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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, 1993
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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
SOUTHERN PACIFIC BUILDING 94105
ONE MARKET PLAZA (ZIP CODE)
SAN FRANCISCO, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE (415) 541-1000
OFFICES) (REGISTRANT'S TELEPHONE 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 Transportation Company New York Stock Exchange, Inc.
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, 1994, 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, 1994 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.
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 HOLDER.
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 OF CONTENTS
PART ITEM DESCRIPTION PAGE
---- --------- --------------------------------------------------------- ----
I. 1. and 2. BUSINESS AND PROPERTIES.................................. 1
General................................................. 1
Business Strategy....................................... 1
Railroad Operations..................................... 5
Transit Corridors and Real Estate Sales................. 9
Employees and Labor..................................... 10
Government Regulation................................... 12
Competition............................................. 12
Environmental Matters................................... 13
3. LEGAL PROCEEDINGS........................................ 15
II. 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................... 18
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 18
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............. 22
9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................ 22
IV. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K................................................ 23
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES............................................... 26
-------------------------
Southern Pacific Transportation Company ("SPT" or the "Company") is a wholly-
owned subsidiary of Southern Pacific Rail Corporation (formerly Rio Grande
Industries, Inc.) ("SPRC"). Unless the content otherwise requires, references
herein to the Company include SPT and its subsidiaries, including St. Louis
Southwestern Railway Company ("SSW") and SPCSL Corp. ("SPCSL"), and references
to SPRC include SPRC and its subsidiaries, including SPT and its subsidiaries
and Rio Grande Holding, Inc. ("RGH") and its subsidiaries, which include The
Denver and Rio Grande Western Railroad Company ("D&RGW") 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.
-------------------------
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
The Company transports freight over approximately 12,600 route miles of track
throughout the western United States. The Company operates in 14 states over
five main routes described in "--Service Territory." The Company serves most
west coast ports and large population centers west of the Mississippi and
connects with eastern railroads at all major gateways 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. In
addition, the Company's rail lines connect with those of the D&RGW at Ogden,
Utah and Herington, Kansas and together constitute continuous routes, one from
the Pacific Coast through the Southwestern United States to East St. Louis and
on to Chicago and the other from the Pacific Coast through the Midwestern
United States to East St. Louis and on to Chicago. It interchanges with Mexican
railroads at six gateways into Mexico, which is more than any other U.S.
railroad.
The Company's lines provide the extensive distribution network needed by its
customers to deliver their products to a wide range of major industrial
markets. The principal commodities hauled in its 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 unit. The Company is the industry leader in the U.S. for container
traffic, based on both containers originated and total container traffic
handled.
Nearly all of the Company's traffic either originates on or is destined to
points served directly by the Company. In addition, nearly half of the
Company's traffic both originates and terminates on its lines and is not
interchanged with another rail carrier, thus enabling the Company to provide
service without the need to coordinate the commercial and operational aspects
of freight movements with other railroads.
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. 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. At the time of its acquisition SPT was burdened
with excess, unprofitable and low density track, inefficient operation and a
generally higher and less competitive cost structure than other Class I
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. Many of the Company's urban and intercity corridors
are unique, and in turn valuable, properties in terms of their geographic
composition and ready availability for transit use. Real estate sales have been
in the past, and for the next several years will continue to be, necessary for
the Company to meet its capital expenditure, debt service and other cash needs.
Management considers the Company's extensive supply of assets available for
sale to be sufficient for that purpose, although sales for 1993 declined
sharply from levels for the preceding four years. The supply of properties that
may be sold diminishes as sales occur and the timing of sales cannot be
accurately predicted.
BUSINESS STRATEGY
Based on the experience gained since SPRC's acquisition of SPT, and the
addition of key management personnel during the past three years, including the
Company's President and Chief Executive Officer, Edward L. Moyers, who joined
the Company in July 1993, the Company has developed and is implementing a
strategy to improve the Company's operating results by improving customer
service and increasing revenues while lowering the cost and improving the
productivity of its railroad operations.
1
Significant elements of the Company's strategy, similar to those implemented
by other railroads, include the following:
Cost Reductions and Operating Efficiencies
The Company's cost reduction strategy is focused principally on the continued
reduction of surplus employees; increased efforts to rationalize its physical
plant through the sale or lease of low-density, high cost lines, the
consolidation of rail yards and other facilities and the sharing of rail line
and facilities with other railroads; the implementation of programs to reduce
derailments, accidents and personal injuries; and the enhancement of its
operating efficiency and asset utilization.
. Labor Productivity. A critical element of the Company's cost reduction
strategy is to lower labor expenses by continuing to improve labor
productivity. From January 1, 1993 to December 31, 1993 the Company
reduced the number of its employees (both labor and management) by
approximately 3,525, including a reduction of approximately 2,785
employees achieved from July 1, 1993 through December 31, 1993. Revenue
ton-miles per employee increased approximately 15 percent in 1993 as
compared to 1992.
. Locomotive Fleet Upgrades. A key to improving the Company's customer
service is increasing the Company's reliability and on time performance,
which have generally lagged behind competitors. To improve transit time
consistency the Company plans to continue to improve the reliability and
utilization of its locomotive fleet through the acquisition of new and
remanufactured locomotives and an extensive program to rebuild and
perform heavy repairs on locomotives it already owns. The Company has
ordered and has financed through capital leases (i) 50 new locomotives,
17 of which were delivered in the last quarter of 1993 and the balance of
which are to be delivered by the end of the first half of 1994, and (ii)
133 remanufactured locomotives to be delivered in 1994. The Company also
has ordered an additional 100 new locomotives for delivery in 1994, of
which 50 are expected to be delivered in May and June 1994. The Company
expects that financing for these acquisitions will be arranged in the
near future.
. Operating Efficiencies. The Company has developed programs to improve the
efficiency and productivity of its rail operations including the
centralization of certain functions, the computerization of its
operations management system and the standardization of certain operating
procedures. In November 1993, the Company and Integrated Systems
Solutions Corporation ("ISSC"), a subsidiary of International Business
Machines Corp. ("IBM"), entered into an agreement under which ISSC will
handle all of the Company's management information services ("MIS")
functions. Outsourcing MIS is expected to reduce the Company's MIS costs
while improving the Company's information systems. In addition, the
Company is taking steps to implement more scheduled train operations. The
Company's intermodal services were operating on a scheduled system during
1993, and a scheduled system of operations was implemented for moving
most of its carload traffic on its five major corridors by the end of
March 1994.
. Plant Rationalization. Through the rationalization of physical plant,
which involves disposition (by sale, lease or abandonment) of low-
density, high cost branch lines and concentration on core routes, the
Company expects to reduce on-going operating costs. At January 1, 1993,
the Company had identified approximately 2,300 miles of branch lines for
disposition, of which 833 miles were sold, leased or abandoned as of
December 31, 1993. The Company will continue in its efforts to dispose of
the balance of these branch lines 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. The
Company is also taking steps to identify opportunities to share rail line
and facility capacity with other railroads. In addition, the Company has
instituted a program to eliminate unnecessary double track and reuse the
rails and ties to reduce the Company's maintenance of way costs.
. Improved Safety Record and Reduced Personal Injury. In 1992 the Company
implemented expanded safety programs designed to reduce accidents and
personal injuries. The Company believes the
2
initiatives it has undertaken, including enhanced employee safety
education and training programs, increased use of protective equipment,
the implementation of improved standardized operating procedures and the
establishment of safety improvement goals for which managers are held
accountable, should enable it to reduce the incidence of injury and
thereby better contain future cost increases.
Marketing Efforts
The Company seeks to capitalize on the strategic advantages of its route
structure, which provides access for service between many key industrial
centers, eastern gateways and Mexico, to serve customers in commodity areas
such as chemicals and forest products and in intermodal transport. In its
intermodal business, the Company has long-standing relationships and multi-year
contracts and other shipping arrangements with major steamship companies which
use the Company's west coast intermodal facilities and has established
marketing arrangements with premier nationwide truckload companies. The Company
is placing additional emphasis on attracting new business in Mexico and Canada
and adding business to specific routes where carload capacity is not fully
utilized. The Company believes these efforts will benefit to some extent from
the recent passage of the North American Free Trade Agreement ("NAFTA"). The
Company has implemented programs to improve its customer service and
responsiveness including the establishment of centralized transportation and
customer service centers and increased training and standardized procedures.
Customer Service
Fundamental to the Company's business strategy to increase revenues is
improving customer services. Through the quality management system implemented
in 1991, the Company has identified specific areas for improvement and
continues to benchmark the Company's performance against the industry leader in
each area. The quality improvement programs include detailed annual objectives
together with monthly cross functional management reviews and ongoing
performance appraisals. A critical element in improving the Company's customer
service is increasing the Company's reliability and on-time performance, which
have generally lagged behind those of its competitors. The locomotive
improvement initiative and efforts to improve the efficiency of the Company's
terminal operations are intended to improve the Company's transit time
consistency. The Company is continuing a multi-year program implemented in 1991
to refurbish approximately 9,000 railcars. Since 1991 the Company has almost
doubled the number of customer service representatives, increased training and
standardized procedures, and organized its customer service efforts to serve
the needs of specific customer groups.
Investment in Plant and Equipment
A key element of the Company's strategy is the continued investment in its
plant and equipment in order to enhance its long-term operating performance.
The condition of the physical plant plays an important role in transit time
reliability. The Company believes its physical plant is in excellent condition
as a result of the significant investments it has made during the past decade.
Operations at the Company's expanded and upgraded Burnham locomotive repair
facility in Denver, Colorado will have a substantial role in the Company's
locomotive upgrade program. In 1993, a total of 53 locomotives were rebuilt and
273 locomotives underwent heavy repairs, 53 and 166 of which, respectively,
were completed at Burnham. Through an increase in the number of crew shifts and
personnel and improved operating efficiencies, management believes that the
Burnham facility will be in a position to rebuild or perform heavy repairs on
up to 300 locomotives a year as part of an ongoing scheduled maintenance
program.
The Company has embarked on rail car refurbishment and purchase and lease
programs designed to improve the efficiency and reliability of the Company's
rail car fleet, as well as meet the specialized needs of its customers. The
Company has an agreement with a leading rail car manufacturer to refurbish
approximately 9,000 rail cars and lease them back to the Company or third
parties under a full maintenance
3
lease agreement. From 1990 through 1993, approximately 5,700 cars were
refurbished, with the balance of the program to be completed in 1994 and 1995.
To complement its rail car refurbishment program, the Company purchases and
leases rail cars on an ongoing basis. In 1993, the Company leased 345 aluminum
coal cars, 177 steel coil flatcars, 30 double stack intermodal cars (with an
additional 70 to be delivered in 1994) and approximately 125 specialized cars
for various uses.
Asset Sales
A key component of the Company's strategy has been and will continue to be
the sale of assets non-essential to its railroad operations. The Company
possesses sizeable holdings that fall into two distinct types: "transit
corridors" and "traditional" real estate. Each type of property has significant
value for different classes of buyers. Historically, the Company has received
substantial cash flow from "traditional" real estate sales and leasing
activities involving industrial and commercial properties located in developed
areas on the Company's system. Many of these properties are targeted for sale
to fit the specific purpose of potential buyers, such as locating a facility
near a customer or supplier or taking advantage of the availability of
transportation service, while others are suited for large scale industrial or
commercial development. More recently, transit corridor sales have become a
dominant component of the Company's asset sales program. The Company expects
that increasing highway congestion and other transportation problems will
continue to create demand for both passenger corridors and, to a lesser extent,
consolidated freight corridors and facilities. The Company has substantial
remaining property which it is in the process of selling, preparing to sell or
holding for an appropriate time to sell. In addition, the Company continues to
release property from its rail business and has a substantial portfolio of
leased properties.
CAPITAL AND DEBT TRANSACTIONS
On August 17, 1993 SPRC closed the offering and sale of 30,783,750 shares of
common stock and issued and sold $375 million principal amount of 9 3/8 percent
Senior Notes due 2005.
In connection with the foregoing transactions, the Company issued 200 shares
of common stock for total consideration of $445.5 million from SPRC. The
proceeds from this transaction were used to repay $169 million outstanding
under the SPT Term Loan, to purchase $107.7 million of D&RGW property including
principally the Burnham locomotive repair facility and certain non-operating
properties, to purchase for $99.1 million equipment operated pursuant to
operating leases, to pay fees and expenses of $3.8 million and for general
corporate purposes. In addition, as part of the foregoing transactions, the
Company entered into a $200 million three-year unsecured credit agreement (the
"Credit Agreement") replacing its then existing secured bank credit facility.
On March 2, 1994, SPRC closed an offering of 25,000,000 shares of common
stock. In connection with this transaction, the Company issued 150 shares of
common stock for consideration of $294.5 million from SPRC. The proceeds were
used to repay the $175 million then outstanding balance on the Credit Agreement
and to purchase $118.9 million of D&RGW rail properties. The proceeds of the
purchase from D&RGW were used to repay the amounts outstanding under the RGH
credit facilities.
SERVICE TERRITORY
The Company's routes and service territory are briefly described below.
Central Corridor Route. The Central Corridor Route links northern California
and the Pacific Northwest with the nation's heartland, traversing the Rocky
Mountain states (via the D&RGW), Kansas, Missouri and Illinois. The eastern end
of this route reaches the key 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.
Pacific Coast Route. This north-south route is the most direct and efficient
rail line connecting the forest product resource base of the Pacific Northwest
with the major consuming markets in California and Arizona.
4
The Company enjoys a strong position in this key corridor. It is the only
railroad with operations which extend from the Oregon border through the state
of California to Mexico.
Sunset Route. The Company's Sunset Route is well-positioned as the shortest,
most direct line from the Los Angeles Basin to Houston and other Gulf Coast
ports. As the only single-line rail carrier in the Southern Corridor between
Los Angeles and the key eastern gateways of Memphis and New Orleans, this route
is favored by international container shippers and carload shippers alike. This
route structure advantage creates an excellent fit with the Company's strong
presence in carload originations of chemicals and plastics in the Gulf region.
