FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997March 31, 1998
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 Numberfile number 1-6075
UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 13-2626465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 Main Street, Suite 5900, Dallas, TexasTX
(Address of principal executive offices)
75201
(Zip Code)
(214) 743-5600
(Registrant's telephone number, including area code)
Eighth and Eaton Avenues, Bethlehem, Pennsylvania 18018
(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrantRegistrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrantRegistrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
______ ______------ -------
As of October 31, 1997,April 30, 1998, there were 247,205,314247,306,604 shares of the Registrant's
Common Stock outstanding.
UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page Number
-----------
Item 1: Condensed Consolidated Financial Statements:
CONDENSED STATEMENT OF CONSOLIDATED INCOME - For the
Three Months Ended March 31, 1998 and Nine Months Ended September 30, 1997
and 1996..............................................1997............ 1
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION -
At September 30, 1997March 31, 1998 and December 31, 1996...........1997............... 2 - 3
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS - For
the NineThree Months Ended September 30, 1997March 31, 1998 and 1996.....1997........ 4
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS -
For the NineThree Months Ended September 30, 1997March 31, 1998 and 1996.1997.... 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.... 5 - 10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 11 - 209
Item 3: Quantitative and Qualitative Disclosures About
Market Risk........................................... 18
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.....................................Proceedings....................................... 18
Item 2: Changes in Securities and Use of Proceeds ............. 21
- 24Item 4: Submission of Matters to a Vote of Security Holders .... 21
Item 6: Exhibits and Reports on Form 8-K......................8-K........................ 22
Signature........................................................ 24
Signature...................................................... 25
1
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended March 31, 1998 and Nine Months Ended September 30, 1997 and 1996
(Amounts in Millions, Except Ratio and Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,1998 1997
1996 1997 1996
------- -------Operating Revenues ......................... $ 2,586 $ 2,810
------- -------
Operating Revenues (Note 2)............... $ 2,825 $ 1,996 $ 8,518 $ 5,976
------- ------- ------- -------
Operating Expenses (Note 2):Expenses:
Salaries, wages and employee benefits... 1,040 716 3,103 2,233benefits.... 1,078 1,026
Equipment and other rents............... 356 208 1,022 649rents................ 363 322
Fuel and utilities (Note 5)............. 241 164 803 5083).............. 221 296
Depreciation and amortization........... 260 170 779 516amortization ........... 263 258
Purchased services....................... 183 183
Materials and supplies.................. 130 106 421 333supplies................... 144 157
Other costs............................. 333 213 1,079 664costs.............................. 275 223
------- -------
------- -------
Total................................ 2,360 1,577 7,207 4,903
------- -------Total................................. 2,527 2,465
------- -------
Operating Income.......................... 465 419 1,311 1,073Income............................ 59 345
Other Income - Net........................ 102 52 159 102Income................................ 23 38
Interest Expense (Notes 2 and 5).......... (156) (115) (453) (346)(Note 3)............ (161) (150)
Corporate Expenses........................ (42) (24) (96) (75)
Income before Income Taxes................ 369 332 921 754
------- -------Expenses.......................... (26) (28)
------- -------
Income Taxes.............................. (129) (121) (337) (250)
------- ------- ------- -------(loss) before Income from Continuing Operations......... 240 211 584 504Taxes........... (105) 205
Income from Discontinued Operations (Note 3) - 64 - 171
------- -------Taxes................................ 43 (77)
------- -------
Net Income ...............................(Loss)........................... $ 240(62) $ 275 $ 584 $ 675
======= =======128
======= =======
Earnings Per Share (Notes 2 and 3):
Income from Continuing Operations....... $ 0.96 $ 1.00 $ 2.35 $ 2.42
Income from Discontinued Operations..... - 0.30 - 0.82
------- ------- ------- -------Share:
Basic:
Net Income .............................(Loss)...................... $ 0.96(0.25) $ 1.300.52
Diluted:
Net Income (Loss)...................... $ 2.35(0.25) $ 3.24
======= ======= ======= =======0.52
Weighted Average Number of Shares (Note 2) 248.0 211.9 248.0 208.5Shares........... 247.7 247.8
Cash Dividends Per Share..................Share.................... $ 0.430.20 $ 0.43 $ 1.29 $ 1.29
Ratio of Earnings to Fixed Charges (Note 6) -- -- 2.5 2.74). .4 2.0
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
2
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Millions of Dollars)
(Unaudited)
September 30,March 31, December 31,
ASSETS 1998 1997 1996
------------- ------------
Current Assets:
Cash and temporary investments............... $ 201191 $ 19190
Accounts receivable ......................... 797 494589 631
Inventories.................................. 295 304309 296
Other current assets......................... 306 345295 398
--------- -------------------
Total Current Assets.................... 1,599 1,334
--------- ---------1,384 1,415
Investments:
Investments in and advances to affiliated
companies (Note 4)........................ 433 387companies................................. 492 443
Other investments............................ 207 226190 181
--------- -------------------
Total Investments....................... 640 613682 624
--------- ---------
Properties (Note 2):----------
Properties:
Railroad:
Road and other............................. 23,272 22,66523,867 23,610
Equipment.................................. 6,932 6,5737,241 7,084
--------- ---------
Total Railroad.......................... 30,204 29,23831,108 30,694
Trucking..................................... 734 736758 750
Other........................................ 56 12371 70
--------- ---------
Total Properties........................ 30,994 30,09731,937 31,514
Accumulated depreciation..................... (5,375) (5,053)(5,704) (5,537)
--------- ---------
Properties - Net........................ 25,619 25,044Net ........................ 26,233 25,977
--------- ---------
Excess Acquisition Costs - Net................. 683 700Net.................. 613 619
Other Assets................................... 125 223Assets.................................... 166 129
--------- ---------
Total Assets............................ $ 28,66629,078 $ 27,91428,764
========= =========
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
3
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Amounts in Millions, Except Share and Per Share Amounts)
(Unaudited)
September 30,March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 1996
------------- ------------
Current Liabilities:
Accounts payable................................ $ 580541 $ 705758
Accrued wages and vacation...................... 452 427420 421
Accrued casualty costs.......................... 327 332334 333
Dividends and interest.......................... 282 293231 295
Income and other taxes.......................... 260 250268 268
Debt due within one year (Note 2)............... 210 127year........................ 132 233
Other current liabilities (Note 2).............. 1,193 922882 939
--------- ---------
Total Current Liabilities.................... 3,304 3,056
--------- ---------Liabilities..................... 2,808 3,247
Debt Due After One Year (Note 2).................. 8,185 7,900Year............................ 9,258 8,285
Deferred Income Taxes ............................ 6,175 5,939Taxes.............................. 6,224 6,252
Accrued Casualty Costs ........................... 813 730Costs............................. 683 695
Retiree Benefits Obligation ...................... 757 720Obligation........................ 844 828
Other Long-Term Liabilities (Notes 2 and 7)....... 948 1,344
Commitments and Contingencies (Note 7)2)............... 1,143 1,232
Stockholders' Equity:
Common stock, $2.50 par value, authorized
500,000,000 shares, 275,881,561276,220,489 shares issued
in 1997, 274,595,1511998, 275,060,633 shares issued in 1996 ...1997.... 690 686690
Paid-in surplus ................................ 4,046 4,009surplus................................. 4,063 4,066
Retained earnings............................... 5,528 5,2625,159 5,271
Treasury stock, at cost, 28,685,46628,926,456 shares in
1997, 27,935,6281998, 29,045,938 shares in 1996............... (1,780) (1,732)1997............... (1,794) (1,802)
--------- ---------
Total Stockholders' Equity................... 8,484Equity.................... 8,118 8,225
--------- ---------
Total Liabilities and Stockholders' Equity...Equity.... $ 28,66629,078 $ 27,91428,764
========= =========
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
4
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
For the NineThree Months Ended September 30,March 31, 1998 and 1997 and 1996
(Millions of Dollars)
(Unaudited)
1998 1997
1996
---- ----
Cash Flows from Operating Activities:operations:
Net income........................................income (loss).................................. $ 584(62) $ 675128
Non-cash charges to income:
Depreciation and amortization.................. 779 516amortization................... 263 258
Deferred income taxes.......................... 231 29taxes........................... (29) 35
Other - net.................................... (388) 105
Income from discontinued operations (Note 3)...... - (171)net..................................... 18 (6)
Changes in current assets and liabilities......... (35) 125
------- -------liabilities.......... (307) (164)
--------- --------
Cash from continuing operations............... 1,171 1,279
------- -------
Cash Flows from Investing Activities:
Capital investments............................... (1,427) (888)
Southern Pacific acquisition (Note 2)............. - (539)
Cash(used in) provided by discontinued operations........... - 31
Asset sales....................................... 229 81operations...... (117) 251
--------- --------
Cash flows from investing activities:
Capital investments................................ (531) (407)
Other - net....................................... (14) (32)
-------net........................................ (22) (27)
--------- -------
Cash used in investing activities............. (1,212) (1,347)
-------activities............... (553) (434)
--------- -------
Cash Flowsflows from Equityequity and Financing Activities:financing activities:
Dividends paid.................................... (317) (265)paid..................................... (106) (105)
Debt repaid....................................... (442) (861)
Financings........................................ 836 1,144repaid........................................ (888) (348)
Financings......................................... 1,766 560
Other - net....................................... (26) (32)net........................................ (1) (21)
--------- -------
-------
Cash (used in) provided by equity and financing activities........................... 51 (14)
-------activities 771 86
--------- -------
Net increase (decrease) in cash and temporary
investments...........................investments................................ $ 10101 $ (82)
======= =======(97)
======== =========
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS
For the NineThree Months Ended September 30,March 31, 1998 and 1997 and 1996
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
1998 1997 1996
---- ----
Balance at Beginning of Year......................... $ 5,271 $ 5,262
$ 5,327
Net Income........................................... 584 675Income (Loss).................................... (62) 128
------- -------
Total......................................... 5,846 6,002
Dividend of Resources Common Stock (Note 3).......... - (598)
CashTotal........................................... 5,209 5,390
Dividends Declared ($1.290.20 per share in 19971998 and
1996).................................. (318) (266)$0.43 per share in 1997)........................ (50) (107)
------- -------
Balance at End of Period........................ $ 5,5285,159 $ 5,1385,283
======= =======
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
5
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Responsibilities for Financial Statements - The condensed consolidated
financial statements are unaudited and reflect all adjustments (consisting
only of normal and recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The Condensed Statement of
Consolidated Financial Position at December 31, 19961997 is derived from audited
financial statements. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Union Pacific Corporation (the Corporation or
UPC) Annual Report to StockholdersShareholders incorporated by reference in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
1996.1997. The results of operations for the three and nine months ended September 30, 1997March 31, 1998
are not necessarily indicative of the results for the entire year ending
December 31, 1997.1998. Certain 1997 amounts have been reclassified to conform
to the 1998 financial statement presentation.
2. Acquisition of Southern Pacific Rail Corporation (Southern Pacific or SP) -
The Corporation completedUPC consummated the acquisition of Southern Pacific in September 1996 by acquiring the remaining 75% of Southern Pacific common shares not
previously owned by UPC. As a result of the initial cash tender offer in
1995 for 25% of Southern Pacific's outstanding shares and the acquisition of
the remaining 75% of Southern Pacific shares, 60% of the outstanding
Southern Pacific shares were converted into 38.1 million shares of the
Corporation's common stock, and the remaining 40% of the outstanding shares
were acquired for $1,562 million in cash. The Corporation initially funded
the cash portion of the acquisition with credit facility borrowings, all of
which have been subsequently refinanced with commercial paper borrowings.1996. The
acquisition of Southern Pacific has beenwas accounted for as a purchase.
Results forusing the three and nine months ended September 30, 1996 included
equity income equal to 25% of Southern Pacific's net income during that
period, reflecting UPC's ownership interest in SP. Southern Pacific'spurchase method.
SP's results were fully consolidated with the Corporation effective October
1, 1996. The purchase priceOn February 1, 1998, Union Pacific Railroad Company (UPRR) was
determinedmerged with and into Southern Pacific Transportation Company (SPT), the
principal SP rail affiliate (the SPT Merger), with SPT continuing as followsthe
surviving corporation and changing its name to "Union Pacific Railroad
Company" immediately following the SPT Merger. Immediately prior to the SPT
Merger, SPT was based on a market
valuewholly-owned, indirect subsidiary of UPC, and UPRR was a
subsidiary of UPC, with all of the Corporation's common stock at the time the merger was announced
of $65.00 per share:
(In Millions)
-------------
Initial 25% investment in SP on September 15, 1995,
including equity income................................ $ 990
Second step cash purchase (23.4 million shares at
$25.00 per SP share) on September 11, 1996............. 586
Merger exchange of SP shares (93.7 million SP
shares converted into 38.1 millionissued and outstanding shares of UPC
commonvoting
stock at $65.00 per UP share) on
September 11, 1996..................................... 2,476
Transaction costs....................................... 45
------
Purchase price.......................................... $4,097
======
The Southern Pacific purchase price has been allocatedof UPRR being owned, directly or indirectly, by UPC. UPRR and SPT
operated as follows:
(In Millions)
-------------
Purchase price to be allocated......................... $ 4,097
Pre-tax merger costs:
Current............................................... 532
Long-term............................................. 426
Equity acquired........................................ (1,083)
-------
Unallocated purchase price........................... $ 3,972
=======
Purchase price allocation:
Propertya unified system before and equipment:
Land.................................................. $ 3,509
Roadway, Equipment and Other.......................... 2,522
Debt and preference share revaluation.................. (200)
Deferred income taxes (includingafter the effect of merger costs) (1,859)
--------
Total................................................ $ 3,972
========SPT Merger.
