<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from _________________ to ______________________
Commission file number 1-6146
SOUTHERN PACIFIC TRANSPORTATION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 94-6001323W
---------------------------- -----------
(State or other jurisdiction (I.R.S. employer
of organization identification no.)
Southern Pacific Building
One Market Plaza
San Francisco, CA 94105
Telephone Number (415) 541-1000
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Outstanding at
Class April 30, 1996
------------------------------- --------------
Common stock, without par value 1,350 shares
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(in millions)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................... $ 12.2 $ 22.7
Accounts receivable, net of allowance for
doubtful accounts............................... 111.1 103.6
Notes receivable from affiliates................... 128.1 211.9
Materials and supplies, at cost.................... 79.9 75.0
Other notes receivable............................. 7.1 7.7
Other current assets............................... 52.2 57.4
-------- --------
Total current assets............................ 390.6 478.3
-------- --------
PROPERTY, AT COST
Roadway and structures............................. 5,991.5 5,979.4
Railroad equipment................................. 2,315.0 2,333.8
Other property..................................... 257.0 257.4
-------- --------
Total property.................................. 8,563.5 8,570.6
Less accumulated depreciation and amortization..... 2,787.2 2,805.3
-------- --------
Property, net................................... 5,776.3 5,765.3
-------- --------
OTHER ASSETS AND DEFERRED CHARGES
Notes receivable and other investments............. 97.5 99.6
Other assets and deferred charges.................. 73.3 58.7
-------- --------
Total other assets.............................. 170.8 158.3
-------- --------
Total assets................................. $6,337.7 $6,401.9
======== ========
</TABLE>
(continued)
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(in millions)
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and wages payable.......................... $ 132.9 $ 140.5
Accrued payables.................................... 164.9 163.9
Current portion of long-term debt................... 56.7 58.9
Redeemable preference shares of a subsidiary........ 2.0 2.0
Other current liabilities........................... 609.9 634.9
-------- --------
Total current liabilities....................... 966.4 1,000.2
-------- --------
ADVANCES PAYABLE TO PARENT............................. 133.2 122.3
-------- --------
LONG-TERM DEBT......................................... 1,335.7 1,333.4
-------- --------
DEFERRED INCOME TAXES.................................. 977.4 980.0
-------- --------
OTHER LIABILITIES...................................... 673.6 710.5
-------- --------
REDEEMABLE PREFERENCE SHARES OF A SUBSIDIARY........... 39.9 40.4
-------- --------
STOCKHOLDER'S EQUITY
Common stock........................................ 424.9 424.9
Additional paid-in capital.......................... 1,090.1 1,090.1
Retained income..................................... 1,415.6 1,419.2
Advances to parent.................................. (719.1) (719.1)
-------- --------
Total stockholder's equity....................... 2,211.5 2,215.1
-------- --------
Total liabilities and stockholder's equity.... $6,337.7 $6,401.9
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
------ ------
(in millions)
<S> <C> <C>
OPERATING REVENUES
Railroad................................ $763.4 $744.3
Other................................... 15.7 16.1
------ ------
Total................................ 779.1 760.4
------ ------
OPERATING EXPENSES
Railroad................................ 739.6 718.4
Other................................... 14.9 15.3
------ ------
Total................................ 754.5 733.7
------ ------
OPERATING INCOME........................... 24.6 26.7
------ ------
OTHER INCOME (EXPENSE)
Gains from sales of property............ 16.0 15.8
Real estate and other rentals, net...... 6.3 5.1
Interest................................ 1.9 1.7
Other expense, net...................... (17.9) (19.0)
------ ------
Total................................. 6.3 3.6
------ ------
INTEREST EXPENSE........................... 37.1 24.1
------ ------
INCOME (LOSS) BEFORE INCOME TAXES.......... (6.2) 6.2
------ ------
INCOME TAX EXPENSE (BENEFIT)
Current................................. - 0.1
Deferred................................ (2.6) 2.4
------ ------
Total.................................. (2.6) 2.5
------ ------
NET INCOME (LOSS).......................... $ (3.6) $ 3.7
====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements
4
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDER'S EQUITY
(Unaudited)
Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Common Stock
------------------ Additional Advances
Number Paid-in Retained to
of Shares Amount Capital Income Parent Total
--------- ------ ---------- -------- -------- -----
(in millions, except number of shares)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995.... 1,350 $424.9 $1,090.1 $1,419.2 $(719.1) $2,215.1
Net income (loss)................ - - - (3.6) - (3.6)
----- ------ -------- -------- ------- --------
Balances at March 31, 1996....... 1,350 $424.9 $1,090.1 $1,415.6 $(719.1) $2,211.5
----- ------ -------- -------- ------- --------
</TABLE>
See accompanying notes to consolidated condensed financial statements
5
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1996 1995
------ ------
(in millions)
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income (loss)............................................. $ (3.6) $ 3.7
------ -------
Adjustments to net income (loss):
