<PAGE>
UNITED STATES
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 September 30, 1994
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 1-6146
SOUTHERN PACIFIC TRANSPORTATION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 94-6001323W
- ------------------------------ --------------------
(State or other jurisdiction (I.R.S. employer
of organization) identification no.)
Southern Pacific Building
One Market Plaza
San Francisco, CA 94105
Telephone Number (415) 541-1000
Indicate by checkmark 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.
Outstanding
Class at October 31,1994
- ---------------------------- ------------------
Common stock, without par value 1,350 shares
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
SOUTHERN PACIFIC TRANSPORTATION COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(in millions)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents (including restricted cash of $ 5.4 $ 31.9
$5.4 in 1994 and 1993)...................................
Accounts and notes receivable, net of allowance for 159.3 112.0
doubtful accounts........................................ 75.2 24.1
Notes receivable from Rio Grande Receivables, Inc............ 49.9 46.5
Materials and supplies, at cost.............................. 62.7 41.4
Other current assets......................................... -------- --------
Total current assets..................................... 352.5 255.9
-------- --------
PROPERTY, AT COST
Roadway and structures....................................... 5,722.6 5,496.9
Railroad equipment........................................... 1,687.3 1,612.2
Other property............................................... 181.6 174.3
-------- --------
Total property............................................. 7,591.5 7,283.4
2,847.6 2,792.1
Less accumulated depreciation................................ -------- --------
Property, net............................................. 4,743.9 4,491.3
-------- --------
OTHER ASSETS AND DEFERRED CHARGES
Notes receivable from Rio Grande Receivables, Inc........... 27.8 27.8
Other assets and deferred charges........................... 143.7 162.2
-------- --------
Total other assets........................................ 171.5 190.0
-------- --------
Total assets.............................................. $5,267.9 $4,937.2
======== ========
</TABLE>
(Continued)
See accompanying notes to consolidated condensed financial statements.
1
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(in millions)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES $ 116.9 $ 119.4
Accounts and wages payable...................... 125.5 121.5
Accrued payables................................ 54.8 62.2
Current portion of long-term debt............... 1.9 1.8
Redeemable preference shares of a subsidiary.... 519.3 520.9
Other current liabilities....................... -------- -------
818.4 825.8
Total current liabilities..................... -------- -------
ADVANCES PAYABLE TO PARENT AND AFFILIATE........... 66.6 -
-------- -------
LONG-TERM DEBT (Note 4) 896.1 916.3
-------- -------
DEFERRED INCOME TAXES.............................. 857.6 837.7
--------
OTHER LIABILITIES.................................. 628.1 642.3
-------- -------
REDEEMABLE PREFERENCE SHARES OF A
SUBSIDIARY...................................... 42.9 44.2
-------- -------
STOCKHOLDER'S EQUITY
Common Stock.................................... 424.9 424.9
Additional paid-in capital (Note 4)............. 909.9 615.5
Retained income................................. 1,342.5 1,314.7
Advances to parent.............................. (719.1) (684.2)
-------- --------
Total stockholder's equity.................... 1,958.2 1,670.9
-------- --------
Total liabilities and stockholder's equity..
$5,267.9 $4,937.2
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
PACIFIC TRANSPORTATION COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ------------------------
1994 1993 1994 1993
---------- --------- ----------- -----------
(in millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Railroad........................................ $684.2 $643.5 $2,003.3 $1,860.8
Other........................................... 13.9 16.4 46.8 45.0
------ ------ ------- --------
Total....................................... 698.1 659.9 2,050.1 1,905.8
------ ------ ------- --------
OPERATING EXPENSES
Railroad........................................ 633.0 688.3 1,880.0 1,903.0
Other........................................... 13.6 15.7 45.2 42.9
------ ------ ------- --------
Total....................................... 646.6 704.0 1,925.2 1,945.9
------ ------ ------- --------
OPERATING INCOME (LOSS)............................ 51.5 (44.1) 124.9 (40.1)
------ ------ ------- --------
OTHER INCOME
Gains from sales of property.................... 3.7 4.5 26.3 16.7
Real estate rentals, net........................ 6.5 3.1 18.1 13.9
Interest income................................. 2.0 1.1 4.8 2.9
Other income (expense), net..................... (15.2) (25.4) (37.2) (48.9)
------ ------ ------- --------
Total....................................... (3.0) (16.7) 12.0 (15.4)
------ ------ ------- --------
INTEREST EXPENSE................................... 27.6 26.4 82.8 75.0
------ ------ ------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................. 20.9 (87.2) 54.1 (130.5)
------ ------ ------- --------
INCOME TAXES (BENEFIT)
Current......................................... (3.2) - (4.2) -
Deferred........................................ 12.5 (14.6) 26.5 (31.5)
------ ------ ------- --------
Total....................................... 9.3 (14.6) 22.3 (31.5)
------ ------ ------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING............................ 11.6 (72.6) 31.8 (99.0)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POST-EMPLOYMENT BENEFITS
IN 1994 AND POST-RETIREMENT BENEFITS
OTHER THAN PENSIONS IN 1993 (Net of income tax
benefits of $2.6 and $61.2, respectively)....... - - (4.0) (98.9)
------ ------ ------- --------
NET INCOME (LOSS).................................. $ 11.6 $(72.6) $ 27.8 $ (197.9)
====== ======= ======= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ADVANCES
--------------- PAID-IN RETAINED TO
SHARES AMOUNT CAPITAL INCOME PARENT TOTAL
-------- -------- --------- --------- --------- -----
(in millions, except shares)
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 1,200 $424.9 $615.5 $1,314.7 $(684.2) $1,670.9
NET INCOME.................... - - - 27.8 - 27.8
COMMON STOCK ISSUED........... 150 - 294.4 - - 294.4
ADVANCES TO PARENT............ - - - - (34.9) (34.9)
----- ------ ------ -------- ------- --------
BALANCES AT SEPTEMBER 30, 1994 1,350 $424.9 $909,9 $1,342.5 $(719.1) $1,958.2
===== ====== ====== ======== ======= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1994 1993
---------- ----------
(in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................. $ 27.8 $(197.9)
Adjustments to net income (loss)
Cumulative effect of change in accounting for post-
employment benefits in 1994 and post-retirement benefits in
1993...................................................... 6.6 160.1
Gains from sales of property.................................. (26.3) (16.7)
Depreciation and amortization................................. 176.4 170.5
Deferred income taxes........................................ 23.9 (92.7)
Other adjustments............................................. (123.6) (121.5)
