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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 1-6075
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.)
Martin Tower, Eighth and Eaton Avenues, Bethlehem, Pennsylvania
(Address of principal executive offices)
18018
(Zip Code)
(610) 861-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------ ------
As of April 30, 1996, there were 205,818,473 shares of the Registrant's
Common Stock outstanding.
UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
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Page Number
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Item 1: Condensed Consolidated Financial Statements:
CONDENSED STATEMENT OF CONSOLIDATED INCOME - For the
Three Months Ended March 31, 1996 and 1995............ 1
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION -
At March 31, 1996 and December 31, 1995............... 2 - 3
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS - For
the Three Months Ended March 31, 1996 and 1995........ 4
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS -
For the Three Months Ended March 31, 1996 and 1995.... 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.... 5 - 8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9 - 15
PART II. OTHER INFORMATION
Item 1: Legal Proceedings....................................... 16
Item 4: Submission of Matters to a Vote of Security
Holders................................................. 16
Item 6: Exhibits and Reports on Form 8-K........................ 16 - 17
Signature........................................................ 18
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, 1996 and 1995
--------------------------------------------------
(Amounts in Millions, Except Ratio and Per Share Amounts)
(Unaudited)
1996 1995
------- -------
Operating Revenues (Note 3)................. $ 1,968 $ 1,664
------- -------
Operating Expenses (Note 3):
Salaries, wages and employee benefits..... 773 656
Equipment and other rents................. 227 163
Depreciation and amortization ............ 172 138
Fuel and utilities (Note 5)............... 164 126
Materials and supplies.................... 117 89
Other costs............................... 250 213
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Total.................................. 1,703 1,385
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Operating Income............................ 265 279
Other Income - Net.......................... 18 49
Interest Expense (Notes 2, 3, 4 and 5)...... (117) (91)
Corporate Expenses.......................... (28) (30)
------- -------
Income before Income Taxes.................. 138 207
Income Taxes................................ (31) (77)
------- -------
Income from Continuing Operations........... 107 130
Income from Discontinued Operations, Net
of Income Taxes of $27 Million in 1996
and $20 Million in 1995 (Note 4).......... 49 61
------- -------
Net Income.................................. $ 156 $ 191
======= =======
Earnings Per Share:
Income from Continuing Operations......... $ 0.52 $ 0.63
Income from Discontinued Operations....... 0.24 0.30
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Net Income................................ $ 0.76 $ 0.93
======= =======
Weighted Average Number of Shares........... 206.3 205.5
Cash Dividends Per Share.................... $ 0.43 $ 0.43
Ratio of Earnings to Fixed Charges (Note 6). 1.9 2.9
2
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Millions of Dollars)
(Unaudited)
March 31, December 31,
ASSETS 1996 1995
--------- ---------
Current Assets:
Cash and temporary investments................ $ 79 $ 230
Accounts receivable .......................... 447 349
Inventories................................... 227 238
Notes receivable (Note 4)..................... 652 653
Other current assets.......................... 241 209
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Total Current Assets..................... 1,646 1,679
--------- ---------
Investments:
Investments in and advances to affiliated
companies (Note 2)......................... 1,261 1,260
Other investments............................. 186 187
--------- ---------
Total Investments........................ 1,447 1,447
--------- ---------
Properties:
Railroad:
Road and other.............................. 13,038 12,888
Equipment................................... 5,111 5,004
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Total Railroad........................... 18,149 17,892
--------- ---------
Trucking...................................... 743 744
--------- ---------
Other......................................... 114 112
--------- ---------
Total Properties.......................... 19,006 18,748
Accumulated depreciation...................... (4,746) (4,643)
--------- ---------
Properties - Net ......................... 14,260 14,105
--------- ---------
Net Assets of Discontinued Operations (Note 4).. 1,361 1,312
Excess Acquisition Costs - Net (Note 3)......... 717 730
Other Assets.................................... 178 173
--------- ---------
Total Assets.............................. $ 19,609 $ 19,446
========= =========
3
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
------------------------------------------------------
(Amounts in Millions, Except Share and Per Share Amounts)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
--------- ------------
Current Liabilities:
Accounts payable................................ $ 130 $ 145
Accrued wages and vacation...................... 299 284
Income and other taxes.......................... 181 178
Accrued casualty costs.......................... 189 192
Dividends and interest.......................... 187 203
Debt due within one year........................ 225 132
Other current liabilities....................... 763 765
--------- ---------
Total Current Liabilities.................... 1,974 1,899
--------- ---------
