<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
-------------------------------------
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
SOUTHERN PACIFIC BUILDING 94105
ONE MARKET PLAZA (ZIP CODE)
SAN FRANCISCO, CALIFORNIA (415) 541-1000
(ADDRESS OF PRINCIPAL (REGISTRANT'S TELEPHONE
EXECUTIVE OFFICES) NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
SOUTHERN PACIFIC NEW YORK STOCK EXCHANGE
TRANSPORTATION COMPANY
FIRST AND REFUNDING MORTGAGE
8.20% BONDS, SERIES B, DUE
DECEMBER 1, 2001
Securities registered pursuant to Section 12(g) of the Act:
None
----------------
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. X
---
AS OF MARCH 15, 1995, NONE OF THE REGISTRANT'S COMMON STOCK WAS HELD BY
NON-AFFILIATES.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF
MARCH 15, 1995 WAS 1,350.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH THE
REDUCED DISCLOSURE FORMAT.
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BECAUSE THE COMPANY IS FILING THIS ANNUAL REPORT UNDER THE REDUCED
DISCLOSURE FORMAT PROVIDED BY GENERAL INSTRUCTION J(2) OF FORM 10-K, CERTAIN
ITEMS HAVE BEEN OMITTED IN THEIR ENTIRETY, OR IN PART, AS FOLLOWS:
OMITTED IN ENTIRETY:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
OMITTED IN PART:
ITEM 1. BUSINESS.
ITEM 2. PROPERTIES.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C>
PART ITEM DESCRIPTION PAGE
-------- --------- ------------------------------------------------------ ----
I. 1. and 2. BUSINESS AND PROPERTIES............................... 1
General............................................... 1
Capital and Debt Transactions......................... 1
Railroad Operations................................... 1
Service Territory..................................... 2
Traffic............................................... 3
Physical Plant and Equipment.......................... 4
Transit Corridor and Real Estate Sales................ 7
Employees and Labor................................... 7
Governmental Regulation............................... 9
Competition........................................... 9
Environmental Matters................................. 10
3. LEGAL PROCEEDINGS..................................... 11
II. 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................. 13
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................. 13
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........... 17
9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................. 17
IV. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.......................................... 18
EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE................................... 21
</TABLE>
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Southern Pacific Transportation Company ("SPT" or the "Company") is a wholly-
owned subsidiary of Southern Pacific Rail Corporation ("SPRC"). Unless the
content otherwise requires, references herein to the Company include SPT and it
subsidiaries, including St. Louis Southwestern Railway Company ("SSW"), The
Denver and Rio Grande Western Railroad Company ("D&RGW") and SPCSL CORP.
("SPCSL"), and references to SPRC include SPRC and its subsidiaries, including
SPT and its subsidiaries and Rio Grande Holding ("RGH") and its subsidiaries.
References herein to SPRC prior to August 18, 1993 include SPTC Holding, Inc.
("SPTCH"), a wholly-owned subsidiary of SPRC and the parent of SPT that was
merged into SPRC on such date and reference herein to RGH prior to October 1,
1994 include D&RGW, which became a subsidiary of SPT on such date. All
financial and statistical amounts, including the consolidated financial
statements and related footnotes, have been restated for all periods presented
to include the accounts and data of D&RGW.
--------------------------------------------------------------------------------
<PAGE>
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
The Company, through the integrated network of its principal subsidiaries,
transports freight over approximately 14,500 miles of first main track
throughout the western United States. The Company operates in 15 states over
five main routes. The Company serves most west coast ports and large population
centers west of the Mississippi and connects with eastern railroads at Chicago,
St. Louis, Kansas City, Memphis and New Orleans. The Company's rail lines reach
the principal Gulf ports south from Chicago and east from the Los Angeles basin.
It interchanges with Mexican railroads at six gateways into Mexico.
The principal commodities hauled in the Company's carload operations are
chemicals and petroleum products, food and agricultural products, forest
products (including paper, paper products and lumber) and coal. Intermodal
container and trailer operations continue to be the Company's largest single
traffic category. In 1994, the largest five shippers accounted for less than 17
% of the Company's gross freight revenues, with no shipper providing more than 6
% of such revenue.
The Company was acquired by SPRC in October 1988 from Santa Fe Pacific
Corporation ("Santa Fe"). In 1989 and 1990, the Company acquired access to
Chicago from St. Louis and Kansas City, respectively, and in 1994, the stock of
D&RGW was contributed to the Company such that all rail operations of SPRC are
included in the Company. All amounts have been restated to reflect the combined
results of the companies for all periods presented. For the five years
preceding its acquisition by SPRC, SPT had been held in trust pending the
decision of the Interstate Commerce Commission (the "ICC") that denied Santa
Fe's requested merger with SPT. During this period, SPT fell significantly
behind other Class I railroads that were then consolidating, streamlining and
strengthening their railroads.
In addition to its rail business, the Company historically has received
substantial cash flow from "traditional" real estate sales and leasing
activities. More recently, transit corridor sales have become a dominant
component of the Company's asset sales program, with the Company usually
retaining operating rights over these corridors to continue freight rail service
to its customers.
CAPITAL AND DEBT TRANSACTIONS
In August 1993 and March 1994 SPRC closed the offering and sale of
30,783,750 shares and 25,000,000 shares of common stock, respectively. In
connection with these offerings, the Company issued 200 shares of common stock
in 1993 and 150 shares of common stock in 1994 for consideration of $445.5
million and $294.4 million from SPRC, respectively. Proceeds from these
transactions were used to repay debt, purchase equipment operated pursuant to
operating leases and for general corporate purposes.
In 1993 and 1994, D&RGW paid dividends of $46.7 million and $53.8 million
to RGH, respectively.
RAILROAD OPERATIONS
The following table sets forth certain freight and operating statistics
relating to the Company's rail operations as restated to included D&RGW for the
periods indicated. The operating ratios show consolidated operating expenses
expressed as a percentage of consolidated operating revenues. The indicated
increases in revenue ton-miles and carloads reflect an improving economy and
implementation of the Company's business strategy. The decrease in revenue per
ton-mile evidences the intense competitive pressures under which the Company
operates, particularly those affecting its intermodal activities. The increase
in revenue ton-miles per gallon of fuel primarily reflects the results of the
Company's on-going program to rehabilitate and upgrade the quality of its
locomotive fleet. The increase in labor productivity, as
1
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measured by revenue ton-miles per employee, is primarily the result of Company
programs to reduce the number of employees combined with increases in traffic
volume.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1994 1993 1992
-------- -------- ---------
Revenue ton-miles (billions)................... 139.1 123.6 115.4
Revenue per ton-mile (dollars)................. $.021 $.022 $.023
Total carloads (thousands)(1).................. 2,274 2,078 1,995
Average length of haul (miles)................. 1,026 990 996
Gallons of fuel (millions)..................... 436.0 408.9 390.3
Average cost per gallon........................ $ .58 $ .62 $ .61
Revenue ton-miles per gallon................... 319 302 296
Total employees (year end)..................... 18,010 18,982 22,793
Revenue ton-miles per employee (thousands)..... 7,456(2) 5,845(2) 5,063
Operating ratio (%)............................ 92.6% 100.7% 100.3%
</TABLE>
______________________
(1) Includes intermodal carloads with an assumed two containers per
carload. Intermodal carloads hold from two to ten containers.
(2) Calculated based on average monthly employment for 1994 and 1993.
SERVICE TERRITORY
The Company's routes and service territory are described below.
Central Corridor Route. The Central Corridor Route links Northern
California and the Pacific Northwest with Kansas, Missouri and Illinois,
traversing the Rocky Mountain states via the D&RGW. The eastern end of this
route reaches the rail gateway cities of Kansas City, St. Louis and Chicago.
This route handles a diverse mix of traffic including eastbound forest products,
perishables and processed foods, as well as significant volumes of finished
automobiles and other manufactured goods. The bulk of the Company's low
sulphur, high BTU coal traffic originates along this route in the mountainous
territory of Colorado and Utah and moves east.
Pacific Coast Route. The north-south route connects the forest product
resource base of the Pacific Northwest with the major consuming markets in
California and Arizona.
Sunset Route. The Company's Sunset Route is a direct line from the Los
Angeles Basin to Houston and other Gulf Coast ports, as well as the eastern rail
gateways of Memphis and New Orleans. This route structure supports the
Company's presence in carload origination of chemicals and plastics in the Gulf
region.
Golden State Route. This route connects Southern California and Arizona
with the industrial midwest and the rail gateways of Kansas City, St. Louis and
Chicago. A wide range of products is handled in the corridor including
intermodal, metals and ores, agricultural products and miscellaneous
manufactured products.
Mid-America Route. The Mid-America Route (also known as the "Cotton Belt
Route") links the petrochemical producing region along the Gulf of Mexico with
industrial users and consuming markets in the midwest and northeast. The Cotton
Belt serves the cities of Dallas/Ft. Worth, Shreveport, Memphis and St. Louis.
Mexico. The Company serves Mexico through interchanges with Mexican
railroads at six gateways in California, Texas and Arizona.
2
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TRAFFIC
Set out below is a comparison of the Company's carload volumes and gross
freight revenues (before contract allowances and adjustments) by commodity
groups in 1994. A more detailed discussion of the traffic generated by each
group follows the table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------
CARLOADS GROSS FREIGHT REVENUE
------------------ ---------------------
NUMBER % OF DOLLARS % OF
(THOUSANDS) TOTAL (MILLIONS) TOTAL
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Intermodal............................ 728.1 32.0% $ 851.9 26.2%
Chemical and petroleum products....... 342.7 15.1 614.9 18.9
Coal.................................. 303.2 13.3 299.3 9.2
Food and agricultural products........ 247.0 10.9 414.7 12.8
Forest products....................... 226.2 9.9 432.0 13.3
Metals and ores....................... 181.5 8.0 275.3 8.5
Construction materials and minerals... 171.5 7.6 172.0 5.3
Automotive............................ 73.4 3.2 188.7 5.8
------- ----- -------- -----
Total 2,273.6 100.0% $3,248.8 100.0%
======= ===== ======== =====
</TABLE>
Intermodal. The intermodal freight business consists of hauling freight
containers or truck trailers by a combination of water, rail and motor carriers,
with rail carriers serving as the link between motor carriers and between ports
and motor carriers. The Company's marketing efforts are focused on direct
negotiations with major steamship lines for international container traffic and
with marketing agents (primarily shipper agents and consolidators) and motor
carriers for domestic container and trailer traffic.
The Company's intermodal revenues are derived in large part from goods
produced in the Pacific Rim and shipped by rail from west coast ports to east
coast markets. This traffic is carried on the Company's lines from its
terminals at Oakland or Los Angeles/Long Beach to Chicago, St. Louis, New
Orleans or Houston, or through connecting carriers, beyond to the U. S. eastern
seaboard. Most of this traffic uses the Company's Intermodal Container Transfer
Facility ("ICTF") in Southern California. In some cases, motor carriers and
railroads have begun to jointly market intermodal service. The Company provides
stack-train and trailer-on-flatcar service among its 27 intermodal facilities
across the system.
Chemical and Petroleum Products. The Company transports a wide range of
industrial, chemical and plastic products which constitute the primary commodity
and product groups included in this traffic. Most of the traffic originates
within Texas where the Company directly serves chemical and plastics plants.
The Company's routes enable it to transport these products from Texas directly
to end-user markets on the west coast and through interchanges at major gateways
to end-user markets on the east coast. Shipper demand is closely tied to
fluctuations in end-user demand and also is sensitive to the availability of
safe, predictable transportation service.
Coal. The Company serves important sources of low-sulfur, high BTU coal in
Colorado and Utah, which represents a growing share of the Company's commodity
mix. The traffic is subject to intense competition from other coal sources,
particularly the Powder River Basin in Wyoming and the Illinois Basin.
Food and Agricultural Products. Grain and grain products constitute the
primary commodity groups included in this traffic. The Company is a major
transporter of grain products to Mexico. Shipper demand is affected by
competition among sources of grain and grain products as well as price
fluctuations in international markets for key commodities. Other food and
consumer goods included in this traffic are shipments primarily from sources in
California to consumer markets in the eastern part of the U. S.
Forest Products. This traffic includes lumber stock, plywood and various
paper products. Most of the traffic originates in Oregon and Northern
California with destinations throughout the U.S. However, certain product
sources in
3
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the Pacific Northwest have been adversely affected by environmental concerns. In
response, the Company is pursuing alternate sources in Canada and the Southern
U.S. to increase volumes. The transportation market for lumber is affected by
housing starts and remodeling activity, while the transportation market for
paper products is driven by end-user demand for packaging and newsprint.
Metals and Ores. Metals and ores traffic includes both ferrous and non-
ferrous metals and is concentrated on the steel mills of the west and shipments
from copper mines and smelters in the southwest. These markets are sensitive to
demand for construction and pipeline projects along with demand for industrial
production and consumer goods with substantial metals components. The markets
also are affected by commodity prices in international markets and subject to
the substitution of imported metals.
Other. The traffic generated by the business development groups discussed
above amounted to approximately 88.9% of the Company's gross freight revenues
for 1994. Other commodity and product groups included in the Company's traffic
mix include automobiles, automotive parts, construction materials, non-metallic
minerals and government traffic.
Mexico. The Company's Mexico Group, headquartered in Houston, serves as a
marketing and service link between the Company's business development groups and
markets in Mexico. The Company maintains a working relationship with FNM.
During 1994, approximately 176,000 carloads, or 7.7% of the Company's total
carloads, were from traffic with Mexico. FNM and the Company are working on
establishing through rates for carload shipments of selected commodities through
all six of the gateways to Mexico served by the Company. The Company also
provides intermodal container service linking the ICTF and Mexico City and has
developed joint marketing arrangements with Mexican trucking companies
establishing single through rates on a truck-rail-truck delivery system.
PHYSICAL PLANT AND EQUIPMENT
Roadway, Yards and Structures. At December 31, 1994, the Company had
approximately 22,500 miles of track in operation, consisting of approximately
14,500 miles of first main track and approximately 8,000 miles of additional
main track, passing track, way switching track and yard switching track. Miles
of first main track include operating rights on 2,578 miles of track owned by
other railroads. The Company is analyzing certain branchlines for possible
sale, lease or abandonment. During 1994, the Company sold over 345 miles of such
lines in Oregon and California. The Company will continue in its efforts to
dispose of the branchlines and will continue to identify additional properties,
including other branch lines, rail yards and terminals, that can be made
available for sale, lease or abandonment. To the extent proceeds from such
dispositions are less than the Company's basis in those properties, a non-cash
financial statement loss would be recognized.
