SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 22, 1995
BURLINGTON NORTHERN SANTA FE CORPORATION
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-11535 41-1804964
- ------------------------------ ------------ -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3800 Continental Plaza
777 Main Street
Fort Worth, Texas 76102-5384
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 817-333-2000
-------------------
Not Applicable
----------------------------------------------------------------------
(Former name or former address, if changed since last report)
Item 2. Acquisition or Disposition of Assets
------------------------------------
On September 22, 1995, Burlington Northern Inc. ("BNI") and Santa Fe Pacific
Corporation ("SFP") consummated a business combination (the "Merger") pursuant
to which each became a direct or indirect wholly owned subsidiary of a
new publicly-held company, Burlington Northern Santa Fe Corporation ("BNSF").
The Merger was effected pursuant to an Agreement and Plan of Merger between BNI
and SFP dated as of June 29, 1994, as amended (the "Merger Agreement").
In the Merger, (i) each share of BNI common stock, no par value, outstanding as
of the effective time of the Merger (other than shares held by BNI as treasury
stock or held by SFP or its subsidiaries) was converted into the right to
receive one share of BNSF common stock, $.01 par value, (ii) each share of BNI 6
1/4% Cumulative Convertible Preferred Stock, Series A, no par value, outstanding
as of the effective time of the Merger was converted into the right to receive
one share of BNSF 6 1/4% Cumulative Convertible Preferred Stock, Series A, and
(iii) each share of SFP common stock, $1.00 par value, outstanding as of the
effective time of the Merger (other than shares held by SFP as treasury stock or
held by BNI or its subsidiaries) was converted into the right to receive
0.41143945 shares of BNSF common stock. Fractional shares of BNSF common stock
will not be issued in connection with the Merger. Any holder of SFP common
stock otherwise entitled to a fractional share of BNSF common stock will receive
a cash payment representing such holder's proportionate interest in the net
proceeds from the sale on behalf of all holders of the aggregate fractional
shares of BNSF common stock which would otherwise have been issued. The common
and preferred stock of BNSF is traded on the New York Stock Exchange,
Chicago Stock Exchange, and Pacific Stock Exchange under the symbols "BNI" and
"BNI-P", respectively. The common and preferred stock of BNI and the common
stock of SFP are no longer publicly traded.
The businesses of BNSF initially consist of the businesses conducted by BNI and
SFP and their respective subsidiaries immediately prior to the consummation of
the Merger. In this regard, BNSF intends to continue to devote the assets
associated with these businesses to generally the same purposes as these assets
were employed prior to the consummation of the Merger.
The Merger was approved by the stockholders of BNI and SFP at special meetings
held on February 7, 1995, and was approved by the Interstate Commerce Commission
on August 23, 1995 (effective September 22, 1995).
This filing on Form 8-K is made by BNSF. Copies of the Merger Agreement and the
press releases announcing consummation of the Merger, the composition of the
BNSF Board of Directors, and the composition of BNSF senior management are
attached as Exhibits and are incorporated by reference herein. Contemporaneously
with the filing of this Current Report on Form 8-K, BNI and SFP are filing
Current Reports on Form 8-K relating to the consummation of the Merger.
2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
------------------------------------------------------------------
A. Financial Statements
--------------------
1. Consolidated financial statements for Burlington Northern Inc. and
Subsidiaries. Unaudited financial statements for the quarters and
six-month periods ended June 30, 1995 and 1994. Audited 1994
financial statements.
2. Consolidated financial statements for Santa Fe Pacific Corporation
and Subsidiaries. Unaudited financial statements for the quarters
and six-month periods ended June 30, 1995 and 1994. Audited 1994
financial statements.
B. Pro Forma Financial Information
-------------------------------
In connection with the Merger described in Item 2 of this Form 8-K, BNSF
will file required pro forma financial statements. Because it is
impracticable to file such required pro forma financial statements at this
time, BNSF will file them as soon as practicable but not later than 60 days
after the date of filing of this Form 8-K with the Commission.
C. Exhibits
--------
Exhibit 2.1. Agreement and Plan of Merger dated as of June 29, 1994
between Burlington Northern Inc. and Santa Fe Pacific Corporation as amended by
Amendments 1 and 2 thereto, together with Amendments 3 and 4 thereto. Schedules
have been omitted. Schedules will be furnished supplementally to the
Securities and Exchange Commission upon request.
Exhibit 23.1 Consent of Coopers & Lybrand L.L.P.
Exhibit 23.2 Consent of Price Waterhouse LLP.
Exhibit 99.1. BSNF Press release, dated September 22, 1995.
Exhibit 99.2. BSNF Press release, dated September 22, 1995.
Exhibit 99.3. SFP Press release, dated September 6, 1995.
3
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BURLINGTON NORTHERN SANTA FE CORPORATION
(Registrant)
Date: October 6, 1995 By: /s/ Jeffrey R. Moreland
____________________________
Name: Jeffrey R. Moreland
Title: Senior Vice President-Law and
General Counsel
4
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
------- -------- ------- --------
Revenues $ 1,284 $ 1,192 $ 2,631 $ 2,402
Costs and expenses:
Compensation and benefits 451 426 940 873
Fuel 100 89 198 172
Materials 69 70 149 155
Equipment rents 116 111 232 217
Purchased services 110 115 214 232
Depreciation 99 89 198 176
Other 88 114 232 217
------- -------- ------- --------
Total costs and expenses 1,033 1,014 2,163 2,042
------- -------- ------- --------
Operating income 251 178 468 360
Interest expense 50 39 93 78
Other income (expense), net 12 (5) 15 (6)
------- -------- ------- --------
Income before income taxes and
cumulative effect of change in
accounting method 213 134 390 276
Income tax expense 83 52 152 107
------- -------- ------- --------
Income before cumulative effect of
change in accounting method 130 82 238 169
Cumulative effect of change in
accounting method, net of tax - - - (10)
------- -------- ------- --------
Net income $ 130 $ 82 $ 238 $ 159
======= ======== ======= ========
Primary earnings per common share:
Income before cumulative effect of
change in accounting method $ 1.37 $ .85 $ 2.51 $ 1.75
Cumulative effect of change in
accounting method - - - (.11)
------- -------- ------- --------
Primary earnings per common share $ 1.37 $ .85 $ 2.51 $ 1.64
======= ======== ======= ========
Shares used in computation
(in thousands) 90,834 90,244 90,546 90,286
Fully diluted earnings per common
share:
Income before cumulative effect
of change in accounting method $ 1.32 $ .84 $ 2.42 $ 1.74
Cumulative effect of change in
accounting method - - - (.11)
------- -------- ------- --------
Fully diluted earnings per
common share $ 1.32 $ .84 $ 2.42 $ 1.63
======= ======== ======= ========
Shares used in computation
(in thousands) 98,350 97,584 98,198 97,626
Dividends declared per common
share $ .30 $ .30 $ .60 $ .60
See accompanying notes to consolidated financial statements.
1
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
ASSETS June 30, December 31,
1995 1994
-------- ---------
Current assets:
Cash and cash equivalents $ 31 $ 27
Accounts receivable, net 667 697
Materials and supplies 130 100
Current portion of deferred income taxes 151 156
Other current assets 205 32
-------- ---------
Total current assets 1,184 1,012
Investment in Santa Fe Pacific Corporation 638 -
Property and equipment, net 6,493 6,311
Other assets 310 269
-------- ---------
Total assets $ 8,625 $ 7,592
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 539 $ 534
Compensation and benefits payable 282 264
Casualty and environmental reserves 225 248
Taxes payable 169 138
Accrued interest 47 45
Other current liabilities 74 96
Commercial paper 231 90
Current portion of long-term debt 31 32
-------- ---------
Total current liabilities 1,598 1,447
Long-term debt 2,194 1,697
Deferred income taxes 1,543 1,456
Casualty and environmental reserves 422 416
Other liabilities 336 339
-------- ---------
Total liabilities 6,093 5,355
-------- ---------
Stockholders' equity:
Convertible preferred stock, no par value,
$345 liquidation value; 25,000,000 shares
authorized; 6,900,000 shares issued;
6,889,657 shares and 6,900,000 shares
outstanding, respectively 336 337
Common stock, without par value, at stated
value, 300,000,000 shares authorized;
89,806,685 shares and 89,329,259 shares
issued, respectively 1 1
Additional paid-in capital 1,469 1,443
Retained earnings 659 485
Treasury stock, at cost, 64,749 shares
and 105,438 shares, respectively (3) (5)
Other 70 (24)
-------- ---------
Total stockholders' equity 2,532 2,237
-------- ---------
Total liabilities and stockholders'
equity $ 8,625 $ 7,592
======== =========
See accompanying notes to consolidated financial statements.
2
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
Six Months Ended
June 30,
1995 1994
------- -------
Cash flows from operating activities:
Net income $ 238 $ 159
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting method - 10
Depreciation 198 176
Deferred income taxes 39 50
Changes in current assets and liabilities:
Accounts receivable, net 32 20
Materials and supplies (31) (27)
Other current assets (173) (135)
Accounts payable 5 17
Compensation and benefits payable 20 (15)
Casualty and environmental reserves (23) (12)
Taxes payable 33 17
Accrued interest 2 2
Other current liabilities (22) (23)
Changes in long-term casualty and environmental
reserves 6 (16)
Other, net (23) (28)
------- -------
Net cash provided by operating activities 301 195
------- -------
Cash flows from investing activities:
Investment in Santa Fe Pacific Corporation (500) -
Additions to property and equipment (376) (289)
Proceeds from property and equipment dispositions 17 22
Other, net (13) (13)
------- -------
Net cash used in investing activities (872) (280)
------- -------
Cash flows from financing activities:
Net increase in commercial paper 141 178
Proceeds from issuance of long-term debt 522 149
Payments on long-term debt (32) (181)
Dividends paid (64) (64)
Proceeds from exercise of common stock options 8 5
Other, net - (1)
------- -------
Net cash provided by financing activities 575 86
------- -------
Increase in cash and cash equivalents 4 1
Cash and cash equivalents:
Beginning of period 27 17
------- -------
End of period $ 31 $ 18
======= =======
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 88 $ 74
Income taxes paid, net of refunds 77 39
Supplemental noncash investing and financing
activities information:
Assets financed through capital lease obligations $ 3 $ 50
See accompanying notes to consolidated financial statements.
3
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Accounting policies
The 1994 Annual Report on Form 10-K for Burlington Northern Inc. (BNI) and its
majority-owned subsidiaries (collectively BN) includes a summary of significant
accounting policies and should be read in conjunction with this Form 10-Q. The
principal subsidiary is Burlington Northern Railroad Company (Railroad). The
statements for the periods presented are condensed and do not contain all
information required by generally accepted accounting principles to be included
in a full set of financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly BN's financial position as of June 30, 1995 and December 31, 1994
and the results of operations for the three-month and six-month periods ended
June 30, 1995 and 1994 and cash flows for the six-month periods ended June 30,
1995 and 1994 have been included. The results of operations for any interim
period are not necessarily indicative of the results of operations to be
expected for the entire year. Certain prior year data has been reclassified to
conform to the current year presentation.
2. Earnings per common share
Primary earnings per common share are computed by dividing net income, after
deduction of preferred stock dividends, by the weighted average number of common
shares and common share equivalents outstanding. Fully diluted earnings per
common share are computed by dividing net income by the weighted average number
of common shares and common share equivalents outstanding. Common share
equivalents are computed using the treasury stock method. An average market
price is used to determine the number of common share equivalents for primary
earnings per common share. The higher of the average or end-of-period market
price is used to determine common share equivalents for fully diluted earnings
per common share. In addition, the if-converted method is used for convertible
preferred stock when computing fully diluted earnings per common share.
3. Agreement to merge and tender offers
As of June 29, 1994, BNI and Santa Fe Pacific Corporation (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 (effected in the manner set forth below, 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. Stockholders of BNI and Santa Fe approved the Merger Agreement
at special stockholders' meetings held on February 7, 1995.
Pursuant to the Merger Agreement, BNI and Santa Fe were entitled to elect to
consummate the Merger through the use of one of two possible structures: (i) a
merger of Santa Fe with and into BNI and (ii) the holding company structure (the
Holding Company Structure) described below. In order to ensure that the
transaction contemplated by the Merger Agreement qualifies as a tax-free
transaction for United States federal income tax purposes, the parties intend to
utilize the Holding Company Structure.
Under the Holding Company Structure, BNSF Corporation, a Delaware corporation
(BNSF), formed to effect the transaction in this manner, would create two
subsidiaries. One such subsidiary would merge into BNI, and the other such
subsidiary would merge into Santa Fe. Each holder of one share of BNI common
stock would receive one share of BNSF common stock and each holder of one share
of Santa Fe common stock, excluding the Santa Fe common stock acquired by BNI in
the Tender Offer referred to below 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 additional shares of
Santa Fe common stock repurchased by Santa Fe as permitted under the Repurchase
Program discussed below. 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 canceled. The rights of each stockholder of BNSF would
be substantially identical to the rights of a stockholder of BNI, and the
Holding Company Structure would have the same economic effect with respect to
the stockholders of BNI and Santa Fe as would a direct merger of BNI and Santa
Fe. The Merger will be accounted for under the purchase method of accounting
upon consummation, and BNI's investment will be included in the purchase price.
Also pursuant to the Merger Agreement, on December 23, 1994, BNI and Santa Fe
commenced tender offers, (together, the Tender Offer) to acquire 25 million and
38 million shares of Santa Fe common stock, respectively, at $20 per share in
cash representing 13 percent and 20 percent, respectively, of the then
outstanding Santa Fe common stock. 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 agreed to finance BNI's purchase of shares of Santa Fe
common stock in the Tender Offer. Funding of the Tender Offer was completed on
February 21, 1995. At BNI's option, renewals of 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 the London Interbank Offered Rate (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.
4
As of June 30, 1995, Santa Fe had borrowed $1,033 million from a syndicate of
financial institutions under a new credit agreement, of which $760 million was
used for the Santa Fe tender offer and the remaining borrowings were primarily
used to replace existing Santa Fe debt and pay related expenses.
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 agreement 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 BNSF common stock to be
issued in the Merger will not be affected by the number of additional shares of
Santa Fe common stock repurchased by Santa Fe under the Repurchase Program.
Accordingly, the exchange ratio of BNSF 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. As of June 30,
1995, Santa Fe had repurchased approximately 2.3 million shares which would
result in an exchange ratio of 0.4073 shares.
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's stockholders' equity, was
charged to expense. The unearned compensation relating to restricted stock at
the time of vesting and related payroll taxes were approximately $24 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) 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 had proposed to adopt for all major railroad mergers. On March 9, 1995, the
ICC issued a schedule providing for a final decision on the merger application
on or before August 23, 1995. Interested parties, including other railroads,
shippers and state agencies, indicated their intent to participate in the ICC
proceeding on April 10, 1995. Railroad and The Atchison, Topeka and Santa Fe
Railway Company (ATSF) have entered into agreements with Union Pacific Railroad
Company; Southern Pacific Transportation Company, The Denver Rio Grande Western
Railroad Company, St. Louis Southwestern Railway Company and SPCSL Corp.; and
Kansas City Southern Railway Company, among others, whereby those carriers
agreed not to oppose the ICC's approval of the Merger in exchange for grants of
certain trackage rights, haulage arrangements or other such arrangements. On
July 20, 1995, the ICC held a voting conference at which it voted to approve the
Merger, subject to limited conditions primarily regarding other carriers'
operations over Railroad's and ATSF's tracks. Given their limited nature, these
conditions will not impact the anticipated benefits of the Merger. It is
expected the ICC will issue a written decision approving the Merger on or before
August 23, 1995; the effective date of such decision will be set forth therein.
4. Investment in Santa Fe Pacific Corporation
On February 21, 1995, BNI completed the acquisition of 25 million shares of
Santa Fe common stock at $20 per share. The transaction was financed through the
$500 million Tender Offer Facility which had a weighted average interest rate of
6.74 percent at June 30, 1995.
The investment in Santa Fe (Investment), which represents approximately 16
percent of the outstanding common stock of Santa Fe, is accounted for under the
cost method and is classified as available for sale. As such, the carrying value
is adjusted for changes in the fair value, as determined by quoted market
prices, and any unrealized gain or loss is recorded, net of deferred income
taxes, as a component of stockholders' equity. At June 30, 1995, the Investment
was increased by $138 million reflecting an unrealized gain and stockholders'
equity was increased by $85 million after deducting deferred income taxes of $53
million.
5. Environmental reserves and other contingencies
BN's operations, as well as those of its competitors, are subject to extensive
federal, state and local environmental regulation. In order to comply with such
regulation and to be consistent with BN's corporate environmental policy, BN's
operating procedures include practices to protect the environment. Amounts
expended relating to such practices are inextricably contained in the normal
day-to-day costs of BN's business operations.