Golden State Route. This route connects Southern California and Arizona with
the industrial midwest and the major 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.
RAILROAD OPERATIONS
The following table sets forth certain freight and operating statistics
relating to the Company's rail operations for the periods indicated. The
operating ratios show consolidated operating expenses expressed as a percentage
of operating revenues. The indicated increases in revenue ton-miles and
carloads in part reflect implementation in 1992 and 1993 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.
YEAR ENDED DECEMBER 31,
---------------------------
1993 1992 1991
------- -------- --------
Revenue ton-miles (billions).................... 106.1 99.3 89.6
Revenue per ton-mile (dollars).................. $ .023 $ .024 $ .025
Total carloads (thousands)(1)................... 1,896 1,827 1,695
Operating ratio (%)............................. 102.1% 101.2% 114.5%(2)
- --------
(1) Includes intermodal carloads with an assumed two containers per carload.
Intermodal carloads hold from two to ten containers.
(2) Includes a special charge of $270.0 million. The operating ratio excluding
the special charge would have been 103.3%.
As the results in the table below show, crew size reductions on Company lines
and efforts initiated in 1992 and continued in 1993 to rehabilitate and upgrade
the Company's locomotive fleet and improve locomotive utilization have resulted
in increased labor productivity.
YEAR ENDED DECEMBER 31,
-----------------------
1993 1992 1991
------- ------- -------
Total employees (period end)............................ 16,894 20,419 21,070
Total employee hours worked (thousands)................. 44,888 47,576 47,609
Revenue ton-miles per employee hour worked.............. 2,364 2,087 1,882
5
In addition to improvements in labor productivity, the Company's initiatives
in rehabilitating and upgrading the quality of its locomotive fleet and
improving locomotive utilization are also intended to achieve improvements in
fuel efficiency. The following table provides information concerning the
Company's diesel fuel consumption for the periods indicated.
YEAR ENDED DECEMBER 31,
-------------------------
1993 1992 1991
------- -------- --------
Gallons (millions).................................... 343.5 326.9 304.9
Average cost per gallon............................... $.59 $.61 $.63
Revenue ton-miles per gallon.......................... 309 304 294
Improvements in labor productivity and overall efficiency of operations have
not translated directly into operating ratio decreases because revenue per ton-
mile has been affected by continued pressure for lower rates, increased
competition for new traffic and a shift in traffic mix from automotive and
lumber products to traffic that historically generates lower rates on a revenue
per ton-mile basis. In addition, the 1993 midwest flooding adversely affected
the operating ratio.
TRAFFIC
The Company's marketing strategy is implemented by business development
groups, each of which is organized to serve a particular customer or commodity
base. The Company seeks to maintain and enhance its competitive position by
tailoring its service capabilities to fit each customer base in terms of
equipment availability, loading facilities, scheduling and contract terms. In
1993, the largest five shippers accounted for less than 16 percent of the
Company's gross freight revenues, with no shipper providing more than five
percent of such revenue. Set out below is a comparison of volumes and gross
freight revenues (before contract allowances and adjustments) by commodity
groups in 1993. A more detailed discussion of the traffic generated by each
group follows the table.
YEAR ENDED DECEMBER 31, 1993
------------------------------------------
CARLOADS GROSS FREIGHT REVENUE
----------------- -----------------------
NUMBER % OF DOLLARS % OF
(THOUSANDS) TOTAL (MILLIONS) TOTAL
----------- ----- ------------- ---------
Intermodal......................... 600.8 31.7% $ 706.4 27.4%
Chemical and petroleum products.... 355.4 18.7 598.0 23.2
Food and agricultural products..... 244.9 12.9 352.9 13.7
Forest products.................... 219.5 11.6 362.8 14.1
Coal............................... 119.4 6.3 100.2 3.9
Metals and ore..................... 144.6 7.6 199.6 7.7
Construction materials and miner-
als............................... 147.6 7.8 134.2 5.2
Automotive......................... 64.2 3.4 122.4 4.8
------- ----- ------------ ---------
Total............................ 1,896.4 100.0% $ 2,576.5 100.0%
======= ===== ============ =========
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. Intermodal traffic accounted for $706.4
million of gross freight revenues for 1993 or 27.4 percent of total gross
freight revenues. 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 Portland, 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.
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. Total chemical and
petroleum products accounted for $598.0 million of gross freight revenues for
1993 or 23.2 percent of total gross freight revenues. Most of the traffic
originates within Texas, where the Company
6
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.
Food and Agricultural Products. Grain and grain products constitute the
primary commodity groups included in this traffic. Total food and agricultural
products accounted for gross freight revenues of $352.9 million for 1993 or
13.7 percent of total gross freight revenues. The Company primarily receives,
rather than originates, shipments of grain and grain products for delivery to
feed lots and poultry farms located along its routes. It also 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 tend to be more stable flows from
sources in California to consumer markets in the eastern part of the United
States.
Forest Products. This traffic includes lumber stock, plywood and various
paper products. It accounted for $362.8 million of gross freight revenues for
1993 or 14.1 percent of total gross freight revenues. Most of the traffic
originates in Oregon and Northern California. However, certain product sources
in the Pacific Northwest have been adversely affected by environmental
concerns. In response, the Company is developing alternative Canadian sources
as well as developing a significant presence in the market as a transporter,
through interchange at eastern gateways, of lumber and paper products from the
southeastern United States to end-user markets in the western United States.
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.
Coal. Coal accounted for gross freight revenues of $100.2 million for 1993 or
3.9 percent of total gross freight revenues. The traffic is subject to intense
competition from other coal sources, particularly the Powder River Basin in
Wyoming.
Metals and Ores. Metals and ores accounted for $199.6 million of gross
freight revenues for 1993 or 7.7 percent of total gross freight revenues. This
traffic includes both ferrous and non-ferrous metals and is concentrated on the
origination of shipments from copper mines and smelters in Arizona and steel
mini-mills in the West. These transportation markets are sensitive to end-user
demand for automobiles, appliances and other consumer goods with substantial
metal 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 90.0 percent of the Company's gross freight
revenues for 1993. Other commodity and product groups included in the Company's
traffic mix include automobiles, automotive parts, construction materials, non-
metallic minerals and government traffic. All are subject to fluctuations in
end-user demand and competition from other railroads and motor carriers.
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 strong working relationship with
FNM. Approximately $213.7 million of the Company's gross freight revenues for
1993 or 8.3 percent of total gross freight revenues were attributable to
shipments to and from Mexico. The Company works closely with FNM's "El
Maquiladora" train between Ciudad Juarez and Chihuahua. 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.
PHYSICAL PLANT AND EQUIPMENT
Roadway, Yards and Structures. At December 31, 1993, the Company had
approximately 19,500 miles of track in operation, consisting of approximately
12,580 miles of first main track (route miles) and approximately 6,940 miles of
additional main track, passing track, way switching track and yard switching
track. Route miles include operating rights on 1,787 miles of track owned by
other railroads. Sales and
7
abandonments are intended to increase the density (gross ton-miles per route
mile operated) of the Company's railroad system and eliminate maintenance costs
for underutilized track.
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. As
part of its effort to rationalize operations, the Company is identifying and
assessing opportunities for consolidation of its railroad yard facilities. In
August 1993, the Company acquired the Burnham locomotive repair facility in
Denver, Colorado from the D&RGW.
Equipment. At December 31, 1993, the Company owned or leased equipment
described in the table below. The table excludes equipment held under short-
term leases. At December 31, 1993 there were 295 locomotives subject to short-
term leases. At December 31, 1993, there were approximately 3,850 non-
serviceable freight cars in storage, which included approximately 1,000 freight
cars awaiting sale to a third party for rehabilitation and leaseback, 750
previously leased freight cars awaiting return to the lessor, 775 freight cars
scheduled for repair and the remainder awaiting retirement.
DECEMBER 31, 1993
-------------------------------------------
OWNED LEASED TOTAL
-------------- ------------- --------------
AVERAGE AVERAGE AVERAGE
DESCRIPTION UNITS AGE UNITS AGE UNITS AGE
----------- ------ ------- ----- ------- ------ -------
(YEARS) (YEARS) (YEARS)
Locomotives:
Road...................... 1,366 12.3 284 11.1 1,650 12.1
Other..................... 333 21.4 12 21.5 345 21.4
------ ----- ------
Total................... 1,699 296 1,995
====== ===== ======
Freight
Box....................... 12,937 18.3 3,143 8.6 16,080 16.4
Tank...................... 73 24.6 -- -- 73 24.6
Gondola................... 2,423 20.9 1,165 4.9 3,588 15.7
Hopper.................... 5,109 19.4 1,742 8.3 6,851 16.6
Flat...................... 5,379 20.6 1,489 8.2 6,868 17.9
------ ----- ------
Total................... 25,921 7,539 33,460
====== ===== ======
Company service units and
cabooses................... 1,134 71 1,205
Highway trailers and trac-
tors....................... -- 4,302 4,302
In addition to the locomotive program described below, the Company has
embarked on rail car refurbishment and purchase and lease programs designed to
improve the efficiency and reliability of the Company's rail car fleet, as well
as meet the specialized needs of its customers. The Company has an agreement
with a leading rail car manufacturer to refurbish approximately 9,000 rail cars
and lease them back to the Company or third parties under a full maintenance
lease agreement. From 1990 through 1993, approximately 5,700 cars were
refurbished, with the balance of the program to be completed in 1994 and 1995.
To complement its rail car refurbishment program, the Company purchases and
leases rail cars on an ongoing basis. In 1993, the Company leased 345 aluminum
coal cars, 177 steel coil flatcars, 30 double stack intermodal cars (with an
additional 70 to be delivered in 1994) and approximately 125 specialized cars
for various uses.
The Company also has an extensive program to enhance the quality of the
locomotives it already owns. The Company plans to rebuild 207 locomotives and
perform heavy repairs on 93 locomotives in 1994, of which all 207 locomotives
are expected to be rebuilt and 41 locomotives are to undergo heavy repairs at
Burnham. Thereafter, in order to maintain high locomotive availability, the
Company plans to rebuild or perform heavy repairs on approximately 300
locomotives each year at its Burnham facility as part of an ongoing scheduled
program to rebuild and perform heavy repairs on the Company's locomotive fleet.
Pending the acquisition (through capital and operating leases and by purchase)
of new and remanufactured locomotives, the Company has substantially increased
the number of locomotives it leases on a short-term basis in order to meet the
anticipated demands of its customers.
8
Capital Expenditures and Maintenance. Improvement and ongoing 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 (exclusive of capital leases) in order
to maintain and improve train service (in millions of dollars):
CAPITAL EXPENDITURES
YEAR ENDED DECEMBER 31,
------------------------
1993(1) 1992 1991
---------------- -------
Roadway and structures................................. $ 196.4 $ 237.2 $ 207.2
Railroad equipment:
Locomotives.......................................... 21.1 70.3 45.2
Freight cars......................................... 5.9 -- 2.4
Other.................................................. 6.6 2.8 4.8
------- ------- -------
Total.............................................. $ 230.0 $ 310.3 $ 259.6
======= ======= =======
- --------
(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). Also excludes $107.7
million of D&RGW property purchased by the Company in 1993 with proceeds
provided to the Company in connection with the SPRC Common Stock and Debt
Transactions.
The Company's capital expenditures for railroad operations for 1994 are
expected to be approximately $230 million (exclusive of capital leases)
including $159 million for roadway and structures and $71 million for railroad
equipment and other items. In addition, in connection with the recent decision
to consolidate the Company's dispatching, crew calling and other operations,
the Company expects to incur approximately $30 million of capitalized costs for
facility improvements and communication equipment. The Company has ordered and
has financed through capital leases 50 new locomotives, 17 of which were
delivered in the last quarter of 1993 and 33 of which will be delivered by the
end of the first half of 1994, and 133 remanufactured locomotives to be
delivered in 1994. These 183 locomotives will be financed by capital leases
(which are expected to have a total present value of minimum lease payments of
approximately $131 million) and therefore are not included in the 1994 capital
expenditure budget. The Company also has ordered an additional 100 new
locomotives for delivery in 1994 at a cost of approximately $135 million (which
amount also is not included in the 1994 capital expenditure budget because
final determination regarding the method of financing (e.g. capital lease or
purchase) has not been made). The Company acquired 1,651 freight cars in 1993
under capital leases with a total present value of minimum lease payments of
approximately $43 million and expects to acquire more by capital lease in 1994.
The following table shows the Company's expenses for ongoing 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
YEAR ENDED DECEMBER 31,
-----------------------
1993 1992 1991
------- ------- -------
Roadway and structures.................................. $ 207.9 $ 236.7 $ 254.2
Railroad equipment:
Locomotives........................................... 204.3 204.1 181.2
Freight cars.......................................... 110.8 127.9 140.8
Other................................................... 3.6 4.7 5.5
------- ------- -------
Total............................................... $ 526.6 $ 573.4 $ 581.7
======= ======= =======
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
9
conducted as a part of the Company's ordinary course of business. While SPT
historically has sold property not required for its core transportation
operations, the Company's new management aggressively markets a large portfolio
of properties that are classified generally into two distinct types: "transit
corridors," which are typically sold to public agencies, and "traditional" real
estate, which is typically sold to different groups of potential buyers. The
Company had gains from the sale of property and real estate of $24.5 million,
$301.3 million and $469.8 million in 1993, 1992 and 1991, respectively.
Transit Corridors. The Company's sales efforts focus 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). Many of the Company's urban and intercity corridors
are unique, and in turn valuable, properties in terms of their geographic
composition and ready availability for transit use. The Company expects that
increasing highway congestion and other transportation problems will continue
to create demand for both passenger corridors and, to a lesser extent,
consolidated freight corridors and facilities. The Company usually retains
freight operating rights over these corridors to continue rail service to its
customers. The Company obtains other benefits as a part of these sales, such as
reduced ongoing maintenance costs for the lines and creating higher traffic
density on substitute lines. The Company has identified a number of additional
urban and intercity line sale opportunities which it will pursue as part of its
normal course of business. Past 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.
