<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 June 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 July 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>
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
(in millions)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents (including restricted cash of
$5.4 in 1994 and 1993)........................................ $ 5.4 $ 31.9
Accounts and notes receivable, net of allowance for doubtful
accounts...................................................... 126.3 112.0
Notes receivable from Rio Grande Receivables, Inc.............. 94.8 24.1
Materials and supplies, at cost................................ 49.6 46.5
Other current assets........................................... 60.5 41.4
-------- --------
Total current assets........................................ 336.6 255.9
-------- --------
PROPERTY, AT COST
Roadway and structures........................................ 5,686.4 5,496.9
Railroad equipment............................................ 1,648.7 1,612.2
Other property................................................ 178.2 174.3
-------- --------
Total property.............................................. 7,513.3 7,283.4
Less accumulated depreciation................................. 2,880.1 2,792.1
-------- --------
Property, net............................................... 4,633.2 4,491.3
-------- --------
OTHER ASSETS AND DEFERRED CHARGES
Notes receivable from Rio Grande Receivables, Inc............. 27.8 27.8
Other assets and deferred charges............................. 131.9 162.2
-------- --------
Total other assets.......................................... 159.7 190.0
-------- --------
Total assets................................................ $5,129.5 $4,937.2
======== ========
(Continued)
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
--------- -------------
(in millions)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts and wages payable....................... $ 122.8 $ 119.4
Accrued payables................................. 125.2 121.5
Current portion of long-term debt................ 57.1 62.2
Redeemable preference shares of a subsidiary..... 1.9 1.8
Other current liabilities........................ 504.3 520.9
-------- --------
Total current liabilities...................... 811.3 825.8
-------- --------
ADVANCES PAYABLE TO PARENT AND AFFILIATE............ 69.5 -
-------- --------
LONG-TERM DEBT (Note 4)............................. 780.9 916.3
-------- --------
DEFERRED INCOME TAXES............................... 845.2 837.7
-------- --------
OTHER LIABILITIES................................... 615.0 642.3
-------- --------
REDEEMABLE PREFERENCE SHARES OF A
SUBSIDIARY....................................... 43.4 44.2
-------- --------
STOCKHOLDER'S EQUITY
Common Stock..................................... 424.9 424.9
Additional paid-in capital (Note 4).............. 909.9 615.5
Retained income.................................. 1,330.9 1,314.7
Advances to parent............................... (701.5) (684.2)
-------- --------
Total stockholder's equity..................... 1,964.2 1,670.9
-------- --------
Total liabilities and stockholder's equity...
$5,129.5 $4,937.2
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------------
1994 1993 1994 1993
------- ------- ----------- ---------
(in millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Railroad......................................... $684.6 $636.3 $1,319.1 $1,217.3
Other............................................ 16.9 15.8 32.9 28.5
------ ------ -------- --------
Total......................................... 701.5 652.1 1,352.0 1,245.8
------ ------ -------- --------
OPERATING EXPENSES
Railroad......................................... 632.3 621.9 1,247.0 1,214.7
Other............................................ 16.2 14.9 31.6 27.1
------ ------ -------- --------
Total........................................ 648.5 636.8 1,278.6 1,241.8
------ ------ -------- --------
OPERATING INCOME.................................... 53.0 15.3 73.4 4.0
------ ------ -------- --------
OTHER INCOME
Gains from sales of property..................... 12.1 5.4 22.6 12.2
Real estate rentals, net......................... 6.8 6.8 11.6 10.8
Interest income.................................. 2.1 1.6 2.8 1.8
Other income (expense), net...................... (10.2) (13.6) (22.0) (23.5)
------ ------ -------- --------
Total........................................ 10.8 0.2 15.0 1.3
------ ------ -------- --------
INTEREST EXPENSE.................................... 28.3 26.6 55.2 48.5
------ ------ -------- --------
INCOME (LOSS) BEFORE INCOME TAXES................... 35.5 (11.1) 33.2 (43.2)
------ ------ -------- --------
INCOME TAXES (BENEFIT)
Current.......................................... (1.0) - (1.0) -
Deferred......................................... 14.9 (4.6) 14.0 (16.9)
------ ------ -------- --------