Debt Due After One Year (Notes 2, 3 and 4)........ 6,129 6,232
Deferred Income Taxes............................. 3,595 3,498
Retiree Benefits Obligation....................... 609 588
Other Long-Term Liabilities (Note 7).............. 640 649
Minority Interest in Consolidated
Subsidiary (Note 4)............................. 226 216
Stockholders' Equity:
Common stock, $2.50 par value, authorized
500,000,000 shares, 232,665,185 shares issued
in 1996, 232,317,010 shares issued in 1995.... 582 581
Paid-in surplus................................. 2,129 2,111
Retained earnings............................... 5,394 5,327
Treasury stock, at cost, 26,945,725 shares in
1996, 26,737,806 shares in 1995............... (1,669) (1,655)
--------- ---------
Total Stockholders' Equity.................... 6,436 6,364
--------- ---------
Total Liabilities and Stockholders' Equity.... $ 19,609 $ 19,446
========= =========
4
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
--------------------------------------------------
(Millions of Dollars)
(Unaudited)
1996 1995
------- -------
Cash flows from operating activities:
Net Income.......................................... $ 156 $ 191
Non-cash items included in income:
Depreciation and amortization................... 172 138
Deferred income taxes........................... (54) 23
Other - net..................................... 79 83
Income from discontinued operations (Note 4)........ (49) (61)
Changes in current assets and liabilities........... (43) (124)
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Cash from operations............................ 261 250
------- -------
Cash flows from investing activities:
Capital investments................................. (259) (178)
Other - net......................................... 13 267
------- -------
Cash (used in) provided by investing activities. (246) 89
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Cash flows from equity and financing activities:
Dividends paid...................................... (89) (88)
Debt repaid......................................... (678) (259)
Financings.......................................... 668 --
Other - net......................................... (67) (21)
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Cash used in equity and financing................ (166) (368)
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Net decrease in cash and temporary investments... $ (151) $ (29)
======= =======
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS
For the Three Months Ended March 31, 1996 and 1995
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
1996 1995
------- -------
Balance at Beginning of Year........................... $ 5,327 $ 4,734
Net Income............................................. 156 191
------- -------
Total........................................... 5,483 4,925
Dividends Declared ($0.43 per share in
1996 and 1995).................................. (89) (89)
------- -------
Balance at End of Period........................ $ 5,394 $ 4,836
======= =======
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, 1995 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 Stockholders incorporated by reference in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
1995. The results of operations for the three months ended March 31, 1996
are not necessarily indicative of the results for the entire year ending
December 31, 1996.
2. Acquisition of Southern Pacific Rail Corporation (Southern Pacific) - In
August 1995, the Corporation and Southern Pacific entered into a definitive
merger agreement (the Agreement) providing for the acquisition of Southern
Pacific by UPC. Under the terms of the Agreement, UPC completed a
first-step cash tender offer in September 1995, pursuant to which
approximately 39 million, or 25%, of the outstanding common shares of
Southern Pacific were acquired at a price of $25 per share. The cash tender
offer was funded with $976 million in borrowings under the Corporation's
then existing credit facilities.
Following the effective date of final approval of the Southern Pacific
acquisition by the Surface Transportation Board (STB) of the U.S. Department
of Transportation--the successor to the Interstate Commerce Commission--
which is expected in September 1996, UPC will complete the acquisition by
exchanging the remaining Southern Pacific common shares, at the holder's
election and subject to proration, for $25 in cash or 0.4065 shares of the
Corporation's common stock.
Should the STB not approve the acquisition or should UPC elect not to
complete the acquisition because the STB imposes onerous conditions which
prevent UPC from realizing the economic benefits of the business combination
with Southern Pacific, a subsequent disposition of the Southern Pacific
shares owned by the Corporation could result in a significant loss. However,
UPC continues to believe that the Southern Pacific acquisition will be
approved without onerous conditions.
The business combination with Southern Pacific will be accounted for as a
purchase. Until the merger's consummation, the Corporation will account for
its investment in Southern Pacific using the equity method. Although the
purchase price allocation will not be finalized until after the STB renders
its decision, initial estimates indicate that the fair value of tangible
assets acquired will exceed the purchase price.
6
3. Acquisition of Chicago and North Western Transportation Company (CNW) - In
April 1995, UPC completed the acquisition of the remaining 71.6% of CNW's
outstanding common stock not previously owned by the Corporation for
approximately $1.2 billion. Prior to the acquisition, CNW was the nation's
eighth largest railroad. The Corporation funded the acquisition through the
issuance of additional debt. The acquisition of CNW has been accounted for
as a purchase and CNW's financial results were consolidated with the
Corporation effective May 1, 1995.
