<COVER PAGE>
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, 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 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, TX
(Address of principal executive offices)
75201
(Zip Code)
(214) 743-5600
(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, 1998, there were 247,306,604 shares of the Registrant's
Common Stock outstanding.
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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 1997............ 1
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION -
At March 31, 1998 and December 31, 1997............... 2
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS - For
the Three Months Ended March 31, 1998 and 1997........ 4
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS -
For the Three Months Ended March 31, 1998 and 1997.... 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.... 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9
Item 3: Quantitative and Qualitative Disclosures About
Market Risk........................................... 18
PART II. OTHER INFORMATION
Item 1: Legal Proceedings....................................... 18
Item 2: Changes in Securities and Use of Proceeds ............. 21
Item 4: Submission of Matters to a Vote of Security Holders .... 21
Item 6: Exhibits and Reports on Form 8-K........................ 22
Signature........................................................ 24
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 1997
(Amounts in Millions, Except Ratio and Per Share Amounts)
(Unaudited)
1998 1997
Operating Revenues ......................... $ 2,586 $ 2,810
------- -------
Operating Expenses:
Salaries, wages and employee benefits.... 1,078 1,026
Equipment and other rents................ 363 322
Fuel and utilities (Note 3).............. 221 296
Depreciation and amortization ........... 263 258
Purchased services....................... 183 183
Materials and supplies................... 144 157
Other costs.............................. 275 223
------- -------
Total................................. 2,527 2,465
------- -------
Operating Income............................ 59 345
Other Income................................ 23 38
Interest Expense (Note 3)............ (161) (150)
Corporate Expenses.......................... (26) (28)
------- -------
Income (loss) before Income Taxes........... (105) 205
Income Taxes................................ 43 (77)
------- -------
Net Income (Loss)........................... $ (62) $ 128
======= =======
Earnings Per Share:
Basic:
Net Income (Loss)...................... $ (0.25) $ 0.52
Diluted:
Net Income (Loss)...................... $ (0.25) $ 0.52
Weighted Average Number of Shares........... 247.7 247.8
Cash Dividends Per Share.................... $ 0.20 $ 0.43
Ratio of Earnings to Fixed Charges (Note 4). .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)
March 31, December 31,
ASSETS 1998 1997
Current Assets:
Cash and temporary investments............... $ 191 $ 90
Accounts receivable ......................... 589 631
Inventories.................................. 309 296
Other current assets......................... 295 398
--------- ----------
Total Current Assets.................... 1,384 1,415
Investments:
Investments in and advances to affiliated
companies................................. 492 443
Other investments............................ 190 181
--------- ----------
Total Investments....................... 682 624
--------- ----------
Properties:
Railroad:
Road and other............................. 23,867 23,610
Equipment.................................. 7,241 7,084
--------- ---------
Total Railroad.......................... 31,108 30,694
Trucking..................................... 758 750
Other........................................ 71 70
--------- ---------
Total Properties........................ 31,937 31,514
Accumulated depreciation..................... (5,704) (5,537)
--------- ---------
Properties - Net ........................ 26,233 25,977
--------- ---------
Excess Acquisition Costs - Net.................. 613 619
Other Assets.................................... 166 129
--------- ---------
Total Assets............................ $ 29,078 $ 28,764
========= =========
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)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
Current Liabilities:
Accounts payable................................ $ 541 $ 758
Accrued wages and vacation...................... 420 421
Accrued casualty costs.......................... 334 333
Dividends and interest.......................... 231 295
Income and other taxes.......................... 268 268
Debt due within one year........................ 132 233
Other current liabilities (Note 2).............. 882 939
--------- ---------
