SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-8627
SANTA FE PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3258709
(State of Incorporation) (I.R.S. Employer Identification No.)
1700 East Golf Road, Schaumburg, Illinois 60173-5860
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (708) 995-6000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding
Class June 30, 1995
----------------------------- -------------------------
Common Stock, $1.00 par value 151,853,794 shares
<PAGE>
PART I - FINANCIAL INFORMATION
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In millions, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues $ 671.9 $ 658.2 $ 1,351.6 $ 1,289.7
---------- ---------- ---------- ----------
Operating Expenses
Compensation and benefits 198.9 209.2 419.4 416.8
Contract services 96.7 90.1 188.8 170.2
Fuel 62.7 61.2 126.5 120.1
Equipment rents 61.9 62.0 121.6 122.4
Depreciation and amortization 52.7 50.1 105.2 99.2
Materials and supplies 25.4 32.3 54.5 64.8
Other 49.1 55.9 106.7 108.1
---------- ---------- ---------- ----------
Total Operating Expenses 547.4 560.8 1,122.7 1,101.6
---------- ---------- ---------- ----------
Operating Income 124.5 97.4 228.9 188.1
Equity in Earnings of Pipeline
Partnership 5.7 10.7 12.4 17.0
Interest Expense 45.4 30.9 85.1 59.9
Other Income (Expense)-Net (6.7) 6.7 (36.5) 32.7
---------- ---------- ---------- ----------
Income From Continuing Operations
Before Income Taxes 78.1 83.9 119.7 177.9
Income Taxes 30.3 35.5 49.6 75.3
---------- ---------- ---------- ----------
Income From Continuing Operations 47.8 48.4 70.1 102.6
Income from Discontinued Operations,
Net of Income Taxes - 9.2 - 23.1
Extraordinary Charge on Early Retirement
of Debt, Net of Income Taxes - - (24.3) -
---------- ---------- ---------- ----------
Net Income $ 47.8 $ 57.6 $ 45.8 $ 125.7
========== ========== ========== ==========
Income (Loss) Per Share
Continuing Operations $ 0.30 $ 0.25 $ 0.41 $ 0.54
Discontinued Operations - 0.05 - 0.12
Extraordinary Charge - - (0.14) -
---------- ---------- ---------- ----------
Net Income $ 0.30 $ 0.30 $ 0.27 $ 0.66
========== ========== ========== ==========
Average Number of Common and
Common Equivalent Shares 159.1 189.7 169.8 189.8
========== ========== ========== ==========
</TABLE>
(See accompanying notes to Consolidated Financial Statements)
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<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In millions)
[CAPTION]
June 30, December 31,
1995 1994
---------- ----------
Assets
Current Assets
Cash and cash equivalents, at cost which
approximates market $ 30.1 $ 176.4
Accounts receivable, less allowances 59.0 62.0
Materials and supplies 90.7 95.3
Note receivable - current - 36.2
Current portion of deferred income taxes 104.0 98.6
Other 22.2 25.2
---------- ----------
Total current assets 306.0 493.7
---------- ----------
Other Long-Term Assets 380.9 337.9
Properties, Plant and Equipment 6,391.9 6,291.8
Less-accumulated depreciation and amortization 1,537.0 1,550.5
---------- ----------
Net Properties 4,854.9 4,741.3
---------- ----------
Total Assets $ 5,541.8 $ 5,572.9
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 627.5 $ 724.8
Long-term debt due within one year 148.8 203.6
---------- ----------
Total current liabilities 776.3 928.4
---------- ----------
Long-Term Debt Due After One Year 1,884.5 1,067.4
Postretirement Benefits Liability 258.3 258.1
Restructuring Liability 152.3 171.1
Other Long-Term Liabilities 700.6 699.1
Deferred Income Taxes 1,225.0 1,191.9
---------- ----------
Total Liabilities 4,997.0 4,316.0
---------- ----------
Shareholders' Equity
Common stock 190.4 190.0
Paid-in capital 794.1 825.8
Retained income 336.3 290.5
Treasury stock, at cost (776.0) (49.4)
---------- ----------
Total shareholders' equity 544.8 1,256.9
---------- ----------
Total Liabilities and Shareholders' Equity $ 5,541.8 $ 5,572.9
========== ==========
(See accompanying notes to Consolidated Financial Statements)
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<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In millions)
[CAPTION]
Six Months
Ended June 30,
1995 1994
---------- ----------
Operating Activities
Net income $ 45.8 $ 125.7
Adjustments to reconcile net income to operating
cash flows:
Income from discontinued operations,
net of income taxes - (23.1)
Extraordinary charge on early retirement of debt,
net of income taxes 24.3 -
Depreciation and amortization 105.2 99.2
Deferred income taxes 38.7 33.7
Rail restructuring costs paid (30.7) (33.8)
Imputed interest expense 8.0 10.4
Other-net (26.0) (49.7)
Changes in working capital:
Accounts receivable 3.0 (3.5)