------- -------
Total adjustments.......................................... 57.0 99.7
------- -------
Net cash provided by (used for) operating activities....... 84.8 (98.2)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Property sold and retired......................................... 29.9 18.5
Capital expenditures.............................................. (162.0) (239.4)
Other investing activities........................................ (130.2) (126.0)
------- -------
Net cash used for investing activities........................ (262.3) (346.9)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt, net of costs...................... 55.6 429.9
Debt and revolver drawdown (repayment), net....................... (229.5) (418.7)
Advances to parent................................................ (34.9) (30.1)
Advances from parent and affiliate................................ 66.6 -
Common stock issued............................................... 294.4 445.5
Redeemable preference shares repayment............................ (1.2) (1.1)
------- -------
Net cash provided by financing activities.................. 151.0 425.5
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (26.5) (19.6)
CASH AND CASH EQUIVALENTS-BEGINNING OF THE
PERIOD............................................................ 31.9 45.4
------- -------
CASH AND CASH EQUIVALENTS-END OF THE PERIOD.......................... $ 5.4 $ 25.8
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
(UNAUDITED)
(1) OWNERSHIP AND PRINCIPLES OF CONSOLIDATION
-----------------------------------------
Southern Pacific Transportation Company ("SPT") is a wholly-owned
subsidiary of Southern Pacific Rail Corporation ("SPRC"); therefore, per share
data are not shown in the accompanying consolidated condensed financial
statements. As used in this document, the Company refers to SPT together with
its subsidiaries. The consolidated condensed financial statements are prepared
on the historical cost basis of accounting and include the accounts of SPT and
all significant subsidiary companies, including St. Louis Southwestern Railway
Company ("SSW") and SPCSL Corp. ("SPCSL"), on a consolidated basis. SPRC also
owns Rio Grande Holding, Inc. ("RGH") which owns The Denver and Rio Grande
Western Railroad Company ("D&RGW"). SPRC management continues to review and
consider the placement of various subsidiaries within the corporate structure of
SPRC. SPRC intends to consolidate D&RGW and SPT as part of an overall plan to
simplify SPRC's corporate structure. These consolidated condensed financial
statements should be read in conjunction with the summary of significant
accounting policies and notes to consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1993 as
amended. Effective January 1, 1994 the Company changed its methods of accounting
for post-employment benefits pursuant to Financial Accounting Standards Board
Statement No. 112. In the opinion of management, all adjustments (consisting of
normal, recurring accruals) necessary for a fair presentation of interim period
results have been included. However, these results are not necessarily
indicative of results for a full year.
(2) RECLASSIFICATIONS
-----------------
Certain of the prior period amounts have been reclassified to conform to
the September 30, 1994 consolidated condensed financial statement presentation.
(3) SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1994 1993
-------- --------
(IN MILLIONS)
<S> <C> <C>
CASH PAYMENTS:
Interest................................. $61.1 $53.3
Income taxes............................. - -
NON-CASH TRANSACTIONS:
Capital lease obligations for railroad
equipment............................... 146.2 -
</TABLE>
6
<PAGE>
CAPITAL AND DEBT TRANSACTIONS
-----------------------------
SPRC closed the offering and sale of 25,000,000 shares of common stock for
$21.00 per share (before underwriting discounts, commissions and offering
expenses) on March 2, 1994.
In connection with the foregoing transaction, the Company issued 150 shares
of common stock for total consideration of $294.4 million from its parent.
Proceeds from this transaction were used for repayment of the $175 million
revolving credit facility (including interest thereon), to purchase $118.9
million of D&RGW property and for general corporate purposes.
(5) SUPPLEMENTAL CONDENSED COMBINING FINANCIAL INFORMATION
------------------------------------------------------
SPT issued $290 million of Senior Secured Notes in 1993. SSW is the
guarantor of those notes. The following presents supplemental condensed
combining financial information (in millions):
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS - SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Current assets $ 262.8 $ 69.1 $ 20.6 $ - $ 352.5
Advances to parent/Investment in
subsidiaries........................ 53.0 434.9 - (487.9) -
Property, net........................ 4,119.5 545.5 78.9 - 4,743.9
Other assets and deferred charges.... 133.0 33.3 5.2 - 171.5
-------- -------- ------ ------- --------
Total assets...................... $4,568.3 $1,082.8 $104.7 $(487.9) $5,267.9
======== ======== ====== ======= ========
Current liabilities.................. $ 596.5 $ 205.4 $ 16.5 $ - $ 818.4
Long-term debt....................... 698.1 153.4 44.6 - 896.1
Deferred income taxes................ 763.0 96.6 (2.0) - 857.6
Other liabilities.................... 552.5 243.7 30.0 (131.5) 694.7
Redeemable preference shares......... - 42.9 - - 42.9
Stockholder's equity................. 1,958.2 340.8 15.6 (356.4) 1,958.2
-------- -------- ------ ------- --------
Total liabilities and stockholder's
equity $4,568.3 $1,082.8 $104.7 $(487.9) $5,267.9
======== ======== ====== ======= ========
</TABLE>
7
<PAGE>
(5) SUPPLEMENTAL CONDENSED COMBINING FINANCIAL INFORMATION (Continued)
------------------------------------------------------
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS - DECEMBER 31, 1993
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Current assets................. $ 190.2 $ 34.7 $ 31.0 $ - $ 255.9
Advances to parent/Investment in
subsidiaries................ 36.8 445.3 - (482.1) -
Property, net.................. 3,860.3 553.3 77.7 - 4,491.3
Other assets and deferred charges 142.5 42.4 5.1 - 190.0
-------- -------- ------ ------- --------
Total assets................ $4,229.8 $1,075.7 $113.8 $(482.1) $4,937.2
======== ======== ====== ======= ========
Current liabilities............ $ 588.6 $ 201.3 $ 35.9 $ - $ 825.8
Long-term debt................. 705.8 171.6 38.9 - 916.3
Deferred income taxes.......... 757.1 82.4 (1.8) - 837.7
Other liabilities.............. 507.4 240.3 26.1 (131.5) 642.3
Redeemable preference shares - 44.2 - - 44.2
Stockholder's equity........... 1,670.9 335.9 14.7 (350.6) 1,670.9
-------- -------- ------ ------- --------
Total liabilities and
stockholder's equity....... $4,229.8 $1,075.7 $113.8 $(482.1) $4,937.2
======== ======== ====== ======= ========
</TABLE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS - NINE MONTHS ENDED
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating revenues................ $1,578.2 $340.5 $131.4 $ - $2,050.1
Operating expenses................ 1,483.8 314.3 127.1 - 1,925.2
-------- ------ ------ ------- --------
Operating income............... 94.4 26.2 4.3 - 124.9
Other income (expense)............ 27.7 15.4 0.2 (31.3) 12.0
Interest expense.................. 90.4 18.9 4.8 (31.3) 82.8