Principal railroad yard facilities owned by the Company are located at
Eugene, Oregon; Sacramento, Roseville, Oakland, Los Angeles and West Colton,
California; Houston, Texas; Pine Bluff, Arkansas; and Kansas City, Kansas;
Denver, Pueblo and Grand Junction, Colorado; and Salt Lake City, Utah. As part
of its effort to rationalize operations, the Company is identifying and
assessing opportunities for consolidation of its railroad yard facilities.
Equipment. In late 1993 and throughout 1994, as part of a program to
upgrade its locomotive fleet, the Company acquired 150 new locomotives, 17 of
which were delivered in the last quarter of 1993 with the balance delivered in
1994. Additionally, the Company has acquired 133 remanufactured locomotives of
which 115 were delivered in 1994 and the balance in early 1995. These
locomotives were financed by capital leases for which the capitalized lease
obligation was approximately $221 million. In 1994, the Company acquired
through capital lease financing approximately 1,400 freight cars (700 newly
manufactured and 700 remanufactured) for which the total capitalized lease
obligation was approximately $56 million. The Company has also received
approximately 1,600 additional reconditioned freight cars in 1994 on which it
expects to complete capital lease financing in 1995. In addition, the Company
acquired 350 used freight cars in 1994 under operating leases.
At December 31, 1994, the Company owned (including equipment under
capitalized leases) or leased the equipment described in the table below. The
table excludes equipment held under short-term leases. At December 31,
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1994, there were 150 locomotives subject to short-term leases. At December 31,
1994, there were approximately 1,585 non-serviceable freight cars in storage,
which included freight cars awaiting sale to a third party for rehabilitation
and leaseback and freight cars scheduled for repair.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------------
OWNED LEASED TOTAL
------------------ ------------------- -----------------
DESCRIPTION AVERAGE AVERAGE AVERAGE
----------- UNITS AGE UNITS AGE UNITS AGE
----- ------- ----- ------- ----- -------
(YEARS) (YEARS) (YEARS)
<S> <C> <C> <C> <C> <C> <C>
LOCOMOTIVES:
Road..................... 1,769 10.8 295 12.9 2,064 11.1
Other.................... 337 20.4 12 20.8 349 20.4
------ ------ ------
Total................ 2,106 307 2,413
====== ====== ======
FREIGHT:
Box...................... 15,441 19.0 2,454 10.6 17,895 16.3
Tank..................... 72 25.3 18 3.1 90 20.9
Gondola.................. 2,773 20.4 2,658 5.8 5,431 13.3
Hopper................... 8,924 19.6 5,431 10.5 14,355 16.0
Flat..................... 5,134 21.7 1,724 7.8 6,858 18.2
Total......... ------ ------ ------
32,344 12,285 44,629
====== ====== ======
COMPANY SERVICE UNITS AND
CABOOSES................... 1,338 41 1,379
HIGHWAY TRAILERS AND
TRACTORS................... - 4,576 4,576
</TABLE>
At December 31, 1993, the Company owned and leased 1,878 and 357
locomotives, respectively and 31,481 and 10,329 freight cars, respectively.
The components of the Company's equipment lease and rental expense are
shown below (in million of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
------- ------- --------
<S> <C> <C> <C>
Operating leased equipment.................... $ 89.9 $109.1 $ 85.4
Net car hire expense from other railroads...... 57.1 54.8 42.4
Private cars, intermodal and other equipment... 183.7 177.1 172.7
------ ------ ------
Total........................................ $330.7 $341.0 $300.5
====== ====== ======
</TABLE>
5
<PAGE>
Capital Expenditures and Maintenance. Improvement and on-going
maintenance of roadway, structures and equipment are essential components of the
Company's efforts to improve service and reduce operating costs. The Company
has made the following railroad capital expenditures in order to maintain and
improve train service (in millions of dollars):
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993(1) 1992
------ --------- ----------
<S> <C> <C> <C>
Roadway and structures... $188.1 $209.5 $263.4
Railroad equipment:
Locomotives........... 69.9 21.1 70.4
Freight cars.......... 6.4 6.5 0.2
Other.................... 5.2 7.3 4.9
------ ------ ------
Total............... $269.6 $244.4 $338.9
====== ====== ======
Capitalized Leases....... $265.2 $ 57.0 -
====== ====== ======
----------
</TABLE>
(1) Excludes equipment previously under operating leases purchased with $65.3
million of the proceeds of capital and debt transactions ($30.1 million
for locomotives and $35.2 million for freight cars).
The Company's capital expenditures for railroad operations for 1995 are
expected to be approximately $317 million (exclusive of capital leases)
including $271 million for roadway and structures and $46 million for railroad
equipment and other items.
The Company has ordered an additional 206 AC powered locomotives to be
financed by capitalized lease financing that are scheduled to be delivered
during the second and third quarters of 1995. In addition, the Company has
ordered 920 new hopper cars and expects to receive approximately 1,500
reconditioned freight cars in 1995. The Company expects to finance these
acquisitions through capitalized lease financing. The total expected
capitalized lease obligation to be incurred during 1995, including the 1,600
reconditioned freight cars received in 1994 for which financing is scheduled to
be arranged in 1995, is approximately $400 million.
The following table shows the Company's expenses for on-going maintenance
and repairs of roadway and structure and railroad equipment (including
administrative and inspection costs) for the periods indicated (in millions of
dollars):
MAINTENANCE EXPENDITURES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------ ------ -------
<S> <C> <C> <C>
Roadway and structures... $202.8 $247.1 $282.4
Railroad equipment:
Locomotives............. 236.0 240.9 228.5
Freight cars............ 133.7 127.4 149.3
Other.................... (0.6) 3.6 7.6
------ ------ ------
Total.................. $571.9 $619.0 $667.8
====== ====== ======
</TABLE>
6
<PAGE>
TRANSIT CORRIDOR AND REAL ESTATE SALES
The disposition of urban and intercity transit corridors and surplus real
estate, mostly in metropolitan areas along the Company's rights of way, is a
major component of the Company's business strategy and is conducted as part of
the Company's ordinary course of business. The Company markets properties that
are classified generally into two distinct types: transit corridors and
consolidated freight corridors, which are typically sold to public agencies, and
traditional real estate, which is typically sold to different groups of
potential buyers. From January 1, 1989 through December 31, 1994, the Company
received over $1.7 billion in proceeds from its real estate asset disposition
program. During that time, such sales were necessary for the Company to meet its
capital expenditure, debt service and other cash needs. Of the $1.7 billion in
proceeds, a total of $362 million was received during 1993 and 1994, with $235
million coming from the Alameda Corridor sale in December 1994. The Company
has identified certain operating properties that it might sell in the future if
it can do so without impacting its railroad operations. Management has not made
a firm decision to remove any of these properties from its operating system. In
order to enhance the value of certain properties and facilitate their
disposition, the Company has participated in the past and may in the future
participate with others in the development of such properties by contributing
the property and funding to joint ventures or other entities, participating in
sale and leaseback arrangements and engaging in other transactions that do not
involve immediate cash proceeds. In addition, in order to facilitate sales or
otherwise enhance values of transit corridors and other facilities, the Company
may form joint ventures with private partners or public entities or engage in
other innovative transactions.
Transit Corridors. The Company's sales efforts have focused particularly
on, and most of the proceeds since January 1, 1989 resulted from, the sale of
transit corridor properties that consist of the Company's rights of way and
related tracks and rail stations that provide a natural corridor over which a
metropolitan, regional or other geographic area can establish and operate public
transportation systems or consolidated freight corridors (for use by more than
one railroad). The Company usually retains freight operating rights over these
corridors to continue rail service to its customers. During 1994, the Ports of
Los Angeles and Long Beach purchased SPT's Alameda Corridor for $235 million.
Earlier sales include the Los Angeles County Transportation Commission's
purchase of over $400 million of SPT's property and the Peninsula Corridor Joint
Powers Board's purchase of SPT's Peninsula Corridor for approximately $220
million, with an additional $110 million of property covered by purchase
options, approximately $79 million of which have not lapsed, been exercised or
extinguished.
Traditional Real Estate. In addition to transit corridors, the Company
sells traditional real estate that consists principally of industrial and
commercial properties located in developed areas on the Company's system. The
Company's supply of properties includes several thousand parcels that are
available or could be made available for sale within the next few years (without
including properties currently leased by the Company to tenants).
Lease Activities. The Company actively administers approximately 21,000
leases that represent most of the Company's annual rental income. Generally,
the Company does not target its leased properties for sale unless the annual
rental does not reflect an appropriate return on the property. Under its
leases, the Company receives annual gross rental income of nearly $45 million,
which includes income from uses of its rights of way for such purposes as
signboards, longitudinal fiber optics and pipelines.
EMPLOYEES AND LABOR
Labor and related expenses accounted for approximately 38% of the
Company's railroad operating expenses in 1994. At December 31, 1994, the
Company employed 18,010 persons, which represents a reduction of approximately
972 from January 1, 1994. The December 31, 1994 employment figure includes
17,785 employed in the Company's rail operations. These reductions resulted
from attrition and voluntary separations, severance, early retirement programs
and furloughs.
At December 31, 1994, approximately 88% of the Company's railroad employees
were covered by collective
7
<PAGE>
bargaining agreements with railway labor organizations that are organized along
craft lines, where employees are grouped together by job and historical
practice. Historically, many collective bargaining agreements in the railroad
industry have been negotiated on a nationwide basis with the railroads being
represented by the National Railway Labor Conference. In November 1993, the
Company withdrew its participation with the National Railway Labor Conference
with respect to the current bargaining round indicating it would negotiate wage
and work rule agreements separately from any nationwide negotiations conducted
by other Class I railroads.
Labor relations in the railroad industry are subject to extensive
governmental regulation under the Railway Labor Act ("RLA"). The most recent
national collective bargaining agreements with the major railway labor
organizations and the railroads, including the Company, expired in 1988, and
negotiations failed to resolve the wage and work rule issues. After various
presidential and legislative actions in 1991, because of its constrained
financial condition, the Company was authorized to negotiate separately with
certain of its employee unions, rather than on a nationwide basis with the
railroads being represented by a bargaining committee, as is typically the case.
These negotiations resulted in wage rates that are lower than the national rates
for most of the Company's union employees and relieved the Company of the
requirement to make certain lump sum payments to employees. These concessions
were applied to the Company's railroad subsidiaries (other than D&RGW) and
represent a substantial savings to the Company in terms of the labor costs it
would have otherwise incurred. The agreements cover over 15,400 union employees
of the Company.
In November 1993, the company entered into a labor agreement with the
United Transportation Union ("UTU"), which represents approximately 2,300
trainmen and switchmen on the Company's Western Lines. The agreement, which
resolved the issues from 1988 and continues through 1997, provided for a
reduction of 210 surplus employees, the elimination of a reserve board
(employees who are paid a percentage of salary but stay home awaiting recall),
and a wage freeze through the end of 1997. As a result, the Company became the
only Class I railroad without reserve boards for any of its lines.
All of the Company's labor agreements became subject to modification
(except the Western Lines UTU Agreement) in January 1995. Wages for
approximately half of the Company's employees covered by these agreements are
required to return to wage levels prevailing under nationwide railway collective
bargaining agreements in 1995. Wages for the other employees covered by the
agreements (including the Western Lines UTU) do not require restoration to
national wage levels and are subject to resolution in the next round of
negotiations which began in late 1994. In addition, all of the Company's labor
agreements (except for the agreement related to UTU employees on the Company's
Western Lines) provide for cost-of-living increases on a semi-annual basis
beginning July 1, 1995. The additional cost to the Company of these automatic
increases could be substantial.
As a result of local negotiations in the current bargaining round, the
Company has entered into six agreements which run through 1997 (includes the
Western Lines UTU Agreement). Those agreements, which cover in excess of 3,800
employees, have been ratified by the union membership and cover all trainmen and
switchmen on the St. Louis Southwestern Railway Company, the signalmen
systemwide, yardmasters systemwide, switchmen on the Company's Eastern Lines,
and the Company's intermodal facilities at Long Beach and Oakland. Those
agreements do not provide for general wage increases; however, they do provide
for a 3% lump sum payment based on the performance of the Company as measured by
its operating ratio. These agreements also provide for cost of living increases
on July 1, 1995 and on July 1, 1996 but none thereafter. As of February 22,
1995, the Company is in negotiations with its clerical employees, locomotive
engineers, shop craft employees and train dispatchers representing approximately
9,500 employees.
Under the RLA, labor agreements are renegotiated when they become open for
modification, but their terms remain in effect until new agreements are reached.
Typically, neither management nor labor is permitted to take economic action
until extended procedures are exhausted.
Railroad industry personnel are covered by the Railroad Retirement Act
("RRA") instead of the Social Security Act. Employer contributions under the
RRA are currently substantially higher than those under the Social Security Act
and may rise further because of the increasing proportion of retired employees
receiving benefits relative to the number of working employees.
8
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Railroad industry personnel are also covered by the Federal Employer's
Liability Act ("FELA") rather than by state workers' compensation systems. FELA
is a fault-based system, with compensation for injuries settled by negotiation
and litigation. By contrast, most other industries are covered under state-
administered no-fault plans with standard compensation schedules.
GOVERNMENTAL REGULATION
The Company is subject to environmental, safety, health and other
regulations generally applicable to all businesses. In addition, the Company,
like other rail common carriers, is subject to regulation by the ICC, the
Federal Railroad Administration, state departments of transportation and some
state regulatory agencies.
Government regulation of the railroad industry is a significant determinant
of the competitiveness and profitability of railroads. Deregulation of certain
rates and services pursuant to the Staggers Act has substantially increased the
flexibility of railroads to respond to market forces, while the deregulated
environment has resulted in highly competitive and steadily decreasing rates.
The ICC has jurisdiction, which is limited in certain circumstances, over,
among other things, rates charged by rail carriers for certain traffic
movements, service levels, car rental payments, the issuance or guarantee of
railroad securities, the terms under which one railroad may gain access to
another railroad's traffic or facilities, extension or abandonment of rail
lines, consolidation, merger or acquisition of control of rail common carriers
and labor protection for certain transactions. Currently, the United States
Congress has under consideration proposals to reduce the scope of regulation
over railroads, eliminate the ICC and transfer remaining regulatory functions to
another federal agency. It is unclear whether, or to what extent, any such
proposals will be enacted and whether any changes in current regulation of the
industry would materially affect the Company.