The funding to purchase transit corridors often comes through either
accumulated funds from past taxes or new bond issues. Recent federal and some
state legislation is encouraging development of public transit lines by, among
other things, creating an awareness on the part of local, state and regional
entities of the availability of funds and the opportunities for projects. The
timing of corridor sales is difficult to predict and varies from period to
period depending on market conditions at the time, differences or delays in
targeted or scheduled sales dates and other factors, such as political
considerations that are typically involved in negotiations with public
agencies. As a result of these and other variables, an effective program for
the sale of the Company's inventory of transit corridors and other facilities
involves patient and careful work with city and county governments, relevant
state agencies and various interested local community organizations. In the
future, 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.
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. Many of these
properties are targeted for sale to fit the specific purpose of potential
buyers, such as locating a facility near a customer or supplier or taking
advantage of the availability of transportation services, while others are
suited for large scale industrial or commercial development. The Company also
owns buildings and other facilities that can be made available for sale or
other disposition as the Company further rationalizes its operations. 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). In
order to enhance the value of certain properties and facilitate their
disposition, the Company has 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.
EMPLOYEES AND LABOR
Labor and related expenses accounted for approximately 40 percent of the
Company's railroad operating expenses in 1993. At December 31, 1993, the
Company employed 16,894 persons, which represents a reduction of approximately
3,525 from January 1, 1993 (including a reduction of over 2,785 employees
10
achieved from July 1, 1993 through December 31, 1993). SPRC expects to further
reduce the number of its employees (both labor and management) by approximately
900 employees through 1994 (a substantial portion of which will come from the
Company), subject to certain temporary increases from time to time. These
reductions resulted from attrition and voluntary separations, severance, early
retirement programs and furloughs.
At December 31, 1993, approximately 86 percent of the Company's railroad
employees were covered by collective 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 national railways represented by a bargaining
committee.
Labor relations in the railroad industry are subject to extensive
governmental regulation under the 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 represent a
substantial savings to the Company in terms of the labor costs it would have
otherwise incurred. In total, new agreements covering over 15,400 union
employees of SPRC have been reached. In addition, the Company was able to avoid
the establishment of reserve boards (employees who are paid a percentage of
salary but stay at home awaiting recall) on all of the Company's lines except
the Western Lines, in connection with reductions in its train crew size from
three to two.
On November 16, 1993 the Company's employees ratified a new four-year labor
agreement with the United Transportation Union, which represents approximately
2,300 trainman and switchmen on the Company's Western Lines. The agreement
provided for a reduction of 210 surplus employees, the elimination of the
reserve board for the Western Lines, 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. Also in November 1993, the Company withdrew from
the National Railway Labor Conference, indicating it would negotiate wage and
work-rule agreements separately from any nationwide negotiations conducted by
other Class I railroads.
In total, new agreements covering all but approximately 150 union employees
of the Company have been reached, most of which are open for modification in
1995, except that the agreement related to employees on the Company's Western
Lines is open for modification in 1998. The Company will be required to
renegotiate its labor agreements at those times.
Wages for approximately half of the Company's employees covered by these new
agreements (other than the agreement related to employees on the Company's
Western Lines) are required to return to wage levels prevailing under
nationwide railway collective bargaining agreements in 1995. Wages for the
other employees covered by the new agreements (including the Western Lines) do
not require restoration to national wage levels and will be subject to
resolution in the next round of negotiations scheduled to begin in late 1994
(1997 for the Western Lines). No assurance can be given as to the terms of any
of the Company's new agreements. In addition, all of the Company's labor
agreements (except for the agreement related to 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.
In 1992, the Company completed the reduction of all through freight train
crew sizes to an engineer and one conductor (instead of an engineer and two or
three train service employees) on all of its lines. Through arbitration the
Company was also able to settle certain issues relating to surplus employees,
resulting in, among other things, the Company's exemption from the
establishment of reserve boards on all lines except the Western Lines. As part
of the Company's labor agreement relating to the Western Lines entered into in
November 1993, the Company is now exempt from the establishment of reserve
boards on all of its lines. As
11
a result of its arbitration efforts and its recent labor agreement with respect
to the Western Lines, 307 employees accepted voluntary severance effective
April 1992 and an additional 210 employees accepted voluntary severance
effective by the end of 1993, at an aggregate cost to the Company of
approximately $37 million.
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.
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 and local
regulatory agencies.
The ICC has jurisdiction over, among other things, rates charged by rail
carriers for certain traffic movements, service levels, car rental payments and
issuance or guarantee of railroad securities. It also has jurisdiction over the
situations and 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 of
other carriers by rail, and labor protection provisions in connection with the
foregoing. Its power to exercise its jurisdiction is limited in certain
circumstances. The Federal Railroad Administration has jurisdiction over
railroad safety and equipment standards. State and local regulatory agencies
also have jurisdiction over certain local safety and operating matters and
these agencies are becoming more aggressive in their exercise of jurisdiction.
State legislatures also recently have enacted new laws that are intended to
regulate railroads more extensively.
Government regulation of the railroad industry is a significant determinant
of the competitiveness and profitability of railroads. Deregulation of certain
rates and services under 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.
Various interests have sought and continue to seek reimposition of government
controls on the railroad industry in areas deregulated in whole or in part by
the Staggers Act. Additional regulation, changes in regulation and re-
regulation of the industry through legislative, administrative, judicial or
other action could materially affect the Company.
COMPETITION
The Company's business is intensely competitive, with competition for freight
traffic coming from other major railroads and motor carriers depending upon the
particular market served. Principal railroad competitors include the Union
Pacific Railroad Company ("Union Pacific") in the central corridor and The
Atchison, Topeka and Santa Fe Railway Company ("ATSF") in the southern
corridor. 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. Some rail competitors have substantially greater
financial and other resources than the resources of the Company. This factor
and other competitive pressures have resulted in a
12
downward pressure on rates. In addition, the consolidation in recent years of
major western rail systems has resulted in particularly strong competition in
the service territory of the Company among the Company's rail system, Union
Pacific, ATSF and the Burlington Northern Railroad Company ("BN"). Further
consolidation of its rail competitors could adversely affect the Company's
competitive position. For example, such further consolidation could result from
the acquisition of control of the Chicago and North Western Holdings Corp. by
the Union Pacific if its pending application is approved by the ICC. Continuing
competitive pressures and declining margins could have a material adverse
effect on the Company's operating results.
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.
While deregulation of freight rates under the Staggers Act has enhanced the
ability of railroads to compete with each other and alternate forms of
transportation, the resulting intense competition has pushed rates downward. In
addition, changes in the structure of governmental regulation could
significantly affect the Company's competitive position and profitability.
The railroad industry in general is susceptible to changes in the economic
conditions of the industries and metropolitan areas that produce and consume
the freight they transport. Because the end users of most of the freight
shipped by the Company are primarily industrial and home consumers, and because
the Company lacks a single large commodity base (such as grain or coal),
changes in general economic conditions particularly affect the Company's
operating results.
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 and other
materials. Inherent in the railroad operations and the real estate ownership
and sales activity 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 ongoing basis associated with regulatory
compliance in its businesses, the Company may have environmental liability in
three general situations. First, 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. CERCLA imposes liability, without regard to fault or
the legality of waste generation or of the original disposal, on certain
classes of persons, including the current and certain prior owners or operators
of the disposal site and persons that arranged for the disposal or treatment of
hazardous substances found at the site at which problems are alleged to exist.
CERCLA also authorizes the Environmental Protection Agency ("EPA"), the states
and in some circumstances third parties to take actions in response to public
health or environmental threats and to seek to recover certain clean-up and
legal costs they incur from the same classes of persons. Governmental
authorities can also seek recovery for damages to natural resources. 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
13
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 wastes 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. Certain federal and state laws also require that the discharger of
hazardous substances reimburse agencies for certain costs in responding to a
hazardous materials incident (also without regard to fault). 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. In particular, properties under
federal and state scrutiny frequently result in significant clean-up costs and
litigation expenses related to a party's clean-up obligation.
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 1993 and 1992 the
Company spent approximately $16.2 million and $15.7 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 1993 and 1992,
the Company also incurred and expensed approximately $12.4 million and $17.6
million, respectively, for environmental matters relating to properties held
for sale. Costs associated with 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.
In assessing its potential environmental liabilities, the Company typically
causes ongoing examinations of newly identified sites and evaluations of
existing clean-up efforts to be performed by environmental engineers employed
both by it and by consulting engineering firms. 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. The Company's analysis includes, among other things, the number of
potentially responsible parties ("PRPs") at many sites that the Company
considers to be financially viable participants with the Company;
considerations such as the estimated allocation of liability among such PRPs,
the selected method of remediation, the timing of work, the effect of
inflation, the ability to recover costs from former and current insurance
carriers and the development of new remediation technologies; information
contained in the Company's historical, operating and compliance files;
regulatory guidelines and the regulatory comment and approval process;
information contained in regulatory agency files regarding certain sites;
settlements made at some sites; the volume and nature of wastes attributable to
the Company at certain sites; and decisions that have been made regarding
clean-up at some of the sites.
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 clean-
up. 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
14
properties described above, the Company has only three sites that individually
involved future cost estimates for environmental matters as of December 31,
1993 in excess of $5 million. None of such estimates exceeded $10 million at
that date.
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, 1993 and 1992, the Company had accrued reserves for environmental
contingencies of $58.8 million and $67.8 million, respectively. 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 condition. However, there can be no
assurance that material liabilities or costs related to environmental matters
will not be incurred in the future. See Note 12 to the Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
Union Pacific--Missouri Pacific, Western Pacific Control; ICC Finance Docket
No. 30,000, 366 ICC 462 (October 20, 1982). On October 20, 1982, the ICC
approved the consolidation of Union Pacific, Missouri Pacific Railroad Company
("MP") and Western Pacific Railroad Company, over vigorous opposition of SPT
and others. As a condition to its approval, the ICC awarded SSW trackage rights
to operate over the MP lines between Kansas City and St. Louis, which
operations commenced on January 6, 1983. The ICC's initial decision did not fix
the compensation SSW would pay for the trackage rights.
In a series of decisions the ICC set forth new principles to govern the
computation of the "rent" portion of the trackage charges (payment for
maintenance expenses has not been a major issue). Court appeals from those
decisions were concluded, and Union Pacific filed a collection action for rent
in Federal District Court. Union Pacific claims approximately $60 million
(including interest) as of December 31, 1993, representing Union Pacific's
calculation of the effect of the ICC decisions. SPT has contested the amount
claimed as overstated, and further has asserted that Union Pacific failed to
provide the service ordered by the Commission, specifically, equal treatment of
the trains of the two companies on the trackage rights lines, a different issue
from the previously-litigated issue of rent. On October 29, 1993, the ICC
issued an order holding in abeyance, pending action from the District Court,
SPT's petition to modify or further interpret its order. On December 6, 1993,
the District Court dismissed Union Pacific's action without prejudice. Union
Pacific requested the District Court reconsider and set aside its decision; and
on March 14, 1994, the District Court vacated its order dismissing Union
Pacific's complaint. The amount that SPT may ultimately owe Union Pacific will
be substantial, but management has made provision that it believes to be
adequate 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 weed
killer) 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. Certain individuals and
businesses have alleged that they incurred costs or damages for medical
expenses, personal injuries, property damage and other losses resulting from
the incident.
Originally there were approximately 46 lawsuits by private plaintiffs pending
against SPT and others in connection with the July 1991 derailment. Most of
these cases were consolidated before a single judge in San Francisco Superior
Court and certified as class actions. After the certification, approximately
3,350 claimants completed claims forms as members of the class. In June 1993,
the class action plaintiffs and SPT entered into an agreement to settle the
class action litigation and, on September 17, 1993, the coordinating trial
judge issued his final approval of that settlement agreement. Under the terms
of the agreement the class action plaintiffs and their counsel will receive a
total of $14 million from SPT and the other remaining defendants
15
(GATX, Huber, Trinity Chemical and Transmatrix). Thirteen class action
plaintiffs have filed timely appeals. Unless settled earlier, the appeals will
be determined by the California Court of Appeals for the First District. The
only remaining civil cases arising from the derailment involve six personal
injury-only cases against SPT of which four have been brought by class members
who opted out of the class and are pursuing their individual claims.
In addition, the State of California and the United States filed separate
suits against SPT and other parties in the United States District Court in
Sacramento, California. The State asserted claims for natural resource damages
under federal and state environmental statutes and state common law, civil
penalties under state statutory law and requests injunctive relief. The federal
suit asserted claims for natural resource damages, penalties, recovery of
costs, and other relief under federal environmental statutes and for damages
pursuant to theories of common law negligence and ultrahazardous activity
liability. Several environmental and angling advocacy groups intervened in the
federal suit, seeking both injunctive relief and the creation of a fund to
cover environmental restoration costs. Prior to the institution of the State
and federal cases, SPT instituted litigation in the United States District
Court in Los Angeles against the State, the United States and private parties
(including the manufacturer of the metam sodium and the manufacturer of the
tank car), seeking declaratory relief with respect to issues of potential
CERCLA liability and damages and other relief against certain potentially
responsible private parties involved in the incident. By judicial directive and
by stipulation of the parties, all claims between and among the parties were
transferred to the United States District Court in Sacramento, California. In
late 1993, that court stayed all litigation among the parties to facilitate
settlement negotiations. Those negotiations recently culminated in a settlement
between the governments and all defendants in the form of two consent decrees
that were lodged with the federal court on March 14, 1994. The consent decree
provides that the Company will pay $30 million and the other defendants
collectively will pay $8 million in settlement of all of the government claims.
The settlement, however, is subject to the condition that the intervenors'
claims are dismissed with prejudice and the court approves the consent decrees
after public comment. The governments and the Company have filed supplemental
motions to dismiss the intervenors' claims, which the Company expects will be
decided shortly. If the motions to dismiss are granted, and the court approves
the consent decrees after public comment, the settlement will be final and the
litigation terminated, except for any appeals. The California Public Utilities
Commission also instituted an investigation into the causes of the derailment.
While 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 they exceed $10.0 million.
As of December 31, 1993, SPT had paid approximately $44.7 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, 1993,
approximately $24.9 million had 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). 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 contract between SPT and Metro.