In connection with the acquisition and continuing integration of Union
Pacific Railroad Company's (UPRR)UPRR and Southern Pacific's
rail operations (collectively, the Railroad), UPC is in the process of eliminating 5,200continuing to eliminate
duplicate positions which are primarily non-train crew. In addition, UPC
is relocating 4,700(primarily positions mergingother than train crews), relocate
positions, merge or disposingdispose of redundant facilities, and disposingdispose of certain rail
lines. The Corporation is also cancelinglines and cancel uneconomical and duplicative SP contracts andcontracts. The Corporation
has refinanced $621 millionalso repaid certain of SP'sSouthern Pacific's debt obligations. UPC
recognized a $958 million liability in the SPSouthern Pacific purchase price
allocation for costs associated with SP's portion of these activities.
The componentsThrough March 31, 1998, a total of the $958 million liability are as follows:
(In Millions)
-------------
Labor protection related to legislated and contractual
obligations to SP union employees..................... $361
Severance costs........................................ 343
Contract cancellation fees............................. 145
Relocation costs....................................... 109
----
Total.............................................. $958
====
Through September 30, 1997, $210$323 million in merger-related costs were
paid by the Corporation and charged against these reserves, principally
comprisedcomposed of
$117approximately $160 million and $67$70 million, respectively, for severance and
relocation payments made to approximately 1,8003,700 Southern Pacific employees.employees,
and approximately $63 million for labor protection payments. The Corporation
expects that the remaining merger payments will be made over the course of
the next five years as the rail operations of UPRR and SP are integrated and
labor negotiations are completed and implemented.
In addition, the Railroad expects to incur $370approximately $206 million in
acquisition-
relatedacquisition-related costs through 1999 for severing or relocating UPRR
employees, disposing of certain UPRR facilities, training and equipment
upgrading. These costs will be charged to expense as incurred over the next
two years. Net income for the three and nine months ended September 30, 1997 was
reduced by $10 million and $46 million, respectively, for acquisition-
related operating costs, net of tax.
The pro forma results presented below have been prepared to reflect the
consummation of the Southern Pacific acquisition and the subsequent
pro-rata distribution of the shares of Union Pacific Resources Group Inc.
(Resources) owned by the Corporation to UPC's stockholders (see Note 3 to
the Condensed Consolidated Financial Statements), as if such events
occurred on January 1, 1996. The pro forma results presented below do not
reflect synergies expected to result from the integration of UPRR's and
Southern Pacific's rail operations and, accordingly, do not account for any
potential increase in revenue or operating income, estimated cost savings,
or one-time costs associated with the elimination of UPRR's duplicate
facilities and relocation or severance payments to UPRR's employees. The
effects of the foregoing could be substantial. This unaudited pro forma
information is not necessarily indicative of the results of operations that
might have occurred had the Southern Pacific acquisition and the
distribution of Resources shares actually occurred on the date indicated,
or of future results of operations of the resulting entity.
------------------------------------------------------------------
Millions of Dollars Three-Months Ended Nine-Months Ended
Except Per Share Amounts September 30, 1996 September 30, 1996
------------------------------------------------------------------
Operating Revenues $ 2,825 $ 8,409
Operating Income 446 1,146
Net Income 194 435
Net Income per Share $ 0.79 $ 1.78
------------------------------------------------------------------
3. Resources - In July 1995, UPC's Board of Directors approved a formal plan
to divest UPC's natural resources business in an initial public offering
(IPO) by Resources, followed by a pro-rata distribution of Resources shares
owned by the Corporation to its stockholders (the Spin-Off).
The IPO of 42.5 million Resources shares at $21 per share was completed in
October 1995 and generated net proceeds of $844 million. At that time,
Resources distributed to UPC a dividend of $1,621 million ($912March 31, 1998 includes
$18 million in cash, $650 million in 8.5% notes, which were repaid on the Spin-Off date,
and a $59 million intercompany balance owed by the Corporation). UPC used
the cash proceeds from the IPO dividend (including the notes receivable
repayment) to reduce outstanding commercial paper.
In September 1996, the Corporation's Board of Directors declared a special
dividend consisting of the shares of Resources common stock owned by UPC.
As a result of the Spin-Off, each of the Corporation's stockholders
received 0.846946 of a share of Resources common stock for each share of
UPC common stock held by such stockholder at the September 26, 1996 record
date for the distribution.
Resources' results prior to the Spin-Off were reported as a discontinued
operation in the Corporation's consolidated financial statements. UPC's
results for the three and nine months ended September 30, 1996 include
income from discontinued operations of $64 million and $171 million,
respectively, (approximately 83% of Resources' net income for the period).
4. Mexican Railway Concession - On June 26, 1997, the Railroad and a
consortium of partners were granted a 50-year concession for the Pacific
North and Chihuahua Pacific lines in Mexico, and a 25% stake in the Mexico
City Terminal Company at a price of $525 million. The Railroad holds a 13%
ownership share, and has accounted for its interest by the equity method.
The consortium plans to assume operational control of both lines in late
1997.
5.acquisition-related operating costs.
3. Financial Instruments - The Corporation and its subsidiaries useuses derivative financial
instruments in limited instances for other than trading purposes to manage
risk as it relates to fuel prices and interest rates. Where the
Corporation has fixed interest rates or fuel prices through the use of
swaps, futures or forward contracts, the Corporation has reducedmitigated the
downside risk of adverse price and rate movements; however, it has also
limited future gains from favorable movements.
The Corporation addresses market-relatedmarket risk related to these instruments by
selecting instruments whose value fluctuations correlate highly with the
underlying item being hedged. Credit risk related to derivative financial
instruments, which is minimal, is managed by requiring minimum credit
standards for counterparties and periodic settlements. The total credit
risk associated with the Corporation's counterparties was $71$73 million at
September 30,
1997.March 31, 1998. The Corporation has not been required to provide, nor
has it received, any collateral relating to its hedging activity.
The fair market value of the Corporation's derivative financial instrument
positions at September 30, 1997March 31, 1998 was determined based upon current fair market
values as quoted by recognized dealers or developed based upon the present
value of future cash flows discounted at the applicable zero coupon U.S.
treasury rate and swap spread.
Interest Rates - The Corporation controls its overall risk relating to
fluctuations in interest rates by managing the proportion of fixed and
floating rate debt instruments within its debt portfolio over a given
period. Derivatives are used in limited circumstances as one of the tools
to obtain the targeted mix. The mix of fixed and floating rate debt is
largely managed through the issuance of targeted amounts of such debt
as debt maturities occur or as incremental borrowings are required. The
Corporation also obtains additional flexibility in managing interest cost
and the interest rate mix within its debt portfolio by issuing callable fixed
rate debt securities.
At September 30, 1997,March 31, 1998, the Corporation had outstanding interest rate swaps on
$266$260 million of notional principal amount of debt (3% of the total debt
portfolio) with a gross fair market value asset position of $58$73 million and
a gross fair market value liability position of $18$25 million. These contracts
mature over the next one to eightseven years. Interest rate hedging activity
increased interest expense by $3 million and $4 million in the
third quarter of 1997 and 1996, respectively, and by $11 million and $8$1 million in the first nine monthsquarter of 19971998 and 1996, respectively.by
$2 million in the first quarter of 1997.
Fuel - Over the past three years, fuel costs approximated 10% of the
Corporation's total operating expenses. As a result of the significance of
the fuel costs and the historical volatility of fuel prices, the
Corporation's transportation subsidiaries periodically use swaps, futures and
forward contracts to mitigate the impact of fuel price volatility. The intent
of this program is to protect the Corporation's operating margins and overall
6
profitability from adverse fuel price changes.
At September 30, 1997,March 31, 1998, the Railroad and Overnite Transportation Company
(Overnite), the Corporation's trucking subsidiary, had hedged 40%49% and 12%38%,
respectively, of its
anticipatedtheir estimated remaining 1998 diesel fuel consumption for the remainder of 1997at
$0.51 and all of
1998, respectively, at $0.52 and $0.53 per gallon, respectively, on a Gulf Coast basis. In addition,At March
31, 1998, the Railroad had outstanding swap agreements covering its fuel
purchases in 1997 and 1998 of $156$267 million, with gross and net assetliability positions of $13$28
million. Fuel hedging increased third
quarter 1997 fuel costs by $1 million and lowered third quarter 1996 fuel
costs by $9 million. Fuel hedging increased year-to-date fuel costs by $1
million and lowered year-to-date 1996 fuel costs by $19 million. Overnite
Transportation Company (Overnite) has hedged 56% of its estimated remaining
1997 diesel fuel requirements and had outstanding swap agreements of $8 million, with gross
and net assetliability positions of $1 million. 6.Fuel hedging increased first
quarter 1998 fuel expense by approximately $15 million and had no impact on
first quarter 1997 fuel expense.
4. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed charges
has been computed on a total enterprise basis. Earnings represent income
from continuing operations less equity in undistributed earnings of
unconsolidated affiliates, plus income taxes and fixed charges. Fixed
charges represent interest, amortization of debt premium,discount and expense, and
the estimated interest portion of rental charges. 7.For the three months ended
March 31, 1998, fixed charges exceeded earnings by approximately $116
million.
5. Commitments and Contingencies - There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. Certain customers
have submitted claims or stated their intention to submit claims to the
Railroad for damages related to shipments delayed in transit, while others have indicated an intention to
submit claims for damages arising outthe delay of delaysshipments as a result of
congestion problems.problems, and certain customers have filed lawsuits seeking relief
related to such delays. The nature of the damages sought include,by claimants
includes, but areis not limited to, contractual liquidated damages, freight loss
or damages to lading,damage, alternative transportation charges, additional production costs,
lost business and lost profits. In addition, some customers have asserted
that they have the right to cancel contracts as a result of alleged material
breaches of such contracts by the Railroad. The FederalCorporation expects
additional claims by shippers. UPC will continue to evaluate the adequacy of
its reserves for claims and expects to add to such reserves as appropriate.
The Railroad Administrationis also party to certain regulatory proceedings before the
Surface Transportation Board of the U.S. Department of Transportation (STB).
One proceeding pertains to rail service problems in the western United
States. As an outgrowth of this proceeding, the STB has also indicated that it may take
enforcement actions againstissued an emergency
service order imposing certain temporary measures on the Railroad baseddesigned,
among other things, to reduce congestion on the Railroad's lines in the
Houston, Texas area. A second proceeding, initiated under the STB's
continuing oversight jurisdiction with respect to the Corporation's
acquisition of Southern Pacific and consolidation of Southern Pacific with
UPRR (and separate from the STB's regularly scheduled annual proceeding to
review the implementation of the merger and the effectiveness of the
conditions that the STB imposed on it), is for the purpose of considering the
justification for and advisability of any proposals for new remedial
conditions to the merger as they pertain to service in the Houston,
Texas/Gulf Coast area, including proposals by Kansas City Southern Railway
Company (KCS), Texas Mexican Railway Company (Tex Mex) and the Greater
Houston Partnership (GHP) for the forced transfer by the Railroad to Tex Mex
of certain lines and facilities in and around Houston, the establishment of
a "neutral" switching operation in the greater Houston area, and the
7
permanent adoption of provisions in the STB's emergency service order that
expanded Tex Mex's right to handle traffic to and from Houston. In addition,
the STB has initiated various inquiries and formal rulemaking proceedings
regarding certain elements of rail regulation following two days of hearings
by the STB at the request of two members of Congress and in response to
shippers' expressions of concern regarding railroad service quality, railroad
rates and allegedly inadequate regulatory remedies. If the Railroad is
unsuccessful in eliminating the remaining congestion and service problems
affecting its system, the STB could issue a new emergency service order upon
an in-depth inquirythe expiration of the current one and revieworder the Railroad to take additional
actions including, among other things, further diversions of safety practices.traffic or the
transfer of certain rail lines or other facilities to other railroads. In
addition, there can be no assurance that the proposals advanced by parties
in the remedial conditions proceeding or the proceedings initiated in
response to the rail regulation hearings will not be approved in some form.