-------- ------ ------ ------- --------
Income (loss) before income taxes
and before change in accounting 31.7 22.7 (0.3) - 54.1
Income taxes........................ 4.5 17.1 0.7 - 22.3
-------- ------ ------ ------- --------
Net income (loss) before change in
accounting....................... 27.2 5.6 (1.0) - 31.8
Cumulative effect on years' prior to
1994 of change in accounting for
post-employment benefits......... (3.3) (0.7) - - (4.0)
-------- ------ ------ ------- --------
Net income (loss)................. $ 23.9 $ 4.9 $ (1.0) $ - $ 27.8
======== ====== ====== ======= ========
</TABLE>
8
<PAGE>
(5) SUPPLEMENTAL CONDENSED COMBINING FINANCIAL INFORMATION (Continued)
------------------------------------------------------
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS - THREE MONTHS ENDED
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating revenues............. $532.6 $117.8 $47.7 $ - $698.1
Operating expenses............. 498.7 104.6 43.3 - 646.6
------ ------ ----- ------- ------
Operating income............ 33.9 13.2 4.4 - 51.5
Other income (expense)......... 3.4 4.3 (0.1) (10.6) (3.0)
Interest expense............... 30.2 6.2 1.8 (10.6) 27.6
------ ------ ----- ------- ------
Income before income taxes.. 7.1 11.3 2.5 - 20.9
Income taxes (benefit)......... (4.7) 13.6 0.4 - 9.3
------ ------ ----- ------- ------
Net income (loss).............. $ 11.8 $ (2.3) $ 2.1 $ - $ 11.6
====== ====== ===== ======= ======
</TABLE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS - NINE MONTHS ENDED
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating revenues $1,471.2 $320.6 $114.0 $ - $1,905.8
Operating expenses 1,501.6 322.5 121.8 - 1,945.9
-------- ------ ------ ------ --------
Operating income (loss).............. (30.4) (1.9) (7.8) - (40.1)
Other income (expense).................. (4.2) (3.0) (0.1) (8.1) (15.4)
Interest expense........................ 60.5 19.7 2.9 (8.1) 75.0
-------- ------ ------ ------ --------
Loss before income taxes and
before change in accounting.......... (95.1) (24.6) (10.8) - (130.5)
Income taxes (benefit).................. (29.0) (3.2) 0.7 - (31.5)
-------- ------ ------ ------ --------
Net loss before change in accounting.... (66.1) (21.4) (11.5) - (99.0)
Cumulative effect on years prior to
1993 of change in accounting for
post-retirement benefits other than
pensions............................. (84.9) (6.0) (8.0) - (98.9)
-------- ------ ------ ------ --------
Net loss................................ $ (151.0) $(27.4) $(19.5) $ - $ (197.9)
======== ====== ====== ====== ========
</TABLE>
9
<PAGE>
(5) SUPPLEMENTAL CONDENSED COMBINING FINANCIAL INFORMATION (Continued)
------------------------------------------------------
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS - THREE MONTHS ENDED
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues............ $514.8 $103.5 $41.6 $ - $659.9
Operating expenses............ 535.8 124.6 43.6 - 704.0
------ ------ ----- ------ ------
Operating loss.............. (21.0) (21.1) (2.0) - (44.1)
Other income (expense)........ (13.2) (0.6) (0.1) (2.8) (16.7)
Interest expense.............. 22.0 6.1 1.1 (2.8) 26.4
------ ------ ----- ------ ------
Loss before income taxes.... (56.2) (27.8) (3.2) - (87.2)
Income taxes (benefit)........ (11.3) (3.4) 0.1 - (14.6)
------ ------ ----- ------ ------
Net loss...................... $(44.9) $(24.4) $(3.3) $ - $(72.6)
====== ====== ===== ====== ======
</TABLE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS - NINE MONTHS ENDED
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities $ 69.4 $ 24.0 $(8.6) $ - $ 84.8
Cash flows from investing activities (241.0) (17.8) (3.5) - (262.3)
Cash flows from financing activities 146.3 (7.6) 12.3 - 151.0
------ ------ ----- ------ -------
Net change in cash and cash
equivalents......................... (25.3) (1.4) 0.2 - (26.5)
Cash and Cash Equivalents -
Beginning of Period................. 32.6 1.4 (2.1) - 31.9
------ ------ ------ ------ -------
Cash and Cash Equivalents -
End of Period....................... $ 7.3 $ - $(1.9) $ - $ 5.4
====== ====== ====== ====== =======
</TABLE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS - NINE MONTHS ENDED
SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities $ (92.9) $ 1.9 $ (7.2) $ - $ (98.2)
Cash flows from investing activities (312.8) (22.6) (11.5) - (346.9)
Cash flows from financing activities 394.9 12.7 17.9 - 425.5
------- ------- ------ ------ -------
Net change in cash and cash
equivalents........................ (10.8) (8.0) (0.8) - (19.6)
Cash and Cash Equivalents -
Beginning of Period................ 39.4 8.0 (2.0) - 45.4
------- ------- ------ ------ -------
Cash and Cash Equivalents - End of
Period............................. $ 28.6 $ - $ (2.8) $ - $ 25.8
======= ======= ====== ====== =======
</TABLE>
10
<PAGE>
(6) OTHER
-----
To ensure stability of its fuel costs, the Company has entered into fuel
hedging agreements covering approximately 90 percent of its 1994 estimated fuel
needs at an average purchase price of $.51 per gallon (excluding handling
costs). These agreements limit potential gains and losses relating to changes
in the market price of fuel. Additionally, approximately 75 percent of 1995
estimated fuel needs are hedged at an average purchase price of $.48 per gallon
(excluding handling costs). The amounts the Company pays or receives related to
each month's hedging agreements are recorded as an adjustment to fuel expense
for that month.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30, 1994 Compared to Three Months Ended
--------------------------------------------------------------------
September 30, 1993
- ------------------
The Company had net income of $11.6 million for the third quarter
of 1994 compared to a net loss of $72.6 million for the third quarter of 1993.
The Company had operating income of $51.5 million for the 1994 period compared
to an operating loss of $44.1 million for the 1993 period. For the third quarter
of 1994, railroad operating revenues increased 6.3% over the same period in
1993, while railroad operating expenses decreased 8.0% compared to the 1993
period.
Operating Revenues. In the third quarter of 1994, railroad operating revenues
- ------------------
increased $40.7 million, or 6.3%, compared to the third quarter of 1993.
Railroad freight operating revenues increased $39.2 million, or 6.3%, due
primarily to increased carloads in most commodities with the largest increases
occurring in intermodal, coal, automotive, metals and ores and construction
material and minerals carloads. Carloads for food and agricultural products
declined for the 1994 period compared to the 1993 period, and reported carloads
for chemical and petroleum products also declined due to a change in
classification. Other railroad revenues (primarily switching and demurrage) for
the 1994 period increased $1.5 million compared to the 1993 period due primarily
to the increased traffic volume. For the third quarter of 1994, carloads
increased 10.5% and revenue ton-miles increased 10.5% compared to the third
quarter of 1993. The average net freight revenue per ton-mile for the third
quarter of 1994 declined by 3.8% compared to the third quarter of 1993 due
principally to an increase in traffic volume for commodities that generate lower
revenue per ton-mile (e.g., coal and intermodal traffic), as well as to
increases in revenue deductions and allowances.
