09 shall be subject to Section 2.12 but otherwise without premium or penalty. All prepayments under this Section 2.09 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.10. Reserve Requirements; Change in Circumstances. ---------------------------------------------- (a) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged 18 with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender of the principal of or interest on any Eurodollar Term Loan or Loans made by such Lender or other amounts payable hereunder (other than changes in respect of taxes imposed on the overall net income of such Lender by the jurisdiction in which such Lender has its principal office or by any political subdivision or taxing authority therein), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such lender, or shall impose on such Lender or the London interbank market any other condition affecting this Agreement or any Eurodollar Term Loan or Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Term Loan or Loans or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender upon demand such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. Notwithstanding the foregoing, no Lender shall be entitled to request compensation under this paragraph with respect to its Term Loan if such Lender shall have been aware of the change giving rise to such request at the time it initially submitted its Commitment to make such Term Loan or Loans pursuant to this Agreement to the Borrower. (b) If any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such 19 Lender's holding company, if any, as a consequence of this Agreement or the Term Loan or Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) A certificate of a Lender setting forth such amount or amounts as shall be necessary to compensate such Lender as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Borrower and shall be conclusive absent demonstrable error. The Borrower shall pay each Lender the amount shown as due on any such certificate delivered by it within 10 days after the receipt of the same. (d) Except as provided in this paragraph, failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's right to demand compensation with respect to such period or any other period. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed. No Lender shall be entitled to compensation under this Section 2.10 for any costs incurred or reductions suffered with respect to any date unless it shall have notified the Borrower that it will demand compensation for such costs or reductions under paragraph (c) above not more than 60 days after the later of (i) such date and (ii) the date on which it shall have become aware of such costs or reductions. SECTION 2.11. Change in Legality. (a) Notwithstanding any other ------------------- provision herein, if any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Term Loan or Loans or to give effect to its obligations as contemplated hereby with 20 respect to any Eurodollar Term Loan or Loans, then, by written notice to the Borrower and to the Administrative Agent, such Lender may: (i) declare that Eurodollar Term Loans will not thereafter be made by such Lender hereunder, whereupon any request by the Borrower for a Eurodollar Borrowing shall, as to such Lender only, be deemed a request for an ABR Borrowing unless such declaration shall be subsequently withdrawn (and such Lender agrees to withdraw any such declaration if legally permissible); and (ii) require that all outstanding Eurodollar Term Loans made by it be converted to ABR Term Loans, as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal which would otherwise have been applied to repay the Eurodollar Term Loan or Loans that would have been made by such Lender or the converted Eurodollar Term Loan or Loans of such Lender shall instead be applied to repay the ABR Term Loan or Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Term Loan or Loans. (b) For purposes of this Section 2.11, a notice to the Borrower by any Lender shall be effective as to such Lender's Eurodollar Term Loan or Loans, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Term Loan or Loans; in all other cases such notice shall be effective on the date of receipt by the Borrower. SECTION 2.12. Indemnity. The Borrower shall indemnify each Lender ---------- against any actual loss or expense which such Lender may sustain or incur as a consequence of (a) any failure by the Borrower to fulfill on the Funding Date hereunder the applicable conditions set forth in Article IV, (b) any failure by the Borrower to borrow on the Funding Date or to convert or continue any Term Loan hereunder after irrevocable notice of such conversion or continuation has been given pursuant to Section 2.08, (c) any payment, prepayment or conversion of a Eurodollar Term Loan required by any other provision of this Agreement or otherwise made or deemed made, and any assignment of a 21 Term Loan pursuant to Section 2.17, on a date other than the last day of the Interest Period applicable thereto, (d) any default in payment or prepayment of the principal amount of any Term Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise) or (e) the occurrence of any Event of Default, including, in each such case, any actual loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Term Loan or any part thereof as a Eurodollar Term Loan. Such loss or reasonable expense shall include an amount equal to the excess, if any, as reasonably determined by such Lender, of (i) its cost of obtaining the funds for the Term Loan being paid, prepaid, converted, not borrowed, not refinanced, not converted, not continued or assigned (assumed to be the LIBO Rate) for the period from the date of such payment, prepayment, failure to borrow, failure to convert, failure to continue or assignment to the last day of the Interest Period for such Term Loan (or, in the case of a failure to borrow, convert or continue, the Interest Period for such Term Loan which would have commenced on the date of such failure) over (ii) the amount of interest (as reasonably determined by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid, not borrowed, not refinanced, not converted, not continued or assigned for such period or Interest Period, as the case may be. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent demonstrable error. SECTION 2.13. Pro Rata Treatment. Except as required under Section ------------------- 2.11, (a) each Borrowing and each payment or prepayment of principal of any Borrowing shall be allocated pro rata among the Lenders in accordance with their respective Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Term Loans), and (b) each payment of interest on the Term Loans shall be allocated pro-rata among the Lenders in accordance with the respective amounts of interest accrued on their Term Loans and not yet paid. SECTION 2.14. Sharing of Setoffs. Each Lender agrees that if it shall, ------------------- through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower, 22 or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) from the Borrower or its assets in respect of its Term Loan or Loans as a result of which the unpaid principal portion of its Term Loan or Loans shall be proportionately less than the unpaid principal portion of the Term Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Term Loan or Loans of such other Lender, so that the aggregate unpaid principal amount of the Term Loan or Loans and participations in the Term Loan or Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Term Loans then outstanding at the principal amount of its Term Loan or Loans prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Term Loans outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that, if any such purchase or purchases or adjustments shall - -------- ------- be made pursuant to this Section 2.14 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in any Term Loan or Loans deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Term Loan or Loans directly to the Borrower in the amount of such participation. SECTION 2.15. Payments. (a) The Borrower shall make each payment --------- (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder and under each other Loan Document not later than 11:00 a.m., Houston time, on the date when due in dollars to the Administrative Agent at its offices at 712 Main Street, Houston, Texas, in immediately available funds. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) 23 hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.16. Taxes. (a) Any and all payments by the Borrower hereunder ------ shall be made, in accordance with Section 2.15, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding --------- taxes, levies, imposts, deductions, charges and withholdings imposed on the Administrative Agent's or any Lender's (or any transferee's or assignee's, including a participation holder's (any such entity a "Transferee")) net income and franchise, capital or license taxes imposed on the Administrative Agent or any Lender (or Transferee) by the United States or any jurisdiction under the laws of which it is organized, domiciled, resident or doing business (other than doing business as a result of its participation in the transactions contemplated by the Loan Documents) or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lenders (or any Transferee) or the Administrative Agent, (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.16) such Lender (or Transferee) or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower (or the Administrative Agent, as applicable) shall make such deductions at the applicable rate and (iii) the Borrower (or the Administrative Agent, as applicable) shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, 24 this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower will indemnify each Lender (or Transferee) and the Administrative Agent for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.16) paid by such Lender (or Transferee) or the Administrative Agent, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant taxing authority or other Governmental Authority. Such indemnification shall be made within 30 days after the date any Lender (or Transferee) or the Administrative Agent, as the case may be, makes written demand therefor; provided, however, -------- ------- that the Borrower shall not have any obligation to indemnify the Administrative Agent or any Lender (or Transferee) for interest and penalties that are imposed on the Administrative Agent or such Lender (or Transferee) with respect to the period after the expiration of the Notice Period with respect to any Tax if such Administrative Agent or such Lender fails to give written notice to the Borrower within 45 days of its receipt of any written assertion by the relevant taxing authority or other Governmental Authority that such Tax is due with respect to the transactions contemplated by the Loan Documents (such 45 day period being the "Notice Period" referred to above). If a Lender (or Transferee) or the Administrative Agent shall become aware that it is entitled to receive a refund (or a credit against taxes not indemnifiable hereunder) in respect of Taxes or Other Taxes, it shall promptly notify the Borrower of the availability of such refund (or credit) and shall, within 30 days after receipt of a request by the Borrower, apply for such refund at the Borrower's expense. If any Lender (or Transferee) or the Administrative Agent receives a refund (or a credit against taxes not indemnifiable hereunder) in respect of any Taxes or Other Taxes for which such Lender (or Transferee) or the Administrative Agent has received payment from the Borrower hereunder it shall promptly notify the Borrower of such refund (or credit) and shall, within 30 days after receipt or a request by the Borrower (or promptly upon receipt, if the Borrower has requested application for such refund (or credit) pursuant thereto), repay such refund (or credit) to the Borrower, net of all out-of-pocket expenses (including taxes not indemnifiable hereunder, to the extent that no deduction or credit has previously been claimed and utilized 25 in connection therewith by such Lender) of such Lender but including interest received from a taxing authority or other Governmental Authority and fairly attributable to such refund; provided that the Borrower, upon the request of -------- such Lender (or Transferee) or the Administrative Agent, agrees to return such refund (plus penalties, interest or other charges) to such Lender (or Transferee) or the Administrative Agent in the event such Lender (or Transferee) or the Administrative Agent is required to repay such refund. Each of the Administrative Agent, each Lender and each Transferee, with respect to itself, agrees to indemnify and hold harmless the Borrower (and, in the case of each Lender and each Transferee, to indemnify and hold harmless the Administrative Agent) from any taxes, penalties, interest and other expenses, costs and losses incurred or payable by the Borrower (or the Administrative Agent, as applicable) as a result of the failure of the Borrower to comply with clauses (ii) and (iii) of Section 2.16(a) in reliance on any form or certificate provided to it by such person pursuant to Section 2.16(f). (d) Within 30 days after the date of any payment of Taxes or Other Taxes withheld by the Borrower in respect of any payment to any Lender (or Transferee) or the Administrative Agent, the Borrower will furnish to the Administrative Agent, at its address referred to in Section 9.01, the original of a certified copy of a receipt evidencing payment thereof or other customary evidence of such payment. (e) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.16 shall survive the payment in full of the principal of and interest on all Term Loans made hereunder. (f) On or prior to the Closing Date (in the case of any Lender and the Administrative Agent) and on or prior to the date any Transferee becomes a Transferee hereunder (in the case of any Transferee), and, upon written request of the Borrower or the Administrative Agent, on or prior to the immediately following due date of any payment by the Borrower hereunder, each Lender (or Transferee) which is organized outside the United States shall deliver to the Borrower such certificates, documents or other evidence, as required by the Code or Treasury Regulations issued pursuant thereto, including Internal Revenue Service Form 1001 or Form 4224 and any other certificate or statement of 26 exemption required by Treasury Regulation Section 1.1441-1(a) or Section 1.1441-6(c) or any subsequent version thereof, properly completed and duly executed by such Lender (or Transferee) establishing that such payment is (i) not subject to withholding under the Code because such payment is effectively connected with the conduct by such Lender (or Transferee) of a trade or business in the United States or (ii) totally exempt from United States tax under a provision of an applicable tax treaty. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder and in respect of the Term Loans are not subject to United States withholding tax the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender (or Transferee) organized under the laws of a jurisdiction outside the United States. (g) The Borrower shall not be required to pay any additional amounts to any Lender (or Transferee) in respect of United States withholding tax pursuant to paragraph (a) above except to the extent such United States withholding tax (a) results from (i) a change in applicable law, regulation or official interpretation thereof or (ii) an amendment, modification or revocation of any applicable tax treaty or a change in official position regarding the application or interpretation thereof, in each case after the Closing Date (and, in the case of a Transferee, after the date of assignment or transfer) or (b) in the case of a Transferee, is imposed at a rate that does not exceed the rate (determined at the time of transfer or assignment) of United States withholding tax with respect to which the Borrower was required to pay to such Transferee's transferor or assignor. SECTION 2.17. Assignment or Prepayment of Term Loans Under Certain ---------------------------------------------------- Circumstances. (a) Any Lender (or Transferee) claiming any additional amounts - -------------- payable pursuant to Section 2.10 or Section 2.16 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrower or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender (or Transferee). 