-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Lws1KFbxKRnIfOSo8ItHFCYqdpvItB/WtMuAE9Whc68uxdnctrZArfCgvmqJxkpY AAgUGf/x8tBqGfAsxd8VCg== 0000950131-94-001510.txt : 19941006 0000950131-94-001510.hdr.sgml : 19941006 ACCESSION NUMBER: 0000950131-94-001510 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940803 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19941005 SROS: CBOE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANTA FE PACIFIC CORP CENTRAL INDEX KEY: 0000732639 STANDARD INDUSTRIAL CLASSIFICATION: 4011 IRS NUMBER: 363258709 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08627 FILM NUMBER: 94551671 BUSINESS ADDRESS: STREET 1: 1700 EAST GOLF RD CITY: SCHAUMBURG STATE: IL ZIP: 60173-5860 BUSINESS PHONE: 7089956000 FORMER COMPANY: FORMER CONFORMED NAME: SANTA FE SOUTHERN PACIFIC CORP DATE OF NAME CHANGE: 19890516 8-K/A 1 FORM 8-K AMEND #2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 3, 1994 ---------------- SANTA FE PACIFIC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION) 1-8627 36-3258709 (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NO.) ---------------- 1700 EAST GOLF ROAD, SCHAUMBURG, 60173-5860 ILLINOIS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (708) 995-6000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (NOT APPLICABLE) (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION TO BE INCLUDED IN THE REPORT ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits: Included as Exhibit 99 is financial information restated to reflect Santa Fe Pacific Corporation's gold operations as discontinued operations. See Exhibit Index included herewith at E-1. 1 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. Santa Fe Pacific Corporation (Registrant) /s/ Thomas N. Hund By: _________________________________ Thomas N. Hund Vice President and Controller Date: October 5, 1994 2 SANTA FE PACIFIC CORPORATION INDEX OF EXHIBITS
SEQUENTIAL EXHIBIT PAGE NUMBER DOCUMENT DESCRIPTION NUMBER ------- -------------------- ---------- 23 Consent of Independent Accountants. 99 Santa Fe Pacific Corporation financial information restated for discontinued operations. The following financial information is included: 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 1 3. Consolidated Financial Statements: Report of Independent Accountants 11 Consolidated Statement of Operations for the three years ended December 31, 1993 12 Consolidated Balance Sheet at December 31, 1993 and 1992 13 Consolidated Statement of Cash Flows for the three years ended December 31, 1993 14 Consolidated Statement of Shareholders' Equity for the three years ended December 31, 1993 15 Notes to Consolidated Financial Statements 16
E-1 EX-23 2 CONSENT OF IND ACCNTNT EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in (i) the Registration Statements on Form S-8 (Nos. 33-12072; 33-26814; 33-33413; 33-41409; 33-60628; and 33-63208), (ii) the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-51435) and (iii) the Prospectus constituting part of the Post-Effective Amendment 1-D on Form S-8 to the Registration Statement on Form S-14 (No. 2-87755) of Santa Fe Pacific Corporation of our report dated February 4, 1994, except for the retroactive restatement described in Note 2 of the notes to consolidated financial statements, as to which the date is June 29, 1994, appearing on page 11 of Exhibit 99 of this Form 8-K/A. /s/ Price Waterhouse LLP Price Waterhouse LLP Kansas City, Missouri October 5, 1994 EX-99 3 MANGMNT DISC & ANALYSIS EXHIBIT 99 CONSOLIDATED FINANCIAL REVIEW MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. REVENUE INFORMATION (In millions) SANTA FE RAILWAY--OPERATING REVENUES
YEAR ENDED DECEMBER 31, -------------------------- 1993 1992 1991 -------- -------- -------- Freight Revenues Intermodal Business Unit Direct Marketing................................ $ 404.1 $ 345.7 $ 290.5 Intermodal Marketing Companies.................. 376.6 398.4 402.2 International................................... 196.1 168.2 150.1 -------- -------- -------- Total Intermodal Business Unit................ 976.8 912.3 842.8 -------- -------- -------- Carload Business Unit Chemicals and Petroleum......................... 281.3 282.7 258.6 Coal............................................ 220.1 193.8 190.5 Vehicles and Parts.............................. 191.2 136.7 144.1 Whole Grain..................................... 160.6 143.4 145.8 Minerals and Ores............................... 143.1 157.0 166.0 Forest Products................................. 121.6 115.9 102.7 Consumer Products............................... 113.9 117.1 116.2 Grain Products.................................. 82.3 80.4 71.1 Primary Metals.................................. 77.6 70.3 69.8 -------- -------- -------- Total Carload Business Unit................... 1,391.7 1,297.3 1,264.8 -------- -------- -------- Total Revenue Before Adjustments.................... 2,368.5 2,209.6 2,107.6 Miscellaneous Adjustments........................... -- 3.3 5.5 -------- -------- -------- Total Freight Revenue......................... 2,368.5 2,212.9 2,113.1 Other Revenues...................................... 40.7 38.8 40.4 -------- -------- -------- Total Operating Revenues...................... $2,409.2 $2,251.7 $2,153.5 ======== ======== ========
RESULTS OF OPERATIONS 1993 Compared with 1992 Santa Fe Pacific Corporation ("SFP" or "Company") reported 1993 net income of $338.8 million or $1.81 per share compared to a net loss of $104.5 million or $0.57 per share last year. Income from continuing operations was $177.4 million or $0.95 per share compared to $21.1 million or $0.11 in the prior year. The increase in net income primarily relates to: (1) higher operating income of $340.5 million at The Atchison, Topeka and Santa Fe Railway Company (Santa Fe Railway) principally due to a $320.4 million special charge recorded in 1992 as well as increased business levels in 1993, partially offset by the negative impact of midwest floods in 1993; (2) lower interest expense of $31.1 million; (3) higher income from discontinued operations partially due to an after-tax gain of $108.3 million on the exchange of mineral assets in 1993; and (4) a $163.0 million charge in 1992 for an accounting change. The above are partially offset by: (1) a $59.5 million decline in pre-tax gains on the sale of rail lines in California; and (2) the increase in the federal income tax rate from 34% to 35% during 1993. 1 On June 29, 1994, SFP's Board of Directors approved the distribution of SFP's interest in Santa Fe Pacific Gold Corporation ("SFP Gold") to SFP shareholders (see Other Matters--Distribution of SFP Gold Subsidiary to Shareholders). As a result, SFP Gold is reflected as a discontinued operation in the consolidated financial statements. Income from discontinued operations, net of income taxes was $161.4 million in 1993 compared to $42.4 million in 1992. The higher income from discontinued operations in 1993 principally reflects an after-tax gain of $108.3 million or $0.58 per share on an exchange of mineral assets. Special items in 1993 include pre-tax gains of $145.4 million from the sale of rail lines in southern California (see Other Matters--Sale of California Lines) and $21.6 million related to the favorable outcome of arbitration and litigation settlements. In addition, 1993 includes $12.2 million of pre-tax expense for SFP's portion of environmental and litigation charges at Santa Fe Pacific Pipeline Partners, L.P. ("Pipeline Partnership"), and an increase in income tax expense of $27.7 million for the retroactive effect from the date of enactment of the increase in the federal income tax rate from 34% to 35%. Special items in 1992 include a pre-tax gain of $204.9 million from the sale of rail lines in southern California (see Other Matters--Sale of California Lines). Additionally, 1992 included pre-tax special charges of $320.4 million at Santa Fe Railway principally related to a new labor agreement, operations centralization and increased environmental accruals (See Other Matters-- Contingencies and Other Matters--Rail Restructuring) and $4.5 million for SFP's portion of environmental charges at the Pipeline Partnership. Also, a charge of $163.0 million after taxes was recorded for the adoption of Statement of Financial Accounting Standards ("SFAS") No.'s 106 and 112, on accounting for postretirement and postemployment benefits other than pensions. This charge represented the cumulative effect of the new principle on years prior to 1992. Finally, an extraordinary charge of $5.0 million after taxes was recorded on early extinguishment of debt. Excluding discontinued operations and special items in both years, SFP's 1993 net income was approximately $114.5 million or $0.61 per share compared to $96.4 million or $0.52 per share in 1992. The improved results are due to higher operating income at Santa Fe Railway, higher equity income from SFP's investment in the Pipeline Partnership and lower interest expense, partially offset by reduced other income (expense)--net. Santa Fe Railway Operating income was $317.7 million and represents an increase of $340.5 million over the $22.8 million operating loss reported in 1992. The increase is the result of the $320.4 million special charge in 1992 discussed above, as well as continued growth in revenues despite an estimated $40 million in lost revenues due to midwest flooding, and increased efficiencies related to operations, partially offset by increased expenses from higher traffic volumes and from flooding in the midwest. Operating income in 1993 increased 7% compared to 1992 excluding the special charge, while the operating ratio of 86.8% was even with adjusted 1992. Operating revenues increased by $157.5 million or 7% in 1993 reflecting a 7% increase in carloadings while average revenue per car remained constant. The volume increase occurred despite the midwest flooding. Intermodal Business Unit ("IBU") revenues increased by 7% to $976.8 million primarily due to a 6% increase in carloadings. Continued growth of Santa Fe Railway's alliance with J.B. Hunt was the principal factor for the 17% increase in direct marketing revenues. International revenues improved by 17% reflecting both continued growth in shipments from existing customers and new contracts. Intermodal Marketing Companies' revenue declined 5% due to lower volumes. The average IBU revenue per car increased 1% principally reflecting a shift in mix to higher rated direct marketing traffic. Carload Business Unit ("CBU") revenues increased by 7% to $1,391.7 million as carloadings increased 8% while average revenue per car declined slightly. Vehicles and parts revenues increased by $54.5 million to $191.2 million due principally to new business related to a long-term automotive contract with General Motors in the Arizona and southern California corridors which began in December 1992. Coal revenues increased 14% to $220.1 million and include traffic related to Wisconsin Electric Power's long-term purchase 2 agreement with the Pittsburg & Midway Coal Mine located near Raton, New Mexico which began in the third quarter of 1992. Whole grain revenues increased 12% to $160.6 million reflecting both higher volumes due to a rise in export shipments and higher average revenue per car due to longer haul shipments and rate increases. Primary metals revenues of $77.6 million were $7.3 million higher principally due to an increase in steel shipments along the west coast. Forest products revenues rose 5% to $121.6 million due to favorable average revenue per car reflecting a shift in mix to higher rated lumber products shipments. Minerals and ores