The following table compares traffic volume (in carloads), gross freight
revenue (before contract allowances and adjustments) and gross freight revenue
per carload by commodity group for the three months ended September 30, 1994 and
1993.
11
<PAGE>
<TABLE>
<CAPTION>
CARLOAD AND GROSS FREIGHT REVENUE COMPARISON
THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
GROSS FREIGHT
CARLOADS GROSS FREIGHT REVENUE REVENUE PER CARLOAD
-------------------------- ------------------------------- -------------------------------
1994 1993 % CHANGE 1994 1993 % CHANGE 1994 1993 % CHANGE
---- ---- -------- ---- ---- -------- ---- ---- --------
(in thousands) (dollars in millions,except revenue per carload)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intermodal.............. 191.4 159.9 19.7% $221.7 $188.2 17.8% $1,158 $1,177 (1.6)%
Chemical and petroleum
products............. 81.2 85.2 (4.7) 147.7 145.2 1.7 1,819 1,704 6.7
Food and agricultural
products............. 62.7 64.3 (2.5) 95.9 93.6 2.5 1,531 1,456 5.2
Forest products......... 56.8 55.0 3.3 98.7 91.4 8.0 1,737 1,663 4.5
Coal.................... 44.8 30.5 46.8 30.8 24.9 23.8 688 816 (15.7)
Metals and ores......... 43.2 39.5 9.4 60.1 56.9 5.6 1,391 1,439 (3.3)
Construction materials
and minerals......... 44.2 40.5 9.1 39.9 36.6 8.9 903 904 (0.1)
Automotive.............. 15.9 13.7 15.5 31.6 26.8 18.1 1,991 1,947 2.2
----- ----- ------ ------
Total 540.2 488.6 10.5% $726.4 $663.6 9.5% $1,345 $1,358 (1.0)%
===== ===== ====== ======
</TABLE>
- Intermodal carloads for the third quarter of 1994 increased over the same
period in 1993 due to increased container-on-flatcar ("COFC") business
with major steamship accounts, as well as the inclusion of additional
revenue empty car movements in the carload figures for the 1994 quarter.
The decline in revenue per carload was due primarily to the lower revenue
per car associated with revenue empty movements.
- Reported chemical and petroleum products carloads declined for the third
quarter of 1994 due to a change in the classification of certain plastics
traffic. Revenue increased due to traffic increases in environmental
waste, organic chemicals and fertilizers. The revenue per carload
increase for the 1994 period was primarily due to changes in the product
mix.
- Food and agricultural products carloads declined for the third quarter of
1994 compared to the third quarter of 1993 due primarily to the shutdown
of a sugar beet processor in California and to reductions in grain traffic
caused by a reduced crop harvest that resulted from the severe Midwest
flooding during the third and fourth quarters of 1993. The revenue per
carload increase for the 1994 period is due to increased length of haul
and changes in commodity mix.
- Carload volume in forest products increased in the third quarter of 1994
through growth in wood chip, particle board, lumber stock and scrap paper
traffic. Revenue per carload increases were due primarily to price
increases in lumber products where strong demand in the California,
Arizona and transcontinental markets helped support price increases, as
well as increased length of haul for particle board, woodchips and scrap
paper.
- Coal carloads and revenue increased for the 1994 period due to continued
demand for the low sulfur high BTU content coal produced by Company-served
mines. This demand was from both existing utility customers and new
utility customers and was enhanced by the customers' ability to blend the
lower sulfur coal with higher sulfur coal in order to satisfy requirements
of the Clean Air Act. The reduction in revenue per carload was due
primarily to changes in customer mix and routing differences associated
with the volume increases.
12
<PAGE>
- Carloads and revenue for metals and ores increased in the third quarter of
1994 compared to the third quarter of 1993 due primarily to start up of a
new contract for taconite unit trains and growth in structural steel and
finished products traffic associated with general economic growth. Growth
in ferrous metals carloads and revenue was generated by strong pipe
markets.
- Construction materials and minerals carloads and revenue increased for the
1994 period due to increased traffic in sand and gravel and miscellaneous
building materials associated with increases in highway and building
construction as well as increases in crude minerals traffic.
- Automotive carloads and revenue grew for the 1994 period due to strong
demand for trucks and automobiles associated with general economic growth.
Operating Expenses. Railroad operating expenses for the third quarter of 1994
- ------------------
decreased $55.3 million, or 8.0%, compared to the third quarter of 1993. The
decrease in operating expense for the third quarter of 1994 was due primarily to
reduced labor and fringe benefit expenses, reduced locomotive material expenses,
as well as to increased expenses during the 1993 period associated with the
severe Midwest flooding. The following table sets forth a comparison of the
Company's railroad operating expenses during the three months ended September
30, 1994 and 1993.
<TABLE>
<CAPTION>
RAILROAD OPERATING EXPENSE COMPARISON
THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
1994 1993 % CHANGE
------- ------ --------
(dollars in millions)
<S> <C> <C> <C>
Labor and fringe benefits....................... $240.4 $264.2 (9.0)%
Fuel............................................ 53.3 53.9 (1.1)
Materials and supplies.......................... 25.4 45.6 (44.3)
Equipment rental................................ 77.4 90.6 (14.6)
Depreciation and amortization................... 61.7 57.2 7.9
Other........................................... 174.8 176.8 (1.1)
------ ------
Total $633.0 $688.3 (8.0)%
====== ======
</TABLE>
- Labor and fringe benefit costs decreased $23.8 million, or 9.0%, for the
third quarter of 1994 compared to the third quarter of 1993. The Company
reduced employment by 1,347, or 7.6%, to a total of 16,375 as of September
30, 1994 compared to September 30, 1993. This employment decline included
a reduction of over 560 in the Company's operating departments as well as
a reduction of approximately 318 employees associated with the January 1,
1994 implementation of the outsourcing plan for management information
services functions. Additional traffic volume during the third quarter of
1994 resulted in a 1.9% increase in train crew starts which reduced the
impact of the employment decline. Expressed as a percentage of operating
revenues, labor and fringe benefit expenses declined to 34.4% for the
third quarter of 1994 compared to 40.0% for the third quarter of 1993.