Depreciation and amortization.............................. 70.8 63.1
Deferred income taxes...................................... (2.6) 2.4
Gains from sales of property............................... (16.0) (15.8)
Other adjustments.......................................... (8.1) (67.1)
------ -------
Total adjustments....................................... 44.1 (17.4)
------ -------
Net cash provided by (used for) operating activities....... 40.5 (13.7)
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................................... (69.0) (77.2)
Property sold and retired..................................... 14.8 17.9
Change in notes receivable and other investments, net......... (1.3) (3.7)
------ -------
Net cash used for investing activities..................... (55.5) (63.0)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt and revolver repayment................................... (6.0) (9.8)
Advances from parent, net..................................... 10.9 32.5
Redeemable preference shares repayment........................ (0.4) (0.4)
------ -------
Net cash provided by financing activities.................. 4.5 22.3
------ -------
NET CHANGE IN CASH AND CASH EQUIVALENTS.......................... (10.5) (54.4)
CASH AND CASH EQUIVALENTS-BEGINNING OF THE PERIOD................ 22.7 54.4
------ -------
CASH AND CASH EQUIVALENTS-END OF THE PERIOD...................... $ 12.2 $ -
====== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited)
(1) OWNERSHIP AND PRINCIPLES OF CONSOLIDATION
-----------------------------------------
Southern Pacific Transportation Company ("SPT") is a wholly-owned
subsidiary of Southern Pacific Rail Corporation ("SPRC"); therefore, per share
data are not shown in the accompanying consolidated financial statements. As
used in this document, the Company refers to SPT together with all of its
subsidiaries, which includes St. Louis Southwestern Railway Company ("SSW"), The
Denver and Rio Grande Western Railroad Company ("D&RGW") and SPCSL Corp.
("SPCSL"). The Company provides railroad freight transportation service in the
Western United States.
The consolidated condensed financial statements are prepared on the
historical cost basis of accounting and include the accounts of the Company and
its subsidiary companies on a consolidated basis. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1995. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
interim period results have been included. However, these results are not
necessarily indicative of results for a full year.
(2) RECLASSIFICATIONS
-----------------
Certain of the prior period amounts have been reclassified to conform to
the March 31, 1996 consolidated condensed financial statement presentation.
(3) PROPOSED MERGER WITH UNION PACIFIC
----------------------------------
On August 3, 1995, the Board of Directors of SPRC approved an agreement
providing for the merger of SPRC and the Union Pacific Railroad Company
("UPRR"), a wholly-owned subsidiary of Union Pacific Corporation ("UP"). Under
the terms of the agreement, a subsidiary of UP acquired 25% of the common stock
of SPRC at a price of $25.00 per share pursuant to a tender offer. The merger
requires approval by the Surface Transportation Board ("STB") of the Department
of Transportation (successor to the Interstate Commerce Commission ("ICC")).
Based upon the 255 day procedural schedule adopted by the ICC, the earliest a
written decision can be expected is August 1996. The shares purchased in the
tender offer are held in a voting trust pending a decision by the STB.
Following receipt of STB approval and the satisfaction of other conditions,
SPRC (and the UP subsidiary that purchased SPRC stock in the cash tender offer)
would be merged into UPRR. In the merger, each share of SPRC stock would be
converted, at the holder's election (subject to proration), into the right to
receive $25.00 in cash or 0.4065 shares of UP common stock. Of the shares of
SPRC common stock outstanding immediately prior to the merger (other than the
shares previously acquired by UP in the tender offer), 20% would be acquired
for cash and 80% would be acquired in exchange for shares of UP common stock.
The merger agreement provides that prior to completion of the merger, or
termination of the merger agreement if that occurs before the merger is
completed, the business of SPRC and its subsidiaries generally will be conducted
in the ordinary course of business consistent with past practice,
7
<PAGE>
or pursuant to "customary actions". Customary actions are defined as actions in
the ordinary course of a person's business where the action is generally
recognized as being customary and prudent for other major enterprises in the
person's line of business. The merger agreement may be terminated by the Board
of Directors of either SPRC or UP if the merger has not occurred on or prior to
March 31, 1997. The agreement restricts SPRC, including the Company, with
certain exceptions, from amending its articles or bylaws, paying dividends,
issuing stock, redeeming or repurchasing shares of its stock, making
compensation changes, making loans, advances, capital contributions or
investments (except for railroad and real estate joint ventures and certain
other transactions) and engaging in transactions with affiliates. In addition,
among other things, the agreement restricts SPRC, including the Company, from
incurring debt other than pursuant to arrangements existing on the date of the
merger agreement (the Company's $450 million of bank credit facilities and
replacements therefor and refinancings thereof, and capital leases to finance
the rebuilding of freight cars and purchase of equipment under existing
commitments), plus borrowings not to exceed $25 million in the fiscal year
ending December 31, 1996, and $12.5 million in the fiscal quarter ending March
31, 1997.