27 (b) In the event that any Lender shall have delivered a notice or certificate pursuant to Section 2.10 or 2.11, or the Borrower shall be required to make additional payments to any Lender under Section 2.16, the Borrower shall have the right, at its own expense, upon notice to such Lender and the Administrative Agent, (a) to prepay the Term Loan or Loans of such Lender or (b) to require such Lender to transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 9.04) all its interests, rights and obligations under this Agreement to another financial institution acceptable to the Administrative Agent which shall assume such obligations; provided that (i) no such prepayment or assignment shall conflict -------- with any law, rule or regulation or order of any Governmental Authority and (ii) the Borrower or the assignee, as the case may be, shall pay to the affected Lender in immediately available funds on the date of such prepayment or assignment the principal of and interest accrued to the date of payment on the Term Loan or Loans made by it hereunder and all other amounts accrued for its account or owed to it hereunder. ARTICLE III. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to each of the Lenders that: (a) The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Borrower possesses all corporate powers and all other authorizations and licenses necessary to engage in its business and operations as now conducted, the failure to obtain or maintain which would result in a Material Adverse Effect. (b) The execution, delivery and performance by the Borrower of this Agreement are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower's certificate of incorporation or by-laws of (ii) any law or contractual restriction binding on or affecting the Borrower. (c) There is no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority (including, without limitation, 28 the ICC) required for the due execution, delivery and performance by the Borrower of this Agreement which has not been obtained or made, as the case may be. (d) This Agreement is the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally or by the applicability of equitable principles. (e) The consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at December 31, 1993, and as at June 30, 1994, and the related consolidated statements of income and cash flows for the fiscal year then ended, copies of which have been furnished to each Lender, fairly present the consolidated financial condition of the Borrower and such Subsidiaries as at such date and the results of their operations for the period ended on such date, all in accordance with GAAP consistently applied, and since December 31, 1993, there has been no material adverse change in such condition or operations. (f) There is no pending or threatened action or proceeding against or involving the Borrower before any Governmental Authority or arbitrator which has a reasonable probability (taking into account the exhaustion of all appeals) of resulting in a Material Adverse Effect. (g) The Borrower has duly paid and discharged all taxes, assessments and governmental charges upon it or against its properties now due and payable, the failure to pay which would result in a Material Adverse Effect unless and to the extent only that the same are being contested in good faith and by appropriate proceedings by the Borrower. (h) The Borrower has good title to its properties and assets except for (i) existing or future liens, security interests, mortgages, conditional sales arrangements and other encumbrances (including, without limitation, reversionary title interests) either securing Debt or other liabilities of the Borrower or any of its Subsidiaries or which the Borrower in its reasonable business judgment determines would not be 29 reasonably expected to materially interfere with the railroad business or railroad operations of the Borrower and its Subsidiaries as conducted from time to time and (ii) irregularities therein which do not materially interfere with the business or operations of the Borrower and its Subsidiaries as conducted from time to time. (i) No Termination Event has occurred or is reasonably expected to occur with respect to any Plan which, with the giving of notice or lapse of time, or both, would constitute an Event of Default under paragraph (g) of Article VII. (j) The statement of assets and liabilities of each Plan covered by the report of Coopers & Lybrand referred to below as of December 31, 1993, and the statements of changes in fund balance and in financial position, or the statement of changes in net assets available for plan benefits, for the plan year then ended, reported on by Coopers & Lybrand, copies of which have been furnished to the Administrative Agent, fairly present the financial condition of such Plan as at such date and the results of operations of such Plan for the plan year ended on such date. (k) Neither the Borrower nor any ERISA Affiliate has incurred, or is reasonably expected to incur, any Withdrawal Liability to any Multiemployer Plan which, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liability (as of the date of determination), exceeds $50,000,000. (l) Neither the Borrower nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated within the meaning of Title IV of ERISA, the effect of which reorganization or termination would be the occurrence of an Event of Default under paragraph (i) of Article VII. (m) Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending 30 credit for the purpose of purchasing or carrying Margin Stock. No part of the proceeds of any Term Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose which entails a violation of, or which is inconsistent with, the provisions of the Regulations of the Board, including Regulation G, U or X. (n) Neither the Borrower nor any Subsidiary is (i) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (ii) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. (o) The Borrower will use the proceeds of the Term Loans only for the purpose specified in the preamble to this Agreement. (p) Neither the Borrower nor any of its Subsidiaries is, to the best of its knowledge, in violation of any law or statute, or in default with respect to any judgment, writ, injunction, decree, rule or regulation of any court or governmental agency or instrumentality, where such violation or default would result in a Material Adverse Effect. (q) On the Closing Date, there has been no material adverse change in or affecting the business, assets, liabilities or operations of the Borrower or in the condition (financial or otherwise) or prospects of the Borrower from those shown in the information furnished to the Lenders prior to the date hereof. (r) To the best knowledge of the Borrower, on the Closing Date all insurable properties of the Borrower and each Subsidiary are adequately insured as part of an insurance program including risk retention and self insurance by financially sound and reputable insurers to such extent and against such risks and liabilities (including liability under Federal, state, local and other statutes and regulations relating to the environment or to employee health and safety) as is customary with companies similarly situated and in the same or similar businesses. 