Should the STB or Congress take aggressive action in the rail regulation
proceedings (e.g., by making purportedly competition-enhancing changes in
rate and route regulation and "access" provisions), the adverse effect on the
Railroad and other rail carriers could be material.
The Corporation is also subject to Federal, state and local environmental
laws and regulations, and is currently participating in the investigation and
remediation of numerous sites. Where the remediation costs can be reasonably
determined, and where such remediation is probable, the Corporation has
recorded a liability. In addition, the Corporation and its subsidiaries
periodically entersenter into financial and other commitments and provides
guarantees for specific financialhave retained
certain contingent liabilities upon the disposition of formerly-owned
operations.
In addition, UPC and contractual obligationscertain of its subsidiariesofficers and affiliates.directors are currently
defendants in two purported class action securities lawsuits, and certain
current and former directors of the Corporation are currently defendants in
a purported derivative action filed on behalf of the Corporation. The class
action suits allege, among other things, that management failed to disclose
properly the Railroad's service and safety problems and thereby issued
materially false and misleading statements concerning the merger with SP and
the safe, efficient operation of its rail network. The derivative action
alleges, among other things, that the named current and former directors
breached their fiduciary duties to the Corporation by approving the mergers
of SP and Chicago and North Western Transportation Company into the
Corporation without ensuring that the Corporation or the Railroad had
adequate systems in place to effectively integrate those companies into the
operations of the Corporation and the Railroad. Because both the size of the
class and the damages are uncertain, UPC and the Railroad are unable at this
time to determine the potential liability, if any, which might arise from
these lawsuits. Management believes that these claims are without merit and
intends to defend them vigorously.
It is not possible at this time for the Corporation to fully determine the
effect of all unasserted claims on its consolidated financial condition,
results of operations or liquidity; however, to the extent possible, where
unasserted claims can be estimated and where such claims are considered
probable, the Corporation has recorded a liability. The Corporation does not
expect that any known lawsuits, claims, environmental costs, commitments or
guarantees will have a material adverse effect on its consolidated financial
condition or operating results.
8.8
condition.
6. Accounting Pronouncements - In FebruaryJune 1997, the Financial Accounting StandardStandards
Board (FASB) issued Statement No. 128, "Earnings per Share," which
replaces Accounting Principles Board Opinion No. 15, "Earnings per Share."
Statement No. 128 requires dual presentation of Basic and Diluted EPS on
the face of the income statement for all entities with complex capital
structures. Statement No. 128 will be effective for UPC's 1997 Annual
Report, including interim periods to be presented therein; however, earlier
application is not permitted. Had Statement No. 128 been effective for the
three and nine months ended September 30, 1997, Basic and Diluted EPS
(based on income from continuing operations and net income) would have been
$0.98 and $0.96 per share, respectively, for the third quarter of 1997 and
$2.38 and $2.35 per share, respectively, for the nine months ended
September 30, 1997.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income"
(FAS 130)that will beis effective for all periods in 1998, including interim
periods. UPC has adopted the provisions of FAS 130 effective January 1,
1998. The Corporation anticipates
minimalcomponents of comprehensive income include, among other things,
changes in the market value of futures contracts which qualify for hedge
accounting and a net loss recognized as an additional pension liability but
not yet recognized as net periodic pension cost. The impact from this Statement.of adopting
FAS 130 for the three months ended March 31, 1998 was approximately
$2 million.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" will beInformation," effective inDecember 31,
1998. UPCThe Corporation currently complies with most provisions of this
Statement, and any incremental disclosure required by that Statement is
expected to be minimal.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" effective in 1998
(FAS 132). FAS 132 revises and standardizes disclosures required by
FAS 87, 88, and 106. Restatement of the retirement plan footnote will be
required for all earlier periods presented in comparative financial
statements at December 31, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Quarter ended September 30, 1997Ended March 31, 1998 Compared to September 30, 1996
CORPORATE REORGANIZATION
During 1996 andMarch 31, 1997 Union Pacific Corporation (UPC or the Corporation)
completed several strategic transactions that refocused the Corporation on its
core transportation operations.
Natural Resources Divestiture - In July 1995, UPC's Board of Directors approved
a formal plan to dispose of its natural resources business through an initial
public offering (IPO) by Union Pacific Resources Group Inc. (Resources) of 17%
of its common stock, followed by a distribution of UPC's interest in Resources
to the Corporation's stockholders on a tax-free, pro-rata basis (the Spin-Off)
(see Note 3 to the Condensed Consolidated Financial Statements). In October
1995, Resources completed the IPO, and, after UPC's receipt of a favorable
Internal Revenue Service ruling as to the tax-free nature of the Spin-Off in
September 1996, UPC completed its divestiture of Resources. The Corporation's
share of Resources' 1996 financial results are presented as discontinued
operations for that period.
Southern Pacific Rail Corporation (Southern Pacific or SP) Acquisition - In
September 1995, UPC
acquired 25%consummated the acquisition of Southern Pacific and, in September 1996,
it acquired the remaining 75% of SP.1996. The
aggregate Southern Pacific purchase price was $4.1 billion ($2.5 billion in
UPC common stock and $1.6 billion in cash). The acquisition of Southern Pacific
was accounted for as a purchase. The
statement of consolidated income for the third quarter of 1996 includes equity
income equal to 25% of Southern Pacific's net income, reflecting UPC's
ownership interest in Southern Pacific for the period. In 1997, Southern Pacific's results werehave been fully
consolidated with the Corporation's results (seeCorporation since October 1, 1996. (See Note 2 to the
Condensed Consolidated Financial Statements). Throughout 1997 and continuing in
the first quarter of 1998, Union Pacific Corporation (UPC or the Corporation)
continued the process of implementing the acquisition of Southern Pacific.
On February 1, 1998, Union Pacific Railroad Company (UPRR) was merged with and
into Southern Pacific Transportation Company (SPT), the principal SP rail
affiliate (the SPT Merger), with SPT continuing as the surviving corporation
and changing its name to "Union Pacific Railroad Company" immediately
following the SPT Merger. Immediately prior to the SPT Merger, SPT was a
wholly-owned, indirect subsidiary of UPC, and UPRR was a subsidiary of UPC,
with all of the issued and outstanding shares of voting stock of UPRR being
owned, directly or indirectly, by UPC. UPRR and SPT operated as a unified
system before and after the SPT Merger.
The Corporation expects to complete the full integration of the railroad
operations of UPRR and the Southern Pacific rail subsidiaries (collectively, the
Railroad) during 1999. The Corporation believes that the full implementation of
the merger will result in shorter routes, faster transit times, better on-time
performance, expanded single-line service and more efficient traffic flow.
9
As a result of the SP acquisition, UPC now operates the largest rail system in
the United States, with nearly 36,00035,000 route miles linking Pacific Coast and Gulf
Coast ports to the Midwest and Easterneastern U.S. gateways. The Corporation also owns
Overnite Transportation Company (Overnite), a major interstate trucking company
specializing in less-than-truckload (LTL) shipments.
Mexican Railway Concession - On June 26, 1997,CONGESTION AND SERVICE ISSUES
As previously reported in the Corporation's principal
subsidiary, Union Pacific Railroad Company (collectively with SP's rail1997 Annual Report on Form 10-K,
congestion in and around Houston and the coastal areas of Texas and Louisiana
(the Gulf Coast region) began to have a material adverse effect on the
Corporation's operations the Railroad) and a consortium of partners were granted a 50-year
concession for the Pacific North and Chihuahua Pacific lines in Mexico, and a
25% stakeearnings in the Mexico City Terminal Company at a pricethird quarter of $525 million. The
Railroad holds a 13% ownership share, and has accounted for its interest by the
equity method. The consortium plans to assume operational control of both
lines in late 1997.
RAILROAD OPERATIONS
Third quarter 1997 rail operations were disrupted by service and congestion
issues. System
congestion started in the Gulf Coast area during the summerregion and spread throughout the system as
the Railroad shifted resources to help mitigate the problem in the Gulf Coast. Factors leading to theCoast
region. The congestion includedwas brought on by, among other things, crew shortages
and restricted track access caused by necessary track maintenance on SPformer
Southern Pacific lines, increased demand, washouts due to severe weather,
derailments and congestion in the majorat Texas/Mexico gateways. The costTraffic slowed further
as rail yards in the Gulf Coast region filled, slowing access into and out of
the congestion-related problems was approximately $100 million,
after tax, which reflected the combined effect of lost businessyards and higher
operating costs. Fourth quarter 1997 Railroad operations and financial
performance willforcing trains to be more severely affected by congestion-related problems thanheld on sidings. Slower average train
velocity led to a greater need for locomotives in the third quarter--including lower revenueregion. As traffic in
the region backed up and incremental costs associated
with the implementationRailroad redeployed locomotives to the Gulf Coast
region to help alleviate local congestion, congestion problems spread to
other parts of the Service Recovery Plan--significantly reducing
the Corporation's financial results for the period. As a result, earnings per
share for all of 1997 are expected to be less than 1996 pro forma results,
and there may well be a net loss for the fourth quarter 1997. There can be no
assurance that these problems will not continue to impact the RailroadRailroad's system during the first quarterthird and fourth quarters of
1998.
The Service Recovery Plan -1997.
To restore service to acceptable levels, the Railroad implemented a Service
Recovery Plan (the Plan) in early October, 1997. The Plan is focusedfocuses on reducing the
number of cars on the system and restoring system velocity, which, will resultin turn,
results in more reliable service to customers. Implementation of the Plan has
resulted in improvement in the overall operation of the Railroad and is
addressing congestion problems in the Gulf Coast region and the surrounding
southeast portion of the Railroad's system (although intermittent periods of
congestion continue to arise in other regions, primarily in the Midwest). In
late March and early April 1998, congestion in the Gulf Coast region was
aggravated by several severe storms and congestion caused by operational
problems on Mexican railroad lines south of Laredo, Texas. However,
operational initiatives subsequently implemented by the Railroad, including
the Railroad's embargo of most southbound traffic destined for the Laredo
gateway described below, have substantially reduced congestion on the
Railroad's lines in the Gulf Coast region.
In connection with its integration with Southern Pacific, the Company has
implemented (i) TCS in the southeast portion of UPRR's system, which includes
the Gulf Coast region, where the cutover to TCS occurred on December 1, 1997,
(ii) directional running from Dexter Junction, Missouri, on the north,
across Arkansas, western Louisiana and eastern Texas to the Houston and
San Antonio areas on the south, beginning on February 1, 1998 and
(iii) the hub-and-spoke labor agreements in Texas and Arkansas. Although
the Company believes that the full implementation of these changes is
essential to achieving significant long-term benefits, their implementations
also contributed to the persistence of congestion in the effected Gulf Coast
region during late 1997 and early 1998.
On March 28, 1998, the Railroad embargoed most southbound traffic destined for
the Laredo, Texas gateway to address worsening congestion at that gateway and
clear the backlog of cars waiting to cross into Mexico. The embargo applied to
grain, chemicals, industrial products and coal, but not finished automobiles,
auto parts or intermodal traffic or any northbound traffic through Laredo. The
Railroad rerouted some of the embargoed traffic through other Railroad gateways
to Mexico, none of which were subject to the embargo. The Railroad believed
that this embargo was necessary because congestion problems principally
within Mexico and agricultural inspection delays at the border that affected
the Laredo gateway had worsened during the weeks preceding the imposition of
the embargo and were affecting other areas within the southeast region of its
system, resulting in a substantial backlog of cars waiting to move south to
Laredo. Imposition of the embargo quickly resulted in a significant reduction
in the backlog of cars.
10
Accordingly, on April 14, 1998, the Railroad amended the embargo to introduce
permitting to control traffic volumes. The permitting system allowed customers
to move traffic that had been embargoed while allowing the Railroad to meter
southbound traffic to prevent any surge of business that could again block the
Laredo crossing. On April 16, 1998, the Railroad further amended the embargo to
eliminate permit requirements for domestic shipments terminating at Laredo, and
on April 22, 1998, the Railroad canceled the embargo.
Financial Impact of Congestion - The Corporation has estimated that the cost of
the congestion-related problems for the three months ended March 31, 1998 was
approximately $260 million, after tax, which reflected the combined effects of
lost business, higher costs associated with system congestion, costs
associated with implementation of the Plan, alternate transportation and
customer claims. Although progress has been made in improving service, the
Railroad expects that the Plan will relieve current congestionthese problems across the system by late 1997, a prolonged service recovery couldto continue to have an adverse material effectimpact on UPC's future earnings and cash flow.