On November 30, 1995, UPRR and SPRC filed an application for the proposed
merger with the ICC and the application process is ongoing. The earliest
closing of the transaction, if approved, would be September 1996.
On January 17, 1996 at a special meeting called to consider the proposed
merger, the stockholders of SPRC voted to proceed with the transaction.
SPRC incurred expenses of $13.8 million through March 31, 1996 associated
with the proposed merger and, if the merger is completed, has committed to
continuity, severance and transaction expenses of up to an additional $40
million.
(4) SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1996 1995
---- ----
(in millions)
<S> <C> <C>
Cash payments:
Interest............................................... $33.0 $ 9.9
Non-cash transactions:
Capital lease obligations for railroad equipment....... 8.2 60.4
</TABLE>
(5) SPECIAL CHARGE
--------------
In June 1995, the Board of Directors approved plans aimed at reducing
future operating costs and increasing productivity which resulted in a $112.6
million pretax charge. Approximately $41 million of the charge is related to
severance payments to be made for approximately 582 employees (both management
and labor), approximately $4 million of the charge is related to costs
associated with terminating certain leased facilities, and approximately $68
million is for the expected loss associated with the sale, lease or abandonment
of 600 miles of light density rail lines. Through the first quarter of 1996,
severance payments totaling $3.6 million for 83 employees whose positions have
been terminated have been charged to the severance reserve. The Company
continues to review the timing of plans approved by the Board in June 1995. If
the proposed merger with UPRR were not approved, management expects that
implementation of plans approved by the Board would be accelerated.
8
<PAGE>
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is subject to Federal, state and local environmental laws and
regulations and is currently participating in the investigation and remediation
of numerous sites. Where the remediation costs can be reasonably determined,
and where such remediation is probable, the Company has recorded a liability.
It is possible that additional losses will be incurred, but such amounts cannot
be reasonably estimated. The Company does not believe that disposition of
environmental matters known to the Company will have a material adverse effect
on the Company's financial condition or liquidity; however, there can be no
assurance that the impact of these matters on its results of operations for any
given reporting period will not be material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
-------------------------------------------------------------------------------
The Company had a net loss of $3.6 million for the first quarter of 1996
compared to net income of $3.7 million for the first quarter of 1995. The
Company had operating income of $24.6 million for the first quarter of 1996
compared to $26.7 million for the 1995 quarter. For the first quarter of 1996,
railroad operating revenues increased 2.6% and railroad operating expenses
increased 3.0% over the 1995 period. The adverse net income variance from the
first quarter 1995 was caused primarily by increased depreciation and interest
expenses related to the locomotive acquisitions completed in 1995.
Operating Revenues. In the first quarter of 1996, railroad operating revenues
- ------------------
increased $19.1 million, or 2.6%, compared to the first quarter of 1995.
Railroad freight operating revenues increased $26.2 million, or 3.7%, due to
stable or increased shipments of all commodities with the exception of coal
shipments which decreased 2.9% due primarily to a mine closure and temporary
downtime at two other mines. The improvement in railroad freight operating
revenues in 1996 is in part due to comparison to a weak performance as a result
of bad weather in the first quarter of 1995. Other railroad revenues (primarily
demurrage and incidental) decreased $7.1 million during the first quarter of
1996 compared to the 1995 quarter. For the first quarter of 1996, carloads
increased 4.5% and revenue ton-miles increased 8.6% compared to the same period
in 1995. The average net freight revenue per ton-mile for the first quarter of
1996 declined by 4.6% compared to the first quarter of 1995 due principally to
an increase in traffic volume for commodities that generate lower revenue per
ton-mile (e.g., iron ore and aggregates traffic).
The following table compares traffic volume (in carloads), gross freight
revenues (before contract allowances and adjustments) and gross freight revenue
per carload by commodity group for the three months ended March 31, 1996 and
1995.
