The chief officers of the treasury department are the executive vice president – finance and the assistant vice president and treasurer.
Cash and securities are held by the treasury department for all entities of Southern Pacific. Although it might be easier to administer these funds and investments collectively, they are, in fact, handled in separate bank and custody accounts in order to preserve the identity and integrity of these assets.
The responsibilities of the treasury department are divided into two areas, financial and treasury, as outlined below:
The principal financial functions are:
(a) Preparing income and cash forecasts.
(b) Obtaining capital from external sources.
(c) Making financial analyses of new business opportunities and special financial studies.
(d) Preparing annual reports to stockholders.
(e) Handling certain types of contracts with the financial community and stockholders.
(f) Furnishing financial witnesses for court or regulatory proceedings.
The principal treasury functions are:
(g) Collecting funds due to the various Southern Pacific entities, acting as custodian of funds and securities owned by them, and maintaining banking relationships.
(h) Arranging for delivery of vouchers in payment of payrolls, services, taxes, materials, and supplies.
(i) Redeeming obligations issued by various companies when presented for pay and paying principal and interest on outstanding debt.
(j) Approving extensions of credit to customers for payment of freight charges, and extending other types of credit.
(k) Transferring stock of Southern Pacific and disbursing dividends.
(l) Investing surplus cash in United States Government or other securities.
Some of the duties outline above are explained briefly below:
There are two types of budgets – the income and expense budget and the capital budget. The income and expense budget is the accumulation of estimates of revenues and expenses for the Southern Pacific entities which are developed by the treasury department. Forecasts of freight revenues are based on economic projections and the continual survey of expectations of shippers made the traffic department. Forecasts of railroad transportation and maintenance expenses are estimated by the operating department and are related to the volume of business. Estimates of other types of income and expenses are made by the departments or companies responsible for such operations. These forecasts are prepared in the fall of each year for the next calendar year. Thereafter, the forecast is completely revised quarterly to reflect actual results to date and changed conditions such as changes in freight rates, wage scales, or in the general economy. If circumstances warrant, however, revisions may be made at any time to reflect current conditions.
The budget is presented in calendar months so as to provide a more useful guide to operations and to inform management promptly as to whether the forecasts are being met. The monthly forecast of revenues is further broken down by days to provide the ability to adjust expenses quickly when necessary.
The forecast of earning serves not only to control operations, but converted to a cash basis, provides for the administration of Southern Pacific’s working cash funds. From the cash forecasts, it is possible to determine first, the amount of cash which may be expected to be on hand from day to day for periods of at least thirty days; second, the amount of funds that the Company may expect to have on hand to meet major requirements over the next six month; and third, the amount that it will expect to have at the year’s end after providing for all expenditures that are contemplated during the year.
The capital budget is an estimate of the amount of money that is expected to be spent during the year for capital improvements. It is necessarily related to the earnings and cash forecasts and the necessity to continue to provide quality service and, at the same time, minimize and offset spiraling wage and material costs. Priorities are assigned as to project need, desirability, and availability of funds. Southern Pacific has spent more than $2 billion for capital expenditures over the last ten years, or since 1966. Of this amount, $786 million was for freight cars and $351 for locomotives. In 1976, capital expenditures were $155 million, including $62 million for freight cars and locomotives and $93 for all other purposes. Capital expenditures for 1977 will be about $202. Only be continuing capital improvement programs at a high level will Southern Pacific be able to provide for the needs of its shippers in the expanding economy and at the same time, offset, in part, the rising costs of operation.
The ability to provide the necessary funds for such purposes is primarily dependent upon an adequate level of earning, which the railroad industry in the United States has been able to achieve for many years. The marginal level of such earning has placed severe constraints on capital improvement programs.
In 1976, Southern Pacific had a net income of $110 million. Its cash flow consisted of this $110 million, $133 million of depreciated, $156 million from issuance of debt obligations, $25 from the sale of properties and scrap, and $20 from other sources for a total of about $444. Not all this amount, however, was available for spending because there were claims on it. Since Southern Pacific had borrowed money in the past, it had an obligation to repay $110 million. The stockholders were entitled to and expected a return on their investment in the Company in the form of dividends, which amounted to $60 million. Capital expenditures for the various entities of Southern Pacific amounted to $155 million and about $22 million was earmarked for other purposes. The balance of $97 million was available for general corporate purposes, including increasing working capital.
In 1976, the $156 million of funds was obtained by the sale of three issues of equipment obligations, which provided $63 million, and the sale of $93 million of mortgage bonds. The Company relies mainly on equipment obligations because they are suited to financing freight cars and locomotives, at the lowest interest cost available today. Southern Pacific and its various entities had $1,068 million of debt outstanding at the end of last year [1976] consisting of $639 million of equipment obligations, $296 million of mortgage bonds, $50 million of unsecured debentures, $9 million of real estate contracts, and $74 of unsecured notes. Leases in the amount of $79 million for railroad equipment have also been entered into over the last ten years.
Southern Pacific has been heavily dependent upon the capital markets and it will continue to be so in the future. The ability of the Company to finance its improvements depends upon the type of assets to be financed, the earning power of the Company, and the cash resources available to pay its outstanding debt and interest charges. Its credit is reflected in the ratings assigned to its obligations by financial rating agencies. In addition, unless the Company meets certain financial standards such as the number of time interest charges are earned and the level of cash coverage of interest and principal, many investors will not purchase its debt securities. The treasury department continually monitors the Company’s financial performances against the investment standards.
It is of vital importance that the Company’s financial standing be maintained at the highest possible level if it is to continue to have access to the capital markets.