The Plan includes1998
results. In addition, as a numberresult of temporary steps currently underway to reduce the
number of trainsrecent operating overlosses incurred by the
Railroad and in order to improve system velocityfund its capital programs, the Corporation has
incurred substantial incremental debt since December 31, 1997 and service levels. These steps include: diverting trainsobtained
additional financing from congested Southern
Corridor routes to less congested alternatives; temporarily transferring
business to several other railroads including Kansas City Southern Railway
Company, Burlington Northerna private placement of preferred securities. (See
Changes in Financial Condition and Santa Fe Railway Company (BNSF) and Norfolk
Southern Corporation; combining shorter trains; reducing the number of
locomotives in use on local and maintenance-of-way service; accelerating the
delivery of new locomotives; adding manpower and capacity at locomotive repair
shops; moving switching activities from allOther Developments) The timing
of the major congested yardsCorporation's return to other locations; transferring switchingprofitability will be determined by how rapidly
it is able to shortline railroads; hiring
additional traineliminate congestion and engine employees; and taking a number of actionsreturn to use
train crews more efficiently in congested terminals.
Status Report - Through mid-November 1997, the Railroad has made ongoing
progress in reducing car inventories on the system and improving system
velocity. These results are being reported weekly to the Surface
Transportation Board. Based upon results to date, the Corporation anticipates
that service levels will continue to improve through the last quarter of 1997.normal operations throughout
its system.
FINANCIAL RESULTS
CONSOLIDATED - The Corporation reported a net loss of $62 million or $0.25 per
diluted share for the first quarter of 1998, compared to 1997 net income of $240$128
million or $0.96$0.52 per share for the third quarter of 1997, compared to net income of $275 million or
$1.30 per share for the same period in 1996. Earnings for the period included
the effects of the completion of the Southern Pacific acquisition and one-time
SP merger-related costs of $16 million pre tax or $10 million after tax.
Results for 1997 also reflected the impact of recent congestion problems. Net
income for 1996 included $64 million in discontinued operations, representing
approximately 83% of Resources' net income (see Note 3 to the Condensed
Consolidated Financial Statements).
Results of Continuing Operations
CONSOLIDATED - In the third quarter of 1997, the Corporation reported income
from continuing operations of $240 million ($0.96 per share), compared to
results for the third quarter of 1996 of $211 million ($1.00 per share).diluted share. This earnings increasedecrease resulted primarily
from continued congestion and service issues at the integration of SP operations andRailroad, which were
slightly offset by improved operating results at Overnite.
The dilution of earnings per share
reflects the issuance of 38.1 million UPC shares in connection with the
Southern Pacific acquisition (see Note 2 to the Condensed Consolidated
Financial Statements).
Operating revenues increased $829decreased $224 million (42%(8%) to $2.83 billion$2,586 million in 1997,1998,
reflecting an 11% decrease in volumes at the acquisition of SP andRailroad, which were somewhat
offset by a 7%20% increase in revenues at Overnite.
Operating expenses increased $783$62 million (50%(3%) to $2.36 billion$2,527 million in 1997. The
addition1998.
Congestion-related costs and wage inflation, partially offset by net merger
benefits and volume-related cost savings, caused salaries, wages and employee
benefits to increase $52 million. Congestion was also a contributing factor,
along with unfavorable rates, to an increase in equipment and other rents by $41
million. Lower volumes and the absence of Southern Pacific operations, as well as congestion costs1997 maintenance projects at the
Railroad were slightly offset by merger integration benefits and continued
cost reductions at Overnite. The addition of Southern Pacific operations,
congestion costs at the Railroad and inflation were the primary factors causing increasesa decrease in salaries, wagesmaterials and employee benefits costssupplies
($32413 million);
equipment and other rents ($148 million); fuel. Fuel and utility costs ($77 million)fell $75 million (25%), principally the
result of decreased volumes at the Railroad and materialsa 15% decrease in fuel prices at
both the Railroad and supplies ($24 million).Overnite. Depreciation charges rose $90$5 million, primarily
due to the addition and revaluation of Southern Pacific
properties and UPC's continued reinvestment inextensive capital spending on its equipment and rail
infrastructure. Other costs increased by $120$52 million, reflecting merger-
related increases in purchased services ($68 million);primarily resulting from
miscellaneous costs associated with the congestion and service recovery.
Personal injury costs and casualty accruals ($36
million); employee relocation costs ($15 million)fell $6 million and property$3 million,
respectively, while professional fees and useother taxes ($11 million), partially offset by merger consolidation benefits at the
Railroad.
Operatingrose $7 million and $4
million, respectively.
Consolidated operating income rose $46fell $286 million (11%(83%) to $465$59 million in 1997,1998,
principally because of increasesdeclining results at the Railroad, and Overnite ($24 million and $23 million,
respectively).slightly offset by
improved results at Overnite. Other income rose $50fell $15 million, primarily
reflecting fewer real estate sales and lower rental income resulting from the
sale of three
aircraft and the Railroad's signboard business.sign board business in 1997. Interest expense increased
$41$11 million, the result of higher debt levels, associated with the Southern Pacific
acquisition, partially offset by the favorable impact of debt reduction from
the proceeds of the Resources notes payable repayment.interest
11
rates. Income taxes increased
$8decreased $120 million to $129a $43 million benefit,
primarily reflecting higherlower income before income taxes, which was partially offset by ataxes.
Railroad tax settlement and tax benefits
from property donations.
RAILROAD (Reported) - NetThe Railroad lost $32 million in the first quarter of 1998, compared
to net income of $275$170 million for the three months ended
September 30, 1997 increased $16 million (6%), compared to reported results of
$259 million during the same perioda year ago. This decline in 1996. This increase was principallyearnings is the
result of the integrationcontinuing effect of Southern Pacific. Operatingcongestion on the Railroad's operations.
Both periods included the impact of one-time SP merger-related costs for
severance, relocation, and training of employees ($18 million reduction in
net income rose $24in 1998 and $9 million (6%) to $457 million compared to reported third quarter 1996 results
of $433 million.reduction in net income in 1997).
The operating ratio for the thirdfirst quarter of 19971998 was 82.0,97.7, which is an increase from reported third quarter 1996 results of 74.9.includes
approximately 15 points estimated to be attributable to congestion costs
(both lost business and incremental operating costs). This increase reflects the integration of SP operations, as SP had an operating
ratio of 92.4compares to 86.2
for the third quarter of 1996. The addition of SP business drove
up operating revenues for the third quarter of 1997 to $2.5 billion, or 47%
higher than reported 1996 operating revenues, while operating costs grew $783
million to $2.36 billion.
The following discussion is based upon Pro Forma third quarter 1996 results
which assumes the SP acquisition occurred on January 1, 1996:
RAILROAD (Pro Forma) - Net income of $275 million was up $34 million, or 14%
from 1996 results of $241 million. Results for 1997 included $16 million ($10
million after tax) of one-time merger costs. Operating income of $457 million
was down $1 million from third quarter 1996, while the operating ratio for the
third quarter of 1997 was 82.0, 0.1 points better than pro forma 1996.
However, excluding one-time merger costs, the operating ratio improved 0.7
points to 81.4. Estimated congestion costs added 2.6 points to the operating
ratiosame period in 1997. Operating revenues were $2,538fell $279 million down $17 million (1%(11%)
versus third quarter 1996to $2.28 billion in 1998. This decrease reflects continuing congestion, the
impact of the Asian crisis on export grain and intermodal markets and weak
grain demand as a 3% increase in averagefarmers delay shipments due to the current grain price
environment. Average commodity revenue per car (ARC) was
more than offset by a 4% decline in carloadings.fell 1% to $1,149 per car,
while total carloadings fell 9% (approximately 189,000 cars). Commodity
revenue also
declined 1% from 1996 pro forma levelsin 1998 fell 10% over the same period in 1997 as shown in the table
below.
- ----------------------------------------------------------------------------
Commodity Revenue
Three Months Ended 9/30/973/31/98 Versus Pro Forma 1996
- ----------------------------------------------------------------------------1997
Commodity
(Revenue in Thousands) Cars ARC Revenue Change %
- ----------------------------------------------------------------------------Agricultural 203,177 $1,554 $315,786 $ (87,410) (22)
Automotive 149,263 $1,461 $ 218,011 $ 2,598 1
Agricultural 218,547 1,543 337,214 3,138 1159,400 1,446 230,464 (6,973) (3)
Chemicals 222,798 1,749 389,773 (43,719) (10)
Energy 442,094 1,124 496,988 (15,207) (3)
Industrial 320,602 1,359 435,709 (40,502) (9)
Intermodal 737,824 638 470,992 26,156 6
Chemicals 248,962 1,743 433,876 (18,426) (4)
Energy 439,478 1,099 482,809 (34,268) (7)
Industrial 377,022 1,360 512,792 (7,992) (2)
----------------------------------------------------590,115 606 357,506 (56,924) (14)
--------- ------ ---------- --------- ----
Total Commodity 2,171,096 $1,131 $2,455,694 $(28,794) (1)
====================================================
REVENUE SUMMARY (Pro Forma)-1,938,186 $1,149 $2,226,226 $(250,735) (10)
========= ====== ========== ========== ====
Agricultural Products: Commodity revenue fell 22% to $316 million. Carloadings
declined 18% to 203,000 cars, primarily the result of a 25% decrease in corn
volumes due to soft export demand (strong foreign production and the effect on
exchange rates due to the Asian crisis), as well as continued congestion. Most
agricultural products suffered from congestion problems and related equipment
shortages; meals and oils were the only bright spot, as U.S. producers
benefitted from strong export markets, primarily to Mexico. Average
commodity revenue per car declined 5%, primarily the result of weak exports,
which significantly reduced the average length of haul.
Automotive: Commodity revenue fell 3% to $230 million, in spite of a 1% increase
in carloadings reflecting new business opportunities and steady economic
conditions in the industry. Strong demand and the new Ford business led the 3%
increase in finished autos carloadings while parts volumes fell 2% resulting
from congestion-related diversions of traffic and inventory control by major
manufacturers. Average commodity revenue per car declined 4%, resulting from
generally shorter haul Ford business and less long-haul Mexico business.
Chemicals: Carloadings declined 6% to 223,000 cars and commodity revenue
decreased $44 million (10%) to $390 million. The decline in volume resulted
12
principally from system congestion (partially the result of congestion of
traffic crossing at the Mexican border), which more than offset strong market
demand. Average commodity revenue per car declined 4% due to generally
shorter hauls (storage-in-transit moves for plastic and growth in short-haul
potash moves) and unfavorable product mix.
Energy (Primarily Coal): Commodity revenue fell 3% to $497 million in 1998,
driven by a 3% decrease in carloadings. Continued congestion problems,
diversions of business to competing roads and a late February blizzard led
the decline, despite strong demand. Average commodity revenue was flat,
quarter were down 4%over quarter. Powder River Basin (PRB) train cycles fell slightly
quarter-over-quarter, 24.8 in 1998 vs. 25.1 in 1997, however longer trains
(117.6 cars/train in 1998 vs. 114.1 in 1997) boosted loads by approximately
3,200 units helping to improve PRB business versus 1997. All other mine
locations posted declines, largely due to congestion and related train cycle
issues.
Industrial Products: Carloadings decreased 10% while commodity revenue declined
9% to $436 million. Volume declines resulted primarily from 1996
loadscontinued
congestion (in the Southern tier and the Pacific Northwest) as well as the
Railroad's sale of 2,265,893. Declines were principallyits Duck Creek North line in 1997. Average commodity
revenue per car improved 1%, the result of the absence of shorter-haul Duck
Creek business and favorable mix changes.
Intermodal: Commodity revenue declined 14% to $358 million while carloadings
fell 12% to 590,000 loads-the result of continued congestion and related
diversions of traffic, as well as equipment imbalances caused by congestion, the United
Parcel Service strikestrong
imports and weak exports. Average commodity revenue per car fell 1%, as
unfavorable mix was largely offset by new longer haul business.
Operating expenses were $2,231 million, $21 million (1%) higher than the first
quarter 1997 saleoperating costs of the Duck Creek North
line, which generated 31,126 cars in the third quarter$2,210 million. Higher operating costs reflect
an estimated $77 million of 1997. Average
revenue per carcongestion-related costs ($148 million of
congestion-related costs offset by $71 million of volume savings from lower
business levels). The impact of congestion was up $35 for the quarter, as a result of higher intermodal
ARC (new premium service and longer-haul traffic), improved corn ARC (more
longer-haul export traffic and higher rates from maintaining a car inventory
available for grain customers), and higher industrial products ARC (mainly due
to the Duck Creek North sale).
Automotive - Traffic was up 1% versus 1996, while ARC rose $8 per car (1%)
accounting for a $3 million improvement in revenue. The higher ARC reflects
fewer low-ARC container moves partially offset by new lower ARC domestic
businessfuel
costs, merger benefits and shorter-haul import moves. Finished vehicle volumes (up 1%)
benefited from new domestic businessvolume-related cost savings, as carloads were
off 9% and strong import and domestic demand.
These positives were offset by congestion and unscheduled auto plant shutdowns.
Parts traffic was flat, as strong Mexico volumes were countered by congestion-
related diversions of traffic and auto plant shutdowns.