The Federal Railroad Administration has jurisdiction over railroad safety
and equipment standards. State departments of transportation and regulatory
agencies also have jurisdiction over certain local safety and operating matters;
and these state and local agencies have become more aggressive in their
exercise of jurisdiction.
COMPETITION
The Company's business faces intense competition from railroads and motor
carriers. Competition with other railroads and modes of transportation is
generally based on the rates charged, as well as the quality and reliability of
the service provided. The Company's intermodal traffic and certain other traffic
confront highly price sensitive competition, particularly from motor carriers.
Some competitors have substantially greater financial and other resources than
the resources of the Company. This factor and other competitive pressures have
led to a downward pressure on rates. If this were to result in declining
margins, it could have an adverse effect on the Company's operating results.
The consolidation in recent years of major western rail systems has
resulted in particularly strong competition in the service territory of the
Company. Further consolidation of the Company's rail competitors could
adversely affect the Company's competitive position and operating results. Such
further consolidations include the acquisition by Union Pacific Railroad Company
("Union Pacific") of control of the Chicago and Northwestern Holdings Corp.
("CNW"), which was approved by the ICC in an order served March 7, 1995, and the
proposed merger of Burlington Northern Railroad Company ("BN") and the Atchison
Topeka and Santa Fe Railway Company ("ATSF"), which has been approved by their
respective shareholders and for which BN and Santa Fe filed an application for
approval with the ICC in November 1994. In their application to the ICC, BN and
ATSF asserted that the Company's gross revenues from rail operations would be
reduced by approximately $60.8 million as a result of diversions of traffic if
the proposed merger is completed. The Company currently is conducting its own
studies and is obtaining assessments of potential diversions from independent
experts in preparation for its filings with the ICC relating to the proposed
BN/ATSF merger. Preliminary analysis suggests, however, that diversions
resulting from the merger could substantially exceed the amounts asserted by BN
and ATSF if appropriate conditions are not obtained or imposed in the merger
proceedings. Because competition otherwise will be reduced by the
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<PAGE>
proposed merger, the Company will be requesting conditions (such as operating
and haulage rights and access to certain shipping points) that would preserve
competition and substantially prevent a loss of revenue. The Company is seeking
and expects to obtain significant shipper support for conditions it will be
requesting. There is no assurance, however, that the conditions requested by the
Company will be obtained or imposed.
Certain segments of the Company's freight traffic, notably intermodal, face
highly price sensitive competition from trucks, although improvements in
railroad operating efficiencies are tending to lessen the truckers' cost
advantages. Trucks are not obligated to provide or to maintain rights of way
and they do not have to pay real estate taxes on their routes. In recent years,
the trucking industry diverted a substantial amount of freight from the
railroads as truck operators' efficiency over long distances increased. Because
fuel costs constitute a larger percentage of the trucking industry's costs,
declining fuel prices disproportionately benefit trucking operations as compared
to railroad operations. Truck competition has also increased because of
legislation removing many of the barriers to entry into the trucking business
and allowing the use of wider, longer and heavier trailers and multiple trailer
combinations in many areas.
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive federal, state and local
regulation under environmental laws and regulations concerning, among other
things, emissions to the air, discharges to waters and the generation, handling,
storage, transportation, treatment and disposal of waste or other materials.
Inherent in the railroad operation of the Company is the risk of environmental
liabilities as a result of both current and past operations. The Company
regularly transports chemicals and other hazardous materials for shippers, as
well as using hazardous materials in its own operations. Environmental
liability can extend to previously owned properties, leased properties and
properties owned by third parties, as well as properties currently owned and
used by the Company. Environmental liabilities can be asserted by adjacent
landowners or other third parties in toxic tort litigation. Also, the Company
has indemnified certain property purchasers as to environmental contingencies.
In addition to costs incurred on an on-going basis associated with
regulatory compliance in its business, the Company may have environmental
liability in three general situations. First, under the Federal Comprehensive
Environment Response, Compensation and Liability Act of 1980 as amended
("CERCLA"), it might have liability for having disposed of wastes at waste
disposal sites that are believed to pose threats to the public health or the
environment, without regard to fault or the legality of waste generation or of
the original disposal. Second, under CERCLA and applicable state statutes, the
current owner or operator of any real property, not just waste disposal sites,
may incur liability for hazardous substances located on the property or that
have migrated to adjoining properties even though such wastes were deposited by
a prior owner, operator or tenant. A former owner or operator of real property
may incur liability for hazardous substances located on the property even though
such wastes were deposited by another owner, operator or tenant; and a former
owner or operator of real property may incur liability after the sale of the
property for hazardous waste disposed on the property during the time that it
owned, operated or leased the property. The third general area is that
associated with the accidental release of hazardous materials or substances
during a transportation incident, such as a derailment. Federal, state and
local laws and regulations may impose (again, without regard to fault),
requirements for clean-up of contaminated soils and surface or groundwater
resulting from a derailment; and there may also be long-term monitoring
requirements to evaluate the impacts on the environment and natural resources.
In addition, adjacent land owners or other third parties sometimes initiate
toxic tort litigation against the type of sites described above.
State and local agencies, particularly in California where the Company has
extensive operations, have become increasingly active in the environmental area.
The increased regulation by multiple agencies can be expected to increase the
Company's future environmental costs.
The Company has made and will continue to make substantial expenditures
relating to the assessment and remediation of environmental conditions on its
properties, including properties held for sale. During 1994 and 1993 the
Company spent approximately $20.8 million and $17.0 million, respectively,
relating to the assessment and remediation of environmental conditions of
operating properties and non-operating properties not held for sale, excluding
the effects of the 1991 derailment at Dunsmuir, California. In 1994 and 1993,
the Company also incurred approximately $13.2 million and $12.4 million,
respectively, for environmental matters relating to properties held for sale.
Costs associated with
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<PAGE>
environmental remediation of properties held for sale may be deferred to the
extent such costs, together with estimated future costs and the existing cost
basis of the property do not exceed, in the aggregate, the amount expected to be
realized upon sale.
The Company owns or previously owned two properties and has a partial
interest in four properties that are on the national priorities list ("NPL")
under CERCLA, the federal "superfund" statute. The Company has been informed
that it is or may be a PRP, together with multiple other PRPs, with respect to
the remediation of eight other properties on such list. Certain other Company
properties are included on lists of sites maintained under similar state laws.
Inclusion of a site on such lists would allow federal or state "superfund"
monies to be spent on clean-up at the sites if PRPs do not perform the cleanup.
The law governing "superfund" sites provides that PRPs may be jointly and
severally liable for the total costs of remediation. In some instances,
liability may be allocated through litigation or negotiation among the PRPs
based on equitable factors, including volume contribution. Of its properties,
including the NPL and PRP properties described above, the Company has only three
sites that individually involved future cost estimates for environmental matters
as of December 31, 1994 in excess of $5 million.
The Company's total costs for its environmental matters cannot be
predicted with certainty; however, the Company has accrued reserves for
environmental matters with respect to operating and non-operating properties not
held for sale, as well as certain properties previously sold, based on the costs
estimated to be incurred when such estimated amounts (or at least a minimum
amount) can be reasonably determined based on information available. At
December 31, 1994 and 1993, the Company had accrued reserves for environmental
contingencies of $65.0 million and $61.7 million, respectively. Based on the
Company's reserves, management does not believe that disposition of
environmental matters known to the Company will have a material adverse effect
on the Company's financial condition. However, there can be no assurance that
material liabilities or costs related to environmental matters will not be
incurred in the future.
ITEM 3. LEGAL PROCEEDINGS
Union Pacific-Missouri Pacific Trackage Rights Compensation. As a
condition to its approval of the consolidation of Union Pacific, Missouri
Pacific Railroad Company ("MP") and Western Pacific Railroad Company in 1982,
the ICC awarded SSW trackage rights to operate over the MP lines between Kansas
City and St. Louis. The ICC's initial decision did not fix the compensation SSW
would pay for the trackage rights, which commenced in January 1983. After a
series of hearings, the ICC set forth new principles to govern the computation
of charges. Union Pacific has asserted a claim for additional amounts due
against the Company of approximately $63 million (including interest) as of
December 31, 1994, and filed a collection action in Federal District Court. In
early 1995, the court issued an order finding that the Company owes Union
Pacific the amount of $60.99 million as of January 31, 1995 plus additional
accrued amounts occurring since that date, but allowing the Company to pursue a
counterclaim for losses due to alleged discrimination against the Company's
trains using the joint facility. The Company and Union Pacific have agreed in
principle concerning settlement of the litigation. Whether or not final
agreement to settle on the proposed terms is reached, the Company's payment to
Union Pacific will be substantial. Management has made adequate provision for
this matter in current liabilities in its financial statements.
1991 Dunsmuir Derailment. In July 1991, a derailment near Dunsmuir,
California resulted in the escape from a tank car of metam sodium (a soil
fumigant) into the Sacramento River. The derailment allegedly resulted in
environmental damage, particularly the loss of fish, plants and other organisms
in approximately 38 miles of the Sacramento River.
Approximately 46 lawsuits were filed against SPT by private plaintiffs
alleging costs and damages for personal injuries, property damage, business
losses and other losses. Most of these were consolidated, and classes
consisting of approximately 3,350 claimants were certified. In June 1993, SPT
and the class action plaintiffs agreed to settle and that settlement was given
final approval by the court in January 1995. Through the settlement, the class
action plaintiffs will receive a total of $14 million from SPT and the other
defendants. Thirteen class action plaintiffs filed appeals from the preliminary
approval of the settlement. Those appeals have not been dismissed. The only
remaining civil cases on the derailment involve four personal injury-only claims
and one business loss-only claim brought by plaintiffs who opted out of the
class action.
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In addition, the State of California and the United States each filed suits
against SPT and others in the United States District Court in Sacramento,
California. These cases sought natural resource damages, costs, injunctive
relief and civil penalties. Litigation instituted earlier by Southern Pacific in
the U. S. District Court for Los Angeles was transferred to the Sacramento
federal court. Several angling advocacy groups and an environmental group
intervened in the Sacramento federal action. All of the parties except the
intervenors reached a settlement which is incorporated in two consent decrees
lodged with the court in March 1994. The consent decree involving SPT provides
that the Company will pay $30 million and the other defendants collectively will
pay $8 million in settlement of all government claims. The settlement was
subject to the conditions that the intervenors' claims be dismissed with
prejudice and that the court approved the consent decrees after public comment.
On December 19, 1994, the court ruled that it would grant SPT's motion to
dismiss the intervenors' claims and indicated it would approve the two consent
decrees upon completion of the public comment process. On February 3, 1995, the
governments responded to public comments and requested entry of the consent
decrees. The intervenors prematurely filed notices of appeal from the decision
to dismiss their claims.
On March 14, 1995, the court entered two orders. In one the court found
that the consent decrees complied with law, were fair, reasonable and made in
good faith, and entered them as final orders as of that date. By the other
order, the court clarified that its December 19, 1994 decision was not a final
order of dismissal of the intervenor's claims, but that its March 14, 1995
actions did constitute final dismissal. The entry of the decrees and dismissal
of the intervenor's claims terminates the litigation except for any properly
brought appeals.
The California Public Utilities Commission ("PUC") also instituted an
investigation into causes of the derailment. The PUC recently issued a decision
imposing fines of $488,000 and certain operational requirements. SPT is
challenging the decision in all respects.
SPT is insured against most types of damages and related costs involved in
the Dunsmuir derailment to the extent they exceed $10.0 million. As of December
31, 1994, SPT had paid approximately $46.8 million related to the Dunsmuir
derailment, of which $12 million was charged to expense primarily to cover the
$10 million deductible. The balance has been or is in the process of being
collected from insurance carriers. As of December 31, 1994, approximately $31.9
million has been recovered by SPT from insurers. SPT expects to recover
substantially all additional damages and costs under its insurance policies
(including amounts payable pursuant to the settlement of private suits described
above, as well as amounts payable pursuant to settlement of the federal court
action described above, except for $750,000 which constitutes penalties and the
potential penalty of $488,000 under the PUC decision). As a result, disposition
of these matters is not expected to have a material adverse effect on the
Company's financial condition.
Houston-Metro. In 1992, SPT received $45 million from the sale of property
to the Metropolitan Transit Authority (Metro) in Houston, Texas. SPT believes
that the contract of sale in 1992 also requires Metro to acquire an additional
$30 million of SPT right-of-way properties. Metro, on the other hand, has
indicated that it believes an adjustment or credit should be made with respect
to the purchase price for the property it already purchased. Negotiations
between SPT and Metro to resolve the matter have been unsuccessful. On March
29, 1994, SPT filed a lawsuit in the U.S. District Court in Houston, Texas
seeking damages and/or specific performance in connection with Metro's decision
not to purchase the additional $30 million of SPT right-of-way properties and
further seeking a declaratory judgment that SPT is not required to refund any
amounts to Metro under the 1992 sales contract. On the same day, Metro filed a
lawsuit in the U.S. District Court in Houston, Texas seeking a refund from SPT
of $19.7 million under the 1992 sales contact between SPT and Metro.
General. SPT is involved in certain income tax cases relating to prior
periods, but pursuant to an agreement with SPT's former parent as part of the
Company's acquisition of SPT, the former parent has assumed the liability for
any adjustments to taxes due or reportable on or before October 13, 1988, the
date of acquisition. Accordingly, the Consolidated Financial Statements of the
Company do not make provision for any taxes and interest of SPT that may have
been due or reportable relating to periods ending on or before October 13, 1988.
Although the Company has purchased insurance, the Company has retained
certain risks (consisting principally of a substantial deductible per
occurrence) with respect to losses for third-party liability and property
claims. In addition, various claims, lawsuits and contingent liabilities are
pending against the Company. Management has made provisions for these matters
which it believes to be adequate. As a result, the ultimate disposition of
these matters is not expected to have any material adverse effect on the
Company's financial condition.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All issued and outstanding Common Stock of the Company is owned by SPRC.
No dividends were declared or paid in 1994, 1993 or 1992. As of December
31, 1994, there were certain restrictions on the payment of dividends by the
Company and net worth covenants. See Notes 5 and 7 to the Consolidated
Financial Statements.