Total........................................ 13.9 (4.6) 13.0 (16.9)
------ ------ -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING............................. 21.6 (6.5) 20.2 (26.3)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR POST-EMPLOYMENT BENEFITS
IN 1994 (NOTE 5) 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)................................... $ 21.6 $ (6.5) $ 16.2 $ (125.2)
====== ====== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 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...................... - - - 16.2 - 16.2
COMMON STOCK ISSUED............. 150 - 294.4 - - 294.4
ADVANCES TO PARENT.............. - - - - (17.3) (17.3)
----- ------ ------ -------- ------- --------
BALANCES AT JUNE 30, 1994....... 1,350 $424.9 $909.9 $1,330.9 $(701.5) $1,964.2
===== ====== ====== ======== ======= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------
1994 1993
-------------------
(in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................................... $ 16.2 $(125.2)
------- -------
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...................................... (22.6) (12.2)
Depreciation...................................................... 114.7 113.2
Deferred income taxes............................................ 11.4 (78.1)
Other adjustments................................................. (121.2) (98.3)
------- -------
Total adjustments.............................................. (11.1) 84.7
------- -------
Net cash provided by (used for) operating activities........... 5.1 (40.5)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Property sold and retired............................................. 25.8 12.4
Capital expenditures.................................................. (228.8) (108.1)
Other investing activities............................................ (7.4) (10.8)
------- -------
Net cash used for investing activities............................ (210.4) (106.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt, net of costs.......................... 54.4 308.7
Debt and revolver drawdown (repayment), net........................... (221.4) (184.2)
Advances to parent.................................................... (17.3) (16.6)
Advances from parent and affiliate.................................... 69.5 -
Common stock issued................................................... 294.4 -
Redeemable preference shares repayment................................ (0.8) (0.9)
------- -------
Net cash provided by financing activities...................... 178.8 107.0
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................. (26.5) (40.0)
CASH AND CASH EQUIVALENTS-BEGINNING OF THE PERIOD........................ 31.9 45.4
------- -------
CASH AND CASH EQUIVALENTS-END OF THE PERIOD.............................. $ 5.4 $ 5.4
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 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") (formerly Rio Grande Industries,
Inc.); 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. 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.
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
June 30, 1994 consolidated condensed financial statement presentation.
(3) SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------
1994 1993
----------------
(in millions)
<S> <C> <C>
CASH PAYMENTS:
Interest................................ $40.5 $36.5
Income taxes............................ - -
NON-CASH TRANSACTIONS:
Capital lease obligations for railroad
equipment.............................. 26.5 -
</TABLE>
7
<PAGE>
(4) 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) POSTEMPLOYMENT BENEFITS
-----------------------
In November 1992, the Financial Accounting Standards Board ("FAS") issued
Statement No. 112 "Employers' Accounting for Postemployment Benefits". FAS 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 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 postemployment benefits as the
benefits are payable.
(6) 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 - JUNE 30, 1994
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS......................... $ 235.3 $ 74.9 $ 26.4 $ - $ 336.6
ADVANCES TO PARENT/INVESTMENT IN
SUBSIDIARIES........................ 63.1 422.9 - (486.0) -
PROPERTY, NET.......................... 4,007.2 547.0 79.0 - 4,633.2
OTHER ASSETS AND DEFERRED CHARGES...... 130.4 23.9 5.4 - 159.7
-------- -------- ----- ------- --------
TOTAL ASSETS........................ $4,436.0 $1,068.7 $110.8 $(486.0) $5,129.5
======== ======== ===== ======= ========
CURRENT LIABILITIES.................... $ 580.3 $ 200.6 $ 30.4 $ - $ 811.3
LONG-TERM DEBT......................... 578.9 158.6 43.4 - 780.9
DEFERRED INCOME TAXES.................. 764.3 82.9 (2.0) - 845.2
OTHER LIABILITIES...................... 548.3 240.1 27.6 (131.5) 684.5
REDEEMABLE PREFERENCE SHARES........... - 43.4 - - 43.4