9
<PAGE>
Carload and Gross Freight Revenue Comparison
Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Gross Freight
Carloads Gross Freight Revenues Revenue Per Carload
---------------------- ------------------------- -------------------------
% % %
Commodity Group 1996 1995 Change 1996 1995 Change 1996 1995 Change
- -------------------------------- ------ ------ -------- ------ ------ -------- ------ ------ --------
(in thousands) (dollars in millions, except revenue per carload)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intermodal............................. 177.1 172.8 2.5 $208.6 $205.1 1.7 $1,178 $1,187 (0.8)
Chemical and petroleum products........ 84.6 77.3 9.4 148.4 142.4 4.2 1,754 1,842 (4.8)
Coal................................... 84.5 87.0 (2.9) 81.1 82.9 (2.2) 960 953 0.7
Food and agricultural products......... 57.2 57.0 0.4 102.7 96.8 6.1 1,795 1,698 5.7
Forest products........................ 54.3 51.9 4.6 103.1 101.1 2.0 1,899 1,948 (2.5)
Metals and ores........................ 49.5 49.1 0.8 73.2 71.7 2.1 1,479 1,460 1.3
Construction materials and minerals.... 49.5 41.0 20.7 46.2 40.3 14.6 933 983 (5.0)
Automotive 23.0 18.8 22.3 52.8 44.4 18.9 2,292 2,356 (2.7)
----- ----- ------ ------
Total 579.7 554.9 4.5 $816.1 $784.7 4.0 $1,408 $1,414 (0.4)
===== ===== ====== ======
</TABLE>
o Intermodal carloads and revenue increased for the first quarter of
1996 compared to the same period in 1995 due to increased container-on-
flatcar ("COFC") traffic, primarily from steamship customers. Trailer-
on-flatcar ("TOFC") carloads and revenue declined due to industry-wide
reduction in volumes, changes in customer distribution and shipping
patterns and increases in service competition from major competitors.
o Chemical and petroleum products carloads and revenues increased during
the first quarter of 1996 compared to the same period in 1995 due to
increased traffic in environmental wastes as well as reduced 1995
shipments attributable to severe weather during the first quarter of
1995, strong crude oil shipments compared to a 1995 quarter that
included a prolonged maintenance shutdown for a primary crude oil
customer and growth in the first quarter of 1996 in shipments of
plastics, liquefied petroleum gas, soda ash and ethanol. Revenue per
carload decreased for the 1996 quarter from the 1995 quarter due
primarily to changes in the commodity and customer mix.
o Coal carloads and revenues decreased for the 1996 period due to a mine
closure and temporary downtime at two mines during 1996 as well as to
reduced shipments for certain customers that are drawing down large
stockpiles or had spot moves in 1995 that did not repeat. Revenue per
carload remained relatively stable between periods.
o Food and agricultural products carloads remained stable for the 1996
quarter compared to the 1995 quarter while revenue and revenue per
carload increased due to increased length of haul for grain traffic and
growth in higher revenue per car canned food shipments. Shipments of
sugar beets, temperature controlled traffic and grain products decreased
during the 1996 quarter compared to the same period in 1995.
o Forest products carloads and revenue increased during the first
quarter of 1996 due to increased shipments of paperboard, scrap paper
and wood chips attributable primarily to incremental volumes from
existing customers as well as to reduced 1995 carloads and revenue. The
weakness in the first quarter of 1995 was caused by severe weather and
flooding in California, a slowdown in construction markets and the
impact of a millworkers strike which ended in March 1995. The revenue
per carload decrease was due to changes in the commodity mix and reduced
length of haul for lumber stock, particle board, scrap paper and wood
pulp.
10
<PAGE>
o Carloads, revenue and revenue per carload for metals and ores traffic
increased in the first quarter of 1996 compared to the first quarter of
1995 due primarily to increased shipments of higher than average revenue
per carload mini-mill traffic associated with strong construction demand
in California and increased pipe traffic.
o Construction materials and minerals carloads and revenues increased
for the 1996 quarter due to increased shipments of aggregates and
minerals. The growth in aggregates is caused by increased volume from
existing customers and comparison to a 1995 quarter that was limited by
severe weather and flooding in California while growth in minerals
shipments was due to better than average winter weather and increased
traffic volumes. The revenue per carload reduction was due to the lower
than average revenue per carload associated with aggregates traffic as
well as length of haul reductions for cement, non-hazardous waste and
minerals traffic.
o Automotive carloads and revenues increased during the 1996 quarter due
to new traffic and strength in the Mexico market. Revenue per carload
declined due to customer and market mix changes as well as to
competitive rate pressures.
Operating Expenses. Railroad operating expenses for the first quarter of 1996
- -------------------
increased $21.2 million, or 3.0%, compared to the first quarter of 1995. The
following table sets forth a comparison of the Company's railroad operating
expenses during the three months ended March 31, 1996 and 1995.