Total Current Liabilities..................... 2,808 3,247
Debt Due After One Year............................ 9,258 8,285
Deferred Income Taxes.............................. 6,224 6,252
Accrued Casualty Costs............................. 683 695
Retiree Benefits Obligation........................ 844 828
Other Long-Term Liabilities (Note 2)............... 1,143 1,232
Stockholders' Equity:
Common stock, $2.50 par value, authorized
500,000,000 shares, 276,220,489 shares issued
in 1998, 275,060,633 shares issued in 1997.... 690 690
Paid-in surplus................................. 4,063 4,066
Retained earnings............................... 5,159 5,271
Treasury stock, at cost, 28,926,456 shares in
1998, 29,045,938 shares in 1997............... (1,794) (1,802)
--------- ---------
Total Stockholders' Equity.................... 8,118 8,225
--------- ---------
Total Liabilities and Stockholders' Equity.... $ 29,078 $ 28,764
========= =========
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 Three Months Ended March 31, 1998 and 1997
(Millions of Dollars)
(Unaudited)
1998 1997
Cash from operations:
Net income (loss).................................. $ (62) $ 128
Non-cash charges to income:
Depreciation and amortization................... 263 258
Deferred income taxes........................... (29) 35
Other - net..................................... 18 (6)
Changes in current assets and liabilities.......... (307) (164)
--------- --------
Cash (used in) provided by operations...... (117) 251
--------- --------
Cash flows from investing activities:
Capital investments................................ (531) (407)
Other - net........................................ (22) (27)
--------- -------
Cash used in investing activities............... (553) (434)
--------- -------
Cash flows from equity and financing activities:
Dividends paid..................................... (106) (105)
Debt repaid........................................ (888) (348)
Financings......................................... 1,766 560
Other - net........................................ (1) (21)
--------- -------
Cash provided by equity and financing activities 771 86
--------- -------
Net increase (decrease) in cash and temporary
investments................................ $ 101 $ (97)
======== =========
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS
For the Three Months Ended March 31, 1998 and 1997
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
1998 1997
Balance at Beginning of Year......................... $ 5,271 $ 5,262
Net Income (Loss).................................... (62) 128
------- -------
Total........................................... 5,209 5,390
Dividends Declared ($0.20 per share in 1998 and
$0.43 per share in 1997)........................ (50) (107)
------- -------
Balance at End of Period........................ $ 5,159 $ 5,283
======= =======
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, 1997 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 Shareholders incorporated by reference in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
1997. The results of operations for the three months ended March 31, 1998
are not necessarily indicative of the results for the entire year ending
December 31, 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) -
UPC consummated the acquisition of Southern Pacific in September 1996. The
acquisition of Southern Pacific was accounted for using the purchase method.
SP's results were fully consolidated with the Corporation effective October
1, 1996. 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.
In connection with the continuing integration of UPRR and Southern Pacific's
rail operations (collectively, the Railroad), UPC is continuing to eliminate
duplicate positions (primarily positions other than train crews), relocate
positions, merge or dispose of redundant facilities, dispose of certain rail
lines and cancel uneconomical and duplicative SP contracts. The Corporation
has also repaid certain of Southern Pacific's debt obligations. UPC
recognized a $958 million liability in the Southern Pacific purchase price
allocation for costs associated with SP's portion of these activities.
Through March 31, 1998, a total of $323 million in merger-related costs were
paid by the Corporation and charged against these reserves, composed of
approximately $160 million and $70 million, respectively, for severance and
relocation payments made to approximately 3,700 Southern Pacific 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.
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In addition, the Railroad expects to incur approximately $206 million in
acquisition-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 months ended March 31, 1998 includes
$18 million in acquisition-related operating costs.