Agricultural Products - Loads finished down 4% for the quarter; however, ARC
improved 5% ($73 a car) pushing revenues up $3 million (1%) over 1996. The
higher ARC reflects longer-haul import and export traffic, service-related
diversions of short-haul traffic and higher rates associated with maintaining
a car fleet available for grain customers. Agricultural products were plagued
by low cycle times on wheat shuttles (2 vs. 4 turns per month from 1996), while
canned and packaged products, as well as, sweeteners suffered from service
problems. However, corn was up for the quarter, compared lower than normal
volumes in 1996, and meals and oils benefitted from strong export markets.
Intermodal - Traffic grew 4% in the quarter with revenue up 6% or $26 million
over 1996. ARC grew 1% from 1996 levels ($9 per car), reflecting new premium
service, longer-haul business and better car utilization. Strong market demand
generated volume gains in the Railroad's LTL partners' businesses. New premium
service, strong international markets and new business opportunities generated
additional volume improvements for the quarter, partially countered by service-
related traffic defections, the United Parcel Service strike and congestion.
Chemicals - Shipments fell 3%, while ARC declined $28 per car (2%) when
compared to 1996 results, accounting for a 4% ($18 million) revenue shortfall
versus 1996. The lower ARC was due to a shift in the business mix within
plastics, sulphur and petroleum, and price reductions in response to BNSF and
truck competition. Strong market demand was countered by system congestion in
the key chemical corridors in the Gulf Coast area and service-related
diversions to truck, barge and BNSF. Other volume drivers included the timing
of fall applications that held down fertilizer demand, a new pipeline that
diverted LP gas volumes and some demand softness that hurt the liquid and dry
chemicals business.
Energy - Movementsgross-ton miles were down 8% from third quarter 1996, causing a $34 million
revenue shortfall despite an ARC improvement of 1% ($11 per carload)10%. ARC
growth was driven by new higher-rated business and growth in long-haul European
export loads. Severe weather (that periodically shut down the Black Thunder
mine) and minor derailments in key corridors caused Powder River Basin,
Wyoming, train cycles to fall by almost one train a day (24.3 in 1997 from 25.0
a year ago), despite gains early in the third quarter from new business added
in the first half of 1997 and strong demand. Southern Illinois coal volumes
fell 29% from 1996 levels, as the Railroad diverted traffic to Illinois Central
due to congestion. Colorado and Utah coal volumes were also lower as higher
European export business could not cover diversions of UP business to BNSF
served mines.
Industrial Products - A 17% volume decline occurred, offset by an 18%
improvement in ARC (due to the sale of the Duck Creek North Escanaba Mine
business, which was very short-haul, low ARC traffic), as revenue fell 2% ($8
million). In 1996, the Duck Creek North line generated 31,126 cars. Volumes
also suffered from equipment shortages and service issues, as a large portion
of industrial products moves are in the Gulf Coast area where congestion has
been most acute. Other factors affecting volumes were soft demand for frac
sand (used in deep drilling activities), a high 1996 base for cement,
competition in California's I-5 corridor, a major steel and wire plant shutdown
and project timing in hazardous waste and recycling.
EXPENSE SUMMARY (Pro Forma)- Operating expenses were $2,081 million, $16
million (1%) better than third quarter 1996 operating costs of $2,097 million.
Labor expense was $9$29 million (3%) higher than 1996,1997, as net congestion-related
costs and wage inflation were partially offset by merger consolidation benefits
and volumevolume-related cost savings. Quarter-over-quarter, the work force levels
were virtually flat, as merger-related reductions and attrition were offset by
new hiring for train and engine crews.
Depreciation expense grew $20$6 million or 9%2% to $242$246 million due to the Railroad's
extensive capital programsprogram in 19961997 and 1997.1998. The Railroad spent over $2 billion
on capital projects in 1997 and anticipates spending $2.2 billion in 1998 of
which $400 million will be merger-related.
Materials and Supplies costs for the quarter were down $15 million. Key drivers included
merger-related savings in contract pricing and materials management,$16 million (11%) from
first quarter 1997. More rebuild projects (which are capitalized) and less
heavy material intensive locomotive andmaintenance projects in 1998 plus the absence of large program maintenance
projects on freight car repairs.
cars in 199 accounted for the quarter-over-quarter decline.
Fuel and Utilities expenses were down $11$73 million or 5%26% from 1996,1997, reflecting
lower fuel prices and volumes.congestion-related volume declines. A 4% reduction in
gross ton-milesgross-ton
13
miles quarter-over-quarter (down 10%) generated volume-related fuel savings
of $9$24 million while lower prices (down 0.8versus 1997. Prices were down 11.7 cents per gallon to 67 cents) resulted in savings of $2 million and a 1% decline in
the63.6
cents, saving $33 million. The fuel consumption rate generated an additional $2 million in savings.of 1.416 gallons per
thousand gross-ton miles improved 3% from last year's 1.457 (largely slower
locomotive speeds), lowering UP's fuel costs by another $7 million.
Rent expenseExpense was up 13% ($3742 million) versus 1996,1997, as system congestion changes in business mix and costs associated(which
hindered car cycle times) combined with maintaining a fleet of grain
cars on handunfavorable rates (strong market demand
for grain customers (GCAS) droveequipment) to drive up equipment rent costs.
SystemOther Costs increased $33 million (9%) from 1997, reflecting costs for customer
claims and service recovery caused by the system congestion accounted for increased costs of $27 million, GCAS added $12 million
(largely offset by higher commodity revenue)merger
consolidation benefits (trackage rights reimbursements and higher intermodal mix added
$12 million. Cost increases were partially offset by lower volume costs of $7
million (cars down 4%)contract pricing
savings) and ongoing contractcost savings from the SP acquisition of
$6 million.
Other Costs decreased $56 million from 1996, reflecting $17 million of net
merger savings (joint facility savings, trackage rights and contract price
savings), reduced costs due to the sale of SP's truck operations of $15
million, lower property and use taxes and lower administrative costs,
reflecting cost control efforts.
NON-OPERATING SUMMARY (Pro Forma) -Operating income declined $300 million (85%) to $53 million in 1998, reflecting
the effect of continued congestion and service issues. Interest expense
increased $12 million to $134 million, principally resulting from higher debt
levels. Other income, was up $37 million from last
year. Asset sales gains grew $38net, declined $18 million due to the saleabsence of the Railroad's
signboard business.Duck
Creek North branch line sale in 1997. Income taxes (State and Federal) were just slightly higher
than 1996 levels at $143decreased $128 million asto a
9% increase in pre-taxbenefit of $31 million, primarily reflecting lower income was offset
by the benefits of property donations and a prior year tax settlement. As a
result, the tax rate improved to 34.2% from 36.9% in 1996.
TRUCKINGbefore income taxes.
Trucking - ThroughoutDuring 1997, Overnite continued to benefit from several strategic
initiatives, implemented in 1996, that were aimed at better matching its operations to the
current trucking industry business environment. Actions taken included workforce
reductions, service center consolidations, centralization of the linehaul
management process and pricing initiatives targeting Overnite's lowest margin
customers, and staff rationalization. Ascustomers. Primarily as a result of these initiatives, Overnite improvedincreased its
net income from a
net loss of $9$1 million in the thirdfirst quarter of 19961997 to $10 million net
income in the first quarter of 1998 (excluding goodwill amortization of
$5 million in the third quarter of 1997. Results for both periods included goodwill
amortization of $5 million.each period).
Overnite's operating revenues increased $16$43 million (7%(20%) to $250$257 million, primarily the result ofas
a 12%13% increase in volumes combined with a 7% increase in average
prices, resultingprices--resulting from Overnite's pricing initiatives. This was partiallyHigher volumes
reflected a 15% increase in LTL tonnage, somewhat offset by a 5% decrease in
volumes, reflecting a 4% decrease in LTL tonnage and a 23%14% decrease
in truckload volumes as Overnite continues to rationalize its traffic base.volumes.
Operating expenses decreased $7increased $30 million (3%(14%) to $236$244 million. Salaries, wages
and employee benefit costs decreased $3increased $19 million (14%) to $149$154 million,
reflecting workforce reductionsincreases, higher volumes, and lower volumes, partially offset by wage and benefit inflation.
An increased use of intermodal rail service and contract linehaul carriers
caused a $1an $8 million increase in rent and purchased transportation.services. Fuel costs declined
$2$.5 million, which reflected the combined result of an 11%as a 15% decrease in fuel prices andwas offset by a 6%10%
volume-related reductionincrease in fuel consumption. LowerHigher volumes and spending controls caused decreasesincreases
in materials and supplies ($1
million), use taxes and licenses ($1 million) and administrative expenses ($12 million). Also, depreciation expense decreased $1Overnite generated operating income
of $13 million for the first quarter of 1998, compared to breaking even for
the comparable period a resultyear ago (excluding goodwill amortization of the
initiatives implemented$5
million in 1996 to eliminate various service centers and excess
equipment.each period). Overnite's operating ratio (excluding(including goodwill
amortization) improved to 94.596.8 in 19971998 from 103.6102.2 in 1996.
CORPORATE SERVICES AND OTHER OPERATIONS1997.
Corporate Services and Other Operations - Expenses related to Corporate Services
and Other Operations (consisting of corporate expenses, third-party interest
charges, intercompany interest allocations, other income and income taxes
related to the Corporation's holding company operations, and the results of
other operating units) increased $1decreased $3 million to $40$35 million in the third
quarter of 1997.1998. This
decrease
14
largely reflects lower Corporate servicesinterest and otherinsurance costs. Other operating
units generated an operating loss of $1$3 million in the first quarter of 1998,
compared to the same results during the comparable period in 1997.
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
FINANCIAL CONDITION - During the first three months of 1998, cash from
operations was a negative $117 million, compared to breaking even in 1996.
Results of Discontinued Operations
Resources reported net income of $77$251 million in the third quarter of 1996. UPC
recognized its share of Resources' net income (approximately 83%) in
discontinued operations in 1996.
Nine Months Ended September 30, 1997 Compared to September 30, 1996
CONSOLIDATED RESULTS - The Corporation reported net income for the nine months
ended September 30, 1997 of $584 million ($2.35 per share) compared to $675
million ($3.24 per share) for the same period of 1996. Results for 1997
included the effects of the completion of the Southern Pacific acquisition
including one-time SP merger-related costs of $46 million, net of tax. Results
for 1997 also reflected the impact of recent congestion problems. Results for
1996 included $171 million representing approximately 83% of Resources' net
income in discontinued operations.
RESULTS OF CONTINUING OPERATIONS - Income from continuing operations increased
by $80 million (16%) for the period to $584 million ($2.35 per share), as the
impact of the Railroad's SP integration more than offset higher debt service
costs associated with the Southern Pacific acquisition. Operating revenues
increased $2.5 billion (43%) to $8.5 billion for the period, principally
resulting from the addition of SP business.
Operating expenses rose $2.3 billion (47%) to $7.2 billion in 1997.
The
addition of Southern Pacific operations, rail volume growth, congestion costs
and inflation caused increases in salaries, wages and employee benefits ($870
million), equipment and other rents ($373 million), fuel and utilities ($295
million) and materials and supplies ($88 million). Depreciation charges rose
$263 million, reflecting the addition and purchase accounting revaluation of
Southern Pacific's properties and UPC's continued reinvestment in its equipment
and rail infrastructure. Other costs increased $415 million, reflecting
merger-related increases in purchased services ($198 million), casualty
accruals ($108 million), other taxes ($36 million), travel ($28 million) and
employee relocation ($16 million).
Operating income increased by $238 million (22%) to $1.3 billion for the nine
months ended September 30, 1997, principally reflecting a $177 million increase
at the Railroad and a $65 million increase in operating results at Overnite.
Other income increased $57 million, primarily the result of UPC's sale of
three aircraft and sale of the Railroad's signboard business. Interest expense
increased $107 million, principally from higher debt levels associated with the
Southern Pacific acquisition offset by the favorable impact of the Resources'
IPO dividend and debt refinancing activities. The Corporation's effective tax
rate for the period increased to 36.6% from 33.2% a year ago, which reflects
the combined effects of various state and federal tax settlements and property
donations.
CHANGES IN CONSOLIDATED FINANCIAL CONDITION
During the first nine months of 1997, cash from continuing operations was $1.2
billion compared to $1.3 billion for the same period in 1996. This $108$368 million decrease primarily reflects lower earnings and increasedtiming of
working capital needsrequirements due to the SP merger andcontinuing congestion as well as
merger consolidation spending, partially
offset by higher non-cash expenses included in income (higher depreciation,
casualty accruals and deferred taxes).spending.
Cash used in investing activities was $1.2 billion$553 million in 1997the first quarter of 1998
compared to $1.3
billion$434 million in 1996.1997. This decreaseincrease primarily reflects the absence of the $539
million expended for SP shares in September 1996 and increased proceeds from
the sale of assets ($148 million), reflecting the sale of the Railroad's
signboard business and Duck Creek North branch line, and the sale of Corporate
aircraft. These items were partially offset by higher
capital spending ($539
million). The Railroad will spend over $2 billion on capital projects in 1997
compared to $1.6 billion in 1996, of which $550 million is merger-related.by the railroad, incuding merger related spending.