4. Union Pacific Resources Group Inc. (Resources) - In July 1995, the
Corporation's Board of Directors approved a formal plan to divest of UPC's
natural resources business through an initial public offering (IPO) followed
by a distribution of the shares owned by the Corporation to its
stockholders. The distribution is expected to occur in the fourth quarter
1996, after receipt of a favorable Internal Revenue Service ruling and
consummation or termination of the Southern Pacific acquisition.
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 ($912 million in
cash, $650 million in 8.5% notes due within 90 days of the stock
distribution and a $59 million intercompany balance owed to the
Corporation). UPC used the cash proceeds to repay outstanding commercial
paper.
Resources' results have been reported as a discontinued operation in the
Corporation's condensed consolidated financial statements for all periods
presented.
The following summarized financial information is derived from Resources'
condensed consolidated financial statements to be contained in Resources'
first quarter 1996 Quarterly Report on Form 10-Q, which will be filed with
the Securities and Exchange Commission no later than May 15, 1996, and is
presented to provide additional information on Resources' financial results
to the Corporation's stockholders:
March 31, December 31,
1996 1995
--------- ------------
(Millions of Dollars)
Current assets $ 353 $ 420
Non-current assets 2,875 2,889
Current liabilities 929 1,067
Non-current liabilities 938 930
Stockholders' equity 1,361 1,312
March 31, March 31,
1996 1995
--------- ---------
(Millions of Dollars)
Operating revenues $ 390 $ 325
Operating income 97 86
Net income 59 61
Financial Instruments: Resources uses swaps, futures and forward contracts
to protect against unfavorable hydrocarbon price movements. Credit risk
related to these activities is managed by requiring that counterparties meet
minimum credit standards. At March 31, 1996, the largest credit risk
7
associated with any of Resources' counterparties was approximately $14
million, which was partially secured by a $10 million letter of credit.
At March 31, 1996, Resources had entered into near-term futures contracts
and price swaps for May-June 1996 with respect to average natural gas sales
volumes of 238 MMcfd at $1.81/Mcf which had a total unrecognized
mark-to-market loss of $2 million. Resources had also entered into financial
contracts related to long-term fixed price commitments for 85.2 Bcf which
had a total unrecognized mark-to-market loss of $13 million at March 31,
1996.
5. Financial Instruments - The Corporation uses 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 mitigated the downside risk of
adverse price and rate movements; however, it has also limited future gains
from favorable movements.
The Corporation addresses market risk related to these instruments by
selecting instruments whose value fluctuations highly correlate 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 largest credit
risk associated with any of the Corporation's counterparties was $18 million
at March 31, 1996. The Corporation has not been required to provide, nor
has it received, any significant amount of collateral relating to its
hedging activity.
The fair market value of the Corporation's derivative financial instrument
positions at March 31, 1996 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 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 March 31, 1996, the Corporation had outstanding interest rate swaps on
$226 million of notional principal amount of debt (4% of the total debt
portfolio) with a gross fair market value asset position of $18 million and
a gross fair market value liability position of $10 million. These
contracts mature over the next one to nine years. Interest rate hedging
activity increased first quarter 1996 interest expense by $2 million.
Fuel - Over the past three years, fuel costs approximated 9 percent 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
periodically uses swaps, futures and forward contracts to mitigate the
8
impact of fuel price volatility. The intent of this program is to protect
the Corporation's operating margins and overall profitability from adverse
fuel price changes.
At March 31, 1996, the Corporation had hedged 33% of the remaining 1996 fuel
consumption of Union Pacific Railroad Company and its affiliate Missouri
Pacific Railroad Company (collectively the Railroad) at $0.46 per
gallon on a Gulf Coast basis, while Overnite Transportation Company had
not hedged any of its 1996 fuel requirements. At March 31, 1996, the
Corporation had outstanding swap agreements covering the Railroad's fuel
purchases of $95 million with a gross and net asset position of $12
million. Fuel hedging lowered first quarter 1996 fuel costs by $4
million.
6. 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 discount and expense, and
the estimated interest portion of rental charges.
7. Commitments and Contingencies - There are various lawsuits pending against
the Corporation and certain of its subsidiaries. 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 has entered into commitments and provided
guarantees for specific financial and contractual obligations of its
subsidiaries and affiliates. The Corporation does not expect that the
lawsuits, environmental costs, commitments or guarantees will have a
material adverse effect on its consolidated financial condition or its
results of operations.