3. 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 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 $73 million at
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 March 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 March 31, 1998, the Corporation had outstanding interest rate swaps on
$260 million of notional principal amount of debt (3% of the total debt
portfolio) with a gross fair market value asset position of $73 million and
a gross fair market value liability position of $25 million. These contracts
mature over the next one to seven years. Interest rate hedging activity
increased interest expense by $1 million in the first quarter of 1998 and 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 March 31, 1998, the Railroad and Overnite Transportation Company
(Overnite), the Corporation's trucking subsidiary, had hedged 49% and 38%,
respectively, of their estimated remaining 1998 diesel fuel consumption at
$0.51 and $0.52 per gallon, respectively, on a Gulf Coast basis. At March
31, 1998, the Railroad had outstanding swap agreements covering its fuel
purchases of $267 million, with gross and net liability positions of $28
million. Overnite had outstanding swap agreements of $8 million, with gross
and net liability positions of $1 million. 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 discount and expense, and
the estimated interest portion of rental charges. 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 the delay of shipments as a result of
congestion problems, and certain customers have filed lawsuits seeking relief
related to such delays. The nature of the damages sought by claimants
includes, but is not limited to, contractual liquidated damages, freight loss
or 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 Corporation 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 issued an emergency
service order imposing certain temporary measures on the Railroad designed,
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
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 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 enter into financial and other commitments and have retained
certain contingent liabilities upon the disposition of formerly-owned
operations.
In addition, UPC and certain of its officers and 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
8
condition.
6. Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement No. 130, "Reporting Comprehensive Income"
(FAS 130)that is effective for all periods in 1998, including interim
periods. UPC has adopted the provisions of FAS 130 effective January 1,
1998. The components 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 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," effective 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" 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 March 31, 1998 Compared to March 31, 1997
Southern Pacific Rail Corporation (Southern Pacific or SP) Acquisition - UPC
consummated the acquisition of Southern Pacific in September 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. Southern Pacific's results have been fully
consolidated with the Corporation 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 35,000 route miles linking Pacific Coast and Gulf
Coast ports to the Midwest and eastern U.S. gateways. The Corporation also owns
Overnite Transportation Company (Overnite), a major interstate trucking company
specializing in less-than-truckload (LTL) shipments.
CONGESTION AND SERVICE ISSUES
As previously reported in the Corporation's 1997 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 and earnings in the third quarter of 1997. System
congestion started in the Gulf Coast region and spread throughout the system as
the Railroad shifted resources to help mitigate the problem in the Gulf Coast
region. The congestion was brought on by, among other things, crew shortages
and restricted track access caused by necessary track maintenance on former
Southern Pacific lines, increased demand, washouts due to severe weather,
derailments and congestion at Texas/Mexico gateways. Traffic slowed further
as rail yards in the Gulf Coast region filled, slowing access into and out of
the yards and forcing trains to be held on sidings. Slower average train
velocity led to a greater need for locomotives in the region. As traffic in
the region backed up and the Railroad redeployed locomotives to the Gulf Coast
region to help alleviate local congestion, congestion problems spread to
other parts of the Railroad's system during the third and fourth quarters of
1997.
To restore service to acceptable levels, the Railroad implemented a Service
Recovery Plan (the Plan) in October, 1997. The Plan focuses on reducing the
number of cars on the system and restoring system velocity, which, in 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 these problems to continue to have an adverse impact on 1998
results. In addition, as a result of recent operating losses incurred by the
Railroad and in order to fund its capital programs, the Corporation has
incurred substantial incremental debt since December 31, 1997 and obtained
additional financing from a private placement of preferred securities. (See
Changes in Financial Condition and Other Developments) The timing
of the Corporation's return to profitability will be determined by how rapidly
it is able to eliminate congestion and return to 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 $128
million or $0.52 per diluted share. This earnings decrease resulted primarily
from continued congestion and service issues at the Railroad, which were
slightly offset by improved operating results at Overnite.
Operating revenues decreased $224 million (8%) to $2,586 million in 1998,
reflecting an 11% decrease in volumes at the Railroad, which were somewhat
offset by a 20% increase in revenues at Overnite.
Operating expenses increased $62 million (3%) to $2,527 million in 1998.
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 1997 maintenance projects at the
Railroad were the primary factors causing a decrease in materials and supplies
($13 million). Fuel and utility costs fell $75 million (25%), principally the
result of decreased volumes at the Railroad and a 15% decrease in fuel prices at
both the Railroad and Overnite. Depreciation charges rose $5 million, primarily
due to the UPC's extensive capital spending on its equipment and rail
infrastructure. Other costs increased $52 million, primarily resulting from
miscellaneous costs associated with the congestion and service recovery.