- Fuel expenses decreased $0.6 million, or 1.1%, for the third quarter of
1994 compared to the same period in 1993. The decrease was a result of a
reduced cost per gallon (which includes handling costs) from $.56 per
gallon during the third quarter of 1993 to $.54 per gallon during the
third quarter of 1994, substantially offset by increased fuel consumption
attributable to the 10.5% increase in carload volume during the third
quarter of 1994. Payments of $2.4 million and $3.0 million related to fuel
hedging contracts were included in expense in the third quarter of 1994
and 1993, respectively. The Company has entered into fuel hedging
agreements covering 90% of its 1994 estimated fuel needs at an average
purchase price of $.51 per gallon
13
<PAGE>
(excluding handling costs). Additionally, approximately 75% of 1995
estimated fuel needs are hedged at $.48 per gallon.
- Materials and supplies expense decreased $20.2 million, or 44.3%, for the
third quarter of 1994 compared to the third quarter of 1993 due primarily
to reduced bridge and signal repair material expenses, a $4.0 million
credit for maintenance of way capitalized costs classified in the other
expense category during the 1993 period, as well as to reduced locomotive
material expenses attributable to a reduced level of locomotive overhauls.
During the third quarter of 1994, 14 locomotives were overhauled compared
to 61 during the third quarter of 1993. In addition, the Company rebuilt
and capitalized 52 locomotives during the 1994 period compared to 10
during the 1993 period.
- Equipment rental expenses decreased $13.2 million, or 14.6%, for the third
quarter of 1994 compared to the third quarter of 1993. The net decrease in
expense for the third quarter of 1994 was due primarily to the increase in
equipment cycle time and rental expense during the third quarter of 1993
attributable to the severe Midwest flooding during that quarter.
- Depreciation and amortization expense increased $4.5 million, or 7.9%, for
the third quarter of 1994 compared to the third quarter of 1993 due to an
increase in the depreciable property base.
- Other expenses decreased $2.0 million, or 1.1%, for the third quarter of
1994 compared to the third quarter of 1993. This category of expense
includes purchased repairs and services, joint facility rent and
maintenance costs, casualty costs and property and other taxes. Expenses
in this category which increased significantly during the third quarter of
1994 were information system outsourcing costs, purchased locomotive
repairs, excise taxes and the capitalized costs referred to above.
Expenses for management information system outsourcing, implemented on
January 1, 1994, were $8.1 million for the third quarter of 1994.
Purchased locomotive repairs increased approximately $3.6 million over the
prior period and excise taxes increased $2.6 million due to the enactment
of an increase in the federal excise tax on fuel in October 1993. During
the third quarter of 1993, additional joint facility and detour expenses
were incurred attributable to the severe Midwest flooding during that
quarter. This 1993 expense was partially offset by reduced joint facility
rent expense associated with the negotiated settlement of a joint facility
case earlier in 1993.
Other Income and Interest Expense. Other income was an expense of $3.0 million
- ---------------------------------
for the third quarter of 1994 compared to an expense of $16.7 million for the
same period in 1993. The decreased expense was due primarily to expenses in
1993 of $12.3 million for the write off of deferred loan costs attributable to
the repayment of debt, partially offset by increased expenses associated with
the sale of accounts receivable during the 1994 period. In addition, real
estate rental income increased $3.4 million for the third quarter of 1994
compared to 1993 due primarily to the settlement of a rental agreement.
Interest expense was $27.6 million for the third quarter of 1994 compared to
$26.4 million for the third quarter of 1993, an increase of $1.2 million due
primarily to increased capitalized lease obligations outstanding during the 1994
period.
Nine Months Ended September 30, 1994 Compared to Nine Months Ended
------------------------------------------------------------------
September 30, 1993
------------------
The Company had net income of $27.8 million for the first nine months of
1994 after deducting $4.0 million for the cumulative effect of a change in
accounting for postemployment benefits under Statement of Financial Accounting
Standards ("FAS") No. 112 adopted by the Company effective January 1, 1994,
compared to a net loss of $197.9 million for the first nine months of 1993 after
deducting $98.9 million for the cumulative effect of a change in accounting for
postretirement benefits other than pensions under FAS No. 106 adopted by the
Company effective January 1, 1993. The Company had operating income of $124.9
million for the 1994 period
14
<PAGE>
compared to an operating loss of $40.1 million for the 1993 period. Operating
income for the first nine months of 1993 was adversely affected by severe
weather and flooding in the Western states during the first quarter of 1993, and
in the Midwestern states during the third quarter of 1993. In addition, the
Company experienced a significant decline in automotive shipments and a
shortage of power due to a temporary reduction in the number of locomotives
leased by the Company, as well as a slower than anticipated recovery in certain
segments of the economy during the first nine months of 1993. For the first
nine months of 1994, railroad operating revenues increased 7.7% over the same
period in 1993, while railroad operating expenses decreased 1.2% from the 1993
period.
Operating Revenues. In the first nine months of 1994, railroad operating
- ------------------
revenues increased $142.5 million, or 7.7%, compared to the first nine months
of 1993. Railroad freight operating revenues increased $132.3 million, or 7.4%,
due primarily to increased carloads in most commodities, with the largest
increases occurring in intermodal, coal, automotive and construction material
and minerals carloads. Carloads for food and agricultural products declined for
the 1994 period compared to 1993. Other railroad revenues (primarily switching
and demurrage) for the 1994 period increased $10.2 million compared to the 1993
period due primarily to increased traffic volume. For the first nine months of
1994, carloads increased 12.7% and revenue ton-miles increased 11.2% compared to
the first nine months of 1993. The average net freight revenue per ton-mile for
the first nine months of 1994 declined by 3.5% compared to the first nine months
of 1993 due principally to an increase in traffic volume for commodities that
generate lower revenue per ton-mile (e.g., coal and intermodal traffic), as well
as to increases in revenue deductions and allowances.
The following table compares traffic volume (in carloads), gross freight
revenue (before contract allowances and adjustments) and gross freight revenue
per carload by commodity group for the nine months ended September 30, 1994 and
1993.