The advances to SPRC of $719.1 million at December 31, 1994 are not
interest bearing. It is anticipated that the Company will make dividend
payments or advances in the future to SPRC in order for SPRC to meet its debt
service obligation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in connection with the Consolidated
Financial Statements and related Notes.
RESULTS OF OPERATIONS
SPRC transferred ownership of D&RGW to SPT effective October 1, 1994 by a
contribution to capital. The consolidated financial statements have been
restated to reflect the combined financial position and results of operations
and cash flows of the companies for all periods presented.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
The Company had net income of $204.5 million for 1994 (including a $6.0
million charge for the cumulative effect of a change in accounting for post-
employment benefits under Statement of Financial Accounting Standards ("FAS")
No. 112 adopted by the Company effective January 1, 1994) compared to a net loss
of $193.0 million for 1993 (including a $104.2 million charge for the
cumulative effect of a change in accounting for post-retirement benefits other
than pensions under FAS No. 106 adopted by the Company effective January 1,
1993). The Company had operating income of $231.6 million for 1994 compared
to an operating loss of $20.8 million for 1993. Operating results for 1993 were
adversely affected by severe weather and flooding in certain western and
midwestern states during the year, a significant decline in automotive
shipments, a shortage of power due to a temporary reduction in the number of
locomotives leased by the Company and a slower than anticipated recovery in
certain segments of the economy. Operating income for 1994 showed the effects of
substantial increases in traffic volume due to improvements in the economy and
to Company programs to increase productivity.
Operating Revenues. In 1994, railroad operating revenues increased $218.7
million compared to 1993. Railroad freight operating revenues increased $206.8
million. Shipments of all commodities increased, with the most significant
percentage increases occurring in intermodal, coal, construction materials and
minerals, and automobiles. Other railroad revenues increased $11.9 million due
primarily to increases in switching and demurrage revenue associated with
increased traffic volume. For 1994, carloads increased 9.4% and revenue ton-
miles increased 12.5% compared to 1993. The average net freight revenue per
ton-mile for 1994 declined by 4.5% compared to 1993 due principally to an
increase in traffic volume for commodities that generated lower revenue per ton-
mile (e.g., coal and intermodal traffic), as well as to increases in revenue
deductions and allowances that resulted in lower net freight revenue per ton-
mile and carload.
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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 1994 compared to 1993.
CARLOAD AND GROSS FREIGHT REVENUE COMPARISON
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
GROSS FREIGHT REVENUE
CARLOADS GROSS FREIGHT REVENUE PER CARLOAD
---------------------------- ------------------------------ ---------------------------
1994 1993 %CHANGE 1994 1993 %CHANGE 1994 1993 %CHANGE
------- ------- -------- -------- -------- -------- ------ ------ --------
(in thousands) (dollars in millions) (dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intermodal.......................... 728.1 607.6 19.8% $ 851.9 $ 731.9 16.4% $1,170 $1,205 (2.9)%
Chemical and petroleum products..... 342.7 344.2 (0.4) 614.9 589.2 4.4 1,794 1,712 4.8
Coal................................ 303.2 263.4 15.1 299.3 245.6 21.9 987 932 5.9
Food and agricultural products...... 247.0 249.0 (0.8) 414.7 392.9 5.5 1,679 1,578 6.4
Forest products..................... 226.2 221.4 2.2 432.0 398.4 8.4 1,910 1,799 6.2
Metals and ores..................... 181.5 173.5 4.6 275.3 259.9 5.9 1,517 1,498 1.3
Construction materials and
minerals.......................... 171.5 153.6 11.7 172.0 151.2 13.8 1,003 984 1.9
Automotive.......................... 73.4 65.1 12.7 188.7 166.6 13.3 2,571 2,562 0.4
------- ------- -------- --------
Total 2,273.6 2,077.8 9.4% $3,248.8 $2,935.7 10.7% $1,429 $1,413 1.1%
======= ======= ======== ========
</TABLE>
- Intermodal carloads and revenue for 1994 increased over 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 1994. The decline in revenue per
carload was due primarily to the lower revenue per car associated with
revenue-empty car movements.
- Chemical and petroleum products carloads remained relatively flat for
1994 compared to 1993, while revenue increased for 1994 compared to 1993.
The revenue growth was due to increased shipments of environmental wastes,
fertilizer, chlorine and caustic soda and organic chemicals, which yield a
higher revenue per carload, partially offset by the change in the
classification of certain plastics traffic.
- Coal carloads and revenue increased for 1994 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 low
sulfur coal with higher sulfur coal in order to satisfy requirements of the
Clean Air Act. The increase in revenue per carload was due primarily to
increases in length of haul.
- Food and agricultural products revenue increased in 1994 compared to
1993 on declining carload volumes. Carloads declined in 1994 compared to
1993 due to the shutdown of a sugar beet processor
in California and to reductions in grain traffic during the first half
of 1994 caused by a smaller than usual crop harvest that resulted from the
severe midwest flooding during 1993. The increases in revenue and revenue
per carload were the result of increased length of haul and changes in the
commodity mix.
- Carload volume for forest products increased in 1994 compared to 1993
due to increased traffic in lumber stock and particle board that was driven
by increased construction activity and by increased wood chip 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, wood chips and scrap paper.
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<PAGE>
- Carloads and revenue for metals and ores traffic increased for 1994
compared to 1993 due primarily to the startup of iron ore traffic between
Minnesota and Utah in August 1994 and to increased ferrous metals shipments
generated by a strong pipe market during the first half of 1994.
- Construction materials and minerals carloads and revenue increased for
1994 compared to 1993 due to increased traffic in sand and gravel, cement
and miscellaneous building materials that resulted from increases in
highway and building construction as well as increases in mineral traffic.
- Automotive carloads and revenue increased for 1994 compared to 1993
due to strong demand for trucks and automobiles associated with general
economic growth.
Operating Expenses. Railroad operating expenses for 1994 decreased $32.2
million, or 1.1%, compared to 1993. The following table sets forth a comparison
of the Company's railroad operating expenses during the year ended December 31,
1994 and 1993.
RAILROAD OPERATING EXPENSE COMPARISON
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993 % Change
-------- -------- --------
<S> <C> <C> <C>
Labor and fringe benefits...... $1,085.1 $1,132.5 (4.2)%
Fuel........................... 251.3 252.4 (0.4)
Materials and supplies......... 187.3 217.6 (13.9)
Equipment rental............... 330.7 341.0 (3.0)
Depreciation and amortization.. 249.9 250.1 (0.1)
Other.......................... 723.5 666.4 8.6
-------- --------
Total.......................... $2,827.8 $2,860.0 (1.1)%
======== ========
</TABLE>
- Labor and fringe benefit costs decreased $47.4 million, or 4.2%, for
1994 compared to 1993. The Company reduced rail employment by
approximately 5% during the year. The employment decline included a
reduction of approximately 460 employees in the Company's operating
departments, as well as a reduction of 275 employees due to the January 1,
1994 implementation of an outsourcing agreement for management information
services functions. In addition, fringe benefit expenses in 1994 were
reduced compared to 1993 by the elimination of an unemployment payroll tax
in July 1993. Additional traffic volume during 1994 resulted in a 4.1%
increase in train crew starts which reduced the impact of the employment
decline. Expressed as a percentage of operating revenue, labor and fringe
benefit expenses declined to 34.8% for 1994 compared to 39.1% for 1993.
- Fuel expenses decreased $1.1 million, or 0.4%, for 1994 compared to 1993.
The decrease is a result of reduced cost per gallon (which includes
handling and fuel hedging costs) from $.62 per gallon during 1993 to $.58
during 1994, partially offset by an increase in fuel consumption
attributable to the increase in traffic volume. Included in the 1994 fuel
expense is $14.0 million related to fuel hedging contracts compared to $9.6
million for 1993.
- Materials and supplies expense decreased $30.3 million, or 13.9%, for
1994 compared to 1993. The decrease was due to a combination of reduced
maintenance of way and equipment repair expenses. The
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<PAGE>
reduced maintenance of way expenses were due primarily to a $17.0 million
reduction attributable to an increase in and a change in classification of
the capitalization of indirect costs. In 1993, these capitalized costs were
classified as a reduction in other expenses. Equipment related materials
and supplies expenses decreased due to the 186 locomotive rebuilds
capitalized (as a result of more extensive work performed) in 1994 compared
to 61 in 1993, while 41 locomotive overhauls were expensed in 1994 compared
to 158 in 1993.
- Equipment rental costs decreased $10.3 million, or 3.0%, for 1994
compared to 1993. The decrease included an $8.0 million decrease in car
hire and a $2.3 million decrease in locomotive and other lease costs.
Included in the 1993 amount were increased rental costs associated with the
midwest flooding. Partially offsetting the decreased expense were
additional equipment rental costs during 1994 associated with increased
traffic volume.
- Depreciation expense decreased $0.2 million, or 0.1%, for 1994 compared
to 1993.
- Other expenses increased $57.1 million, or 8.6%, for 1994 compared to
1993. This category of expense includes outside 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 year were information system outsourcing costs, property taxes,
excise taxes and joint facility rent expense and the capitalized costs
referred to above. Expenses in this category which decreased significantly
from the prior year included costs associated with the midwest flooding in
1993 and other professional services costs. Expenses for management
information system outsourcing, implemented on January 1, 1994, were $41.6
million for 1994 (partially offset by decreased labor costs as discussed
above). Property taxes in 1994 showed a $15.1 million increase over 1993
because the 1993 amount was reduced by the favorable settlement of disputed
property taxes in California. Excise taxes increased $11.9 million over
the prior year due to the enactment of an increase in the federal excise
tax on fuel in October 1993. Joint facility rent expense increased $4.5
million in 1994 over 1993 because the 1993 amount was reduced by the
favorable settlement of joint facility agreements with another railroad.
Joint facility maintenance costs and detour costs showed a decrease in 1994
due to costs incurred in 1993 associated with the midwest flooding. In
addition, professional services expenses deceased $7.7 million in 1994 from
1993.
Other Income and Interest Expense. Other income was $236.6 million for
1994 compared to $11.1 million for 1993, an increase in income of $225.5
million. The increase was due primarily to increased gains on sales of property
of $250.6 million, most of which resulted from the December 1994 sale of a
transit corridor and other related properties located between downtown Los
Angeles and the ports of Los Angeles and Long Beach (the "Alameda Corridor") for
proceeds of $235 million. Real estate rental income, net, increased $5.2
million due primarily to reduced expenses associated with real estate
activities. Interest income increased $1.8 million due to the higher average
cash balance outstanding during 1994. The remaining portion of other income was
an expense of $77.2 million in 1994 compared to an expense of $45.1 million in
1993, an increased expense of $32.1 million. Included in the 1994 amount is an
increase in expense of $12.0 million associated with the sale of accounts
receivable. In December 1994, the Company recorded expenses of $15.2 million
for the write-off of deferred loan costs and for redemption premiums
attributable to the repayment of $290 million principal amount Senior Secured
Notes. During 1993, the Company recorded expenses of $12.3 million for the
write-off of deferred loan costs. In addition, in November 1993, the Company
received $27.1 million in cash from Southern Pacific Telecommunications Company
("SP Telecom") in full redemption of the SP Telecom preferred stock owned by the
Company plus accrued dividends on the preferred stock, resulting in other income
of $14.9 million.
Interest expense was $118.2 million for 1994 compared to $104.4 million
for 1993, an increase of $13.8 million. The increase was due primarily to
increased expense on capitalized lease obligations in 1994 as well as to $5.2
million charge attributable to the Company's interest rate swap agreements.
16
<PAGE>
OTHER
In prior years, the Company has experienced increased costs due to the
effect of inflation on the cost of compensation and benefits, and in the
replacement of or additions to property and equipment. A portion of the
increased labor costs directly affects expenses through increased operating
costs. Fuel costs have fluctuated with market conditions and have directly
affected operating results. Operating efficiencies have, however, partially
offset this impact. Competition and other market factors may continue to
restrict the Company's ability to recover all increases in costs through
increases in the price of services. Certain of the wage agreements obtained in
1991, 1992 and 1993 have reduced the effects of inflation on operating costs but
provide for cost of living increases beginning in 1995. A substantial portion
of those agreements expire and are subject to renegotiation in 1995 (1988 with
respect to the agreement covering the Western Lines).
To ensure stability of its fuel costs, the Company has entered into fuel
hedging agreements covering approximately 95% of its estimated 1995 fuel needs
at an average purchase price of $.49 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's Consolidated Financial Statements are prepared on the
historical accounting basis. SPRC reports its financial position and results of
operations on the purchase accounting basis. As a result, the Company reflects
more depreciation expense than its parent, as well as larger gains on sales of
property.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, including supplementary data and
accompanying report of independent auditors are listed in the Index to
Consolidated Financial Statements and Consolidated Financial Statement Schedules
filed as part of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Documents filed as part of this report:
1. The financial statements, financial statement schedules and
accompanying report of independent auditors are listed in the Index
to Financial Statements and Financial Statement Schedules filed as
part of this Annual Report.
2. Exhibits:
DOCUMENT
NUMBER DOCUMENT DESCRIPTION
-------- --------------------
3.1 Southern Pacific Transportation Company Composite Certificate of
Incorporation (incorporated by reference to Exhibit 3A to the
Company's Annual Report on Form 10-K for the year ended December 31,
1980).
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company dated April 1, 1989 (incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1989).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company dated August 9, 1993 (incorporated by reference to Exhibit
3.3 to the Company's Annual Report on From 10-K for the year ended
December 31, 1993).
3.4 By-laws of the Company, as adopted October 13, 1988 (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1988).
4.2 Debt Instruments: The Company is not filing any instruments
evidencing indebtedness because the total amount of securities
authorized under any single such instrument does not exceed 10% of
the Company's total assets. The registrant agrees to provide the
Commission upon request copies of instruments defining the rights of
holders of long-term debt of the registrant and its subsidiaries for
which consolidated financial statements are required to be filed with
the Commission.
10.1 Receivables Purchase Agreement between the Company and Rio Grande
Receivables, Inc. dated as of November 1, 1989 (incorporated by
reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1989).
10.2 Receivables Purchase Agreement between St. Louis Southwestern Railway
Company and Rio Grande Receivables, Inc. dated as of November 1, 1989
(incorporated by reference to Exhibit 10.2 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1989).