Under the requirements of the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund) and certain other laws, BN is
potentially liable for the cost of clean-up of various contaminated sites
identified by the United States Environmental Protection Agency and other
agencies. BN has been notified that it is a potentially responsible party (PRP)
for study and clean-up costs at approximately 85 sites (the PRP sites) and, in
many instances, is one of several PRPs. BN generally participates in the clean-
up of these sites through cost-sharing agreements with terms that vary from site
to site. Costs are typically allocated based on relative volumetric contribution
of material, the amount of time the site was owned or operated, and/or the
portion of the total site owned or operated by each PRP. However, under
Superfund and certain other laws, as a PRP, BN can be held jointly and severally
liable for all environmental costs associated with a site.
5
Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and restoration
of sites determined to be contaminated. Liabilities for environmental clean-up
costs are initially recorded when BN's liability for environmental clean-up is
both probable and a reasonable estimate of associated costs can be made.
Adjustments to initial estimates are recorded as necessary based upon additional
information developed in subsequent periods. BN conducts an ongoing
environmental contingency analysis, which considers a combination of factors,
including independent consulting reports, site visits, legal reviews, analysis
of the likelihood of participation in and ability to pay for clean-up by other
PRPs, and historical trend analyses.
BN is involved in a number of administrative and judicial proceedings and other
mandatory clean-up efforts at approximately 170 sites, including the PRP sites,
at which BN is being asked to participate in the clean-up of the sites
contaminated by material discharged into the environment. BN paid approximately
$10 million during the six months ended June 30, 1995 relating to mandatory
clean-up efforts, including amounts expended under federal and state voluntary
clean-up programs. Recoveries received from third parties, net of legal costs
incurred, were approximately $5 million during the six months ended June 30,
1995. At this time, BN estimates that it will spend approximately $110 million
in future years to remediate and restore all known sites, including $105 million
pertaining to mandated sites, of which approximately $75 million relates to the
PRP sites. Of the $110 million, BN estimates that it will spend $18 million
during the remainder of 1995. Also, BN 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
June 30, 1995, 24 sites accounted for approximately $75 million of the accrual
and no individual site was considered to be material.
Liabilities for environmental costs represent BN's best estimates for
remediation and restoration of these sites and include both asserted and
unasserted claims. At June 30, 1995, BN 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. BN's best estimate of
unasserted claims was approximately $5 million as of June 30, 1995. Although
recorded liabilities include BN's best estimates of all costs, without reduction
for anticipated recoveries from third parties, BN'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 BN's consolidated
financial position, cash flow or liquidity.
6. Hedging activities
BN has a program to hedge against fluctuations in the price of its diesel fuel
purchases. This program includes forward purchases for delivery at fueling
facilities and exchange-traded petroleum futures contracts. The futures
contracts are accounted for as hedges which are marked to market with any gains
or losses associated with changes in market value being deferred and recognized
as a component of fuel expense in the period in which the designated fuel is
purchased and used. As of June 30, 1995, BN had entered into agreements with
fuel suppliers setting the price of fuel to be obtained by taking physical
delivery directly from such suppliers at a future date. The average price of the
approximately 106 million gallons which BN had committed to purchase was
approximately 50 cents per gallon, exclusive of taxes, certain transportation
costs and other charges. In addition, BN held petroleum futures contracts
representing approximately 68 million gallons at an average price of
approximately 50 cents per gallon. These contracts have expiration dates ranging
from July, 1995 to May, 1996.
BN's current fuel hedging program is designed to cover no more than 50 percent
of projected fuel requirements for the subsequent 12-month period; therefore,
hedge positions will not exceed actual fuel requirements. The current and future
fuel delivery prices are monitored continuously and hedge positions are adjusted
accordingly. In order to reduce risk associated with market movements, fuel
hedging transactions do not extend beyond a 12-month period. BN purchases
petroleum futures contracts only through regulated exchanges (e.g. New York
Mercantile Exchange). In order to effectively monitor the fuel hedging
activities, results of the program are summarized and reported to senior
management on a regular basis.
6
7. Other income (expense), net
Other income (expense), net includes the following (in millions):
Three Months Six Months
Ended Ended
June 30, June 30,
1995 1994 1995 1994
----- ------ ----- ------
Gain (loss) on property dispositions $ 7 $ (1) $ 9 $ 1
Interest income 5 - 6 1
Loss on sale of receivables - (2) - (4)
Miscellaneous, net - (2) - (4)
----- ------ ----- ------
Total $ 12 $ (5) $ 15 $ (6)
===== ====== ===== ======
7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------
1994 1993 1992
------- ------- -------
Revenues............................................ $ 4,995 $ 4,699 $ 4,630
Costs and expenses:
Compensation and benefits......................... 1,779 1,709 1,709
Fuel.............................................. 369 362 348
Materials......................................... 305 300 295
Equipment rents................................... 429 395 389
Purchased services................................ 472 457 449
Depreciation...................................... 362 352 338
Other............................................. 426 463 505
------- ------- -------
Total costs and expenses........................ 4,142 4,038 4,033
------- ------- -------
Operating income.................................... 853 661 597
Interest expense.................................... 155 145 186
Other income (expense), net......................... (3) 5 41
------- ------- -------
Income before income taxes and cumulative effect of
changes in accounting methods...................... 695 521 452
Income tax expense.................................. 269 225 153
------- ------- -------
Income before cumulative effect of changes in
accounting methods................................. 426 296 299
Cumulative effect of changes in accounting methods,
net of tax......................................... (10) -- (21)
------- ------- -------
Net income...................................... $ 416 $ 296 $ 278
======= ======= =======
Primary earnings (loss) per common share:
Income before cumulative effect of changes in
accounting methods............................... $ 4.48 $ 3.06 $ 3.35
Cumulative effect of changes in accounting
methods.......................................... (.11) -- (.24)
------- ------- -------
Primary earnings per common share............... $ 4.37 $ 3.06 $ 3.11
======= ======= =======
Shares used in computation (in thousands)......... 90,187 89,672 88,617
Fully diluted earnings (loss) per common share:
Income before cumulative effect of changes in
accounting methods............................... $ 4.38 $ 3.04 $ 3.34
Cumulative effect of changes in accounting
methods.......................................... (.11) -- (.24)
------- ------- -------
Fully diluted earnings per common share......... $ 4.27 $ 3.04 $ 3.10
======= ======= =======
Shares used in computation (in thousands)......... 97,528 97,189 89,492
See accompanying notes to consolidated financial statements.
8
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
DECEMBER 31,
--------------
1994 1993
------ ------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 27 $ 17
Accounts receivable, net................................. 697 589
Materials and supplies................................... 100 91
Current portion of deferred income taxes................. 156 167
Other current assets..................................... 32 27
------ ------
Total current assets................................... 1,012 891
Property and equipment, net................................ 6,311 5,909
Other assets............................................... 269 245
------ ------
Total assets......................................... $7,592 $7,045
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 534 $ 492
Compensation and benefits payable........................ 264 271
Casualty and environmental reserves...................... 248 286
Taxes payable............................................ 138 123
Accrued interest......................................... 45 44
Other current liabilities................................ 96 102
Commercial paper......................................... 90 26
Current portion of long-term debt........................ 32 185
------ ------
Total current liabilities.............................. 1,447 1,529
Long-term debt............................................. 1,697 1,526
Deferred income taxes...................................... 1,456 1,342
Casualty and environmental reserves........................ 416 426
Other liabilities.......................................... 339 303
------ ------
Total liabilities...................................... 5,355 5,126
------ ------
Stockholders' equity:
Convertible preferred stock, no par value, $345
liquidation value; 25,000,000 shares authorized;
6,900,000 shares issued................................. 337 337
Common stock, without par value, at stated value,
300,000,000 shares authorized; 89,329,259 shares and
88,881,675 shares issued, respectively.................. 1 1
Additional paid-in capital............................... 1,443 1,420
Retained earnings........................................ 485 198
Treasury stock, at cost, 105,438 shares and 85,536
shares, respectively.................................... (5) (4)
Other.................................................... (24) (33)
------ ------
Total stockholders' equity............................. 2,237 1,919
------ ------
Total liabilities and stockholders' equity........... $7,592 $7,045
====== ======
See accompanying notes to consolidated financial statements.
9
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
Cash flows from operating activities:
Net income......................................... $ 416 $ 296 $ 278
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of changes in accounting
methods......................................... 10 -- 21
Depreciation..................................... 362 352 338
Deferred income taxes............................ 126 156 56
Changes in current assets and liabilities:
Accounts receivable, net....................... (108) (116) (29)
Materials and supplies......................... (13) 6 2
Other current assets........................... (5) (4) 2
Accounts payable............................... 40 19 6
Compensation and benefits payable.............. (3) (47) 14
Casualty and environmental reserves............ (38) 32 2
Taxes payable.................................. 17 -- 28
Accrued interest............................... 1 3 (14)
Other current liabilities...................... (6) (2) 4
Changes in long-term casualty and environmental
reserves........................................ (10) (57) 16
Other, net....................................... -- (60) (44)
------- ------- -------
Net cash provided by operating activities...... 789 578 680
------- ------- -------
Cash flows from investing activities:
Additions to property and equipment................ (698) (676) (487)
Proceeds from property and equipment dispositions.. 45 35 34
Other, net......................................... (28) (18) (17)
------- ------- -------
Net cash used in investing activities.......... (681) (659) (470)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock.......... -- -- 337
Net increase (decrease) in commercial paper........ 64 26 (353)
Proceeds from issuance of long-term debt........... 310 224 416
Payments on long-term debt......................... (346) (88) (470)
Dividends paid..................................... (129) (125) (106)
Proceeds from exercise of common stock options..... 6 15 11
Redemption of redeemable preferred stock........... -- (9) (2)
Other, net......................................... (3) (2) (2)
------- ------- -------
Net cash provided by (used in) financing
activities.................................... (98) 41 (169)
------- ------- -------
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.......... $ 149 $ 144 $ 197
Income taxes paid, net of refunds.................. 128 70 76
Supplemental noncash investing and financing
activities information:
Assets financed through a capital lease
obligation........................................ $ 50 $ -- $ --
See accompanying notes to consolidated financial statements.
10
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE YEARS ENDED DECEMBER 31, 1994
-------------------------------------------------------------------------------
OTHER
-----------------------
UNEARNED
CONVERTIBLE ADDITIONAL RETAINED COMPENSATION, MINIMUM
PREFERRED COMMON PAID-IN EARNINGS TREASURY RESTRICTED PENSION
STOCK STOCK CAPITAL (DEFICIT) STOCK STOCK LIABILITY TOTAL
----------- ------ ---------- --------- -------- ------------- --------- ------
Balance at December 31,
1991................... $ -- $ 1 $1,356 $(140) $(1) $(14) $ -- $1,202
Net income.............. 278 278
Dividends:
Common stock, $1.20 per
share................. (105) (105)
Redeemable preferred
stock, $.55 per
share................. (1) (1)
Convertible preferred
stock, $3.125 per
share................. (2) (2)
Issuance of convertible
preferred stock
(6,900,000 shares)..... 337 337
Adjustments associated
with unearned
compensation,
restricted stock
(214,475 shares)....... 12 (1) (5) 6
Exercise of stock
options and related tax
benefit (438,139
shares)................ 14 14
Equity adjustment from
minimum pension
liability.............. (4) (4)
Other (15,253 shares)... 3 3
---- --- ------ ----- --- ---- ---- ------
Balance at December 31,
1992................... 337 1 1,385 30 (2) (19) (4) 1,728
Net income.............. 296 296
Dividends:
Common stock, $1.20 per
share................. (106) (106)
Convertible preferred
stock, $3.125 per
share................. (22) (22)
Adjustments associated
with unearned
compensation,
restricted stock
(232,354 shares)....... 12 (2) (4) 6
Exercise of stock
options and related tax
benefit (499,779
shares)................ 20 20
Equity adjustment from
minimum pension
liability.............. (6) (6)
Other (40,117 shares)... 3 3
---- --- ------ ----- --- ---- ---- ------
Balance at December 31,
1993................... 337 1 1,420 198 (4) (23) (10) 1,919
Net income.............. 416 416
Dividends:
Common stock, $1.20 per
share................. (107) (107)
Convertible preferred
stock, $3.125 per
share................. (22) (22)
Adjustments associated
with unearned
compensation,
restricted stock
(177,670 shares)....... 12 (1) 11
Exercise of stock
options and related tax
benefit (184,088
shares)................ 8 8
Equity adjustment from
minimum pension
liability.............. 9 9
Other (65,924 shares)... 3 3
---- --- ------ ----- --- ---- ---- ------
Balance at December 31,
1994................... $337 $ 1 $1,443 $ 485 $(5) $(23) $ (1) $2,237
==== === ====== ===== === ==== ==== ======
See accompanying notes to consolidated financial statements.
11
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Burlington
Northern Inc. (BNI) and its majority-owned subsidiaries (collectively BN). The
principal subsidiary is Burlington Northern Railroad Company (Railroad). All
significant intercompany accounts and transactions have been eliminated.
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
Income taxes are provided based on earnings reported for tax return purposes
in addition to a provision for deferred income taxes. The provision for income
taxes includes deferred 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.
Earnings per common share
Primary earnings per common share are computed by dividing net income, after
deduction of preferred stock dividends, by the weighted average number of
common shares and common share equivalents outstanding. Fully diluted earnings
per common share are computed by dividing net income by the weighted average
number of common shares and common share equivalents outstanding. Common share
equivalents are computed using the treasury stock method. An average market
price is used to determine the number of common share equivalents for primary
earnings per common share. The higher of the average or end-of-period market
price is used to determine common share equivalents for fully diluted earnings
per common share. In addition, the if-converted method is used for convertible
preferred stock when computing fully diluted earnings per common share.
12
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 (expense), net were expenses of $9 million in 1994 and 1993 and $11
million in 1992, relating to the sale. BN 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..................... $ 7,875 $7,493
Equipment.................................................... 2,304 2,143
------- ------
Total cost................................................. 10,179 9,636
Less accumulated depreciation................................ 3,868 3,727
------- ------
Property and equipment, net................................ $ 6,311 $5,909
======= ======
The consolidated balance sheets at December 31, 1994 and 1993 included $77
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, BN adjusts accumulated depreciation for significant differences
between recorded accumulated depreciation and computed requirements.
Differences between recorded accumulated depreciation and computed
requirements are recognized prospectively on a straight-line basis. Under ICC
regulations, BN conducts service life studies on a periodic basis. Results of
service life studies are recorded over the remaining life 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.
13
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
------ ------
BNI:
7 1/2% debentures, due 2023.......................... $ 150 $ 150
8 3/4% debentures, due 2022.......................... 200 200
9% debentures, due 1997 to 2016...................... 156 157
7% notes, due 2002................................... 150 150
7.40% notes, due 1999................................ 150 --
Equipment obligations, weighted average rate of 7.09%
and 7.08%, respectively, due serially to 2013....... 194 191
Railroad:
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................................... (63) (68)
------ ------
Total.............................................. 1,819 1,737
Less:
Commercial paper..................................... 90 26
Current portion of long-term debt.................... 32 185
------ ------
Long-term debt..................................... $1,697 $1,526
====== ======
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 Railroad's
option, borrowings can be obtained through either a competitive bid or a
standby procedure. Rates for borrowings under the standby
14
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 December 1994, BNI entered into an agreement whereby Chemical Bank
(Chemical) and Texas Commerce Bank National Association (TCB) agreed to
provide a five-year $500 million unsecured bank credit facility (the Tender
Offer Facility) for the purpose of funding BNI's tender offer to purchase 25
million shares of Santa Fe common stock at $20 per share. 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. In February 1995, a group of banks executed a definitive agreement
for the Tender Offer Facility.
In May 1994, BNI issued $150 million of 7.4 percent notes due May 15, 1999
and used the proceeds to retire $150 million aggregate principal amount of
Railroad Consolidated Mortgage Bonds, 8 7/8 percent, Series I, due May 30,
1994. The 7.4 percent notes were the initial offering under an effective
registration statement on Form S-3 covering the issuance, from time to time,
of up to $500 million aggregate principal amount of debt securities. This
issuance reduced the amount available for future issuance to $350 million.
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.
In December 1993, BNI financed equipment through the issuance of $78 million
of 6.32 percent notes due serially to 2012.
15
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 1993, BNI issued $150 million of 7 1/2 percent senior unsecured
debentures due 2023 and used the proceeds for general corporate purposes,
including working capital.
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.
Aggregate long-term debt scheduled maturities for 1995 through 1999 and
thereafter are $32 million, $27 million, $253 million, $27 million, $174
million and $1,279 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. Equipment obligations are secured by the underlying
equipment.
5. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of BN'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 BN, 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 10.0 percent to 10.8 percent at
December 31, 1994 and 8.7 percent at December 31, 1993, were determined to be
appropriate when considering current United States Treasury rates and the
credit risk associated with these notes.
Marketable securities
Marketable securities, which are pledged to fund liabilities of certain
employee benefit plans, consist of corporate bonds (57 percent of carrying
amount) and United States government or agency issues (43 percent of carrying
amount) and are classified as available for sale. The carrying value of
available for sale securities is adjusted for changes in fair value and any
unrealized gains or losses are recorded as a component of stockholders'
equity. At December 31, 1994, the unrealized gains and losses were immaterial.
The fair value for these securities was based on secondary market indicators.
Realized gains or losses from the sales of marketable securities are based on
the specific identification method and were also immaterial for 1994.
16
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The contract maturities at December 31, 1994 for the securities were as
follows (in millions):
CARRYING FAIR
AMOUNT VALUE
-------- -----
Due in one year or less....................................... $ 7 $ 7
Due after one year through five years......................... 12 12
Due after five years through 10 years......................... -- --
Due after 10 years............................................ 1 1
--- ---
$20 $20
=== ===
Accrued interest payable
The carrying amount approximated fair value as the majority of interest
payments are made semiannually.
Long-term debt and commercial paper
The fair value of BN's long-term debt, excluding unamortized discount, was
primarily based on secondary market indicators. For those issues not actively
quoted, estimates were based on each obligation's characteristics. Among the
factors considered were the maturity, interest rate, credit rating,
collateral, amortization schedule, liquidity and option features such as
optional redemption or optional sinking funds. These features were compared to
other similar outstanding obligations to determine an appropriate increment or
spread, above 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.
The carrying amount and estimated fair values of BN'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......................... 8 8 9 11
Marketable securities.................... 20 20 -- --
Liabilities:
Accrued interest payable................. 45 45 44 44
Long-term debt and commercial paper...... 1,882 1,742 1,805 1,884
Recourse liability from sale of receiv-
ables................................... -- -- 4 4
BN also holds investments in, and has advances to, several unconsolidated
transportation affiliates. It was not practicable to estimate the fair value
of these financial instruments, which were carried at their
17
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
original cost of $16 million and $19 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 BN.
In addition, BN has a note receivable, from a shortline railroad, that has
principal payments which are based on traffic volume over a segment of line.
The carrying value of the note was $5 million at December 31, 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
BN has a program to hedge against fluctuations in the price of its diesel
fuel purchases. This program includes forward purchases for delivery at
fueling facilities and exchange-traded petroleum futures contracts. The
futures contracts are accounted for as hedges which are marked to market with
any gains or losses associated with changes in market value being deferred and
recognized as a component of fuel expense in the period in which the
designated fuel is purchased and used. At December 31, 1994, BN had entered
into agreements with fuel suppliers setting the price of fuel to be obtained
by taking physical delivery directly from such suppliers at a future date. The
average price of the approximately 79 million gallons which BN had committed
to purchase was approximately 52 cents per gallon, exclusive of taxes, certain
transportation costs and other charges. In addition, BN 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.
BN's current fuel hedging program is designed to cover no more than 50
percent of projected fuel requirements for the subsequent 12-month period;
therefore, hedge positions will not exceed actual fuel requirements. The
current and future fuel delivery prices are monitored continuously and hedge
positions are adjusted accordingly. In order to reduce risk associated with
market movements, fuel hedging transactions do not extend beyond a 12-month
period. BN purchases petroleum futures contracts only through regulated
exchanges (e.g. New York Mercantile Exchange). In order to effectively monitor
the fuel hedging activities, results of the program are summarized and
reported to senior management on a regular basis.
In the second quarter of 1994, BN entered into a three year interest rate
swap on a notional amount of $50 million to hedge against interest rate
exposure on one of its debt issuances. BN's position in this swap was
subsequently closed during the fourth quarter of the year. Under the terms of
this swap, BN 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, BN 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 BN effective January 1, 1986. BN adopted SFAS
No. 109 consistent with the transitional guidelines of SFAS No. 109. The
effect of the adoption was to increase the current portion of the deferred
income tax asset with a corresponding increase in the noncurrent deferred
income tax liability of $26 million at January 1, 1993. There was no effect on
net income, stockholders' equity or cash flows upon adoption.
18
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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................... $ 124 $ 61 $ 82
State..................... 19 8 15
------- ------- -------
143 69 97
------- ------- -------
Deferred:
Federal................... 109 136 52
State..................... 17 20 4
------- ------- -------
126 156 56
------- ------- -------
Total................... $ 269 $ 225 $ 153
======= ======= =======
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 3.4 3.4
Effect of one percent
federal tax rate increase
on deferred tax balances at
January 1, 1993............ -- 5.0 --
Internal Revenue Service
settlement................. -- -- (3.8)
Other, net.................. .3 (.2) .2
------- ------- -------
Effective tax rate........ 38.7% 43.2% 33.8%
======= ======= =======
The components of deferred tax assets and liabilities were as follows (in
millions):
DECEMBER 31,
----------------
1994 1993
------- -------
Deferred tax liabilities:
Accelerated depreciation and amortization............... $(1,785) $(1,667)
Other................................................... (106) (96)
------- -------
Total deferred tax liabilities........................ (1,891) (1,763)
------- -------
Deferred tax assets:
Casualty and environmental reserves..................... 255 270
Pensions................................................ 49 45
Other................................................... 287 273
------- -------
Total deferred tax assets............................. 591 588
------- -------
Valuation allowance..................................... -- --
------- -------
Net deferred tax liability............................ $(1,300) $(1,175)
======= =======
Noncurrent deferred income tax liability................ $(1,456) $(1,342)
Current deferred income tax asset....................... 156 167
------- -------
Net deferred tax liability............................ $(1,300) $(1,175)
======= =======
19
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1994, tax expense of $6 million related to the adjustment to reduce the
minimum pension liability was allocated directly to stockholders' equity.
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 1993 net income by $29
million, or $.32 per common share, through the date of enactment. A one-time,
non-cash charge of $28 million to income tax expense was recorded as an
adjustment to deferred taxes as of the enactment date and a charge of $1
million to income tax expense was recorded as an adjustment to current income
taxes.
In December 1992, BN received notification that an Appeals Division
settlement of the Internal Revenue Service audits for the years 1981 through
1985 had been approved by the Joint Committee on Taxation. This action settled
all unagreed issues for those years. The tax effect of the settlement was
included in the 1992 tax provision as shown below (in millions, except per
share data):
Current tax expense................................................... $ 2
Deferred tax benefit.................................................. (19)
----
Total tax benefit................................................... $(17)
====
Increase in earnings per common share................................. $.19
====
8. REDEEMABLE PREFERRED STOCK
In July 1993, BNI redeemed all of the outstanding shares of its $10 Par Value
5 1/2 percent Cumulative Redeemable Preferred Stock. BNI purchased the shares
for $10.067222 per share or for a total of $9 million, representing the
redemption price of $10 per share plus accrued dividends for the period from
June 2, 1993 to July 15, 1993.
Redeemable preferred stock activity was as follows (dollars in millions):
DECEMBER 31,
-------------------------------
1993 1992
-------------- ----------------
SHARES AMOUNT SHARES AMOUNT
------- ------ --------- ------
Balance at beginning of year................. 899,009 $ 9 1,076,734 $11
Acquired during year......................... 899,009 9 177,725 2
------- --- --------- ---
Balance at end of year..................... -- $-- 899,009 $ 9
======= === ========= ===
9. PREFERRED CAPITAL STOCK
No Par Value Preferred Stock, authorized 25,000,000 shares--6,900,000 shares
issued
In November 1992, BNI issued 6,900,000 shares of 6 1/4 percent Cumulative
Convertible Preferred Stock, Series A No Par Value. The convertible preferred
stock is not redeemable prior to December 26, 1995. Thereafter, the shares may
be redeemed at BNI's option, in whole or in part, during the twelve months
beginning November 24 of each year except for 1995 which commences December 26,
at the following redemption prices per share: $52.1875 in 1995, $51.875 in
1996, $51.5625 in 1997, $51.25 in 1998, $50.9375 in 1999, $50.625 in 2000,
$50.3125 in 2001, and $50 in 2002 and thereafter. The convertible preferred
stock may be converted, at the option of the holder at any time, into the
number of shares of BNI's common stock equal to the liquidation preference of
each share of convertible preferred stock, $50, divided by the conversion
20
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
price of $47 per share of common stock. The convertible preferred stockholders
have no voting rights unless six quarterly dividend payments are in default.
In a default, such stockholders may vote separately as a class with all other
series of the No Par Value Preferred Stock to elect two additional directors.
Voting rights will continue until all arrearages have been paid. As of
December 31, 1994, there had been no such defaults.
Class A Preferred Stock Without Par Value, authorized 50,000,000 shares--
unissued
At December 31, 1994, BNI had available for issuance 50,000,000 shares of
Class A Preferred Stock Without Par Value. The Board of Directors has the
authority to issue such stock in one or more series, to fix the number of
shares and to fix the designations and the powers. On July 10, 1986, the Board
of Directors designated a series of 800,000 shares of Class A Preferred Stock
Without Par Value as Series A Junior Participating Class A Preferred Stock. On
December 19, 1991, the Board of Directors increased the Series A Junior
Participating Class A Preferred Stock designation to 3,000,000 shares. Each
one one-hundredth of a share will have dividend and voting rights
approximately equal to those of one share of common stock of BNI. In addition,
on July 10, 1986, the Board of Directors declared a dividend distribution of
one right for each outstanding share of common stock of BNI. The rights become
exercisable if, without BNI's prior consent, a person or group acquires
securities having 20 percent or more of the voting power of all of BNI's
voting securities or announces a tender offer which would result in such
ownership. Each right, when exercisable, entitles the registered holder to
purchase from BNI one one-hundredth of a share of Series A Junior
Participating Class A Preferred Stock at a price of $190 per one one-hundredth
of a share, subject to adjustment. If, after the rights become exercisable,
BNI were to be acquired through a merger, each right would permit the holder
to purchase, for the exercise price, stock of the acquiring company having a
value of twice the exercise price. In addition, if any person acquires 25
percent or more of BNI (other than as a result of a cash offer for all
shares), each right not owned by the holder of such 25 percent would permit
the purchase, for the exercise price, of stock of BNI having a value of twice
the exercise price. The rights may be redeemed by BNI under certain
circumstances until their expiration date for $.05 per right.
10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
BNI is authorized to issue 300,000,000 shares of Common Stock Without Par
Value. At December 31, 1994, there were 89,223,821 shares of common stock
outstanding. Each holder of common stock is entitled to one vote per share in
the election of directors and on all matters submitted to a vote of
stockholders. Subject to the rights and preferences of the convertible
preferred stock and any future issuance of additional preferred stock, each
share of common stock is entitled to receive dividends as may be declared by
the Board of Directors out of funds legally available and to share ratably in
all assets available for distribution to stockholders upon dissolution or
liquidation. No holder of common stock has any preemptive right to subscribe
for any securities of BNI.
11. STOCK OPTIONS AND OTHER CAPITAL STOCK
Stock options
Under BN's stock option plans, options may be granted to officers and key
salaried employees at fair market value on the date of grant. All options
expire within ten years after the date of grant. BN may also grant stock
appreciation rights (SARs) in tandem with stock options which would be
exercisable during the same period as the options. SARs entitle an option
holder to receive a payment equal to the difference between the option price
and the fair market value of the common stock at the date of exercise of the
SAR. To the extent the SAR is exercised, the related option is cancelled and
to the extent the option is exercised the related SAR is cancelled. Any change
in the current market value over the SAR's exercise price would be recognized
at such time as an adjustment to compensation expense.
21
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity in stock option plans was as follows:
EXERCISE
OPTIONS SARS PRICE PER SHARE
--------- ------- ----------------
Balance at December 31, 1991.......... 2,902,820 54,226 $ 6.48 to $39.88
Granted............................. 984,515 -- 40.88 to 44.24
Exercised........................... (438,500) (54,226) 6.48 to 34.88
Cancelled........................... (197,511) -- 20.48 to 44.24
--------- -------
Balance at December 31, 1992.......... 3,251,324 -- 10.32 to 44.24
Granted............................. 947,125 -- 55.56 to 55.94
Exercised........................... (508,476) -- 10.32 to 44.24
Cancelled........................... (54,882) -- 22.50 to 55.94
--------- -------
Balance at December 31, 1993.......... 3,635,091 -- 12.49 to 55.94
Granted............................. 752,690 -- 53.69 to 55.94
Exercised........................... (184,088) -- 12.49 to 55.94
Cancelled........................... (83,962) -- 20.48 to 55.94
--------- -------
Balance at December 31, 1994.......... 4,119,731 -- 15.26 to 55.94
Exercisable at December 31:
1994................................ 2,950,427 -- $15.26 to $55.94
1993................................ 2,153,170 -- 12.49 to 44.24
1992................................ 1,711,726 -- 10.32 to 44.24
Available for future grants at Decem-
ber 31:
1994................................ 4,464,447
1993................................ 5,151,315
1992................................ 5,995,545
Shares issued upon exercise of options may be issued from treasury shares or
from authorized but unissued shares.
All outstanding stock options became exercisable upon the February 7, 1995
approval by the stockholders of both BNI and Santa Fe of the proposed merger
with Santa Fe.
Other capital stock
BN has restricted stock award plans under which up to 1,700,000 common
shares may be awarded to eligible employees and directors of BN. No cash
payment is required by the individual. Shares awarded under the plan may not
be sold, transferred or used as collateral by the holder until the shares
awarded become free of the restrictions, generally by one-thirds on the third,
fourth and fifth anniversaries of the date of grant. All shares still subject
to restrictions are generally forfeited and returned to the plan if the
employee or director's relationship with BN is terminated. If the employee or
director retires, becomes disabled or dies, the restrictions will lapse at
that time. The compensation expense resulting from the award of restricted
stock is valued at the average of the high and low market prices of BNI common
stock on the date of the award, recorded as a reduction of stockholders'
equity, and charged to expense evenly over the service period. Restricted
stock awards under these plans, net of forfeitures, were 177,670, 232,354 and
214,475 shares in 1994, 1993 and 1992, respectively. A total of 780,694,
870,525 and 824,877 restricted common shares were outstanding at December 31,
1994, 1993 and 1992, respectively. Compensation expense was not significantly
affected for all periods presented. Upon the February 7, 1995 approval by the
stockholders of both BNI and Santa Fe of the proposed merger with Santa Fe,
the restrictions on the BNI stock grants lapsed and the previously unearned
compensation relating to such restricted stock, included in BNI's
stockholders' equity, was recognized as
22
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
a non-cash charge to compensation and benefits expense. As of December 31,
1994, such unearned compensation relating to restricted stock was approximately
$23 million.
BN also has a stock award plan which provides for grants of shares of BNI's
common stock to full-time employees, excluding officers, based upon
performance. A total of 100,000 shares of common stock has been authorized for
these awards. The shares awarded contain no restrictions and the recipients
have full stockholder rights and privileges. Compensation expense is based upon
the average of the high and low market prices of BNI common stock on the date
of grant. During the years ended December 31, 1994, 1993 and 1992, 3,900,
5,540, and 11,720 shares were awarded under this plan. The related compensation
expense was not significant.
An employee stock purchase plan was adopted in 1992, effective in 1993, as a
means to encourage employee ownership of BNI common stock. A total of 500,000
shares of common stock were authorized for distribution under this plan. The
plan allows eligible BN employees to use the proceeds of incentive compensation
awards to purchase shares of BNI common stock at a discount, as determined by
the BNI Board of Directors, from the market price and may require that the
shares purchased be held for a specific time period as also determined by the
Board of Directors. The difference between the market price and the employees'
purchase price is recorded as additional compensation expense. During the years
ended December 31, 1994 and 1993, 31,832 and 34,629 shares were purchased under
this plan. The related compensation expense was not significant.
12. RETIREMENT PLANS
BN has non-contributory defined benefit pension plans covering substantially
all non-union employees. The benefits are based on years of credited service
and the highest five-year average compensation levels. Contributions to the
plans are based upon the projected unit credit actuarial funding method and are
limited to amounts that are currently deductible for tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
The funded status of BN plans and the net accrued pension cost reflected in
the 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
====== ======
23
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
BN sponsors a 401(k) thrift and profit sharing plan which covers
substantially all non-union employees. BN matches 35 percent of the first 6
percent of the employees' contributions, which is subject to certain percentage
limits of the employees' earnings, at the end of each quarter. Depending on
BN's performance, an additional matching contribution of 20 to 40 percent can
be made at the end of the year. BN's expense was $8 million, $6 million and $4
million in 1994, 1993 and 1992, respectively. Effective January 1, 1994, BN
also sponsors a 401(k) retirement savings plan covering substantially all union
employees which is non-contributory on the part of BN.