16
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.
17
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 1993, 1992 or 1991. As of December 31,
1993, there were certain restrictions on the payment of dividends by the
Company and net worth covenants. See Notes 6 and 8 to the Consolidated
Financial Statements.
The advances to SPRC of $684.2 million at December 31, 1993 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
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
The Company had a net loss of $204.8 million for 1993 compared to a net
income of $109.5 million for 1992. The 1993 amount includes a $98.9 million
after-tax charge for the cumulative effect of a change in accounting for post-
retirement benefits other than pensions under Statement of Financial Accounting
Standards ("FAS") No. 106 adopted by the Company effective January 1, 1993. See
"--Accounting Matters." The Company had an operating loss of $53.9 million for
1993 compared to an operating loss of $24.7 million for 1992. Operating results
for 1993 were adversely affected by severe weather and flooding in certain
western states during the first quarter of the year and in certain midwestern
states during the third and fourth quarters of the year. In addition, the
Company experienced 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. The Company addressed the power shortage by continuing to lease
additional locomotives on a short-term basis. Management of SPRC estimates that
the midwest floods in the second half of 1993, which caused delays, detours and
additional repair costs, resulted in additional costs and revenue shortfalls of
approximately $60 million to $65 million for 1993, much of which occurred on
Company-owned and used rail lines. The foregoing estimate is based on a number
of assumptions and the actual amount of additional costs and revenue shortfalls
is uncertain. Partially offsetting an increase in operating expenses for 1993
were reduced joint facility rent expense of approximately $10.0 million as a
result of the negotiated settlement of a joint facility case, as well as
reduced property tax expense of approximately $16.7 million due to revised
state property tax assessments and to the favorable settlement of prior years'
disputed property taxes in California.
Operating Revenues. In 1993, railroad operating revenues increased $14.8
million compared to 1992. Railroad freight operating revenues increased $26.6
million primarily due to increased intermodal and coal carloads partially
offset by decreased automobile and food and agricultural carloads. Other
railroad revenues (primarily passenger, switching and demurrage) decreased
$11.8 million compared to 1992. Passenger revenues decreased because the
Company discontinued operating commuter service in 1992, following the sale of
the Company's peninsula corridor in the San Francisco Bay Area (the "Peninsula
Corridor"). There was a similar decrease in commuter operating expense.
Partially offsetting this decline were increased demurrage and other incidental
revenues associated with increased traffic volume. For 1993, carloads increased
3.8 percent and revenue ton-miles increased 6.9 percent compared to 1992. The
average freight revenue per ton-mile declined by 5.4 percent compared to 1992
due to continued competitive pressures on
18
rates and changes in traffic to lower revenue per ton-mile commodities and
routes. In 1993 lower than average revenue per ton-mile coal traffic carloads
increased by 39.5 percent, while higher than average revenue per ton-mile
automobile traffic carloads decreased by 30.0 percent principally due to a
plant closing and the loss of a major contract, contributing to the decline in
average freight revenue per ton-mile.
The following table compares traffic volume (in carloads), gross freight
revenues (before contract allowances and adjustments) and gross freight
revenues per carload by commodity group for 1993 compared to 1992.
CARLOAD AND GROSS FREIGHT REVENUE COMPARISON
YEARS ENDED DECEMBER 31, 1993 AND 1992
GROSS FREIGHT
CARLOADS GROSS FREIGHT REVENUES REVENUE PER CARLOAD
------------------------ -------------------------- ----------------------
1993 1992 % CHANGE 1993 1992 % CHANGE 1993 1992 % CHANGE
------- ------- -------- -------- -------- -------- ------ ------ --------
(IN THOUSANDS) (DOLLARS IN MILLIONS, EXCEPT REVENUE PER CARLOAD)
Intermodal.............. 600.8 541.9 10.9% $ 706.4 $ 640.3 10.3% $1,176 $1,182 (0.5)%
Chemical and petroleum
products............... 355.4 362.0 (1.8) 598.0 581.6 2.8 1,683 1,607 4.7
Food and agricultural
products............... 244.9 246.1 (0.5) 352.9 357.9 (1.4) 1,441 1,454 (0.9)
Coal.................... 119.4 85.6 39.5 100.2 80.2 24.9 839 937 (10.5)
Forest products......... 219.5 207.6 5.7 362.8 358.6 1.2 1,653 1,727 (4.3)
Metals and ores......... 144.6 147.6 (2.0) 199.6 204.5 (2.4) 1,380 1,386 (0.4)
Construction materials
and minerals........... 147.6 144.3 2.3 134.2 131.6 2.0 909 912 (0.3)
Automotive.............. 64.2 91.7 (30.0) 122.4 198.2 (38.2) 1,907 2,161 (11.8)
------- ------- -------- --------
Total.................. 1,896.4 1,826.8 3.8% $2,576.5 $2,552.9 0.9% $1,359 $1,397 (2.7)%
======= ======= ======== ========
. Both segments of the intermodal business, container-on-flatcar ("COFC")
and trailer-on-flatcar ("TOFC"), contributed to the increase in 1993
intermodal volume and revenue over 1992 levels. COFC growth primarily
came from increased business with major steamship customers and increases
in domestic doublestack business. TOFC volumes grew primarily as a result
of increased business with motor carriers.
. Chemical and petroleum products carloads were down 1.8% in 1993 due to
reduced demand by Company-served plastics shippers, a corresponding
reduction in plastic feedstocks, reduced carloads of soda ash and crude
oil and completion of an environmental waste contract in 1992. Revenue
per carload increased due to an increase in long-haul traffic and yield
improvement strategies, particularly in plastics.
. Coal carloads and revenue increased in 1993 due in large part to the
United Mine Workers strike affecting eastern mine operations between June
and December 1993, which increased demand for coal from Company-served
mines. The strike was settled in December 1993. The increased coal
carloads and revenues in 1993 were also due to strong summer demand by
utilities and continued demand for western coal to be used in utility
test burns. The Company expects that settlement of the coal strike, which
was a significant factor in the increase in coal carloads and revenues in
1993, will result in reductions or eliminations of coal shipments for
certain customers, but the Company cannot predict the effect of such
settlement on total coal carloads in the future.
. Carload volume in forest products increased in 1993 through growth in
shipments of paper products, while lumber product carloadings maintained
1992 levels primarily due to weak construction markets. Revenue for
forest products grew at a slower rate than carloads due to a reduction in
revenue per carload which was brought about by changes in product and
market mix.
. Automobile traffic declined in 1993 as compared to 1992 because of the
closing of a General Motors plant in California and the loss of a
contract for transportation of finished automobiles.
Operating Expenses. Railroad operating expenses for 1993 increased $41.6
million, or 1.7 percent, compared to 1992. Management of SPRC estimates that
approximately $50 million to $55 million of increased operating expenses were
associated with the severe flooding that occurred in the midwest during the
third and fourth quarters of 1993, much of which occurred on Company-owned and
used rail lines.
19
The foregoing estimate is based on a number of assumptions and the actual
amount of additional operating expenses is uncertain. Equipment rental costs
and fuel costs also increased in 1993, while labor and fringe benefits costs
and materials and supplies costs decreased in 1993 compared to 1992 as
discussed below.
The following table sets forth a comparison of the Company's operating
expenses for 1993 and 1992.
RAILROAD OPERATING EXPENSE COMPARISON
YEARS ENDED DECEMBER 31, 1993 AND 1992
1993 1992 % CHANGE
---------- ---------- --------
(DOLLARS IN MILLIONS)
Labor and fringe benefits....................... $ 1,013.0 $ 1,037.7 (2.4)%
Fuel............................................ 212.6 197.8 7.5
Materials and supplies.......................... 161.6 189.5 (14.7)
Equipment rental................................ 325.5 283.2 14.9
Depreciation and amortization................... 228.2 227.2 0.4
Other........................................... 604.1 568.0 6.4
---------- ----------
Total......................................... $ 2,545.0 $ 2,503.4 1.7%
========== ==========
. Labor and fringe benefit expenses decreased $24.7 million, or 2.4
percent, for 1993 compared to 1992. At December 31, 1993 Company
employment had substantially declined compared to December 31, 1992,
primarily due to a decline in roadway maintenance employees during the
last four months of 1993 resulting in reduced labor costs for day-to-day
repair and maintenance activities, as well as to a decline in
transportation employees in December 1993 resulting from the November
1993 ratification of a UTU agreement. During 1993, train crew starts
declined by 2.1 percent compared to 1992, even though adversely impacted
by the midwest floods in the third and fourth quarters of 1993,
contributing to the overall decline in labor costs. In addition, included
in the expense reduction above is reduced payroll tax expense due to
reduced employment and the elimination in 1993 of the railroad
unemployment insurance repayment tax.
. Fuel expense increased $14.8 million, or 7.5 percent, due primarily to
increased fuel consumption associated with increased traffic volume,
partially offset by a 2.1 percent decline in the average cost per gallon
of fuel from $.61 in 1992 to $.59 in 1993.
. Materials and supplies expenses decreased $27.9 million, or 14.7 percent,
for 1993 compared to 1992 due primarily to reduced running repairs on
locomotives, reduced roadway repair and maintenance activity, the use of
recycled and reconditioned second-hand materials, as well as to reduced
purchases of material during the first quarter of 1993 in response to
reduced revenues in that quarter compared to 1992. There was also a $5.0
million non-recurring inventory adjustment during 1993. During the year,
the Company rebuilt or performed heavy repairs on 203 locomotives
compared to heavy repairs on 141 locomotives in 1992. Costs associated
with the rebuilding of 60 locomotives in 1993 were capitalized.
. Equipment rental costs increased $42.3 million, or 14.9 percent, due to a
combination of the effects of the midwest floods causing increased
equipment cycle time and increased short-term locomotive lease costs
associated with increased traffic volume and a shortage of locomotives in
certain areas. Included in the increase is a $19.1 million increase in
net car hire, and a $13.4 million increase in locomotive lease costs over
1992.
. Depreciation and amortization expense increased $1.0 million, or 0.4
percent, due primarily to an increased depreciable property base in 1993.
. Other expenses increased $36.1 million, or 6.4 percent, for 1993 compared
to 1992. This category of expense includes purchased repairs and
services, joint facility rent and maintenance costs, casualty
20
costs and property and other taxes. The 1993 increase is due primarily to
detour fees and joint facility maintenance and operations costs associated
with the midwest floods which SPRC estimated to be approximately $27
million, much of which occurred on Company-owned and used rail lines. The
foregoing estimate is based on a number of assumptions and the actual
amount of additional flood-related costs is uncertain. Also showing an
increase for 1993 were casualty costs (due in part to the fact that 1992
casualty costs were reduced by insurance recoveries received with respect
to claims accrued in 1992 and prior years), environmental cost accruals,
data processing equipment rental costs as well as an increase in taxes on
fuel beginning in the fourth quarter of 1993. Partially offsetting the
expense increases in this category were reduced joint facility rent
expense of approximately $10.0 million as a result of the negotiated
settlement of a joint facility case earlier in the year, as well as
reduced property tax expense of approximately $16.7 million due to revised
state property tax assessments and to a favorable settlement of prior
years' disputed property taxes in California.
Other Income and Interest Expense. Other income in total was $8.6 million in
1993 compared to $292.1 million in 1992, a decrease of $283.5 million. Gains on
sales of property and real estate decreased $276.8 million to a total of $24.5
million in 1993. Rental income increased $3.7 million due in part to non-
recurring rental income associated with a fiber optic conduit easement with
Southern Pacific Telecommunications Company ("SP Telecom"). Interest income
remained relatively stable with a decrease of $0.6 million during 1993. The
remaining portion of other income was an expense of $41.1 million in 1993
compared to an expense of $31.3 million in 1992, an increased expense of $9.8
million. This increase is due in part to the write-off of $12.3 million of
deferred loan costs and to increased expenses of $10.6 million in 1993
associated with the sale of accounts receivable which were partially offset by
reduced expenses associated with properties held for sale. In addition, in
November 1993, the Company received $27.1 million in cash from 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 $101.5 million in 1993 compared to $89.2 million
in 1992, an increase of $12.3 million due primarily to a higher level of
outstanding debt during 1993.
ENERGY TAX
On August 10, 1993, the President signed into law legislation which imposes a
tax on certain fuels. The tax is expected to increase the Company's fuel costs
for 1994 by approximately $10 million to $15 million. However, certain of the
Company's freight contracts have escalation clauses that would help to offset
such increased fuel costs. The Company also posted certain rate increases
effective October 1, 1993 that represent a surcharge intended to mitigate the
impact of the fuel tax.
INFLATION
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 have adversely affected the Company's
ability to price services to fully recover cost increases. Certain of the wage
agreements obtained in 1991, 1992 and 1993 have reduced the effects of
inflation on future operating costs until they expire and become subject to
renegotiation in 1995 (1998 with respect to the agreement covering the Western
Lines).
ACCOUNTING MATTERS
In 1991, the Company recorded the 1991 Special Charge of $270.0 million. The
1991 Special Charge provided for employee separation and relocation related
primarily to labor agreements reached in 1991, sale, lease or abandonment of
low density lines, restoration and clean-up costs and certain legal matters.
See Note 2 to the Consolidated Financial Statements included elsewhere herein.
21
The Company adopted FAS 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" effective January 1, 1993, thus incurring an
after-tax charge of $98.9 million for the cumulative effect of change in
accounting principle relating to the Company's retiree welfare plan. The
Company has amended its retiree benefit policies and estimates that its
liability for such retiree benefits at January 1, 1993 was approximately $160.1
million before tax, after reflecting these policy amendments. See Note 10 to
the Company's Consolidated Financial Statements included elsewhere herein.
In February 1992, FAS 109 "Accounting for Income Taxes" was issued. Through
December 31, 1992, the Company accounted for income taxes under the asset and
liability method prescribed by FAS 96, "Accounting for Income Taxes".
Management adopted FAS 109 prospectively in the first quarter of 1993. The
impact of adoption of FAS 109 did not have a material effect on the Company's
Consolidated Financial Statements.