31 ARTICLE IV. CONDITIONS OF LENDING The obligations of the Lenders to make term Loans hereunder are subject to the satisfaction of the following conditions: (a) The Agent shall have received the favorable written opinion of Francis T. Kelly, Esq., counsel for the Borrower, dated the date hereof and addressed to the Agent and the Lenders, to the effect set forth in Exhibit C hereto, and the Borrower hereby instructs such counsel to deliver such opinion to the Agent. (b) The Agent shall have received a favorable written opinion of Douglas J. Babb, Vice President and General Counsel of the borrower, as to certain ICC regulatory matters, dated the date hereof and addressed to the Agent and the Lenders, to the effect set forth in Exhibit D hereto, and the Borrower hereby instructs such counsel to deliver such opinion to the Agent. (c) All legal matters incident to this Agreement and the borrowings hereunder shall be satisfactory to the Lenders and their counsel and to Cravath, Swaine & Moore, counsel for the Agent. (d) The Agent shall have received (i) a copy of the certificate or articles of incorporation, including all amendments thereto, of the Borrower, certified as of a date shortly before the date hereof by the Secretary of State of the state of its organization, and a certificate as to the good standing of the Borrower as of a date shortly before the date hereof, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of the Borrower dated the date hereof and certifying (A) that attached thereto is a true and complete copy of the by-laws of the Borrower as in effect on the date hereof and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of the Borrower authorizing the execution, delivery and performance of the Loan Documents and the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate or articles of incorporation of the Borrower have not been amended since the date of the 32 last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of the Borrower; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above; and (iv) such other documents as the Lenders or their counsel or Cravath, Swaine & Moore, counsel for the Agent, may reasonably request. (e) The Agent shall have received a certificate, dated the date hereof and signed by the treasurer or the chief financial officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (f) and (g) of this Article IV. (f) The representations and warranties set forth in Article III hereof shall be true and correct in all material respects on and as of the Funding Date, except to the extent such representations and warranties expressly relate to an earlier date. (g) The Borrower shall be in compliance with all the terms and provisions set forth herein and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after such Borrowing no Event of Default or Default shall have occurred and be continuing. ARTICLE V. AFFIRMATIVE COVENANTS The Borrower covenants and agrees with each Lender and the Agent that, so long as this Agreement shall remain in effect or the principal of or interest on any Term Loan, any Fees or any other expenses or amounts payable under any Loan Document shall be unpaid, unless the Required Lenders shall otherwise consent in writing, the Borrower will: SECTION 5.01. Existence; Businesses and Properties. (a) Preserve and ------------------------------------- maintain its corporate existence, rights (charter and statute) and material franchises, except as otherwise permitted by Sections 6.03 and 6.04. 33 (b) Comply in all material respects with all applicable laws, rules, regulations and orders (including, without limitation, laws requiring payment of all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent contested in good faith by appropriate proceedings) except where the failure to so comply would not have a Material Adverse Effect. (c) Maintain and preserve all of its properties which are used in the conduct of its business in good working order and condition, ordinary wear and tear excepted, to the extent that any failure to do so would have a Material Adverse Effect and except for dispositions thereof permitted by Section 6.02; SECTION 5.02. Insurance. Maintain insurance with responsible and ---------- reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties as the Borrower. SECTION 5.03. Reporting Requirements. Furnish to the Agent and each ----------------------- Lender: (a) within 60 days after the close of each of the first three quarters of each of the Borrower's fiscal years, a copy of the quarterly report on Form 10-Q containing the consolidated statement of income of the Borrower and its consolidated Subsidiaries for the period from the beginning of such fiscal year to the end of such quarter and the related consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such period, each certified by the chief financial officer of the Borrower and accompanied by a certificate of such officer stating (i) that such statement of income and such balance sheet has been prepared in accordance with GAAP, (ii) whether or not he or she has knowledge of the occurrence of any Event of Default or Default which is continuing hereunder and, if so, stating in reasonable detail the facts with respect thereto and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 5.04, 6.01 and 6.02; (b) within 120 days after the close of each of the Borrower's fiscal years, a copy of the annual report on 34 Form 10-K of the Borrower and its consolidated Subsidiaries, including the opinion of independent certified public accountants of internationally recognized standing, together with financial statements consisting of the consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of income, retained earnings and cash flows of the Borrower and its consolidated Subsidiaries for the year then ended and accompanied by an opinion signed by said accountants stating that (i) such financial statements have been prepared in accordance with GAAP and (ii) in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Event of Default or default which is continuing hereunder; (c) within 120 days after the close of each of the Borrower's fiscal years, a certificate of the chief financial officer of the Borrower stating (i) whether or not he or she has knowledge of the occurrence of any Event of Default or Default which is continuing hereunder and, if so, stating in reasonable detail the facts with respect thereto, and (ii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 5.04, 6.01 and 6.02; (d) promptly upon their becoming available, all reports on Form 10-K, 10-Q or 8-K, or any successor form, and all proxy statements that the Borrower or the Parent shall file with the Securities and Exchange Commission or any national securities exchange; (e) promptly in writing, notice of all litigation and of all proceedings before any governmental or regulatory agencies affecting the Borrower or any Subsidiary, except any litigation or proceeding which is not likely to have any Material Adverse Effect; (f) within three Business Days after a Responsible Officer of the Borrower obtains knowledge of the occurrence of any Event of Default or Default which is continuing, notice of such occurrence together with a detailed statement by a Responsible Officer of the Borrower of the steps being taken by the Borrower or 35 the appropriate Subsidiary to cure the effect of such event; (g) as soon as practicable and in any event (i) within 30 days after the Borrower or any ERISA Affiliate knows or has reason to know that any Termination Event described in clause (i) of the definition of Termination Event with respect to any Plan has occurred and (ii) within 10 days after the Borrower or any ERISA Affiliate knows or has reason to know that any other Termination Event with respect to any Plan has occurred, a statement of the treasurer or the chief financial officer of the Borrower describing such Termination Event and the action, if any, which the Borrower or such ERISA Affiliate proposes to take with respect thereto; (h) promptly and in any event within two Business Days after receipt thereof by the Borrower or any ERISA Affiliate, copies of each notice received by the Borrower or any ERISA Affiliate from the PBGC stating its intention to terminate any Plan or to have a trustee appointed to administer any Plan; (i) promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan; (j) promptly and in any event within five Business Days after receipt thereof by the Borrower or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each notice received by the Borrower or any ERISA Affiliate concerning (i) the imposition of Withdrawal Liability by a Multiemployer Plan, (ii) the determination that a Multiemployer Plan is, or is