13. OTHER BENEFIT PLANS
Effective January 1, 1992, BN adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." BN provides certain
postretirement health care benefits, payable until age 65, for a small number
of retirees who were at least 55 years of age and who retired on or before
March 1986.
Both the accumulated postretirement benefits obligation and cost associated
with this plan were insignificant. Life insurance benefits are provided for
eligible non-union employees. BN adopted accrual accounting for the expense of
these plans in 1992 by taking a $16 million cumulative effect charge to income
in order to establish a liability for those benefits. BN pays benefits as
claims are processed.
The following table presents the status of the plans and the accrued
postretirement benefit cost reflected in the consolidated balance sheets (in
millions):
DECEMBER 31,
-----------------------
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
=== === === ===
24
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
14. COMMITMENTS AND CONTINGENCIES
Agreement to merge and tender offers
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
or 20 percent and 13 percent, respectively, of the then outstanding Santa Fe
common stock). Prior to expiration of the Tender Offer on February 8, 1995,
Santa Fe stockholders tendered sufficient shares to complete the Tender Offer.
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
25
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the amount borrowed under the Tender Offer Facility, or an alternative base
rate. BNI's investment in Santa Fe, which represents approximately 17 percent
of Santa Fe stock outstanding following completion of the Tender Offer, will
be accounted for under the cost method until consummation of the Merger. 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
Sante Fe tender offer and related matters from a syndicate of financial
institutions under a new 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. Funding of the Tender Offer is expected to be
completed on or about February 21, 1995.
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 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 one share of BNI common stock would receive one share of BNSF
common stock and each holder of one share 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 as permitted
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.
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's 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 ICC, approval under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other customary
conditions. In connection with the ICC
26
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Casualty and environmental reserves
Casualty reserves consist primarily of personal injury claims, including
work-related injuries to employees. Employees of BN are compensated for work-
related injuries according to the provisions of the Federal Employers'
Liability Act. Liabilities for personal injury claims are estimated through an
actuarial model that considers historical data and trends and is designed to
record those costs in the period of occurrence. BN conducts an ongoing review
and analysis of claims and other information to ensure the continued adequacy
of casualty reserves. To the extent costs may exceed recorded accruals, they
are not anticipated to materially affect BN's financial condition, results of
operations or liquidity.
BN's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. In order to
comply with such regulation and to be consistent with BN's corporate
environmental policy, BN's operating procedures include practices to protect
the environment. Amounts expended relating to such practices are inextricably
contained in the normal day-to-day costs of BN's business operations.
Under the requirements of the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund) and certain other laws, BN
is potentially liable for the cost of clean-up of various contaminated sites
identified by the United States Environmental Protection Agency and other
agencies. BN has been notified that it is a potentially responsible party
(PRP) for study and clean-up costs at approximately 75 sites (the PRP sites)
and, in many instances, is one of several PRPs. BN generally participates in
the clean-up of these sites through cost-sharing agreements with terms that
vary from site to site. Costs are typically allocated based on relative
volumetric contribution of material, the amount of time the site was owned or
operated, and/or the portion of the total site owned or operated by each PRP.
However, under Superfund and certain other laws, as a PRP, BN can be held
jointly and severally liable for all environmental costs associated with a
site.
Environmental costs include initial site surveys and environmental studies
of potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when BN's liability for
environmental clean-up is both probable and a reasonable estimate of
associated costs can be made. Adjustments to initial estimates are recorded as
necessary based upon additional information developed in subsequent periods.
BN conducts an ongoing environmental contingency analysis, which considers a
combination of factors, including independent consulting reports, site visits,
legal reviews, analysis of the likelihood of participation in and ability to
pay for clean-up by other PRPs, and historical trend analyses.
BN 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. BN 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, BN
expects to spend approximately $110 million in future years to remediate and
restore all known sites,
27
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
including $105 million pertaining to mandated sites, of which approximately
$70 million relates to the PRP sites. Of the $110 million, BN expects to spend
$33 million during 1995. Also, BN 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 BN's best estimates for
remediation and restoration of these sites and include asserted and unasserted
claims. At December 31, 1994, BN 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. BN's best estimate of
unasserted claims was approximately $5 million as of December 31, 1994.
Although recorded liabilities include BN's best estimates of all costs,
without reduction for anticipated recovery from insurance, BN'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 BN's consolidated financial position, cash
flow or liquidity.
Lease commitments
BN 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 $229 million, $194 million and
$189 million for the years ended December 31, 1994, 1993 and 1992,
respectively.
Minimum annual rental commitments were as follows (in millions):
CAPITAL OPERATING
YEAR ENDED DECEMBER 31, LEASES LEASES
----------------------- ------- ---------
1995....................................................... $ 9 $ 175
1996....................................................... 7 161
1997....................................................... 5 136
1998....................................................... 5 122
1999....................................................... 5 113
Thereafter................................................. 37 890
--- ------
Total.................................................... 68 $1,597
======
Less amount representing interest.......................... 22
---
Present value of minimum lease payments.................. $46
===
In addition to the above, BN also receives and pays rents for railroad
equipment on a per diem basis, which is included in equipment rents.
28
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other commitments and contingencies
In 1993, BN 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, BN
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.
BN 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. BN's 1995 minimum commitment
obligation is $53 million. Based on projected locomotive power requirements,
BN'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, BN entered into a letter of credit for
the benefit of a vendor. This letter of credit is a performance guarantee for
up to $15 million in major overhauls to be performed on the power purchase
equipment.
In connection with its program to transfer certain rail lines to independent
operators, BN has agreed to make certain payments for services performed by
the operators in connection with traffic that involves the shortlines and
Railroad as carriers. These payments will vary with such factors as traffic
volumes and shortline costs and are not expected to exceed normal business
requirements for services received. These payments are reflected as reductions
to revenue to conform with reporting to the ICC. Revenues for these joint
moves, including amounts applicable to the independent operator portion of the
line haul, are reflected by BN as revenue from operations.
BN 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, BN believes that any liability resulting from these matters, after
taking into consideration BN's insurance coverages and amounts already
provided for, should not have a material adverse effect on BN's financial
position.
There are no other commitments or contingent liabilities which BN believes
would have a material adverse effect on the consolidated financial position,
results of operations or liquidity.
15. OTHER INCOME (EXPENSE), NET
Other income (expense), net includes the following (in millions):
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
---- ------- --------
Gain on property disposi-
tions.................... $ 15 $ 17 $ 3
Interest income........... 3 6 4
Loss on sale of receiv-
ables.................... (9) (9) (11)
Litigation settlement
agreement................ -- -- 47
Miscellaneous, net........ (12) (9) (2)
-------- ------- --------
Total................... $ (3) $ 5 $ 41
======== ======= ========
29
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Miscellaneous, net includes losses related to international ventures of $15
million and $4 million in 1994 and 1993, respectively.
In the first quarter of 1992, BN entered into a settlement agreement
relating to the reimbursement of attorneys' fees and costs incurred by BN in
connection with litigation filed by Energy Transportation Systems, Inc., and
others, and reimbursement of a portion of the amount paid in prior years by BN
in settlement of that action. Under the terms of the settlement, BN received
approximately $50 million before legal fees.
16. ACCOUNTING CHANGES
Effective January 1, 1994, BN 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, or
$.11 per common share.
In 1994, BN adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The adoption of this standard had no effect on
net income and no material effect on stockholders' equity.
Effective January 1, 1993, BN adopted SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 modifies SFAS No. 96, which established the liability
method of accounting for income taxes, and had been adopted by BN effective
January 1, 1986. BN adopted SFAS No. 109 consistent with the transitional
guidelines of SFAS No. 109. The effect of the adoption was to increase the
current portion of the deferred income tax asset with a corresponding increase
in the noncurrent deferred income tax liability of $26 million at January 1,
1993. There was no effect on net income, stockholders' equity or cash flows.
In January 1992, the Emerging Issues Task Force of the 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, BN changed
its method of revenue recognition from one which recognized transportation
revenue at the origination point, to a method whereby transportation revenue
is recognized proportionately as a shipment moves from origin to destination.
The cumulative effect, net of a $7 million income tax benefit, of the change
on the prior year's revenue, at the time of adoption, decreased 1992 net
income by $11 million, or $.13 per common share.
In the fourth quarter of 1992, effective January 1, 1992, BN adopted SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and elected immediate recognition of the $16 million transition
obligation. The cumulative effect, net of a $6 million income tax benefit, of
the change on prior years', at the time of adoption, decreased 1992 net income
by $10 million, or $.11 per common share.
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Burlington Northern Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Burlington
Northern Inc. and Subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Burlington Northern Inc. 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.
As discussed in Note 16 to the consolidated financial statements, the
Company changed its method of accounting for postemployment benefits and
investments in debt and equity securities 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
31
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In millions, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
---------- ---------- ---------- ----------
Operating Revenues $ 671.9 $ 658.2 $ 1,351.6 $ 1,289.7
---------- ---------- ---------- ----------
Operating Expenses
Compensation and benefits 198.9 209.2 419.4 416.8
Contract services 96.7 90.1 188.8 170.2
Fuel 62.7 61.2 126.5 120.1
Equipment rents 61.9 62.0 121.6 122.4
Depreciation and amortization 52.7 50.1 105.2 99.2
Materials and supplies 25.4 32.3 54.5 64.8
Other 49.1 55.9 106.7 108.1
---------- ---------- ---------- ----------
Total Operating Expenses 547.4 560.8 1,122.7 1,101.6
---------- ---------- ---------- ----------
Operating Income 124.5 97.4 228.9 188.1
Equity in Earnings of Pipeline
Partnership 5.7 10.7 12.4 17.0
Interest Expense 45.4 30.9 85.1 59.9
Other Income (Expense)-Net (6.7) 6.7 (36.5) 32.7
---------- ---------- ---------- ----------
Income From Continuing Operations
Before Income Taxes 78.1 83.9 119.7 177.9
Income Taxes 30.3 35.5 49.6 75.3
---------- ---------- ---------- ----------
Income From Continuing Operations 47.8 48.4 70.1 102.6
Income from Discontinued Operations,
Net of Income Taxes - 9.2 - 23.1
Extraordinary Charge on Early Retirement
of Debt, Net of Income Taxes - - (24.3) -
---------- ---------- ---------- ----------
Net Income $ 47.8 $ 57.6 $ 45.8 $ 125.7
========== ========== ========== ==========
Income (Loss) Per Share
Continuing Operations $ 0.30 $ 0.25 $ 0.41 $ 0.54
Discontinued Operations - 0.05 - 0.12
Extraordinary Charge - - (0.14) -
---------- ---------- ---------- ----------
Net Income $ 0.30 $ 0.30 $ 0.27 $ 0.66
========== ========== ========== ==========
Average Number of Common and
Common Equivalent Shares 159.1 189.7 169.8 189.8
========== ========== ========== ==========
(See accompanying notes to Consolidated Financial Statements)
-1-
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In millions)
June 30, December 31,
1995 1994
---------- ----------
Assets
Current Assets
Cash and cash equivalents, at cost which
approximates market $ 30.1 $ 176.4
Accounts receivable, less allowances 59.0 62.0
Materials and supplies 90.7 95.3
Note receivable - current - 36.2
Current portion of deferred income taxes 104.0 98.6
Other 22.2 25.2
---------- ----------
Total current assets 306.0 493.7
---------- ----------
Other Long-Term Assets 380.9 337.9
Properties, Plant and Equipment 6,391.9 6,291.8
Less-accumulated depreciation and amortization 1,537.0 1,550.5
---------- ----------
Net Properties 4,854.9 4,741.3
---------- ----------
Total Assets $ 5,541.8 $ 5,572.9
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 627.5 $ 724.8
Long-term debt due within one year 148.8 203.6
---------- ----------
Total current liabilities 776.3 928.4
---------- ----------
Long-Term Debt Due After One Year 1,884.5 1,067.4
Postretirement Benefits Liability 258.3 258.1
Restructuring Liability 152.3 171.1
Other Long-Term Liabilities 700.6 699.1
Deferred Income Taxes 1,225.0 1,191.9
---------- ----------
Total Liabilities 4,997.0 4,316.0
---------- ----------
Shareholders' Equity
Common stock 190.4 190.0
Paid-in capital 794.1 825.8
Retained income 336.3 290.5
Treasury stock, at cost (776.0) (49.4)
---------- ----------
Total shareholders' equity 544.8 1,256.9
---------- ----------
Total Liabilities and Shareholders' Equity $ 5,541.8 $ 5,572.9
========== ==========
(See accompanying notes to Consolidated Financial Statements)
-2-
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In millions)
Six Months
Ended June 30,
1995 1994
---------- ----------
Operating Activities
Net income $ 45.8 $ 125.7
Adjustments to reconcile net income to operating
cash flows:
Income from discontinued operations,
net of income taxes - (23.1)
Extraordinary charge on early retirement of debt,
net of income taxes 24.3 -
Depreciation and amortization 105.2 99.2
Deferred income taxes 38.7 33.7
Rail restructuring costs paid (30.7) (33.8)
Imputed interest expense 8.0 10.4
Other-net (26.0) (49.7)
Changes in working capital:
Accounts receivable 3.0 (3.5)
Materials and supplies 4.6 (22.4)
Accounts payable and accrued liabilities (97.3) 29.0
Other 3.0 13.4
---------- ----------
Net Cash Provided by Operating
Activities-Continuing Operations 78.6 178.9
Discontinued Operations-net - (11.3)
---------- ----------
Net Cash Provided by Operating Activities 78.6 167.6
---------- ----------
Investing Activities
Cash used for capital expenditures (197.5) (205.8)
Other-net 38.4 79.5
Discontinued Operations-net - (29.1)
---------- ----------
Net Cash Used for Investing Activities (159.1) (155.4)
---------- ----------
Financing Activities
Proceeds from borrowings 1,047.0 -
Principal payments on borrowings (285.1) (128.5)
Purchase of SFP common stock (812.2) -
Extraordinary charge on early retirement of debt (24.3) -
Other-net 8.8 7.1
Discontinued Operations-net - 53.9
---------- ----------
Net Cash Used for Financing Activities (65.8) (67.5)
---------- ----------
Decrease in Cash and Cash Equivalents (146.3) (55.3)
Cash and Cash Equivalents:
Beginning of period 176.4 70.3
---------- ----------
End of period $ 30.1 $ 15.0
========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 75.6 $ 51.4
Income taxes $ 13.6 $ 33.5
========== ==========
(See accompanying notes to Consolidated Financial Statements)
-3-
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) The consolidated financial statements should be read in
conjunction with the Santa Fe Pacific Corporation ("SFP",
"Registrant" or "Company") Annual Report on Form 10-K for the
year ended December 31, 1994 ("1994 Form 10-K"), including those
financial statements and notes thereto incorporated by reference
from the Registrant's 1994 Annual Report to Shareholders.
(b) In the opinion of SFP management, the consolidated statement of
operations for the three and six months ended June 30, 1995 and
1994 reflect all adjustments necessary for a fair statement of
the results of operations. Except as otherwise disclosed, all
adjustments are of a normal recurring nature.
(c) The consolidated statement of operations for the three and six
months ended June 30, 1995 is not necessarily indicative of the
results of operations for the full year 1995.
(d) Certain comparative prior year amounts in the consolidated
financial statements have been reclassified to conform with the
current year presentation.
(e) On June 29, 1994, SFP and Burlington Northern Inc. ("BNI")
entered into a definitive Agreement and Plan of Merger (as
amended, the "Merger Agreement") pursuant to which SFP is to
merge with and into BNI, with BNI being the surviving corporation
(the "Merger"). The Merger was approved by the stockholders of
both SFP and BNI on February 7, 1995. In accordance with the
Merger Agreement, BNI and SFP conducted a joint tender offer in
which SFP purchased 38 million shares and BNI purchased 25
million shares of SFP common stock at a price of $20 per share,
the payment for which shares was made on February 21, 1995 (the
"Tender Offer").
At Merger consummation, each remaining outstanding share of SFP
common stock will be converted into at least 0.40 of a share of
BNI common stock (the "Exchange Ratio") in a tax-free exchange.