Under both FAS 96 and FAS 109, deferred tax liabilities and assets are
recorded based on the enacted income tax rates which are expected to be in
effect in the periods in which the deferred tax liability or asset is expected
to be settled or realized. A change in the tax laws or rates results in
adjustments to the deferred tax liabilities and assets. The effect of such
adjustments shall be included in income in the period in which the tax laws or
rates are changed.
In November 1992, FAS 112 "Employers' Accounting for Postemployment Benefits"
was issued. 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. The initial effect of applying FAS
112 is to be reported as the effect of a change in accounting method and
previously issued financial statements are not to be restated. The Company will
adopt FAS 112 and take a pre-tax charge of approximately $6.6 million in the
first quarter of 1994 as required by FAS 112. See Note 1 to the Company's
Consolidated Financial Statements included elsewhere herein.
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.
SSW, a 99.9% owned subsidiary of SPT has not filed an annual report on Form
10-K by reason of its guarantee of the Senior Secured Notes of SPT because:
(a) summarized financial information concerning SSW as required by Rule
1-02(aa) of Regulation S-X is contained in Note 16 to SPT's Consolidated
Financial Statements on pages F-22 to F-24; and
(b) SPT and SSW are jointly and severally liable with respect to the
Senior Secured Notes and the aggregate of total assets, net earnings and
net equity of SPT and SSW constitute a substantial portion of the total
assets, net earnings and net equity of SPT on a consolidated basis.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Documents filed as part of this report:
1. Financial statements and schedules:
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:
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.
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 10.1 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 The Denver and Rio Grande Western Railroad Company Benefit Protection
Agreement with William J. Holtman dated August 11, 1989 (incorporated by
reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1989).*
10.4 Southern Pacific Transportation Company Benefit Protection Agreement with
E.L. Johnson dated August 17, 1989 (incorporated by reference to Exhibit
10.11 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1989).*
10.5 1990 Incentive Compensation Plan of Southern Pacific Transportation
Company (incorporated by reference to Exhibit 10.12 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1989).*
10.6 Rio Grande Industries, Inc. (SPRC's former name) 1990-1994 Long Term
Earnings Growth Incentive Plan as adopted by Board of Directors of SPRC
on May 23, 1990 (incorporated by reference to Exhibit 10.13 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1990).*
23
10.7 Southern Pacific Rail Corporation Employment Agreement with E.L. Moyers
dated July 16, 1993 (previously filed as Exhibit 10.14 to SPRC's
Registration Statement on Form S-1 which was initially filed on May 12,
1993 (File No. 33-62608), and incorporated by this reference).*
10.8 Southern Pacific Transportation Company Supplemental Retirement Benefit
for D.M. Mohan dated March 25, 1993 (incorporated by reference to
Exhibit 10.18 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1992).*
10.9 Southern Pacific Transportation Company Pension and Benefit Agreement
with W.J. Holtman dated December 9, 1992 (incorporated by reference to
Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1992).*
10.10 1993 Incentive Compensation Plan of Southern Pacific Transportation
Company (incorporated by reference to Exhibit 10.20 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1992).*
10.11 Rio Grande Industries, Inc. (the Company's former name) 1990-1994 Long
Term Earnings Growth Incentive Plan (as amended and effective January 1,
1993) as adopted by the Board of Directors of SPRC on January 27, 1993
(incorporated by reference to Exhibit 10.21 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1992).*
10.12 Form of Registration Rights Agreement (previously filed as Exhibit 10.19
to SPRC's Registration Statement on Form S-1 which was initially filed
on May 12, 1993 (File No. 33-62608), and incorporated by this
reference).
10.13 Form of Corporate Matters Agreement (previously filed as Exhibit 10.20
to SPRC's Registration Statement on Form S-1 which was initially filed
on May 12, 1993 (File No. 33-62608), and incorporated by this
reference).
10.14 Form of 1993 Equity Incentive Plan (previously filed as Exhibit 10.21 to
SPRC's Registration Statement on Form S-1 which was initially filed on
May 12, 1993 (File No. 33-62608), and incorporated by this reference).*
10.15 Employment Agreement with Cannon Y. Harvey dated June 1, 1993
(previously filed as 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 incorporated by this reference).*
10.16 Employment Agreement with Thomas J. Matthews dated August 1, 1993
(previously filed as 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 incorporated by this reference).*
10.17 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).*
21.1 Subsidiaries of the Company (previously filed as part of Exhibit 21.1 to
the Registration Statement of SPRC on Form S-1 which was initially filed
on December 17, 1993 (File No. 33-73116), and incorporated by this
reference).
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, 1993.
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.
24
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 AUTHORIZED.
SOUTHERN PACIFIC TRANSPORTATION
COMPANY
/s/ B.C. Kane
By: _________________________________
B.C. Kane
Controller
(Principal Accounting Officer)
Date: March 24, 1994
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 24, 1994
/s/ Edward L. Moyers
By: _________________________________
Edward L. Moyers
Chairman, President, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: March 24, 1994
/s/ Robert F. Starzel
By: _________________________________
Robert F. Starzel
Vice Chairman and Director
Date: March 24, 1994
/s/ Donald C. Orris
By: _________________________________
Donald C. Orris
Executive Vice President--
Distribution Services and Director
Date: March 24, 1994
/s/ Thomas J. Matthews
By: _________________________________
Thomas J. Matthews
Vice President--Administration and
Director
Date: March 24, 1994
/s/ Glenn P. Michael
By: _________________________________
Glenn P. Michael
Vice President--Operations and
Director
Date: March 24, 1994
/s/ Lawrence C. Yarberry
By: _________________________________
Lawrence C. Yarberry
Vice President--Finance
(Principal Financial Officer)
25
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
----
Report of Independent Auditors.......................................... F-1
Consolidated Balance Sheets, December 31, 1993 and 1992................. F-2
Consolidated Statements of Operations for the Years Ended December 31,
1993, 1992 and 1991.................................................... F-4
Consolidated Statements of Stockholder's Equity for the Years Ended De-
cember 31, 1993, 1992 and 1991......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1992 and 1991.................................................... F-6
Notes to Consolidated Financial Statements, December 31, 1993........... F-7
Schedules:
V. Property and Equipment...................................... F-25
Accumulated Depreciation and Amortization of Property and
VI. Equipment................................................... F-26
VIII. Valuation and Qualifying Accounts and Reserves.............. F-27
X. Supplementary Income Statement Information.................. F-28
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.
26
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 as of December 31, 1993
and 1992, 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, 1993. In connection with our audits of the consolidated financial
statements, we also have audited financial statement schedules V, VI, VIII and
X as of and for the years ended December 31, 1993, 1992 and 1991. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1993
and 1992, and the results of their operations and their cash flows for each of
the years in the three year period ended December 31, 1993 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedules, as of and for the years ended December 31, 1993,
1992 and 1991, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 1 to the financial statements, effective January 1, 1993
the Company changed its methods of accounting for income taxes and
postretirement benefits other than pensions.
KPMG Peat Marwick
San Francisco, California
February 17, 1994, except as to the
third paragraph of Note 15, which is
as of March 2, 1994
F-1
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------
1993 1992
-------- --------
(DOLLARS IN
MILLIONS)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents (includes restricted cash of $5.4
in 1993 and 1992)......................................... $ 31.9 $ 45.4
Accounts receivable, net of allowance for doubtful accounts
of $7.0 in 1993 and $7.6 in 1992 (Note 3)................. 109.7 111.3
Notes receivable from Rio Grande Receivables, Inc. (Note
3)........................................................ 24.1 14.7
Other notes receivable..................................... 2.3 3.7
Materials and supplies, at cost............................ 46.5 44.1
Other current assets....................................... 41.4 38.2
-------- --------
Total current assets..................................... 255.9 257.4
-------- --------
PROPERTY, at cost (Notes 4, 6, 9 and 12)
Roadway and structures..................................... 5,496.9 5,298.8
Railroad equipment......................................... 1,612.2 1,556.1
Other property............................................. 174.3 123.1
-------- --------
Total property........................................... 7,283.4 6,978.0
Less accumulated depreciation.............................. 2,792.1 2,717.2
-------- --------
Property, net.............................................. 4,491.3 4,260.8
-------- --------
OTHER ASSETS AND DEFERRED CHARGES
Investments in affiliated companies........................ 17.0 26.3
Notes receivable and other investments..................... 60.1 48.8
Note receivable from Rio Grande Receivables, Inc. (Note 3). 27.8 27.8
Other...................................................... 85.1 76.6
-------- --------
Total other assets....................................... 190.0 179.5
-------- --------
TOTAL.................................................... $4,937.2 $4,697.7
======== ========
(Continued)
See accompanying notes to consolidated financial statements.
F-2
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31,
------------------
1993 1992
-------- --------
(DOLLARS IN
MILLIONS)
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts and wages payable............................... $ 119.4 $ 159.7
Accrued payables
Taxes.................................................. 34.5 53.3
Interest............................................... 26.4 14.2
Vacation pay........................................... 60.6 66.9
Current portion of long-term debt (Note 6)............... 62.2 147.9
Redeemable preference shares of a subsidiary (Note 8).... 1.8 2.2
Other current liabilities (Note 5)....................... 520.9 558.1
-------- --------
Total current liabilities............................ 825.8 1,002.3
-------- --------
LONG-TERM DEBT (Note 6).................................... 916.3 755.6
-------- --------
DEFERRED INCOME TAXES (Note 7)............................. 837.7 938.1
-------- --------
OTHER LIABILITIES (Notes 5 and 10)......................... 642.3 515.4
-------- --------
REDEEMABLE PREFERENCE SHARES OF A SUBSIDIARY (Note 8)...... 44.2 46.0
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 9, 10 and 12)
STOCKHOLDER'S EQUITY
Common stock, without par value: authorized 2,000 shares,
issued and outstanding 1,200 shares in 1993 and 1,000
shares in 1992.......................................... 424.9 424.9
Additional paid-in capital............................... 615.5 150.0
Retained income (Note 8)................................. 1,314.7 1,519.5
Advances to parent....................................... (684.2) (654.1)
-------- --------
Total stockholder's equity........................... 1,670.9 1,440.3
-------- --------
TOTAL................................................ $4,937.2 $4,697.7
======== ========
See accompanying notes to consolidated financial statements.
F-3
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1992 1991
--------- -------- --------
(IN MILLIONS)
OPERATING REVENUES
Railroad...................................... $ 2,489.7 $2,474.9 $2,405.0
Other......................................... 61.0 48.9 40.0
--------- -------- --------
Total....................................... 2,550.7 2,523.8 2,445.0
--------- -------- --------
OPERATING EXPENSES
Railroad
Labor and fringe benefits (Note 10).......... 1,013.0 1,037.7 1,033.9
Fuel......................................... 212.6 197.8 192.2
Materials and supplies....................... 161.6 189.5 192.9
Equipment rental............................. 325.5 283.2 254.9
Depreciation and amortization (Note 4)....... 228.2 227.2 231.2
Other........................................ 604.1 568.0 578.8
Special charge (Note 2)...................... -- -- 270.0
--------- -------- --------
Total railroad.............................. 2,545.0 2,503.4 2,753.9
Other......................................... 59.6 45.1 38.8
--------- -------- --------
Total....................................... 2,604.6 2,548.5 2,792.7
--------- -------- --------
OPERATING LOSS.................................. (53.9) (24.7) (347.7)
--------- -------- --------
OTHER INCOME
Gains from sales of property (Note 4)......... 24.5 301.3 469.8
Real estate and other rentals, net............ 20.7 17.0 23.6
Interest income............................... 4.5 5.1 7.4
Other income (expense), net (Note 3).......... (41.1) (31.3) (55.3)
--------- -------- --------
Total....................................... 8.6 292.1 445.5
--------- -------- --------
INTEREST EXPENSE (Note 6)....................... 101.5 89.2 93.8
--------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES............... (146.8) 178.2 4.0
--------- -------- --------
INCOME TAXES (BENEFIT) (Note 7)
Current....................................... (1.8) (1.3) --
Deferred...................................... (39.1) 70.0 2.5
--------- -------- --------
Total....................................... (40.9) 68.7 2.5
--------- -------- --------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING........................... (105.9) 109.5 1.5
CUMULATIVE EFFECT ON YEARS PRIOR TO 1993 OF
CHANGE IN ACCOUNTING FOR POST-RETIREMENT BENE-
FITS OTHER THAN PENSIONS (Net of tax benefit of
$61.2) (Note 10)............................... (98.9) -- --
--------- -------- --------
NET INCOME (LOSS)............................... $ (204.8) $ 109.5 $ 1.5
========= ======== ========
See accompanying notes to consolidated financial statements.
F-4
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
COMMON STOCK
---------------- ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED ADVANCES STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL INCOME TO PARENT EQUITY
--------- ------ ---------- -------- --------- -------------
(IN MILLIONS, EXCEPT SHARES)
Balances at December 31,
1990................... 1,000 $424.9 $150.0 $1,408.5 $(599.7) $1,383.7
Net income............. -- -- -- 1.5 -- 1.5
Contribution of SPCSL
common stock.......... -- -- -- -- 14.2 14.2
Advances to parent..... -- -- -- -- (35.3) (35.3)
----- ------ ------ -------- ------- --------
Balances at December 31,
1991................... 1,000 424.9 150.0 1,410.0 (620.8) 1,364.1
Net income............. -- -- -- 109.5 -- 109.5
Advances to parent..... -- -- -- -- (33.3) (33.3)
----- ------ ------ -------- ------- --------
Balances at December 31,
1992................... 1,000 424.9 150.0 1,519.5 (654.1) 1,440.3
Net loss............... -- -- -- (204.8) -- (204.8)
Advances to parent..... -- -- -- -- (30.1) (30.1)
Common stock issued.... 200 -- 445.5 -- -- 445.5
Contribution of capi-
tal................... -- -- 20.0 -- -- 20.0
----- ------ ------ -------- ------- --------
Balances at December 31,
1993................... 1,200 $424.9 $615.5 $1,314.7 $(684.2) $1,670.9
===== ====== ====== ======== ======= ========
See accompanying notes to consolidated financial statements.