expected to be, in reorganization within the meaning of Title IV of ERISA, (iii) the termination of a Multiemployer Plan within the meaning of Title IV of ERISA, or (iv) the amount of liability incurred, or expected to be incurred, by the Borrower or any ERISA Affiliate in connection with any event described in clause (i), (ii) or (iii) above; (k) within 10 days after the due date for filing with the PBGC pursuant to Section 412(n) of the Code of a notice of failure to make a required installment or 36 other payment with respect to a Plan, a statement of the treasurer or the chief financial officer setting forth details as to such failure and the action proposed to be taken with respect thereto, together with a copy of such notice given to the PBGC; and (1) as soon as practicable but in any event within 60 days of any notice of request therefor, such other information respecting the financial condition and results of operations of the Borrower as the Agent, or a Lender through the Agent, may from time to time reasonably request. Each balance sheet and other financial statement furnished pursuant to paragraphs (a) and (b) of this Section 5.03 shall contain comparative information which conforms to the presentation required in Form 10-Q and 10-K, as appropriate, under the Securities Exchange Act of 1934, as amended. SECTION 5.04. Consolidated Tangible Net Worth. Maintain Consolidated -------------------------------- Tangible Net Worth of not less than $1,700,000,000. SECTION 5.05. Taxes. Pay and discharge promptly all material taxes, ------ assessments and governmental charges or levies, levied or assessed upon it or upon its upon its income or profits or in respect of its property, before the same shall become delinquent or in default; provided, however, that such payment -------- ------- and discharge shall not be required with respect to any such tax, assessment, charge or levy so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings. ARTICLE VI. NEGATIVE COVENANTS The Borrower covenants and agrees with each Lender and the Agent that, so long as this Agreement shall remain in effect or the principal of or interest on any Term Loan, any Fees or any other expenses or amounts payable under any Loan Document shall be unpaid, unless the Required Lenders shall otherwise consent in writing, the Borrower will not: SECTION 6.01. Debt. Create or suffer to exist, or permit its ----- Subsidiaries to create or suffer to exist, any Debt if, immediately after giving effect to such Debt and the receipt and application of any proceeds thereof, the sum of the aggregate amount of Debt of the Borrower and its 37 consolidated Subsidiaries on a consolidated basis would exceed 140% of Consolidated Tangible Net Worth. Notwithstanding anything contained in the foregoing to the contrary, consolidated Debt of the Borrower and its consolidated Subsidiaries, taken as a whole, shall not exceed at any time $3,000,000,000. SECTION 6.02. Sale, etc., of Assets. Sell, lease, dispose of, distribute ---------------------- or otherwise transfer, whether in a single transaction or a series of transactions (collectively, a "Transfer"), all or any part of the property of the Borrower, provided that the Borrower may Transfer: -------- (a) properties (other than properties Transferred pursuant to any other clause of this Section 6.02) having an aggregate net book value for all such Transfers (determined with respect to each such property based on the net book value reflected on the most recent consolidated balance sheet of the Borrower delivered pursuant to Section 5.03 prior to the Transfer thereof, in each case determined without regard to any writedown in such net book value subsequent to the date hereof) not in excess of 10% of the total book value of the assets of the Borrower and its consolidated Subsidiaries (as reflected on the most recent consolidated balance sheet of the Borrower delivered pursuant to Section 5.03) less the excess of the net book value of all assets transferred since the date of such balance sheet over the amount of cash and the fair market value of all other consideration received in exchange therefor; (b) properties to any person, provided that the Borrower or any of its -------- Subsidiaries or the Borrower and any of its Subsidiaries has the power, direct or indirect, (i) to vote more than 50% of the securities or interests having ordinary voting power for the election of directors or comparable governing persons of such person or (ii) to direct or cause the direction of the management and policies of such person (whether by contract or otherwise); (c) properties abandoned or retired from use in the ordinary course of business; (d) properties usable by the Borrower in the operation of its business as a railroad company 38 including, without limitation, the Transfer of accounts receivable, provided that the Borrower Transfers such property in arms-length -------- transactions in exchange for property or cash of substantially equivalent fair market value usable by the Borrower in the operation of its business as a railroad company, and provided further that the amount of property ---------------- constituting the excess, if any, of (i) the fair market value of the property Transferred by the Borrower over (ii) the fair market value of property received by the Borrower in exchange therefor (in each case, determined as of the date of such Transfer) may be transferred pursuant to clause (a) above on and subject to the terms and conditions of such clause (a); and (e) property constituting Margin Stock. SECTION 6.03. Mergers, etc. Merge or consolidate with any person, or ------------- permit any of its Subsidiaries to merge or consolidate with any person, except that (a) any Subsidiary may merge or consolidate with any other Subsidiary or may merge or liquidate into the Borrower (if the Borrower shall be the continuing or surviving corporation), (b) the Borrower or any Subsidiary may merge or consolidate with any other corporation if (i) (A) the surviving corporation shall be the Borrower or a Subsidiary of (B) the surviving corporation, if not the Borrower or a Subsidiary, shall be a corporation organized and existing under the laws of the United States or any state thereof or the District of Columbia and shall expressly assume by a written assignment executed and delivered to the Administrative Agent, in form and substance satisfactory to the Administrative Agent, all of the rights and obligations of the Borrower under this Agreement, and (ii) after giving effect to such merger or consolidation no Event of Default or Default shall have occurred and be continuing and (c) the Borrower and any Subsidiary may merge or consolidate as required by a valid order of the ICC. SECTION 6.04. Liens. Create or (in the case of clause (b) or (d) below) ------ suffer to exist, or permit its Subsidiaries to create or (in the case of clause (b) or (d) below) suffer to exist, any Lien securing (a) Debt of the Borrower or any of its consolidated Subsidiaries, (b) taxes imposed upon the Borrower or any of its consolidated Subsidiaries, (c) reimbursement obligations of the Borrower or any of its consolidated Subsidiaries in respect of letters of credit of (d) liabilities of the Borrower or any 39 of its consolidated Subsidiaries asserted in any legal or other proceeding arising under the Comprehensive Environmental, Response, Compensation and Liability Act of 1980, as amended from time to time, or other similar Federal or state laws, regulations or decrees relating to environmental protection or the release of any hazardous or toxic materials into the environment, in each case, upon or with respect to all or a portion of the cash or accounts receivable of the Borrower or any of its consolidated Subsidiaries arising from income from railroad operations generated in the ordinary course of business (and excluding in any event cash and accounts receivable constituting the proceeds of the sale or other disposition of property), except, in each case for Liens (A) in respect ------ of taxes, the nonpayment of which would not constitute a default under Section 5.01(b), (B) arising