revenues declined 9% to $143.1 million due to sluggish international markets and foreign competition in the sulphur and potash industries. Operating expenses of $2,091.5 million decreased by $183.0 million from 1992, which included the $320.4 million special charge discussed above. Compensation and benefits expense rose slightly as higher traffic levels and cost escalations were offset by increased efficiencies, which include the effect of a crew consist agreement reached in September 1992 with the United Transportation Union reducing crew sizes on the eastern half of the railroad. Revenue ton miles per average employee improved by 8% reflecting efficiencies and volume growth. Fuel expense of $239.1 million rose $33.6 million reflecting a 9% increase in consumption and a 7% higher price. The increase in consumption reflects the higher traffic volumes as well as additional consumption associated with flood-related train detours. The higher fuel price includes a 4.3 cent increase in federal tax on fuel which became effective October 1, 1993. Equipment rents expense increased by $43.4 million to $229.4 million due to the higher traffic volume, the lease of equipment for new business and additional expenses associated with flood-related train detours. Other expenses rose by $51.6 million to $507.1 million due to the higher volume levels including ramping/deramping and drayage costs for IBU shipments, and various other contract service costs. Operating expenses increased by $137.4 million excluding the 1992 special charge. Equity in Earnings of Pipeline Partnership SFP's investment in the Pipeline Partnership produced equity income of $18.6 million including the $12.2 million special litigation and environmental charge, a decrease of $5.5 million compared to 1992 which included a $4.5 million special environmental charge. The Pipeline Partnership's revenues increased 7% principally reflecting a 3% volume increase and 4% increase in average revenue per barrel. Operating expenses at the Pipeline Partnership increased by $27.6 million due to a $17.0 million increase in special charges and higher major maintenance and administrative expenses. Excluding special items in both years, SFP's equity investment in the Pipeline Partnership produced income of $30.8 million in 1993 compared to $28.6 million in 1992. Interest Expense/Other Income (Expense)--Net Interest expense declined by $31.1 million or 19% due principally to lower outstanding debt as well as favorable variable interest rates. Other income (expense)--net increased by $6.1 million to $5.8 million reflecting $21.6 million related to favorable outcome of arbitration and litigation settlements, partially offset by lower interest income and reduced income from real estate activities. Income Taxes Income tax expense in 1993 includes an increase of approximately $27.7 million which reflects the retroactive impact of the increase in the federal tax rate from 34% to 35% from the date of enactment of the Omnibus Budget Reconciliation Act of 1993, signed into law on August 10, 1993. A majority of this increase relates to additional tax expense related to temporary differences at January 1, 1993. SFAS No. 109--"Accounting for Income Taxes" requires deferred taxes to be provided using enacted tax rates in effect during the years in which the differences are expected to reverse. Discontinued Operations Income from discontinued operations, net of income taxes increased $119.0 million due to an after-tax gain of $108.3 million related to the exchange of assets with Hanson Natural Resources Company ("Hanson") and higher operating income from gold. Ounces sold doubled to 591,000 in 1993, which reflects increased 3 sales from existing mines as well as production in the second half of the year from mines received in the exchange of assets with Hanson. Operating income from coal and aggregate operations declined by approximately $14 million as 1993 included only six months of operations due to the exchange of these assets with Hanson. 1992 Compared with 1991 SFP had a 1992 net loss of $104.5 million or $0.57 per share compared to 1991 net income of $96.4 million or $0.54 per share. Income from continuing operations was $21.1 million or $0.11 per share compared to $62.4 million or $0.35 in 1991. The decrease in net income primarily relates to: (1) lower operating income of $278.2 million which includes a $320.4 million special charge recorded in 1992, partially offset by higher business levels; (2) lower other income-net of $25.8 million; and (3) a $163.0 million charge for an accounting change in 1992. The above are partially offset by: (1) a $204.9 million pre-tax gain on the sale of rail lines in California in 1992; (2) lower interest expense of $44.4 million; and (3) higher income from discontinued operations. Excluding the special items in 1992 discussed previously, net income from continuing operations for 1992 was $96.4 million or $0.52 per share compared to net income from continuing operations of $62.4 million or $0.35 per share in 1991. This improvement in adjusted 1992 income from continuing operations is due to higher operating income at Santa Fe Railway and lower interest expense, partially offset by lower other income (expense)--net. Santa Fe Railway Operating loss was $22.8 million and represents a decrease of $278.2 million compared to operating income of $255.4 million reported in 1991. This decrease was principally due to the 1992 special charge, partially offset by higher business levels and increased operating efficiencies. Excluding the special charge, operating income in 1992 increased 17% compared to 1991 while the operating ratio as adjusted, improved from 88.1% in 1991 to 86.8% in 1992. Operating revenues increased by $98.2 million or 5% in 1992 due to a 6% increase in carloadings partially offset by a 1% decrease in the average revenue per car. IBU revenues increased by 8% to $912.3 million as carloadings were up 11% while average revenue per car declined by 3%. Growth of J.B. Hunt shipments was the principal factor for the 19% increase in direct marketing revenues. International revenues improved by 12% principally reflecting continued growth in shipments from existing customers. The average revenue per car declined due to a shift in traffic mix, reflecting growth in international container shipments which move at lower average rates, as well as competitive pressures within all IBU segments. CBU revenues increased by 3% to $1,297.3 million as carloadings increased 3% while average revenue per car remained relatively constant. Chemicals and petroleum revenues increased by 9% to $282.7 million due largely to increased shipments of plastics and agricultural and industrial chemicals. Forest products revenues increased by 13% to $115.9 million due to both favorable volume and average revenue per car including a rebound in the housing market which resulted in increased shipments of lumber and other forest products. Grain products revenues of $80.4 million increased by $9.3 million reflecting increased shipments of corn syrup, soybean meal and tapioca. The average revenue per car within grain products was higher reflecting in part increases in rates on export flour traffic. Minerals and ores revenues declined 5% to $157.0 million as competitive pressures depressed sulphur and potash rates. Vehicles and parts revenues decreased by $7.4 million to $136.7 million principally reflecting declines in long haul traffic which caused the average revenue per car to decline by 7%. Operating expenses increased by $376.4 million to $2,274.5 million, and includes the $320.4 million special charge. Compensation and benefits expense increased 2% reflecting increased levels of traffic and cost escalations. Average employees for the year declined 4% to 14,218 partially due to a new labor agreement 4 with train crew personnel, and revenue ton miles per average employee increased by 11% reflecting improved efficiency and volume growth. Fuel expense of $205.5 million declined by $1.2 million principally reflecting a 3% decline in price. Fuel consumption increased only 2% despite the 6% increase in traffic volume, due to the lease of 90 new, fuel efficient locomotives in 1992 as well as other conservation efforts. Equipment rents expense increased by $23.8 million to $186.0 million due to the higher traffic volume as well as the lease of locomotives. Materials and supplies expense declined by 6% to $127.5 million principally reflecting reduced equipment maintenance. Other expenses increased by $27.6 million to $455.5 million largely reflecting volume related increases including ramping/deramping and drayage costs for IBU shipments. Operating expenses increased by $56.0 million excluding the special charge. Equity in Earnings of Pipeline Partnership SFP's investment in the Pipeline Partnership produced equity income of $24.1 million including the $4.5 million special environmental charge. This was a decrease of $3.0 million compared to 1991. The Pipeline Partnership's revenues increased 6% principally reflecting an increase in average revenue per barrel. Operating expenses at the Pipeline Partnership increased by $16.0 million due to a $10.0 million special environmental charge and higher depreciation and facility costs. Excluding the special item in 1992, SFP's equity investment in the Pipeline Partnership produced operating income of $28.6 million in 1992 compared to $27.1 million in 1991. Interest Expense/Other Income (Expense)--Net Interest expense declined by $44.4 million or 21% due to both lower outstanding debt and favorable variable interest rates. Other income (expense)--net declined by $25.8 million reflecting reduced income from real estate activities at Santa Fe Railway and lower interest income. Discontinued Operations Income from discontinued operations, net of income taxes increased by 25% to $42.4 million. Higher operating income from gold was partially offset by lower operating income from coal and increased exploration and development costs. Operating income from gold increased by approximately $19 million principally reflecting an 80% increase in sales to 295,000 ounces. Operating income from coal declined by $2.9 million due to a 19% decline in sales partially offset by a 12% increase in price. Both are principally the result of reduced spot market sales. FINANCIAL CONDITION Liquidity and Capital Resources Cash provided by operating activities from continuing operations is generally SFP's primary source of liquidity and for the year ended December 31, 1993 was $296.1 million. It primarily consists of net earnings before depreciation and deferred taxes, reduced by restructuring payments, which include employee severance, relocation costs and other labor related payments. During 1993, additional cash of $247.6 million was provided by the sale of assets at Santa Fe Railway, including $226.9 million from the sale of lines in southern California (see Other Matters--Sale of California Lines). In addition, $72.5 million was received as principal payments on a note receivable. Capital expenditures during 1993, including non-cash capital expenditures of $157.6 million primarily for directly financed equipment acquisitions and reimbursed projects at Santa Fe Railway, totaled $539.1 million. Capital expenditures in 1993 were significantly higher than in 1992 due to increased spending on rail expansion projects and facilities which include the Alliance, Texas intermodal and carload transportation center and the Willow Springs, Illinois intermodal facility, and improvements to track structure. Additionally, 1993 capital expenditures reflect the purchase of 85 new locomotives valued at approximately $100 million, while in 1992, 90 new locomotives with a fair market value in excess of $100 million were acquired through an operating lease. Cash expenditures were primarily funded through cash generated from continuing operations. Principal payments on long term borrowings during 1993 were $242.6 million. 