Railroad Operating Expense Comparison
Three Months Ended March 31, 1996 and 1995
(in millions)
<TABLE>
<CAPTION>
%
1996 1995 Change
------ ------ ------
<S> <C> <C> <C>
Compensation and benefits................... $282.7 $269.7 4.8%
Fuel........................................ 64.8 62.1 4.4
Materials and supplies...................... 29.5 47.4 (37.8)
Equipment rental............................ 80.3 77.1 4.2
Depreciation and amortization............... 70.8 63.1 12.2
Other....................................... 211.5 199.0 6.3
------ ------ -----
Total................................. $739.6 $718.4 3.0%
====== ====== =====
</TABLE>
o Compensation and benefit costs increased $13.0 million, or 4.8%, for
the first quarter of 1996 compared to the first quarter of 1995. The
increased costs were due primarily to increased transportation labor as
revenue ton-miles were up 8.6% for the quarter, gross ton-miles
increased 7.8% and carloads increased 4.5% compared to the first quarter
of 1995. Train crew starts increased by 3.5% for the first quarter of
1996 compared to the 1995 quarter. In addition, the increase included an
adjustment in the first quarter of 1995 to reflect reduced costs
associated with non-agreement fringe benefits. Company employment
increased only 0.3% to a total of 18,594 at March 31, 1996 compared to
18,538 at the end of March 1995. Expressed as a percentage of operating
revenues, compensation and benefit expenses were 36.3% for the first
quarter of 1996 compared to 35.5% for the first quarter of 1995.
o Fuel expenses increased $2.7 million, or 4.4%, for the first quarter
of 1996 compared to the same period in 1995. The increase was a result
of a 2.6% increase in the average price
11
<PAGE>
per gallon of fuel to $.57 per gallon during the 1996 quarter compared
to $.56 per gallon during the 1995 period combined with an increase in
gallons consumed of 1.8% attributable to the increase in traffic volume.
The average price per gallon of fuel and fuel expense for both periods
includes handling, fuel hedging costs paid or received under fuel
hedging contracts and amounts paid to the Company's suppliers. Included
in the first quarter 1996 fuel expense was $2.6 million received under
fuel hedging contracts compared to $2.5 million paid during the 1995
quarter. The Company's locomotive fleet continues to become more fuel
efficient as evidenced by a 5.7% reduction in the average gallons
consumed per gross ton-mile for the first quarter of 1996 due to the
recent acquisitions of new and remanufactured locomotives completed
during 1995.
o Materials and supplies expenses decreased $17.9 million, or 37.8%, for
the first quarter of 1996 compared to the first quarter of 1995 due to
reduced locomotive material expenses and running repairs. Locomotive
overhauls charged to expense decreased 24% for the 1996 quarter with 6
locomotives overhauled compared to 25 locomotives during the 1995
period. In addition, maintenance of way material expenses for signal
repairs decreased during the 1996 quarter as well as expenses related to
storm damage repairs. The Company is planning on overhauling fewer
locomotive units during 1996 compared to prior years due to the
completion, in 1995, of the locomotive acquisition program, fewer older
units remaining to be overhauled and increased use of the power-by-the-
mile maintenance program.
o Equipment rental costs increased $3.2 million, or 4.2%, for the first
quarter of 1996 compared to the first quarter of 1995. The increase was
primarily attributable to a $6.2 million increase in car hire associated
with increases in traffic volume and cycle times partially offset by a
$3.1 million reduction in locomotive lease expenses during the 1996
quarter.
o Depreciation and amortization expense increased $7.7 million, or
12.2%, for the first quarter of 1996 due to an increase in the
depreciable property base principally from significant equipment
acquisitions during the latter part of 1995.
o Other expenses increased $12.5 million, or 6.3%, for the first quarter
of 1996 compared to the first quarter of 1995. This category of expense
includes outside repairs and services, joint facility rent and
maintenance costs, casualty costs and property and other taxes. The
first quarter 1996 increase is due to $5.0 million in insurance
recoveries received during the 1995 period as partial settlement of
claims relating to the 1993 midwest flood, a $1.7 million increase in
casualty costs associated with derailments occurring during the first
quarter of 1996, a $2.0 million increase in joint facility costs
associated with the increase in traffic volume and the new Burlington
Northern Santa Fe Corporation ("BNSF") trackage rights agreements, and a
$4.3 million increase in locomotive power-by-the-mile costs resulting
from an increase in the number of locomotive units subject to that
maintenance program.
Other Income (Expense) and Interest Expense. Other income (expense) (non-
- -------------------------------------------
operating) was a net income of $6.3 million for the first quarter of 1996
compared to $3.6 million for the same period in 1995. The increased net income
was due primarily to a $2.3 million charge during the 1995 period associated
with the repayment of the Company's $290 million Senior Secured Notes, and a
$1.2 million increase in real estate and other rentals, net during the 1996
quarter. Interest expense was $37.1 million for the first quarter of 1996
compared to $24.1 million for the first quarter of 1995, an increase of $13.0
million. The increase is due to the higher level of capitalized lease
obligations for new locomotives and freight cars outstanding during the first
quarter of 1996 combined with interest expense associated with the $150 million
term loan borrowed in September 1995.
12
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's business is capital intensive and requires on-going
substantial expenditures for, among other things, improvements to roadway,
structures and technology, acquisitions and repair of equipment, and maintenance
of the rail system. During the first quarter of 1996, and for more than a
decade before that, the Company's railroad operations did not produce sufficient
cash flows to meet its capital expenditure, debt service and other cash needs.