STOCKHOLDER'S EQUITY................... 1,964.2 343.1 11.4 (354.5) 1,964.2
-------- -------- ----- ------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY................................ $4,436.0 $1,068.7 $110.8 $(486.0) $5,129.5
======== ======== ===== ======= ========
</TABLE>
8
<PAGE>
(6) 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 -
SIX MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES........................ $1,045.6 $222.7 $83.7 $ - $1,352.0
OPERATING EXPENSES........................ 985.1 209.7 83.8 - 1,278.6
-------- ------ ----- ------ --------
OPERATING INCOME (LOSS)................. 60.5 13.0 (0.1) 73.4
OTHER INCOME (EXPENSE).................... 24.3 11.1 0.3 (20.7) 15.0
INTEREST EXPENSE.......................... 60.2 12.7 3.0 (20.7) 55.2
-------- ------ ----- ------ --------
INCOME (LOSS) BEFORE INCOME TAXES AND
BEFORE CHANGE IN ACCOUNTING............ 24.6 11.4 (2.8) - 33.2
INCOME TAXES.............................. 9.2 3.5 0.3 - 13.0
-------- ------ ----- ------ --------
NET INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING............................. 15.4 7.9 (3.1) - 20.2
CUMULATIVE EFFECT ON YEARS' PRIOR TO
1994 OF CHANGE IN ACCOUNTING FOR
POST-EMPLOYMENT BENEFITS............... (3.3) (0.7) - - (4.0)
-------- ------ ----- ------ --------
NET INCOME (LOSS)......................... $ 12.1 $ 7.2 $(3.1) $ - $ 16.2
======== ====== ===== ====== ========
</TABLE>
9
<PAGE>
(6) SUPPLEMENTAL CONDENSED COMBINING FINANCIAL INFORMATION (Continued)
------------------------------------------------------
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF
OPERATIONS - THREE MONTHS ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES....................... $539.4 $118.2 $43.9 $ - $701.5
OPERATING EXPENSES....................... 498.0 108.5 42.0 - 648.5
------ ------ ----- ------ ------
OPERATING INCOME (LOSS)............... 41.4 9.7 1.9 - 53.0
OTHER INCOME (EXPENSE)................... 15.9 5.1 0.4 (10.6) 10.8
INTEREST EXPENSE......................... 30.9 6.3 1.7 (10.6) 28.3
------ ------ ----- ------ ------
INCOME (LOSS) BEFORE INCOME TAXES AND
BEFORE CHANGE IN ACCOUNTING........... 26.4 8.5 0.6 - 35.5
INCOME TAXES............................. 11.9 2.4 (0.4) - 13.9
------ ------ ----- ------ ------
NET INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING............................ 14.5 6.1 1.0 - 21.6
CUMULATIVE EFFECT ON YEARS' PRIOR TO
1994 OF CHANGE IN ACCOUNTING FOR
POST-EMPLOYMENT BENEFITS.............. - - - - -
------ ------ ----- ------ ------
NET INCOME (LOSS)........................ $ 14.5 $ 6.1 $ 1.0 $ - $ 21.6
====== ====== ===== ====== ======
</TABLE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS - SIX MONTHS ENDED
JUNE 30, 1993
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES........................ $ 956.3 $217.1 $ 72.4 $ - $1,245.8
OPERATING EXPENSES........................ 965.8 197.9 78.1 - 1,241.8
------- ------ ------ ----- --------
OPERATING INCOME (LOSS)................. (9.5) 19.2 (5.7) - 4.0
OTHER INCOME (EXPENSE).................... 9.0 (2.3) - (5.4) 1.3
INTEREST EXPENSE.......................... 38.5 13.6 1.8 (5.4) 48.5
------- ------ ------ ----- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
BEFORE CHANGE IN ACCOUNTING............ (39.0) 3.3 (7.5) - (43.2)
INCOME TAXES (BENEFIT).................... (17.7) 0.2 0.6 - (16.9)
------- ------ ------ ----- --------
NET INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING............................. (21.3) 3.1 (8.1) - (26.3)
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.................................. $(106.2) $ (2.9) $(16.1) $ - $ (125.2)
======= ====== ====== ===== ========
</TABLE>
10
<PAGE>
(6) SUPPLEMENTAL CONDENSED COMBINING FINANCIAL INFORMATION (Continued)
------------------------------------------------------
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS - THREE MONTHS ENDED
JUNE 30, 1993
<TABLE>
<CAPTION>
SPT SSW NON- ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES........................ $497.6 $114.0 $40.5 $ - $652.1
OPERATING EXPENSES........................ 494.7 101.5 40.6 - 636.8
------ ------ ----- ----- ------
OPERATING INCOME (LOSS)................. 2.9 12.5 (0.1) - 15.3
OTHER INCOME (EXPENSE).................... 3.9 (1.0) 0.1 (2.8) 0.2
INTEREST EXPENSE.......................... 21.7 6.7 1.0 (2.8) 26.6
------ ------ ----- ----- ------
INCOME (LOSS) BEFORE INCOME TAXES AND
BEFORE CHANGE IN ACCOUNTING............ (14.9) 4.8 (1.0) - (11.1)
INCOME TAXES (BENEFIT).................... (4.5) 0.7 (0.8) - (4.6)
------ ------ ----- ----- ------
NET INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING............................. (10.4) 4.1 (0.2) - (6.5)
CUMULATIVE EFFECT ON YEARS PRIOR TO
1993 OF CHANGE IN ACCOUNTING FOR
POST-RETIREMENT BENEFITS OTHER THAN
PENSIONS............................... - - - - -
------ ------ ----- ----- ------