5 For the year ended December 31, 1992, cash provided by operating activities from continuing operations was $250.6 million. Additionally, cash of $319.0 million was provided by the sale of assets at Santa Fe Railway, including $255.0 million from the sale of lines in southern California. In addition, $72.5 million was received as principal payments on a note receivable. Capital expenditures during 1992, including non-cash capital expenditures of $9.5 million, totaled $265.5 million and were used for equipment and improvements to track structure and facilities at Santa Fe Railway. The expenditures were primarily funded through cash generated from continuing operations. Principal payments on long term borrowings during 1992 were $407.5 million, including $201.0 million of proceeds from the sale of lines in southern California used to retire debt. During the year ended December 31, 1991, cash provided by operating activities from continuing operations was $196.8 million. Additional cash of $90.5 million was provided through the sale of assets, principally branch lines and real estate at Santa Fe Railway. Also, $36.3 million was received as a principal payment on a note receivable and proceeds of $36.2 million were received from the sale of SFP stock. Capital expenditures in 1991, including non-cash capital expenditures of $35.2 million primarily related to directly financed equipment acquisitions at Santa Fe Railway, totaled $243.2 million and were primarily used for equipment and improvements to track structure at Santa Fe Railway. The expenditures were primarily funded through the cash generated from continuing operations, equipment financings and other sources. Principal payments on long-term borrowings during 1991 were $132.2 million. Management anticipates that it will fund payment of current obligations from continuing operations in 1994 through internally generated funds. Current obligations include principal payments on long term debt as well as commitments related to operating leases, maintenance agreements for locomotives and minimum payments under haulage agreements with other railroads (see Note 13: Leases and Other Commitments). Capital expenditures in 1994 are anticipated to approximate $650 million, including non-cash capital expenditures of approximately $200 million primarily for directly financed equipment acquisitions and reimbursed projects. The remaining expenditures will be funded through the use of internally generated funds as well as various financings. In addition, Santa Fe Railway's agreement to sell accounts receivable expires in December 1994 (see Note 8: Sales of Accounts Receivable). At December 31, 1993, $225 million was outstanding under the agreement. It is the Company's intention to replace or extend this agreement with a similar facility prior to the December 1994 expiration. In addition, in December 1993, the Company filed a shelf registration statement with the Securities and Exchange Commission ("SEC"), for the issuance of up to $250 million in debt securities, none of which had been issued as of December 31, 1993. At present, the payment of external and intercompany dividends are limited in amount by certain debt covenants of the Company. At December 31, 1993 no payment of external dividends was allowed. Inflation Because of the capital intensive nature of SFP's businesses and because depreciation is based on historical cost, the full effect of inflation is not reflected in operating expenses. An assumption that all operating assets were replaced at current price levels would result in depreciation charges substantially greater than historically reported amounts. OTHER MATTERS Distribution of SFP Gold Subsidiary to Shareholders On June 15, 1994, SFP Gold's, SFP's gold subsidiary, registration statement for the initial public offering of 14.6% of its common stock became effective. Approximately 19 million shares were sold at a price of $14 per share. On June 29, 1994, SFP's Board of Directors approved the distribution to SFP shareholders of its remaining 85.4% interest in SFP Gold. As a result, SFP Gold will become a separate, independent entity effective September 30, 1994. Holders of record of SFP common stock as of September 12, 1994, will receive 6 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 distributions are tax-free to SFP shareholders. The consolidated financial statements and notes have been retroactively restated to present SFP Gold as a discontinued operation. Sale of California Lines In November 1992, Santa Fe Railway announced that it and eight southern California transportation agencies had reached definitive agreements for the sale to the agencies of certain interests in approximately 340 miles of rail lines and additional property, for 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 anticipate using these facilities for commuter lines. The sale encompassed three separate closings which occurred in December 1992 and March and June of 1993. Cash proceeds of $226.9 million in 1993 and $255.0 million in 1992 were received resulting in pre-tax gains of $145.4 million and $204.9 million in 1993 and 1992, respectively (see Note 3: Gain on Sale of California Lines). A substantial portion of the net proceeds in both years were used to reduce outstanding debt, including $126.0 million of debt related to discontinued operations. Both of the gains recognized are net of the cost of the properties, and other expenses of sale. Additionally, the 1993 gain is net of an obligation retained by Santa Fe Railway which under certain conditions, requires Santa Fe Railway to repurchase a portion of the properties sold for $50 million. Contingencies The Company is subject to extensive regulation under federal, state, and local environmental laws concerning, among other things, 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 conduct of operations. Environmental risks are also inherent in railroad operations which frequently involve the transportation of chemicals and other hazardous materials. Santa Fe Railway expects it will become subject to new requirements regulating air emissions from diesel locomotives that may increase its operating costs in the future. By 1995, the United States Environmental Protection Agency must issue regulations applicable to new locomotive engines. Locomotive engines (other than new locomotive engines) may be regulated by states based on standards and procedures which the State of California ultimately adopts. The California standards are currently in the process of being developed. In addition, because 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, 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 predecessor 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, predecessor owners or lessees of properties, or other third parties. At December 31, 1993, SFP had been named a potentially responsible party (PRP) at 6 sites on the Environmental Protection Agency's (EPA) National Priorities List (NPL). Additionally, SFP is potentially liable for the cost of clean-up at other sites identified by the EPA and other agencies. Finally, SFP has 7 identified sites where costs exist for environmental clean-up and monitoring (including where no claim has been asserted), and no agency is currently involved. There are approximately 125 known environmental sites at December 31, 1993 which include, among other things; closed facilities including 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. The Company has not included any reduction in costs for anticipated recovery from insurance. Estimated costs at sites where SFP is a PRP are generally based on cost sharing agreements which vary from site to site, after consideration of the financial condition of other PRP's. These costs are typically allocated based on 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 it was determined that an additional accrual of $67 million was appropriate to provide for future costs of this nature which was recorded in the third quarter of 1992 as part of a rail special charge. In addition, the Company monitors, on a regular basis, accruals for environmental sites which 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. Payments recorded against environmental liabilities totaled $13.5 million, $6.3 million and $7.1 million for the years ended December 31, 1993, 1992 and 1991, respectively. The majority of these payments related to mandatory clean- up efforts. Capital expenditures related to environmental sites were insignificant during this three year period. At December 31, 1993 and December 31, 1992 the Company had accrued liabilities for environmental costs of approximately $125 million and $121 million, respectively. The Company anticipates that approximately 75% of the accrued costs at December 31, 1993 will be paid over the next five years, with approximately $25 million of payments occurring in 1994. 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. 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. Rail Restructuring During the third quarter of 1992, Santa Fe Railway recorded a $253 million pre-tax charge primarily for costs of a crew consist agreement on the eastern half of the railroad and for centralization of certain transportation functions. The eastern lines crew consist agreement comprised $149 million of the charge. The 1992 agreement is an update to a 1990 crew consist agreement. The 1992 agreement provides for further reductions in average crew sizes on through freight trains and elimination of productivity payments which were required when reduced crews were used. The 1992 eastern lines 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. 8 Estimated operating expense savings resulting from the eastern lines agreement was approximately $25 million annually beginning in 1993. The agreement covers approximately 2,000 employees. Costs of the agreement which are 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 will decline over time through attrition and other factors. The charge also included $73 million related to centralization. In 1992, Santa Fe Railway decided to centralize many operating support functions. Centralization activities began in late 1992 and by the fall of 1993, Railway had centralized train 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. Annual savings resulting from centralized functions are expected to be approximately $20 million, most of which will be reflected annually beginning in 1994. Cost of centralization included in the $73 million charge relates to approximately 700 relocations, reductions of 600 administrative and clerical positions, and abandonment of facilities. Most of the costs of centralization had been paid by December 31, 1993. Additionally, the charge includes approximately $31 million for other cost saving initiatives including an adjustment of accruals established for other operating craft labor agreements reached in prior periods. At December 31, 1993, the balance of the restructuring liability was $315.6 million. The majority of the balance represents future deferred benefit and reserve board payments related to the 1992 eastern lines agreement and similar agreements reached in and accrued for in prior years. Restructuring costs paid were $80.9 million in 1993, $118.9 million in 1992 and $104.5 million in 1991. In 1994, the Company expects payments of approximately $60 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 $18 million supporting certain of its obligations under labor agreement. 