Cash provided by equity and financing activities was $51$771 million in 1997the first
quarter of 1998 compared to cash
used for financing activities of $14$86 million in 1996. This change primarily1997. Cash provided in 1998
principally reflects lowerhigher net debt repaymentsborrowings ($110 million)1.76 billion), offset by higher dividends
($52 million) resulting from the 38.1 million additional shares issued in the
Southern Pacific acquisition.debt
repaid of $888 million. The ratio of debt to debt plus equitytotal capital employed increased
to 49.7%53.6% at September 30, 1997 from 49.4%March 31, 1998, compared to 50.9% at December 31, 1996.1997 and 50.7%
at March 31, 1997. This change resulted from a slightthe increase in debt levels
(higher year-over-year capital
spending) from year-end 1996.
OTHER DEVELOPMENTS
Federal Railroad Administration (FRA) Review - The Railroad suffered three
severe accidents in mid-1997. As a resultIn February 1998, the Corporation announced that its Board of these incidents,Directors had
taken certain steps, including authorizing the FRA reviewed
the Railroad's operations and made several recommendations, including creating
a joint committeeissuance of Railroad management, laborequity-related
securities and the FRAreduction of the first quarter 1998 common stock dividend
to review20 cents per share from 43 cents per share in the previous quarter, to
ensure that the Railroad maintains the financial flexibility critical to
funding its 1998 capital program. On April 1, 1998, the Corporation
completed a private placement of $1.5 billion of 6-1/4% preferred securities
of Union Pacific Capital Trust, a statutory business trust sponsored by the
Corporation, which securities are convertible into common stock of the
Corporation at an initial conversion price of $68.90 (the Convertible
Preferred Securities). Proceeds from the sale of the Convertible Preferred
Securities were used for repayment of borrowings. (See "Part II. OTHER
INFORMATION; Item 2. Changes in Securities and monitor all aspectsUse of safety, adding an executive positionProceeds.")
The Convertible Preferred Securities will be presented as a separate line item
in the consolidated balance sheet for safety
reporting directlythe second quarter of 1998 between
liabilities and equity and appropriate disclosures will be included in the
notes to the President, creatingfinancial statements. For financial reporting purposes, the
Corporation will record distributions payable on the Convertible Preferred
Securities as a safety hotline (directfinancing charge to earnings in the Railroad's President), re-evaluating all existing training programs, and
increasing the monitoringstatement of train crew performance, crew fatigue and crew
scheduling. All such FRA proposals have been implemented by the Railroad. The
Railroad has also proposed a guaranteed time-off program for train and engine
employees.
During the last week of October, 1997, the Railroad experienced two additional
train collisions in Texas, which resulted in non-fatal injuries to train crew
employees. As a result of these incidents, the FRA sent additional inspectors
to Texas and other states to monitor the Railroad's operations.
Derailments in 1997 have cost the Railroad approximately $67 million in capital
and operating expense. During the first nine months of 1996, pro forma
derailment costs were $87 million. This decrease reflects safety improvements
year-to-date over the same pro forma period last year, including a 10% decline
in derailments.consolidated
income.
OTHER MATTERS
Accounting Pronouncements - In FebruaryJune 1997, the Financial Accounting StandardStandards
Board (FASB) issued Statement No. 128, "Earnings per Share," which replaces
Accounting Principles Board Opinion No. 15, "Earnings per Share." Statement
No. 128 requires dual presentation of Basic and Diluted EPS on the face of the
income statement for all entities with complex capital structures. Statement
No. 128 will be effective for UPC's 1997 Annual Report, including interim
periods to be presented therein; however, earlier application is not permitted.
Had Statement No. 128 been effective for the three and nine months ended
September 30, 1997, UPC's Basic and Diluted EPS (based on income from
continuing operations and net income) would have been $0.98 and $0.96 per
share, respectively, for the third quarter of 1997 and $2.38 and $2.35 per
share, respectively, for the nine months ended September 30, 1997.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income"
(FAS 130) that will beis effective for all periods in 1998. UPC has adopted the
provisions of FAS 130 effective January 1, 1998. The Corporation anticipates minimalcomponents of
comprehensive income include, among other things, changes in the market value
of futures contracts which qualify for hedge accounting and a net loss
recognized as an additional pension liability but not yet recognized as net
periodic pension cost. The impact from this Statement.of adopting FAS 130 for the three months
ended March 31, 1998 was approximately $2 million.
15
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information.Information," UPCeffective December 31,
1998. The Corporation currently complies with most provisions of this
Statement, and any incremental disclosure required by that Statement is
expected to be minimal.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (FAS 132) effective in 1998.
FAS 132 revises and standardizes disclosures required by FAS 87, 88, and 106.
Restatement of the retirement plan footnote will be required for all earlier
periods presented in comparative financial statements at December 31, 1998.
Commitments and Contingencies - There-There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. Certain customers
have submitted claims or stated their intention to submit claims to the
Railroad for damages related to shipments delayed in
transit, while others have indicated an intention to submit claims for damages
arising outthe delay of delaysshipments as a result of
congestion problems.problems, and certain customers have filed lawsuits seeking relief
related to such delays. The nature of the damages sought include,by claimants
includes, but areis not limited to, contractual liquidated damages, freight loss
or damages to lading,damage, alternative transportation charges, additional production costs,
lost business and lost profits. In addition, some customers have asserted
that they have the right to cancel contracts as a result of alleged material
breaches of such contracts by the Railroad. The FRACorporation expects additional
claims by shippers. UPC will continue to evaluate the adequacy of its
reserves for claims and expects to add to such reserves as appropriate.
The Railroad is also party to certain regulatory proceedings before the Surface
Transportation Board of the U.S. Department of Transportation (STB). One
proceeding pertains to rail service problems in the western United States. As an
outgrowth of this proceeding, the STB has also indicated that it may take
enforcement actions againstissued an emergency service order
imposing certain temporary measures on the Railroad baseddesigned, among other
things, to reduce congestion on the Railroad's lines in the Houston, Texas
area. A second proceeding, initiated under the STB's continuing oversight
jurisdiction with respect to the Corporation's acquisition of Southern Pacific
and consolidation of Southern Pacific with UPRR (and separate from the STB's
regularly scheduled annual proceeding to review the implementation of the merger
and the effectiveness of the conditions that the STB imposed on it), is for the
purpose of considering the justification for and advisability of any proposals
for new remedial conditions to the merger as they pertain to service in the
Houston, Texas/Gulf Coast area, including proposals by Kansas City Southern
Railway Company (KCS), Texas Mexican Railway Company (Tex Mex) and the Greater
Houston Partnership (GHP) for the forced transfer by the Railroad to Tex Mex of
certain lines and facilities in and around Houston, the establishment of a
"neutral" switching operation in the greater Houston area, and the permanent
adoption of provisions in the STB's emergency service order that expanded Tex
Mex's right to handle traffic to and from Houston. In addition, the STB has
initiated various inquiries and formal rulemaking proceedings regarding certain
elements of rail regulation following two days of hearings by the STB at the
request of two members of Congress and in response to shippers' expressions of
concern regarding railroad service quality, railroad rates and allegedly
inadequate regulatory remedies. If the Railroad is unsuccessful in eliminating
the remaining congestion and service problems affecting its system, the STB
could issue a new emergency service order upon an in-depth inquirythe expiration of the current
one and revieworder the Railroad to take additional actions including, among other
things, further diversions of safety practices.traffic or the transfer of certain rail lines
or other
16
facilities to other railroads. In addition, there can be no assurance that the
proposals advanced by parties in the remedial conditions proceeding or the
proceedings initiated in response to the rail regulation hearings will not be
approved in some form. Should the STB or Congress take aggressive action in the
rail regulation proceedings (e.g., by making purportedly competition-enhancing
changes in rate and route regulation and "access" provisions), the adverse
effect on the Railroad and other rail carriers could be material.
The Corporation is also subject to Federal, state and local environmental laws
and regulations, and is currently participating in the investigation and
remediation of numerous sites. Where the remediation costs can be reasonably
determined, and where such remediation is probable, the Corporation has recorded
a liability. In addition, the Corporation and its subsidiaries periodically
entersenter into financial and other commitments and provides guarantees for specific financialhave retained certain contingent
liabilities upon the disposition of formerly-owned operations.
In addition, UPC and contractual obligationscertain of its subsidiariesofficers and affiliates.directors are currently
defendants in two purported class action securities lawsuits, and certain
current and former directors of the Corporation are currently defendants in
a purported derivative action filed on behalf of the Corporation. The class
action suits allege, among other things, that management failed to disclose
properly the Railroad's service and safety problems and thereby issued
materially false and misleading statements concerning the merger with SP and
the safe, efficient operation of its rail network. The derivative action
alleges, among other things, that the named current and former directors
breached their fiduciary duties to the Corporation by approving the mergers
of SP and Chicago and North Western Transportation Company into the
Corporation without ensuring that the Corporation or the Railroad had
adequate systems in place to effectively integrate those companies into the
operations of the Corporation and the Railroad. Because both the size of the
class and the damages are uncertain, UPC and the Railroad are unable at this
time to determine the potential liability, if any, which might arise from
these lawsuits. Management believes that these claims are without merit and
intends to defend them vigorously.
It is not possible at this time for the Corporation to fully determine the
effect of all unasserted claims on its consolidated financial condition,
results of operations or liquidity,liquidity; however, to the extent possible, where
unasserted claims can be estimated and where such claims are considered
probable, the Corporation has recorded a liability. The Corporation does
not expect that any known lawsuits, claims, environmental costs, commitments
or guarantees will have a material adverse effect on its consolidated
financial condition or
operating results.
Cautionary Information -condition.
CAUTIONARY INFORMATION
Certain information included in this Reportreport contains, and other materials filed
or to be filed by the Corporation with the Securities and Exchange Commission
(as well as information included in oral statements or other written statements
made or to be made by the Corporation) contain or will contain,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking information may include, without
limitation, statements that the Corporation does not expect that lawsuits,
claims, environmental costs, commitments, guarantees, contingent liabilities, labor negotiations,
claims or other matters will have a material adverse effect on its consolidated
financial condition, results of operations or liquidity and other similar
expressions concerning matters that are
17
not historical facts, and projections or predictions as to the Corporation's
financial or operational results. Such forward-looking information is or will
be based on factsinformation available at that time, and is or will be subject to
risks and uncertainties that could cause actual results to differ materially
from those expressed in the statements. Important factors that could cause
such differences include, but are not limited to whether the Service RecoveryRailroad is fully
successful in overcoming its congestion-related problems and implementing the
Plan referred to above achieves its goals,and other operational and financial initiatives, industry competition and
regulatory developments, natural events such as severe weather, floods and earthquakes, the
effects of adverse general economic conditions, changes in fuel prices, labor strikes, the
impact of year 2000 systems problems and the ultimate outcome of shipper claims
related to congestion, environmental investigations or proceedings and other
types of claims and litigation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Disclosure concerning market risk-sensitive instruments is set forth in Note 3
to the Financial Statements, pages 6-7 herein.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Southern Pacific Acquisition:Proceedings.
SOUTHERN PACIFIC ACQUISITION: As previously reported in Union Pacificthe Corporation's (the "Corporation")1997
Annual Report on Form 10-K, for the year ended
December 31, 1996 (the "1996 10-K"), various appeals have been filed with respect to the
Surface Transportation Board's ("STB")STB's August 12, 1996 decision (the "Decision")Decision) approving the acquisition of
control of Southern Pacific Rail
Corporation and its rail affiliates (collectively, "SP") by the Corporation and
its affiliates.Corporation. All of the appeals have been
consolidated. On April 23, 1997,consolidated in the U.S. Court of Appeals for the District of Columbia Circuit.
Oral argument in the case is scheduled for September 11, 1998. Various
appellants have withdrawn their appeals, leaving only Burlington Northern and
Santa Fe Railway Company (BNSF), the Western Coal Traffic League (WCTL),
Enterprise Products Company and the City of WichitaReno, Nevada with appeals pending.
On April 10, 1998, WCTL filed a motion to vacate and Sedgwick County, Kansas, movedremand the Decision in
light of a proceeding the STB commenced on March 31, 1998, under its continuing
oversight jurisdiction over the merger, to withdraw their
petition for review,consider whether any additional
conditions are justified and should be imposed to deal with service problems in
the Court granted their motion on April 30, 1997. On
August 11, 1997, the Court established a briefing schedule under which briefs
for petitioners and supporting intervenors were due on October 10, 1997, the
brief for respondents is due December 9, 1997, briefs for intervenors
supporting respondents are due December 30, 1997, and reply briefs are due
January 20, 1998. On August 18, 1997, Geneva Steel Company moved to withdraw
its petitions for review, and the Court granted its motion on September 8,
1997. On October 3, 1997,Houston/Gulf Coast area. The STB, the Corporation and its affiliates moved to dismiss
their petitions for review, and the Court granted their motion on October 7,
1997. On October 6, 1997, Kansas City Southern Railway Company ("KCS") moved
to dismiss its petitions for review; on October 7, 1997, Texas Mexican Railway
Company ("Tex Mex") moved to dismiss its petition for review; and on October
10, 1997, the United Transportation Union-General Committee of Adjustment (GO
401) moved to dismiss its petition for review. The Court granted these motions
on October 22, 1997.BNSF have opposed
this motion. The Corporation believes that it is unlikely that the disposition
of thesethe remaining appeals will have a material adverse impact on its consolidated
financial condition or its results of operations.