Management does not anticipate that the ultimate resolution of the matters
described in Part I, Item 3. Legal Proceedings of the Corporation's 1995
Annual Report on Form 10-K and in Part II, Item 1. Legal Proceedings in this
Report will have a material adverse effect on the Corporation's consolidated
financial condition or operating results.
8. Accounting Pronouncements - The Financial Accounting Standards Board (FASB)
issued Statement No. 121,"Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which establishes methods for
determining when an impairment of long-lived assets has occurred and for
measuring the impairment of long-lived assets. Initial adoption of Statement
121 did not have a material effect on UPC's operating results or financial
condition.
The FASB also issued Statement No. 123, "Accounting for Stock-Based
Compensation," which encourages, but does not require, employers to adopt a
fair value method of accounting for employee stock-based compensation, and
which requires increased stock-based compensation disclosure if expense
recognition is not adopted. The Corporation has not elected expense
recognition for stock options and therefore implementation of this
Statement had no effect on UPC's operating results or financial condition.
9
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 March 31, 1996 Compared to March 31, 1995
CORPORATE REOGRANIZATION
Chicago and North Western Transportation Company (CNW) - In April 1995, Union
Pacific Corporation (the Corporation or UPC) acquired the remaining 71.6% of
CNW's outstanding common stock not previously owned by UPC for $1.2 billion.
The acquisition of CNW was accounted for as a purchase and CNW's financial
results were consolidated with UPC beginning in May 1995.
Natural Resources Divestiture - In July 1995, UPC's Board of Directors approved
a formal plan to exit its natural resources business. The plan includes an
initial public offering (IPO) of Union Pacific Resources Group Inc.'s
(Resources) common stock (which occurred in October 1995) followed by the
distribution of UPC's remaining interest in Resources to the Corporation's
stockholders on a tax-free, pro-rata basis once UPC has received a favorable
ruling from the Internal Revenue Service (IRS) as to the tax-free nature of the
distribution and after the completion or termination of the acquisition of
Southern Pacific Rail Corporation (Southern Pacific).
Southern Pacific Acquisition - In August 1995, UPC and Southern Pacific entered
into a definitive merger agreement (the Agreement) providing for the acquisition
of Southern Pacific by UPC. Under the terms of the Agreement, UPC acquired 25%
of Southern Pacific's common stock in a first-step cash tender offer in
September 1995. UPC deposited these shares in an independent voting trust
pending regulatory approval of the acquisition. Following the effective date
of final approval of the Southern Pacific acquisition by the Surface
Transportation Board (STB) of the U.S. Department of Transportation--the
successor to the Interstate Commerce Commission--which is expected in
September 1996, UPC will complete the acquisition of Southern Pacific by
exchanging each of the remaining Southern Pacific common shares, at the
holder's election and subject to proration, for $25 or 0.4065 shares of UPC
common stock.
The Corporation filed its application for control of Southern Pacific with the
STB on November 30, 1995. Since that time, nearly 2,000 support statements have
been filed with the STB. Of such support statements, more than 1,300 were
provided by customers of Union Pacific Railroad Company and its affiliate,
Missouri Pacific Railroad Company (collectively the Railroad), and Southern
Pacific. In addition, 21 of the 25 states served by the Railroad and Southern
Pacific have formally endorsed the acquisition, as have over 650 state and local
officials. The acquisition has also received formal endorsements from every
major Pacific Coast port and the Gulf Coast ports of Houston, Corpus Christi,
Brownsville and Lake Charles Harbor. Furthermore, seven labor organizations
representing the majority of the unionized workforce of the Railroad and
Southern Pacific have formally endorsed the acquisition.
10
However, the acquisition is not without opposition. On or before the March 29,
1996 filing deadline, several groups and shippers, including the Texas Railroad
Commission and the National Industrial Transportation League, filed statements
opposing the acquisition with the STB. On April 12, 1996, the U.S. Department
of Justice filed its comments in opposition to the acquisition. Certain other
Class I railroads have also filed opposition statements.
On April 18, 1996, UPC reached a settlement agreement with the Chemical
Manufacturers Association (CMA) that addressed the concerns that CMA had with
respect to the acquisition and resulted in CMA withdrawing its opposition to the
acquisition. CMA is a 200-member trade group whose members produce 90% of the
chemical industry's annual output. Individual members of CMA are free to
support or oppose the acquisition.
On April 29, 1996, UPC and Southern Pacific filed their Rebuttals to Interested
Parties with the STB in response to the acquisition opposition statements.