As a result, the Company relied on proceeds from transit corridor, real estate
and other asset sales, borrowings and other financing for these purposes. At
March 31, 1996, the Company had cash and cash equivalents of $12.2 million and
had $300 million available under its revolving credit facility.
At this time, the Company faces extraordinary capital investment
requirements in order to meet the challenges of its major competitors,
particularly as a result of the recent merger of Burlington Northern Railroad
Company ("BN") and The Atchison, Topeka & Santa Fe Railway Company ("ATSF") in
1995. The increasing service competition that has developed and will be
accelerating will require substantial additional capital expenditures for
equipment, track improvements and other new facilities and technology. The
Company estimates that it needs to expend approximately $500 million in capital
per year simply to maintain its existing plant and equipment and its current
service levels. In addition, the Company has identified capital expenditures of
more than $1 billion that it believes should be made in excess of normal capital
expenditures to maintain its current competitive position. The Company's two
major competitors have substantially stronger cash flow and financial
capabilities and their facilities and technology is more advanced than those of
the Company. The completion of the BN/ATSF merger and the integration of that
system occurred more quickly than the Company initially anticipated. The
combined BN/ATSF is a substantially stronger competitor than either railroad was
separately. The stronger financial condition and resources of the Company's
major competitors will allow them to make more investments designed to enhance
service, attract new customers, gain market share and achieve even more
efficient operations.
The Company anticipates that, if the proposed merger with UPRR were not
completed, cash flows generated by rail operations would continue to be
insufficient to meet all its cash needs including acquisition of equipment and
other necessary capital expenditures. Certain of the Company's debt agreements
contain quarterly financial covenants and restrictions based on minimum tangible
net worth, a maximum funded debt to net worth ratio and a minimum fixed charge
coverage ratio. As a result of not achieving certain ratios and covenants in
SPRC's $375 million Senior Notes at December 31, 1995, SPRC, including the
Company, is restricted in incurring additional indebtedness, except for certain
permitted categories of debt, including $300 million available under its
revolving bank credit facility. Because continued compliance with the financial
terms and covenants under its bank credit facilities would require more gains
than now contemplated from the sales of properties in the first and second
quarters of 1996, the Company and its banks have amended those covenants through
the second quarter of 1996 to eliminate the fixed charge coverage test for these
periods. This amendment was conditioned upon the Company's proposed merger with
UPRR not being terminated or denied. If the merger were not consummated in the
third quarter of 1996 and the Company's earnings did not meet the reinstated
fixed charge coverage test as of the end of the quarter, the Company would be in
default on both its revolver and term loan unless it were able to obtain
waivers or amendments to its loan agreements. Management of the Company
currently believes it will meet its revised financial covenants in 1996,
although the margin will be small. If the Company were unable to meet these
covenants, or obtain waivers or amendments, substantially all of the Company's
outstanding indebtedness could be declared in default and payment thereon
accelerated.
In order to satisfy its future cash flow requirements, as well as the
financial covenants in its bank credit facilities, the Company must improve its
operating results while maintaining its bank credit facilities for use as
required. Management of the Company does not believe that the Company should
plan to continue to rely on real estate sales to fund its operations. The
timing of such sales is difficult to predict. The supply of real estate that
can be sold (especially readily salable real estate) is being depleted. Public
funding for transit corridor sales is more difficult to obtain. Proceeds from
sales of real estate sales and other properties totaled $14.8 million in the
first quarter of 1996 and no large real estate
13
<PAGE>
sales are anticipated during the remainder of the year. Management believes that
under current circumstances the Company cannot expect to obtain capital in the
amounts required to fund the capital expenditures described above that would be
necessary for the Company to compete effectively in all its present markets with
its present services. Therefore, if the proposed merger with UPRR were not
completed, management believes it would be necessary for the Company to develop
and implement a plan for a major reduction in its services and investments. See
"Certain Effects of Competition" below.
Operating Activities
--------------------
As shown in the Consolidated Condensed Statements of Cash Flows, cash
provided by operating activities was $40.5 million for the first quarter of 1996
compared to a use of cash of $13.7 million for the first quarter of 1995. The
change between periods was due primarily to the net effect of changes in income
offset by changes in accounts receivable and payable between periods based on
the timing of receipts and payments. The Company expects to fund its operations
(including scheduled interest payments, capital lease payments and severance
payments attributable to items provided for in the special charge) over the next
twelve months with cash from operations, cash on hand, property sales, capital
leases and borrowings under its bank credit facilities.