Materials and supplies 4.6 (22.4)
Accounts payable and accrued liabilities (97.3) 29.0
Other 3.0 13.4
---------- ----------
Net Cash Provided by Operating
Activities-Continuing Operations 78.6 178.9
Discontinued Operations-net - (11.3)
---------- ----------
Net Cash Provided by Operating Activites 78.6 167.6
---------- ----------
Investing Activities
Cash used for capital expenditures (197.5) (205.8)
Other-net 38.4 79.5
Discontinued Operations-net - (29.1)
---------- ----------
Net Cash Used for Investing Activities (159.1) (155.4)
---------- ----------
Financing Activities
Proceeds from borrowings 1,047.0 -
Principal payments on borrowings (285.1) (128.5)
Purchase of SFP common stock (812.2) -
Extraordinary charge on early retirement of debt (24.3) -
Other-net 8.8 7.1
Discontinued Operations-net - 53.9
---------- ----------
Net Cash Used for Financing Activities (65.8) (67.5)
---------- ----------
Decrease in Cash and Cash Equivalents (146.3) (55.3)
Cash and Cash Equivalents:
Beginning of period 176.4 70.3
---------- ----------
End of period $ 30.1 $ 15.0
========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 75.6 $ 51.4
Income taxes $ 13.6 $ 33.5
========== ==========
(See accompanying notes to Consolidated Financial Statements)
-3-
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) The consolidated financial statements should be read in
conjunction with the Santa Fe Pacific Corporation ("SFP",
"Registrant" or "Company") Annual Report on Form 10-K for the
year ended December 31, 1994 ("1994 Form 10-K"), including those
financial statements and notes thereto incorporated by reference
from the Registrant's 1994 Annual Report to Shareholders.
(b) In the opinion of SFP management, the consolidated statement of
operations for the three and six months ended June 30, 1995 and
1994 reflect all adjustments necessary for a fair statement of
the results of operations. Except as otherwise disclosed, all
adjustments are of a normal recurring nature.
(c) The consolidated statement of operations for the three and six
months ended June 30, 1995 is not necessarily indicative of the
results of operations for the full year 1995.
(d) Certain comparative prior year amounts in the consolidated
financial statements have been reclassified to conform with the
current year presentation.
(e) On June 29, 1994, SFP and Burlington Northern Inc. ("BNI")
entered into a definitive Agreement and Plan of Merger (as
amended, the "Merger Agreement") pursuant to which SFP is to
merge with and into BNI, with BNI being the surviving corporation
(the "Merger"). The Merger was approved by the stockholders of
both SFP and BNI on February 7, 1995. In accordance with the
Merger Agreement, BNI and SFP conducted a joint tender offer in
which SFP purchased 38 million shares and BNI purchased 25
million shares of SFP common stock at a price of $20 per share,
the payment for which shares was made on February 21, 1995 (the
"Tender Offer").
At Merger consummation, each remaining outstanding share of SFP
common stock will be converted into at least 0.40 of a share of
BNI common stock (the "Exchange Ratio") in a tax-free exchange.
Between the Tender Offer and consummation of the Merger, SFP has
the right but not the obligation to repurchase up to an
additional 10 million shares of SFP common stock, subject to
certain financial conditions and limitations of the Merger
Agreement and SFP's bank loan facility ("Credit Facility"). The
Exchange Ratio will depend on the number of SFP shares
repurchased by SFP as well as the number of SFP employee stock
options exercised prior to the consummation of the Merger. The
Merger Agreement provides for a maximum Exchange Ratio of 0.4347
which will not be reached because SFP employee stock options have
been exercised since December 31, 1994 and the anticipated timing
- 4 -
<PAGE>
of the consummation of the Merger will limit the time available
to make repurchases. Through June 30, 1995, SFP has repurchased
approximately 2.3 million shares at an average cost of
approximately $22.40 per share. The effect of these repurchases,
after adjusting for SFP employee stock options exercised since
December 31, 1994, was to increase the Exchange Ratio to 0.4073
of a share of BNI common stock for each outstanding share of SFP
common stock at June 30, 1995. SFP has met certain performance
and financial criteria under the Merger Agreement and Credit
Facility and, therefore, is allowed to repurchase additional
shares up to an aggregate amount of approximately $36 million in
the third quarter. While SFP intends to continue repurchases of
shares during the third quarter, there can be no assurances that
the permitted repurchases will be completed.