by operation of law in the ordinary course of business, (C) on cash or other property in any bank's possession arising either in the ordinary course of business and securing daylight overdrafts and other Debt incurred in favor of such bank in the ordinary course of the cash management program of the Borrower and its Subsidiaries, or by operation of law, or contractually in the ordinary course of establishing and/or maintaining deposit and other accounts, letters of credit and other banking services (other than the incurrence of indebtedness for borrowed money), (D) on cash or other property in any Lender's possession securing (or entitling any Lender to set off against) amounts owing to any Lender pursuant to this Agreement, (E) securing lessees' obligations under leases referred to in clause (ii) of the definition of Debt, and (F) Liens in respect of any liability referred to in clause (d) above which liability does not have a reasonable probability (taking into account the exhaustion of all corrective and other appropriate procedures and proceedings and/or all appeals)of having a Material Adverse Effect; provided, however, that -------- ------- this Section 6.04 shall not restrict the creation or existence of (1) Existing Liens and Liens under Existing Mortgages and (2) Liens securing Debt outstanding from time to time under the Mortgage Indenture. SECTION 6.05. Sales of Accounts Receivable. Sell any accounts ----------------------------- receivable other than pursuant to the Borrower's receivables sale facilities and any extensions, renewals or replacements of any thereof, provided that the -------- aggregate amount of accounts receivable sold pursuant to this Section 6.05 shall in no event exceed $300,000,000. 40 ARTICLE VII. EVENTS OF DEFAULT In case of the happening (and during the continuance) of any of the following events ("Events of Default"): (a) The Borrower shall (i) fail to pay any principal of any Term Loan or (ii) fail to pay any interest on any Term Loan or any other amount payable hereunder or pursuant hereto, in each case referred to in this clause (ii) within two Business Days after the same shall be due; (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in connection with this Agreement shall prove to have been incorrect in any material respect when made or deemed made; (c) The Borrower shall (i) fail to perform or observe any term, covenant or agreement contained in Sections 5.04, 6.01, 6.02 or 6.03 of this Agreement or (ii) fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure referred to in this clause (ii) shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent or by any Lender with a copy to the Administrative Agent; (d) The Borrower or any Subsidiary shall (i) fail to pay any Debt (excluding Debt hereunder) of the Borrower or any Subsidiary (as the case may be) in an aggregate principal amount of $50,000,000 or more, or any installment of principal thereof or interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; (ii) default under any agreement or instrument relating to any Debt (excluding Debt hereunder) in an aggregate principal amount of $25,000,00 or more, or any other event shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate the maturity of such Debt; or 41 (iii) default under any agreement or instrument relating to any Debt (excluding Debt hereunder) in an aggregate principal amount of $101,000,000 or more, or any other event shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to permit the acceleration of the maturity of such Debt, provided that, notwithstanding any provision -------- contained in this paragraph (d) to the contrary, to the extent that pursuant to the terms of any agreement or instrument relating to any Debt referred to in this paragraph (d), any sale, pledge or disposal of Margin Stock, or utilization of the proceeds thereof would result in a breach of any covenant contained therein or otherwise give rise to a default or event of default thereunder and/or acceleration of the maturity of the Debt extended pursuant thereto and as a result of such terms or of such sale, pledge, disposal, utilization, breach, default, event of default or acceleration, or the provisions hereof relating thereto, this Agreement or any Term Loan hereunder would otherwise be subject to the margin requirements or any other restriction under Regulation U, then such breach, default, event of default or acceleration shall not constitute a Default or Event of Default under this paragraph (d); (e) (i) The Borrower or any Subsidiary shall (A) generally not pay its debts as such debts become due; or (B) admit in writing its inability to pay its debts generally; or (C) make a general assignment for the benefit of creditors; (ii) any proceeding shall be instituted or consented to by the Borrower or any Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; (iii) any such proceeding shall have been instituted against the Borrower or any Subsidiary and either (A) such relief shall have been granted or (B) such proceeding shall have been pending undismissed for a period of 60 consecutive days; or (iv) the Borrower or any Subsidiary shall take any 42 corporate action to authorize any of the actions set forth above in this paragraph (e); (f) (i) One or more final and non-appealable judgments or orders for the payment of money in excess of $50,000,000 in the aggregate shall be rendered against the Borrower and/or one or more Subsidiaries and enforcement proceedings shall have been commenced by creditors upon such judgments or orders; or (ii) one or more judgments or orders for the payment of money in excess of $100,000,000 shall be rendered against the Borrower and/or one or more Subsidiaries and either (x) enforcement proceedings shall have been commenced by creditors upon such judgments or orders or (y) there shall be any period of 20 consecutive days during which a stay of enforcement of such judgments or orders, by reason of a pending appeal or otherwise, shall not be in effect; (g) Any Termination Event with respect to a Material Plan shall have occurred and, 30 days after notice thereof shall have been given to the Borrower by the Administrative Agent, (i) such Termination Event shall still exist and (ii) the sum (determined as of the date of occurrence of such Termination Event) of the Insufficiency of such Plan and the Insufficiency of any and all other Plans with respect to which a Termination Event shall have occurred and then exist (or in the case of a Plan with respect to which a Termination Event described in clause (ii) of the definition of Termination Event shall have occurred and then exist, the liability related thereto), in each case in respect of which the Borrower or any ERISA Affiliate has liability, is equal to or greater than $50,000,000; (h) The Borrower or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date of such notification), exceeds $50,000,000; (i) The Borrower or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization 43 or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Borrower and its ERISA Affiliates to all Multiemployer Plans which are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the respective plan years which include the date hereof by an amount exceeding $50,000,000; or (j) There shall have occurred a Change in Control: then, and in any such event, the Administrative Agent shall, at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, (i) declare the Commitment of each Lender to make Term Loans to be terminated, whereupon the same shall forthwith terminate, and (ii) declare the Term Loans, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Term Loans, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that if an Event of Default under -------- ------- paragraph (e) of this Article VII (except under clause (i)(A) thereof) shall occur, (A) the Commitment of each Lender to make Term Loans shall automatically be terminated and (B) the Term Loans, all interest thereon and all other amounts payable under this Agreement shall automatically become and be forthwith due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VIII. THE AGENT In order