Another treasury department function is to undertake the financial analysis of new business opportunities and to prepare special financial studies such as the possibility of consolidating in the future the various System mortgages into a single mortgage. Such a mortgage would improve Southern Pacific’s credit as the holders of the bonds would have all the operating entities of a viable company as security rather than just a part of the whole. The department is also concerned with the ability of the Company to meet the maturities of the outstanding debt and continually updates and reviews plans for handling these maturities. The department provides investors and security analysts with information about the Company and its activities and is responsible for the Company’s contacts with the financial community.
Over ninety percent of the freight charges due Southern Pacific from its customers are collected in San Francisco, Los Angeles, Houston, and Eugene. Under the collection plan, our customers mail their payments to post office boxes located in one of these four cities. The contents of each box is picked up by a bank for credit to the Company’s account and the supporting papers, or if none, photos of the checks, are sent to the zone accounting office. Payments for rents, leases, and any other activities are also collected through similar post office boxes. The aggregate amount of such collections is between $4 and $5 million a day. The remaining ten percent of the freight charges are paid to agents at various locations throughout the System. The collections are deposited by the agent in a local bank to be credited to the Company’s account.
Securities, notes, and other important documents held in San Francisco are in the custody of the treasurer and are kept in bank safe deposit boxes. It requires two persons to gain access to the boxes, one from the treasury department, and one from the accounting department. Securities warrants detailing documents deposited or withdrawn are required for each visit.
All payroll vouchers are distributed from the treasury department in San Francisco. Vouchers for all other services and for materials are also distributed.
These vouchers are prepared in the accounting department and delivered to the treasury department, where they are made negotiable by affixing a facsimile signature by machine. Approximately 40,000 payroll vouchers are distributed semi-monthly and 2,000 other types of vouchers are handled daily. In addition, over 324,747 dividend vouchers were sent to stockholders last year [1996]. Although these documents are called vouchers, they are similar to checks except that the Company is able to inspect and verify that the proper payee has received payment before its account is charged.
The treasury department is responsible for all extensions of credit whether they be for freight charges, rentals, or for any other purpose. Before extending credit, a careful investigation is made of a customer’s financial condition and, therefore, no credit is extended by anyone without the department’s approval. It is also important that any adverse information bearing on a customer’s financial situation be brought to the immediate attention of the treasurer so that necessary steps can be taken to protect Southern Pacific’s interests, since any default in payment adversely impacts the Company’s resources.
As of May 1, 1977, Southern Pacific is owned by 84,119 registered stockholders who hold 26,934,091 shares and reside in every state, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands, and thirty-nine foreign countries. Many of the registered stockholders hold stock for other people. Stock is held, for example, in the names of brokerage firms for customers. Thus, the actual number of owners of Southern Pacific stock is far in excess of the number of stockholders shown on the Company’s books, and it is estimated that there are probably over 105,000 holders of Southern Pacific stock.
Southern Pacific stock certificates may be presented either to the transfer office in New Your City, or the transfer office in San Francisco, to be transferred from one name to another. The old certificated are canceled and the new certificates are prepared in the name of the new stock holder. The stockholder’s name, number of shares, and certificate number are recorded in the stock ledger. The stock certificates are sent to the bank which acts as registrar and who duty it is to see that no more or less than 27,141,366 shares of stock are outstanding at any time. When the stock certificate is returned by the registrar to the transfer office, it is delivered to the broker or other person who requested the transfer and is eventually sent to the stockholder. Although the transfer of stock is done manually, most of the records are maintained electronically. Dividend checks, proxies, and tax statement are issued through the use of automated data processing equipment.
A stock purchase plan for employees was established effective September 1, 1966. Under the plan, employees of Southern Pacific and its subsidiary companies may purchase Southern Pacific capital stock at market value through periodic payroll deductions. The Company pays the brokerage commissions and other service charges on the stock purchased in the open market. As of April 1977, 1,685 employees were enrolled in the plan.
In June 1969, full-time salaried employees of Southern Pacific and its subsidiary companies, whose positions were not covered by a collective bargaining agreement, and who had at least one year’s service with the Company, became eligible to participate in a stock purchase and savings plan. An employee may participate in subscribing one to six per cent of their basic monthly salary and the Company will match it to the extent of fifty percent of the amount subscribed. The employees’ subscriptions are fully vested and the Company’s portion is vested to the extent of sixty percent after three years’ membership in the plan, eighty percent after four years, and one hundred percent after five years.
As of April 1977, 815,417 shares were purchased for the 3,910 employees (4,606 employees were eligible ) who were in the plan.
Since stockholders are the owners of the Company, it is important that they be kept fully informed. This is done by providing each with an annual report, quarterly report, special messages enclosed with the dividend, by a summary report of the annual meeting of stockholders, my media releases of earnings and other matters of importance, and by answering their inquiries promptly.
The investment of surplus cash is an important responsibility of the treasury department. As of May 31, 1977, Southern Pacific’s total cash resources were $375 million. Of these resources, $35 was on deposit in commercial banks. The balance of $340 million was invested in short-term securities.
Money is as much a part of the Company’s assets as its trackage and rolling stock, and, just as that kind of property must be used to capacity to justify its existence, so must money. Cash balances in excess of those necessary for day-to-day operations are available for investment. To ensure safety and liquidity, most surplus funds are invested in short-term government securities. For example, if Federal income taxes must be paid on June 15 and a million dollars has been accumulated toward that payment, the million dollars should be invested to earn as much as possible with safety until the date on which it will be needed.
A million dollars will produce $27.78 a day at one percent interest. The present rate of interest for day is about five percent of $138.90 per million. This is more than sufficient to offset the cost of investing and other expenses. Consequently, no money in excess of authorized amounts is ever permitted to stay on deposit in the Company’s banks for s long a period as twenty-four hours.