<TABLE>
<CAPTION>
CARLOAD AND GROSS FREIGHT REVENUE COMPARISON
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
Gross Frieght
Carloads Gross Freight Revenue Revenue Per Carload
------------------------- -------------------------- --------------------------
1994 1993 % Change 1994 1993 % Change 1994 1993 % Change
---- ---- -------- ---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intermodal................. 541.1 439.1 23.2% $ 617.8 $ 519.1 19.0% $1,142 $1,182 (3.4)%
Chemical and petroleum
products................ 254.7 253.4 0.5 444.9 426.0 4.4 1,747 1,681 3.9
Food and agricultural
products................ 179.4 187.7 (4.4) 279.4 273.1 2.3 1,558 1,455 7.1
Forest products............ 169.8 164.4 3.3 294.3 273.2 7.7 1,733 1,662 4.3
Coal....................... 125.3 82.5 51.8 88.7 72.8 21.9 708 882 (19.7)
Metals and ores............ 128.1 118.8 7.9 186.5 171.7 8.6 1,455 1,445 0.7
Construction materials and
minerals................ 127.5 108.9 17.1 115.5 101.2 14.1 905 929 (2.5)
Automotive................. 53.1 46.0 15.6 103.1 89.1 15.7 1,940 1,938 0.1
------- ------- -------- --------
Total....... 1,579.0 1,400.8 12.7% $2,130.2 $1,926.2 10.6% $1,349 $1,375 (1.9)%
======= ======= ======== ========
</TABLE>
- Intermodal carloads for the first nine months of 1994 increased over the
same period in 1993 due to increased container-on-flatcar ("COFC")
business with major steamship accounts, as well as the inclusion of
additional revenue empty car movements in the carload figures for the 1994
period. The decline in revenue per carload was due primarily to a
reduction in length of haul for COFC traffic, as well as to the lower
revenue per car associated with revenue empty movements.
15
<PAGE>
- Chemical and petroleum products revenue and carloads increased for the
first nine months of 1994 due to increased shipments of environmental
wastes, organic chemicals, chlorine and fertilizers substantially offset
by the change in the classification of certain plastics traffic. The
revenue per carload increase for the 1994 period was primarily due to
changes in product mix.
- Food and agricultural products carloads declined for the first nine months
of 1994 compared to the first nine months of 1993 due primarily to the
shutdown of a sugar beet processor in California and to reductions in
grain traffic caused by a reduced crop harvest that resulted from the
severe Midwest flooding during the third and fourth quarters of 1993. The
revenue per carload increase for the 1994 period is due to increased
length of haul and changes in commodity mix.
- Carload volume in forest products increased in the first nine months of
1994 through growth in wood chip, particle board, lumber stock and scrap
paper products traffic. Revenue per carload increases were due primarily
to price increases in lumber products where strong demand in the
California, Arizona and transcontinental markets helped support price
increases as well as increased length of haul for particle board,
woodchips and scrap paper.
- Coal carloads and revenue increased for the 1994 period due to continued
demand for the low sulfur high BTU content coal produced by Company-served
mines. This demand was from both existing utility customers and new
utility customers and was enhanced by the customers' ability to blend the
lower sulfur coal with higher sulfur coal in order to satisfy requirements
of the Clean Air Act. The reduction in revenue per carload was due
primarily to changes in customer mix and routing differences associated
with the volume increases.
- Carloads and revenue for metals and ores increased in the first nine
months of 1994 compared to the first nine months of 1993 due to growth in
copper concentrate and finished products traffic that was depressed by
flooding in Arizona during the first quarter of 1993. Growth in ferrous
metals carloads and revenue was generated by strong pipe markets.
- Construction materials and minerals carloads and revenue increased for the
1994 period due to increased traffic in sand and gravel, cement and
miscellaneous building materials associated with increases in highway and
building construction as well as increases in crude mineral traffic.
- Automotive carloads and revenue grew for the 1994 period due to strong
demand for trucks and automobiles associated with general economic growth.
Operating Expenses. Railroad operating expenses for the first nine months of
- ------------------
1994 decreased $23.0 million, or 1.2%, compared to the first nine months of
1993. The decrease in operating expense for the first nine months of 1994 was
due primarily to reduced labor and fringe benefit costs and reduced material
expenses during the 1994 period as well as to expenses incurred in the 1993
period associated with the severe Midwest flooding. The 1993 period expenses
also included reduced joint facility rent and property tax expenses. The
following table sets forth a comparison of the Company's railroad operating
expenses during the nine months ended September 30, 1994 and 1993.
16
<PAGE>
<TABLE>
<CAPTION>
RAILROAD OPERATING EXPENSE COMPARISON
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
1994 1993 % CHANGE
------ ------ ----------
(dollars in millions)
<S> <C> <C> <C>
Labor and fringe benefits...................... $ 722.4 $ 769.6 (6.1)%
Fuel........................................... 154.3 157.4 (2.0)
Materials and supplies......................... 99.3 111.2 (10.7)
Equipment rental............................... 231.4 242.7 (4.7)
Depreciation and amortization.................. 176.4 170.5 3.5
Other.......................................... 496.2 451.6 9.9
-------- --------
Total....................................... $1,880.0 $1,903.0 (1.2)%
======== ========
</TABLE>
- Labor and fringe benefit costs decreased $47.2 million, or 6.1%, for the
first nine months of 1994 compared to the first nine months of 1993. The
Company reduced employment by 1,347, or 7.6%, to a total of 16,375 as of
September 30, 1994 compared to September 30, 1993. This employment decline
included a reduction of over 560 in the Company's operating departments as
well as a reduction of approximately 318 employees associated with the
January 1, 1994 implementation of the outsourcing plan for management
information services functions. In addition, fringe benefit expenses in
the first nine months of 1994 were reduced compared to the first nine
months of 1993 due to the elimination of an unemployment payroll tax in
July 1993. Additional traffic volume during the first nine months of 1994
resulted in a 2.9% increase in train crew starts which reduced the impact
of the employment decline. Expressed as a percentage of operating
revenues, labor and fringe benefit expenses declined to 35.2% for the
first nine months of 1994 compared to 40.4% for the first nine months of
1993.
- Fuel expenses decreased $3.1 million, or 2.0%, for the first nine months
of 1994 compared to the same period in 1993. The decrease is the result of
a reduced cost per gallon (which includes handling costs) from $.59 per
gallon during the first nine months of 1993 to $.52 per gallon during the
1994 period, partially offset by increased fuel consumption attributable
to increased traffic volume as well as to increased payments charged to
expense related to fuel hedging contracts of $9.5 million during the first
nine months of 1994 compared to $5.2 million during the 1993 period. The
Company has entered into fuel hedging agreements covering 90% of its 1994
estimated fuel needs at an average purchase price of $.51 per gallon
(excluding handling costs). Additionally, approximately 75% of the 1995
estimated fuel needs are hedged at $.48 per gallon.
- Materials and supplies expense decreased $11.9 million, or 10.7%, for the
first nine months of 1994 compared to the first nine months of 1993. The
decrease was due primarily to reduced maintenance of way materials and
supplies expenses including a $12.0 million credit for capitalized
material costs during the 1994 period. For the 1993 period, these
capitalized costs were classified as a reduction in other expenses. This
decrease was partially offset by increased freight car material expenses
during the 1994 period. During the first nine months of 1994, 85
locomotives were overhauled compared to 159 locomotives for the 1993
period. In addition, the Company rebuilt and capitalized 119 locomotives
during the 1994 period compared to 10 during the 1993 period. During the
1993 period there was a $5.0 million non-recurring inventory adjustment
(primarily related to restoring inventory materials that had been
previously released from inventory but had not been used).