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 upon commodities that are 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 participate in decreases in fuel prices. At December 31, 1993, the Company had entered into various agreements with several counterparties covering approximately 260 million gallons which is anticipated to cover approximately two-thirds of 1994 fuel purchases. Through swap arrangements the Company has hedged approximately 205 million gallons at an average price of 48 cents. Additionally, approximately 55 million gallons have been hedged through collar arrangements which allow the price to float between average floor and ceiling prices of 46 cents and 51 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 the Company's diesel fuel. The effects of the Company's fuel hedges was to increase operating expense by $12.4 million in 1993 and to reduce operating expense by $0.9 million and $5.6 million in 1992 and 1991, respectively. From time to time, the Company enters into various interest rate hedging transactions for various purposes, including managing exposure to fluctuations in interest rates or establishing rates in anticipation of future debt issuance. At December 31, 1993, the Company had entered into four related interest rate swap transactions for a total notional principal amount of $100 million, for the purpose of establishing rates in anticipation of an expected future debt offering. These swap transactions call 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 9 rate which was 3.5% at December 31, 1993. At the time of the borrowing, which is also expected to have a term of ten years, the swap will be closed out and any gain or loss relating to the terminated interest rate swap will be amortized as an adjustment to interest expense over the term of the borrowing. The Company monitors its positions and the credit ratings of its counterparties and does not currently anticipate losses due to counterparty non-performance. The fair market value of the Company's fuel hedging transactions at December 31, 1993 were unrealized losses of $9.2 million for swap arrangements and $2.4 million for collar arrangements. The fair market value of the Company's interest hedging transactions at December 31, 1993 was not significant. COMMON STOCK MARKET PRICES AND DIVIDENDS Santa Fe Pacific Corporation common stock is traded on the New York, Chicago and Pacific Stock Exchanges. The quarterly price range per share for the years 1993 and 1992 is as follows:
1993 1992 --------------- --------------- HIGH LOW HIGH LOW ------- ------- ------- ------- First Quarter............................. $15 5/8 $12 3/4 $14 1/8 $11 1/8 Second Quarter............................ $18 3/8 $14 1/2 $13 3/8 $11 Third Quarter............................. $19 1/8 $16 3/4 $12 7/8 $10 7/8 Fourth Quarter............................ $22 1/2 $18 $13 7/8 $10 5/8
SFP paid a cash dividend of $0.10 per share in both 1993 and 1992. As of January 31, 1994, there were approximately 75,000 holders of record of SFP common stock. 10 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, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 17 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. As discussed in Note 2 to the consolidated financial statements, on June 29, 1994 Santa Fe Pacific Corporation's Board of Directors declared a special dividend to holders of its common stock consisting of interests in its subsidiary Santa Fe Pacific Gold Corporation. The consolidated financial statements have been retroactively restated to present the subsidiary as a discontinued operation. /s/ Price Waterhouse LLP Price Waterhouse LLP Kansas City, Missouri February 4, 1994, except for the retroactive restatement described in Note 2 of the notes to consolidated financial statements, as to which the date is June 29, 1994. 11 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------- 1993 1992 1991 -------- -------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA) Operating Revenues................................. $2,409.2 $2,251.7 $2,153.5 -------- -------- -------- Operating Expenses Compensation and benefits........................ 799.8 798.8 781.8 Fuel............................................. 239.1 205.5 206.7 Equipment rents.................................. 229.4 186.0 162.2 Depreciation and amortization.................... 188.4 180.8 184.3 Materials and supplies........................... 127.7 127.5 135.2 Other............................................ 507.1 455.5 427.9 Rail special charge.............................. -- 320.4 -- -------- -------- -------- Total Operating Expenses....................... 2,091.5 2,274.5 1,898.1 -------- -------- -------- Operating Income (Loss)............................ 317.7 (22.8) 255.4 Equity in Earnings of Pipeline Partnership......... 18.6 24.1 27.1 Interest Expense................................... 133.4 164.5 208.9 Gain on Sale of California Lines................... 145.4 204.9 -- Other Income (Expense)--Net........................ 5.8 (0.3) 25.5 -------- -------- -------- Income From Continuing Operations Before Income Taxes............................................. 354.1 41.4 99.1 Income Taxes....................................... 176.7 20.3 36.7 -------- -------- -------- Income from Continuing Operations.................. 177.4 21.1 62.4 Income from Discontinued Operations, Net of Income Taxes............................................. 161.4 42.4 34.0 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).............................. $ 338.8 $ (104.5) $ 96.4 ======== ======== ======== Income (Loss) Per Share of Common Stock Continuing Operations............................ $ 0.95 $ 0.11 $ 0.35 Discontinued Operations.......................... 0.86 0.23 0.19 Extraordinary Charge............................. -- (0.03) -- Cumulative Effect of a Change in Accounting...... -- (0.88) -- -------- -------- -------- Net Income (Loss).............................. $ 1.81 $ (0.57) $ 0.54 ======== ======== ======== Average Number of Common and Common Equivalent Shares............................................ 187.2 184.8 178.0 ======== ======== ========
(See notes to consolidated financial statements) 12 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, ------------------ 1993 1992 -------- -------- (IN MILLIONS) ASSETS ------ Current Assets Cash and cash equivalents, at cost which approximates market.................................................. $ 70.3 $ 62.1 Accounts receivable, less allowances..................... 96.1 83.9 Materials and supplies................................... 92.3 87.7 Note receivable--current................................. 72.5 72.5 Current portion of deferred income taxes................. 99.3 103.9 Other.................................................... 27.2 19.4 -------- -------- Total current assets................................... 457.7 429.5 -------- -------- Note Receivable............................................ 36.2 108.7 Other Long-Term Assets..................................... 323.3 342.8 -------- -------- Properties, Plant and Equipment............................ 5,886.1 5,524.0 Less-accumulated depreciation and amortization............. 1,577.7 1,535.3 -------- -------- Net properties............................................. 4,308.4 3,988.7 -------- -------- Net Assets of Discontinued Operations...................... 248.4 76.7 -------- -------- Total Assets........................................... $5,374.0 $4,946.4 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Current Liabilities Accounts payable and accrued liabilities................. $ 669.8 $ 696.3 Long-term debt due within one year....................... 184.7 187.1 -------- -------- Total current liabilities.............................. 854.5 883.4 -------- -------- Long-Term Debt Due After One Year.......................... 991.1 1,119.6 Postretirement Benefits Liability.......................... 284.7 279.1 Rail Restructuring Liability............................... 257.8 254.6 Other Long-Term Liabilities................................ 601.7 553.6 Deferred Income Taxes...................................... 1,115.9 927.6 -------- -------- Total Liabilities...................................... 4,105.7 4,017.9 -------- -------- Commitments and Contingencies (See Note 13 and Note 14) Shareholders' Equity Common stock, $1 par value, shares authorized, 600.0 million; 1993 shares issued and outstanding, 190.0 million and 185.6 million; 1992 shares issued and outstanding, 190.0 million and 181.8 million................................................. 190.0 190.0 Paid-in capital.......................................... 869.7 966.7 Retained income.......................................... 340.3 19.9 Treasury stock, at cost.................................. (131.7) (248.1) -------- -------- Total shareholders' equity............................. 1,268.3 928.5 -------- -------- Total Liabilities and Shareholders' Equity............. $5,374.0 $4,946.4 ======== ========
(See notes to consolidated financial statements) 13 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------- 1993 1992 1991 ------- -------- ------- (IN MILLIONS) Operating Activities Net income (loss)................................ $ 338.8 $ (104.5) $ 96.4 Adjustments to reconcile net income (loss) to operating cash flows: Income from discontinued operations, net of income taxes.................................. (161.4) (42.4) (34.0) Depreciation and amortization.................. 188.4 180.8 184.3 Deferred income taxes.......................... 139.0 53.0 16.1 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.................. (80.9) (118.9) (104.5) Imputed interest expense....................... 26.6 23.3 23.8 Gain on sales of property, plant and equipment. (156.0) (218.7) (36.9) Other--net..................................... (22.4) (20.0) 17.6 Changes in Working Capital: Accounts receivable.......................... (25.3) (7.5) (0.4) Materials and supplies....................... (3.6) (11.2) 0.5 Accounts payable and accrued liabilities..... 51.6 40.0 60.5 Short term investments and other current assets...................................... 1.3 (6.7) (26.6) ------- -------- ------- Net Cash Provided By Operating Activities-- Continuing Operations......................... 296.1 250.6 196.8 Discontinued Operations--Net................... 67.7 79.0 19.7 ------- -------- ------- Net Cash Provided By Operating Activities...... 363.8 329.6 216.5 ------- -------- ------- Investing Activities Cash used for capital expenditures............... (381.5) (256.0) (208.0) Proceeds from the sale of property, plant and equipment....................................... 247.6 319.0 90.5 Other--net....................................... 70.3 43.8 58.0 Discontinued Operations--Net..................... (99.8) (68.2) (87.8) ------- -------- ------- Net Cash Provided By (Used For) Investing Activities.................................... (163.4) 38.6 (147.3) ------- -------- ------- Financing Activities Proceeds from long-term borrowings............... 6.5 -- 9.0 Principal payments on long-term borrowings....... (242.6) (407.5) (132.2) Proceeds from sale of stock...................... -- -- 36.2 Cash dividends paid.............................. (18.5) (18.2) (17.9) Other--net....................................... 20.7 16.0 11.8 Discontinued Operations--Net..................... 41.7 (4.6) 73.3 ------- -------- ------- Net Cash Used For Financing Activities......... (192.2) (414.3) (19.8) ------- -------- ------- Increase (Decrease) In Cash and Cash Equivalents... 8.2 (46.1) 49.4 Cash and Cash Equivalents: Beginning of year.................................. 62.1 108.2 58.8 ------- -------- ------- End of year........................................ $ 70.3 $ 62.1 $ 108.2 ======= ======== =======