10.3 Receivables Purchase Agreement between The Denver and Rio Grande
Western Railroad Company and Rio Grande Receivables, Inc. dated as of
November 1, 1989 (incorporated by reference to Exhibit 10.3 to SPRC's
Annual Report on Form 10-K for the year ended December 31, 1994).
10.4 Southern Pacific Rail Corporation Employment Agreement with E. L.
Moyers dated July 16, 1993 (incorporated by reference to Exhibit
10.14 to SPRC's Registration Statement on Form S-1 that was initially
filed on May 12, 1993 (File No. 33-62608) ); Southern Pacific Rail
Corporation Agreement dated March 3, 1994 (accepted March 7, 1994)
with E. L. Moyers (incorporated by reference to Exhibit 10.17 to
SPRC's Annual Report on Form 10-K for the year ended December 31,
1993); and Agreement with E. L. Moyers dated February 14, 1995
(incorporated by reference to Exhibit 10.4 to SPRC's Annual Report on
Form 10-K for the year ended December 31, 1994).*
18
<PAGE>
DOCUMENT
NUMBER DOCUMENT DESCRIPTION
-------- --------------------
10.5 Form of Registration Rights Agreement (incorporated by reference to
Exhibit 10.19 to SPRC's Registration Statement on Form S-1 that was
initially filed on May 12, 1993 (File No. 33-62608)).
10.6 Form of Corporate Matters Agreement (incorporated by reference to
Exhibit 10.20 to SPRC's Registration Statement on Form S-1 that was
initially filed on May 12, 1993 (File No. 33-62608)).
10.7 Form of 1993 Equity Incentive Plan (incorporated by reference to
Exhibit 10.21 to SPRC'S Registration Statement on Form S-1 that was
initially filed on May 12, 1993 (File No. 33-62608)).
10.8 Employment Agreement with Cannon Y. Harvey dated June 1, 1993
(incorporated by reference to Exhibit 10.15 to SPRC's Registration
Statement on Form S-1 that was initially filed on December 17, 1993
(File No. 33-73116)); and Amendment to such Agreement dated December
1, 1994 (accepted December 7, 1994) (incorporated by reference to
Exhibit 10.8 to SPRC's Annual Report on Form 10-K for the period
ending December 31, 1994).*
10.9 Employment Agreement with Thomas J. Matthews dated August 1, 1993
(incorporated by reference to Exhibit 10.16 to SPRC's Registration
Statement on Form S-1 that was initially filed on December 17, 1993
(File No. 33-73116)); and Amendment to such Agreement dated January
1, 1995 (incorporated by reference to Exhibit 10.9 to SPRC's Annual
Report on Form 10-K for the period ending December 31, 1994).*
10.10 Employment Agreement with Robert F. Starzel dated October 26, 1994
(incorporated by reference to Exhibit 10.10 to SPRC's Annual Report
on Form 10-K for the period ending December 31, 1994).*
10.11 Employment Agreement with Donald C. Orris dated February 21, 1995
(incorporated by reference to Exhibit 10.11 to SPRC's Annual Report
on Form 10-K for the period ending December 31, 1994).*
10.12 Employment Agreement with Jerry R. Davis dated February 20, 1995
(incorporated by reference to Exhibit 10.12 to SPRC's Annual Report
on Form 10-K for the period ending December 31, 1994).*
21.1 Subsidiaries of the Company
The Registrant will furnish to a requesting security holder any Exhibit
requested upon payment of the Registrant's reasonable copying charges and
expenses in furnishing the Exhibit.
__________
* Management contract or compensatory plan, contract or arrangement required to
be filed as an Exhibit pursuant to Item 14(c).
B. Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months
ended December 31, 1994.
C. Other Exhibits:
No exhibits in addition to those previously filed or listed in Item
14(a)(3) are filed herein.
D. Other Financial Statement Schedules:
No additional financial statement schedules are required.
19
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTH ORIZED.
SOUTHERN PACIFIC TRANSPORTATION
COMPANY
By: /s/ B. C. Kane
-----------------------------------
B. C. Kane
Controller
(Principal Accounting Officer)
Date: March 23, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: March 23, 1995 By: /s/ Jerry R. Davis
----------------------------------
Jerry R. Davis
Chairman, and Chief Executive Officer and
Director (Principal Executive Officer)
Date: March 23, 1995 By: /s/ Robert F. Starzel
----------------------------------
Robert F. Starzel
Vice Chairman and Director
Date: March 23, 1995 By: /s/ Donald C. Orris
----------------------------------
Donald C. Orris
President and Chief Operating
Officer and Director
Date: March 23, 1995 By: /s/ Thomas J. Matthews
----------------------------------
Thomas J. Matthews
Senior Vice President--Administration
and Director
Date: March 23, 1995 By: /s/ Lawrence C. Yarberry
----------------------------------
Lawrence C. Yarberry
Vice President--Finance
(Principal Financial Officer)
20
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors......................................................................... F-1
Consolidated Balance Sheets, December 31, 1994 and 1993................................................ F-2
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992............. F-4
Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1994, 1993 and 1992... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992............. F-6
Notes to Consolidated Financial Statements, December 31, 1994.......................................... F-7
Schedule:
VIII. Valuation and Qualifying Accounts and Reserves................................................ F-23
</TABLE>
All other schedules are omitted because they are not applicable or because
the required information is shown in the financial statements or the notes
thereto. Columns omitted from schedules filed have been omitted because the
information is not applicable.
Financial statements and summarized financial information of companies
accounted for by the equity method have been omitted because considered in the
aggregate, or individually, they would not constitute a significant subsidiary.
21
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Southern Pacific Transportation Company:
We have audited the accompanying consolidated balance sheets of Southern
Pacific Transportation Company and Subsidiary Companies (a wholly-owned
subsidiary of Southern Pacific Rail Corporation ) as of December 31, 1994 and
1993, and the related consolidated statements of operations, stockholder's
equity, and cash flows for each of the years in the three-year period ended
December 31, 1994. In connection with our audits of the consolidated financial
statements, we also have audited financial statement schedule VIII as of and for
each of the years in the three-year period ended December 31, 1994. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southern Pacific
Transportation Company and Subsidiary Companies as of December 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1994 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule VIII, as of and for each of the years in the three-
year period ended December 31, 1994, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for income taxes and post-retirement benefits
other than pensions effective January 1, 1993.
As discussed in Note 1 to the consolidated financial statements, Southern
Pacific Rail Corporation transferred ownership of the Denver and Rio Grande
Western Railroad Company to the Company effective October 1, 1994 by a
contribution to capital. The accompanying consolidated financial statements
have been restated to reflect the combined financial position and results of
operations and cash flows of the companies for all periods presented.
KPMG PEAT MARWICK LLP
San Francisco, California
February 24, 1995
F-1
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
-------- --------
(restated)
ASSETS (in millions)
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................... $ 54.4 $ 51.7
Accounts receivable, net of allowance for doubtful accounts of
$7.7 in 1994 and $7.0 in 1993 (Note 2)................... 176.6 122.1
Notes receivable from Rio Grande Receivables, Inc. (Note 2)...... 96.1 54.6
Other notes receivable........................................... 7.2 2.8
Materials and supplies, at cost.................................. 71.1 56.9
Other current assets............................................. 62.6 43.0
-------- --------
Total current assets........................................ 468.0 331.1
-------- --------
PROPERTY, at cost (Notes 3, 5, 9 and 12)
Roadway and structures........................................... 5,800.6 5,893.1
Railroad equipment............................................... 1,871.5 1,711.3
Other property................................................... 239.1 225.1
-------- --------
Total property.......................................... 7,911.2 7,829.5
Less accumulated depreciation.................................... 2,779.2 2,960.4
-------- --------
Property, net............................................... 5,132.0 4,869.1
-------- --------
OTHER ASSETS AND DEFERRED CHARGES
Investments in affiliated companies.............................. 17.3 17.0
Notes receivable and other investments........................... 78.0 50.7
Notes receivable from Rio Grande Receivables, Inc. (Note 2)...... 30.0 30.0
Other............................................................ 64.1 90.7
-------- --------
Total other assets............................................. 189.4 188.4
-------- --------
TOTAL.......................................................... $5,789.4 $5,388.6
======== ========
(Continued)
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
-------- --------
(restated)
LIABILITIES AND STOCKHOLDER'S EQUITY (in millions)
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and wages payable..................................... $ 151.0 $ 123.5
Accrued payables
Taxes........................................................ 34.7 47.7
Interest..................................................... 36.7 26.5
Vacation pay................................................. 65.7 66.9
Current portion of long-term debt (Note 5)..................... 59.5 66.7
Redeemable preference shares of a subsidiary (Note 7).......... 1.9 1.8
Other current liabilities (Note 4)............................. 629.3 568.1
-------- --------
Total current liabilities................................ 978.8 901.2
-------- --------
LONG-TERM DEBT (Note 5)........................................... 725.3 929.9
-------- --------
DEFERRED INCOME TAXES (Note 6).................................... 1,038.4 951.4
-------- --------
OTHER LIABILITIES (Notes 4 and 10)............................... 720.5 688.0
-------- --------
REDEEMABLE PREFERENCE SHARES OF A SUBSIDIARY (Note 7)............. 42.3 44.2
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 6, 9, 10 and 12)
STOCKHOLDER'S EQUITY
Common stock, without par value: authorized 2,000 shares,
issued and outstanding 1,350 shares in 1994 and 1,200
shares in 1993................................................. 424.9 424.9
Additional paid-in capital (Note 8)............................ 1,090.1 795.7
Retained income (Note 7)....................................... 1,488.2 1,337.5
Advances to parent............................................. (719.1) (684.2)
-------- --------
Total stockholder's equity................................... 2,284.1 1,873.9
-------- --------
TOTAL.......................................................... $5,789.4 $5,388.6
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
--------- ------------- ---------
(restated) (restated)
<S> <C> <C> <C>
OPERATING REVENUES
Railroad.............................................. $3,056.4 $2,837.7 $2,810.3
Other................................................. 63.9 $ 61.0 48.9
-------- -------- --------
Total................................................. 3,120.3 2,898.7 2,859.2
-------- -------- --------
OPERATING EXPENSES
Railroad
Labor and fringe benefits (Note 10)................. 1,085.1 1,132.5 1,167.0
Fuel................................................ 251.3 252.4 236.9
Materials and supplies ............................. 187.3 217.6 244.7
Equipment rental .................................. 330.7 341.0 300.5
Depreciation and amortization (Note 3) ............ 249.9 250.1 250.4
Other............................................... 723.5 666.4 624.3
-------- -------- ---------
Total railroad................................... 2,827.8 2,860.0 2,823.8
Other................................................. 60.9 59.5 45.0
-------- -------- ---------
Total........................................ 2,888.7 2,919.5 2,868.8
-------- -------- ---------
OPERATING INCOME (LOSS).................................. 231.6 (20.8) (9.6)
-------- -------- ----------
OTHER INCOME
Gains from sales of property and real estate (Note 3). 281.3 30.7 303.0
Real estate and other rentals, net.................... 25.5 20.3 16.7
Interest income....................................... 7.0 5.2 5.9
Other income (expense), net (Note 2).................. (77.2) (45.1) (36.5)
-------- -------- ----------
Total............................................ 236.6 11.1 289.1
-------- -------- ----------
INTEREST EXPENSE (Note 5)................................ 118.2 104.4 94.0
-------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................ 350.0 (114.1) 185.5
-------- -------- ----------
INCOME TAXES (BENEFIT) (Note 6)
Current............................................... 51.3 34.8 21.8
Deferred.............................................. 88.2 (60.1) 51.7
-------- -------- ----------
Total............................................ 139.5 (25.3) 73.5
-------- -------- ----------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING................................... 210.5 (88.8) 112.0
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POST-EMPLOYMENT BENEFITS IN 1994 AND
POST-RETIREMENT BENEFITS OTHER THAN
PENSIONS IN 1993 (Net income tax benefits
of $3.8 and $64.3, respectively) (Note 10)............. (6.0) (104.2) --
-------- --------- ----------
NET INCOME (LOSS)........................................ $ 204.5 $(193.0) $ 112.0
======== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL ADVANCES TOTAL
NUMBER OF PAID-IN RETAINED TO STOCKHOLDER'S
SHARES AMOUNT CAPITAL INCOME PARENT EQUITY
--------- ----------- ------------ --------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1991 (RESTATED)................ 1,000 $424.9 $330.2 $1,465.2 $(620.8) $1,599.5
Net income................... - - - 112.0 - 112.0
Advances to parent........... - - - - (33.3) (33.3)
------ ------- ------- --------- -------- ---------
BALANCES AT DECEMBER 31,
1992 (RESTATED)................. 1,000 424.9 330.2 1,577.2 (654.1) 1,678.2
Net loss..................... - - - (193.0) - (193.0)
Dividend to Rio Grande
Holding, Inc. ............. - - - (46.7) - (46.7)
Advances to parent........... - - - - (30.1) (30.1)
Common stock issued (Note 8). 200 - 445.5 - - 445.5
Contribution of capital...... - - 20.0 - - 20.0
------ ------- ------- --------- -------- ---------
BALANCES AT DECEMBER 31,
1993 (RESTATED)................. 1,200 424.9 795.7 1,337.5 (684.2) 1,873.9
Net income................... - - - 204.5 - 204.5
Dividend to Rio Grande
Holding, Inc............... - - - (53.8) - (53.8)
Advances to parent........... - - - - (34.9) (34.9)
Common stock issued
(Note 8)................... 150 - 294.4 - - 294.4
------ ------- ------- --------- -------- ---------
BALANCES AT DECEMBER 31, 1994.. 1,350 $424.9 $1,090.1 $ 1,488.2 $ (719.1) $ 2,284.1
====== ======= ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---------- --------- ----------
(restated) (restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................... $ 204.5 $(193.0) $ 112.0
-------- -------- -------
Adjustments to net income (loss)
Depreciation and amortization................................. 249.9 250.1 250.4
Deferred income taxes......................................... 84.4 (124.4) 51.8
Gains from sales of property.................................. (281.3) (30.7) (303.0)
Cumulative effect of change in accounting for
post-employment benefits in 1984 and
post-retirement benefits in 1993............................ 9.8 168.5 -
Changes in:
Receivables, net............................................ (95.7) (9.1) 44.3
Materials and supplies...................................... (14.2) (3.1) 1.2
Other current and non-current assets........................ 7.0 5.3 9.7
Other current and non-current liabilities................... 41.2 (164.7) (19.5)
-------- -------- -------
Total adjustments........................................ 1.1 91.9 34.9
-------- -------- -------
Net cash provided by (used for) operating
activities.................................................. 205.6 (101.1) 146.9
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................ (270.1) (313.1) (335.8)
Property sold and retired....................................... 343.4 35.7 359.7
Change in notes receivable and other investments, net........... (11.1) (6.1) (26.3)
---------- --------- ---------
Net cash provided by (used for) investing activities.......... 62.2 (283.5) (2.4)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt, net of costs.................... 55.6 430.3 510.7
Debt and revolver drawdown (repayment), net..................... (524.5) (433.0) (596.6)
Advances to parent.............................................. (34.9) (30.1) (33.3)
Dividends paid (Note 8)........................................ (53.8) (46.7) -
Proceeds from issuance of common stock, net of costs............ 294.4 445.5 -
Contribution of capital......................................... - 20.0 -
Redeemable preference shares repayment.......................... (1.9) (2.1) (2.1)
---------- --------- ---------
Net cash provided by (used for) financing activities.......... (265.1) 383.9 (121.3)
---------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................ 2.7 (0.7) 23.2
CASH AND CASH EQUIVALENTS-BEGINNING OF THE YEAR.................... 51.7 52.4 29.2
CASH AND CASH EQUIVALENTS-END OF THE YEAR.......................... $ 54.4 $ 51.7 $ 52.4
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership, Principles of Consolidation and Basis of Presentation - 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 financial statements. As used in this document,
the Company refers to SPT together with its subsidiaries. The consolidated
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"), the Denver and Rio Grande
Western Railroad Company ("D&RGW") and SPCSL Corp. ("SPCSL"), on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated in consolidation. SPRC transferred ownership of D&RGW to SPT
effective October 1, 1994 by a contribution to capital. The consolidated
financial statements have been restated to reflect the combined financial
position and results of operations and cash flows of the companies for all
periods presented.