17
<PAGE>
- Equipment rental costs decreased $11.3 million, or 4.7%, for the first
nine months of 1994 compared to the first nine months of 1993. The net
decrease in expense was due primarily to the increase in equipment cycle
time and rental expense during the third quarter of 1993 attributable to
the severe Midwest flooding during that quarter.
- Depreciation and amortization expense increased $5.9 million, or 3.5%, for
the first nine months of 1994 compared to the first nine months of 1993
due to an increase in the depreciable property base.
- Other expenses increased $44.6 million, or 9.9%, for the first nine months
of 1994 compared to the same period in 1993. This category of expense
includes purchased repairs and services, joint facility rent and
maintenance costs, casualty costs and property and other taxes. Expenses
in this category which increased significantly over the prior period were
information system outsourcing costs, property taxes, excise taxes and
joint facility rent expense and the capitalized costs referred to above.
Expenses for management information system outsourcing, implemented on
January 1, 1994, were $26.3 million for the first nine months of 1994.
Property taxes showed a $16.3 million increase over 1993 because the 1993
amount was reduced by the favorable settlement of disputed property taxes
in California. Excise taxes increased $10.9 million over the prior period
due to the enactment of an increase in the federal excise tax on fuel in
October 1993. Joint facility rent expense increased $1.8 million over the
prior period because the 1993 amount was reduced by the favorable
settlement of joint facility agreements with another railroad. During the
first nine months of 1993, additional joint facility maintenance and
detour expenses were incurred attributable to the severe Midwest flooding
during that quarter.
Other Income and Interest Expense. Other income was $12.0 million for the first
- ---------------------------------
nine months of 1994 compared to an expense of $15.4 million for the same period
in 1993. The increased income was due primarily to expenses in 1993 of $12.3
million for the write off of deferred loan costs attributable to the repayment
of debt, as well as to increased gains on sales of property of $9.6 million and
increased real estate rental income of $4.2 million due to the settlement of a
rental agreement. Interest expense was $82.8 million for the first nine months
of 1994 compared to $75.0 million for the first nine months of 1993, an increase
of $7.8 million. The increased interest expense was attributable to the
increase in capital lease obligations outstanding during the first nine months
of 1994.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's business is capital intensive and requires on-going
substantial expenditures for, among other things, improvements to roadway,
structures and technology, acquisitions and repair of equipment, and maintenance
of the rail system. During the first nine months of 1994, and for a number of
years before that, the Company's railroad operations did not produce sufficient
cash flows to meet its capital expenditure, debt service and other cash needs.
As a result, the Company relied on proceeds from real estate and other asset
sales, borrowings and other financings for these purposes.
On March 2, 1994, SPRC closed an offering of 25,000,000 shares of common
stock for net proceeds of $503.6 million. In connection with the foregoing
transaction, the Company issued 150 shares of common stock for total
consideration of $294.4 million from SPRC. Proceeds from this transaction were
used for repayment of the $175 million revolving credit facility (including
interest thereon) and to purchase $118.9 million of D&RGW property. This has
significantly improved the Company's liquidity; however, the Company anticipates
that, for the next few years, cash flows generated by rail operating results,
although improved, will continue to be insufficient to meet all of its cash
needs including acquisition of equipment and other necessary capital
expenditures. In order to satisfy these cash flow requirements, as well as
satisfy financial covenants in its credit facilities, the Company must not only
continue to improve its operating results and continue to obtain equipment
financing, but also sell transit corridors and other real estate assets with
substantial values that are not necessary to its transportation operations.
18
<PAGE>
The Company's real estate department will continue its "traditional" real
estate activities consisting of sales and leases of industrial and commercial
properties located in developed areas on the Company's system. In addition, the
Company will emphasize sales of transit corridors for use by public
transportation systems and consolidated freight corridors for use by more than
one railroad. The timing of sales to public agencies often is difficult to
predict and such sales can be subject to delays created by funding issues and
other matters. Thus, levels of asset sales may vary substantially from period
to period, which in turn can cause significant variations in the Company's net
income or loss, cash flows and liquidity. In addition, the closing of real
estate sales is customarily subject to the satisfaction of various closing
conditions and similar contingencies.
As a result of the variations in levels of asset sales, the Company's
liquidity may vary substantially, thus requiring the Company to make substantial
borrowings under its revolving credit facility. As of September 30, 1994, the
Company had no outstanding borrowings under the revolving credit facility, with
$200 million of available capacity.
In addition, continued implementation of the Company's strategic plan
requires the ongoing availability of additional sources of funding, including
secured equipment and capital lease financing to upgrade the Company's
locomotive and railcar fleet and borrowings under the revolving credit facility.
Management believes, based upon current levels of operation and anticipated
improvements in operating results, that cash flow from operations and transit
corridor and traditional real estate sales, expected secured equipment and
capital lease financings and other financing sources, will be adequate to make
required payments of principal and interest on debt, to permit anticipated
capital expenditures and to fund working capital requirements and other cash
needs. In addition, the Company has borrowing capacity under its revolving
credit facility. Nevertheless, the Company will remain leveraged to a
significant extent and its debt service and capital lease obligations will
continue to be substantial, particularly in light of the financing the Company
has incurred or expects to incur to acquire the 350 new locomotives, 133
remanufactured locomotives and freight cars which it has ordered or intends to
order for delivery in 1994 and 1995. Amounts that could become due to Union
Pacific during the next year or two under the SSW trackage rights case (in which
Union Pacific claimed approximately $62 million as of September 30, 1994) could
add substantially to the Company's cash requirements for the near term. If the
Company's sources of funds were to fail to satisfy the Company's requirements,
the Company would need to refinance its existing debt or obtain additional
financing. There is no assurance either of those alternatives would be
available, and, in any case, any such refinancing or new financing (if
available) would be expected to be more costly and burdensome than the debt
agreements currently in place. The availability of any such new financing would
likely depend in part upon whether the Company has been able to improve its
results of operations. No assurance can be given that the Company's sources of
funds will be sufficient to satisfy its cash needs.
Operating Activities
--------------------
As shown in the Consolidated Condensed Statements of Cash Flows, cash
provided by operating activities was $84.8 million for the first nine months of
1994 compared to cash used for operating activities of $98.2 million for the
first nine months of 1993. The $183.0 million improvement was due primarily to
improved operating results for the first nine months of 1994. Included in the
operating cash flows is a $61.1 million payment of interest during the first
nine months of 1994 compared to $53.3 million for the first nine months of 1993.
The Company is unable to predict whether cash flows from operating activities
will be sufficient to fund its operations (including scheduled interest and
capital lease payments) over the next twelve months, but expects to be able to
fund its operations for such period with cash from operations, cash on hand,
secured equipment financing, capital leases and, if necessary, borrowings under
the revolving credit facility.