Interested parties' rebuttals to the UPC/Southern Pacific filing are scheduled
to be filed by May 14, 1996, with legal briefs due to to be filed with the STB
by June 3, 1996 and oral arguments before the STB anticipated to occur on July
1, 1996. The STB voting conference on the acquisition is scheduled for July 3,
1996 with the final STB written decision due August 12, 1996.
Should the STB not approve the acquisition or should UPC elect not to complete
the acquisition because the STB imposes onerous conditions which prevent UPC
from realizing the economic benefits of the acquisition, a subsequent
disposition of the Southern Pacific shares owned by the Corporation could
result in a significant loss. However, UPC continues to believe that the
Southern Pacific acquisition will be approved without onerous conditions.
CONSOLIDATED - The Corporation reported net income of $156 million or $0.76 per
share for the first quarter of 1996, compared to 1995 net income of $191 million
or $0.93 per share. Results for 1996 included the effects of the acquisition of
CNW and, as a result of the Resources' IPO, reflected 83% of Resources' net
income in discontinued operations.
RESULTS OF CONTINUING OPERATIONS - Income from continuing operations declined
$23 million (18%) to $107 million ($0.52 per share) for the first quarter of
1996, as severe winter weather, Pacific Northwest flooding, and the 17-day
General Motors brake plant strike (the GM Strike) more than offset the positive
impact of the CNW integration at the Railroad, while severe weather conditions
and an unfavorable pricing environment reduced earnings at Overnite
Transportation Company (Overnite).
Consolidated operating revenues grew 18% to $1.97 billion from $1.66 billion in
1995, resulting primarily from increased carloadings--reflecting the acquisition
of CNW offset in part by the GM Strike and severe winter weather--and higher
average revenue per car at the Railroad, reflecting the CNW integration.
Consolidated operating expenses rose $318 million (23%) to $1.70 billion. The
addition of CNW volumes, weather-related traffic interruptions, rail traffic
congestion and inflation were the primary reasons for increases in salaries,
wages and employee benefits ($117 million), equipment and other rents ($64
million), materials and supplies ($28 million), personal injury expense ($8
million), other taxes ($11 million) and third-party transportation costs ($12
million). Fuel and utility costs increased $38 million, reflecting increased
fuel prices, incremental CNW volumes and weather-related inefficiencies.
11
Depreciation charges rose $34 million--the result of UPC's continued
reinvestment in its equipment and rail infrastructure and the addition of
CNW properties.
Consolidated operating income declined $14 million (5%) to $265 million for the
period. Interest expense increased $26 million, principally from higher debt
levels associated with the CNW acquisition and the Southern Pacific first-step
cash tender offer. Other income decreased $31 million, reflecting reduced real
estate sales activity at the Railroad.
Railroad - The Railroad earned $166 million for the quarter, a 15% decline from
$195 million in 1995. Earnings reductions reflected the current period's severe
winter weather, Pacific Northwest flooding, and the GM Strike. Results in 1996
also included a $33 million after-tax increase in interest costs, primarily
related to financing the CNW acquisition and Southern Pacific first-step cash
tender offer, and lower year-over-year real estate sales ($31 million). The
negative impact of these factors was somewhat countered by the acquisition of
CNW and a favorable IRS tax settlement ($20 million). The CNW acquisition added
roughly $10 million to the Railroad's first quarter 1996 net income.
Operating revenues improved $297 million (22%) to $1.68 billion, as CNW volumes
combined with a 9% increase in average commodity revenue per car, reflecting
longer average length of haul, favorable traffic mix shifts and pricing
improvements. Carloadings grew 10% (122,000 cars) detailed as follows:
Energy: Energy carloadings declined 4% as weather-related inefficiencies and a
late-January derailment reduced Powder River Basin coal traffic by 6%. Energy
traffic was also adversely affected by volume declines from other western mines,
reflecting lower export demand and increased competition from hydroelectric
power generation in the Western U.S.
Intermodal: Fierce price competition and weather-related traffic interruptions
caused a 4% reduction in intermodal volumes.
Industrial Products: Industrial products carloadings advanced 34%, as CNW
volumes combined with strong improvements in stone, steel and cement
shipments. Stone and cement growth were driven by favorable construction
conditions in Texas, while significant steel slab movements increased
steel carloadings. These increases were partially offset by weaknesses in
nonmetallic minerals--the result of an industrial sand plant
shutdown--newsprint, and non-ferrous metals volumes.
Agricultural Products: Agricultural products carloadings grew 41% over 1995,
reflecting the addition of CNW volumes. These increases were slightly offset by
decreases in shipments of sweeteners--reflecting a reduced sugar beet crop--and
reductions in shipments of canned and packaged foods.