F-5
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1992 1991
------- ------------- ------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................. $(204.8) $109.5 $ 1.5
------- ------ ------
Adjustments to net income (loss)
Depreciation and amortization................ 228.2 227.2 231.5
Special charge............................... -- -- 270.0
Deferred income taxes........................ (100.3) 70.0 2.5
Gains from sales of property................. (24.5) (301.3) (469.8)
Cumulative effect of change in accounting for
post-retirement benefits other than pen-
sions....................................... 160.1 -- --
Changes in:
Receivables, net............................ (5.0) 38.3 8.9
Materials and supplies...................... (2.4) (1.9) 17.6
Income taxes payable/receivable............. (18.8) 2.0 (5.9)
Other current and noncurrent assets......... 1.8 11.3 (1.5)
Other current and noncurrent liabilities.... (104.8) (28.7) (90.8)
------- ------ ------
Total adjustments......................... 134.3 16.9 (37.5)
------- ------ ------
Net cash provided by (used for) operating
activities............................... (70.5) 126.4 (36.0)
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................... (404.0) (310.3) (259.6)
Property sold and retired..................... 28.1 322.9 513.4
Change in notes receivable and other invest-
ments, net................................... (3.3) (37.3) (7.3)
------- ------ ------
Net cash provided by (used for) investing
activities............................... (379.2) (24.7) 246.5
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt, net of costs.. 430.3 510.7 43.7
Debt repayment, net........................... (427.4) (560.2) (257.5)
Advances to parent............................ (30.1) (33.3) (35.3)
Proceeds from issuance of common stock, net of
costs........................................ 445.5 -- --
Contribution of capital....................... 20.0 -- --
Redeemable preference shares repayment........ (2.1) (2.1) (1.3)
------- ------ ------
Net cash provided by (used for) financing
activities............................... 436.2 (84.9) (250.4)
------- ------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS......... (13.5) 16.8 (39.9)
CASH AND CASH EQUIVALENTS--BEGINNING OF THE
YEAR........................................... 45.4 28.6 68.5
------- ------ ------
CASH AND CASH EQUIVALENTS--END OF THE YEAR...... $ 31.9 $ 45.4 $ 28.6
======= ====== ======
See accompanying notes to consolidated financial statements.
F-6
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership, Principles of Consolidation and Basis of Presentation--Southern
Pacific Transportation Company ("SPT") was a wholly-owned subsidiary of SPTC
Holding, Inc. ("SPTCH") until August 1993 at which time, SPTCH, a wholly-owned
subsidiary of Southern Pacific Rail Corporation ("SPRC") (formerly Rio Grande
Industries, Inc.) was merged into 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") and SPCSL
Corp. ("SPCSL"), on a consolidated basis. SPRC also owns Rio Grande Holding,
Inc. ("RGH") which owns The Denver and Rio Grande Western Railroad Company
("D&RGW"). SPRC management continues to review and consider the placement of
various subsidiaries within the corporate structure of SPRC.
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 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 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
disposals of equipment. Certain railroad properties that are not essential to
transportation operations are being 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 Postretirement Benefits Other Than Pensions" and recorded the
estimate of its liability under Statement No. 106 of $160.1 million, which net
of income taxes resulted in a charge to earnings of $98.9 million (See Note
10). Statement 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
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Postemployment Benefits--In November 1992, Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" was
issued. Statement No. 112 requires employers to recognize the obligation to
provide benefits to former or inactive employees after employment but before
retirement, if certain conditions are met. The initial effect of applying
Statement No. 112 is to be reported as the effect of a change in accounting
method and previously issued financial statements are not to be restated. The
Company will adopt Statement No. 112 and take a pre-tax charge of approximately
$6.6 million in the first quarter of 1994.
Income Taxes--Prior to January 1, 1993 income taxes were reported using the
liability method prescribed by Statement of Financial Accounting Standards No.
96 "Accounting for Income Taxes." Under Statement No. 96, 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.
Effective January 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
impact of adoption of Statement No. 109 was not material to the Company's
consolidated financial statements.
Under both Statement No. 96 and Statement No. 109, deferred tax liabilities
and assets are recorded based on the statutory income tax rates which are
expected to be settled or realized. A change in the tax laws or rates results
in adjustments to the deferred tax liabilities and assets. The effect of such
adjustments shall be included in income in the period in which the tax laws or
rates are changed.
Reclassifications--Certain of the amounts previously reported have been
reclassified to conform to the current consolidated financial statement
presentation.
2. SPECIAL CHARGE
In the fourth quarter of 1991, the Company recorded a $270 million Special
Charge. Approximately $125 million of the Special Charge is related to labor
agreements then recently concluded and then in progress which have resulted in
crew size reduction and payments to approximately 1,000 employees and
relocation costs over the next several years. Approximately $55 million of the
Special Charge was credited to accumulated depreciation to reserve for 1,200
miles of low density rail lines identified for sale or abandonment. The
remainder of the charge was to provide for restoration and clean up costs on
certain properties ($74 million) and for various legal matters ($16 million).
Expenditures in 1993 and 1992 applied against the reserves were $54.7 million
and $72.2 million for employee separation and relocation and $16.2 million and
$15.7 million for restoration and cleanup costs, respectively.
3. SALE OF RECEIVABLES
Beginning in 1989, the Company began selling certain net recievables
(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.
F-8
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ABS purchases an undivided interest in the receivables up to an aggregate
amount of approximately $300.0 million, net of discounts, at any one time, for
a period up to five years subject to certain conditions. 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. During 1991, one bank's rating was
reduced and additional bank commitments were obtained from the remaining banks.
As of December 31, 1993, 1992 and 1991, the Company had sold $338.3 million,
$317.9 million and $369.2 million of net outstanding receivables, respectively,
and had notes receivables from RGR for receivables sold of $51.9 million, $42.5
million and $81.5 million, of which $27.8 million were interest bearing at
December 31, 1993, 1992 and 1991, and are included in other assets. Included in
other income (expense), net is approximately ($37.9) million in 1993, ($27.8)
million in 1992, and ($58.0) million in 1991 of discounts and other expenses
associated with the sales of accounts receivable. The initial term of the
agreements expire on October 31, 1994. The Company has obtained commitments of
the banks to extend the facility for a period of one year.
4. PROPERTY
The average depreciation rates for the Company's property and equipment were
approximately 3.1 percent for roadway and structures, 4.9 percent for
locomotives and 4.2 percent for freight cars for 1993.
The Company received cash proceeds from sales and retirements of real estate
and property of $28.1 million, $322.9 million and $513.4 million in 1993, 1992
and 1991, respectively. 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 and $83.0 million from sales to the Los Angeles
County Transportation Commission ("LACTC"). The 1991 amount includes $321.7
million from sales to the LACTC and $91.9 million from sales to the JPB. The
Company incurred and capitalized approximately $12 million in 1993 and $18
million in each of 1992 and 1991 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 approximately $110 million. The Company will retain exclusive freight
rights on the sold properties.
5. OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
Other current liabilities include the following amounts at December 31, 1993
and 1992:
1993 1992
------ ------
(IN MILLIONS)
Reserves for casualty, freight-related claims, and other
(current portion)......................................... $145.0 $190.8
Accrued repairs, equipment rentals and other payables...... 333.4 320.7
Post-retirement benefit obligation......................... 20.0 --
Reserve for employee separation and relocation
(current portion)......................................... 22.5 46.6
------ ------
$520.9 $558.1
====== ======
F-9
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in other non-current liabilities are $312.7 million and $299.6
million for casualty and freight-related claims and $35.3 million and $66.0
million for employee separation and relocation at December 31, 1993 and 1992,
respectively, in addition to $140.6 million for post-retirement benefits other
than pensions at December 31, 1993.
6. LONG-TERM DEBT
Long-term debt is summarized as follows (in millions):
DECEMBER 31,
---------------
1993 1992
------ -------
Equipment obligations (9.125-14.25%; due 1994 to 2005)......... $378.1 $437.6
Mortgage bonds (2.75-8.2%; due 1994 to 2001)................... 39.6 42.1
Bank credit facility (5.438-7.75%; due 1994 to 1996)........... -- 335.0
Credit agreement (various; due 1996)........................... 125.0 --
Senior secured notes (10.5%; due 1999)......................... 290.0 --
Other debt (4.0-6.0%; due 1994 to 2018)........................ 88.1 88.1
Capitalized lease obligations (Note 9)......................... 57.7 0.7
------ -------
Total...................................................... 978.5 903.5
Less current portion........................................... (62.2) (147.9)
------ -------
Total long-term............................................ $916.3 $ 755.6
====== =======
On May 12, 1992, SPT completed a refinancing of its $525 million bank loan
and other credit facilities and obtained a $450 million credit facility from a
group of banks (the "Bank Credit Facility"), which consisted of a $325 million
four-year amortizing term loan (the "SPT Term Loan") and a $125 million four-
year non-amortizing revolver (the "SPT Revolver"). On August 17, 1993, the Bank
Credit Facility was repaid as part of the SPRC common stock and debt
transactions and the issuance of 200 shares of common stock by the Company to
SPRC.
SPT closed $290 million of 10 1/2% Senior Secured Notes on April 6, 1993. The
Notes are secured by the rail lines of SSW and are required to be repaid over
the three-year period 1997-1999. Proceeds of the financing were used to make a
$100 million payment on the SPT Term Loan, a $125 million payment on the SPT
Revolver, and for general corporate purposes. The Notes contain certain
covenants and restrictions on dividends, loans and affiliate transactions, and
provided registration rights to their holders. The registration rights were
satisfied by an exchange offer of substantially identical notes completed in
November 1993.
In August 1993 SPT entered into a $200 million three-year unsecured credit
agreement (the "Credit Agreement") (replacing the SPT Revolver) and made an
initial $125 million drawdown thereunder. The Credit Agreement contains several
quarterly financial covenants including, subject to certain exceptions,
required minimum tangible net worth; a maximum funded debt to tangible net
worth ratio; and a minimum fixed charge coverage ratio. As a result of delays
in asset sales and the continuing effects of severe midwestern floods, SPT was
required to obtain waivers of compliance with certain financial covenants
applicable as of September 30,1993 contained in the Credit Agreement. Further,
because of the delays in asset sales and continuing effects of the flooding,
SPT entered into amendments to the Credit Agreement with its banking group in
December 1993 to modify certain financial covenant tests.
F-10
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As part of an on-going program to improve its locomotive fleet, the Company
acquired through capital lease 15 new locomotives in 1993 and borrowed a total
of $103.8 million in 1991 and 1992 to purchase a total of 55 new and 45
remanufactured locomotives.
Contractual maturities of long-term debt (including capital lease
obligations) during each of the five years subsequent to 1993 and thereafter
are as follows (in millions):
1994............................................................. $ 62.2
1995............................................................. 54.0
1996............................................................. 171.8
1997............................................................. 144.4
1998............................................................. 137.7
Thereafter......................................................... 408.4
------
$978.5
======
Management estimates the fair value of the Company's debt at December 31,
1993 and 1992 was approximately $1,067 million and $944 million, respectively,
based on interest rates for similar issues and financings.
At December 31, 1993 the Company is a party to interest rate swap agreements
with an aggregate notional amount of $100 million, which is used to hedge its
interest rate exposure and is accounted for as an adjustment of interest
expense over the life of the debt.
A significant portion of railroad equipment and certain railroad property is
subject to liens securing the mortgage bonds, equipment obligations, or other
debt.
7. INCOME TAXES
The following summarizes income tax expense (benefit) for the years
indicated:
YEAR ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- ------- -------
(IN MILLIONS)
Current
Federal...................................... $ -- $ -- $ --
State........................................ (1.8) (1.3) --
-------- ------- ------
Total current.............................. (1.8) (1.3) --
-------- ------- ------
Deferred
Federal...................................... (31.2) 58.2 2.2
State........................................ (7.9) 11.8 0.3
-------- ------- ------
Total deferred............................. (39.1) 70.0 2.5
-------- ------- ------
Deferred taxes on cumulative effect of change
in accounting for post-retirement benefits
other than pensions
Federal...................................... (51.8) -- --
State........................................ (9.4) -- --
-------- ------- ------
Total deferred taxes on cumulative effect.. (61.2) -- --
-------- ------- ------
Total income tax expense (benefit)............. $ (102.1) $ 68.7 $ 2.5
======== ======= ======
Deferred tax expense in 1993 includes $18.7 million related to the change in
the Federal tax rate.
F-11
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 for the years ended
December 31, 1993, 1992 and 1991:
DECEMBER 31,
------------------
1993 1992 1991
----- ---- ----
Statutory rate.......................................... (35.0%) 34.0% 34.0%
State income taxes (net of federal income tax benefit).. (4.3) 3.9 3.1
Cumulative effect of federal tax rate change (from 34%
to 35%)................................................ 12.7 -- --
Other, net.............................................. (1.3) 0.7 24.4
----- ---- ----
Effective rate.......................................... (27.9%) 38.6% 61.5%
===== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1993 and January 1, 1993 are presented below (in millions):
DECEMBER
31, JANUARY 1,
1993 1993
--------- ----------
Deferred tax assets:
Accruals and reserves not deducted for tax purposes
until paid......................................... $ 350.8 $ 317.6
Net operating loss carryforwards.................... 546.7 485.6
Other............................................... 108.5 90.6
--------- --------
Total gross deferred tax assets................... 1,006.0 893.8
--------- --------
Deferred tax liabilities
Differences in depreciation and cost capitalization
methods (including deferred gains on property)..... (1,835.7) (1,791.9)
Other............................................... (8.0) (40.0)
--------- --------
Total gross deferred tax liabilities.............. (1,843.7) (1,831.9)
--------- --------
Net deferred tax liability........................ $ (837.7) $ (938.1)
========= ========
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.
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 will also 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.
F-12
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The intercompany tax allocation agreement among the Company and SPRC, which
became effective following the closing of the Acquisition, was amended
effective January 1, 1992 to provide that the Company will pay to SPRC the
lessor 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.