Personal injury costs and casualty accruals fell $6 million and $3 million,
respectively, while professional fees and other taxes rose $7 million and $4
million, respectively.
Consolidated operating income fell $286 million (83%) to $59 million in 1998,
principally because of declining results at the Railroad, slightly offset by
improved results at Overnite. Other income fell $15 million, primarily
reflecting fewer real estate sales and lower rental income resulting from the
sale of the sign board business in 1997. Interest expense increased
$11 million, the result of higher debt levels, offset by favorable interest
11
rates. Income taxes decreased $120 million to a $43 million benefit,
primarily reflecting lower income before income taxes.
Railroad - The Railroad lost $32 million in the first quarter of 1998, compared
to net income of $170 million a year ago. This decline in earnings is the
result of the continuing effect of congestion 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 in 1998 and $9 million reduction in net income in 1997).
The operating ratio for the first quarter of 1998 was 97.7, which includes
approximately 15 points estimated to be attributable to congestion costs
(both lost business and incremental operating costs). This compares to 86.2
for the same period in 1997. Operating revenues fell $279 million (11%)
to $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 farmers delay shipments due to the current grain price
environment. Average commodity revenue per car (ARC) fell 1% to $1,149 per car,
while total carloadings fell 9% (approximately 189,000 cars). Commodity
revenue in 1998 fell 10% over the same period in 1997 as shown in the table
below.
Commodity Revenue
Three Months Ended 3/31/98 Versus 1997
Commodity
(Revenue in Thousands) Cars ARC Revenue Change %
Agricultural 203,177 $1,554 $315,786 $ (87,410) (22)
Automotive 159,400 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 590,115 606 357,506 (56,924) (14)
--------- ------ ---------- --------- ----
Total Commodity 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 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 continued
congestion (in the Southern tier and the Pacific Northwest) as well as the
Railroad's sale of its 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 strong
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 operating costs of $2,210 million. Higher operating costs reflect
an estimated $77 million of congestion-related costs ($148 million of
congestion-related costs offset by $71 million of volume savings from lower
business levels). The impact of congestion was partially offset by lower fuel
costs, merger benefits and volume-related cost savings, as carloads were
off 9% and gross-ton miles were down 10%.
Labor expense was $29 million (3%) higher than 1997, as net congestion-related
costs and wage inflation were partially offset by merger consolidation benefits
and volume-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 $6 million or 2% to $246 million due to the Railroad's
extensive capital program in 1997 and 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 $16 million (11%) from
first quarter 1997. More rebuild projects (which are capitalized) and less
maintenance projects in 1998 plus the absence of large program maintenance
projects on freight cars in 199 accounted for the quarter-over-quarter decline.
Fuel and Utilities expenses were down $73 million or 26% from 1997, reflecting
lower fuel prices and congestion-related volume declines. A reduction in
gross-ton
13
miles quarter-over-quarter (down 10%) generated volume-related fuel savings
of $24 million versus 1997. Prices were down 11.7 cents per gallon to 63.6
cents, saving $33 million. The fuel consumption rate 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 Expense was up 13% ($42 million) versus 1997, as system congestion (which
hindered car cycle times) combined with unfavorable rates (strong market demand
for equipment) to drive up equipment rent costs.
Other Costs increased $33 million (9%) from 1997, reflecting costs for customer
claims and service recovery caused by the system congestion offset by merger
consolidation benefits (trackage rights reimbursements and contract pricing
savings) and cost savings from administrative cost control efforts.
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, net, declined $18 million due to the absence of the Duck
Creek North branch line sale in 1997. Income taxes decreased $128 million to a
benefit of $31 million, primarily reflecting lower income before income taxes.
Trucking - During 1997, Overnite continued to benefit from several strategic
initiatives, implemented in 1996, 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. Primarily as a result of these initiatives, Overnite increased its
net income from $1 million in the first quarter of 1997 to $10 million net
income in the first quarter of 1998 (excluding goodwill amortization of
$5 million in each period).