Chemicals: Chemicals carloadings rose 5%, as additional CNW volumes were
slightly offset by reduced export fertilizer shipments to China and
curtailed liquid and dry chemicals product demand.
Automotive: Automotive carloadings rose 22%, reflecting the addition of CNW
volumes, strong northbound Mexican business for finished vehicles and increased
auto parts shipments. Partially offsetting these increases was the impact of
the GM Strike which reduced the Railroad's automotive revenues by
approximately $12 million.
Operating expenses advanced $286 million (26%) to $1.39 billion. Incremental
CNW
12
volumes, system congestion caused by severe weather and the late
arrival of new locomotives, and inflation were primarily responsible for the
escalation in salaries, wages and employee benefits ($107 million),
rent expense ($55 million), materials and supplies expense ($26 million) and
contracted services ($10 million). Personal injury expense increased
$8 million, reflecting higher average settlement costs, while other taxes
increased $9 million--primarily the result of real estate taxes on CNW
properties. Fuel and utility costs increased $35 million, reflecting increased
fuel prices, incremental CNW volumes and weather-related inefficiencies.
Depreciation expense rose $33 million, reflecting the addition of CNW
properties and continued capital spending. Operating income improved
$11 million to $292 million in 1996, while the operating ratio increased
to 82.6 in 1996 from 79.6 in 1995.
Trucking - Overnite's operating environment was extremely difficult in the first
quarter of 1996. The major factors affecting Overnite's operations were
industry overcapacity, severe winter weather, aggressive pricing efforts
from regional less-than-truckload (LTL) and truckload carriers and
wage and benefit inflation. As a result, Overnite reported a net loss of
$17 million in 1996 compared to a net loss of $4 million in 1995. Results
for both periods included goodwill amortization of $5 million.
Overnite's operating revenues advanced $10 million (4%) to $255 million as a 5%
increase in volumes was slightly offset by a 1% decrease in average prices.
Increased volumes were generated by a 6% increase in LTL tonnage; year-over-year
truckload volumes were essentially unchanged.
Operating expenses increased $30 million to $280 million. Salaries, wages and
employee benefit costs increased $13 million due to wage and benefit inflation,
increased volumes and weather-related inefficiencies. Overnite's efforts to
balance traffic lanes on longer-haul business through the use of intermodal
rail service and contract line-haul carriers resulted in a $7 million
increase in rent and purchased transportation expenses. Fuel and utilities
costs rose $3 million, the result of increased volumes, weather-related
inefficiencies and a 13% increase in fuel prices, while general and
administrative costs advanced $2 million--largely due to costs incurred in
response to unionization efforts. Overnite's operating loss grew $20 million
to an operating loss of $25 million in 1996, while Overnite's operating ratio
(including goodwill amortization) increased to 109.7 for the quarter
from 102.2 in 1995.
Corporate Services and Other Operations - Expenses related to Corporate Services
and Other Operations (comprising corporate expenses, third-party interest
charges, inter-company interest allocations, other income and income taxes
related to the Corporation's holding company operations and the results of other
operating units) decreased $19 million to $42 million. This decrease is largely
the result of lower Corporate interest costs reflecting the utilization of the
Resources' IPO dividend to reduce debt levels. Other operating units recorded
an operating loss of $2 million in 1996 compared to operating income of $3
million in 1995.
RESULTS OF DISCONTINUED OPERATIONS
Natural Resources - Resources' 1996 earnings declined $2 million from 1995 to
$59 million, as higher average realized hydrocarbon prices and sales volumes
were more than offset by increased depreciation and depletion; plants,
pipeline and marketing expenses; and interest and administrative costs related
to Resources' IPO. UPC recognized $49 million of Resources' 1996 net income
in discontinued operations, reflecting its 83% ownership of Resources
during the period.
13
Operating revenues increased $65 million (20%) to $390 million. Producing
property revenues increased $26 million (13%), as the effects of a 5% increase
in natural gas production and increases in average natural gas, natural gas
liquids and crude oil prices (20%, 20% and 4%, respectively)--primarily the
result of below normal temperatures in the eastern U.S.--more than offset a 12%
reduction in crude oil volumes, reflecting crude oil production declines for all
business units. During the quarter, Resources continued its aggressive
development program in the Austin Chalk, remaining the most active U.S.
driller. Plants, pipelines and marketing revenues advanced $39 million,
largely due to the expansion of two West Texas gas processing plants, the
start-up and expansion of pipelines in West Texas and the Austin Chalk, and
higher average product price realizations.