The consummation of the Merger is subject to various conditions,
including approval by the Interstate Commerce Commission ("ICC").
At its July 20, 1995, voting conference, the ICC voted to approve
the Merger. In accordance with its procedural schedule, the ICC
is expected to issue its formal, written decision by August 23,
1995. The ICC's written decision will specify the effective date
of the decision. Depending on the effective date of the ICC
decision and the absence of any action to delay or otherwise stay
effectiveness, it is possible that the Merger could be
consummated as early as the end of the third quarter 1995. Based
on the voting conference, the ICC's written decision will place
certain limited conditions on the Merger, primarily relating to
allowing other carriers to operate on specific portions of tracks
of The Atchison, Topeka and Santa Fe Railway Company ("Santa Fe
Railway") or Burlington Northern Railroad Company. Given their
limited nature, these conditions are not expected to have an
adverse effect on the anticipated benefits of the Merger.
As permitted by the Merger Agreement, BNI and SFP intend to
effect the Merger through the use of a holding company and have
established BNSF Corporation ("Holdings") for this purpose.
Holdings is jointly and equally owned by BNI and SFP. Under this
structure (the "Alternative Merger"): (1) Holdings will create
two new wholly owned subsidiaries, cause one of the subsidiaries
to merge into BNI, and cause the other to merge into SFP; (2)
each holder of BNI common stock will receive one share of common
stock, par value $0.01 per share, of Holdings ("Holdings Common
Stock") for each share of BNI common stock; and (3) each holder
of SFP common stock will receive a minimum of 0.40 of a share of
Holdings Common Stock for each share of SFP common stock based on
the Exchange Ratio. The rights of a stockholder of Holdings will
be substantially identical to the rights of a stockholder of BNI,
and the Alternative Merger will have the same economic effect on
the stockholders of SFP and BNI as the Merger of SFP with and
into BNI.
- 5 -
<PAGE>
(f) During the first quarter of 1995, SFP borrowed $1.0 billion under
the Credit Facility. Proceeds of $760 million from the borrowing
were used by SFP to purchase 38 million shares of SFP common
stock pursuant to the terms of the Tender Offer. The repurchased
shares are reflected within treasury stock in the accompanying
consolidated balance sheet. The remaining proceeds were used by
SFP to repay SFP's $200 million 12.65% senior notes maturing
1998-2000 ("Senior Notes"), plus the costs associated with the
retirement. These costs, totaling $40.0 million pre-tax,
included $37.0 million for the premium attributable to the early
retirement of the Senior Notes and $3.0 million for the write-off
of related unamortized debt issue costs. These costs, net of
applicable income tax benefits of $15.7 million, have been
presented in the accompanying consolidated statement of
operations as an extraordinary charge.
During the first quarter, the Credit Facility was amended:
(i) to reduce potential borrowings available to SFP from $1.56
billion to $1.36 billion; (ii) to reduce the interest rates
applicable to borrowings under the Credit Facility by reducing
credit spreads and expanding money market borrowing flexibility
and; (iii) to reduce SFP's hedging requirements for interest rate
protection to a minimum of $400 million of outstanding
borrowings. SFP has outstanding $200 million of fixed-rate debt
which is considered interest rate protection under the Credit
Facility. Additionally, SFP has entered into seven interest rate
swap transactions with a total notional principal amount of $200
million. The interest rate swaps mature from December 1996
through December 1998 and were entered into to match maturities
under the Credit Facility. The interest rate swap transactions
require payment of a fixed interest rate of approximately 7.6%,
and the receipt of a variable interest rate based on LIBOR. The
fair value of the swap transactions at June 30, 1995, was an
unrealized loss of approximately $7.3 million.
At June 30, 1995, SFP had also entered into five interest rate
swap transactions with a total notional principal amount of $150
million, for the purpose of establishing rates in anticipation of
an expected future debt issuance. These swap transactions, which
mature in December 2005, call for payment of a fixed interest
rate of 6.5%, and the receipt of a variable interest rate based
on LIBOR. Any realized gain or loss upon closing of these swap
transactions will be amortized as an adjustment to interest
expense over the term of the related debt. The fair value of the
swap transactions at June 30, 1995, was an unrealized gain of
approximately $1.3 million.