Cash and Cash Equivalents - For statement of cash flows purposes, the
Company considers commercial paper, municipal securities and certificates of
deposit with original maturities when purchased of three months or less to be
cash equivalents.
Investments - Investments in affiliated companies (those in which the
Company has a 20 percent to 50 percent ownership interest) are accounted for by
the equity method. Other investments are stated at cost which does not exceed
market.
Property - Property accounting procedures followed by the Company and its
railroad subsidiaries are prescribed by the Interstate Commerce Commission ("
ICC"). In accordance with the Company's definition of unit of property, all
costs associated with the installation of rail, ties, ballast and other track
improvements are capitalized. Other costs are capitalized to the extent they
increase asset values or extend useful lives. Retirements are generally
recorded using a system-wide first-in, first-out basis. The cost of property
and equipment (including removal and restoration costs) is depreciated on the
straight line composite group method, generally based on estimated service
lives. Pursuant to ICC regulation, periodic depreciation and cost studies are
required and changes in service life estimates are subject to the review and
approval of the ICC. Gains or losses from disposition of depreciable railroad
operating property are credited or charged to accumulated depreciation except
for significant disposal of property. Certain railroad properties that are not
essential to transportation operations may be sold or held for sale. Gains or
losses resulting from sales of real estate no longer required for railroad
operations are recognized as other income in the consolidated statement of
operations.
Revenues - Freight revenues from rail transportation operations are
recognized based on the percentage of completed service method. Other railroad
revenues and other revenues are recognized as earned.
Retiree Welfare Benefits - Prior to January 1, 1993, the Company expensed
retiree welfare benefits when paid. Effective January 1, 1993, the Company
adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions" and recorded the
estimate of its liability under Statement No. 106 of $168.5 million, which net
of income taxes resulted in a charge to earnings of $104.2 million (see Note
10). Statement of Financial Accounting Standards No. 106 requires that all
employers sponsoring a retiree welfare plan use a single actuarial cost method
as is required for pension plan accounting and that they disclose specific
information about their plan in their financial statements.
F-7
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Post-employment Benefits - In November 1992, the Financial Accounting
Standards Board ("FAS") issued Statement of Financial Accounting Standards No.
112 "Employers' Accounting for Post-employment 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 $9.8
million pre-tax charge ($6.0 million after tax). The Company's policy continues
to be to fund the cost of post-employment benefits as the benefits are payable.
Income Taxes - The Company records income taxes using the liability method
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities.
A change in the tax laws or rates results in adjustment to the deferred tax
liabilities and assets. The effect of such adjustments are included in income
in the period in which the tax laws or rates are changed.
2. SALE OF RECEIVABLES
Beginning in 1989, the Company began selling certain net receivables
(including interline accounts), without recourse, to Rio Grande Receivables,
Inc. ("RGR"), a subsidiary of SPRC. Also in 1989, RGR began selling the
receivables purchased from the Company, with certain limited recourse
provisions, to ABS Commercial Paper, Inc. ("ABS"), an unaffiliated third party,
on a continuing basis for a period of up to five years subject to certain terms
and conditions. The Company has agreed to service the receivables sold and is
paid a fee for such services. The sale price for the receivables sold is based
upon the face amount of the receivables and is reduced by discounts for expected
defaults, servicing costs and anticipated collection periods. The Company
retains a residual interest in the receivables should actual collections exceed
the projected collections upon which the default discounts are calculated.
ABS finances its purchases by the sale of its commercial paper, secured by
the receivables it purchases, up to a maximum aggregate principal amount of
$300.0 million at any time outstanding. The ability of ABS to sell commercial
paper is supported by certain banks which have agreed to provide liquidity to
ABS on an as-needed basis. The liquidity banks must maintain a P-1 rating or
there would need to be one or more replacement banks or a reduction in the
maximum amount of commercial paper which ABS could issue.
As of December 31, 1994, 1993 and 1992, the Company had sold $454.3
million, $391.7 million and $366.5 million of net outstanding receivables,
respectively, and had notes receivable from RGR for receivables sold of $126.1
million, $84.6 million and $65.7 million, of which $ 30.0 million were interest
bearing at December 31, 1994, and 1993, respectively, and are included in other
assets. Included in other income (expense), net, is approximately $(54.0)
million in 1994, $(42.0) million in 1993 and $(31.1) million in 1992 of
discounts and other expenses associated with the sales of accounts receivable.
The initial term of the agreements expires on October 31, 1995. The Company is
currently in the process of replacing the facility with another facility prior
to the expiration date.
3. PROPERTY
The average depreciation rates for the Company's property and equipment
ranged from 1 to 5 percent for roadway and structures, 4 to 7 percent for
locomotives and 3 to 6 percent for freight cars for 1994.
The Company received cash proceeds from sales and retirements of real
estate and property of $343.4 million,
F-8
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$35.7 million and $359.7 million in 1994, 1993 and 1992, respectively. The 1994
amount includes proceeds of $235.0 million for the sale of a transit corridor to
the ports of Los Angeles and Long Beach (the "Alameda Corridor"). The 1992
amount includes $124.0 million from sales to the Peninsula Corridor Joint Powers
Board ("JPB"), $45.0 million from sales to Metro Transit of Houston, Texas,
$83.0 million from sales to the Los Angeles County Transportation Commission
("LACTC") and $36.5 million from the sale/leaseback of locomotives and freight
cars in June 1992. The Company recorded expenditures of $13 million in 1994, $12
million in 1993 and $18 million in 1992 in costs relating to environmental
conditions on properties held for sale.
The Company has granted the JPB options to purchase additional rights-of-
way and land within five years after the closing of the sale of the Peninsula
Main Line for $110 million of which approximately $79 million has not lapsed,
been exercised or extinguished. The Company will retain exclusive freight
rights on the sold properties.
4. OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
Other current liabilities include the following amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1993
------ ------
(in millions)
<S> <C> <C>
Reserves for casualty, freight-related claims and other
(current portion).................................. $225.4 $165.3
Accrued repairs, equipment rentals and other payables..... 375.2 357.2
Post-retirement and post-employment benefit obligations... 17.2 20.6
Reserve for employee separation and relocation (current
portion)........................................... 11.5 25.0
------ ------
Total....................................... $629.3 $568.1
====== ======
</TABLE>
Included in other non-current liabilities are $322.0 million and $329.0
million for casualty and freight-related claims and $-0-million and $35.3
million for employee separation and relocation at December 31, 1994 and 1993,
respectively, in addition to $157.5 million and $148.8 million for post-
retirement and post-employment benefits other than pensions at December 31, 1994
and 1993, respectively.
F-9
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt is summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993
------ ------
<S> <C> <C>
Equipment obligations (9.125-14.25%; due 1995 to 2007)... $324.5 $380.4
Mortgage bonds (8.2%; due 1995 to 2001).................. 34.7 39.6
Credit agreement (various; due 1996)..................... - 125.0
Senior secured notes (10.5%; due 1999)................... - 290.0
Other debt (4.0-6.0%; due 1995 to 2018).................. 93.0 88.1
Capitalized lease obligations (Note 8)................... 332.6 73.5
------ ------
Total................................................. 784.8 996.6
Less current portion..................................... (59.5) (66.7)
------ ------
Total long-term....................................... $725.3 $929.9
====== ======
</TABLE>
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 to SPRC for total
consideration of $294.4 million from its parent. Proceeds from this transaction
were used for repayment of the $175 million outstanding under the SPT Credit
agreement (including interest thereon) and for general corporate purposes.
In November 1994, the Company entered into a new $300 million three-year
revolving credit agreement to replace its existing $200 million credit
agreement. This agreement contains quarterly financial covenants including
minimum tangible net worth, a maximum funded debt to net worth ratio and a
minimum fixed charge coverage ratio. No borrowings have been made under the new
facility.
In December 1994, the Company entered into a bank agreement permitting the
Company to borrow up to $150 million as a term loan maturing in 1999. The
agreement contains quarterly financial covenants identical to those contained in
the revolving credit agreement. Any borrowing under the facility must be made
by December 27, 1995. No borrowings have been made under this facility.
In December 1994, using proceeds from the sale of the Alameda Corridor of
$235 million, together with other funds on hand, the Company retired the $290
million outstanding under the Senior Secured Notes. The repayment was
accomplished by placing approximately $297 million of government securities in a
defeasance trust in December 1994. In connection with the retirement of the
Senior Secured Notes, the Company wrote-off in other expenses $9.4 million of
unamortized debt issuance costs and paid a prepayment premium of $5.8 million
and expensed in interest expense $5.2 million attributable to the Company's
interest rate swap agreement.
F-10
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Contractual maturities of long-term debt (including capital lease
obligations) during each of the five years subsequent to 1994 and thereafter are
as follows (in millions):
<TABLE>
<S> <C>
1995................................... $ 59.5
1996................................... 53.0
1997................................... 53.0
1998................................... 45.6
1999................................... 54.4
Thereafter................................ 519.3
</TABLE>
Management estimates the fair value of the Company's debt at December 31,
1994 and 1993 was approximately $783 million and $1,085 million, respectively,
based on interest rates for similar issues and financings.
At December 31, 1994, the Company was a party to interest rate swap
agreements for which it pays a variable rate on an aggregate notional amount of
$100 million, which is used to hedge its fixed interest rate exposure on
certain debt and is accounted for as an adjustment of interest expense over the
life of the debt. The approximate expense to terminate the swap at December 31,
1994 was $4 million.
A significant portion of railroad equipment and certain railroad property is
subject to liens securing the mortgage bonds, equipment obligations or other
debt.
6. INCOME TAXES
The following summarizes income tax expense (benefit) for the years
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
---------- --------- ----------
(in millions)
<S> <C> <C> <C>
CURRENT
Federal.................................................. $ 43.5 $ 30.7 $ 19.1
State.................................................... 7.8 4.1 2.7
---------- --------- ----------
Total................................................ 51.3 34.8 21.8
---------- --------- ----------
DEFERRED
Federal.................................................. 74.6 (48.4) 43.1
State.................................................... 13.6 (11.7) 8.6
---------- --------- ----------
Total................................................ 88.2 (60.1) 51.7
---------- --------- ----------
DEFERRED TAXES ON CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR POST-EMPLOYMENT BENEFITS IN 1994 AND POST-RETIREMENT
BENEFITS OTHER THAN PENSIONS IN 1993
Federal................................................. (3.3) (54.6) -
State................................................... (.5) (9.7) -
---------- --------- ----------
Total deferred taxes on cumulative effect............ (3.8) (64.3) -
---------- --------- ----------
TOTAL INCOME TAX EXPENSE (benefit)....................... $ 135.7 $ (89.6) $ 73.5
========== ========= ==========
</TABLE>
F-11
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax expense in 1993 includes $21.2 million related to the change
in the federal tax rate. Total income tax expense (benefit) from continuing
operations differed from the amounts computed by applying the statutory Federal
income tax rate to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory rate.......................................... 35.0% (35.0)% 34.0%
State income taxes (net of federal income tax
benefit)........................................... 4.7 (4.3) 4.0
Cumulative effect of federal tax rate change (from
34% to 35%)........................................ - 18.6 -
Other, net.............................................. 0.2 (1.5) 1.6
---- ------ ----
Effective rate.......................................... 39.9% (22.2)% 39.6%
==== ====== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accruals and reserves not deducted for tax purposes
until paid........................................... $ 386.6 $ 361.9
Net operating loss carryforwards.......................... 501.9 546.7
Capital lease obligation.................................. 135.7 36.2
Other..................................................... 110.1 109.0
----------- ------------
Total gross deferred tax assets.................... 1,134.3 1,053.8
----------- ------------
DEFERRED TAX LIABILITIES:
Differences in depreciation and cost capitalization
methods (including deferred gains on property)....... (2,171.6) (1,994.7)
Other...................................................... (1.1) (10.5)
----------- ------------
Total gross deferred tax liabilities............... (2,172.7) (2,005.2)
----------- ------------
Net deferred tax liability......................... $ (1,038.4) $ (951.4)
=========== ============
</TABLE>
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets and liabilities. The Company believes that the tax benefits
attributable to deductible temporary differences and operating loss
carryforwards will be realized by the recognition of future taxable amounts
related to taxable temporary differences for which deferred tax liabilities have
been recorded. Accordingly, the Company believes a valuation allowance for its
deferred tax assets is not necessary.
F-12
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The former parent of the Company has agreed to indemnify SPRC, SPT and its
subsidiaries against any federal income tax liability that may be imposed on the
Company or its 80%-owned subsidiaries for tax periods ending on or prior to
October 13, 1988 ("the Acquisition Date"). Years prior to 1984 are closed.