The Company had working capital deficits of $575.8 million and $518.5
million at March 31, 1996 and 1995, respectively. The increased deficit was due
primarily to an increase in current liabilities at March 31, 1996. The
increased liability included a higher current portion of restructuring reserves
(including amounts associated with the special charge taken in June 1995) and a
higher interest payable balance due primarily to accrued interest associated
with the increased capital lease obligations outstanding at March 31, 1996
compared to March 31, 1995. Working capital at March 31, 1996 was $53.9 million
less than December 31, 1995 primarily resulting from lower cash and receivables.
Investing Activities
--------------------
Capital expenditures (exclusive of capital leases) for the first quarter
of 1996 were $69.0 million compared to $77.2 million for the same period in
1995. The 1996 amount included approximately $64.5 million for roadway and
structures and $2.9 million for rebuilt locomotives. The 1995 amount included
approximately $63.9 million for roadway and structures and $8.0 million for
rebuilt locomotives. During the first quarter of 1996, the Company rebuilt 9
locomotives compared to 22 locomotives during the 1995 period. The Company
expects 1996 capital expenditures for railroad operations to be approximately
$337 million (exclusive of capital leases). The Company expects to fund 1996
capital expenditures with cash from operations, cash on hand, property sales,
capital leases and borrowing under its bank credit facilities.
The Company has been engaged in a program to expand and upgrade its
locomotive and freight car fleets principally through capitalized lease
financing. All locomotive acquisitions were completed in 1995 and there are no
commitments to purchase additional locomotives. During the first three months
of 1996, the Company received 331 reconditioned freight cars and incurred $8.2
million in capitalized lease obligations. All of the remaining 198
reconditioned freight cars to be financed under capital leases are expected to
be received by year end with a total capitalized lease obligation for the year
of approximately $13.9 million.
The Company received cash proceeds from sales and retirements of real
estate and other property totaling $14.8 million and $17.9 million for the first
quarter of 1996 and 1995, respectively.
The Company plans on acquiring through operating leases, approximately
3,100 new and remanufactured freight cars during 1996 at an estimated annual
operating lease expense of $8.5 million in 1996 and approximately $14.6 million
annually thereafter. The Company has received 425 of these freight cars as of
March 31, 1996.
14
<PAGE>
Financing Activities
--------------------
The Company received advances of $10.9 million from SPRC and repaid $6.0
million of debt during the first quarter of 1996.
Certain Effects of Competition
------------------------------
The Company faces extraordinary capital investment requirements in order
to meet the challenges of its major competitors, particularly as a result of the
BN/ATSF merger in 1995. The increasing service competition that has developed
and will be accelerating will require substantial additional capital
expenditures for equipment, track improvements and other new facilities and
technology. The Company estimates that it needs approximately $500 million in
capital per year simply to maintain its existing plant and equipment and its
current service levels. In addition, the Company has identified capital
expenditures of more than $1 billion that it believes should be made in excess
of normal capital expenditures to maintain its current competitive position. The
Company's two major competitors have substantially stronger cash flow and
financial capabilities and their facilities and technology are more advanced
than those of the Company. The completion of the BN/ATSF merger and the
integration of that system occurred more quickly than the Company initially
anticipated. The combined BN/ATSF is a substantially stronger competitor than
either railroad was separately. The stronger financial condition and resources
of the Company's major competitors will allow them to make more investments
designed to enhance service, attract new customers, gain market share and
achieve even more efficient operations. The Company faces substantially
increased service competition from the Company's major competitors relating to
transit time and consistency, areas in which the Company has historically lagged
certain of its competitors. This intense service competition, including new
single line service provided by the merged BN/ATSF, is expected to continue as
the BN/ATSF merger has created a much stronger competitor. BN/ATSF's ability to
offer expanded single line service that the Company cannot offer to its
customers will also negatively impact the Company. Pressure on the Company to
improve service and price more aggressively is expected to continue and is
expected to have an adverse impact on operating results because the Company does
not expect to be able to reduce costs as rapidly as it would have without the
increased service competition from the BN/ATSF or to expend capital equivalent
to its competitors and compete with equal service. After several years of
extraordinary capital expenditures to rebuild its locomotive fleet, the Company
will not be able to match the financial resources of BN/ATSF or UP going forward
to provide the facilities and other service enhancing investments necessary to
be fully competitive on a stand-alone basis. Although no specific plan has as
yet been prepared, management believes, if the proposed merger with UPRR were
not implemented, it would be necessary for the Company to develop and implement
a plan for a major reduction in its services and a reduction in capital
expenditures to a level sustainable out of cash flow from rail operations.
Management would expect to focus the Company's operations, pricing initiatives
and capital investments on markets and shippers where it has existing
competitive advantages and de-emphasize those markets where it faces rigorous
competition. Management expects that, over time, a significant portion of its
services would be eliminated or reduced and the number of employees would be
reduced. Examples of service reductions that would be considered are reductions
in midwestern and Texas intermodal operations, some transcontinental and west
coast intermodal business lines, closure of several smaller intermodal
terminals, a de-emphasis on operations across the Central Corridor and
rationalization of parallel main lines across east Texas.