NET INCOME (LOSS) $(10.4) $ 4.1 $(0.2) $ - $ (6.5)
====== ====== ===== ===== ======
</TABLE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS - SIX MONTHS ENDED
JUNE 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....... $ 12.0 $ (3.0) $(3.9) $ - $ 5.1
CASH FLOWS FROM INVESTING ACTIVITIES........ (197.5) (10.1) (2.8) - (210.4)
CASH FLOWS FROM FINANCING ACTIVITIES........ 160.5 11.7 6.6 - 178.8
------- ------ ----- ------------ -------
NET CHANGE IN CASH AND CASH EQUIVALENTS..... (25.0) (1.4) (0.1) - (26.5)
CASH AND CASH EQUIVALENTS - BEGINNING OF
PERIOD................................... 32.6 1.4 (2.1) - 31.9
------- ------ ----- ------------ -------
CASH AND CASH EQUIVALENTS - END OF PERIOD... $ 7.6 $ - $(2.2) $ - $ 5.4
======= ========= ===== ============ =======
</TABLE>
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS - SIX MONTHS ENDED
JUNE 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........ $(47.8) $ 16.0 $(8.7) $ - $ (40.5)
CASH FLOWS FROM INVESTING ACTIVITIES........ (89.6) (12.7) (4.2) - (106.5)
CASH FLOWS FROM FINANCING ACTIVITIES........ 103.6 (9.1) 12.5 - 107.0
------ ------ ----- ------------ -------
NET CHANGE IN CASH AND CASH EQUIVALENTS..... (33.8) (5.8) (0.4) - (40.0)
CASH AND CASH EQUIVALENTS - BEGINNING OF
PERIOD................................... 39.4 8.0 (2.0) - 45.4
------ ------ ----- ------------ -------
CASH AND CASH EQUIVALENTS - END OF PERIOD... $ 5.6 $ 2.2 $(2.4) $ - $ 5.4
====== ====== ===== ============ =======
</TABLE>
11
<PAGE>
(7) 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 50 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.
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, resulting in the death of four crewmembers. Based on
preliminary assessments of equipment damage and other costs related to the
accident, the Company estimates that the impact on operating expenses in the
third quarter of 1994 could be approximately $7 million to $8 million. There
were no spills or leaks of hazardous materials.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended June 30, 1994 Compared to Three Months Ended June 30,
------------------------------------------------------------------------
1993
- ----
The Company had net income of $21.6 million for the second quarter of 1994
compared to a net loss of $6.5 million for the second quarter of 1993. The
Company had operating income of $53.0 million for the 1994 period compared to
$15.3 million for the 1993 period. For the second quarter of 1994, railroad
operating revenues increased 7.6% over the same period in 1993, while railroad
operating expenses increased 1.7% over the 1993 period.
Operating Revenues. In the second quarter of 1994, railroad operating revenues
- ------------------
increased $48.3 million, or 7.6%, compared to the second quarter of 1993.
Railroad freight operating revenues increased $45.6 million, or 7.4%, due
primarily to increased carloads in most commodities, with the largest increases
occurring in coal, intermodal, construction material and minerals and automotive
carloads. Other railroad revenues (primarily switching and demurrage) for the
1994 period increased $2.7 million compared to the 1993 period due primarily to
the increased traffic volume. For the second quarter of 1994, carloads
increased 13.6% and revenue ton-miles increased 10.2% compared to the second
quarter of 1993. The average freight revenue per ton-mile for the second
quarter of 1994 declined by 2.5% compared to the second 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
revenues (before contract allowances and adjustments) and gross freight revenues
per carload by commodity group for the three months ended June 30, 1994 and
1993.
12
<PAGE>
<TABLE>
<CAPTION>
CARLOAD AND GROSS FREIGHT REVENUE COMPARISON
THREE MONTHS ENDED JUNE 30, 1994 AND 1993
GROSS FREIGHT
CARLOADS GROSS FREIGHT REVENUES 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................... 188.3 149.6 25.9% $213.8 $176.1 21.4% $1,135 $1,177 (3.6)%
CHEMICAL AND PETROLEUM
PRODUCTS.................... 87.6 83.9 4.4 148.1 143.3 3.3 1,691 1,708 (1.0)
FOOD AND AGRICULTURAL
PRODUCTS.................... 60.7 65.6 (7.5) 96.6 96.4 0.2 1,591 1,470 8.2
FOREST PRODUCTS.............. 56.7 54.8 3.5 98.5 90.4 9.0 1,737 1,650 5.3
METALS AND ORES.............. 42.7 40.8 4.7 61.9 58.8 5.3 1,450 1,441 0.6
CONSTRUCTION MATERIALS
AND MINERALS.............. 44.4 37.4 18.7 41.0 35.6 15.2 923 952 (3.0)
COAL......................... 42.8 28.3 51.2 29.9 24.1 24.1 699 852 (18.0)
AUTOMOTIVE................... 19.9 17.7 12.4 37.5 34.2 9.6 1,884 1,932 (2.5)
----- ----- ------ ------
TOTAL......... 543.1 478.1 13.6% $727.3 $658.9 10.4% $1,339 $1,378 (2.8)%
===== ===== ====== ======
</TABLE>
- Intermodal carloads for the second 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 a reduction in length of haul for COFC traffic, as
well as to the lower revenue per car associated with revenue empty
movements.