- 6 -
<PAGE>
(g) At June 30, 1995, Santa Fe Railway had entered into various
commodity swap and collar transactions with several
counterparties covering approximately 110 million gallons of
diesel fuel in 1995 which is anticipated to cover approximately
55% of remaining 1995 fuel purchases. Through swap arrangements,
Santa Fe Railway has hedged approximately 80 million gallons at
an average price of 49 cents per gallon. Additionally,
approximately 30 million gallons have been hedged through collar
arrangements which allow the price to float between average floor
and ceiling prices of 45 cents and 50 cents, respectively. These
prices do not include taxes, fuel handling costs and any
differences which may occur from time to time between the prices
of commodities hedged and the purchase price of Santa Fe
Railway's diesel fuel. The fair value of Santa Fe Railway's fuel
hedging transactions at June 30, 1995, was an unrealized loss of
$2.7 million.
The effect of the Company's fuel hedging activities was to
decrease operating expense by $0.7 million for the three months
ended June 30, 1995, and to increase operating expense by $0.5
million for the three months ended June 30, 1994; and increase
operating expense by $0.5 million and $3.4 million for the six
months ended June 30, 1995 and 1994, respectively.
(h) In September 1994, SFP distributed its remaining interest in
Santa Fe Pacific Gold Corporation ("SFP Gold") to SFP
shareholders. SFP Gold operations for 1994 are reflected as
discontinued operations. Revenues from discontinued operations
for the three and six months ended June 30, 1994, were $93.5
million and $177.8 million, respectively.
(i) SFP is a party to a number of legal actions and claims, various
governmental proceedings and private civil suits arising in the
ordinary course of business, including those related to
environmental matters and personal injury claims. While the
final outcome of these items cannot be predicted with certainty,
considering among other things the meritorious legal defenses
available, it is the opinion of SFP management that none of these
items, when finally resolved, will have a material adverse effect
on the annual results of operations, financial position or
liquidity of SFP, although an adverse resolution of a number of
these items in a single year could have a material adverse effect
on the results of operations for that year.
- 7 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
---------------------
Current Quarter Compared with Same Quarter of Preceding Year
------------------------------------------------------------
Santa Fe Pacific Corporation ("SFP" or "Registrant") reported net
income of $47.8 million or $0.30 per share compared to $57.6 million
or $0.30 per share last year. The decrease in net income primarily
relates to: (i) a $14.5 million increase in interest expense; (ii) a
$13.4 million decrease in other income (expense)-net; (iii) $9.2
million of income from discontinued operations in 1994; and (iv) a
$5.0 decrease in equity in earnings of Santa Fe Pacific Pipeline
Partners, L.P. ("Pipeline Partnership"). The above were largely
offset by higher operating income of $27.1 million. Despite the
decrease in net income, SFP's net income per share was the same as
last year due to SFP purchases of common stock discussed in Note (e)
which reduced SFP's outstanding shares in 1995. Special items in 1994
include a pre-tax credit of $29.5 million resulting from a change in
postretirement medical benefits eligibility requirements related to
employees who are no longer currently eligible for benefits, and a
$12.3 million pre-tax charge related to an adverse appellate court
decision. Excluding these items, SFP's second quarter 1994 net income
from continuing operations was $38.5 million or $0.20 per share.