Overnite's operating revenues increased $43 million (20%) to $257 million, as
a 13% increase in volumes combined with a 7% increase in average
prices--resulting from Overnite's pricing initiatives. Higher volumes
reflected a 15% increase in LTL tonnage, somewhat offset by a 14% decrease
in truckload volumes.
Operating expenses increased $30 million (14%) to $244 million. Salaries, wages
and employee benefit costs increased $19 million (14%) to $154 million,
reflecting workforce increases, higher volumes, and wage and benefit inflation.
An increased use of intermodal rail service and contract linehaul carriers
caused an $8 million increase in purchased services. Fuel costs declined
$.5 million, as a 15% decrease in fuel prices was offset by a 10%
volume-related increase in fuel consumption. Higher volumes caused increases
in materials and supplies ($2 million). Overnite generated operating income
of $13 million for the first quarter of 1998, compared to breaking even for
the comparable period a year ago (excluding goodwill amortization of $5
million in each period). Overnite's operating ratio (including goodwill
amortization) improved to 96.8 in 1998 from 102.2 in 1997.
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) decreased $3 million to $35 million in 1998. This
decrease
14
largely reflects lower Corporate interest and insurance costs. Other operating
units generated an operating loss of $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 $251 million in 1997.
This $368 million decrease primarily reflects lower earnings and timing of
working capital requirements due to the continuing congestion as well as
merger consolidation spending.
Cash used in investing activities was $553 million in the first quarter of 1998
compared to $434 million in 1997. This increase primarily reflects higher
capital spending by the railroad, incuding merger related spending.
Cash provided by equity and financing activities was $771 million in the first
quarter of 1998 compared to $86 million in 1997. Cash provided in 1998
principally reflects higher net borrowings ($1.76 billion), offset by debt
repaid of $888 million. The ratio of debt to total capital employed increased
to 53.6% at March 31, 1998, compared to 50.9% at December 31, 1997 and 50.7%
at March 31, 1997. This change resulted from the increase in debt levels
from year-end 1996.
In February 1998, the Corporation announced that its Board of Directors had
taken certain steps, including authorizing the issuance of equity-related
securities and the reduction of the first quarter 1998 common stock dividend
to 20 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 Use of Proceeds.")
The Convertible Preferred Securities will be presented as a separate line item
in the consolidated balance sheet for the second quarter of 1998 between
liabilities and equity and appropriate disclosures will be included in the
notes to the financial statements. For financial reporting purposes, the
Corporation will record distributions payable on the Convertible Preferred
Securities as a financing charge to earnings in the statement of consolidated
income.
OTHER MATTERS
Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement No. 130, "Reporting Comprehensive Income"
(FAS 130) that is effective for all periods in 1998. UPC has adopted the
provisions of FAS 130 effective January 1, 1998. The components 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 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," effective 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 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 the delay of shipments as a result of
congestion problems, and certain customers have filed lawsuits seeking relief
related to such delays. The nature of the damages sought by claimants
includes, but is not limited to, contractual liquidated damages, freight loss
or 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 Corporation 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 issued an emergency service order
imposing certain temporary measures on the Railroad designed, 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 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 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
enter into financial and other commitments and have retained certain contingent
liabilities upon the disposition of formerly-owned operations.
In addition, UPC and certain of its officers and 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.
CAUTIONARY INFORMATION
Certain information included in this report 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,
environmental costs, commitments, 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 information 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 Railroad is fully
successful in overcoming its congestion-related problems and implementing the
Plan and other operational and financial initiatives, industry competition and
regulatory developments, natural events such as floods and earthquakes, the
effects of adverse general economic conditions, 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: As previously reported in the Corporation's 1997
Annual Report on Form 10-K, various appeals have been filed with respect to the
STB's August 12, 1996 decision (the Decision) approving the acquisition of
control of Southern Pacific by the Corporation. All of the appeals have been
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 Reno, Nevada with appeals pending.