(See notes to consolidated financial statements) 14 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SHARES OF SHARES OF COMMON TREASURY COMMON TREASURY PAID-IN RETAINED STOCK STOCK STOCK STOCK CAPITAL INCOME ------- --------- ------ -------- -------- -------- (SHARES IN THOUSANDS) (DOLLARS IN MILLIONS) Balance December 31, 1990. 190,021 17,051 $190.0 $(516.9) $1,166.1 $ 72.5 1991 net income........... -- -- -- -- -- 96.4 Dividends declared........ -- -- -- -- -- (17.9) Sale of common stock...... -- (4,043) -- 122.4 (86.2) -- Exercise of stock options. -- (1,511) -- 45.8 (35.9) -- Stockholder rights redemption............... -- (1,311) -- 39.8 (31.2) (8.4) Other..................... -- 23 -- (0.3) 0.7 -- ------- ------ ------ ------- -------- ------- Balance December 31, 1991. 190,021 10,209 $190.0 $(309.2) $1,013.5 $ 142.6 1992 net loss............. -- -- -- -- -- (104.5) 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 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 ======= ====== ====== ======= ======== =======
- -------- 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, 1993. (See notes to consolidated financial statements) 15 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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") which are majority owned and controlled, directly or indirectly, by SFP. The equity method is used to account for investments in 20% to 50% owned entities. 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 $157.6 million, $9.5 million, and $35.2 million in 1993, 1992, and 1991, respectively. Non-cash capital expenditures consist principally of directly financed equipment acquisitions and reimbursed projects at The Atchison, Topeka and Santa Fe Railway Company ("Santa Fe Railway"). Accounts Receivable SFP maintains an allowance for doubtful accounts based upon the estimated collectibility of all trade accounts receivable. Allowances for doubtful accounts of $16.4 million and $11.2 million have been applied as a reduction of accounts receivable at December 31, 1993 and 1992, respectively. 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 1993 and 1992. Remaining proceeds to be received from the note are $72.5 million in 1994 and $36.2 million in 1995. Properties Properties are stated at cost and include capitalized interest incurred during construction of $8.2 million in 1993, $3.7 million in 1992, and $3.9 million in 1991. 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 salvage, net of cost of removal, is charged to accumulated depreciation and no gain or loss is recognized. With respect to all other property sold or retired, gain or loss is recognized. Depreciation is computed under the straight-line method. 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. 16 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2: DISCONTINUED OPERATIONS On June 15, 1994, Santa Pacific Gold Corporation's ("SFP Gold"), SFP's gold subsidiary, registration statement for the initial public offering of 14.6% of its common stock became effective. Approximately 19 million shares were sold at a price of $14 per share. On June 29, 1994, SFP's Board of Directors approved the distribution to SFP shareholders of its remaining 85.4% interest in SFP Gold. As a result, SFP Gold will become a separate, independent entity effective September 30, 1994. Holders of record of SFP common stock as of September 12, 1994, will receive 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 distributions are tax- free to SFP shareholders. The consolidated financial statements and notes have been retroactively restated to present SFP Gold as a discontinued operation. Income from discontinued operations in 1993, 1992 and 1991 was as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1993 1992 1991 ------ ------ ------ (IN MILLIONS) Revenues.......................................... $298.6 $220.6 $179.4 Income before income taxes........................ 296.1 63.1 48.3 Income taxes...................................... 134.7 20.7 14.3 ------ ------ ------ Income from discontinued operations............... $161.4 $ 42.4 $ 34.0 ====== ====== ======
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 accordingly, the results from the gold assets have been 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 3: GAIN ON SALE OF CALIFORNIA LINES In November 1992, Santa Fe Railway announced that it and eight southern California transportation agencies had reached definitive agreements for the sale to the agencies of certain interests in approximately 340 miles of rail lines and additional property, for 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 anticipate using these facilities for commuter lines. The sale encompassed three separate closings which occurred in December 1992 and March and June of 1993. Cash proceeds of $226.9 million in 1993 and $255.0 million in 1992 were received 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. Additionally, 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 sold 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 11: Long-Term Debt). NOTE 4: RAIL SPECIAL CHARGE During 1992, Santa Fe Railway recorded a $320.4 million pre-tax special charge which included provisions for restructuring and environmental. 17 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rail Restructuring During the third quarter of 1992, Santa Fe Railway recorded a $253 million pre-tax charge primarily for costs of a crew consist agreement on the eastern half of the railroad and for centralization of certain transportation functions. The eastern lines crew consist agreement comprised $149 million of the charge. The 1992 agreement is an update to a 1990 crew consist agreement. The 1992 agreement provides for further reductions in average crew size on through freight trains and elimination of productivity payments which were required when reduced crews were used. The 1992 eastern lines 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 which are 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 will decline over time through attrition and other factors. The charge also included $73 million related to centralization. In 1992, Santa Fe Railway decided to centralize many operating support functions. Centralization activities began in late 1992 and by the fall of 1993, Railway had centralized train 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. Cost of centralization included in the $73 million charge relates to approximately 700 relocations, reductions of 600 administrative and clerical positions, and abandonment of facilities. Most of the costs of centralization had been paid by December 31, 1993. Additionally, the charge includes approximately $31 million for other cost saving initiatives including an adjustment of accruals established for other operating craft labor agreements reached in prior periods. At December 31, 1993, the balance of the restructuring liability was $315.6 million. The majority of the balance represents future deferred benefit and reserve board payments related to the 1992 eastern lines agreement and similar agreements reached in and accrued for in prior years. Restructuring costs paid were $80.9 million in 1993, $118.9 million in 1992 and $104.5 million in 1991. In 1994, the Company expects payments of approximately $60 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 $18 million supporting certain of its obligations under labor agreement. Environmental Approximately $67 million of the special charge was to increase accruals for environmental clean-up and remediation, primarily on abandoned properties (see Note 14: Contingencies). During 1993, payments charged to the environmental reserve were approximately $13 million, with the majority of remaining expenditures expected to be incurred over the next five years. NOTE 5: 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% 18 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 $61.5 million and $67.6 million at December 31, 1993 and 1992, respectively, for SFP's investment in the Pipeline Partnership. Pipeline Holdings also issued the Pipeline Exchangeable Debentures ("Pipeline Debentures") (see Note 11: Long-Term Debt) which are traded on the New York Stock Exchange and under certain circumstances are exchangeable for common units that represent SFP's 42% limited partnership interest in the Pipeline Partnership. Interest on the Pipeline Debentures is payable quarterly and is equal to the greater of (a) distributions of cash from operations declared by the Pipeline Partnership for such 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. During 1993, 1992 and 1991, SFP, through its wholly owned subsidiaries, received cash distributions of $25.1 million, $25.1 million, and $23.8 million, respectively, from the Pipeline Partnership. Of these distributions $22.8 million, $22.8 million, and $22.0 million, respectively, were used to pay interest costs on the Pipeline Debentures. The following table sets forth selected financial data for the Pipeline Partnership:
YEAR ENDED DECEMBER 31, --------------------------- 1993 1992 1991 ------ ------ ------ (IN MILLIONS, EXCEPT PER UNIT DATA) Income Statement Data Total revenues............................. $219.5 $205.0 $193.4 Operating income........................... 78.3(1) 91.4 (1) 95.8 Interest expense........................... 37.1 36.9 36.9 Income before cumulative effect of accounting change......................... 41.6 54.1 60.6 Cumulative effect of accounting change..... -- (16.4)(2) -- Net income................................. 41.6 37.7 60.6 Per Unit Data Income before accounting change............ $ 2.13 $ 2.77 $ 3.10 Cumulative effect of accounting change..... -- (.84)(2) -- Net income................................. 2.13 1.93 3.10 Cash distributions per unit................ 2.80 2.80 2.75
DECEMBER 31, ------------- 1993 1992 ------ ------ Balance Sheet Data Total current assets..................................... $ 67.7 $ 58.4 Net properties, plant and equipment...................... 616.6 618.1 Total assets............................................. 697.0 684.9 Total current liabilities................................ 35.6 21.6 Long-term debt........................................... 355.0 355.0 Total partners' capital.................................. 265.9 279.0
- -------- (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. 19 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6: OTHER INCOME (EXPENSE)--NET Other income (expense)--net consisted of the following:
1993 1992 1991 ------ ------ ------ (IN MILLIONS) Real estate activities............................ $ 19.4 $ 23.9 $ 45.6 Interest income................................... 11.7 17.8 27.4 Corporate administrative expenses................. (24.2) (22.3) (20.0) Accounts receivable fees.......................... (8.3) (9.4) (14.5) Arbitration/litigation settlements................ 21.6 -- -- Other-net......................................... (14.4) (10.3) (13.0) ------ ------ ------ Total......................................... $ 5.8 $ (0.3) $ 25.5 ====== ====== ======
NOTE 7: INCOME TAXES The provision for income taxes applicable to continuing operations consisted of the following:
1993 1992 1991 ------ ------ ----- (IN MILLIONS) Current: Federal............................................ $ 33.5 $(32.0) $17.5 State.............................................. 4.2 (0.7) 3.1 ------ ------ ----- Total Current.................................... 37.7 (32.7) 20.6 ------ ------ ----- Deferred: Federal............................................ 124.6 40.7 13.9 State.............................................. 14.4 12.3 2.2 ------ ------ ----- Total Deferred................................... 139.0 53.0 16.1 ------ ------ ----- Total............................................ $176.7 $ 20.3 $36.7 ====== ====== =====
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:
1993 1992 1991 ------ ----- ----- (IN MILLIONS) Federal income tax at statutory rate (35% in 1993, 34% in 1992-1991)................................. $123.9 $14.1 $33.7 Increase(decrease) in taxes resulting from: State income taxes, net of federal benefit....... 12.1 7.7 3.5 1% increase in federal tax rate.................. 23.5 -- -- Other............................................ 17.2 (1.5) (0.5) ------ ----- ----- Total.......................................... $176.7 $20.3 $36.7 ====== ===== =====
The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," as of January 1, 1992 having previously accounted for income taxes under SFAS No. 96. The adoption of SFAS No. 109 had no impact on 1992 net income. Both SFAS No. 96 and No. 109 required that deferred income taxes be determined based on temporary differences between the financial reporting and tax basis of the Company's assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. 20 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. In accordance with SFAS No. 109, 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. The impact of the tax increase as of August 10, 1993, the date of enactment, was approximately $27.7 million. The difference between the $23.5 million impact as of the beginning of the year and the $27.7 million impact as of August 10, 1993 is due to taxable income and temporary differences generated during the period January 1, 1993 through August 10, 1993. Principal temporary differences that gave rise to the net deferred tax liability at December 31, 1993 and 1992 were as follows:
1993 1992 --------- --------- (IN MILLIONS) Deferred tax debits: Accrued liabilities not deductible until paid: Restructuring.................................. $ 119.5 $ 144.6 Postretirement benefits........................ 110.8 106.7 Casualty and environmental..................... 114.8 112.8 Other.......................................... 124.2 133.9 Non-expiring AMT credit carryforwards............ 93.7 73.9 Other............................................ 13.5 36.5 --------- --------- Subtotal..................................... $ 576.5 $ 608.4 ========= ========= Deferred tax credits: Depreciation..................................... $(1,267.4) $(1,195.2) Condemnation sales............................... (211.8) (123.1) Other............................................ (113.9) (113.8) --------- --------- Subtotal..................................... $(1,593.1) $(1,432.1) ========= ========= Net deferred tax liability................... $(1,016.6) $ (823.7) ========= =========
During 1993 and 1992, SFP made income tax payments, net of refunds, of $23.9 million and $8.2 million, respectively. During 1991, SFP received net refunds of $8.5 million. The federal income tax returns of SFP have been examined through 1988. All years prior to 1981 are closed. Issues relating to the years 1981-1988 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 which might be assessed for open years through 1993. NOTE 8: SALES OF ACCOUNTS RECEIVABLE Santa Fe Railway has an agreement to sell, on a revolving basis, an undivided percentage interest in certain accounts receivable, with limited recourse, to a financial institution. The agreement, which expires in December 1994, allows for sales of accounts receivable up to a maximum of $225.0 million. Santa Fe Railway acts as collection agent under the agreement. The amount of accounts receivable sold under the agreement was $225.0 million at both December 31, 1993 and 1992. The financial institution purchases an interest in a pool of receivables that has generally ranged from $250-$325 million during 1993 and 1992. Santa Fe Railway is exposed to credit loss related to collection of accounts receivable to the extent that the purchased interest exceeds the amount of accounts receivable sold. Costs related to the agreement vary on a monthly basis and are generally related to certain interest rates. These costs, which are included in Other Income (Expense)--Net, were $8.3 million, $9.4 million and $14.5 million in 1993, 1992 and 1991, respectively. 21 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9: PROPERTIES, PLANT AND EQUIPMENT The major classes of properties, plant and equipment are as follows:
1993 1992 -------- -------- (IN MILLIONS) Track structure........................................ $2,326.8 $2,199.8 Equipment.............................................. 1,952.6 1,864.0 Other road properties.................................. 1,478.9 1,337.5 Real estate and other.................................. 127.8 122.7 -------- -------- Total.............................................. 5,886.1 5,524.0 Accumulated depreciation and amortization.............. 1,577.7 1,535.3 -------- -------- Net properties....................................... $4,308.4 $3,988.7 ======== ========
NOTE 10: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities at December 31, 1993 and 1992 consisted of the following:
1993 1992 ------ ------ (IN MILLIONS) Accounts and wages payable................................. $141.8 $154.5 Accrued claims............................................. 90.3 88.3 Rail restructuring......................................... 57.8 122.6 Vacations.................................................. 49.8 48.8 Taxes other than income taxes.............................. 34.3 34.3 Interest................................................... 28.1 28.3 Other...................................................... 267.7 219.5 ------ ------ Total.................................................. $669.8 $696.3 ====== ======
NOTE 11: LONG-TERM DEBT Long-term debt at December 31, 1993 and 1992 consisted of the following:
1993 1992 -------- -------- (IN MILLIONS) Equipment Obligations, weighted average rate of 8.9%, maturing from 1994 to 2008............................. $ 478.9 $ 453.1 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 Term Loan, 4.0% (variable), maturing from 1994 to 1995................. 108.7 181.2 Mortgage Bonds, 4%, maturing 1995....................... 95.8 95.8 Bank Term Loan, 4.1% (variable), maturing from 1994 to 1997................. 50.0 130.8 Other Obligations, 9.4% to 10.3%, maturing from 1994- 2014................................................... 40.2 43.8 Debt discount........................................... (16.8) (17.0) -------- -------- Total long-term debt................................ 1,175.8 1,306.7 Due within one year..................................... (184.7) (187.1) -------- -------- Due after one year...................................... $ 991.1 $1,119.6 ======== ========
22 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Under the Bank Term Loan, SFP has a $173.6 million revolving credit facility for general corporate purposes. SFP pays commitment fees of 3/8% per annum on the unused portion of the Bank Term Loan and revolving credit facility, payable quarterly. As of December 31, 1993, no borrowings were outstanding under the revolving credit facility. In December 1992, SFP accelerated the repayment of borrowings related to a 1990 litigation settlement. The early extinguishment of debt 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 California Lines (see Note 3: Gain on Sale of California Lines). In December 1993, SFP filed a shelf registration statement with the SEC, for the issuance of up to $250 million in debt securities, none of which had been issued at December 31, 1993. As of December 31, 1993, projected principal repayments of long term debt during the five years 1994 through 1998, excluding capital leases, are $182.9 million, $206.5 million, $50.1 million, $46.5 million and $100.7 million, respectively. Total interest paid was $111.3 million in 1993, $142.2 million in 1992 and $160.5 million in 1991. Substantially all 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. At December 31, 1993, no payment of dividends was allowed. Certain other debt agreements of the Company and its subsidiaries include covenants which place limitations on indebtedness and intercompany dividends, require the maintenance of various financial ratios, and restrict the disposition of assets. Pipeline Holdings is contingently liable for $355.0 million of Pipeline Partnership debt. NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments at December 31, 1993 and 1992, 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 the carrying amount because of the short maturity of those instruments. Note Receivable The fair value of the Note Receivable approximates the carrying amount as the variable interest rate on the note approximates current interest rates. Other Investments SFP maintained an investment in common stock which became publicly traded during 1993. The carrying value of the investment at December 31, 1993 was $10.6 million. In January 1994, the investment was sold resulting in a pre-tax gain of approximately $25 million. Additionally, SFP maintains various other investments in common stock with a carrying value at December 31, 1993 and 1992 of approximately $17 million and $27 million, respectively, which are accounted for under a cost basis. These investments are in non-publicly traded companies which have no quoted market prices; therefore, a reasonable estimate of fair value could not be made. 23 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 which would be offered to the Company for debt of the same remaining maturities. The carrying value of debt at December 31, 1993 and 1992 was $1,175.8 million and $1,306.7 million compared with estimated fair values of approximately $1,395 million and $1,475 million, respectively. NOTE 13: LEASES AND OTHER COMMITMENTS SFP leases certain locomotives, freight cars, trailers, data processing equipment and other property. Future minimum lease payments for operating leases applicable to continuing operations (which reflect operating leases having non-cancelable lease terms in excess of one year) as of December 31, 1993 are summarized as follows:
(IN MILLIONS) 1994........................................................ $ 60.2 1995........................................................ 55.1 1996........................................................ 46.1 1997........................................................ 36.0 1998........................................................ 30.1 Later years................................................. 174.5 ------ Total minimum payments.................................. $402.0 ======