- Chemical and petroleum products revenues and carloads increased for
the second quarter of 1994 due to increased shipments of crude oil,
organic chemicals, petroleum products and chlorine.
- Food and agricultural products carloads declined for the second
quarter of 1994 compared to the second 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 second quarter of
1994 through growth in wood chip, particle board, lumber stock and
finished 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.
- Carloads and revenue for metals and ores increased in the second
quarter of 1994 compared to the second quarter of 1993 due
primarily to 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.
13
<PAGE>
- 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. The decline in revenue per
carload is due primarily to a reduced length of haul.
- Coal carloadings 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 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 is due primarily to a change in customer mix resulting
in a reduction in the average length of haul for the 1994 period.
- 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 second quarter of 1994
- ------------------
increased $10.4 million, or 1.7%, compared to the second quarter of 1993. The
increase in second quarter 1994 operating expense was due primarily to increases
in volume and the new fuel excise tax in 1994. Labor and fringe benefit
expenses decreased during the second quarter of 1994 compared to the second
quarter of 1993 partially offsetting these expense increases. Operating
expenses for the second quarter of 1993 were reduced by non-recurring
adjustments for property taxes and joint facility rental costs. The following
table sets forth a comparison of the Company's railroad operating expenses
during the three months ended June 30, 1994 and 1993.
<TABLE>
<CAPTION>
RAILROAD OPERATING EXPENSE COMPARISON
THREE MONTHS ENDED JUNE 30, 1994 AND 1993
1994 1993 % CHANGE
-------- -------- ----------
(dollars in millions)
<S> <C> <C> <C>
LABOR AND FRINGE BENEFITS....... $237.1 $257.6 (8.0)%
FUEL............................ 52.9 56.0 (5.5)
MATERIALS AND SUPPLIES.......... 37.6 38.2 (1.6)
EQUIPMENT RENTAL................ 76.4 83.8 (8.8)
DEPRECIATION AND AMORTIZATION... 58.8 57.2 2.8
OTHER........................... 169.5 129.1 31.3
------ ------
TOTAL.......................... $632.3 $621.9 1.7%
====== ======
</TABLE>
- Labor and fringe benefit costs decreased $20.5 million, or 8.0%,
for the second quarter of 1994 compared to the second quarter of
1993. The Company reduced employment by 3,090, or 15.7%, to a total
of 16,588 as of June 30, 1994 compared to June 30, 1993. This
employment decline included a reduction of over 1,400 in the roadway
maintenance area resulting in reduced labor costs for day-to-day
repair and maintenance activities, as well as reduced capitalized
labor costs. The employment decline also included a reduction of
approximately 321 employees associated with the January 1, 1994
implementation of the outsourcing plan for management information
services functions. In addition, fringe benefit expenses in the
second quarter of 1994 were reduced compared to the second quarter
of 1993 due to the elimination of an unemployment payroll tax in
July 1993. Additional traffic volume during the second quarter of
1994 resulted in a 0.9% 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
33.8% for the second quarter of 1994 compared to 39.5% for the
second quarter of 1993.
14
<PAGE>
- Fuel expenses decreased $3.1 million, or 5.5%, for the second
quarter of 1994 compared to the same period in 1993. The decrease
was a result of reduced cost per gallon (which includes handling
costs) from $.63 per gallon during the second quarter of 1993 to
$.51 per gallon during the second quarter of 1994, partially offset
by an increase in fuel consumption attributable to the increase in
traffic volume and $3.4 million of payments related to fuel hedging
contracts applicable to the second quarter of 1994. 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 50% of 1995
estimated fuel needs are hedged at $.48 per gallon.
- Materials and supplies expense decreased $0.6 million, or 1.6%,
for the second quarter of 1994 compared to the second quarter of
1993 due primarily to an $8.0 million credit for capitalized costs
attributable to materials and supplies. For the 1993 period, these
capitalized costs were classified as a reduction in other expenses.
This expense decrease was partially offset by increased material
costs for locomotive running repairs and freight car repair
activities.
- Equipment rental expenses decreased $7.4 million, or 8.8%, for the
second quarter of 1994 compared to the second quarter of 1993. The
net decrease in expense was due to a decrease in locomotive and
other lease costs partially offset by increased car hire expenses
associated with increased traffic volume during the second quarter
of 1994.
- Depreciation and amortization expense increased $1.6 million, or
2.8%, for the second quarter of 1994 compared to the second quarter
of 1993 due to an increase in the depreciable property base.