On April 10, 1998, WCTL filed a motion to vacate and remand the Decision in
light of a proceeding the STB commenced on March 31, 1998, under its continuing
oversight jurisdiction over the merger, to consider whether any additional
conditions are justified and should be imposed to deal with service problems in
the Houston/Gulf Coast area. The STB, the Corporation and BNSF have opposed
this motion. The Corporation believes that it is unlikely that the disposition
of the remaining appeals will have a material adverse impact on its consolidated
financial condition or its results of operations.
RAIL SERVICE PROCEEDINGS AND RELATED MATTERS: As previously reported in the
Corporation'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 2, 1998, the
maximum period allowable under
18
the law for the original order.
On March 31, 1998, the STB initiated a proceeding under its continuing oversight
jurisdiction with respect to the merger of the Corporation and Southern Pacific
to consider proposals for new remedial conditions to the merger as they pertain
to service in the Houston, Texas/Gulf Coast area. This proceeding, which is
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, was initiated in response to submissions by Texas Mexican
Railway Company (Tex Mex), Kansas City Southern Railway Company (KCS) and the
Greater Houston Partnership (GHP), proposing that the Railroad be directed to
transfer certain lines and facilities in the Gulf Coast region to other rail
carriers, that a "neutral" switching operation be established in the greater
Houston area and that provisions in the STB'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 (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 alternative, discussions
of this issue between railroad and shipper representatives); (ii) initiated
a rulemaking proceeding to consider revisions to "competitive access"
regulations in order to address quality of service issues; (iii) ordered
interested parties to identify modifications to regulations governing access
on non-service-related grounds; (iv) began a proceeding to consider
eliminating product and geographic competition as factors to be considered in
deciding 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 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 union had won instead of lost the
election 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 employees 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 remedy would attach
retrospectively to the date when, after a union with a showing of majority
support demanded recognition, Overnite embarked on an unlawful course of
conduct. In the event of such a retroactive effective bargaining order,
Overnite would face back pay liability for losses in 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 Railroad has been named as a defendant in a civil
action brought by the California 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 named 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 same 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 Clean Harbors' transload facility in
Sterling, Colorado were held in the Railroad'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 State of Delaware and a
subsidiary of the Corporation, closed a private placement of $1.5 billion in
aggregate amount of 6-1/4% Convertible Preferred Securities (the "Convertible
Preferred Securities"), with a liquidation amount of $50 per each of the
Convertible Preferred Securities. Each of the Convertible Preferred Securities
is convertible, 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 Schroder & Co. Inc. The
Initial Purchasers resold 29,909,600 of the 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 32,900 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
$1,495,480,000 in the aggregate, and the IAI Securities were sold for their
liquidation amount of $50 each or $1,645,000 in the aggregate. In connection
with the purchase of the QIB Securities and the IAI Securities, the
Corporation paid the Initial Purchasers a commission equal to 2.25% of the
purchase price of each of the QIB Securities and the IAI Securities, or
$33,648,300 and $37,012.50, respectively, in the aggregate. In addition to
sales of the QIB and IAI Securities, the initial purchasers also sold 57,500
of the Convertible Preferred Securities outside the United States to certain
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 a Vote of Security Holders.
(a) The annual meeting of shareholders of the Corporation was held on April
17, 1998.
(c) At the Annual Meeting, the Corporation's shareholders voted for the
election 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 Corporation. In
21
addition, the Corporation's shareholders voted to ratify the appointment
of Deloitte & Touche LLP as independent auditors of the Corporation
(215,978,952 shares in 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 Report on Form 8-K regarding the fourth
quarter 1997 earnings of the Corporation.
On February 26, 1998, UPC filed a Current Report on Form 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
Corporation'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 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: May 13, 1998
UNION PACIFIC CORPORATION
(Registrant)
/S/ Joseph E. O'Connor, Jr.
---------------------------
Joseph E. O'Connor, Jr.
Vice President and Controller
(chief accounting officer
and duly authorized officer)
<EXHIBIT INDEX> 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 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).