Between the Tender Offer and consummation of the Merger, SFP has
the right but not the obligation to repurchase up to an
additional 10 million shares of SFP common stock, subject to
certain financial conditions and limitations of the Merger
Agreement and SFP's bank loan facility ("Credit Facility"). The
Exchange Ratio will depend on the number of SFP shares
repurchased by SFP as well as the number of SFP employee stock
options exercised prior to the consummation of the Merger. The
Merger Agreement provides for a maximum Exchange Ratio of 0.4347
which will not be reached because SFP employee stock options have
been exercised since December 31, 1994 and the anticipated timing
- 4 -
of the consummation of the Merger will limit the time available
to make repurchases. Through June 30, 1995, SFP has repurchased
approximately 2.3 million shares at an average cost of
approximately $22.40 per share. The effect of these repurchases,
after adjusting for SFP employee stock options exercised since
December 31, 1994, was to increase the Exchange Ratio to 0.4073
of a share of BNI common stock for each outstanding share of SFP
common stock at June 30, 1995. SFP has met certain performance
and financial criteria under the Merger Agreement and Credit
Facility and, therefore, is allowed to repurchase additional
shares up to an aggregate amount of approximately $36 million in
the third quarter. While SFP intends to continue repurchases of
shares during the third quarter, there can be no assurances that
the permitted repurchases will be completed.
The consummation of the Merger is subject to various conditions,
including approval by the Interstate Commerce Commission ("ICC").
At its July 20, 1995, voting conference, the ICC voted to approve
the Merger. In accordance with its procedural schedule, the ICC
is expected to issue its formal, written decision by August 23,
1995. The ICC's written decision will specify the effective date
of the decision. Depending on the effective date of the ICC
decision and the absence of any action to delay or otherwise stay
effectiveness, it is possible that the Merger could be
consummated as early as the end of the third quarter 1995. Based
on the voting conference, the ICC's written decision will place
certain limited conditions on the Merger, primarily relating to
allowing other carriers to operate on specific portions of tracks
of The Atchison, Topeka and Santa Fe Railway Company ("Santa Fe
Railway") or Burlington Northern Railroad Company. Given their
limited nature, these conditions are not expected to have an
adverse effect on the anticipated benefits of the Merger.
As permitted by the Merger Agreement, BNI and SFP intend to
effect the Merger through the use of a holding company and have
established BNSF Corporation ("Holdings") for this purpose.
Holdings is jointly and equally owned by BNI and SFP. Under this
structure (the "Alternative Merger"): (1) Holdings will create
two new wholly owned subsidiaries, cause one of the subsidiaries
to merge into BNI, and cause the other to merge into SFP; (2)
each holder of BNI common stock will receive one share of common
stock, par value $0.01 per share, of Holdings ("Holdings Common
Stock") for each share of BNI common stock; and (3) each holder
of SFP common stock will receive a minimum of 0.40 of a share of
Holdings Common Stock for each share of SFP common stock based on
the Exchange Ratio. The rights of a stockholder of Holdings will
be substantially identical to the rights of a stockholder of BNI,
and the Alternative Merger will have the same economic effect on
the stockholders of SFP and BNI as the Merger of SFP with and
into BNI.
- 5 -
(f) During the first quarter of 1995, SFP borrowed $1.0 billion under
the Credit Facility. Proceeds of $760 million from the borrowing
were used by SFP to purchase 38 million shares of SFP common
stock pursuant to the terms of the Tender Offer. The repurchased
shares are reflected within treasury stock in the accompanying
consolidated balance sheet. The remaining proceeds were used by
SFP to repay SFP's $200 million 12.65% senior notes maturing
1998-2000 ("Senior Notes"), plus the costs associated with the
retirement. These costs, totaling $40.0 million pre-tax,
included $37.0 million for the premium attributable to the early
retirement of the Senior Notes and $3.0 million for the write-off
of related unamortized debt issue costs. These costs, net of
applicable income tax benefits of $15.7 million, have been
presented in the accompanying consolidated statement of
operations as an extraordinary charge.
During the first quarter, the Credit Facility was amended:
(i) to reduce potential borrowings available to SFP from $1.56
billion to $1.36 billion; (ii) to reduce the interest rates
applicable to borrowings under the Credit Facility by reducing
credit spreads and expanding money market borrowing flexibility
and; (iii) to reduce SFP's hedging requirements for interest rate
protection to a minimum of $400 million of outstanding
borrowings. SFP has outstanding $200 million of fixed-rate debt
which is considered interest rate protection under the Credit
Facility. Additionally, SFP has entered into seven interest rate
swap transactions with a total notional principal amount of $200
million. The interest rate swaps mature from December 1996
through December 1998 and were entered into to match maturities
under the Credit Facility. The interest rate swap transactions
require payment of a fixed interest rate of approximately 7.6%,
and the receipt of a variable interest rate based on LIBOR. The
fair value of the swap transactions at June 30, 1995, was an
unrealized loss of approximately $7.3 million.
At June 30, 1995, SFP had also entered into five interest rate
swap transactions with a total notional principal amount of $150
million, for the purpose of establishing rates in anticipation of
an expected future debt issuance. These swap transactions, which
mature in December 2005, call for payment of a fixed interest
rate of 6.5%, and the receipt of a variable interest rate based
on LIBOR. Any realized gain or loss upon closing of these swap
transactions will be amortized as an adjustment to interest
expense over the term of the related debt. The fair value of the
swap transactions at June 30, 1995, was an unrealized gain of
approximately $1.3 million.
- 6 -
(g) At June 30, 1995, Santa Fe Railway had entered into various
commodity swap and collar transactions with several
counterparties covering approximately 110 million gallons of
diesel fuel in 1995 which is anticipated to cover approximately
55% of remaining 1995 fuel purchases. Through swap arrangements,
Santa Fe Railway has hedged approximately 80 million gallons at
an average price of 49 cents per gallon. Additionally,
approximately 30 million gallons have been hedged through collar
arrangements which allow the price to float between average floor
and ceiling prices of 45 cents and 50 cents, respectively. These
prices do not include taxes, fuel handling costs and any
differences which may occur from time to time between the prices
of commodities hedged and the purchase price of Santa Fe
Railway's diesel fuel. The fair value of Santa Fe Railway's fuel
hedging transactions at June 30, 1995, was an unrealized loss of
$2.7 million.
The effect of the Company's fuel hedging activities was to
decrease operating expense by $0.7 million for the three months
ended June 30, 1995, and to increase operating expense by $0.5
million for the three months ended June 30, 1994; and increase
operating expense by $0.5 million and $3.4 million for the six
months ended June 30, 1995 and 1994, respectively.
(h) In September 1994, SFP distributed its remaining interest in
Santa Fe Pacific Gold Corporation ("SFP Gold") to SFP
shareholders. SFP Gold operations for 1994 are reflected as
discontinued operations. Revenues from discontinued operations
for the three and six months ended June 30, 1994, were $93.5
million and $177.8 million, respectively.
(i) SFP is a party to a number of legal actions and claims, various
governmental proceedings and private civil suits arising in the
ordinary course of business, including those related to
environmental matters and personal injury claims. While the
final outcome of these items cannot be predicted with certainty,
considering among other things the meritorious legal defenses
available, it is the opinion of SFP management that none of these
items, when finally resolved, will have a material adverse effect
on the annual results of operations, financial position or
liquidity of SFP, although an adverse resolution of a number of
these items in a single year could have a material adverse effect
on the results of operations for that year.
- 7 -
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders, Chairman and Board of Directors of Santa Fe Pacific
Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders'
equity present fairly, in all material respects, the financial position of
Santa Fe Pacific Corporation and subsidiary companies at December 31, 1994 and
1993, and the 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. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Note 18 to the consolidated financial statements includes a description of a
change in the method of accounting for postretirement and postemployment
benefits other than pensions effective January 1, 1992.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Kansas City, Missouri
February 21, 1995
SANTA FE PACIFIC CORPORATION | 19
CONSOLIDATED STATEMENT OF OPERATIONS
Santa Fe Pacific Corporation and Subsidiary Companies
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------
(In millions, except per share data) 1994 1993 1992
================================================================================================================
Operating Revenues $2,680.9 $2,409.2 $2,251.7
- ----------------------------------------------------------------------------------------------------------------
Operating Expenses
Compensation and benefits 835.7 799.8 798.8
Contract services 395.6 321.7 276.9
Fuel 252.7 239.1 205.5
Equipment rents 248.2 229.4 186.0
Depreciation and amortization 200.5 188.4 180.8
Materials and supplies 118.8 127.7 127.5
Other 200.5 185.4 178.6
Rail special charge -- -- 320.4
- ----------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,252.0 2,091.5 2,274.5
- ----------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 428.9 317.7 (22.8)
Equity in Earnings of Pipeline Partnership 34.6 18.6 24.1
Interest Expense 121.9 133.4 164.5
Gain on Sale of California Lines -- 145.4 204.9
Other Income (Expense)--Net 9.5 5.8 (0.3)
- ----------------------------------------------------------------------------------------------------------------
Income From Continuing Operations Before Income Taxes 351.1 354.1 41.4
Income Taxes 151.7 176.7 20.3
- ----------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 199.4 177.4 21.1
Income from Discontinued Operations, Net of Income Taxes 23.1 161.4 42.4
Extraordinary Charge on Early Retirement of Debt, Net of Income Taxes -- -- (5.0)
Cumulative Effect of a Change in Accounting for Postretirement and
Postemployment Benefits, Net of Income Taxes -- -- (163.0)
- ----------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 222.5 $ 338.8 $ (104.5)
================================================================================================================
Income (Loss) Per Share of Common Stock
Continuing Operations $ 1.05 $ 0.95 $ 0.11
Discontinued Operations 0.12 0.86 0.23
Extraordinary Charge -- -- (0.03)
Cumulative Effect of a Change in Accounting -- -- (0.88)
- ----------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 1.17 $ 1.81 $ (0.57)
================================================================================================================
Average Number of Common and Common Equivalent Shares 190.8 187.2 184.8
================================================================================================================
(See notes to consolidated financial statements)
20 | SANTA FE PACIFIC CORPORATION
CONSOLIDATED BALANCE SHEET
Santa Fe Pacific Corporation and Subsidiary Companies
December 31,
-------------------
(In millions) 1994 1993
- ----------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents, at cost which approximates market $ 176.4 $ 70.3
Accounts receivable, less allowances 62.0 96.1
Materials and supplies 95.3 92.3
Note receivable--current 36.2 72.5
Current portion of deferred income taxes 98.6 99.3
Other 25.2 27.2
- ----------------------------------------------------------------------------------------------------------
Total current assets 493.7 457.7
- ----------------------------------------------------------------------------------------------------------
Note Receivable -- 36.2
Other Long-Term Assets 337.9 323.3
- ----------------------------------------------------------------------------------------------------------
Properties, Plant and Equipment 6,291.8 5,886.1
Less--accumulated depreciation and amortization 1,550.5 1,577.7
- ----------------------------------------------------------------------------------------------------------
Net properties 4,741.3 4,308.4
- ----------------------------------------------------------------------------------------------------------
Net Assets of Discontinued Operations -- 248.4
- ----------------------------------------------------------------------------------------------------------
Total Assets $5,572.9 $5,374.0
- ----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 724.8 $ 669.8
Long-term debt due within one year 203.6 184.7
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 928.4 854.5
- ----------------------------------------------------------------------------------------------------------
Long-Term Debt Due After One Year 1,067.4 991.1
Postretirement Benefits Liability 258.1 284.7
Rail Restructuring Liability 171.1 257.8
Other Long-Term Liabilities 699.1 601.7
Deferred Income Taxes 1,191.9 1,115.9
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 4,316.0 4,105.7
- ----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (See Notes 2, 14 and 15)
- ----------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $1 par value, shares authorized, 600.0 million; 1994 shares issued and
outstanding, 190.0 million and 188.3 million; 1993 shares issued and outstanding,
190.0 million and 185.6 million 190.0 190.0
Paid-in capital 825.8 869.7
Retained income 290.5 340.3
Treasury stock, at cost (49.4) (131.7)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,256.9 1,268.3
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $5,572.9 $5,374.0
- ----------------------------------------------------------------------------------------------------------
(See notes to consolidated financial statements)
SANTA FE PACIFIC CORPORATION | 21
CONSOLIDATED STATEMENT OF CASH FLOWS
Santa Fe Pacific Corporation and Subsidiary Companies
Year Ended December 31,
-----------------------------
(In millions) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 222.5 $ 338.8 $(104.5)
Adjustments to reconcile net income (loss) to operating cash flows:
Income from discontinued operations, net of income taxes (23.1) (161.4) (42.4)
Depreciation and amortization 200.5 188.4 180.8
Deferred income taxes 100.7 139.0 53.0
Cumulative effect of a change in accounting for postretirement and
postemployment benefits, net of income taxes - - 163.0
Rail special charge - - 320.4
Rail restructuring costs paid (64.4) (80.9) (118.9)
Imputed interest expense 20.7 26.6 23.3
Gain on sales of property, plant and equipment (6.2) (156.0) (218.7)
Other--net (57.7) (22.4) (20.0)
Changes in Working Capital:
Accounts receivable:
Sale of accounts receivable--net 50.0 - 12.0
Other changes (15.9) (25.3) (19.5)
Materials and supplies (3.0) (3.6) (11.2)
Accounts payable and accrued liabilities 55.0 51.6 40.0
Other (3.0) 1.3 (6.7)
- -----------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities--Continuing Operations 476.1 296.1 250.6
Discontinued Operations--net 54.3 67.7 79.0
- -----------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 530.4 363.8 329.6
- -----------------------------------------------------------------------------------------------------
Investing Activities
Cash used for capital expenditures (461.5) (381.5) (256.0)
Proceeds from the sale of property, plant and equipment 16.2 247.6 319.0
Other--net 81.0 70.3 43.8
Discontinued Operations--net (49.4) (99.8) (68.2)
- -----------------------------------------------------------------------------------------------------
Net Cash Provided By (Used For) Investing Activities (413.7) (163.4) 38.6
- -----------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from borrowings 232.0 6.5 -
Principal payments on borrowings (255.9) (242.6) (407.5)
Cash dividends paid (18.7) (18.5) (18.2)
Other--net 23.4 20.7 16.0
Discontinued Operations--net 8.6 41.7 (4.6)
- -----------------------------------------------------------------------------------------------------
Net Cash Used For Financing Activities (10.6) (192.2) (414.3)
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) In Cash and Cash Equivalents 106.1 8.2 (46.1)
Cash and Cash Equivalents:
Beginning of year 70.3 62.1 108.2
- -----------------------------------------------------------------------------------------------------
End of year $ 176.4 $ 70.3 $ 62.1
- -----------------------------------------------------------------------------------------------------
(See notes to consolidated financial statements)
22 | SANTA FE PACIFIC CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Santa Fe Pacific Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------------------------------------------------
Shares of Shares of
Common Treasury Common Treasury Paid-In Retained
(Shares in thousands) (Dollars in millions) Stock Stock Stock Stock Capital Income
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1991 190,021 10,209 $190.0 $(309.2) $1,013.5 $ 142.6
1992 net loss - - - - - (104.5)
Cash dividends declared - - - - - (18.2)
Exercise of stock options - (1,995) - 60.5 (46.4) -
Other - (20) - 0.6 (0.4) -
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1992 190,021 8,194 $190.0 $(248.1) $ 966.7 $ 19.9
1993 net income - - - - - 338.8
Cash dividends declared - - - - - (18.5)
Exercise of stock options - (3,231) - 97.1 (73.8) -
Issuance of restricted stock - (777) - 23.2 (23.2) -
Other - 224 - (3.9) - 0.1
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 190,021 4,410 $190.0 $(131.7) $ 869.7 $ 340.3
1994 net income - - - - - 222.5
Cash dividends declared - - - - - (18.7)
Distribution of gold subsidiary - - - - - (253.6)
Exercise of stock options - (2,574) - 78.8 (50.2) -
Other - (116) - 3.5 6.3 -
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 190,021 1,720 $190.0 $ (49.4) $ 825.8 $ 290.5
==========================================================================================================================
Note: SFP has authorized common stock of 600 million shares with a par value of
$1.00. Also authorized are 200 million shares of preferred stock with a par
value of $1.00, none of which was outstanding at December 31, 1994.
(See notes to consolidated financial statements)
SANTA FE PACIFIC CORPORATION | 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Santa Fe Pacific Corporation and Subsidiary Companies
Note 1: Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Santa Fe Pacific Corporation and subsidiary companies (SFP or Company) that are
majority owned and controlled, directly or indirectly, by SFP. The principal
subsidiary is The Atchison, Topeka and Santa Fe Railway Company (Santa Fe
Railway). All significant intercompany transactions have been eliminated.
Reclassifications
Certain comparative prior year amounts in the consolidated financial
statements and notes have been reclassified to conform with the current year
presentation.