Operating expenses increased $54 million in 1996 to $293 million. Exploration
costs increased $9 million, largely the result of increased dry hole
costs--reflecting increased exploratory drilling activity in the current high
price environment. Plants, pipeline and marketing expenses increased
$20 million to $61 million reflecting the start-up and expansion of
West Texas and Austin Chalk pipelines and higher gas plant hydrocarbon purchase
costs. Depreciation and depletion costs rose $17 million, primarily as a
result of a property writedown and a greater proportion of higher cost Austin
Chalk production. Production expenses increased $5 million reflecting
higher lease operating costs. Operating income improved to $97 million in
1996 from $86 million a year earlier.
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
FINANCIAL CONDITION - During the first three months of 1996, cash from
operations was $261 million compared to $250 million in 1995. This
$11 million increase primarily reflects the impact of higher non-cash
expenses--mainly depreciation and accrued expenses--offset by lower earnings
and higher tax payments related to the 1995 Columbia Gas bankruptcy
settlement and Resources' sale of its Wilmington, California field in 1994.
Cash used in investing activities was $246 million in 1996 compared to cash
provided by investing activities of $89 million in 1995. This change in cash
reflects increased capital expenditures of $81 million--largely from fleet
expansion and renewal at the Railroad--and the absence of $225 million in
USPCI, Inc. sale proceeds collected in January 1995.
Outstanding debt levels decreased $10 million from December 31, 1995 to
March 31, 1996 as cash provided by UPC's continuing and discontinued
operations ($271 million) and the depletion of cash on hand at year-end
1995 were utilized to fund capital investments and dividends. The quarterly
common stock dividend remained at $0.43 per share in the first quarter of
1996. The ratio of debt to capital employed improved to 49.7% at
March 31, 1996 from 50.0% at December 31, 1995. This decrease reflected the
relatively unchanged debt levels and a $72 million increase in
equity--primarily the result of net income of $156 million offset by
dividends of $89 million.
OTHER MATTERS
Labor Matters
Railroad: Approximately 90% of the Railroad's 35,000 employees are represented
by one of twelve national rail unions. In November 1994, negotiations began on
new labor agreements for all crafts. In January 1996, a tentative agreement was
reached between the major freight railroads and the leadership of the United
Transportation Union (UTU)--representing approximately 25% of the Railroad's
14
unionized workforce--which was rejected in April 1996 by the union's membership.
The railroads and the UTU agreed to accept binding arbitration which resulted in
a decision in May 1996 to adopt the original five-year agreement, which includes
a combination of general wage increases and lump-sum payments from 3% to 3.5%
annually, as well as increased work rule flexibility.
In February 1996, a tentative agreement was reached between the major freight
railroads and the leadership of the Brotherhood of Locomotive Engineers
(BLE)--representing approximately 15% of the Railroad's unionized workforce.
Ratification votes by the BLE's membership are currently in process. The
Transportation Communications Union (TCU)--representing approximately 20% of the
Railroad's unionized workforce--was released from mediation by the National
Mediation Board (NMB) when the TCU rejected the NMB's binding arbitration
alternative. The President appointed a Presidential Emergency Board (PEB) on
May 8, 1996, which postponed a work shutdown for at least 60 days.
The PEB will ultimately make recommendations for settlement, but neither the
railroads nor the TCU is required to accept such recommendations.
Should negotiations with other crafts, including the BLE, reach an impasse, it
is anticipated that separate PEBs will be appointed by the President to examine
the disputes and make recommendations for settlement. In the event that
a work shutdown occurs, Congress may enact legislation resolving the
disputes, although there is no assurance that it will do so. At this time, the
ultimate outcome of binding arbitration, labor negotiations, PEB
recommendations or Congressional action is not clear. However, the
Corporation continues to be optimistic that a combination of negotiated
settlements, arbitration awards, and PEB settlements will finalize this round
of negotiations in 1996. In the past, any ultimate service interruption has
been quickly addressed by Congress with limited disruption to the
Railroad's operations.
Overnite: Overnite continues to resist the Teamsters' efforts to unionize
Overnite service centers. Since year-end 1995, six Overnite service centers
have held union elections--two of which voted for union representation--while
the employees of two service centers that previously voted for union
representation filed petitions with the National Labor Relations Board
to decertify the Teamsters as their union bargaining representative.
Despite the Teamsters' efforts, less than 9% of Overnite's workforce has
voted for union representation. Overnite has begun negotiations with the
Teamsters at several of the unionized service centers and is unable at this
time to estimate the impact these negotiations will have on its
future operating costs or profitability.