On May 7, 1997, the STB served a decision commencing the first annual
proceeding to implement the oversight condition it had imposed in the Decision.
The Corporation and its affiliates, and the Burlington Northern and Santa Fe
Railway Company ("BNSF"), filed reports required by the STB on July 1, 1997.
BNSF and other parties filed comments on August 1, 1997. The Corporation and
its affiliates, and others, filed replies on August 20, 1997. On October 27,
1997, the STB served a decision containing its findings and recommendations
based on the record compiled in the first oversight proceeding. The STB
concluded that the merger, as conditioned, had thus far not caused any
substantial competitive harm, and it rejected various requested adjustments to
the merger conditions. The STB ordered the Corporation and BNSF to continue
to report quarterly on merger implementation, and to provide a comprehensive
summary presentation in the progress reports due on July 1, 1998. The STB
order requires interested parties to file comments concerning the next annual
oversight proceeding on August 14, 1998, and replies are due September 1, 1998.
Bottleneck Proceedings:RAIL SERVICE PROCEEDINGS AND RELATED MATTERS: As previously reported in the
1996Corporation's 1997 Annual Report on Form 10-K, the Railroad is currently subject
to an emergency service order issued by the STB on October 31, 1997, as an
outgrowth of a proceeding initiated by the STB on October 2, 1997 to investigate
rail service problems in the western United States. The original service order,
which, among other things, imposed several temporary measures designed to reduce
congestion on the Railroad's lines in the Houston area, was modified and
extended by a supplemental order dated December 4, 1997. On February 25,
1998, the STB, citing the gravity of the Railroad's congestion problems and
characterizing them as "not yet close to being resolved," further modified
the emergency service order and extended it until August 27, 1996,2, 1998, the
maximum period allowable under
18
the law for the original order.
On March 31, 1998, the STB initiated a proceeding asking for arguments and evidence onunder its continuing oversight
jurisdiction with respect to the issuemerger of whether it should modify its existing regulations regarding the prescription of, and challenge to, rates for rail service involving a segment
that is served by only one railroad between an interchange point and an
exclusively-served shipper facility (i.e., a bottleneck segment). The STB
proceeding also referred to pending motions to dismiss three individual
complaint proceedings filed by shippers challenging a class rate charged for
the movement of coal, two of which named Union Pacific Railroad Company
("UPRR")Corporation and Southern Pacific
Transportation Company ("SPT")to consider proposals for new remedial conditions to the merger as a party
thereto. Neither complaintthey pertain
to service in the Houston, Texas/Gulf Coast area. This proceeding, individually involved a significant
exposure for reparations. However, if existing regulationwhich is
separate from the STB's regularly scheduled annual proceeding to review the
implementation of bottleneck
movements were changed, future revenue from such movements, including those
covered by the complaint proceedings, could be substantially reduced. On
December 31, 1996,merger and the effectiveness of the conditions that the
STB served a decision which generally reaffirmed earlier
rulings regarding a rail carrier's obligationimposed on it, was initiated in response to provide rates for bottleneck
segmentssubmissions by Texas Mexican
Railway Company (Tex Mex), Kansas City Southern Railway Company (KCS) and assured the
right of rail carriersGreater Houston Partnership (GHP), proposing that the Railroad be directed to
differentially price
traffic. It also dismissed the two complaint proceedings in which UPRRtransfer certain lines and SPT
were defendants. On April 30, 1997, the STB served a decision generally
declining to reconsider its December 31, 1996 decision, but clarifying that in
certain circumstances a "bottleneck" destination carrier that does not serve
the origin for a traffic movement may be required to provide a separately-
challengeable common carrier rate for the "bottleneck" portion of the movement.
The STB decisions are pending on appeal before the Eighth Circuit Court of
Appeals, and an oral argument has been scheduled for November 18, 1997.
Rail Service Proceedings: Recently, UPRR has been experiencing serious
congestion problems, especially on SP linesfacilities in the Gulf Coast area but also
affecting other lines of the system. In late September 1997, following an
intense analysis and planning effort, UPRR adopted a comprehensive Service
Recovery Plan. The objective of this Plan is to return service to normal
within 90 days. The Service Recovery Plan involves additional expenditures on
locomotives and personnel and the diversion of trafficregion to other rail
carriers, among
other measures.
UPRR reported to the STBthat a "neutral" switching operation be established in the ongoing oversight proceeding regarding the
UP/SP merger concerning the recent service problemsgreater
Houston area and the Service Recovery
Plan. On October 2, 1997, the STB initiated a proceeding entitled Ex Parte No.
573, Rail Servicethat provisions in the Western United States ("Ex Parte No. 573"), to provide
interested persons the opportunity to report on the status of rail service in
the western United States and to review proposals for solving the service
problems that exist. The STB directed interested parties to file written
statements by October 23, 1997, and held a hearing on October 27, 1997. The
Corporation filed a written submission and made an oral presentation at the STB
hearing reporting further on its Service Recovery Plan and the progress that
is being made in implementing it. A number of shippers, shipper organizations,
public bodies and other railroads also submitted both written and oral
testimony. Some participants in the proceeding asked the STB to allow the
Service Recovery Plan time to work, while others requested that the STB take
more active measures to remedy service problems.
In addition, on October 21, 1997, the Society of the Plastics Industry, the
National Industrial Transportation League and the Chemical Manufacturers
Association filed a joint petition asking the STB to issue an emergency
directed service order designed to remedy UPRR's recent service problems, but
without specifying any specific action. The Corporation filed a response
opposing the joint petition on October 24, 1997.
On October 31, 1997, the STB issued anSTB's emergency service order that
expanded Tex Mex's right to handle traffic to and from Houston be adopted
permanently. The STB's decision announcing the proceeding established a
procedural schedule for the submission of evidence, replies and rebuttal.
If continued implementation of the Plan and other operational and financial
initiatives undertaken by the Corporation ultimately prove unsuccessful in
alleviating the remaining congestion and related service problems experienced by
the Railroad, the STB could issue a new emergency service order upon the
expiration of the current one and order the Railroad to take additional actions
including, among other things, further diversions of traffic or the transfer of
certain of the Railroad's rail lines or other facilities to other railroads. In
addition, there can be no assurance that the proposals advanced by Tex Mex, KCS,
GHP or other parties in the remedial conditions proceeding will not be approved
in some form.
RAIL ACCESS AND COMPETITION: Acting pursuant to requests from two members of
Congress and responding to shippers' concerns about railroad service quality,
railroad rates and allegedly inadequate regulatory remedies, the STB on April
17, 1998, following two days of hearings, issued a decision opening inquiries
into certain elements of rail regulation. The STB noted that no parties to the
hearings had shown how aggressive remedies designed to produce lower rates and
enhance competition would permit the industry to cover system costs and support
reinvestment. Nevertheless, it described(i) directed a panel of disinterested economic
experts to recommend appropriate standards to measure railroad revenue adequacy,
which is used to determine whether rates are lawful (this portion of the
decision was subsequently modified to permit, as an outgrowthalternative, discussions
of the STB proceedings in Ex Parte No. 573. The
service order, which by its terms expires in 30 days, imposes several temporary
measures designedthis issue between railroad and shipper representatives); (ii) initiated
a rulemaking proceeding to allow Tex Mexconsider revisions to divert some traffic off of UPRR"competitive access"
regulations in order to reduce congestionaddress quality of service issues; (iii) ordered
interested parties to identify modifications to regulations governing access
on UPRR linesnon-service-related grounds; (iv) began a proceeding to consider
eliminating product and geographic competition as factors to be considered in
Houston, Texas. The STB alsodeciding whether a railroad has market dominance over rail traffic;
(v) ordered large and small railroads to negotiate arrangements that would
increase the role of short-line rail carriers; and (vi) directed the Corporation,railroads
to establish "formalized dialogue" immediately with large and small shippers
and rail labor. Should the STB or Congress take aggressive action, (e.g., by
making purportedly competition-enhancing changes in rate and route regulation
and "access" provisions), the adverse effect on the Railroad and other
railroads could be material.
LABOR MATTERS: As previously reported in the Corporation's 1997 Annual Report
19
on Form 10-K, the General Counsel of the National Labor Relations Board ("NLRB")
is seeking a bargaining order remedy in 15 cases involving Overnite where a
Teamsters local union lost a representation election. These cases are pending
before the NLRB. By decision dated April 10, 1998, an administrative law judge
has recommended that bargaining orders be issued in four locations. Overnite
plans to appeal the decision to the NLRB. The remaining cases must yet be
scheduled for trial. A bargaining order remedy would require Overnite to
recognize and bargain with the union as if the Corporationunion had offered, to suspend rail transportation
service contract obligations of all shippers at Houston that wish to route
shipments over the Tex Mexwon instead of UPRR duringlost the
periodelection and would be warranted only if the following findings are made and
upheld: (1) the petitioning Teamsters local had obtained valid authorization
cards from a majority of the service
order. The serviceemployees in an appropriate unit; (2) Overnite
committed serious unfair labor practices; and (3) those unfair labor practices
would preclude the holding of a fair election despite the application of less
drastic remedies. Under NLRB case law, a bargaining order also requires the Corporation to reportremedy would attach
retrospectively to the STB
regarding service issues raised atdate when, after a union with a showing of majority
support demanded recognition, Overnite embarked on an unlawful course of
conduct. In the hearingevent of such a retroactive effective bargaining order,
Overnite would face back pay liability for losses in Ex Parte No. 573.employee earnings due to
unilateral changes in terms or conditions of employment, such as layoffs,
reduced hours of work or less remunerative work assignments. In addition, if
a bargaining order remedy was granted in all contested cases, the increased
Teamsters' representation could force Overnite to alter its posture in
collective bargaining, increase its costs and alter its operating methods.
Overnite believes it has substantial defenses to these cases and intends to
continue to aggressively defend them.
ENVIRONMENTAL MATTERS: The STB
rejectedRailroad has been named as a defendant in a civil
action brought by the more intrusive proposals that hadCalifornia Department of Fish and Game, Office of Spill
Prevention and Response on April 10, 1998. The complaint alleges violations of
California Fish and Game Code Section 5650, California Business and Professions
Code Section 17200, Civil Code Sections 3479 and 3480, and damage to the waters
of California for which the Department of Fish and Game allege trusteeship. The
complaint results from derailments and alleged releases of diesel fuel oil
during 1995 in the Feather River Canyon in Butte County, California. The
Complaint seeks penalties, exemplary damages, natural resource damages and
unspecified injunctive relief.
The Railroad has been presentednamed as a defendant in a criminal misdemeanor action
brought by the State of California in the Municipal Court of Placer County,
California on February 24, 1998. The complaint alleges a violation of
California Fish and Game Code Section 5650 as a result of a diesel fuel spill
in Norden, California in February 1997. In addition, the California
Department of Fish and Game is seeking penalties, monitoring costs and
natural resource damages under state water statutes, and the U.S.
Environmental Protection Agency (EPA) is seeking penalties for violation of
the Clean Water Act in connection with the Ex Parte No. 573 proceedings so as notsame incident.
The Railroad and Clean Harbors, a waste disposal firm, are the subject of a
criminal investigation by the EPA and the Federal Bureau of Investigation. Tank
cars containing hazardous waste billed to impedeClean Harbors' transload facility in
Sterling, Colorado were held in the implementationRailroad's Sterling, Colorado rail yard for
periods longer than ten days prior to placement in Clean Harbor's facility,
allegedly in violation of hazardous waste regulations. A finding of violation
could result in significant criminal or civil penalties.
20
Item 2. Changes in Securities and Use of Proceeds.
On April 1, 1998, Union Pacific Capital Trust (the "Trust"), a statutory
business trust formed under the laws of the Service Recovery Plan. The STB indicated that it will holdState of Delaware and a
further
hearing on December 3, 1997, at which timesubsidiary of the Corporation, will be required to
address the progress it has madeclosed a private placement of $1.5 billion in
addressing the recent service problems,
after which the STB will determine whether an extensionaggregate amount of 6-1/4% Convertible Preferred Securities (the "Convertible
Preferred Securities"), with a liquidation amount of $50 per each of the
service orderConvertible Preferred Securities. Each of the Convertible Preferred Securities
is requiredconvertible, at the option of the holder thereof, into shares of UPC's
common stock, par value $2.50 per share (the "UPC Common Stock"), at the rate
of 0.7257 shares of UPC Common Stock for each of the Convertible Preferred
Securities, equivalent to a conversion price of $68.90 per share of UPC
Common Stock, subject to adjustment under certain circumstances. The
Corporation owns all of the common securities of the Trust.