to expedite the transactions contemplated by this Agreement, Texas Commerce Bank National Association is hereby appointed to act as Administrative Agent on behalf of the Lenders. Each of the Lenders hereby irrevocably authorizes the Agent to take such actions on behalf of such Lender and to exercise such powers as are specifically delegated to the Agent by the terms and provisions hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the 44 Lenders, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Term Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrower of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by the Borrower pursuant to this Agreement as received by the Administrative Agent. Neither the Agent nor any of its directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its, his or her own gross negligence or wilful misconduct, or be responsible for any warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Borrower of any of the terms, conditions, covenants or agreements contained in any Loan Document other than those expressly provided for herein. The Agent shall not be responsible to the Lenders for the due execution, genuineness, validity, enforceability or effectiveness (other than against the Agent) of this Agreement or any other Loan Documents or other instruments or agreements. The Agent shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders. The Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Agent nor any of its directors, officers, employees or agents shall have any responsibility to the Borrower on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender on account of the failure of or delay in performance or breach by any other Lender or Borrower of any of their respective obligations hereunder or under any other Loan Document or in connection herewith or therewith. The Agent may execute any and all duties hereunder by or through agents or employees 45 and shall be entitled to rely upon the advice of legal counsel reasonably selected by them with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a bank with an office in the United States, having a combined capital and surplus of at least $50,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. After the Agent's resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. With respect to the Term Loans made by it hereunder, the Agent in its individual capacity and not as Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not the Agent, and the Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Agent. Each lender agrees (i) to reimburse the Agent, on demand, in the amount of its pro rata share (based on its Commitment hereunder) of any reasonable expenses incurred for the benefit of the Lenders by the Agent, including counsel fees and compensation of agents and employees paid 46 for services rendered on behalf of the Lenders, which shall not have been reimbursed by the Borrower and (ii) to indemnify and hold harmless the Agent and any of its directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against it in its capacity as the Agent or any of them in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by it or any of them under this Agreement or any other Loan Document, to the extent the same shall not have been reimbursed by the Borrower; provided that no Lender shall be liable to the Agent -------- for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or wilful misconduct of the Agent or any of its directors, officers, employees or agents. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents, and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX. MISCELLANEOUS SECTION 9.01. Notices. Notices and other communications provided for -------- herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telecopy by the sending party, as follows: (a) if to the Borrower, to it at 3200 Continental Plaza, 777 Main Street, Fort Worth, Texas 76102, Attention of Treasurer (Telecopy No. 817-333-7484); (b) if to the Administrative Agent, to it at 1111 Fannin Street, 9th Floor MS46, Houston, Texas 77002, 47 Attention of Loan Syndication Services (Telecopy No. 713-750-3810); with a copy to Texas Commerce Bank National Association, 201 Main Street, 3rd Floor, Fort Worth, Texas 76102, Attention of Corporate Banking (Telecopy No. 817-878-7591); (c) if to a Lender, to it at its address (or telecopy number) set forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy, or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 9.01 or in accordance with the latest unrevoked direction from such party given in accordance with the latest unrevoked direction from such party given in accordance with this Section 9.01. SECTION 9.02. Survival of Agreement. All covenants, agreements, ---------------------- representations and warranties made by the Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Term Loans regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Term Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid and so long as the Commitments have not been terminated. SECTION 9.03. Binding Effect. This Agreement shall become effective when --------------- it shall have been executed by the Borrower and the Administrative Agent and when the Administrative Agent shall have received copies hereof which, when taken together, bear the signatures of each Lender, and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior consent of all the Lenders. 48 SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement ----------------------- any of the parties hereto is referred to, such reference shall be deemed to include the successors and permitted assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and permitted assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of the Term Loan or Loans at the time owing to it); provided, however, -------- ------- that (i) except in the case of an assignment to a Lender or an Affiliate of such Lender, the Borrower and the Administrative Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld, taking into account such factors as the financial responsibility and reputation of a proposed assignee), (ii) the amount of the Term Loan or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $10,000,000 (and integral multiples of $1,000,000) or, if less, the entire amount of the assigning Lender's Term Loan or Loans, (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, and the assigning Lender shall deliver together therewith a processing and recordation fee of $2,500 and (iv) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent and Administrative Questionnaire. Upon acceptance and recording pursuant to paragraph (e) of this Section 9.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto (but shall continue to be entitled to the benefits of Sections 2.10, 2.12, 2.16 and 9.05, as well as to any Fees 49 accrued for its account hereunder and not yet paid)) and (C) Schedule 2.01 shall be deemed amended to give affect to such assignment. The Interest Rate Margin applicable to any assigned portion of a Term Loan shall at all times equal the Interest Rate Margin applicable to such Term Loan on the Closing Date. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that the amount of its Term Loan without giving effect to assignments thereof which have not become effective, is as set forth in such Assignment and Acceptance; (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or any other any instrument or document furnished pursuant hereto, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto or the financial condition of the Borrower or any Subsidiary or the performance or observance by the Borrower or any Subsidiary of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.03 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it 50 will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at one of its offices in The City of Houston a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the principal amount of the Term Loan or Loans owing to each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of demonstrable error and the Borrower, the Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and, if required, the written consent of the Borrower and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders. (f) Each Lender may without the consent of the Borrower or the Agent sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of the Term Loan or Loans owing to it); provided, however, that (i) such -------- ------- Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.10, 2.12 and 2.16 to the same extent as if they were Lenders and (iv) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such lender shall retain the sole right to enforce the obligations of the Borrower relating to the 51 Term Loans and to approve any amendment, modification or waiver or any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Term Loans, or extending any scheduled principal payment date or date fixed for the payment of interest on the Term Loans). (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of -------- information designated by the Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information. (h) Any Lender may at any time assign all or any portion of its rights under this Agreement to a Federal Reserve Bank; provided that no such assignment -------- shall release a Lender from any of its obligations hereunder. In order to facilitate such an assignment to a Federal Reserve Bank, the Borrower shall, to the extent permissible without registration under applicable regulations of the ICC, at the request of the assigning Lender, duly execute and deliver to the assigning Lender a promissory note or notes evidencing the Term Loan or Loans made to the Borrower by the assigning Lender hereunder. (i) The Borrower shall not assign or delegate any of its rights or duties hereunder without the prior written consent of the Lenders. SECTION 9.05. Expenses; Indemnity. (a) The Borrower agrees to pay all -------------------- out-of-pocket expenses incurred by the Agent in connection with the preparation of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby contemplated shall be consummated) or incurred by the Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement and the other Loan Document or in connection with the Term Loans made hereunder, including the reasonable fees, charges 52 and disbursements of Cravath, Swaine & Moore, counsel for the Agent, and, in connection with any such amendment, modification or waiver or any such enforcement or protection, the reasonable fees, charges and disbursements of any other counsel for the Agent or any Lender. The Borrower further agrees that it shall indemnify the Lenders from and hold them harmless against any documentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Agreement or any of the other Loan Documents. (b) The Borrower agrees to indemnify the Agent, each Lender and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the transactions contemplated thereby, (ii) the use of the proceeds of the Term Loans or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing to which such Indemnitee reasonably believes that it may become a party, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be -------- available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) The provisions of this Section 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Term Loans, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Agent or any Lender. All amounts due under this Section 9.05 shall be payable on written demand therefor. SECTION 9.06. Right of Setoff. If an Event of Default shall have ---------------- occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to 53 the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement and other Loan Documents held by such lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such setoff and application made by such lender, provided that the -------- failure to give such notice shall not affect the validity of such setoff and application. The rights of each lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.07. APPLICABLE LAW. THIS AGREEMENT AND THE OTHER LOAN --------------- DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the Agent ------------------- or any lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders; provided, however, that -------- ------- no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal 54 payment date or date for the payment of any interest on, any Term Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Term Loan, without the prior written consent of each Lender affected thereby, or (ii) amend or modify the provisions of Section 2.13, the provisions of this Section, any provision of this agreement which by its terms requires the consent or approval of all Lenders or the definition of "Required Lenders", without the prior written consent of each Lender; provided further that no such ---------------- agreement shall amend, modify or otherwise affect the rights or duties of the Agent hereunder without the prior written consent of the Agent. SECTION 9.09. Interest Rate Limitation. Notwithstanding anything herein ------------------------- to the contrary, if at any time the applicable interest rate, together with all fees and charges which are treated as interest under applicable law (collectively the "Charges"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken or reserved by any Lender, shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by such Lender in accordance with applicable law, the rate of interest payable on the Term Loan or Loans of such Lender, together with all Charges payable to such Lender, shall be limited to the Maximum Rate. SECTION 9.10. Entire Agreement. This Agreement and the other Loan ----------------- Documents constitute the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. SECTION 9.11. Severability. In the event any one or more of the ------------- provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of 55 which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 9.12. Counterparts. This Agreement may be executed in two or ------------- more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 9.03. SECTION 9.13. Headings. Article and Section headings and the Table of --------- Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 9.14. Jurisdiction; Consent to Service of Process. (a) The -------------------------------------------- Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Borrower or its properties in the courts of any jurisdiction. (b) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this agreement or the other Loan Documents in any New York State or Federal court sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted 56 by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. IN WITNESS WHEREOF, the Borrower, the Lenders, and the Administrative Agent have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. BURLINGTON NORTHERN RAILROAD COMPANY, by /s/ ROBERT F. MCKENNEY ---------------------------------- Name: Robert F. McKenney Title: Senior Vice President and Treasurer TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually and as Administrative Agent, by /s/ B. B. WUTHRICH ---------------------------------- Name: B. B. Wuthrich Title: Vice President 57 THE BANK OF TOKYO, LTD., Dallas Agency by /s/ J. BECKWITH ----------------------------------- Name: J. Beckwith Title: Vice President THE DAI-ICHI KANGYO BANK, LIMITED, Los Angeles Agency, by /s/ TOMOHIRO NOZAKI ----------------------------------- Name: Tomohiro Nozaki Title: Senior Vice President and Joint General Manager MELLON BANK, N.A., by /s/ PAUL A. BRIGGS ----------------------------------- Name: Paul A. Briggs Title: Senior Vice President THE SANWA BANK, LIMITED, by /s/ BLAKE WRIGHT ----------------------------------- Name: Blake Wright Title: Assistant Vice President SOCIETE GENERALE, Southwest Agency, by /s/ CHRISTOPHER J. SPELTZ ----------------------------------- Name: Christopher J. Speltz Title: Vice President EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BURLINGTON NORTHERN RAILROAD'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1994 DEC-31-1994 27 0 722 20 100 1013 9603 3755 7088 1378 719 1191 0 0 1792 7088 0 4995 0 4164 0 0 79 769 300 469 0 0 (10) 459 0 0
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