- Other expenses increased $40.4 million, or 31.3%, for the second
quarter of 1994 compared to the second 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 over the prior period were property and excise taxes,
joint facility rent, information system outsourcing costs and the
capitalized costs referred to above. Property taxes showed a $10.9
million increase over 1993 because the 1993 amount was reduced by
the favorable settlement of disputed property taxes in California.
Expenses for management information system outsourcing, implemented
on January 1, 1994, were $9.1 million for the second quarter of
1994. Excise taxes increased $4.6 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 $7.1 million
over the prior period because the 1993 amount was reduced by the
favorable settlement of joint facility agreements with another
railroad. Also showing increases during the second quarter of 1994
were expenses associated with equipment repairs and power by the
mile maintenance.
Other Income and Interest Expense. Other income was $10.8 million for the
- ---------------------------------
second quarter of 1994 compared to an expense of $0.2 million for the same
period in 1993. The increased income is due primarily to increased gains on
sales of property combined with reduced expenses associated with real estate
held for sale and reduced expenses associated with the sale of accounts
receivable during the 1994 period. Interest expense was $28.3 million for the
second quarter of 1994 compared to $26.6 million for the second quarter of 1993,
an increase of $1.7 million.
Six Months Ended June 30, 1994 Compared to Six Months Ended June 30, 1993
-------------------------------------------------------------------------
The Company had net income of $16.2 million for the first six 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 $125.2 million for the first six months of 1993 after
deducting $98.9 million for the cumulative effect of a change
15
<PAGE>
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 $73.4 million for the 1994 period compared to operating income of $4.0
million for the 1993 period. Operating income for the first six months of 1993
was adversely affected by severe weather and flooding in California, Oregon and
Arizona in the first quarter of 1993, 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 six months of 1993. For
the first six months of 1994, railroad operating revenues increased 8.4% over
the same period in 1993, while railroad operating expenses increased 2.7% over
the 1993 period.
Operating Revenues. In the first six months of 1994, railroad operating
- ------------------
revenues increased $101.8 million, or 8.4%, compared to the first six months of
1993. Railroad freight operating revenues increased $93.1 million, or 7.9%, due
primarily to increased carloads in most commodities, with the largest increases
occurring in coal, intermodal, construction material and minerals and automotive
carloads. Other railroad revenues (primarily switching and demurrage) for the
1994 period increased $8.7 million compared to the 1993 period due primarily to
increased traffic volume. For the first six months of 1994, carloads increased
13.9% and revenue ton-miles increased 11.6% compared to the first six months of
1993. The average freight revenue per ton-mile for the first six months of 1994
declined by 3.3% compared to the first six 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
revenues (before contract allowances and adjustments) and gross freight revenue
per carload by commodity group for the six months ended June 30, 1994 and 1993.
<TABLE>
<CAPTION>
CARLOAD AND GROSS FREIGHT REVENUE COMPARISON
SIX MONTHS ENDED JUNE 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................... 349.6 279.3 25.2% $ 396.2 $ 330.9 19.7% $1,133 $1,185 (4.4)%
CHEMICAL AND PETROLEUM
PRODUCTS.................... 173.6 168.2 3.2 297.1 280.6 5.9 1,711 1,668 2.6
FOOD AND AGRICULTURAL
PRODUCTS.................... 116.7 123.5 (5.5) 183.6 179.7 2.2 1,573 1,455 8.1
FOREST PRODUCTS.............. 113.0 109.5 3.2 195.6 181.9 7.5 1,731 1,661 4.2
METALS AND ORES.............. 84.9 79.1 7.3 126.3 114.7 10.1 1,488 1,450 2.6
CONSTRUCTION MATERIALS AND
MINERALS.................. 83.3 68.4 21.8 75.6 64.6 17.0 908 944 (3.8)
COAL......................... 80.5 52.0 54.8 57.9 47.9 20.9 719 921 (21.9)
AUTOMOTIVE................... 37.3 32.2 15.8 71.5 62.3 14.8 1,917 1,935 (0.9)
------- ----- -------- --------
TOTAL....... 1,038.9 912.2 13.9% $1,403.8 $1,262.6 11.2% $1,351 $1,384 (2.4)%
======= ===== ======== ========
</TABLE>
- Intermodal carloads for the first six months of 1994 increased
over the same period in 1993 due to increased 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.
- Chemical and petroleum products revenues and carloads increased
for the first six months of 1994 due to increased shipments of
organic chemicals, crude oil, plastics, chlorine and fertilizers.
The revenue per carload increase for the 1994 period was primarily
due to changes in product mix.
16
<PAGE>
- Food and agricultural products carloads declined for the first six
months of 1994 compared to the first six 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 six
months of 1994 through growth in wood chip, particle board, lumber
stock and finished 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.