SPRC agreed to pay or cause SPT and its subsidiaries to pay to the former parent
any refund of federal income taxes attributable to the 80%-owned subsidiaries
received by SPRC, SPT or its subsidiaries after the Acquisition Date for any tax
period ending on or prior to the Acquisition Date. Further, the former parent
also agreed to indemnify SPRC, SPT and its subsidiaries, at least in part, for
state, local and other taxes in respect of periods to and including the
Acquisition Date, but only to the extent that such taxes are due or reportable
for periods prior to the Acquisition Date.
The intercompany tax allocation agreement between the Company and SPRC,
which became effective following the closing of the Acquisition, was amended
effective January 1, 1992, to provide that SPT and its subsidiaries will pay to
SPRC the lesser of either the amount equal to that which the Company would have
paid (or received) had the Company filed a separate consolidated tax return or
which SPRC would pay as current taxes.
SPRC's consolidated federal income tax returns, in which the Company is
included, for the period October 14, 1988 through 1990, have been examined and
are currently being considered by the Appeals Office of the Internal Revenue
Service ("IRS") regarding various unagreed issues. SPRC's consolidated Federal
income tax returns are currently being examined for the tax years 1991 through
1993. Management believes adequate provision has been made for any potential
adverse result.
The IRS's audit of RGH's returns, in which D&RGW is included, for 1983 and
the period ended October 31, 1984, led to the issuance of a Notice of Deficiency
in October 1992 for 1980, 1983 and the period ended October 31, 1984. The audit
of the Anschutz Corporation ("TAC"), of which RGH and D&RGW were members from
November 1, 1984, through October 13, 1988, also led to the issuance of a Notice
of Deficiency for the 1979 and 1982 years as the result of the disallowance of
net operating loss ("NOL") and investment tax credit carrybacks from the July
31, 1985 through July 31, 1987 periods. Both notices have been petitioned to
the United State Tax Court. RGH does not expect a resolution of these
cases in 1995. RGH's taxable periods from July 1, 1987 through October 13,
1988, included in the consolidated returns of TAC are currently under IRS audit
as part of the TAC audit. However, management believes adequate reserves have
been provided to cover any anticipated deficiencies for these tax years.
As of December 31, 1994, the Company had approximately $1.2 billion of
NOLs that will expire in 2003 through 2008. The NOLs are subject to review and
possible disallowance, in whole or in part, by the IRS upon audit of the Federal
income tax returns of the Company.
Section 382 of the Internal Revenue Code of 1986, as amended, limits a
corporation's utilization of its NOLs when certain changes in the ownership of
the corporation's stock occur within a three-year period. Such a change has
occurred with respect to SPRC and therefore the Company will be permitted to
deduct a limited amount of its NOLs in each taxable year, commencing with the
year ending December 31, 1994. The Company currently does not expect, however,
that the limitation imposed under Section 382 will have a material adverse
impact on the Company's ability to utilize its NOLs prior to their expiration.
Nevertheless, the limitation could under certain circumstances delay the
Company's utilization of its NOLs and thereby increase the current portion of
the Company's Federal income taxes. Further, the limitation under certain
circumstances could also cause a portion of the Company's NOLs to expire
unutilized.
F-13
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERENCE SHARES OF A SUBSIDIARY
SSW, a 99.9%-owned subsidiary of SPT, originally issued $53.5 million
($48.5 million Series A and $5.0 million Series B) of SSW's non-voting
redeemable preference shares. The current carrying amount on the balance sheets
at December 31, 1994 and 1993 reflects the outstanding balances of the
redeemable preference shares of $44.2 million and $46.0 million, respectively.
The Series A shares are subject to mandatory redemption at face value over
a 20-year period commencing in 1991, at which time mandatory dividends shall be
declared and paid over the same period. The overall effective interest rate
since the date of issue is approximately 2.0%. The Series B shares are subject
to mandatory redemption at face value over a 15-year period commencing in 1989.
Mandatory dividends shall be declared and paid over a 10-year period commencing
in 1994. The overall effective interest rate since the date of issue is
approximately 4.9%.
Mandatory redemptions and mandatory dividends of Series A and Series B
shares scheduled for payment during each of the five years subsequent to 1994
are $4.2 million per year.
The Series A and Series B shares restrict certain dividend payments by
SSW to its common and preferred shareholders. Under these provisions, at
December 31, 1994, $53.2 million of SSW's historical cost basis retained income
was not restricted. No estimate of the fair value of the preference shares was
made by the Company.
8. CAPITAL AND DEBT TRANSACTIONS
In August 1993 and March 1994 SPRC closed the offering and sale of
30,783,750 shares and 25,000,000 shares of common stock, respectively. In
connection with these offerings, the Company issued 200 shares of common stock
in 1993 and 150 shares of common stock in 1994 for consideration of $445.5
million and $294.4 million from SPRC, respectively. Proceeds from these
transactions were used to repay debt, purchase equipment operated pursuant to
operating leases and for general corporate purposes.
In 1993 and 1994, D&RGW paid dividends of $46.7 million and $53.8 million
to RGH, respectively.
F-14
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEASES
The Company leases certain freight cars, locomotives, data processing
equipment and other property. Future minimum lease payments under noncancellable
leases as of December 31, 1994 are summarized as follows (in millions):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31,
1995.......................................................... $ 24.3 $152.7
1996.......................................................... 44.5 140.2
1997.......................................................... 40.9 130.3
1998.......................................................... 39.8 121.8
1999.......................................................... 46.7 106.5
Thereafter.................................................... 503.9 349.4
------ -------
Total minimum payments........................................ 700.1 $1,000.9
========
Less amount representing interest (at rates
ranging from 7.2% to 13.1%)................................... (367.5)
-------
Present value of minimum lease payments....................... $332.6
=======
</TABLE>
Rental expense for noncancellable operating leases with terms over one year
was $168.7 million, $156.5 million and $117.6 million for the years ended
December 31, 1994, 1993 and 1992, respectively. Contingent rentals and sublease
rentals were not significant.
In late 1993 and 1994, as part of a program to upgrade its locomotive
fleet, the Company acquired 150 new locomotives, 17 of which were delivered in
the last quarter of 1993 with the balance delivered in 1994. Additionally, the
Company acquired 133 remanufactured locomotives of which 115 were delivered in
1994 and the balance in early 1995. These locomotives were financed by capital
leases (for which the total capitalized lease obligation in 1994 was
approximately $221 million). The Company acquired through capital lease
financing approximately 1,400 freight cars (700 newly manufactured and 700
remanufactured) for which the total capitalized lease obligation in 1994 was
approximately $56 million. The Company also received approximately 1,600
additional reconditioned freight cars in 1994 on which it expects to complete
capital lease financing in 1995. In addition, the Company acquired 350 used
freight cars in 1994 under operating leases.
The Company has ordered an additional 206 AC powered locomotives to be
financed by capitalized lease financing that are scheduled to be delivered
during the second and third quarters of 1995. In addition, the Company has
ordered 920 new hopper cars and expects to receive approximately 1,500
reconditioned freight cars in 1995. The Company expects to finance these
acquisitions though capitalized lease financing. The total expected capitalized
lease obligation to be incurred in 1995, including the 1,600 reconditioned
freight cars received in 1994 for which financing is scheduled to be arranged in
1995, is approximately $400 million.
In 1984, the Company entered into a long-term lease agreement with the
ports of Los Angeles and Long Beach relating to the Company's Intermodal
Container Transfer Facility (the "Facility"). Under the terms of the lease, the
Company is obligated to make certain future minimum lease payments and is
subject to additional contingent rentals which are based
F-15
<PAGE>
SOUTHERN CALIFORNIA TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on the annual volume of container movement at the Facility. The minimum lease
payments, ranging from approximately $3.9 million to $4.5 million for 1995 and
1996, respectively, are included in the table above. However, for each five-year
period from 1987 through 2036, the amount of the annual minimum lease payments
and contingent rentals will be determined by the ports based on independent
appraisals of the fair rental value of the property and, therefore, no amounts
are included in the above table for such years. The 1994 expense was $7.6
million.
The Company leases operating rights on track owned by other railroads and
shares costs of transportation facilities and operations with other railroads.
These include rights on Union Pacific lines between Kansas City and St. Louis
and on Burlington Northern Railroad Company lines between Kansas City and
Chicago. The Company has the right to terminate its usage with certain notice
periods. Net rent expense for trackage rights was $6.4 million in 1994, $1.9
million in 1993 and $13.0 million in 1992. The 1993 amount includes the benefit
of the negotiated settlement of a joint facility case of approximately $10
million.
The Company pays for the use of transportation equipment owned by others
and receives income from others for the use of its equipment. It also shares
the cost of other transportation facilities with other railroads. Rental
expense and income from equipment and the operation of joint facilities are
included in operating expenses on a net basis. Total net equipment lease, rent
and car hire expense was $331 million, $341 million and $301 million for 1994,
1993 and 1992, respectively.
10. EMPLOYEE BENEFIT AND COMPENSATION PLANS
Pension Plan. The Company is a participating employer under the SPRC
Pension Plan (the "SPRC Pension Plan"). The SPRC Pension Plan is a defined
benefit noncontributory pension plan covering primarily employees not covered by
a collective bargaining agreement. The SPRC Pension Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").
Pension benefits for normal retirement are calculated under a formula which
utilizes average compensation, years of benefit service and Railroad Retirement
and Social Security pay levels. The Company's funding policy is to contribute
each year an amount not less than the minimum required contribution under ERISA
nor greater than the maximum tax deductible contribution. The assets of the
SPRC Pension Plan consist of a variety of investments including U.S. Government
and agency securities, corporate stocks and bonds and money market funds.
F-16
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes the components the Company's net periodic pension
cost under the provisions of Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions" (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
Service costs - benefits covered during the year... $ 5.1 $ 5.5 $ 4.9
Interest cost on projected benefit obligation...... 29.9 31.2 31.5
Actual (return)/loss on plan assets................ 0.7 (40.1) (17.6)
Net amortization and deferral...................... (32.0) 7.5 (16.1)
------ ------ ------
Net periodic pension cost....................... $ 3.7 $ 4.1 $ 2.7
====== ====== ======
</TABLE>
The following summarizes the funded status and amounts recognized in the
Company's consolidated balance sheets for the SPRC Pension Plan (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1993
--------- --------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefits................................................ $ 335.1 $ 366.0
Non-vested benefits............................................ 6.0 7.8
--------- --------
Accumulated benefit obligation................................. $ 341.1 $ 373.8
========= ========
Projected benefit obligation.......................................... $ 376.9 $ 420.8
Fair value of assets in plan.......................................... 328.3 363.2
--------- --------
Projected benefit obligation in excess of plan assets................. (48.6) (57.6)
Unrecognized transition amount........................................ (3.9) (4.6)
Unrecognized gain or loss............................................. 7.8 20.7
Unrecognized prior service cost....................................... 4.3 4.8
--------- --------
Net pension liability included in the balance sheet................ $ (40.4) $ (36.7)
========= ========
</TABLE>
The following summarizes the significant assumptions used in accounting for
the SPRC Pension Plan:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate........................................ 8.5% 7.25% 8.0%
Expected rate of increase in future compensation
levels................................................................ 6.0% 6.0% 6.0%
Weighted average expected long-term rate of return on
plan assets........................................................... 9.0% 9.0% 9.0%
</TABLE>
F-17
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Thrift Plan. SPRC has established a defined contribution plan (the "SPRC
Thrift Plan") as an individual account savings and investment plan primarily
for employees of SPRC who are not subject to a collective bargaining agreement.
Eligible participants may contribute a percentage of their compensation and the
Company also contributes using a formula based on participant contributions.
Post-retirement Benefits Other Than Pensions. The Company sponsors several
plans which provide health care and life insurance benefits to retirees who have
met age and service requirements. The contribution rates that are paid by
retirees are adjusted annually to offset increases in health care costs, if any,
and fix the amounts payable by the Company. The life insurance plans provide
life insurance benefits for certain retirees. The amount of life insurance is
dependent upon length of service, employment dates and several other factors and
increases in coverage beyond certain minimum levels are borne by the employee.
Prior to January 1, 1993, the Company's policy was to expense and fund the cost
of all retiree welfare benefits only as the benefits were payable.
The Company adopted FAS No. 106, "Employers' Accounting for Post-retirement
Benefits Other Than Pensions", effective January 1, 1993. The effect of
adopting FAS No. 106 on net income and the net periodic benefit cost (expense)
for 1993 was a charge to earnings of $168.5 million (less income taxes of $64.3
million). The Company's policy continues to be to fund the cost of all retiree
welfare benefits only as the benefits are payable. Accordingly, there are no
plan assets.
The following table summarizes the plan's accumulated post-retirement
benefit obligation (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1994 1993
---------------------------- -------------------------------
HEALTH LIFE HEALTH LIFE
CARE INSURANCE TOTAL CARE INSURANCE TOTAL
------ ------------ ------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Retirees................................. $41.1 $92.0 $133.1 $47.2 $107.7 $154.9
Fully eligible plan participants......... 8.6 5.4 14.0 10.9 7.7 18.6
----- ----- ------ ----- ------ ------
Accumulated post-retirement benefit
obligation...................... $49.7 $97.4 $147.1 $58.1 $115.4 $173.5
===== ===== ===== ======
Unrecognized net gain (loss)............. 13.7 (8.4)
Plan amendment........................... 4.1 4.3
----- -----
Accrued post-retirement benefit cost
included in other liabilities... $164.9 $169.4
===== =====
</TABLE>
As of December 31, 1994 and 1993, the current portion of accrued post-
retirement benefit cost was approximately $16.3 million and $20.6 million,
respectively, and the long-term portion was approximately $148.6 million and
$148.8 million, respectively.
The net periodic post-retirement benefit costs include the following
components (in millions):
<TABLE>
<CAPTION>
1994 1993
------ -----
<S> <C> <C>
Service cost................................ $ 0.8 $ 0.7
Interest cost............................... 12.0 12.7
Amortization of plan amendment.............. (0.2) -
----- -----
Net periodic post-retirement benefit cost... $12.6 $13.4
===== =====
</TABLE>
For measurement purposes, the Company has not assumed an annual rate of
increase in the per capita cost of covered benefits for future years since the
Company has limited its future contributions to current levels. The weighted
average
F-18
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
discount rate used in determining the benefit obligation was 8.5 percent.