As of December 31, 1993 the Company had approximately $1.3 billion of net
operating loss carryforwards ("NOLs") which expire in 2003 through 2008. The
NOLs are subject to review and potential disallowance, in whole or in part, by
the Internal Revenue Service ("IRS") upon audit of the federal income tax
returns of the Company. SPRC's consolidated federal income tax returns, in
which the Company is included, are currently being examined for the period
October 14, 1988 through 1990. Management believes adequate provision has been
made for any potential adverse result.
8. REDEEMABLE PREFERENCE SHARES OF A SUBSIDIARY
SSW, a 99.9 percent owned subsidiary of SPT, originally issued $53.5 million
($48.5 million Series A and $5 million Series B) of SSW's non-voting redeemable
preference shares. The current carrying amount on the balance sheets at
December 31, 1993 and 1992 reflects the outstanding balances of the redeemable
preference shares of $46.0 million and $48.2 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 1993 are as
follows (in millions):
1994................................................................. $4.1
1995................................................................. 4.2
1996................................................................. 4.2
1997................................................................. 4.2
1998................................................................. 4.2
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,
1993, $35.5 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.
F-13
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, 1993 are summarized as follows:
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
-----------------------
1994...................................................... $ 8.2 $120.9
1995...................................................... 9.4 105.2
1996...................................................... 9.4 88.8
1997...................................................... 9.4 81.7
1998...................................................... 9.4 55.4
Later years through 2015.................................. 66.4 163.6
------ ------
Total minimum payments.................................. 112.2 $615.6
======
Less amount representing interest (at rates ranging from
4.1% to 13.3%)........................................... (54.5)
------
Present value of minimum lease payments................... $ 57.7
======
Rental expense for noncancellable operating leases with terms over one year
was $146.7 million, $106.3 million and $138.2 million for the years ended
December 31, 1993, 1992 and 1991, respectively. Contingent rentals and sublease
rentals were not significant.
During the fourth quarter of 1993, the Company committed to a capital lease
financing for 50 new locomotives. The locomotives will be leased for a term of
21 years. The first 17 locomotives were delivered in the fourth quarter, 1993,
with the remainder to be delivered in the first half of 1994. In addition, the
Company committed to acquire 133 remanufactured locomotives in 1994 to be
financed with a capital lease. The total present value of minimum lease
payments relating to the 183 locomotives is expected to be approximately $131
million.
In 1984, the Company entered into a long-term lease agreement with the Ports
of Los Angeles and Long Beach. 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 on the annual volume of container
movement at the Intermodal Container Transfer Facility. The minimum lease
payments, ranging from approximately $3.0 million to $4.5 million per year for
1994 to 1998 are included in the table above. However, for each 5-year period
from 1998 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 1993 expense was $6.5
million.
In late 1990, the Company entered into an agreement to sell up to 9,000 of
its freight cars to a company which would recondition the cars and lease them
back to the Company or third parties under a full-maintenance lease agreement.
As of December 31, 1993, approximately 5,680 freight cars have been sold under
the agreement for approximately $43 million in cash and notes receivable. The
Company realized a gain of $19.3 million from these sales, which has been
deferred and is being amortized over the terms of the leases. Annual rental for
the reconditioned freight cars leased back to the Company under operating
leases for periods up to 10 years is expected to be approximately $30.9 million
in 1994. In 1993, the Company entered into a capital lease covering 1,651
freight cars with a total present value of minimum lease payments of
approximately $43 million.
F-14
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1992, the Company commenced a sale/leaseback transaction consisting of 100
locomotives which were sold to a rebuilder for their net book value of
approximately $10.2 million, and were leased back (when rebuilt) under an
operating lease agreement over a term of nine years.
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 a benefit of $2.2 million in
1993, $8.7 million in 1992, and $15.0 million in 1991. 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 $326 million, $283 million and $255 million for 1993, 1992 and
1991, 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 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.
The following summarizes the components of SPRC's net periodic pension cost
under the provisions of Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions" (in millions):
YEAR ENDED DECEMBER 31
-------------------------
1993 1992 1991
------- ------- -------
Service cost--benefits covered during the year....... $ 5.5 $ 4.9 $ 4.4
Interest cost on projected benefit obligation........ 31.2 31.5 31.5
Actual return on plan assets......................... (40.1) (17.6) (86.9)
Net amortization and deferral........................ 7.5 (16.1) 58.3
------- ------- -------
Net periodic pension cost........................... $ 4.1 $ 2.7 $ 7.3
======= ======= =======
The Company's pension expenses related to its participation in the SPRC
Pension Plan were $6.1 million in 1993, $6.2 million in 1992 and $7.3 million
in 1991.
F-15
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes the funded status and amounts recognized in SPRC's
consolidated balance sheets for the SPRC Pension Plan at December 31, 1993 and
1992 (in millions):
DECEMBER 31,
--------------
1993 1992
------ ------
Actuarial present value of benefit obligations:
Vested benefits............................................ $366.0 $347.8
Non-vested benefits........................................ 7.8 4.7
------ ------
Accumulated benefit obligation........................... $373.8 $352.5
====== ======
Projected benefit obligation................................. 420.8 405.3
Fair value of assets in plan................................. 363.2 377.9
------ ------
Projected benefit obligation in excess of plan assets........ (57.6) (27.4)
Unrecognized transition amount............................... (4.6) (5.2)
Unrecognized gain or loss.................................... 20.7 4.1
Unrecognized prior service cost.............................. 4.8 5.3
------ ------
Net pension liability included in SPRC's balance sheet... $(36.7) $(23.2)
====== ======
At December 31, 1993 and 1992, the Company's consolidated balance sheets
included pension liabilities of $35.9 million and $29.9 million, respectively.
The following summarizes the significant assumptions used in accounting for
the SPRC Pension Plan:
DECEMBER 31,
----------------
1993 1992 1991
---- ---- ----
Weighted average discount rate.............................. 7.25% 8.0% 8.5%
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%
Thrift Plan. SPRC has established a defined contribution plan (the "SPRC
Thrift Plan") as an individual account savings and investment plan 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.
Postretirement 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 charged to expense $21.8 million and $18.9 million in
1992 and 1991, respectively, for these benefits.
The Company adopted Statement of Financial Accounting Standards No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
effective January 1, 1993. The effect of adopting Statement No. 106 on net
income and the net periodic benefit cost (expense) for 1993 was a charge to
earnings of $160.1
F-16
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million (less income taxes of $61.2 million) and an increase in expense of $0.8
million, respectively. 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 postretirement benefit
obligation at December 31, 1993 (in millions):
HEALTH LIFE
CARE INSURANCE TOTAL
------ --------- ------
Retirees........................................... $41.3 $107.5 $148.8
Fully eligible plan participants................... 9.6 6.9 16.5
----- ------ ------
Accumulated post-retirement benefit obligation..... $50.9 $114.4 165.3
===== ======
Unrecognized net gain (loss)....................... (8.7)
Plan amendment..................................... 3.7
------
Accrued post-retirement benefit cost included in
other liabilities................................. $160.3
======
As of December 31, 1993, the current portion of accrued post-retirement
benefit cost was approximately $19.9 million and the long-term portion was
approximately $140.4 million.
The net periodic post-retirement benefit costs for 1993 includes the
following components (in millions):
Service cost.......................................................... $ 0.7
Interest cost......................................................... 12.1
-----
Net periodic post-retirement benefit cost............................. $12.8
=====
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 discount rate used in determining the benefit obligation was 7.25
percent.
1990-1994 Long Term Earnings Growth Incentive Plan and Annual Incentive
Compensation Plans. Certain officers of the Company participate in the 1990-
1994 Long Term Earnings Growth Incentive Plan of the Company. The 1992 and 1993
Incentive Compensation Plans covered all exempt employees of the Company. Based
on the provisions of these plans, no amounts were charged to expense in 1993,
1992 or 1991.
Executive Compensation Plans. SPRC has an employment agreement with its chief
executive officer ("CEO") which provides for an annual base salary and provides
that, if SPRC achieves an operating ratio of 89.5% for 1994, 88.0% for 1995 or
85.0% for 1996, the CEO will receive 200,000 shares, 300,000 shares and 350,000
shares of SPRC Common Stock, respectively, as a stock bonus under SPRC's Equity
Incentive Plan. If the required SPRC operating ratio for any year is not
achieved, the SPRC Compensation Committee of the Board of Directors may in its
discretion award a portion of such shares.
The SPRC Compensation Committee has authorized the grant of stock bonuses
covering up to 1,375,000 shares of SPRC Common Stock, in the aggregate, to 27
additional key executive employees of the Company in addition to the CEO,
contingent upon the attainment of certain pre-established corporate financial
and individual performance objectives based on many of the same criteria as the
CEO's agreement. A portion of each stock bonus grant is subject to the
achievement of such corporate financial and individual performance objectives
during each of 1994, 1995, 1996 and 1997.
F-17
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTIES
SPRC 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 considered
appropriate, consolidating the marketing, administration, transportation and
maintenance operations of the railroads.
In 1992 the Company started using D&RGW's new locomotive repair facility in
Denver, Colorado for major locomotive repair work. D&RGW charged the Company
$33.8 in 1993 and $35.8 million in 1992 for locomotive repairs performed for
the Company. In addition, D&RGW charged the Company $2.0 million, $2.4 million
and $1.1 million for locomotives leased to the Company in 1993, 1992 and 1991,
respectively. At December 31, 1993, the Company owed D&RGW approximately $8.4
million for such items. Commencing in 1990, the Company charges D&RGW for a
portion of costs incurred relating to the marketing and administrative
functions of the railroads. Such charges amounted to $16.4 million, $14.3
million and $9.5 million in 1993, 1992 and 1991, respectively.
As part of the capital and debt transactions completed in August 1993 and
March 1994, the Company purchased a total of $226.6 million of D&RGW property,
including the Burnham locomotive repair facility in Denver, Colorado (See Note
15).
The Company paid $6.8 million, $4.2 million and $4.1 million in 1993, 1992
and 1991, 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.
The Company and The Anschutz Corporation ("TAC") have engaged in a variety of
transactions primarily related to administration and equipment owned and used
by the companies for which amounts are billed to and from the Company and
functions relating to the purchase of fuel and entering fuel futures contracts
on behalf of the Company. Such transactions are based on the usage or services
performed. In addition, the Company has entered into an arrangement with TAC
whereby TAC administers the Company's mineral interests, including but not
limited to oil and gas and hard mineral estates. The Company believes that the
terms of these transactions are comparable to those that could be obtained from
unaffiliated parties.
12. COMMITMENTS AND CONTINGENCIES
It is anticipated that the Company will 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. In addition, in order for the
Company to meet its consolidated debt obligations and to make payments to buy-
out surplus employees and make capital expenditures expected to be required,
the Company must improve operating results and sell property, real estate and
other assets with substantial values that are not necessary to its
transportation operations.
The various debt agreements of the Company contain restrictions as to payment
of dividends to SPRC. The Company is permitted 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
F-18
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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) 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 as a result of past operations. 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 ongoing 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, 1993, 1992
and 1991, the Company recognized expenses of $10.5 million, $5.0 million and
$74.0 million, respectively, related to environmental matters. At December 31,
1993 and 1992, the Company had accrued reserves for environmental contingencies
of $58.8 million and $67.8 million, respectively, which includes $13.6 million
and $15.8 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 completed agreements allowed the Company not to make
lump sum payments previously accrued and to incur smaller wage increases in the
future than other railroads. A substantial number of the labor agreements
expire in 1995.
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
F-19
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
additional amounts due against the Company of approximately $60 million
(including interest) as of December 31, 1993 and has filed a collection action
in Federal District Court. SPT has contested the amounts claimed for various
reasons. Union Pacific has requested the District Court to reconsider and set
aside its decision. Whether or not the Company's position is sustained, the
amount owed Union Pacific will be substantial. Management has made provision
that it believes to be adequate for this matter in current liabilities in its
financial statements.
In July 1991, a derailment near Dunsmuir, California, occurred. While certain
litigation continues 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, 1993, SPT had paid approximately $44.7
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, 1993, approximately $24.9 million had 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
Supplemental cash flow information for the years ended December 31, 1993,
1992, and 1991 is as follows (in millions):
DECEMBER 31,
-----------------
1993 1992 1991
----- ----- -----
Cash payments (refunds):
Interest................................................ $72.3 $76.3 $93.2
Income taxes............................................ -- -- 0.6
Noncash transactions:
Sale of real estate for a note receivable............... -- -- 124.0
Purchase of locomotives................................. -- -- 69.8
Capital lease obligations for railroad equipment........ 57.0 -- --
F-20
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
1993
Operating revenues........................ $593.7 $652.1 $659.9 $ 645.0
Operating income (loss)................... (11.3) 15.3 (44.1) (13.8)
Other income (expense).................... 1.1 0.2 (16.7) 2.4
Net income (loss) (a)..................... (118.7) (6.5) (72.6) (7.0)
1992
Operating revenues........................ $624.4 $651.6 $628.9 $ 618.9
Operating income (loss)................... (25.3) 4.4 2.6 (6.4)
Other income (expense).................... 119.6 17.0 20.6 134.9
Net income (loss)......................... 46.1 -- .6 62.8
- --------
(a) First quarter 1993 data includes an extraordinary charge of $98.9 million
(net of taxes) for the change in accounting for postretirement benefits
other than pensions.
15. CAPITAL AND DEBT TRANSACTIONS
On August 17, 1993 SPRC closed the offering and sale of 30,783,750 shares of
common stock and issued and sold $375 million principal amount of 9 3/8 percent
Senior Notes due 2005.
In connection with the foregoing transactions, the Company issued 200 shares
of common stock for total consideration of $445.5 million from SPRC. The
proceeds from this transaction were used to repay $169 million outstanding
under the SPT Term Loan, to purchase $107.7 million of D&RGW property including
principally the Burnham locomotive repair facility and certain non-operating
properties, to purchase for $99.1 million equipment operated pursuant to
operating leases, to pay fees and expenses of $3.8 million and for general
corporate purposes. In addition, as part of the foregoing transactions, the
Company entered into a $200 million three-year unsecured Credit Agreement
replacing its then existing secured bank credit facility.