Operating income at The Atchison, Topeka and Santa Fe Railway Company
("Santa Fe Railway") for the quarter was $124.5 million, an increase
of $27.1 million or 28% over the $97.4 million reported in the second
quarter of 1994. Operating revenues of $671.9 million, rose 2% as
average revenue per car increased 2.5% and carloadings decreased
slightly. The quarterly operating ratio improved to 81.5% from 85.2%
in 1994. Operating revenues by business group for the three and six
months ended June 30, 1995 and 1994 were as follows:
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<PAGE>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
-------- -------- -------- --------
(In millions)
Intermodal
Intermodal Marketing Companies $ 84.9 $ 101.4 $ 168.4 $ 189.1
Direct Marketing 101.6 80.3 203.7 153.6
International 59.6 54.1 117.0 105.7
Truckload 59.1 60.0 113.6 109.5
-------- -------- -------- --------
Total Intermodal 305.2 295.8 602.7 557.9
-------- -------- -------- --------
Carload Commodities
Petroleum 37.7 35.5 72.6 71.0
Chemicals & Plastics 35.5 37.0 71.7 70.6
Consumer/Food Products 29.7 32.4 59.5 66.4
Building Materials & Paper Prod. 30.7 29.3 60.8 59.0
Metals 25.9 19.2 51.7 40.4
-------- -------- -------- --------
Total Carload Commodities 159.5 153.4 316.3 307.4
-------- -------- -------- --------
Bulk Products
Coal 47.5 58.6 104.7 117.8
Minerals, Ores & Other 39.2 39.1 76.9 74.4
Grain 30.2 26.7 71.0 59.4
Grain Products 24.6 20.9 48.4 41.7
-------- -------- -------- --------
Total Bulk Products 141.5 145.3 301.0 293.3
-------- -------- -------- --------
Automotive 56.4 54.7 112.2 112.5
-------- -------- -------- --------
Total Freight Revenues 662.6 649.2 1,332.2 1,271.1
Other Revenue 9.3 9.0 19.4 18.6
-------- -------- -------- --------
Total Operating Revenues $ 671.9 $ 658.2 $1,351.6 $1,289.7
======== ======== ======== ========
Intermodal revenues increased 3% to $305.2 million, primarily the
result of a 27% increase in direct marketing due to growth in less-
than-truckload business, partially offset by a 16% decrease in
intermodal marketing companies due to lower volumes. Carload
commodities revenues of $159.5 million were 4% higher than last year
mainly due to a 25% increase in metals traffic. Bulk products
revenues of $141.5 million decreased 3% principally due to decreased
shipments of coal, partially offset by higher average revenue per car
for grain, grain products, and minerals ores and other. Automotive
revenues of $56.4 million increased 3% principally due to 3% higher
volumes. Recent economic trends have indicated a slowdown in general
business activity in the United States. As a result, SFP currently
anticipates that revenue levels for the third quarter of 1995 could
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<PAGE>
approximate 1994 levels for the comparable period.
Operating expenses of $547.4 million decreased by $13.4 million or 2%,
principally due to cost control efforts. Compensation and benefits
expense decreased $10.3 million or 5% reflecting lower employment
levels, and decreased incentive compensation and benefits expenses.
Materials and supplies expense decreased $6.9 million or 21%
reflecting lower cost of roadway material and expanded use of
locomotive maintenance contractors, which principally accounts for the
$6.6 million increase in contract services expense.
SFP's equity investment in Pipeline Partnership produced income of
$5.7 million, down $5.0 million from last year due principally to
SFP's equity portion of Pipeline Partnership's provision for
environmental related costs, including litigation related to the
Sparks, Nevada environmental site. Interest expense increased $14.5
million, principally reflecting borrowings under SFP's bank loan
facility ("Credit Facility"), partially offset by lower average
interest rates. Other income-net, adjusted to exclude $28.1 million
of the credit from the change in postretirement medical benefits
eligibility requirements and the $12.3 million adverse appellate court
decision in 1994, increased $2.4 million, principally due to higher
income from real estate activities.
Year-to-Date 1995 Compared to Year-to-Date 1994
-----------------------------------------------
SFP reported net income of $45.8 million or $0.27 per share for the
six months ended June 30, 1995, compared to $125.7 million or $0.66
per share in 1994. The decrease in net income primarily relates to:
(i) a $69.2 million decrease in other income (expense)-net; (ii) a
$25.2 million increase in interest expense; (iii) a $24.3 million
after tax extraordinary charge on early retirement of debt; and (iv)
$23.1 million of income from discontinued operations in 1994. The
above were partially offset by a $40.8 million increase in operating
income. Other income (expense)-net in 1995 includes $26.3 million of
merger related costs. The first six months of 1994 included the
second quarter special items discussed above and first quarter pre-tax
gains totaling $34.2 million related to the sale of an investment and
a favorable litigation settlement. Excluding these items, SFP's net
income from continuing operations for the six months ended June 30,
1995, was $89.2 million or $0.53 per share compared to $73.0 million
or $0.38 per share in 1994.
Santa Fe Railway's operating income for the first six months was
$228.9 million compared to $188.1 million a year earlier. Operating
revenues of $1,351.6 million improved 5% as average revenue per car
increased 3% and carloadings increased 2%. Intermodal revenues
increased 8% compared to last year principally due to a 34% increase
in direct marketing traffic due to growth in less-than-truckload
business, partially offset by lower intermodal marketing companies
volumes. Carload commodities revenues increased 3% reflecting a 28%
increase in metals revenues due to higher average revenue per car and
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<PAGE>
volumes, partially offset by lower consumer/food products revenues.