The initial purchasers of the Convertible Preferred Securities (the "Initial
Purchasers") were Credit Suisse First Boston Corporation; Merrill Lynch, Pierce,
Fenner & Smith Incorporated; Smith Barney Inc.; and whether any additional actions are necessary.
Two railroad competitorsSchroder & Co. Inc. The
Initial Purchasers resold 29,909,600 of UPRR, BNSFthe Convertible Preferred Securities
(the "QIB Securities") to qualified institutional buyers in reliance on
Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"),
and KCS, proposed that they be32,900 of the Convertible Preferred Securities (the "IAI Securities") to
a limited number of institutional "accredited investors," as such term is
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
The QIB Securities were sold for their liquidation amount of $50 each or
given access to,$1,495,480,000 in the aggregate, and the IAI Securities were sold for their
liquidation amount of $50 each or granted$1,645,000 in the right to control, various UPRR assets as a
purported remedy for UPRR's service problems. While UPRR has sought and
received constructive assistance from other carriers to dealaggregate. In connection
with the congestion problems, UPRR declinedpurchase of the QIB Securities and the IAI Securities, the
Corporation paid the Initial Purchasers a commission equal to agree to2.25% of the
BNSFpurchase price of each of the QIB Securities and KCS proposals on
the grounds that they would worsen the problem, are legally unjustified,IAI Securities, or
$33,648,300 and are aimed at obtaining competitive advantages that were rejected by the STB$37,012.50, respectively, in the UP/SP merger proceeding.
Some customers have submitted claims for damages relatedaggregate. In addition to
shipments delayed
in transit while other customers have indicated an intention to submit claims
for damages arising out of delays to their shipments as a resultsales of the congestion problems. The natureQIB and IAI Securities, the initial purchasers also sold 57,500
of the damages sought include, but are not
limitedConvertible Preferred Securities outside the United States to loss or damagescertain
persons other than U.S. persons in reliance on Regulation S under the
Securities Act, as previously reported in the Corporation's Current Report on
Form 8K, filed on April 20, 1998.
Item 4. Submission of Matters to lading, alternative transportation charges,
additional production costs, lost business and lost profits. In addition, some
customers have asserted that they havea Vote of Security Holders.
(a) The annual meeting of shareholders of the right to cancel contracts as a
result of alleged material breaches of such contracts by UPRR. It is not
possible at this time to assessCorporation was held on April
17, 1998.
(c) At the likelihood or magnitude of such liability
orAnnual Meeting, the likelihood that any of such contracts could be canceled by particular
customers. Each claim actually submitted to UPRR is being reviewed and
resolved on the basis of UPRR's contractual relationship with the customer
asserting the claim. As part of this process and the Service Recovery Plan,
UPRR has offered to waive shippers' contract obligationsCorporation's shareholders voted for the
durationelection of Philip F. Anschutz (206,359,406 shares in favor;11,044,914
shares withheld), Robert P. Bauman (206,581,925 shares in favor;
10,822,395 shares withheld), Richard K. Davidson (205,913,479 shares in
favor; 11,490,841 shares withheld), Spencer F. Eccles (206,604,706
shares in favor; 10,799,614 shares withheld), Elbridge T. Gerry, Jr.
(206,601,620 shares in favor; 10,802,700 shares withheld), William H.
Gray, III (206,536,320 shares in favor; 10,868,000 shares withheld),
Judith Richards Hope (206,553,752 shares in favor; 10,850,568 shares
withheld), Richard J. Mahoney (206,564,904 shares in favor; 10,839,416
shares withheld), John R. Meyer (206,563,462 shares in favor; 10,840,858
shares withheld), and Richard D. Simmons (206,586,280 shares in favor;
10,818,040 shares withheld) as directors of the congestion crisis on a case-by-case basis, wherever routing traffic over
other railroads or other modes would assistCorporation. In
21
addition, the shipper and not worsenCorporation's shareholders voted to ratify the congestion on UPRR.
UPRR experienced a numberappointment
of serious accidentsDeloitte & Touche LLP as independent auditors of the Corporation
(215,978,952 shares in July and August 1997,
although most overall safety measures continue to improve. In August and
September 1997, the Federal Railroad Administration ("FRA") conducted an
in-depth inquiry into UPRR's safety practices and made a number of
recommendations for improvements. Such recommendations include creating
a joint committee of Railroad management, labor and the FRA to review and
monitor all aspects of safety, adding an executive position for safety
reporting directly to the President, creating a safety hotline (direct to the
Railroad's President), re-evaluating all existing training programs and
increasing the monitoring of train crew performance, crew fatigue and crew
scheduling. All such recommendations have been implemented. The FRA has
indicated that it may take enforcement actions against UPRR.
During the last week of October, 1997, the Railroad experienced two additional
train collisions in Texas, which resulted in non-fatal injuries to train crew
employees. As a result of these incidents, the FRA sent additional inspectors
to Texas and other states to monitor the Railroad's operations. UPRR also
agreed voluntarily to introduce a guaranteed time-off program for 3,500 train
and engine employees which would ensure that every such employee has two
consecutive calendar days off after working 14 consecutive calendar days. This
program is pending approval by the joint management, labor and FRA committee
formed to examine and adopt safety initiatives. Once adopted, this program is
expected to be expanded to the rest of UPRR's system by mid-December.favor; 696,527 shares against; 728,841 shares
withheld).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------3 - By-Laws of Union Pacific Corporation, as amended effective as
of April 30, 1998.
4.1 - Revised Articles of Incorporation of Union Pacific Corporation,
as amended through April 25, 1996 (incorporated by reference to
Exhibit 3 to Union Pacific Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996).
4.2 - By-Laws of Union Pacific Corporation (filed as Exhibit 3).
4.3 - Certificate of Trust of Union Pacific Capital Trust
(incorporated by reference to Exhibit 4.3 to Union Pacific
Corporation's Registration Statement on Form S-3, Registration
No. 333-51617).
4.4 - Amended and Restated Declaration of Trust of Union Pacific
Capital Trust, dated as of April 1, 1998, among Union Pacific
Corporation, as Sponsor, The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware Trustee,
and Gary M. Stuart, L. White Matthews, III and Joseph E.
O'Connor, Jr., as Regular Trustees (incorporated by reference
to Exhibit 4.4 to Union Pacific Corporation's Registration
Statement on Form S-3, Registration No. 333-51617).
4.5 - Indenture for the Convertible Junior Subordinated Debentures
due 2028, dated as of April 1, 1998, among Union Pacific
Corporation, as Issuer, and The Bank of New York, as Indenture
Trustee (incorporated by reference to Exhibit 4.5 to Union
Pacific Corporation's Registration Statement on Form S-3,
Registration No.333-51617).
4.6 - Form of Union Pacific Corporation Stock Certificate.
4.7 - Form of Union Pacific Capital Trust 6-1/4% Convertible
Preferred Securities (included in Exhibit 4.4).
4.8 - Form of Union Pacific Corporation Convertible Junior
Subordinated Debentures due 2028 (included in Exhibit 4.5).
4.9 - Preferred Securities Guarantee, dated as of April 1, 1998,
between Union Pacific Corporation, as Guarantor, and The Bank
of New York, as Guarantee Trustee (incorporated by reference to
Exhibit 4.9 to Union Pacific Corporation's Registration
Statement on Form S-3, Registration No.333-51617).
22
4.10 -Common Securities Guarantee, dated as of April 1, 1998, by
Union Pacific Corporation, as Guarantor (incorporated by
reference to Exhibit 4.10 to Union Pacific Corporation's
Registration Statement on Form S-3, Registration No.333-51617).
11 - Computation of earnings per share.
12 - Computation of ratio of earnings to fixed charges.
27 - Financial data schedule.
27.1 Financial Data Schedule (restated for the year ended December 31,
1996).
27.2 Financial Data Schedule (restated for the year ended December 31,
1995).
27.3 Financial Data Schedule (restated for the quarters ended March 31,
June 30, and September 30, 1997).
27.4 Financial Data Schedule (restated for the quarters ended March 31,
June 30, and September 30, 1996).
(b) Reports on Form 8-K
-------------------On January 23, 1998, UPC filed a Current reportReport on Form 8-K regarding the fourth
quarter 1997 earnings of the Corporation.
On February 26, 1998, UPC filed a Current Report on October 10, 1997Form 8-K describing first
quarter 1998 results and current actions taken by Union Pacific Corporation's
Board of Directors.
On March 20, 1998, UPC filed a Current Report on Form 8-K regarding the
Railroad's
congestion, safety issuesCorporation's plan to privately place $1 billion of preferred securities of a
statutory business trust sponsored by UPC, convertible into Common Stock of the
Corporation, to provide financial flexibility in funding its 1998 capital
improvement programs and restoring quality service to its customers.
On March 25, 1998, UPC filed a Current Report on Form 8-K announcing that Union
Pacific Railroad will embargo most southbound traffic destined for the Service Recovery Plan.Laredo,
TX gateway, effective Saturday, March 28, 1998, to clear the backlog of cars
waiting to cross into Mexico.
On March 31, 1998, UPC filed a Current Report on Form 8-K regarding the STB's
commencement of a proceeding under its continuing oversight jurisdiction of the
UPC/Southern Pacific rail merger to consider proposals for new remedial
conditions to the merger as they pertain to service in the Houston, Texas/Gulf
Coast area.
23 SIGNITURE PAGE
SIGNATURE
Pursuant to the requirements 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.
Dated: November 14, 1997May 13, 1998
UNION PACIFIC CORPORATION
(Registrant)
/s//S/ Joseph E. O'Connor, Jr.
---------------------------------------------------------
Joseph E. O'Connor, Jr.
Vice President and Controller
(principal(chief accounting officer
and duly authorized officer)
INDEX
UNION PACIFIC CORPORATION
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------3 By-Laws of Union Pacific Corporation, as amended effective as of April
30, 1998.
4.1 Revised Articles of Incorporation of Union Pacific Corporation, as
amended through April 25, 1996 (incorporated by reference to Exhibit 3
to Union Pacific Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996).
4.2 By-Laws of Union Pacific Corporation (filed as Exhibit 3).
4.3 Certificate of Trust of Union Pacific Capital Trust (incorporated by
reference to Exhibit 4.3 to Union Pacific Corporation's Registration
Statement on Form S-3, Registration No. 333-51617).
4.4 Amended and Restated Declaration of Trust of Union Pacific Capital
Trust, dated as of April 1, 1998, among Union Pacific Corporation, as
Sponsor, The Bank of New York, as Property Trustee, The Bank of New
York (Delaware), as Delaware Trustee, and Gary M. Stuart, L. White
Matthews, III and Joseph E. O' Connor, Jr., as Regular Trustees
(incorporated by reference to Exhibit 4.4 to Union Pacific
Corporation's Registration Statement on Form S-3, Registration No.
333-51617).
4.5 Indenture for the Convertible Junior Subordinated Debentures due 2028,
dated as of April 1, 1998, among Union Pacific Corporation, as Issuer,
and The Bank of New York, as Indenture Trustee (incorporated by
reference to Exhibit 4.5 to Union Pacific Corporation's Registration
Statement on Form S-3, Registration No.333-51617).
4.6 Form of Union Pacific Corporation Stock Certificate.
4.7 Form of Union Pacific Capital Trust 6-1/4% Convertible Preferred
Securities (included in Exhibit 4.4).
4.8 Form of Union Pacific Corporation Convertible Junior Subordinated
Debentures due 2028 (included in Exhibit 4.5).
4.9 Preferred Securities Guarantee, dated as of April 1, 1998, between
Union Pacific Corporation, as Guarantor, and The Bank of New York, as
Guarantee Trustee (incorporated by reference to Exhibit 4.9 to Union
Pacific Corporation's Registration Statement on Form S-3, Registration
No.333-51617).
4.10 Common Securities Guarantee, dated as of April 1, 1998, by Union
Pacific Corporation, as Guarantor (incorporated by reference to Exhibit
4.10 to Union Pacific Corporation's Registration Statement On Form S-3,
Registration No.333-51617).
11 Computation of earnings per shareEarnings Per Share.
12 Computation of ratioRatio of earningsEarnings to fixed chargesFixed Charges.
27 Financial data scheduleData Schedule.
27.1 Financial Data Schedule (restated for the year ended December 31, 1996).
27.2 Financial Data Schedule (restated for the year ended December 31, 1995).
27.3 Financial Data Schedule (restated for the quarters ended March 31, June
30, and September 30, 1997).
27.4 Financial Data Schedule (restated for the quarters ended March 31, June
30, and September 30, 1996).