- Carloads and revenue for metals and ores increased in the first
six months of 1994 compared to the first six 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 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. The decline in revenue per
carload reflects a reduced length of haul, as well as the increase
of sand and gravel traffic in the commodity mix resulting in a lower
revenue per carload.
- Coal carloadings 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 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 is due primarily to a change in customer mix resulting
in a reduction in the average length of haul for the 1994 period.
- 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 six months of
- ------------------
1994 increased $32.3 million, or 2.7%, compared to the first six months of 1993.
The increase in operating expense for the first six months of 1994 was due
primarily to increases in volume, the new fuel excise tax in 1994 and increased
purchase of freight car and locomotive repair materials. Labor and fringe
benefit expenses decreased during the first six months of 1994 compared to the
first six months of 1993 partially offsetting these expense increases.
Operating expenses for the first six months of 1993 were reduced by non-
recurring adjustments to inventory, property taxes and joint facility rental
costs. The following table sets forth a comparison of the Company's railroad
operating expenses during the six months ended June 30, 1994 and 1993.
17
<PAGE>
<TABLE>
<CAPTION>
RAILROAD OPERATING EXPENSE COMPARISON
SIX MONTHS ENDED JUNE 30, 1994 AND 1993
1994 1993 % CHANGE
-------- -------- --------
(dollars in millions)
<S> <C> <C> <C>
LABOR AND FRINGE BENEFITS....... $ 482.1 $ 505.4 (4.6)%
FUEL............................ 100.9 103.5 (2.5)
MATERIALS AND SUPPLIES.......... 74.0 65.6 12.8
EQUIPMENT RENTAL................ 154.0 152.2 1.2
DEPRECIATION AND AMORTIZATION... 114.7 113.2 1.3
OTHER........................... 321.3 274.8 16.9
-------- --------
TOTAL........................ $1,247.0 $1,214.7 2.7%
======== ========
</TABLE>
- Labor and fringe benefit costs decreased $23.3 million, or 4.6%, for the
first six months of 1994 compared to the first six months of 1993. The
Company reduced employment by 3,090, or 15.7%, to a total of 16,588 as of
June 30, 1994 compared to June 30, 1993. This employment decline included a
reduction of over 1,400 in the roadway maintenance area resulting in reduced
labor costs for day-to-day repair and maintenance activities, as well as
reduced capitalized labor costs. The employment decline also included a
reduction of approximately 321 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 six months of
1994 were reduced compared to the first six months of 1993 due to the
elimination of an unemployment payroll tax in July 1993. Additional
traffic volume during the first six months of 1994 resulted in a 3.5%
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 35.7% for the first six months of 1994 compared
to 40.6% for the first six months of 1993.
- Fuel expenses decreased $2.6 million, or 2.5%, for the first six months of
1994 compared to the same period in 1993. The decrease was a result of
reduced cost per gallon (which includes handling costs) from $.60 per gallon
during the first six months of 1993 to $.51 per gallon during the first six
months of 1994, partially offset by an increase in fuel consumption
attributable to the increase in traffic volume and $7.1 million of payments
related to fuel hedging contracts applicable to the first six months of
1994. 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 50% of the
1995 estimated fuel needs are hedged at $.48 per gallon.
- Materials and supplies expense increased $8.4 million, or 12.8%, for the
first six months of 1994 compared to the first six months of 1993. The
increase was due primarily to an increase in freight car and locomotive
repair material purchased during the 1994 period, as well as to a $5.0
million non-recurring inventory adjustment during the first quarter of 1993
(primarily related to restoring inventory materials that had been
previously released from inventory but had not been used) and to reduced
roadway maintenance and repair expenditure and activity in the 1993 period
in response to reduced revenues in such period. Partially offsetting the
1994 expense increase was an $8.0 million credit for capitalized costs
attributable to material and supplies. For the 1993 period, these
capitalized costs were classified as a reduction in other expenses. During
the first six months of 1994, the Company rebuilt or overhauled 152
locomotives compared to 101 locomotives during the first six months of
1993.
18
<PAGE>
- Equipment rental costs increased $1.8 million, or 1.2%, for the
first six months of 1994 compared to the first six months of 1993.
The increase included a $6.6 million increase in car hire and a $4.8
million decrease in locomotive and other lease costs. In large part,
the increases in car hire are associated with increased traffic
volume during the first six months of 1994 compared to the same
period during 1993. In addition, the Company had reduced the number
of short-term locomotives it leased in the first quarter of 1993 in
an effort to reduce costs.
- Depreciation and amortization expense increased $1.5 million, or
1.3%, for the first six months of 1994 compared to the first six
months of 1993 due to an increase in the depreciable property base.
- Other expenses increased $46.5 million, or 16.9%, for the first six
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 and maintenance expenses.