Other
-----
On April 3, 1996, the Company paid UPRR $31.8 million as the final
payment under the settlement agreement previously entered into pertaining to the
compensation SSW would pay for trackage rights over UPRR lines between Kansas
City and St. Louis.
In June 1995, the Board of Directors approved plans aimed at reducing
future operating costs and increasing productivity which resulted in a $112.6
million pretax charge. Approximately $41 million of the charge is related to
severance payments to be made for approximately 582 employees (both management
and labor), approximately $4 million of the charge is related to costs
associated with
15
<PAGE>
terminating certain leased facilities, and approximately $68 million is for the
expected loss associated with the sale, lease or abandonment of 600 miles of
light density rail lines. Through the first quarter of 1996, severance payments
totaling $3.6 million for 83 employees whose positions have been terminated have
been charged to the severance reserve. The Company continues to review the
timing of plans approved by the Board in June 1995. If the proposed merger with
UPRR were not approved, management expects that implementation of plans approved
by the Board would be accelerated.
In 1995, the Financial Accounting Standards Board issued Statement No.
121, "Impairment of Long-Lived Assets", which was adopted by the Company
effective January 1, 1996 and had no financial statement impact. Future
business decisions could impact the financial statement results under this
accounting standard.
The Company is subject to Federal, state and local environmental laws and
regulations and is currently participating in the investigation and remediation
of numerous sites. Where the remediation costs can be reasonably determined,
and where such remediation is probable, the Company has recorded a liability.
It is possible that additional losses will be incurred, but such amounts cannot
be reasonably estimated. The Company does not believe that disposition of
environmental matters known to the Company will have a material adverse effect
on the Company's financial condition or liquidity; however, there can be no
assurance that the impact of these matters on its results of operations for any
given reporting period will not be material.
The Company had entered into fuel hedging agreements covering 46% of its
first quarter 1996 fuel needs at an average purchase price of $.485 per gallon
(excluding handling costs). Effective April 1, 1996, the Company has no hedging
agreements in place and accordingly will incur all of the effects of current
fuel prices. Further fuel hedging activity may occur during 1996.
Cautionary Statement
--------------------
This report contains "forward looking statements" within the meaning of
the federal securities laws, including management's belief that the SPRC,
including the Company, will meet its revised financial covenants in 1996 and
that known environmental matters and other types of claims and litigation will
not have a material adverse effect on the Company's financial condition or
liquidity, the Company's expected 1996 capital expenditures and funding
therefor, the Company's expectations as to funding its operations over the next
twelve months, and other statements of expectations, beliefs, plans, and similar
expressions concerning matters that are not historical facts. These statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in the statements. Important factors that could
cause such differences include but are not limited to the increasingly intense
competition within the Company's service territory (see "Certain Effects of
Competition" above), the Company's insufficient cash flow from operations and
resulting dependence on real estate sales, and other constraints on the
Company's liquidity and capital resources, as well as its substantial capital
requirements to improve its service and facilities (see "Liquidity and Capital
Resources" above), existing restrictions on the Company's borrowing capacity,
the Company's continuing exposure to environmental liabilities and other types
of claims and litigation, the impact of federal, state and local regulation of
the Company's business and the possibility for adverse changes in such
governmental regulation, the requirement for STB approval of the Company's
proposed merger with Union Pacific, natural events such as flooding and
earthquakes and the effects of adverse general economic conditions. These and
other risks and uncertainties affecting the Company are discussed in greater
detail in other filings by SPRC and the Company with the Securities and
Exchange Commission, including but not limited to SPRC's registration statement
on Form S-1 initially filed on June 4, 1994 (File No. 33-79950) and SPRC's joint
proxy statement/prospectus dated December 12, 1995.
16
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) During the quarter ended March 31, 1996, no reports on Form 8-K were
filed by the Company.
17
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHERN PACIFIC TRANSPORTATION COMPANY
Date: May 13, 1996 By: /s/ L. C. Yarberry
------------------ -----------------------------------
Vice President-Finance
(Principal Financial Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHERN
PACIFIC TRANSPORTATION COMPANY'S FORM 10-Q FOR THE FIRST QUARTER OF 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 12
<SECURITIES> 0
<RECEIVABLES> 255
<ALLOWANCES> (9)
<INVENTORY> 80
<CURRENT-ASSETS> 391
<PP&E> 8,564
<DEPRECIATION> 2,787
<TOTAL-ASSETS> 6,338
<CURRENT-LIABILITIES> 966
<BONDS> 1,336
0
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<COMMON> 425
<OTHER-SE> 1,787
<TOTAL-LIABILITY-AND-EQUITY> 6,338
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<TOTAL-REVENUES> 779
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