Post-employment Benefits. In November 1992, the FAS issued Statement No.
112 "Employers' Accounting for Post-employment 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 $9.8
million pre-tax charge ($6.0 million after tax). The Company's policy continues
to be to fund the cost of post-employment benefits as the benefits are payable.
1990-1994 Long-Term Earnings Growth Incentive Plan and Annual Incentive
Compensation Plans. Certain officers of the Company were covered by the 1990-
1994 Long-Term Earnings Growth Incentive Plan of the Company. The 1992 and 1993
Annual Incentive Compensation Plans covered all exempt employees of the Company.
Based on the provisions of these plans, no amounts were paid or charged to
expense in 1994, 1993 or 1992.
Equity Incentive Plan. The SPRC Compensation Committee has authorized a
grant of stock bonuses under SPRC's Equity Incentive Plan covering up to
1,555,000 shares of SPRC Common Stock, in the aggregate, to 28 key executive
employees of the Company, contingent upon the attainment of certain pre-
established corporate financial and individual performance objectives. A
portion of each stock bonus grant is subject to the achievement of an operating
ratio for SPRC of 89.5 for 1994, 88.0 for 1995, 85.0 for 1996, or 83.0 for
1997, as well as individual performance objectives during those same years. If
the required SPRC operating ratio for any year is not achieved, or if the
required individual performance objectives are not achieved, the SPRC
Compensation Committee of the Board of Directors may in its discretion award a
portion of such shares. In 1994, the Company charged to expense approximately
$7.5 million representing the value of approximately 413,000 shares which were
awarded in January 1995 pursuant to the Equity Incentive Plan.
11. RELATED PARTIES
The Company has maintained separate accountability for the operating
activities of its principal railroad subsidiaries as to the sharing of freight
revenues and charges for use of railroad equipment and joint facilities.
Interline accounts receivable and payable continue to be settled through the
traditional clearing process between railroads. The railroads are coordinating
and, where appropriate, consolidating the marketing, administration,
transportation and maintenance operations of the railroads.
The Company paid $1.3 million, $6.8 million and $4.2 million in 1994, 1993,
1992, respectively, to SP Environmental Systems, Inc. ("SPES"), a wholly-owned
subsidiary of SPRC, for professional services regarding environmental matters,
excluding services provided by third parties billed through SPES.
Subsidiaries of Anschutz Company perform specific services for the Company,
primarily relating to the purchase and administration of locomotive fuel and
fuel futures contracts and fiber optic telecommunications. The amount paid by
the Company in 1994 for these transactions was $7.9 million. The Company
believes that the terms of the transactions are comparable to those that could
be obtained from unaffiliated parties.
12. COMMITMENTS AND CONTINGENCIES
The Company is dependent upon its rail operations and real estate
activities to meet its debt obligations, to make payments to buy-out surplus
employees, to make capital expenditures and to pay dividends or make advances to
SPRC in order for SPRC to make principal and interest payments relating to the
$375 million 9-3/8% Senior Notes due 2005. The various debt agreements of the
Company contain restrictions as to payment of dividends to SPRC. The Company is
permitted
F-19
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to make advances or dividends to its parent in order for certain specified
interest to be paid by its parent.
On November 4, 1993, the Company and Integrated Systems Solutions
Corporation ("ISSC"), a subsidiary of IBM, entered into a ten-year agreement
under which ISSC will handle all of the Company's management information
services ("MIS") functions. These include systems operations, application
development and implementation of a disaster recovery plan. Pursuant to the
agreement, the Company is obligated to pay annual base charges of between $45
million and $50 million (which covers, among other things, payments for MIS
equipment and personnel) over a ten-year period subject to adjustments for cost
of living increases and variations in the levels of service provided under the
agreement.
Inherent in the operations of the transportation and real estate business
is the possibility that there may exist environmental conditions as a result of
current and past operations which might be in violation of various federal and
state laws relating to the protection of the environment. In certain instances,
the Company has received notices of asserted violation of such laws and
regulations and has taken or plans to take steps to address the problems cited
or to contest the allegations of violation. The Company has recorded reserves
to provide for environmental costs on certain operating and non-operating
properties. Environmental costs include site remediation and restoration on a
site-by-site basis, as well as costs for initial site surveys and environmental
studies of potentially contaminated sites. The Company has made and will
continue to make substantial expenditures relating to environmental conditions
on its properties, including properties held for sale. In assessing its
potential environmental liabilities, the Company typically causes on-going
examinations of newly identified sites and evaluations of existing clean-up
efforts to be performed by environmental engineers. These assessments which
usually consider a combination of factors such as the engineering reports, site
visits, area investigations and other steps, are reviewed periodically by
counsel. Due to uncertainties as to various issues such as the required level
of remediation and the extent of participation in clean-up efforts by others,
the Company's total clean-up costs for environmental matters cannot be predicted
with certainty. The Company has accrued reserves for environmental matters with
respect to operating and non-operating properties not held for sale, as well as
certain properties previously sold, based on the costs estimated to be incurred
when such estimated amounts (or at least a minimum amount) can be reasonably
determined based on information available. During the years ended December 31,
1994, 1993 and 1992, the Company recognized expenses of $15.4 million, $11.8
million and $8.0 million, respectively, related to environmental matters. At
December 31, 1994 and 1993 the Company had accrued reserves for environmental
contingencies of $65.0 million and $61.7 million, respectively, which includes
$13.2 million and $16.5 million, respectively, in current liabilities. These
reserves relate to estimated liabilities for operating and non-operating
properties not held for sale and certain properties previously sold and were
exclusive of any significant future recoveries from insurance carriers. Based
on the Company's assessments described above, other available information and
the amounts of the Company's established reserves, management does not believe
that disposition of environmental matters known to the Company will have a
material adverse effect on the Company's financial position. However, there can
be no assurance that material liabilities or costs related to environmental
matters will not be incurred in the future.
A substantial portion of the Company's railroad employees are covered by
collective bargaining agreements with national railway labor organizations that
are organized along craft lines. These agreements are generally negotiated on a
multi-employer basis with the railroad industry represented by a bargaining
committee. The culmination of various Presidential and legislative events in
1992 resulted in the Company negotiating most of its labor agreements
separately. Certain of the wage agreements obtained in 1991, 1992 and 1993 have
reduced the effects of inflation on operating costs but provide for cost of
living increases beginning in 1995. A substantial number of the labor agreements
expire and are subject to renegotiation in 1995.
To ensure stability of its fuel costs, the Company has entered into fuel
hedging agreements covering approximately 95% of its 1995 estimated fuel needs
at an average purchase price of $.49 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.
F-20
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a condition to its approval of the consolidation of Union Pacific,
Missouri Pacific Railroad Company ("MP") and Western Pacific Railroad Company in
1982, the ICC awarded SSW trackage rights to operate over the MP lines between
Kansas City and St. Louis. The ICC's initial decision did not fix the
compensation SSW would pay for the trackage rights, which commenced in January
1983. After a series of hearings, the ICC set forth new principles to govern
the computation of charges. Union Pacific has asserted a claim for additional
amounts due against the Company of approximately $63 million (including
interest) as of December 31, 1994 and filed a collection action in Federal
District Court. In early 1995, the court issued an order finding that the
Company owes Union Pacific the amount of $60.99 million as of January 31, 1995
plus additional accrued amounts occurring since that date, but allowing the
Company to pursue a counterclaim for losses due to alleged discrimination
against the Company's trains using the joint facility. The Company and Union
Pacific have agreed in principle concerning settlement of the litigation.
Whether or not final agreement to settle on the proposed terms is reached, the
Company's payment to Union Pacific will be substantial. Management has made
adequate provision for this matter in current liabilities in its financial
statements.
In July 1991, a derailment occurred near Dunsmuir, California. While
certain aspects of the matter have not been resolved and the total amount of
damages and related costs cannot be determined at this time, SPT is insured
against most types of damages and related costs involved with the Dunsmuir
derailment to the extent that they exceed $10 million. As of December 31, 1994,
SPT has paid approximately $46.8 million related to the Dunsmuir derailment, of
which $12 million was charged to expense primarily to cover the $10 million
deductible. The balance has been or is in the process of being collected from
insurance carriers. As of December 31, 1994, approximately $31.9 million has
been recovered by SPT from insurers. SPT expects to recover substantially all
additional damages and costs under its insurance policies. As a result,
disposition of these matters is not expected to have a material adverse effect
on the Company's financial condition.
Although the Company has purchased insurance, the Company has retained
certain risks with respect to losses for third-party liability and property
claims. In addition, various claims, lawsuits and contingent liabilities are
pending against the Company. Management has made provisions for these matters
which it believes to be adequate. As a result, the ultimate disposition of
these matters is not expected to have a material adverse effect on the Company's
consolidated financial position.
13. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
DECEMBER 31,
----------------------
1994 1993 1992
----- ------ ------
(in millions)
<S> <C> <C> <C>
Cash payments (refunds):
Interest........................................... $ 93.2 $72.7 $78.2
Income taxes....................................... 61.6 60.6 9.3
Non-cash transactions:
Sales of real estate for notes receivable.......... 27.9 -- --
Capital lease obligations for railroad equipment... 265.2 57.0 --
</TABLE>
F-21
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTATED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------- ------------- -------------- -------------
(in millions)
<S> <C> <C> <C> <C>
1994
Operating revenues........ $ 742.1 $801.7 $801.5 $775.0
Operating income.......... 34.5 75.5 65.9 55.7
Other income (expense).... 2.9 9.9 (3.2) 227.0 (c)
Net income (loss) (a) .... (45.9) 50.2 30.0 170.2 (c)
1993
Operating revenues........ $ 671.9 $740.9 $748.5 $737.4
Operating income (loss)... (11.9) 27.2 (32.1) (4.0)
Other income (expense).... 6.2 (0.4) (17.9) 23.2
Net income (loss) (b) .... (119.6) (2.1) (69.0) (2.3)
</TABLE>
------------
(a) First quarter 1994 data includes an extraordinary charge of $6.0 million
(net of taxes) for the change in accounting for post-employment benefits
(FAS 112).
(b) First quarter 1993 data includes an extraordinary charge of $104.2 million
(net of taxes) for the change in accounting for post-retirement benefits
other than pensions (FAS 106).
(c) Fourth quarter 1994 data includes a pre-tax gain of approximately $227
million on the sale of the Alameda Corridor.
F-22
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. HISTORICAL STATEMENTS OF OPERATIONS
Effective October 1, 1994, the stock of D&RGW was contributed to the Company.
The historical results of operations of SPT and its subsidiaries including D&RGW
commencing October 1, 1994 are as follows for the years ended December 31, 1994,
1993, and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Operating Revenues........................................ $2,825.0 $2,550.7 $2,523.8
Operating Expense......................................... 2,644.4 2,604.6 2,548.5
--------- --------- ---------
Operating Income (Loss)................................... 180.6 (53.9) (24.7)
--------- --------- ---------
Other Income.............................................. 239.0 8.6 292.1
--------- --------- ---------
Interest Expense.......................................... 115.9 101.5 89.2
--------- --------- ---------
Income (Loss) Before Income Taxes......................... 303.7 (146.8) 178.2
--------- --------- ---------
Income Tax (Benefit)...................................... 120.9 (40.9) 68.7
--------- --------- ---------
Net Income (Loss) Before Cumulative Effect of Change in
Accounting.............................................. 182.8 (105.9) 109.5
--------- --------- ---------
Cumulative Effect of Change in Accounting................. (4.0) (98.9) --
--------- --------- ---------
Net Income (Loss)......................................... $ 178.8 $ (204.8) $ 109.5
========== ========== =========
</TABLE>
F-23
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO END
OF YEAR EXPENSE DEDUCTIONS OF YEAR
----------- ----------- ----------- -----------
(in millions)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Casualty and other claims.................................. $448.4 $146.8 $102.8 $492.4
Post-retirement and post-employment benefit
obligations.............................................. 169.4 23.2 17.9 174.7
Employee separation and relocation and other............... 60.3 -- 48.8 11.5
-------- -------- -------- --------
Total...................................................... $678.1 $170.0 $169.5 $678.6
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1993 (RESTATED)
Casualty and other claims.................................. $467.6 $157.7 $176.9 $448.4
Post-retirement benefit obligation......................... -- 181.9 12.5 169.4
Employee separation and relocation and other............... 113.2 2.5 55.4 60.3
-------- -------- -------- --------
Total...................................................... $580.8 $342.1 $244.8 $678.1
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1992 (RESTATED)
Casualty and other claims.................................. $481.0 $147.7 $161.1 $467.6
Employee separation and relocation and other............... 195.9 -- 82.7 113.2
-------- -------- -------- --------
Total...................................................... $676.9 $147.7 $243.8 $580.8
======== ======== ======== ========
</TABLE>
F-24
<PAGE>
EXHIBIT INDEX
EXHIBITS:
---------
21.1 Subsidiaries
27 Financial Data Schedule
<PAGE>
EXHIBIT 21.1
SOUTHERN PACIFIC TRANSPORTATION COMPANY SUBSIDIARIES
Arkansas & Memphis Railway Bridge and Terminal Company
The Denver and Rio Grande Western Railroad Company
Pacific Motor Transport Company
St. Louis Southwestern Railway Company
Southern Pacific Asset Management Company
Southern Pacific Equipment Company
Southern Pacific International, Inc.
Southern Pacific Marine Transport, Inc.
Southern Pacific Mexico, S. A. de C. V.
Southern Pacific Motor Trucking Company
Southern Pacific Warehouse Company
SPCSL Corp.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (IDENTIFY
SPECIFIC FINANCIAL STATEMENTS) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 54
<SECURITIES> 0
<RECEIVABLES> 288
<ALLOWANCES> (8)
<INVENTORY> 71
<CURRENT-ASSETS> 468
<PP&E> 7,911
<DEPRECIATION> 2,779
<TOTAL-ASSETS> 5,789
<CURRENT-LIABILITIES> 979
<BONDS> 725
<COMMON> 425
0
0
<OTHER-SE> 1,859
<TOTAL-LIABILITY-AND-EQUITY> 5,789
<SALES> 0
<TOTAL-REVENUES> 3,120
<CGS> 0
<TOTAL-COSTS> 2,889
<OTHER-EXPENSES> 77
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> 350
<INCOME-TAX> 139
<INCOME-CONTINUING> 211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (6)
<NET-INCOME> 205
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