Expenses for management information system outsourcing, implemented
on January 1, 1994, were $18.2 million for the first six months of
1994. Property taxes showed a $15.9 million increase over 1993
because the 1993 amount was reduced by the favorable settlement of
disputed property taxes in California. Excise taxes increased $8.3
million over the prior period due to the enactment of an increase in
the federal excise tax on fuel in October 1993. Joint facility
maintenance expense increased $9.0 million due to the combination of
increased payments in 1994 to other railroads coupled with increased
billings in 1993 to other railroads. Joint facility rent expense
increased $4.8 million over the prior period because the 1993 amount
was reduced by the favorable settlement of joint facility agreements
with another railroad. Also showing increases during the first six
months of 1994 were expenses associated with equipment repairs and
power by the mile maintenance. These expense increases were partially
offset by reduced intermodal ramping and storm damage repair expenses
during the first six months of 1994 compared to the first six months
of 1993.
Other Income and Interest Expense. Other income was $15.0 million for the first
- ---------------------------------
six months of 1994 compared to $1.3 million for the same period in 1993. The
increased income was due primarily to increased gains on sales of property
combined with reduced expenses associated with real estate held for sale and
reduced expenses associated with the sale of accounts receivable. Interest
expense was $55.2 million for the first six months of 1994 compared to $48.5
million for the first six months of 1993, an increase of $6.7 million. The
increased interest expense was primarily attributable to increased capital lease
obligations during the first six 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 six 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 will continue to be insufficient to meet its cash
19
<PAGE>
needs for operating activities and necessary capital expenditures, including
acquisition of equipment. 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.
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 June 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, together with borrowings under the
revolving credit facility, 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.
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 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 the Union Pacific Railroad Company ("Union Pacific") during
the next year or two under the SSW trackage rights case (in which Union Pacific
claimed approximately $62 million as of June 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 $5.1 million for the first six months of
1994 compared to cash used for operating activities of $40.5 million for the
first six months of 1993. The $45.6 million improvement was due primarily to
improved operating results for the first six months of 1994. Included in the
operating cash flows is a $40.5 million payment of interest during the first six
months of 1994 compared to $36.5 million for the first six 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, secured equipment
financing, capital leases and, if necessary, borrowings under the revolving
credit facility.
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The Company had working capital deficits of $474.7 million and $659.7
million at June 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 June 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 $25.8 million and $12.4 million for the
first six 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, resulting in the death of four crewmembers. Based on
preliminary assessments of equipment damage and other costs related to the
accident, the Company estimates that the impact on operating expense in the
third quarter of 1994 could be approximately $7 million to $8 million. There
were no spills or leaks of hazardous materials.
Capital Expenditures
--------------------
Capital expenditures for railroad operations (exclusive of capital leases)
for the first six months of 1994 were $228.8 million compared to $108.1 million
for the same period in 1993. The 1994 amount included approximately $118.9
million for property purchased from D&RGW and $28.5 million for rebuilt
locomotives. The 1993 amount included $104.0 million for roadway and structures
expenditures. The Company expects 1994 capital expenditures for railroad
operations to be approximately $230 million (exclusive of capital leases and the
D&RGW property purchase). The Company expects to fund 1994 capital expenditures
with cash from operations, secured equipment financings and, if necessary,
borrowings under the revolving credit facility.
During the latter part of 1993 and in 1994, the Company began a plan of
expansion and upgrading of its locomotive and freight car fleets principally
through capitalized lease financing. The Company received 85 new locomotives
through June 30, 1994 and has 65 new locomotives and 133 remanufactured
locomotives on order to be delivered during the balance of 1994. The Company
has acquired 70 new freight cars and 682 refurbished freight cars during the
first six months of 1994 and plans to acquire an additional 600 new and
approximately 1,170 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 intends
to order 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.
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.
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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 50 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.
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PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Kona Technology Corporation ("Kona"), a contract freight bill auditor that
formerly represented Chevron Chemical Company ("Chevron"), filed a lawsuit
against SPT and SSW on July 14, 1994 in the Harris County District Court in
Houston, Texas. The suit seeks refunds from SPT and SSW pursuant to a "most
favored nation" clause in a rate contract involving Chevron in effect from mid-
1988 to mid-1994. Kona, which claims to have a financial interest in any
refunds obtained, also filed suit in Chevron's name. However, the suit by Kona
also requested a declaratory judgement against Chevron as a defendant. In
addition, the suit alleges that SPT and SSW interfered with Chevron's contract
with Kona and also seeks exemplary damages. The complaint has not been served
on SPT and SSW. It is 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 June 30, 1994, no reports on Form 8-K were
filed by the Company.
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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: August 1, 1994 By /s/ B. C. Kane
---------------------- ----------------------------------------
Controller
(Principal Accounting Officer)
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