Statement of Cash Flows
SFP considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. In addition to amounts reported
as "Cash Used for Capital Expenditures", SFP had non-cash capital expenditures
totaling $182.8 million, $157.6 million, and $9.5 million in 1994, 1993, and
1992, respectively. Non-cash capital expenditures consist principally of
directly financed equipment acquisitions and reimbursed projects.
Materials and Supplies
Material and supply inventories are valued at the lower of cost (average or
first-in, first-out) or market.
Note Receivable
The note receivable included in the consolidated balance sheet relates to
the sale of a subsidiary in 1986. Principal payments of $72.5 million were
received in both 1994 and 1993. Remaining proceeds to be received from the note
are $36.2 million in 1995.
Properties, Plant and Equipment
Properties, plant and equipment are stated at cost and include capitalized
interest incurred during construction of $7.3 million in 1994, $8.2 million in
1993 and $3.7 million in 1992. Additions and replacements are capitalized.
Expenditures for maintenance and repairs are charged to income. Upon normal
sale or retirement of depreciable railroad property, cost less net salvage is
charged to accumulated depreciation and no gain or loss is recognized.
Depreciation is computed using the straight-line method over the estimated
service life of the asset. The weighted average annual depreciation rate in
effect at December 31, 1994 was 2.8% for track structure, 5.0% for equipment
and 2.1% for other road properties.
Revenue Recognition
Rail revenue is recognized when freight is received from the shipper with a
corresponding accrual of the direct costs to complete delivery of the
freight-in-transit.
Note 2: Merger Activities
SFP signed an agreement to merge with Burlington Northern Inc. (BNI) (the
Merger) pursuant to an Agreement and Plan of Merger dated June 29, 1994, as
amended (the Merger Agreement). The Merger was approved by SFP and BNI
shareholders on February 7, 1995, and in accordance with the Merger Agreement,
BNI and SFP conducted a tender offer to purchase a total of 63 million shares
of SFP common stock at a price of $20 per share (the Tender Offer). Between the
Tender Offer and consummation of the Merger, SFP has the right to purchase an
additional 10 million shares, subject to certain limitations of the Merger
Agreement and the SFP Credit Facility (defined below). At Merger consummation,
each remaining outstanding share of SFP common stock will be converted into at
least 0.40 of a share of BNI common stock (the Exchange Ratio) in a tax-free
exchange. The Exchange Ratio will depend on the number of shares purchased by
SFP between the Tender Offer and Merger consummation as well as the number of
SFP stock options which are exercised prior to consummation of the Merger. The
Merger Agreement provides for a maximum Exchange Ratio of 0.4347; however, as
SFP stock options have been exercised since December 31, 1994, the Exchange
Ratio will be less than the maximum. The consummation of the Merger is subject
to various conditions, including approval by the Interstate Commerce Commission
(ICC).
Under current law, the ICC has a maximum of 31 months to approve the Merger
after the application is filed; however, the ICC had previously established a
535 day schedule for a final decision from the filing date of the ICC
application, which occurred on October 13, 1994. This schedule was held in
abeyance until the shareholders' vote on the Merger. The ICC recently requested
comments on a proposed 180-day schedule for the review of railroad mergers and
specifically asked for comments on whether the new schedule should apply to the
BNI-SFP merger. BNI and SFP have asked the ICC to apply a 165-day schedule to
the Merger. The ICC has the matter under consideration, and it has not yet
rendered a decision. Currently, there can be no assurance that the ICC will
issue a decision on the Merger any sooner than the 31-month period permitted by
law.
Under the terms of the Tender Offer, SFP purchased 38 million shares of SFP
common stock and BNI purchased 25 million shares of SFP common stock. In
connection with the Tender Offer, SFP has obtained a bank loan facility (Credit
Facility) up to $1.56 billion which consists of a $1 billion term loan, a $310
million revolving credit facility and a $250 million revolving credit facility.
On February 21, 1995, SFP borrowed $760 million under the term loan to purchase
the 38 million shares of SFP common stock. SFP intends to borrow up to an
additional $350 million in 1995, which will be used in part to retire SFP's $200
million 12.65% senior notes maturing 1998-2000, including any costs associated
with such retirement. The debt repayment is expected to result in an after-tax
extraordinary charge for the early retirement of debt of approximately $20
million.
If the Tender Offer and related financing activities had been completed at
December 31, 1994, SFP's long-term debt would have increased by up to $910
million and SFP's stockholders' equity would have decreased by approximately
$780 million. SFP's total debt to total capitalization ratio would have
increased from 50% to approximately 82%.
Borrowings under the Credit Facility are based on variable interest rates
(e.g., LIBOR or prime) plus a credit spread which varies based on the financial
performance of the Company. The variable rate plus the credit spread was
approximately 7.6% on February 21, 1995. Terms of the Credit Facility also
require SFP to enter into interest rate hedging transactions for two-thirds of
outstanding borrowings under the term loan or up to $667 million to protect
against increases in interest rates. As of February 21, 1995 the Company had
entered into various interest rate swap transactions with a total notional
principal amount of $200 million. The interest rate swaps mature from December
1996 through
24 | SANTA FE PACIFIC CORPORATION
December 1998 and were entered into to match maturities under the term loan. The
interest rate swaps require payment of a fixed interest rate of approximately
7.6% and the receipt of a variable interest rate based on LIBOR. The
transactions will be settled quarterly and will be recognized as a component of
interest expense as incurred.
Repayment terms of outstanding borrowings under the Credit Facility are as
follows: (i) the $1 billion term loan requires repayment of $50 million in 1996,
$100 million in both 1997 and 1998, $150 million in 1999, $200 million in 2000
and $400 million in 2001; (ii) outstanding borrowings under the $310 million
revolving credit facility are payable at the earliest of (a) December 31, 1997,
(b) six months after ICC approval of the Merger or (c) six months after
termination of the Merger Agreement; and (iii) outstanding borrowings under the
$250 million revolving credit facility are payable on December 31, 1999. SFP
pays commitment fees of 0.3% per annum on the unused portion of the revolving
credit facilities. The use of borrowings under the term loan are generally
restricted; however, up to $360 million of the revolving credit facilities can
be used by SFP for working capital needs and other general corporate purposes.
The Credit Facility contains various covenants including: limitations on
indebtedness, dividends and stock repurchases; maintenance of various financial
ratios; and certain restrictions related to the disposition of assets. After the
Tender Offer and related financing activities it is anticipated that SFP will
not pay any cash dividends in the foreseeable future.
Subject to the limitations set forth in the Merger Agreement and the Credit
Facility, repurchases of up to an additional 10 million shares of SFP common
stock after the Tender Offer and before the Merger, including the amount and
timing of any such repurchases, will be in the sole discretion of SFP.
Accordingly, although SFP anticipates that at least $50 million would be
available for repurchases under the terms of the Credit Facility in 1995, there
can be no assurance that SFP will make any repurchases. To have the $50 million
available for repurchases, SFP would have to comply with the minimum capital
expenditure and maximum total debt provisions of the Merger Agreement. If
regulatory approval of the Merger is expedited, as discussed above, it is likely
that the number of shares SFP would repurchase would be less than if regulatory
approval is not expedited.
Note 3: Discontinued Operations
In June 1994, Santa Pacific Gold Corporation (SFP Gold), SFP's gold
subsidiary, completed an initial public offering of 14.6% of its common stock.
Approximately 19 million shares were sold at a price of $14 per share resulting
in net proceeds of $250.3 million, the majority of which was used for the
repayment of outstanding debt at SFP Gold. SFP distributed its remaining 85.4%
interest in SFP Gold to SFP shareholders and SFP Gold became a separate,
independent entity on September 30, 1994. Holders of record of SFP common stock
received a distribution of one share of common stock of SFP Gold for every
approximately 1.7 shares of SFP common stock held. Under a ruling obtained from
the Internal Revenue Service, the distribution was tax-free to SFP shareholders.
Income from discontinued operations in 1994, 1993 and 1992 was as follows:
- ------------------------------------------------------------------
Year Ended December 31,
------------------------------
(In millions) 1994 1993 1992
- ------------------------------------------------------------------
Revenues $273.7 $298.6 $220.6
- ------------------------------------------------------------------
Income before income taxes 44.2 296.1 63.1
Income taxes 21.1 134.7 20.7
- ------------------------------------------------------------------
Income from discontinued operations $ 23.1 $161.4 $ 42.4
==================================================================
Income from discontinued operations in 1994 includes SFP's portion of SFP
Gold's results of operations through September 30, 1994, net of transaction and
other costs related to the distribution. In June 1993, SFP Gold closed an asset
exchange with Hanson Natural Resources Company (Hanson). SFP Gold received
certain gold assets of Hanson, and Hanson acquired essentially all coal and
aggregate assets of SFP Gold. The exchange was recorded as a purchase of assets,
and the results from the gold assets were reflected in income prospectively from
the date of closing. Income from discontinued operations for 1993 includes an
after tax gain on the exchange of $108.3 million.
Note 4: Gain on Sale of California Lines
In November 1992, Santa Fe Railway announced it would sell approximately 340
miles of rail lines and property to eight southern California transportation
agencies. Santa Fe Railway received both cash and relief of obligations to
reimburse certain state and county agencies for capital improvements previously
paid for by the agencies and the State of California. Santa Fe Railway retained
all rights necessary for its freight operations in southern California. The
transportation agencies plan to use these facilities for commuter lines.
The sale encompassed three separate closings which occurred in December 1992,
March 1993, and June 1993. Santa Fe Railway received cash proceeds of $226.9
million in 1993 and $255.0 million in 1992, resulting in pre-tax gains of $145.4
million and $204.9 million in 1993 and 1992, respectively. Both of the gains
recognized are net of the cost of the properties and other expenses of the sale.
The 1993 gain is net of an obligation retained by Santa Fe Railway, which under
certain conditions requires the repurchase of a portion of the properties for
$50 million. Proceeds of $126.0 million were used to retire debt related to
discontinued operations in 1993; and proceeds of $201.0 million were used to
retire debt in 1992 (see Note 12: Long-Term Debt).
Note 5: Rail Special Charge
During 1992, Santa Fe Railway recorded a $320.4 million pre-tax special
charge, which included provisions of approximately $253 million for
restructuring and $67 million for environmental (see Note 15: Environmental and
Other Contingencies).
Approximately $149 million of the restructuring charge related to a 1992
eastern lines crew consist agreement and revised estimates related to a previous
agreement. The agreement provided for further reductions in average crew size on
through freight trains, and elimination of productivity payments which were
required when reduced crews were used. This agreement, when combined with a
similar agreement reached earlier with trainmen on the other half of the system,
provides for through trains generally to operate with two person crews.
The agreement covers approximately 2,000 employees. Costs of the agreement
provided for in the charge relate to a signing bonus of $10,000 per employee,
the present value of a $65,000 deferred benefit per employee payable upon
separation or retirement and the present value of reserve board costs. Reserve
board costs represent wages paid to employees rendered excess due to reduced
crews. When on reserve board status, employees are removed from active service
and receive a percentage of their normal wages. Eastern line reserve boards
initially contained approximately 500 members and have declined significantly
over time through attrition, recall to work, and other factors.
The restructuring charge also included approximately $73 million related to
centralization. In 1992, Santa Fe Railway decided to centralize many operating
support functions. Centralization began in late 1992 and by the fall of 1993,
Santa Fe Railway had centralized train
SANTA FE PACIFIC CORPORATION | 25
dispatching, crew planning and fleet management in Schaumburg, Illinois; crew
management, customer service and mechanical (equipment) administration in
Topeka, Kansas; and other administrative and operating support functions in
Kansas City, Kansas. The charge provided for the cost of approximately 700
relocations, reductions of 600 administrative and clerical positions, and
abandonment of facilities. Most of the costs of centralization have been paid.
Additionally, the restructuring charge included approximately $31 million for
other cost saving initiatives, including an adjustment of accruals established
for other operating craft labor agreements reached in prior periods.
In the fourth quarter of 1994, based upon a review of the adequacy of the
restructuring reserve as well as an actuarial review of Santa Fe Railway's
liability for personal injury claims, the Company reduced the restructuring
reserve by approximately $30 million and increased the personal injury reserve
by approximately $30 million. The restructuring over accrual primarily resulted
from lower than anticipated reserve board levels due to higher business volumes
while the higher personal injury reserve requirement primarily resulted from
greater actuarial loss development partially offset by reduced employee
injuries. At December 31, 1994, the balance of the restructuring liability was
$218.7 million. The majority of the balance represents the present value of
future deferred benefit payments related to the 1992 eastern lines agreement and
similar agreements reached in and accrued for in prior years. Restructuring
costs paid were $64.4 million in 1994, $80.9 million in 1993 and $118.9 million
in 1992. In 1995, the Company expects payments of approximately $50 million.
Future payments will decline over time; however, certain separation benefits
will not be paid until employee retirement. Santa Fe Railway has obtained
letters of credit of approximately $13 million supporting certain of its
obligations under labor agreements.
Note 6: Pipeline Partnership
A wholly owned subsidiary of SFP, SFP Pipeline Holdings, Inc. (Pipeline
Holdings), through its wholly owned subsidiary, holds an aggregate 44% common
unit ownership in Santa Fe Pacific Pipeline Partners, L.P. (Pipeline
Partnership), a Delaware limited partnership. This interest is held through a 2%
general partner interest and a 42% limited partner interest. The Company
accounts for its interest in the partnership under the equity method. Other
long-term assets include $71.7 million and $61.5 million at December 31, 1994
and 1993, respectively, for SFP's investment in the Pipeline Partnership.
Pipeline Holdings also issued the Pipeline Exchangeable Debentures (Pipeline
Debentures) (see Note 12: Long-Term Debt) which are traded on the New York Stock
Exchange and under certain circumstances can be exchanged for common units that
represent SFP's 42% limited partnership interest in the Pipeline Partnership.
Interest on the Pipeline Debentures is paid quarterly and is equal to the
greater of (a) distributions of cash from operations declared by the Pipeline
Partnership for the quarter on the number of common units for which the Pipeline
Debentures are then exchangeable or (b) 2% of the unpaid Pipeline Debentures
principal balance.
SFP, through its wholly owned subsidiaries, received annual cash distributions
from the Pipeline Partnership of $25.1 million in 1994, 1993 and 1992. $22.8
million of these distributions was used in each of these years to pay interest
costs on the Pipeline Debentures.
The following table sets forth selected financial data for the Pipeline
Partnership:
Year ended December 31, 1994 1993 1992
- --------------------------------------------------------------------
(In millions, except per unit data)
Statement of Operations Data
Total revenues $228.1 $219.5 $205.0
Operating income 111.0 78.3(1) 91.4(1)
Interest expense 37.6 37.1 36.9
Income before cumulative
effect of accounting change 76.9 41.6 54.1
Cumulative effect of
accounting change - - (16.4)(2)
Net income 76.9 41.6 37.7
Per Unit Data
Income before accounting
change $ 3.93 $ 2.13 $ 2.77
Cumulative effect of
accounting change - - (.84)(2)
Net income 3.93 2.13 1.93
Cash distributions per unit 2.80 2.80 2.80
December 31, 1994 1993
- --------------------------------------------------------------------
Balance Sheet Data
Total current assets $ 87.8 $ 67.7
Net properties, plant and equipment 613.0 616.6
Total assets 714.8 697.0
Total current liabilities 31.8 35.6
Long-term debt 355.0(3) 355.0(3)
Total partners' capital 288.0 265.9
====================================================================
(1) 1993 includes a $15 million special environmental charge and a $12 million
special litigation charge. 1992 includes a $10 million special
environmental charge.
(2) Reflects a change in accounting for postretirement and postemployment
benefits.
(3) Pipeline Holdings is contingently liable for $355.0 million of Pipeline
Partnership long-term debt.
Note 7: Other Income (Expense)--Net
Other income (expense)--net consisted of the following:
(In millions) 1994 1993 1992
- ----------------------------------------------------------------
Real estate activities $ 12.1 $ 19.4 $ 23.9
Interest income 5.4 11.7 17.8
Corporate administrative expenses (24.8) (22.4) (22.3)
Accounts receivable fees (12.1) (8.3) (9.4)
Curtailment gain-postretirement
benefits 28.1(1) - -
Gain on sale of investment 23.7 - -
Arbitration/litigation settlements (1.7) 21.6 -
Merger related costs (15.8) - -
Other--net (5.4) (16.2) (10.3)
- ----------------------------------------------------------------
Total $ 9.5 $ 5.8 $ (0.3)
================================================================
(1) Gain resulting from a change in eligibility requirements related to
postretirement benefits. (See Note 17: Other Postretirement Benefits).