Rental expense for all operating leases applicable to continuing operations was $94.9 million in 1993, $72.8 million in 1992 and $65.9 million in 1991. Contingent rentals and sublease rentals were not significant. Santa Fe Railway has entered into agreements with certain locomotive suppliers which provide for maintenance on a portion of its locomotive fleet. As of December 31, 1993, these agreements obligate Santa Fe Railway to make minimum annual payments over periods ranging from two 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. In the aggregate, these agreements require minimum annual payments of approximately $63 million in 1994, $52 million in 1995, $50 million in 1996, $51 million in 1997, $52 million in 1998, and $327 million in total thereafter through 2012. Payments under the agreements totaled approximately $68 million, $62 million and $49 million in 1993, 1992 and 1991, respectively. In connection with the closing of the sale of California lines, Santa Fe Railway has entered into various shared use agreements with the agencies which require Santa Fe Railway to pay the agencies approximately $6.0 million annually for the maintenance of track structure and facilities. In addition, Santa Fe Railway is committed to acquire locomotives valued at approximately $62 million in 1994. 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 upon commodities that are 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 participate in decreases in fuel prices. At December 31, 1993, the Company had entered into various agreements with several counterparties covering approximately 260 million gallons which is anticipated to cover approximately two-thirds of 1994 fuel purchases. Through swap arrangements the Company has hedged approximately 205 million gallons at an average price of 48 cents. Additionally, approximately 55 million gallons have been hedged through collar 24 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) arrangements which allow the price to float between average floor and ceiling prices of 46 cents and 51 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 the Company's diesel fuel. The effects of the Company's fuel hedges was to increase operating expense by $12.4 million in 1993 and to reduce operating expense by $0.9 million and $5.6 million in 1992 and 1991, respectively. From time to time, the Company enters into various interest rate hedging transactions for various purposes, including managing exposure to fluctuations in interest rates or establishing rates in anticipation of future debt issuance. At December 31, 1993, the Company had entered into four related interest rate swap transactions for a total notional principal amount of $100 million, for the purpose of establishing rates in anticipation of an expected future debt offering. These swap transactions call 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 which was 3.5% at December 31, 1993. At the time of the borrowing, which is also expected to have a term of ten years, the swap will be closed out and any gain or loss relating to the terminated interest rate swap will be amortized as an adjustment to interest expense over the term of the borrowing. The Company monitors its positions and the credit ratings of its counterparties and does not currently anticipate losses due to counterparty non-performance. The fair market value of the Company's fuel hedging transactions at December 31, 1993 were unrealized losses of $9.2 million for swap arrangements and $2.4 million for collar arrangements. The fair market value of the Company's interest hedging transactions at December 31, 1993 was not significant. NOTE 14: CONTINGENCIES Environmental The Company is subject to extensive regulation under federal, state and local environmental laws concerning, among other things, 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 conduct of operations. Environmental risks are also inherent in railroad operations which frequently involve the transportation of chemicals and other hazardous materials. Santa Fe Railway expects it will become subject to new requirements regulating air emissions from diesel locomotives that may increase its operating costs in the future. By 1995, the United States Environmental Protection Agency must issue regulations applicable to new locomotive engines. Locomotive engines (other than new locomotive engines) may be regulated by states based on standards and procedures which the State of California ultimately adopts. The California standards are currently in the process of being developed. In addition, because 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, 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 predecessor 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, predecessor owners or lessees of properties, or other third parties. At December 31, 1993, SFP had been named a potentially responsible party (PRP) at 6 sites on the Environmental Protection Agency's (EPA) National Priorities List (NPL). Additionally, SFP is potentially liable for the cost of clean-up at other sites identified by the EPA and other agencies. Finally, SFP has identified sites where costs exist for environmental clean-up and monitoring, (including where no claim has 25 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) been asserted) and no agency is currently involved. There are approximately 125 known environmental sites at December 31, 1993 which include, among other things; closed facilities including 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. The Company has not included any reduction in costs for anticipated recovery from insurance. Estimated costs at sites where SFP is a PRP are generally based on cost sharing agreements which vary from site to site, after consideration of the financial condition of other PRP's. These costs are typically allocated based on 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 it was determined that an additional accrual of $67 million was appropriate to provide for future costs of this nature which was recorded in the third quarter of 1992 as part of the rail special charge (see Note 4: Rail Special Charge). In addition, the Company monitors, on a regular basis, accruals for environmental sites which 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. Payments recorded against environmental liabilities totaled $13.5 million, $6.3 million and $7.1 million for the years ended December 31, 1993, 1992 and 1991, respectively. The majority of these payments related to mandatory clean- up efforts. Capital expenditures related to environmental sites were insignificant during this three year period. At December 31, 1993 and December 31, 1992 the Company had accrued liabilities for environmental costs of approximately $125 million and $121 million, respectively. The Company anticipates that approximately 75% of the accrued costs at December 31, 1993 will be paid over the next five years, with approximately $25 million of payments occurring in 1994. 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 15: 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 substantially 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 26 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 1993, 1992 and 1991 were as follows:
RETIREMENT PLAN ----------------------- 1993 1992 1991 ------- ------ ------ (IN MILLIONS) Components of pension (income) expense Service cost................................... $ 6.0 $ 7.1 $ 8.2 Interest cost.................................. 41.9 39.1 40.0 Actual return on plan assets................... (110.4) (58.5) (99.0) Net amortization and deferral.................. 46.6 (5.3) 37.4 ------- ------ ------ Total........................................ $ (15.9) $(17.6) $(13.4) ======= ====== ======
SUPPLEMENTAL PLAN -------------- 1993 1992 1991 ---- ---- ---- (IN MILLIONS) Components of pension expense Service cost............................................ $0.1 $0.1 $0.1 Interest cost........................................... 0.6 0.7 0.7 Net amortization and deferral........................... 0.5 0.6 0.6 ---- ---- ---- Total................................................. $1.2 $1.4 $1.4 ==== ==== ====
Plan assets and liabilities are measured at September 30. A reconciliation of the funded status of the plans with amounts recorded is shown as follows:
RETIREMENT PLAN ---------------- 1993 1992 ------- ------- (IN MILLIONS) Plan assets at fair value, primarily invested in common stock, and U.S. and corporate bonds........... $ 657.3 $ 590.9 Actuarial present value of projected benefit obligation Accumulated benefit obligation Vested............................................ (535.1) (422.4) Nonvested......................................... (30.5) (29.1) Provision for future salary increases............... (40.4) (45.4) ------- ------- Excess of plan assets over projected benefit obligation........................................... 51.3 94.0 Unrecognized net (gain) loss.......................... 33.5 (27.5) Unrecognized prior service cost....................... 13.4 17.8 Unrecognized net assets being recognized ratably through 2002......................................... (16.1) (18.1) ------- ------- Prepaid pension asset................................. $ 82.1 $ 66.2 ======= =======
27 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL PLAN ------------------ 1993 1992 -------- -------- (IN MILLIONS) Actuarial present value of projected benefit obligation Accumulated vested benefit obligation.............. $ (8.3) $ (7.2) Provision for future salary increases.............. (0.6) (1.2) -------- -------- Projected benefit obligation......................... (8.9) (8.4) Unrecognized net gain................................ (0.8) (1.4) Unrecognized net transition obligation being recognized ratably through 2003..................... 5.6 6.2 Adjustment required to recognize minimum liability... (4.2) (3.6) -------- -------- Accrued pension liability............................ $ (8.3) $ (7.2) -------- -------- Major assumptions (Retirement and Supplemental Plans): Discount rate........................................ 7.0% 8.5% Rate of increase in compensation levels.............. 4.0% 5.5% Expected return on market value of plan assets....... 9.75% 11.0%
NOTE 16: OTHER POSTRETIREMENT BENEFITS In addition to the Company's defined benefit pension plans, salaried employees who have attained age 55 and who have rendered ten years of service are eligible for both medical benefits and life insurance coverage during retirement. The retiree medical plan is contributory and provides benefits to retirees, their covered dependents and beneficiaries. Retiree contributions are adjusted annually. The plan also contains fixed deductibles, coinsurance and out-of-pocket limitations. The life insurance plan is noncontributory and covers retirees only. The Company adopted SFAS No. 106 effective January 1, 1992 (see Note 17: Change in 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 -------------- 1993 1992 ------ ------ (IN MILLIONS) Components of net periodic postretirement benefit cost Service cost........................................... $ 3.3 $ 4.8 Interest cost.......................................... 15.1 18.2 Net amortization and deferral.......................... (3.4) -- ------ ------ Total................................................ $ 15.0 $ 23.0 ====== ====== LIFE INSURANCE PLAN -------------- 1993 1992 ------ ------ (IN MILLIONS) Components of net periodic postretirement benefit cost Service cost........................................... $ 0.2 $ 0.2 Interest cost.......................................... 3.9 3.8 ------ ------ Total................................................ $ 4.1 $ 4.0 ====== ======
28 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Prior to 1992, the costs of these benefits were generally recognized when paid and for 1991 were $13.6 million. SFP's policy is to fund benefits payable under the medical and life insurance plans as due. The following table shows the reconciliation of the plans' obligations to amounts accrued at December 31, 1993 and 1992. The Company uses a September 30 measurement date.