Bulk products revenues increased 3% as increased shipments and average
revenue per car within grain and grain products were partially offset
by lower shipments of coal. Automotive revenues decreased slightly,
principally reflecting 3% lower average revenue per car partially
offset by 2% higher volumes.
Operating expenses were $1,122.7 million, a 2% increase over last
year. Compensation and benefits expense increased $2.6 million
reflecting wage increases, largely offset by decreased incentive
compensation and benefits expense. Contract services expense was
$18.6 million above last year reflecting expanded use of locomotive
maintenance contractors. Fuel expense increased $6.4 million
reflecting a 3% increase in consumption and a 2% increase in price.
Materials and supplies expense decreased $10.3 million reflecting the
expanded use of locomotive maintenance contractors as well as
decreased roadway material expense.
SFP's equity investment in Pipeline Partnership produced income of
$12.4 million, down $4.6 million from last year due principally to the
environmental related costs discussed above. Interest expense
increased $25.2 million, principally reflecting borrowings under the
Credit Facility, partially offset by lower average interest rates.
Other income-net, adjusted to exclude the two second quarter 1994
special items discussed above, the first quarter 1994 gain on the sale
of an investment and a favorable litigation settlement, and first
quarter 1995 Merger expenses, increased $7.1 million principally due
to higher income from real estate activities and lower administrative
expenses, partially offset by higher costs related to accounts
receivable sales.
Financial Condition and Other Matters
-------------------------------------
Year-to-Date Cash Flow
----------------------
For the six months ended June 30, 1995, net cash provided by operating
activities from continuing operations totaled $78.6 million which
principally reflects net income before depreciation and deferred
income taxes, partially offset by cash used for working capital
requirements and restructuring payments (which principally include
employee separation and other labor payments). Total capital
expenditures for the first six months of 1995, which include noncash
transactions, were $232.4 million. Noncash transactions of $34.9
million primarily represent reimbursable projects. Capital spending
related principally to improvements to track structure and other road
properties, new facilities, and equipment, and was primarily funded
through cash from operations and available cash balances. Additional
cash of $1,047 million was provided by borrowings under SFP's Credit
Facility, $760 million of which was used to repurchase 38 million
shares of SFP common stock and approximately $240 million of which was
used to repay SFP's 12.65% $200 million Senior Notes ("Senior Notes")
and related costs, as discussed in Note (f) to the consolidated
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<PAGE>
financial statements. Additionally, SFP used approximately $52
million in cash to repurchase an additional 2.3 million shares of SFP
common stock (see Note (e)). SFP's ratio of total debt to capital
increased to 79% at June 30, 1995 compared to 50% at December 31,
1994, principally reflecting reductions in equity and increases in
debt due to share repurchases.
Rail Restructuring
------------------
Restructuring costs paid were $30.7 million for the first six months
of 1995, with annual payments estimated to be approximately $60
million in 1995.
Labor Negotiations/Service Interruption
---------------------------------------
Santa Fe Railway is actively involved in industrywide labor contract
negotiations which began in late 1994. Wages, health and welfare
benefits, work rules and other issues are being negotiated for all
rail union employees, which represent approximately 85% of Santa Fe
Railway's work force. These negotiations have traditionally taken
place over a number of months and have previously not resulted in any
extended work stoppages.
Santa Fe Railway is party to service interruption insurance agreements
under which Santa Fe Railway would be required to pay premiums of up
to a maximum of approximately $38 million in the event of work
stoppages on other railroads. Santa Fe Railway is also entitled to
receive payments under certain conditions if a work stoppage occurs on
its property.
Merger Activities
-----------------
On June 29, 1994, SFP and Burlington Northern Inc. ("BNI") entered
into a definitive Agreement and Plan of Merger (as amended, the
"Merger Agreement") pursuant to which SFP is to merge with and into
BNI, with BNI being the surviving corporation (the "Merger"). The
Merger was approved by the stockholders of both SFP and BNI on
February 7, 1995. In accordance with the Merger Agreement, BNI and
SFP conducted a joint tender offer in which SFP purchased 38 million
shares and BNI purchased 25 million shares of SFP common stock at a
price of $20 per share, the payment for which shares was made on
February 21, 1995 (the "Tender Offer").