19
<PAGE>
The Company had working capital deficits of $465.9 million and $701.6
million at September 30, 1994 and 1993, respectively. The improvement was due
primarily to increased accounts and notes receivable coupled with a reduced
current portion of long-term debt at September 30, 1994. The deficit in general
is caused by the capital intensive nature of the railroad business, items
accrued for in a special charge recorded in 1991 and the large number of one-
year accruals funded out of future operations.
The Company received cash proceeds from sales and retirements of real
estate and other property totalling $29.9 million and $18.5 million for the
first nine months of 1994 and 1993, respectively.
On July 25, 1994, two of the Company's freight trains collided on the
Company's main line near Marathon, Texas, approximately halfway between El Paso
and San Antonio. The operating expense impact for equipment damage and other
costs relating to the collision were between $11 million and $12 million. There
were no spills or leaks of hazardous materials.
During the first nine months of 1993, the Company incurred substantial
costs and revenue shortfalls due to the severe flooding in the Midwest during
that quarter.
Capital Expenditures
--------------------
Capital expenditures for railroad operations (exclusive of capital leases)
for the first nine months of 1994 were $162.0 million compared to $239.4 million
for the same period in 1993. The 1994 amount included $115.4 million for
roadway and structures and $34.4 million for rebuilt locomotives. The 1993
amount included $163.5 million for roadway and structures expenditures and $65.3
million for the buyback of equipment previously under operating leases. The
Company expects 1994 capital expenditures for railroad operations to be
approximately $230 million (exclusive of capital leases). The Company expects to
fund 1994 capital expenditures with cash from operations, secured equipment
financings and, if necessary, borrowings under the revolving credit facility.
Included in other investing activities on the Consolidated Condensed
Statements of Cash Flows were $118.9 million and $107.3 million for the purchase
of property from D&RGW during the 1994 and 1993 periods, respectively.
During the latter part of 1993 and in 1994, the Company expanded and
upgraded its locomotive and freight car fleets principally through capitalized
lease financing. The Company received 100 new locomotives and 70 remanufactured
locomotives through September 30, 1994 and has 50 new locomotives and 63
remanufactured locomotives on order to be delivered during the balance of 1994.
The Company has acquired 70 new freight cars and 1,266 refurbished freight cars
during the first nine months of 1994 and plans to acquire an additional 600 new
and approximately 586 refurbished freight cars during the balance of 1994. In
total, the capitalized lease obligations for the locomotives and freight cars to
be acquired by capital lease during 1994 are expected to be approximately $315
million. In addition, the Company has ordered 200 new locomotives and 920 coal
cars for delivery in 1995 at an estimated total cost (including related
equipment) of approximately $400 million. The Company will be required to
arrange financing for such acquisitions.
Financing Activities
--------------------
SPRC closed the offering and sale of 25,000,000 shares of common stock for
$21.00 per share (before underwriting discounts, commissions and offering fees)
on March 2, 1994.
20
<PAGE>
In connection with the foregoing transaction, the Company issued 150 shares
of common stock for total consideration of $294.4 million from its parent.
Proceeds from this transaction were used for repayment of the $175 million
revolving credit facility (including interest thereon), to purchase $118.9
million of D&RGW property and for general corporate purposes.
On November 8, 1994, the Company entered into a new revolving credit
agreement with its banks providing a $300 million unsecured revolving credit
facility replacing the existing $200 million facility.
On September 29, 1994, the Company finalized the financing of the debt
portion of the 1994 capitalized lease of 600 new freight cars, 133
remanufactured locomotives and 100 new locomotives by the public issuance of
$186 million in Pass Through Certificates.
Other
-----
In November 1992, FAS No. 112 was issued. FAS No. 112 requires employers
to recognize the obligation to provide benefits to former or inactive employees
after employment but before retirement, if certain conditions are met.
Effective January 1, 1994, the Company adopted FAS No. 112 and recorded a $6.6
million pre-tax charge ($4.0 million after tax). The Company's policy continues
to be to fund the cost of post-employment benefits as the benefits are payable.
Effective January 1, 1993, the Company adopted FAS No. 106 "Employers'
Accounting for Post-retirement Benefits Other Than Pensions" and recorded a
$160.1 million pre-tax ($98.9 million after tax) charge.
To ensure stability of its fuel costs, the Company has entered into fuel
hedging agreements covering approximately 90 percent of its 1994 estimated fuel
needs at an average purchase price of $0.51 per gallon (excluding handling
costs). Additionally, approximately 75 percent of 1995 estimated fuel needs are
hedged at an average purchase price of $0.48 per gallon (excluding handling
costs). However, in the event that fuel prices decline below the average
purchase price under the hedging agreements, the Company will not receive any
benefit from these fuel hedging agreements and may in fact pay more for fuel
than it would have paid in the absence of such agreements.
The Company continues to study and assess the impact of the proposed
combination of Burlington Northern Railroad Company ("BN") and The Atchison,
Topeka and Santa Fe Railway Company ("ATSF") announced on June 30, 1994. At the
present time, based upon current circumstances, the Company expects to opppose
the combination.
More recently, Union Pacific Railroad Company ("UP") has made offers to
acquire ATSF and has brought suit opposing the proposed BN/ATSF combination.
The Company is currently assessing the impact of a possible UP/ATSF combination.
21
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The complaint filed against SPT and SSW by Kona Technology Corporation
("Kona") which was referenced in the Company's report on Form 10-Q for the
period ended June 30, 1994 was served on SPT and SSW on August 1, 1994. It
remains too early to assess all of the contract, tariff and other issues related
to the lawsuit, although, based upon its initial evaluation, the Company
believes that, if any refunds are due, they would not be significant. However,
there can be no assurance as to the outcome of the litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) During the quarter ended September 30, 1994, no reports on Form 8-K
were filed by the Company.
22
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHERN PACIFIC TRANSPORTATION COMPANY
Date: November 9, 1994 By /s/ B.C.Kane
----------------------- -----------------------------------
Controller
(Principal Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
27 Financial Data Schedule
- ---------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
3rd Quarter 1994 Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 241
<ALLOWANCES> (7)
<INVENTORY> 50
<CURRENT-ASSETS> 353
<PP&E> 7,592
<DEPRECIATION> 2,848
<TOTAL-ASSETS> 5,268
<CURRENT-LIABILITIES> 818
<BONDS> 896
<COMMON> 425
0
0
<OTHER-SE> 1,533
<TOTAL-LIABILITY-AND-EQUITY> 5,268
<SALES> 0
<TOTAL-REVENUES> 2,050
<CGS> 0
<TOTAL-COSTS> 1,925
<OTHER-EXPENSES> 37
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> 54
<INCOME-TAX> 22
<INCOME-CONTINUING> 32
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4)
<NET-INCOME> 28
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