Note 8: Income Taxes
The provision for income taxes applicable to continuing operations
consisted of the following:
(In millions) 1994 1993 1992
- ---------------------------------------------
Current:
Federal $ 46.3 $ 33.5 $(32.0)
State 4.7 4.2 (0.7)
- ---------------------------------------------
Total Current 51.0 37.7 (32.7)
- ---------------------------------------------
Deferred:
Federal 84.6 124.6 40.7
State 16.1 14.4 12.3
- ---------------------------------------------
Total Deferred 100.7 139.0 53.0
- ---------------------------------------------
Total $151.7 $176.7 $ 20.3
=============================================
26 | SANTA FE PACIFIC CORPORATION
Income taxes from continuing operations as reflected in the consolidated
statement of operations differ from the amounts computed by applying the
statutory federal corporate tax rate to income from continuing operations as
follows:
(In millions) 1994 1993 1992
- -------------------------------------------------------------
Federal income tax at statutory rate
(35% in 1994-1993, 34% in 1992) $122.9 $123.9 $14.1
Increase (decrease) in taxes
resulting from:
State income taxes, net of
federal benefit 13.5 12.1 7.7
1% increase in federal tax rate - 23.5 -
Other 15.3 17.2 (1.5)
- -------------------------------------------------------------
Total $151.7 $176.7 $20.3
- -------------------------------------------------------------
The Omnibus Budget Reconciliation Act of 1993 resulted in an increase in the
maximum corporate federal income tax rate from 34% to 35%, retroactive to
January 1, 1993. SFP recorded additional income tax expense of $23.5 million,
representing the impact of the 1% rate increase on SFP's net beginning of year
deferred income tax liability.
Principal temporary differences that gave rise to the net deferred tax
liability at December 31, 1994 and 1993 were as follows:
(In millions) 1994 1993
- ------------------------------------------------------------------------
Deferred tax debits:
Accrued liabilities not deductible until paid:
Casualty and environmental $ 131.8 $ 114.8
Postretirement benefits 105.3 110.8
Restructuring 86.0 119.5
Other 109.7 124.2
Non-expiring AMT credit carryforwards 108.6 93.7
Other 12.8 13.5
- ------------------------------------------------------------------------
Subtotal $ 554.2 $ 576.5
- ------------------------------------------------------------------------
Deferred tax credits:
Depreciation $(1,443.6) $(1,267.4)
Condemnation sales (128.2) (211.8)
Other (75.7) (113.9)
- ------------------------------------------------------------------------
Subtotal $(1,647.5) $(1,593.1)
- ------------------------------------------------------------------------
Net deferred tax liability $(1,093.3) $(1,016.6)
- ------------------------------------------------------------------------
During 1994, 1993 and 1992, SFP made income tax payments, net of refunds, of
$69.4 million, $23.9 million and $8.2 million, respectively.
SFP's federal income tax returns have been examined through 1990. All years
prior to 1981 are closed. Issues relating to the years 1981-1990 are being
contested through various stages of administrative appeal. In addition, SFP and
its subsidiaries have various state income tax returns in the process of
examination, administrative appeal or litigation. Management believes that
adequate provision has been made for any adjustment that might be assessed for
open years through 1994.
Note 9: Accounts Receivable
In December 1994, a special purpose subsidiary of Santa Fe Railway sold, with
limited recourse, variable rate certificates which mature in December 1999
evidencing undivided interests in an accounts receivable master trust. The
master trust's assets include an ownership interest in a revolving portfolio of
Santa Fe Railway's accounts receivable which are used to support the
certificates. At December 31, 1994, $275 million of certificates sold were
outstanding and were supported by receivables in the master trust of $354
million. A maximum of $300 million of certificates can be sold if the master
trust balance is increased by receivables which are eligible for sale. Santa Fe
Railway has retained the collection responsibility with respect to the accounts
receivable held in trust. Santa Fe Railway is exposed to credit loss related to
collection of accounts receivable to the extent that the amount of receivables
in the master trust exceeds the amount of certificates sold.
The proceeds from the sale were used to reduce the amount of accounts
receivable sold under a previous agreement which expired in December 1994. The
amount of accounts receivable sold under the previous agreement was $225 million
at December 31, 1993. Similar to the prior agreement, costs related to the new
agreement vary on a monthly basis and are generally related to certain interest
rates. Costs related to accounts receivable sales, which are included in Other
Income (Expense)--Net, were $12.1 million, $8.3 million and $9.4 million in
1994, 1993 and 1992, respectively.
SFP maintains an allowance for doubtful accounts based upon the estimated
collectibility of all accounts receivable, including accounts receivable sold.
Activity in the allowance for doubtful accounts for the three years ended
December 31, 1994 was as follows:
(In millions) 1994 1993 1992
- -----------------------------------------------------------------
Balance at beginning of year $21.6 $17.3 $22.8
Additions charged to expense 7.6 7.8 5.7
Deductions 6.6 3.5 11.2
- -----------------------------------------------------------------
Balance at end of year $22.6 $21.6 $17.3
- -----------------------------------------------------------------
Note 10: Properties, Plant and Equipment
The major classes of properties, plant and equipment are as follows:
(In millions) 1994 1993
- -----------------------------------------------------------------
Track structure $ 2,506.3 $ 2,326.8
Equipment 2,015.1 1,952.6
Other road properties 1,640.4 1,478.9
Real estate and other 130.0 127.8
- -----------------------------------------------------------------
Total 6,291.8 5,886.1
Accumulated depreciation and amortization (1,550.5) (1,577.7)
- -----------------------------------------------------------------
Net properties $ 4,741.3 $ 4,308.4
- -----------------------------------------------------------------
Note 11: Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 1994 and 1993 consisted
of the following:
(In millions) 1994 1993
- -----------------------------------------------------------
Accounts and wages payable $190.3 $141.8
Accrued claims 106.4 90.3
Vacations 51.5 49.8
Rail restructuring 47.6 57.8
Taxes other than income taxes 36.4 34.3
Interest 31.9 28.1
Other 260.7 267.7
- -----------------------------------------------------------
Total $724.8 $669.8
- -----------------------------------------------------------
SANTA FE PACIFIC CORPORATION | 27
Note 12: Long-Term Debt
Long-term debt at December 31, 1994 and 1993 consisted of the following:
- ----------------------------------------------------------------------
(In millions) 1994 1993
======================================================================
Equipment Obligations, weighted average rate
of 8.6%, maturing from 1995 to 2009 $ 498.9 $ 478.9
Pipeline Exchangeable Debentures, 10.4%
(variable), maturing 2010 219.0 219.0
Senior Notes, 12.65%, maturing from 1998
to 2000 200.0 200.0
Senior Notes, 8.625%, maturing 2004 100.0 -
Senior Notes, 8.375%, maturing 2001 100.0 -
Mortgage Bonds, 4%, maturing 1995 95.8 95.8
Term Loan, 6.3% (variable), maturing 1995 36.2 108.7
Bank Term Loan, (variable) - 50.0
Other Obligations, 10.3%, maturing from
1995-2014 38.0 40.2
Debt discount (16.9) (16.8)
- ----------------------------------------------------------------------
Total long-term debt 1,271.0 1,175.8
Due within one year (203.6) (184.7)
- ----------------------------------------------------------------------
Due after one year $1,067.4 $ 991.1
======================================================================
In the fourth quarter of 1993, the Company established four related interest
rate swap transactions with a total notional principal amount of $100 million,
for the purpose of establishing rates in anticipation of a debt issuance under a
shelf registration statement. The swap transactions called for the payment of a
fixed interest rate of 6.2% which was based upon ten year treasury notes, and
the receipt of a variable interest rate. In conjunction with the fourth quarter
1994 issuance of the ten year 8.625% senior notes, the Company closed out the
swap transactions which resulted in a gain of $10.9 million. The gain was
deferred and will be recognized over the term of the borrowing.
During 1994, SFP had a $200 million revolving credit facility for general
corporate purposes, which was replaced with $250 million and $310 million
revolving credit facilities in conjunction with the Tender Offer and related
financing activities (see Note 2: Merger Activities). As of December 31, 1994,
no borrowings were outstanding under the $200 million revolving credit facility.
In December 1992, SFP accelerated the repayment of borrowings related to a
1990 litigation settlement. This early debt retirement resulted in an
extraordinary charge of $5.0 million, net of applicable tax benefits of $3.0
million, reflecting the write off of unamortized debt discount. The repayment
was made using a portion of the 1992 proceeds from Santa Fe Railway's sale of
rail lines in southern California (see Note 4: Gain on Sale of California
Lines).
As of December 31, 1994, projected principal repayments of long-term debt in
1995 through 1999, excluding capital leases, are $201.9 million, $45.5 million,
$41.9 million, $108.7 million and $103.8 million, respectively. SFP paid
interest totaling $102.6 million in 1994, $111.3 million in 1993 and $142.2
million in 1992.
Most railroad property is subject to liens securing Mortgage Bonds or
Equipment Obligations. The payment of cash dividends by SFP is restricted by
various debt covenants. Such restrictions vary with levels of income and other
factors. Certain other debt agreements of the Company and its subsidiaries
include covenants that limit indebtedness and intercompany dividends, require
maintaining various financial ratios, and restrict the disposition of assets.
See Note 2: Merger Activities for a discussion of changes to SFP's long-term
debt structure which occurred subsequent to December 31, 1994.
Note 13: Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at December 31,
1994 and 1993, and the methods and assumptions used to estimate such fair
values, are as follows:
Cash and short-term investments
The fair value of cash and short-term investments approximates book value
because of the short maturity of those instruments.
Note Receivable
The fair value of the Note Receivable approximates book value since the variable
interest rate on the note approximates current interest rates.
Other Investments
SFP maintains various investments of common stock in nonmarketable securities
which are accounted for under a cost basis. The carrying value of these
investments at December 31, 1994 and 1993 was $45 million and $46 million,
respectively, compared with estimated fair values, based on the underlying net
assets, of $123 million and $117 million, respectively.
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues, or on the current rates that would
be offered to the Company for debt of the same remaining maturities. The
carrying value of debt at December 31, 1994 and 1993 was $1,271.0 million and
$1,175.8 million, respectively, compared with estimated fair values of
approximately $1,359 million and $1,371 million, respectively.
Note 14: Hedging Activities, Leases and Other
Commitments
Hedging Activities
The Company enters into various commodity swap and collar transactions to manage
exposure against fluctuations in diesel fuel prices. The Company's fuel hedging
transactions are based on commodities established in the futures markets. The
prices of these commodities have historically shown a high degree of correlation
with the Company's diesel fuel prices. Cash settlements on contracts to hedge
fuel prices are made at the end of a quarter and the related gain or loss is
included in fuel expense for that quarter. To the extent the Company hedges
portions of its fuel purchases, it may not fully benefit from decreases in fuel
prices.
At December 31, 1994, the Company had entered into various commodity swap
transactions with several counterparties covering approximately 180 million
gallons of diesel fuel which is anticipated to cover approximately 45% of 1995
fuel purchases. These swap arrangements have an average price of 48 cents per
gallon. This price does not include taxes, fuel handling costs and any
differences that may occur from time to time between the prices of commodities
hedged and the purchase price of the Company's diesel fuel. The effect of the
Company's fuel hedging activities was to increase operating expense by $4.4
million and $12.4 million in 1994 and 1993, respectively, and to reduce
operating expense by $0.9 million in 1992. The effect of the Company's fuel
hedging activities since the inception of its fuel hedging program in 1990, has
been to increase operating expense by approximately $2 million. The unrealized
gain related to the fair market value of the Company's fuel hedging transactions
at December 31, 1994 was $1.6 million.
From time to time, the Company enters into various interest rate hedging
transactions for the purpose of managing exposure to fluctuation in interest
rates and establishing rates in anticipation of future debt issuances. During
1994, the Company closed out four related interest
28 SANTA FE PACIFIC CORPORATION
rate swap transactions in conjunction with the issuance of debt (see Note 12:
Long-Term Debt). As of December 31, 1994, the Company had no outstanding hedging
transactions related to interest rates, although, the Company has subsequently
entered into various interest rate transactions in conjunction with the Tender
Offer and related financing activities (see Note 2: Merger Activities).
The Company monitors its hedging positions and the credit ratings of its
counterparties and does not anticipate losses due to counterparty non-
performance.
Leases
SFP leases certain locomotives, freight cars, trailers, data processing
equipment and other property. Future minimum lease payments (which reflect
operating leases having non-cancelable lease terms in excess of one year) as of
December 31, 1994 are summarized as follows:
- --------------------------------------
(In millions)
======================================
1995 $ 54.6
1996 51.9
1997 40.1
1998 34.1
1999 31.8
Later years 146.4
- --------------------------------------
Total minimum payments $358.9
======================================
Rental expense for all operating leases related to continuing operations was
$103.6 million in 1994, $94.9 million in 1993 and $72.8 million in 1992.
Contingent rentals and sublease rentals were not significant.
Other Commitments
Santa Fe Railway has entered into agreements with certain locomotive suppliers
to maintain a portion of its locomotive fleet. As of December 31, 1994, these
agreements obligate Santa Fe Railway to make minimum annual payments over
periods ranging from one to eighteen years. Santa Fe Railway has also entered
into haulage agreements with other rail carriers under which it is required to
make minimum payments if specified traffic levels are not met. Together, these
agreements require minimum annual payments of approximately $80 million in 1995,
$76 million in 1996, $75 million in 1997, $74 million in 1998, $73 million in
1999, and $385 million in total thereafter through 2012. Payments under the
agreements totaled approximately $103 million, $68 million and $62 million in
1994, 1993 and 1992, respectively.
In connection with the closing of the sale of rail lines in southern
California, Santa Fe Railway has entered into various shared use agreements with
the agencies, which require Santa Fe Railway to pay the agencies approximately
$6 million annually to maintain track structure and facilities.
Note 15: Environmental and Other Contingencies
Environmental
The Company is subject to extensive regulation under federal, state and local
environmental laws covering, for example, discharges to waters, air emissions,
toxic substances, and the generation, handling, storage, transportation, and
disposal of waste and hazardous materials. These laws and regulations have the
effect of increasing the cost and liabilities associated with the operations of
the Company. Environmental risks are also inherent in railroad operations which
frequently involve transporting chemicals and other hazardous materials.
Santa Fe Railway expects it will become subject to future requirements
regulating air emissions from diesel locomotives that may increase its operating
costs. During 1995, the Environmental Protection Agency (EPA) must issue
regulations applicable to new locomotive engines. It is anticipated that these
regulations will be effective for locomotive engines installed after 1999. Under
some interpretations of federal law, older locomotive engines may be regulated
by states based on standards and procedures which the State of California
ultimately adopts. At this time it is unknown whether California will adopt any
locomotive emission standards.
In addition, many of SFP's land holdings are and have been used for industrial
or transportation related purposes or leased to commercial or industrial
companies whose activities may have resulted in discharges onto the property. As
a result, the Company is now subject and will from time to time continue to be
subject to environmental clean-up and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as the "Superfund" law, generally imposes joint and several
liability for clean-up and enforcement costs, without regard to fault or the
legality of the original conduct, on current and former owners and operators of
a site. Accordingly, SFP may be responsible under CERCLA and other federal and
state statutes for all or part of the costs to clean up sites at which certain
substances may have been released by the Company, its current lessees, former
owners or lessees of properties, or other third parties.
At December 31, 1994, SFP had been named a potentially responsible party (PRP)
at seven sites on the EPA's National Priorities List. SFP is also potentially
liable for the cost of clean-up at other sites identified by the EPA and other
agencies. SFP has identified approximately 125 sites where costs exist for
environmental clean-up and monitoring, including some where no claim has been
asserted and no agency is currently involved. These sites include, among other
things: closed facilities, diesel locomotive repair shops, tie treating plants,
fueling facilities and underground storage tanks; property leased or sold to
others; and current operating sites.
Estimates of the Company's ultimate liabilities associated with Superfund and
other environmental sites are difficult to predict with certainty due to, among
other factors, the number of parties involved, possible remediation
alternatives, lengthy time frames, evolving environmental laws and regulations,
and potential recoveries from third parties. Environmental costs include initial
site surveys and environmental studies of potentially contaminated sites, costs
for remediation and restoration of sites determined to be contaminated, as well
as post-closure and ongoing monitoring costs. Estimated costs at sites where SFP
is a PRP are generally based on cost sharing agreements which vary from site to
site. These costs are typically allocated based on the financial condition of
other PRP's, volume of material contributed, the portion of the total site owned
or operated by each PRP, and/or the amount of time the site was owned or
operated.
During 1992, management completed an internal assessment of Santa Fe Railway's
environmental liabilities, including a site-by-site analysis of properties with
potentially significant environmental exposure. As a result of this review and
analysis, an additional accrual of $67 million was recorded as part of the rail
special charge to provide for future costs of this nature (see Note 5: Rail
Special Charge). The Company also monitors accruals for environmental sites that
have been identified, based on additional information developed in subsequent
periods. The additional information is based on a combination of factors
including independent consulting reports, site visits, legal reviews and
historical trend analysis. At December 31, 1994 and 1993, the Company had
accrued liabilities for environmental costs of approximately $126 million and
$125 million, respectively. The Company has not included any reduction in costs
for anticipated recovery from insurance.