On March 2, 1994, SPRC closed an offering of 25,000,000 shares of common
stock. In connection with this transaction, the Company issued 150 shares of
common stock for consideration of $294.5 million from SPRC. The proceeds were
used to repay the $175 million then outstanding balance on the Credit Agreement
and to purchase $118.9 million of D&RGW rail properties. The proceeds of the
purchase from D&RGW were used to repay the amounts outstanding under the RGH
credit facilities.
F-21
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SUPPLEMENTAL CONDENSED COMBINING FINANCIAL INFORMATION
The following presents supplemental condensed combining financial information
(in millions).
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS--DECEMBER 31, 1993
SPT SSW NON ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
Current assets.......... $ 190.2 $ 34.7 $ 31.0 $ -- $ 255.9
Advances to
parent/Investment in
subsidiaries........... 36.8 445.3 -- (482.1) --
Property, net........... 3,860.3 553.3 77.7 -- 4,491.3
Other assets and de-
ferred charges......... 142.5 42.4 5.1 -- 190.0
-------- -------- ------ ------- --------
Total assets.......... $4,229.8 $1,075.7 $113.8 $(482.1) $4,937.2
======== ======== ====== ======= ========
Current liabilities..... $ 588.6 $ 201.3 $ 35.9 $ -- $ 825.8
Long-term debt.......... 705.8 171.6 38.9 -- 916.3
Deferred income taxes... 757.1 82.4 (1.8) -- 837.7
Other liabilities....... 507.4 240.3 26.1 (131.5) 642.3
Redeemable preference
shares................. -- 44.2 -- -- 44.2
Stockholder's equity.... 1,670.9 335.9 14.7 (350.6) 1,670.9
-------- -------- ------ ------- --------
Total liabilities and
stockholder's equity. $4,229.8 $1,075.7 $113.8 $(482.1) $4,937.2
======== ======== ====== ======= ========
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS--DECEMBER 31, 1992
SPT SSW NON ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
Current assets.......... $ 186.9 $ 42.9 $27.6 $ -- $ 257.4
Advances to
parent/Investment in
subsidiaries........... 250.0 147.4 (19.5) (377.9) --
Property, net........... 3,423.6 782.4 54.8 -- 4,260.8
Other assets and de-
ferred charges......... 136.4 33.7 9.4 -- 179.5
-------- -------- ----- ------- --------
Total assets.......... $3,996.9 $1,006.4 $72.3 $(377.9) $4,697.7
======== ======== ===== ======= ========
Current liabilities..... $ 787.5 $ 187.9 $26.9 $ -- $1,002.3
Long-term debt.......... 529.2 188.2 38.2 -- 755.6
Deferred income taxes... 838.8 98.8 0.5 -- 938.1
Other liabilities....... 401.1 113.9 0.4 -- 515.4
Redeemable preference
shares................. -- 46.0 -- -- 46.0
Stockholder's equity.... 1,440.3 371.6 6.3 (377.9) 1,440.3
-------- -------- ----- ------- --------
Total liabilities and
stockholder's equity. $3,996.9 $1,006.4 $72.3 $(377.9) $4,697.7
======== ======== ===== ======= ========
F-22
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS--YEAR ENDED DECEMBER
31, 1993
SPT SSW NON ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
Operating revenues...... $1,980.8 $413.7 $156.2 $ -- $2,550.7
Operating expenses...... 2,007.8 430.5 166.3 -- 2,604.6
-------- ------ ------ ----- --------
Operating income
(loss)............... (27.0) (16.8) (10.1) -- (53.9)
Other income (expense).. 21.0 (1.1) (0.4) (10.9) 8.6
Interest expense........ 82.3 26.2 3.9 (10.9) 101.5
-------- ------ ------ ----- --------
Loss before income
taxes and before
change in accounting. (88.3) (44.1) (14.4) -- (146.8)
Income taxes (benefit).. (28.3) (14.4) 1.8 -- (40.9)
-------- ------ ------ ----- --------
Net loss before change
in accounting.......... (60.0) (29.7) (16.2) -- (105.9)
Cumulative effect on
years' prior to 1993 of
change in accounting
for post-retirement
benefits other than
pensions............... (84.9) (6.0) (8.0) -- (98.9)
-------- ------ ------ ----- --------
Net loss................ $ (144.9) $(35.7) $(24.2) $ -- $ (204.8)
======== ====== ====== ===== ========
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS--YEAR ENDED DECEMBER
31, 1992
SPT SSW NON ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
Operating revenues...... $1,977.3 $ 407.2 $139.3 $-- $2,523.8
Operating expenses...... 2,011.5 395.6 141.4 -- 2,548.5
-------- ------- ------ ----- --------
Operating income
(loss)............... (34.2) 11.6 (2.1) -- (24.7)
Other income (expense).. 299.2 1.0 0.4 (8.5) 292.1
Interest expense........ 67.8 27.9 2.0 (8.5) 89.2
-------- ------- ------ ----- --------
Income (loss) before
income taxes......... 197.2 (15.3) (3.7) -- 178.2
Income taxes (benefit).. 73.3 (4.6) -- -- 68.7
-------- ------- ------ ----- --------
Net income (loss)....... $ 123.9 $ (10.7) $ (3.7) $ -- $ 109.5
======== ======= ====== ===== ========
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS--YEAR ENDED DECEMBER
31, 1991
SPT SSW NON ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
Operating revenues...... $1,964.2 $384.4 $96.4 $ -- $2,445.0
Operating expenses...... 2,242.1 459.9 90.7 -- 2,792.7
-------- ------ ----- ------ --------
Operating income
(loss)............... (277.9) (75.5) 5.7 -- (347.7)
Other income (expense).. 444.1 20.2 (4.7) (14.1) 445.5
Interest expense........ 81.1 24.3 2.5 (14.1) 93.8
-------- ------ ----- ------ --------
Income (loss) before
income taxes......... 85.1 (79.6) (1.5) -- 4.0
Income taxes (benefit).. 29.2 (27.1) 0.4 -- 2.5
-------- ------ ----- ------ --------
Net income (loss)....... $ 55.9 $(52.5) $(1.9) $ -- $ 1.5
======== ====== ===== ====== ========
F-23
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS--YEAR ENDED DECEMBER
31, 1993
SPT SSW NON ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
------- --------- ---------- ------------ ------------
Cash Flows From Operat-
ing Activities......... $ (63.2) $ 1.3 $ (8.6) -- $ (70.5)
Cash Flows From Invest-
ing Activities......... (340.1) (25.0) (14.1) -- (379.2)
Cash Flows From Financ-
ing Activities......... 396.5 17.1 22.6 -- 436.2
------- ------ ------ ---- -------
Net Change In Cash and
Cash Equivalents....... (6.8) (6.6) (0.1) -- (13.5)
Cash and Cash
Equivalents--Beginning
of Year................ 39.4 8.0 (2.0) -- 45.4
------- ------ ------ ---- -------
Cash and Cash Equiva-
lents--End of Year..... $ 32.6 $ 1.4 $ (2.1) -- $ 31.9
======= ====== ====== ==== =======
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS--YEAR ENDED DECEMBER
31, 1992
SPT SSW NON ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------- ------------ ------------
Cash Flows From Operat-
ing Activities......... $ 79.1 $ 35.5 $ 11.8 -- $126.4
Cash Flows From Invest-
ing Activities......... (15.9) (6.0) (2.8) -- (24.7)
Cash Flows From Financ-
ing Activities......... (52.4) (21.5) (11.0) -- (84.9)
------ ------ ------ ---- ------
Net Change In Cash and
Cash Equivalents....... 10.8 8.0 (2.0) -- 16.8
Cash and Cash Equiva-
lents--Beginning of
Year................... 28.6 -- -- -- 28.6
------ ------ ------ ---- ------
Cash and Cash Equiva-
lents--End of Year..... $ 39.4 $ 8.0 $ (2.0) -- $ 45.4
====== ====== ====== ==== ======
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS--YEAR ENDED DECEMBER
31, 1991
SPT SSW NON ADJUSTMENTS COMPANY
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
------- --------- ---------- ------------ ------------
Cash Flows From Operat-
ing Activities......... $ (37.7) $ 7.6 $ (5.9) -- $ (36.0)
Cash Flows From Invest-
ing Activities......... 269.9 (1.2) (22.2) -- 246.5
Cash Flows From Financ-
ing Activities......... (271.5) (6.4) 27.5 -- (250.4)
------- ----- ------ ---- -------
Net Change In Cash and
Cash Equivalents....... (39.3) -- (0.6) -- (39.9)
Cash and Cash
Equivalents--Beginning
of Year................ 67.9 -- 0.6 -- 68.5
------- ----- ------ ---- -------
Cash and Cash Equiva-
lents--End of Year..... $ 28.6 -- $ -- -- $ 28.6
======= ===== ====== ==== =======
F-24
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE V. PROPERTY AND EQUIPMENT
BALANCE
AT BALANCE
BEGINNING ADDITIONS OTHER AT END
OF YEAR (AT COST) RETIREMENTS CHANGES OF YEAR
--------- --------- ----------- ------- --------
(IN
MILLIONS)
YEAR ENDED DECEMBER 31,
1993
Roadway and structures... $5,298.8 $267.7 $ (69.6) $ -- $5,496.9
Railroad equipment....... 1,556.1 96.1 (97.0) 57.0(a) 1,612.2
Other property........... 123.1 52.6 (1.4) -- 174.3
-------- ------ -------- ------- --------
Total................... $6,978.0 $416.4 $(168.0) $ 57.0 $7,283.4
======== ====== ======== ======= ========
YEAR ENDED DECEMBER 31,
1992
Roadway and structures... $5,120.1 $237.2 $ (58.5) $ -- $5,298.8
Railroad equipment....... 1,690.3 71.6 (136.1) (69.7)(b) 1,556.1
Other property........... 140.9 19.4 (37.2) -- 123.1
-------- ------ -------- ------- --------
Total................... $6,951.3 $328.2 $(231.8) $(69.7) $6,978.0
======== ====== ======== ======= ========
YEAR ENDED DECEMBER 31,
1991
Roadway and structures... $5,018.4 $207.2 $(148.7) $ 43.2(c) $5,120.1
Railroad equipment....... 1,650.2 47.6 (77.2) 69.7(b) 1,690.3
Other property........... 123.0 22.8 (4.9) -- 140.9
-------- ------ -------- ------- --------
Total................... $6,791.6 $277.6 $(230.8) $ 112.9 $6,951.3
======== ====== ======== ======= ========
- --------
(a) Equipment acquired under capitalized lease agreement.
(b) Locomotives delivered in 1991 and paid for in 1992.
(c) Property acquired in connection with the acquisition of SPCSL.
F-25
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE VI. ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY AND EQUIPMENT
BALANCE ADDITIONS
AT CHARGED RETIREMENTS BALANCE
BEGINNING TO (NET OF OTHER AT END
OF YEAR EXPENSE SALVAGE) CHANGES OF YEAR
--------- --------- ----------- ------- --------
(IN
MILLIONS)
YEAR ENDED DECEMBER 31,
1993
Roadway and structures.... $1,881.4 $159.1 $ (74.1) $ -- $1,966.4
Railroad equipment........ 815.7 67.6 (78.6) -- 804.7
Other property............ 20.1 1.5 (0.6) -- 21.0
-------- ------ -------- ----- --------
Total.................... $2,717.2 $228.2 $(153.3) $ -- $2,792.1
======== ====== ======== ===== ========
YEAR ENDED DECEMBER 31,
1992
Roadway and structures.... $1,799.0 $152.2 $ (69.8) $ -- $1,881.4
Railroad equipment........ 855.3 72.2 (111.8) -- 815.7
Other property............ 26.0 2.8 (8.7) -- 20.1
-------- ------ -------- ----- --------
Total.................... $2,680.3 $227.2 $(190.3) $ -- $2,717.2
======== ====== ======== ===== ========
YEAR ENDED DECEMBER 31,
1991
Roadway and structures.... $1,718.8 $154.8 $(128.3) $53.7(a) $1,799.0
Railroad equipment........ 840.9 71.5 (57.1) -- 855.3
Other property............ 21.3 5.2 (0.5) -- 26.0
-------- ------ -------- ----- --------
Total.................... $2,581.0 $231.5 $(185.9) $53.7 $2,680.3
======== ====== ======== ===== ========
- --------
(a) Amount reserved for 1,200 miles of low density rail lines identified for
sale or abandonment as part of the 1991 Special Charge.
F-26
SOUTHERN PACIFIC TRANSPORTATION COMPANY
AND SUBSIDIARY COMPANIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE AT BALANCE AT
BEGINNING CHARGED TO END
OF YEAR EXPENSE DEDUCTIONS OF YEAR
---------- ---------- ---------- ----------
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 1993
Casualty and other claims.......... $440.4 $143.0 $165.4 $418.0
Post-retirement benefit obligation. -- 172.6 12.0 160.6
Employee separation and relocation
and other......................... 112.5 -- 54.7 57.8
------ ------ ------ ------
Total.............................. $552.9 $315.6 $232.1 $636.4
====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1992
Casualty and other claims.......... $459.0 $133.3 $151.9 $440.4
Employee separation and relocation
and other......................... 184.7 -- 72.2 112.5
------ ------ ------ ------
Total.............................. $643.7 $133.3 $224.1 $552.9
====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1991
Casualty and other claims.......... $412.9 $223.0 $176.9 $459.0
Employee separation and relocation
and other......................... 66.2 125.0 6.5 184.7
------ ------ ------ ------
Total.............................. $479.1 $348.0 $183.4 $643.7
====== ====== ====== ======
F-27
SOUTHERN PACIFIC RAIL CORPORATION
AND SUBSIDIARY COMPANIES
SCHEDULE X. SUPPLEMENTARY INCOME STATEMENT INFORMATION
CHARGED TO COSTS AND EXPENSES
-----------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
Maintenance and repairs....................... $526.6 $573.4 $581.7
Taxes other than payroll and income taxes:
Real estate and personal property........... 11.3 28.4 23.2
Sales and other............................. 40.6 39.3 33.1
F-28