At Merger consummation, each remaining outstanding share of SFP common
stock will be converted into at least 0.40 of a share of BNI common
stock (the "Exchange Ratio") in a tax-free exchange. Between the
Tender Offer and consummation of the Merger, SFP has the right but not
the obligation to repurchase up to an additional 10 million shares of
SFP common stock, subject to certain financial conditions and
limitations of the Merger Agreement and the Credit Facility. The
Exchange Ratio will depend on the number of SFP shares repurchased by
- 12 -
<PAGE>
SFP as well as the number of SFP employee stock options exercised
prior to the consummation of the Merger. The Merger Agreement
provides for a maximum Exchange Ratio of 0.4347 which will not be
reached because SFP employee stock options have been exercised since
December 31, 1994 and the anticipated timing of the consummation of
the Merger will limit the time available to make repurchases. Through
June 30, 1995, SFP has repurchased approximately 2.3 million shares at
an average cost of approximately $22.40 per share. The effect of
these repurchases, after adjusting for SFP employee stock options
exercised since December 31, 1994, was to increase the Exchange Ratio
to 0.4073 of a share of BNI common stock for each outstanding share of
SFP common stock at June 30, 1995. SFP has met certain performance
and financial criteria under the Merger Agreement and Credit Facility
and, therefore, is allowed to repurchase additional shares up to an
aggregate amount of approximately $36 million in the third quarter.
While SFP intends to continue repurchases of shares during the third
quarter, there can be no assurances that the permitted repurchases
will be completed.
The consummation of the Merger is subject to various conditions,
including approval by the Interstate Commerce Commission ("ICC"). At
its July 20, 1995, voting conference, the ICC voted to approve the
Merger. In accordance with its procedural schedule, the ICC is
expected to issue its formal, written decision by August 23, 1995.
The ICC's written decision will specify the effective date of the
decision. Depending on the effective date of the ICC decision and the
absence of any action to delay or otherwise stay effectiveness, it is
possible that the Merger could be consummated as early as the end of
the third quarter 1995. Based on the voting conference, the ICC's
written decision will place certain limited conditions on the Merger,
primarily relating to allowing other carriers to operate on specific
portions of tracks of Santa Fe Railway or Burlington Northern Railroad
Company ("BN"). Given their limited nature, these conditions are not
expected to have an adverse effect on the anticipated benefits of the
Merger.
As permitted by the Merger Agreement, BNI and SFP intend to effect the
Merger through the use of a holding company and have established BNSF
Corporation ("Holdings") for this purpose. Holdings is jointly and
equally owned by BNI and SFP. Under this structure (the "Alternative
Merger"): (1) Holdings will create two new wholly owned subsidiaries,
cause one of the subsidiaries to merge into BNI, and cause the other
to merge into SFP; (2) each holder of BNI common stock will receive
one share of common stock, par value $0.01 per share, of Holdings
("Holdings Common Stock") for each share of BNI common stock; and (3)
each holder of SFP common stock will receive a minimum of 0.40 of a
share of Holdings Common Stock for each share of SFP common stock
based on the Exchange Ratio. The rights of a stockholder of Holdings
will be substantially identical to the rights of a stockholder of BNI,
and the Alternative Merger will have the same economic effect on the
stockholders of SFP and BNI as the Merger of SFP with and into BNI.
- 13 -
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
--------------------------
Merger-Related Litigation
-------------------------
Reference is made to the discussion of IN RE SANTA FE PACIFIC
CORPORATION SHAREHOLDER LITIGATION, C.A. No. 13587 (Delaware Chancery
Court), under Part I, Item 3 (Legal Proceedings) in Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1994. On
May 31, 1995, the Delaware Chancery Court rendered its decision
granting the motion to dismiss that was filed by SFP and SFP's
directors on March 13, 1995. The plaintiffs have appealed the
dismissal and on July 17, 1995, filed their opening brief with the
appellate court. SFP and SFP's directors will file their responsive
brief on or about August 17, 1995. SFP believes these lawsuits are
meritless and continues to oppose them vigorously.
ICC Merger Case
---------------
Reference is made to the discussion of the railroad merger and control
application filed by BNI, BN, SFP, and Santa Fe Railway ("Applicants")
with the ICC, Finance Docket No. 32549, BURLINGTON NORTHERN INC. AND
BURLINGTON NORTHERN RAILROAD COMPANY--CONTROL AND MERGER--SANTA FE
PACIFIC CORPORATION AND THE ATCHISON, TOPEKA AND SANTA FE RAILWAY
COMPANY, under Part I, Item 3 (Legal Proceedings) in Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1994. At
its July 20, 1995, voting conference, the ICC voted to approve the
Merger. In accordance with its procedural schedule, the ICC is
expected to issue its formal, written decision by August 23, 1995.
The ICC's written decision will specify the effective date of the
decision. Based on the voting conference, the ICC's written decision
will place certain limited conditions on the Merger, primarily
relating to allowing other carriers to operate on specific portions of
tracks of Santa Fe Railway or BN. Given their limited nature, these
conditions are not expected to have an adverse effect on the
anticipated benefits of the Merger.
Other Claims
------------
For a description of certain claims against the Pipeline Partnership,
see the sections entitled "East Line Civil Litigation and FERC
Proceeding" and "Environmental Matters" under Item 1, Legal
Proceedings, of the Pipeline Partnership's Report on Form 10-Q for the
quarter ended June 30, 1995, which sections are hereby incorporated by
reference.
- 14 -
<PAGE>
SFP and its subsidiaries and affiliates are also a party to a number
of other legal actions and claims, various governmental proceedings
and private civil suits arising in the ordinary course of business,
including those related to environmental matters and personal injury
claims. While the final outcome of these 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 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.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) See Index to Exhibits on page E-1 for a description of the
exhibits filed as part of this report.
(b) Reports on Form 8-K.
Registrant filed a Current Report on Form 8-K (Date of earliest
event reported: April 19, 1995) which included under Item 5,
Other Events, a reference to, and under Item 6, Exhibits and
Reports on Form 8-K, an exhibit consisting of, SFP's April 19,
1995, press release announcing its 1995 first quarter earnings.
Registrant filed a Current Report on Form 8-K (Date of earliest
event reported: May 31, 1995), which included under Item 5, Other
Events, action by the Court of Chancery for the State of Delaware
dismissing a class action lawsuit purportedly filed on behalf of
SFP stockholders against SFP, the individual members of the SFP
Board of Directors, and BNI in connection with the proposed
merger of SFP and BNI.
- 15 -
<PAGE>
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 thereunto duly authorized.
SANTA FE PACIFIC CORPORATION
(Registrant)
/s/ Thomas N. Hund
----------------------------------------
Thomas N. Hund
Vice President & Controller
(On Behalf of the Registrant and as
Principal Accounting Officer)
Schaumburg, Illinois
August 11, 1995
- 16 -
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER Description of Exhibit
------- ----------------------
12 Statement regarding computation of ratio of earnings to
fixed charges (six months ended June 30, 1995).
27 Financial Data Schedule (six months ended June 30,
1995).
E-1
<PAGE>
Exhibit 12
Santa Fe Pacific Corporation and Subsidiary Companies
Statement of Computation of Ratio of Earnings to Fixed Charges
Six Months Ended June 30, 1995
(In millions, except ratio)
Earnings:
Income from continuing operations
before income taxes $119.7
Less income of unconsolidated subsidiaries
greater than distributions (0.3)
Amortization of capitalized interest 1.2
Fixed charges before interest
capitalized (see below) 103.6
------
Total Earnings $224.2
======
Fixed Charges:
Interest expense including
amortization of debt discount $ 85.1
Portion of rentals representing
an interest factor 18.5
------
Fixed charges before interest
capitalized 103.6
Interest capitalized 2.6
------
Total Fixed Charges $106.2
======
Ratio of earnings to fixed charges 2.1
======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited June 30, 1995, Santa Fe Pacific Corporation and subsidiary companies
consolidated financial statements and accompanying notes and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 30
<SECURITIES> 0
<RECEIVABLES> 84
<ALLOWANCES> 25
<INVENTORY> 91
<CURRENT-ASSETS> 306
<PP&E> 6392
<DEPRECIATION> 1537
<TOTAL-ASSETS> 5542
<CURRENT-LIABILITIES> 776
<BONDS> 1885
<COMMON> 190
0
0
<OTHER-SE> 355
<TOTAL-LIABILITY-AND-EQUITY> 5542
<SALES> 0
<TOTAL-REVENUES> 1352
<CGS> 0
<TOTAL-COSTS> 1123
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> 120
<INCOME-TAX> 50
<INCOME-CONTINUING> 70
<DISCONTINUED> 0
<EXTRAORDINARY> (24)
<CHANGES> 0
<NET-INCOME> 46
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0<F2>
<FN>
<F1>Provision for doubtful accounts included in total costs and expenses applicable
to sales and revenue.
<F2>Not applicable.
</FN>
</TABLE>