Payments recorded against environmental liabilities totaled $20.0 million,
$13.5 million and $6.3 million for the years ended December 31,
SANTA FE PACIFIC CORPORATION | 29
1994, 1993 and 1992, respectively. The majority of these payments related to
mandatory clean-up efforts. Capital expenditures related to environmental sites
were insignificant during this period. The Company anticipates that
approximately 75% of the accrued costs at December 31, 1994 will be paid over
the next five years, with approximately $25 million of payments occurring in
1995. It is the opinion of SFP management that none of the above items, when
finally resolved, will have a material adverse effect on the annual results of
operations, financial position or liquidity of SFP, although an adverse
resolution of a number of these items in a single year could have a material
adverse effect on the results of operations for that year.
Other Claims and Litigation
SFP is also a party to a number of other legal actions and claims, including
employee injury claims, various governmental proceedings and private civil
suits, arising in the ordinary course of business. While the final outcome of
these other legal actions cannot be predicted with certainty, considering among
other things, the meritorious legal defenses available, it is the opinion of SFP
management that none of these claims, when finally resolved, will have a
material adverse effect on the annual results of operations, financial position
or liquidity of SFP, although an adverse resolution of a number of these items
in a single year could have a material adverse effect on the results of
operations for that year.
Note 16: Pension Plans
SFP and its subsidiaries have two significant defined benefit pension plans: the
trusteed noncontributory Santa Fe Pacific Corporation Retirement Plan
(Retirement Plan) and the Santa Fe Pacific Corporation Supplemental Retirement
Plan (Supplemental Plan).
The Retirement Plan complies with Employee Retirement Income Security Act of
1974 (ERISA) requirements and covers nearly all officers and employees of SFP
and its subsidiaries not covered by collective bargaining agreements. Benefits
payable under the Retirement Plan are based on compensation during the 60
highest paid consecutive months of service during the ten years immediately
preceding retirement, and years of service. SFP's funding policy is to
contribute annually not less than the ERISA minimum, and not more than the
maximum amount deductible for income tax purposes.
The Supplemental Plan is an unfunded plan that provides supplementary
retirement benefits primarily to certain executives.
Components of pension income and expense applicable to continuing operations
relating to the Retirement and Supplemental Plans for 1994, 1993 and 1992 were
as follows:
- ---------------------------------------------------------------
Retirement Plan
-------------------------
(In millions) 1994 1993 1992
- ---------------------------------------------------------------
Components of pension
(income) expense
Service cost $ 7.4 $ 6.0 $ 7.1
Interest cost 42.4 41.9 39.1
Actual return on plan assets (10.1) (110.4) (58.5)
Net amortization and deferral (53.0) 46.6 (5.3)
- ---------------------------------------------------------------
Total $(13.3) $ (15.9) $(17.6)
===============================================================
- ---------------------------------------------------------------
Supplemental Plan
-------------------------
(In millions) 1994 1993 1992
- ---------------------------------------------------------------
Components of pension expense
Service cost $0.1 $0.1 $0.1
Interest cost 0.6 0.6 0.7
Net amortization and deferral 0.6 0.5 0.6
- ---------------------------------------------------------------
Total $1.3 $1.2 $1.4
===============================================================
The following table shows the reconciliation of the funded status of the plans
with amounts recorded at December 31, 1994 and 1993. The Company uses a
September 30 measurement date.
- ----------------------------------------------------------------------
Retirement Plan
-------------------
(In millions) 1994 1993
- ----------------------------------------------------------------------
Plan assets at fair value, primarily invested in
common stock, and U.S. and corporate bonds $ 626.3 $ 657.3
Actuarial present value of projected
benefit obligation
Accumulated benefit obligation
Vested (484.9) (535.1)
Nonvested (24.9) (30.5)
Provision for future salary increases (30.5) (40.4)
- ----------------------------------------------------------------------
Excess of plan assets over projected benefit
obligation 86.0 51.3
Unrecognized net loss 13.8 33.5
Unrecognized prior service cost 9.8 13.4
Unrecognized net assets being recognized
ratably through 2002 (14.2) (16.1)
- ----------------------------------------------------------------------
Prepaid pension asset $ 95.4 $ 82.1
======================================================================
- ----------------------------------------------------------------------
Supplemental Plan
-------------------
(In millions) 1994 1993
- ----------------------------------------------------------------------
Actuarial present value of projected benefit
obligation
Accumulated vested benefit obligation $(7.5) $(8.3)
Provision for future salary increases (2.3) (0.6)
- ----------------------------------------------------------------------
Projected benefit obligation (9.8) (8.9)
Unrecognized net gain (3.0) (0.8)
Unrecognized prior service cost 2.9 -
Unrecognized net transition obligation being
recognized ratably through 2003 5.1 5.6
Adjustment required to recognize minimum
liability (2.7) (4.2)
- ----------------------------------------------------------------------
Accrued pension liability $(7.5) $(8.3)
- ----------------------------------------------------------------------
Major assumptions
(Retirement and Supplemental Plans):
Discount rate 8.5% 7.0%
Rate of increase in compensation levels 4.0% 4.0%
Expected return on market related value of
plan assets 9.75% 9.75%
======================================================================
Note 17: Other Postretirement Benefits
As of June 1994, salaried employees who have rendered ten years of service after
attaining age 45 are eligible for both medical benefits and life insurance
coverage during retirement. Prior to June 1994, salaried employees who had
attained age 55 and rendered ten years of service were eligible. This change in
eligibility requirements resulted in a $29.5 million pre-tax curtailment gain in
1994 relating to employees who are no longer currently eligible for
postretirement medical benefits, and a negative plan amendment due to a
reduction in the accumulated postretirement benefit obligation related to
remaining eligible active employees. $28.1 million of the curtailment gain was
reflected in Other Income (Expense)-Net with the remaining $1.4 million recorded
in Equity in Earnings of Pipeline Partnership.
The retiree medical plan is contributory and provides benefits to retirees,
their covered dependents and beneficiaries. Retiree contributions are adjusted
annually. The plan also contains fixed deductibles, coinsurance and out-of-
pocket limitations. The life insurance plan is noncontributory and covers
retirees only.
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 106
effective January 1, 1992 (see Note 18: Change in
30 | SANTA FE PACIFIC CORPORATION
Method of Accounting for Postretirement and Postemployment Benefits). Components
of net periodic postretirement benefit cost applicable to continuing operations
relating to the medical plan and the life insurance plan were as follows:
Medical Plan
------------------
(In millions) 1994 1993
- --------------------------------------------------------------
Components of net periodic
postretirement benefit cost
Service cost $ 4.0 $ 3.3
Interest cost 14.5 15.1
Net amortization and deferral (4.8) (3.4)
- --------------------------------------------------------------
Total $13.7 $15.0
==============================================================
Life Insurance Plan
-------------------
(In millions) 1994 1993
- --------------------------------------------------------------
Components of net periodic
postretirement benefit cost
Service cost $0.2 $0.2
Interest cost 3.4 3.9
- --------------------------------------------------------------
Total $3.6 $4.1
==============================================================
SFP's policy is to fund benefits payable under the medical and life
insurance plans as they come due. The following table shows the reconciliation
of the plans' obligations to amounts accrued at December 31, 1994 and 1993. The
Company uses a September 30 measurement date.
Medical Plan
------------------
(In millions) 1994 1993
- --------------------------------------------------------------
Accumulated postretirement
benefit obligation
Retirees $114.4 $138.6
Fully eligible active plan participants 13.4 16.1
Other active plan participants 36.8 76.1
- --------------------------------------------------------------
Accumulated postretirement
benefit obligation 164.6 230.8
- --------------------------------------------------------------
Unrecognized prior service credit 42.8 41.3
Unrecognized net gain (loss) 0.2 (40.3)
- --------------------------------------------------------------
Accrued postretirement liability $207.6 $231.8
==============================================================
Life Insurance Plan
-------------------
(In millions) 1994 1993
- --------------------------------------------------------------
Accumulated postretirement
benefit obligation
Retirees $40.4 $45.8
Fully eligible active plan participants 0.1 0.2
Other active plan participants 3.4 4.9
- --------------------------------------------------------------
Accumulated postretirement
benefit obligation 43.9 50.9
- --------------------------------------------------------------
Unrecognized net loss (1.0) (5.5)
- --------------------------------------------------------------
Accrued postretirement liability $42.9 $45.4
==============================================================
The unrecognized prior service credit will be amortized straight line over
the average future service to full eligibility of the active participants.
For 1995, the assumed health care cost trend rate for managed care medical
costs is 11% and is assumed to decrease gradually to 5% by 2006 and remain
constant thereafter. For medical costs not in managed care, the assumed health
care cost trend rate is 13% and is assumed to decrease gradually to 5% by 2006
and remain constant thereafter. Increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation for the medical plan by $27.8 million and the
combined service and interest components of net periodic postretirement benefit
cost recognized in 1994 by $2.6 million. In 1994, the assumed health care cost
trend rate for managed care medical costs was 11.5% and was assumed to decrease
gradually to 5% by 2006 and remain constant thereafter. For medical costs not in
managed care, the assumed health care cost trend rate was 14% in 1994 and was
assumed to decrease gradually to 5% by 2006 and remain constant thereafter.
The weighted-average discount rate assumed in determining the accumulated
postretirement benefit obligation was 8.5% and 7% in 1994 and 1993,
respectively. The assumed weighted-average salary increase was 4.0% in 1994 and
1993.
Other Plans
Under collective bargaining agreements, Santa Fe Railway participates in
multiemployer benefit plans which provide certain postretirement health care and
life insurance benefits for eligible union employees. Insurance premiums paid
attributable to retirees, which are generally expensed as incurred, were $3.2
million, $3.3 million and $3.5 million in 1994, 1993 and 1992, respectively.
Note 18: Change in Method of Accounting for Postretirement and Postemployment
Benefits
Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS No. 106 requires that
an actuarial method be used to accrue the expected cost of postretirement health
care and other benefits over employees' years of service. SFAS No. 112 relates
to benefits provided to former or inactive employees after employment but before
retirement. SFAS No. 112 requires these benefits be recognized if they are
vested, and payment is probable and can be reasonably estimated. Before 1992,
the cost of most postretirement and certain postemployment benefits were
expensed when paid. The cumulative effect of this change in accounting
attributable to years prior to 1992 was to decrease 1992 net income by $163.0
million, net of the related income tax benefit of $97.0 million. The impact of
SFAS No. 106 comprises approximately $158 million of the change.
Note 19: Stock Option and Growth Plans
Under various plans, the most significant of which are the Santa Fe Pacific Long
Term Incentive Stock Plan (Long Term Plan) and the Santa Fe Pacific Incentive
Stock Compensation Plan (Incentive Compensation Plan), options have been granted
to employees to purchase common stock of SFP at a price not less than the fair
market value at the date of grant. Options can usually be exercised no earlier
than one year after the date of grant and expire ten years after the date of
grant.
Also, approximately 900,000 shares of restricted stock have been granted
under these plans. The restrictions on a majority of these shares lapse upon
attaining certain corporate performance objectives, completing a required
vesting period, or upon a change in control. Shareholder approval of the Merger
is considered a change in control and accordingly, approximately 750,000 shares
of restricted stock vested in February 1995.
As a result of the distribution of SFP Gold common stock on September 30,
1994, SFP's outstanding stock options were adjusted resulting in a 6.7 million
increase in outstanding options, accompanied with a decrease in the related
exercise price resulting in a decline in average option price. These adjustments
complied with regulations under the Internal Revenue Code and resulted from
adjustment provisions in the
Santa Fe Corporation 31
respective plans. The maximum number of shares available under these plans
increased by a combined 6.7 million shares. A total of 16.2 million shares,
including additional shares that may be granted in exchange for shares tendered
to the Company to pay for an option exercise is the maximum available under the
Long Term Plan, and a total of 20.8 million shares is the maximum available
under the Incentive Compensation Plan.
The Long Term Plan replaced the Incentive Compensation Plan and no new grants
will be made under the Incentive Compensation Plan. Under these plans, awards
may be granted in the form of (1) options to purchase SFP common stock; (2)
shares of restricted stock, which may be issued in combination with performance
units; (3) performance units; (4) limited stock appreciation rights; and (5)
stock appreciation rights. Aggregate awards of 11.1 million shares under the
Long Term Plan and 16.9 million shares under the Incentive Compensation Plan, of
SFP common stock, net of options surrendered or terminated, have been made in
the form of options, stock appreciation rights, and restricted stock.
Approximately 14.5 million and 4.9 million of outstanding options at December
31, 1994 and 1993, respectively, were exercisable within the next year. Option
activity in all plans during 1994, 1993 and 1992 is summarized below:
- -------------------------------------------------------------------------------
SFP Average
Shares Price
===============================================================================
Options outstanding at December 31, 1991 11,045,300 $ 7.23
Granted 70,000 12.31
Exercised 2,114,257 6.93
Surrendered or terminated 750,475 8.43
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1992 8,250,568 $ 7.24
Granted 5,814,770 17.17
Exercised 3,284,947 7.21
Surrendered or terminated 176,544 9.91
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1993 10,603,847 $12.65
Granted 328,795 12.52
Adjustment for spin-off of gold subsidiary 6,666,629
Exercised 2,999,605 7.70
Surrendered or terminated 129,595 12.58
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1994 14,470,071 $ 8.05*
===============================================================================
* Reflects adjustment to market price of stock subsequent to September 1994
distribution of SFP Gold common stock.
Note 20: Stockholder Rights Plan
On November 28, 1994, SFP declared a dividend distribution of one preferred
stock purchase right for each common share outstanding to stockholders of record
as of December 9, 1994. Pursuant to the Rights Agreement of November 28, 1994 as
amended on January 24, 1995 (the Rights Agreement), each right may under certain
circumstances be exercised to buy one one-hundredth of a newly issued share of
Series A Junior Participating Preferred Stock at a price of $50. The rights may
only be exercised after a person or group acquires ownership of 15% or more of
SFP's common shares or commences a tender or exchange offer which upon
consummation would result in ownership of 15% or more of the common shares. The
rights, which do not have voting rights, expire on December 9, 2004 and may be
redeemed by SFP at a price of $.01 per right at any time until 15 days, subject
to extension, after a public announcement of the acquisition of 15% of SFP's
common stock.
Subject to the terms of the amendment described below, if 15% of SFP's common
stock is acquired by any person or if certain other events occur, then
generally, each right not owned by a 15% -or-more stockholder will entitle the
holder to purchase, at the right's then-current exercise price, shares of SFP
common stock, having a value of twice the right's exercise price. The Board of
Directors of SFP may, at its sole discretion, delay distribution of the rights,
and has done so in regards to the Merger. In addition, if SFP is involved in a
merger or other business combination transaction with another person in which
its common shares are changed or converted, or sells 50% or more of its assets
or earnings power, each right will entitle its holder to purchase shares of
common stock of the surviving corporation having a value of twice the rights'
exercise price.
Note 21: Summarized Quarterly Operating Results (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1993
-----------------------------------------------------------------------------
(In millions, except per share data) First Second Third Fourth First Second Third Fourth
====================================================================================================================================
Operating Revenues $631.5 $658.2 $680.2 $711.0 $583.2 $609.1 $585.8 $631.1
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 90.7 $ 97.4 $117.8 $123.0 $ 71.2 $ 82.1 $ 49.6 $114.8
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss)
Continuing Operations $ 54.2 $ 48.4 $ 50.5 $ 46.3 $106.4 $ 28.2 $(10.3) $ 53.1
Discontinued Operations, Net of Income Taxes 13.9 9.2 -- -- 20.7 119.3 7.5 13.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 68.1 $ 57.6 $ 50.5 $ 46.3 $127.1 $147.5 $ (2.8) $ 67.0
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Per Common Share
Continuing Operations $ 0.29 $ 0.25 $ 0.27 $ 0.24 $ 0.57 $ 0.15 $(0.05) $ 0.28
Discontinued Operations 0.07 0.05 -- -- 0.11 0.64 0.04 0.08
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Per Common Share $ 0.36 $ 0.30 $ 0.27 $ 0.24 $ 0.68 $ 0.79 $(0.01) $ 0.36
====================================================================================================================================
(1) The sum of income per share from discontinued operations and net income
(loss) per share for the four quarters of 1993 does not equal the related
net income (loss) per share for the full year due to incremental shares
resulting from stock options.
32 | SANTA FE PACIFIC CORPORATION