MEDICAL PLAN -------------- 1993 1992 ------ ------ (IN MILLIONS) Accumulated postretirement benefit obligation Retirees................................................ $138.6 $114.1 Fully eligible active plan participants................. 16.1 9.5 Other active plan participants.......................... 76.1 54.7 ------ ------ Accumulated postretirement benefit obligation............. 230.8 178.3 ------ ------ Unrecognized prior service credit......................... 41.3 44.7 Unrecognized net gain (loss).............................. (40.3) 3.0 ------ ------ Accrued postretirement liability.......................... $231.8 $226.0 ====== ====== LIFE INSURANCE PLAN -------------- 1993 1992 ------ ------ (IN MILLIONS) Accumulated postretirement benefit obligation Retirees................................................ $ 45.8 $ 43.5 Fully eligible active plan participants................. 0.2 -- Other active plan participants.......................... 4.9 4.1 ------ ------ Accumulated postretirement benefit obligation............. 50.9 47.6 ------ ------ Unrecognized net gain (loss).............................. (5.5) (1.3) ------ ------ Accrued postretirement liability.......................... $ 45.4 $ 46.3 ====== ======
The unrecognized prior service credit will be amortized straight line over the average future service to full eligibility of the active population. For 1994, the assumed health care cost trend rate for managed care medical costs is 11.5% 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 14% and is assumed to decrease gradually to 5% by 2006 and remain constant thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, 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 $36.5 million and the aggregate of the service and interest components of net periodic postretirement benefit cost recognized in 1993 by $3.2 million. In 1993, the assumed health care cost trend rate for managed care medical costs was 12% and was assumed to decrease gradually to 5.5% by 2006 and remain constant thereafter. For medical costs not in managed care, the assumed health care cost trend rate was 15% in 1993 and was assumed to decrease gradually to 6.5% by 2006 and remain constant thereafter. The weighted-average discount rate assumed in determining the accumulated postretirement benefit obligation was 7% and 8.5% in 1993 and 1992, respectively. The assumed weighted-average salary increase was 4.0% and 5.5% in 1993 and 1992, respectively. 29 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 $3.3 million, $3.5 million and $3.7 million in 1993, 1992 and 1991, respectively. NOTE 17: 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 and requires recognition of these benefits if they are vested and payment is probable and reasonably estimable. Prior to 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. Additionally, pre-tax expenses in 1992 were $14 million higher than in 1991 as a result of the change in accounting for these costs. NOTE 18: 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 are generally exercisable no earlier than one year after the date of grant and expire ten years after the date of grant. Under these plans, approximately 0.8 million shares of restricted stock have been granted with the restrictions on such shares lapsing no earlier than one year from the date of grant and upon the attainment of certain corporate performance objectives or the completion of a required vesting period. A total of 10 million shares, excluding 2 million additional shares that may be granted in exchange for shares tendered to the Company to pay for an option exercise, and a total of 18.4 million shares may be used under the Long Term Plan and Incentive Compensation Plan, respectively. 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; and (4) stock appreciation rights. Awards of 6.6 million shares under the Long Term Plan and 14.6 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. As a result of the approval by SFP's Board of Directors to distribute the common stock of SFP Gold to SFP shareholders, it will be necessary to adjust the outstanding options to maintain their economic value. The option price and number of shares will be adjusted in accordance with Internal Revenue Code Section 424. 30 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Approximately 4.9 million and 6.2 million of outstanding options at December 31, 1993 and 1992, respectively, were exercisable within the next year. Option activity in all plans during 1993, 1992 and 1991 is summarized below:
SFP AVERAGE SHARES PRICE ---------- ------- Options outstanding at December 31, 1990............... 15,610,892 $ 7.46 Granted................................................ 343,700 7.22 Exercised.............................................. 2,022,221 6.21 Surrendered or terminated.............................. 2,887,071 9.20 ---------- 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 ========== ======
NOTE 19: STOCKHOLDER RIGHTS PLAN AND SALE OF STOCK In January 1991, the SFP Board of Directors voted to redeem by means of a share distribution the rights to purchase Series A Junior Participating Preferred Stock of SFP issued under a rights agreement. Holders of record of the rights as of the close of business on February 15, 1991, received an amount of SFP common stock, with a current market price equal to $0.05 per right in March 1991. The redemption resulted in an issuance of approximately 1.3 million shares of common stock. In October 1991, SFP sold 4,043,039 shares of stock, and received net proceeds of approximately $36.2 million. These shares were purchased as a result of options which had been granted to underwriters to cover over- allotments in conjunction with the sale of SFP stock by a significant shareholder through a secondary offering. The shares were issued through use of treasury stock held by the Company. 31 SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) NOTE 20: SUMMARIZED QUARTERLY OPERATING RESULTS (UNAUDITED)
1993 1992 ----------------------------- ------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH ------ ------ ------- ------ ------- ------ ------- ------ (IN MILLIONS, EXCEPT PER SHARE DATA) Operating Revenues...... $583.2 $609.1 $585.8 $631.1 $ 545.2 $550.0 $ 577.8 $578.7 ------ ------ ------- ------ ------- ------ ------- ------ Operating Income (Loss). $ 71.2 $ 82.2 $ 49.6 $114.7 $ 57.8 $ 65.5 $(238.0) $ 91.9 ------ ------ ------- ------ ------- ------ ------- ------ Income (Loss) Continuing Operations.. $106.4 $ 28.2 $ (10.3) $ 53.1 $ 9.4 $ 19.2 $(176.8) $169.3 Discontinued Operations, Net of Income Taxes.......... 20.7 119.3 7.5 13.9 18.8 7.3 11.7 4.6 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).... $127.1 $147.5 $ (2.8) $ 67.0 $(134.8) $ 26.5 $(165.1) $168.9 ====== ====== ======= ====== ======= ====== ======= ====== Income (Loss) Per Common Share Continuing Operations.. $ 0.57 $ 0.15 $ (0.05) $ 0.28 $ 0.05 $ 0.10 $ (0.95) $ 0.91 Discontinued Operations............ 0.11 0.64 0.04 0.08 0.10 0.04 0.06 0.03 Extraordinary Charge... -- -- -- -- -- -- -- (0.03) Cumulative Effect of a Change in Accounting.. -- -- -- -- (0.88) -- -- -- ------ ------ ------- ------ ------- ------ ------- ------ Net Income (Loss) Per Common Share........ $ 0.68 $ 0.79 $ (0.01) $ 0.36 $ (0.73) $ 0.14 $ (0.89) $ 0.91 ====== ====== ======= ====== ======= ====== ======= ======
- -------- (1) Quarterly results of operations have been reclassified to present SFP's gold subsidiary as discontinued operations. (2) 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. (3) 1993 income (loss) includes a first quarter $145.4 million pre-tax gain on sale of California lines, and a third quarter increase in income tax expense of approximately $27.7 million reflecting the retroactive impact of the increase in the federal income tax rate to 35%. (4) 1992 income (loss) includes a third quarter $320.4 million pre-tax rail special charge and a fourth quarter $204.9 million pre-tax gain on sale of California lines. 32 -----END PRIVACY-ENHANCED MESSAGE-----