Management - In April 1996, Overnite announced the formation of an Office of the
Chairman, consisting of Leo Suggs, Overnite's newly appointed Chairman and Chief
Executive Officer, and Jim Douglas, President and Chief Operating Officer.
Since 1992, Mr. Suggs has served as President and Chief Executive Officer
of Preston Trucking Company, Inc. and prior thereto as Senior Vice President
of Corporate Development for Yellow Corporation.
Accounting Pronouncements - The Financial Accounting Standards Board (FASB)
issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which establishes methods for
determining when an impairment of long-lived assets has occurred and for
measuring the impairment of long-lived assets. Initial adoption of Statement 121
did not have a material effect on UPC's operating results or financial
condition.
The FASB also issued Statement No. 123, "Accounting for Stock-Based
Compensation," which encourages, but does not require, employers to adopt a fair
15
value method of accounting for employee stock-based compensation, and which
requires increased stock-based compensation disclosure if expense recognition is
not adopted. The Corporation has not elected expense recognition for stock
options and therefore implementation of this Statement had no effect on UPC's
operating results or financial condition.
Commitments and Contingencies - There are various lawsuits pending against the
Corporation and certain of its subsidiaries. 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 has entered into commitments and provided guarantees for specific
financial and contractual obligations of its subsidiaries and affiliates.
The Corporation does not expect that the lawsuits, environmental costs,
commitments or guarantees will have a material adverse effect on its
consolidated financial condition, results of operations or liquidity.
16
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
As previously reported in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995, in July 1995 the Butte County
(Oroville, California) District Attorney advised that a civil penalty
action would be filed against the Railroad for violations resulting
from the derailment and spill of diesel fuel into the Feather River
in Peo, California on April 14, 1995. The District Attorney
has since advised the Railroad that he intends to seek $180,000 in
civil penalties and resource damages for such spill. In late July,
the California Regional Water Quality Control Board also filed a
separate penalty action seeking $40,000 for the same incident. This
latter action was settled for $40,000.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of stockholders of the Corporation was held on April
19, 1996.
(c) At the Annual Meeting, the Corporation's stockholders voted for the
election of Richard B. Cheney (170,493,706 shares in favor; 12,237,605
shares withheld), E. Virgil Conway (170,493,912 shares in favor;
12,230,443 shares withheld), Drew Lewis (170,333,950 shares in favor;
12,318,548 shares withheld), L. White Matthews, III (170,583,530 shares
in favor; 12,218,699 shares withheld), Jack L. Messman (170,506,520
shares in favor; 12,222,730 shares withheld), and Thomas A. Reynolds,
Jr.(170,486,590 shares in favor; 12,232,592 shares withheld) as
directors of the Corporation. In addition, the Corporation's
stockholders voted to eliminate cumulative voting (134,347,182
shares in favor, 22,662,877 shares against and 8,483,708 shares
abstained), to declassify the Board of Directors (152,482,535 shares
in favor, 4,366,382 shares against and 8,643,622 shares abstained),
and to appoint Deloitte & Touche LLP as independent auditors of the
Corporation (172,731,476 shares in favor, 558,847 shares against and
9,411,033 shares abstained). Furthermore, a stockholder resolution
to provide that an independent director serve as chair of the board
was defeated (2,864,789 shares in favor, 167,017,057 shares against
and 5,380,536 shares abstained).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3 - Union Pacific's Revised Articles of Incorporation, as amended
through April 25, 1996.
11 - Computation of earnings per share.
12 - Computation of ratio of earnings to fixed charges.
27 - Financial data schedule.
17
(b) Reports on Form 8-K
On January 23, 1996, the Corporation filed a Current Report on Form 8-K
containing (i) an Indenture dated as of January 5, 1996 between the
Corporation and Chemical Bank, (ii) historical financial statements for
Southern Pacific as of December 31, 1994 and September 30, 1995, (iii)
restated financial statements of the Corporation reflecting the
financial presentation of Resources as a discontinued operation, (iv)
pro forma financial statements as of September 30, 1995 for the
Corporation and Southern Pacific and (v) a statement concerning the
Corporation's consolidated income statement for the nine months ended
September 30, 1995.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 1996
UNION PACIFIC CORPORATION
(Registrant)
/s/ Morris B. Smith
-----------------------------
Morris B. Smith,
Vice President and Controller
(chief accounting officer and
duly authorized officer)
UNION PACIFIC CORPORATION
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3 Union Pacific's Revised Articles of Incorporation, as
amended through April 25, 1996.
11 Computation of Earnings Per Share
12 Computation of Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule