FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
- 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.)
1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 271-5777
(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 October 29, 1999, there were 248,568,309 shares of the Registrant's
Common Stock outstanding.
UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1: Consolidated Financial Statements:
STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended September 30, 1999 and 1998.... 1
STATEMENT OF CONSOLIDATED INCOME
For the Nine Months Ended September 30, 1999 and 1998..... 2
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
At September 30, 1999 and December 31, 1998............... 3
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998..... 4
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999.............. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................... 6-14
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15-23
Item 3: Quantitative and Qualitative Disclosures About
Market Risk............................................... 23
PART II. OTHER INFORMATION
Item 1: Legal Proceedings............................................ 24-25
Item 6: Exhibits and Reports on Form 8-K............................. 25
Signature............................................................... 26
1
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
- -------------------------------------------------------------------------------
Statement of Consolidated Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Three Months Ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------
Millions, Except Per Share and Ratios 1999 1998
- -------------------------------------------------------------------------------
Operating Revenues Rail and other (Note 2)................. $2,893 $2,660
---------------------------------------------------------
Operating Expenses Salaries, wages and employee benefits... 1,099 1,079
Equipment and other rents............... 341 349
Depreciation............................ 271 269
Fuel and utilities (Note 5)............. 212 204
Materials and supplies.................. 149 143
Casualty costs.......................... 82 119
Other costs (Note 10)................... 224 287
---------------------------------------------------------
Total................................... 2,378 2,450
---------------------------------------------------------
Income Operating Income........................ 515 210
Other income (Note 8)................... 24 36
Interest expense (Notes 5 and 6)........ (184) (188)
---------------------------------------------------------
Income before Income Taxes.............. 355 58
Income taxes............................ (137) (24)
---------------------------------------------------------
Income from Continuing Operations....... 218 34
Gain on Disposal of Discontinued
Operations, Net of
Income Taxes (Note 4)................ 27 -
---------------------------------------------------------
Net Income (Note 2)..................... $ 245 $ 34
- -------------------------------------------------------------------------------
Earnings Per Share Basic:
(Note 7) Income from Continuing Operations..... $ 0.88 $ 0.14
Gain on Disposal of Discontinued
Operations......................... 0.11 -
Net Income............................ $ 0.99 $ 0.14
Diluted:
Income from Continuing Operations..... $ 0.86 $ 0.14
Gain on Disposal of Discontinued
Operations......................... 0.10 -
Net Income............................ $ 0.96 $ 0.14
---------------------------------------------------------
Weighted Average Number of
Shares (Basic)........................ 246.6 246.1
Weighted Average Number of
Shares (Diluted)...................... 270.1 246.7
---------------------------------------------------------
Cash Dividends Per Share................ $ 0.20 $ 0.20
---------------------------------------------------------
Ratio of Earnings to Fixed
Charges (Note 9)...................... 2.5 1.2
- -------------------------------------------------------------------------------
The accompanying notes to the financial statements are an integral part
of these statements.
2
- -------------------------------------------------------------------------------
Statement of Consolidated Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Nine Months Ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------
Millions, Except Per Share and Ratios 1999 1998
- -------------------------------------------------------------------------------
Operating Revenues Rail and other (Note 2)................. $8,406 $7,869
---------------------------------------------------------
Operating Expenses Salaries, wages and employee benefits... 3,232 3,247
Equipment and other rents............... 997 1,100
Depreciation............................ 809 800
Fuel and utilities (Note 5)............. 603 639
Materials and supplies.................. 439 433
Casualty costs.......................... 288 354
Other costs (Note 10)................... 720 1,192
---------------------------------------------------------
Total................................... 7,088 7,765
---------------------------------------------------------
Income Operating Income........................ 1,318 104
Other income (Note 8)................... 73 113
Interest expense (Notes 5 and 6)........ (554) (526)
---------------------------------------------------------
Income (Loss) before Income Taxes....... 837 (309)
Income taxes............................ (296) 127
---------------------------------------------------------
Income (Loss) from Continuing
Operations............................ 541 (182)
Gain (Loss) on Disposal of
Discontinued Operations, Net of
Income Taxes (Note 4)................. 27 (262)
---------------------------------------------------------
Net Income (Loss) (Note 2).............. $ 568 $ (444)
- -------------------------------------------------------------------------------
Earnings Per Share Basic:
(Note 7) Income (Loss) from Continuing
Operations.......................... $ 2.19 $(0.74)
Gain (Loss) on Disposal of
Discontinued Operations............. 0.11 (1.06)
Net Income (Loss)..................... $ 2.30 $(1.80)
Diluted:
Income (Loss) from Continuing
Operations.......................... $ 2.17 $ (.74)
Gain (Loss) on Disposal of
Discontinued Operations............. 0.10 (1.06)
Net Income (Loss)..................... $ 2.27 $(1.80)
---------------------------------------------------------
Weighted Average Number of
Shares (Basic)........................ 246.5 246.0
Weighted Average Number of
Shares (Diluted)...................... 269.6 246.0
---------------------------------------------------------
Cash Dividends Per Share................ $ 0.60 $ 0.60
---------------------------------------------------------
Ratio of Earnings to Fixed
Charges (Note 9)...................... 2.2 0.5
- -------------------------------------------------------------------------------
The accompanying notes to the financial statements are an integral part
of these statements.
3
- -------------------------------------------------------------------------------
Statement of Consolidated Financial Position (Unaudited)
Union Pacific Corporation and Subsidiary Companies
- -------------------------------------------------------------------------------
Sep. 30, Dec. 31,
Millions of Dollars 1999 1998
- -------------------------------------------------------------------------------
Assets
Current Assets Cash and temporary investments......... $ 198 $ 176
Accounts receivable (Note 5)........... 626 643
Inventories............................ 335 343
Current deferred tax asset............. 110 244
Other current assets................... 111 96
---------------------------------------------------------
Total.................................. 1,380 1,502
---------------------------------------------------------
Investments (Note 3) Investments in and advances to
affiliated companies................. 650 520
Other investments...................... 125 171
---------------------------------------------------------
Total.................................. 775 691
---------------------------------------------------------
Properties Cost................................... 34,128 33,145
Accumulated depreciation............... (6,726) (6,206)
---------------------------------------------------------
Net.................................... 27,402 26,939
---------------------------------------------------------
Other Other assets........................... 296 242
---------------------------------------------------------
Total Assets (Note 2).................. $29,853 $29,374
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
---------------------------------------------------------
Current Liabilities Accounts payable....................... $ 596 $ 586
Accrued wages and vacation payable..... 466 410
Accrued casualty costs................. 395 400
Income and other taxes payable......... 299 301
Dividends and interest payable......... 273 289
Debt due within one year (Note 6)...... 206 181
Other current liabilities (Note 3)..... 654 765
---------------------------------------------------------
Total.................................. 2,889 2,932
---------------------------------------------------------
Other Liabilities and Debt due after one year (Note 6)....... 8,502 8,511
Stockholders' Equity Deferred income taxes.................. 6,573 6,308
Accrued casualty costs................. 997 995
Retiree benefit obligations............ 848 803
Other long-term
liabilities (Notes 3, 4 and 10)...... 724 932
Company-Obligated Mandatorily
Redeemable Convertible Preferred
Securities (Note 6).................. 1,500 1,500
Common stockholders' equity (Page 5)... 7,820 7,393
---------------------------------------------------------
Total Liabilities and
Stockholders' Equity................. $29,853 $29,374
- -------------------------------------------------------------------------------
The accompanying notes to the financial statements are an integral part
of these statements.
4
- -------------------------------------------------------------------------------
Statement of Consolidated Cash Flows (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Nine Months Ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------
Millions of Dollars 1999 1998
- -------------------------------------------------------------------------------
Cash from Operations Net Income (Loss)...................... $ 568 $ (444)
Deduct Gain (Loss) on Disposal of
Discontinued Operations............. 27 (262)
---------------------------------------------------------
Income (Loss) from
Continuing Operations............... 541 (182)
Non-cash charges to income:
Depreciation....................... 809 800
Deferred income taxes.............. 399 (125)
Other - net........................ (383) (147)
Changes in current assets and
liabilities......................... 101 (137)
---------------------------------------------------------
Cash Provided by Operations............ 1,467 209
---------------------------------------------------------
Investing Activities Capital investments.................... (1,350) (1,798)
Other - net (Note 3)................... 43 104
---------------------------------------------------------
Cash Used in Investing Activities...... (1,307) (1,694)
---------------------------------------------------------
Equity and Financing Dividends paid......................... (148) (205)
Activities (Note 6) Debt repaid ........................... (591) (1,754)
Net financings......................... 600 3,956
Other - net............................ 1 (45)
---------------------------------------------------------
Cash Provided by (Used in) Equity and
Financing Activities................. (138) 1,952
---------------------------------------------------------
Net Change in Cash and Temporary
Investments.......................... 22 467
Cash and Temporary Investments at
Beginning of Period.................. 176 90
---------------------------------------------------------
Cash and Temporary Investments at
End of Period........................ $ 198 $ 557
- -------------------------------------------------------------------------------
Change in Current Accounts receivable.................... $ 17 $ 68
Assets and Liabilities Inventories........................ 8 (18)
Other current assets................... 119 121
Accounts, wages and vacation payable... 66 (159)
Debt due within one year (Note 6)...... 25 (52)
Other current liabilities.............. (134) (97)
---------------------------------------------------------
Total.................................. $ 101 $ (137)
- -------------------------------------------------------------------------------
The accompanying notes to the financial statements are an integral part
of these statements.
5
- -------------------------------------------------------------------------------
Statement of Changes in Common Stockholders' Equity (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Nine Months Ended September 30, 1999
- -------------------------------------------------------------------------------
Millions of Dollars 1999
- -------------------------------------------------------------------------------
Common Stock Common stock, $2.50 par value
(authorized 500,000,000 shares)
Balance at beginning of period
(276,335,423 shares issued)................... $ 691
-----------------------------------------------------------
Conversions, exercises of stock options and retention stock
forfeitures for the period
(14,777 net shares forfeited)................. -
-----------------------------------------------------------
Balance at end of period
(276,320,646 shares issued)................... 691
-----------------------------------------------------------
Paid-in Surplus Balance at beginning of period.................... 4,053
Conversions, exercises of stock
options and forfeitures......................... (17)
-----------------------------------------------------------
Balance at end of period.......................... 4,036
-----------------------------------------------------------
Retained Earnings Balance at beginning of period.................... 4,441
Net income........................................ 568
Cash dividends declared ($0.60 per share)......... (148)
-----------------------------------------------------------
Balance at end of period.......................... 4,861
-----------------------------------------------------------
Treasury Stock Balance at September 30, at cost
(28,481,390 shares)........................... (1,768)
-----------------------------------------------------------
Total Common Stockholders' Equity................. $ 7,820
- -------------------------------------------------------------------------------
The accompanying notes to the financial statements are an integral part
of these statements.
6
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Responsibilities for Financial Statements - The 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 presented. The Statement of Consolidated
Financial Position at December 31, 1998 is derived from audited financial
statements. The 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, 1998 (the 1998
Annual Report). The results of operations for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results for
the entire year ending December 31, 1999. Certain 1998 amounts have been
reclassified to conform to the 1999 financial statement presentation.
2. Segmentation - UPC consists of one reportable segment, rail transportation
(Rail), and UPC's other product lines (Other Operations). The Rail segment
includes the operations of Union Pacific Railroad Company (UPRR), its
subsidiaries and rail affiliates (collectively, the Railroad). Other
Operations include the trucking product line (Overnite Transportation
Company or Overnite), as well as technology and insurance product lines,
corporate holding company operations, which largely support the Rail
segment, and all appropriate consolidating entries.
The following tables detail reportable financial information for UPC's
Rail segment and Other Operations for the three months and nine months
ended September 30, 1999 and 1998, respectively:
-------------------------------------------------------------------------
Three Months Ended September 30, 1999 Other Operations[a]
-------------------
Millions of Dollars Rail Trucking Other[b] Consolidated
-------------------------------------------------------------------------
Net sales and revenues
from external customers [c]... $ 2,606 $ 277 $ 10 $ 2,893
Net income [d].................. 234 8 3 245
Assets.......................... 28,864 883 106 29,853
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended September 30, 1998 Other Operations [a]
--------------------
Millions of Dollars Rail Trucking Other[b] Consolidated
-------------------------------------------------------------------------
Net sales and revenues
from external customers [c]... $ 2,360 $ 257 $ 43 $ 2,660
Net income (loss) [e]........... 67 4 (37) 34
Assets [f]...................... 28,291 1,365 122 29,778
-------------------------------------------------------------------------
7
-------------------------------------------------------------------------
Nine Months Ended September 30, 1999 Other Operations [a]
--------------------
Millions of Dollars Rail Trucking Other[b] Consolidated
-------------------------------------------------------------------------
Net sales and revenues
from external customers [c]... $ 7,576 $ 803 $ 27 $ 8,406
Net income (loss) [d]........... 589 28 (49) 568
Assets.......................... 28,864 883 106 29,853
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Months Ended September 30, 1998 Other Operations [a]
--------------------
Millions of Dollars Rail Truckin Other[b] Consolidated
-------------------------------------------------------------------------
Net sales and revenues
from external customers [c]... $ 6,961 $ 776 $ 132 $ 7,869
Net income (loss) [e]........... (87) 14 (371) (444)
Assets [f]...................... 28,291 1,365 122 29,778
-------------------------------------------------------------------------
[a] "Other Operations" includes all product lines that are not significant
enough to warrant reportable segment classification.
[b] Included in the "Other" product line are the results of the corporate
holding company; Union Pacific Technologies, a provider of
transportation-related technologies; Wasatch Insurance Limited, a
captive insurance company; and all necessary consolidating entries.1998
also includes Skyway Freight Systems, Inc., a provider of contract
logistics and supply chain management services, which was sold in
November 1998.
[c] The Corporation does not have significant intercompany sales
activities. [d] "Other" includes the adjustment of a liability related
to the discontinued operations of a former subsidiary (Note 4).
[e] "Trucking" includes goodwill amortization of $5 million and $15
million for the three months and nine months ended September 30, 1998,
respectively.
[f] "Other" includes the write-down of the investment in Overnite in
connection with the attempted sale of Overnite (Note 4).
3. Acquisitions
Southern Pacific Rail Corporation (Southern Pacific or SP) - UPC consummated
the acquisition of Southern Pacific in September 1996. The acquisition of SP
was accounted for as a purchase and was fully consolidated into UPC's
results beginning in October 1996.
Merger Consolidation Activities - In connection with the acquisition and
continuing integration of UPRR and Southern Pacific's rail operations, UPC
is in the process of eliminating 5,200 duplicate positions, which are
primarily employees involved in activities other than train, engine and yard
activities. In addition, UPC is relocating 4,700 positions, merging or
disposing of redundant facilities and disposing of certain rail lines. The
Corporation is also canceling uneconomical and duplicative SP contracts.
To date, UPC has severed 2,900 employees and relocated 4,500 employees
due to merger implementation activities. UPC recognized a $958 million
pre-tax merger liability as part of the SP purchase price allocation for
costs associated with SP's portion of these activities. In addition, the
Railroad expects to incur $110 million in pre-tax acquisition-related costs
for severing or relocating UPRR employees, disposing of certain UPRR
facilities, training and equipment upgrading over the remainder of the
merger implementation period. Earnings for the three months ended September
30, 1999 and 1998 included $13 million and $7 million after-tax,
respectively, and for the nine months ended September 30, 1999 and 1998,
included $30 million and $36 million after-tax, respectively, for
acquisition-related costs for UPRR consolidation activities.
8
The components of the merger liability as of September 30, 1999 were as
follows:
- -------------------------------------------------------------------------------
Original Cumulative Current
Millions of Dollars Reserve Activity Reserve
- -------------------------------------------------------------------------------
Contractual obligations....................... $361 $361 $ -
Severance costs............................... 343 264 79
Contract cancellation fees and
facility and line closure costs............. 145 126 19
Relocation costs.............................. 109 89 20
- -------------------------------------------------------------------------------
Total......................................... $958 $840 $118
- -------------------------------------------------------------------------------
Merger Liabilities - Merger liability activity reflects cash payments for
merger consolidation activities and reclassification of contractual
obligations from merger liabilities to contractual liabilities. The
Corporation expects that the remaining merger payments will be made over the
course of the next two years as labor negotiations are completed and
implemented, and related merger consolidation activities are finalized.
Mexican Railway Concession - During 1997, UPRR and a consortium of partners
were granted a 50-year concession to operate the Pacific-North and Chihuahua
Pacific lines in Mexico and a 25% stake in the Mexico City Terminal Company
at a price of $525 million. The consortium assumed operational control of
both lines in 1998. In March 1999, UPRR purchased an additional 13%
ownership interest for $87 million from one of its partners. UPRR now holds
a 26% ownership share in the consortium. The investment is accounted for
under the equity method.
4. Discontinued Operations
Adjustment to 1994 Loss on Disposal of Discontinued Operations - Net income
for the third quarter 1999 included a one-time after-tax gain of $27
million, net of taxes of $16 million, from the adjustment of a liability
established in connection with the discontinued operations of a former
subsidiary.
Attempted Sale of Overnite - In May 1998, the Corporation's Board of
Directors approved a formal plan to divest UPC's investment in Overnite
through an initial public offering (IPO). UPC recorded a $262 million
after-tax loss, net of a $198 million tax benefit, from discontinued
operations in the second quarter of 1998 to provide for the expected loss
from the sale of Overnite. During the fourth quarter of 1998, it became
apparent that, because of continued weakness in the IPO market, a successful
divestiture of Overnite within the one year time limit prescribed by
generally accepted accounting principles was no longer reasonably assured.
As a result, in the fourth quarter of 1998 the Corporation reclassified
Overnite's results to continuing operations and reversed the $262 million
loss from discontinued operations. Overnite's operating results have been
reclassified to continuing operations for all periods. Additionally, as
discussed in the 1998 Annual Report, the Corporation changed its method of
valuing goodwill during the fourth quarter of 1998. In connection with this
change in accounting policy, $547 million of goodwill related to the
acquisition of Overnite was written off during the fourth quarter of 1998.
5. Financial Instruments - The Corporation and its subsidiaries use derivative
financial instruments in limited instances and 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.
9
Credit Risk - The total credit risk associated with the Corporation's
counterparties was $111 million at September 30, 1999. UPC has received
collateral relating to its hedging activity where the concentration of
credit risk was substantial.
Valuation - The fair market values of the Corporation's derivative financial
instrument positions at September 30, 1999 and December 31, 1998 were
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 U.S. Treasury rate and swap spread.
The following is a summary of the Corporation's financial instruments at
September 30, 1999 and December 31, 1998:
---------------------------------------------------------------------------
Millions of Dollars September 30, December 31,
Except Percentages and Average Commodity Prices 1999 1998
---------------------------------------------------------------------------
Interest Rate Hedging:
Amount of debt hedged........................ $ 54 $ 150
Percentage of total debt portfolio........... 1% 2%
Rail Fuel Hedging:
Fuel purchases hedged for 1999............... $ 86 $ 343
Percentage of forecasted 1999 fuel
consumption hedged......................... 67% 64%
Average price of 1999 hedges outstanding
(per gallon) [a]........................... $0.41 $0.41
Fuel purchases hedged for 2000 [b]........... $ 50 -
Percentage of forecasted 2000 fuel
consumption hedged [b]..................... 10% -
Average price of 2000 hedges outstanding
(per gallon) [a] [b]....................... $0.40 -
Trucking Fuel Hedging:
Fuel purchases hedged for 1999............... $ 3 $ 10
Percentage of forecasted 1999 fuel
consumption hedged......................... 40% 41%
Average price of 1999 hedges outstanding
(per gallon) [a]........................... $0.45 $0.45
Fuel purchases hedged for 2000............... $ 2 -
Percentage of forecasted 2000 fuel
consumption hedged......................... 9% -
Average price of 2000 hedges
outstanding (per gallon) [a].............. $0.39 -
------------------------------------------------------------------------
[a] Excludes taxes and transportation costs.
[b] Excludes written options held by counterparties which are not expected
to be exercised as of September 30, 1999.
10
The asset and liability positions of the Corporation's outstanding
financial instruments at September 30, 1999 and December 31, 1998 were as
follows:
---------------------------------------------------------------------------
September 30, December 31,
Millions of Dollars 1999 1998
---------------------------------------------------------------------------
Interest Rate Hedging:
Gross fair market asset position............... $ 47 $ 41
Gross fair market (liability) position......... (1) (5)
Rail Fuel Hedging:
Gross fair market asset position............... 62 -
Gross fair market (liability) position......... - (49)
Trucking Fuel Hedging:
Gross fair market asset position............... 2 -
Gross fair market (liability) position......... - (2)
---------------------------------------------------------------------------
Total asset (liability) position................... $110 $(15)
---------------------------------------------------------------------------
The Corporation's use of financial instruments had the following impact
on pre-tax income for the three months and nine months ended September 30,
1999 and 1998:
---------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
-----------------------------
September 30, September 30,
------------------------------
Millions of Dollars 1999 1998 1999 1998
------------------------------
Increase in interest expense from interest
rate hedging........................... $ - $ - $ 1 $ 1
Increase (decrease) in fuel expense from
Rail fuel hedging...................... (26) 25 (7) 59
Increase in fuel expense from
Trucking fuel hedging.................. (1) - - 2
---------------------------------------------------------------------------
(Increase) decrease in pre-tax income....... $(27) $25 $(6) $62
---------------------------------------------------------------------------
Sale of Receivables - The Railroad has sold, on a revolving basis, an
undivided percentage ownership interest in a designated pool of accounts
receivable to third parties through a bankruptcy-remote subsidiary (the
Subsidiary). The Subsidiary is collateralized by a $66 million note from
UPRR. The amount of receivables sold fluctuates based upon the availability
of the designated pool of receivables and is directly affected by changing
business volumes and credit risks. At September 30, 1999 and December 31,
1998, accounts receivable are presented net of $576 million and $580
million, respectively, of receivables sold.
6. Debt
Credit Facilities - The Corporation had $1.2 billion of credit facilities
with various banks designated for general corporate purposes that expired in
the first quarter of 1999. Because of improvements in earnings and operating
cash flows during 1999, the Corporation no longer required this credit
capacity for operational purposes. A $2.8 billion credit facility, which
expires in 2001, remains outstanding.
Convertible Preferred Securities - Union Pacific Capital Trust (the Trust),
a statutory business trust sponsored and wholly owned by the Corporation,
has issued $1.5 billion aggregate liquidation amount of 6-1/4% Convertible
Preferred Securities (the CPS). Each of the CPS has a stated liquidation
amount of $50 and is convertible, at the option of the holder, into shares
of UPC's common stock, par value $2.50 per share (the Common Stock), at the
11
rate of 0.7257 shares of Common Stock for each of the CPS, equivalent to a
conversion price of $68.90 per share of Common Stock, subject to adjustment
under certain circumstances. The CPS accrue and pay cash distributions
quarterly in arrears at the annual rate of 6-1/4% of the stated liquidation
amount. The Corporation owns all of the common securities of the Trust. The
proceeds from the sale of the CPS and the common securities of the Trust
were invested by the Trust in $1.5 billion aggregate principal amount of the
Corporation's 6-1/4% Convertible Junior Subordinated Debentures due April 1,
2028, which represent the sole assets of the Trust.
For financial reporting purposes, the Corporation has recorded
distributions payable on the CPS as an interest charge to earnings in the
statement of consolidated income.
Significant New Borrowings - During January 1999, the Corporation issued
$600 million of 6-5/8% debentures with a maturity date of February 1, 2029.
Also, during September 1999, the Corporation issued $150 million of 7 3/8%
notes with a maturity date of September 15, 2009. The proceeds from the
issuance of these debentures and notes were used for repayment of debt and
other general corporate purposes.
Shelf Registration Statement - Under currently effective shelf registration
statements, the Corporation may sell, from time to time, up to $850 million
in the aggregate of any combination of debt securities, preferred stock, or
warrants for debt securities or preferred stock in one or more offerings.
The Corporation has no immediate plans to issue equity securities.
7. Earnings Per Share - The following tables provide a reconciliation between
basic and diluted earnings per share for the three months and nine months
ended September 30, 1999 and 1998:
---------------------------------------------------------------------------
Three Months Ended
September 30,
-------------------
Millions, Except Per Share Amounts 1999 1998
---------------------------------------------------------------------------
Income Statement Data:
Income from continuing operations................ $ 218 $ 34
Income available to common stockholders from
continuing operations........................ 218 34
Gain on disposal of discontinued operations...... 27 -
---------------------------------------------------------------------------
Net income available to common stockholders -
Basic.......................................... 245 34
Dilutive effect of interest associated with the
CPS [a]........................................ 14 -
---------------------------------------------------------------------------
Net income available to common stockholders -
Diluted........................................ $ 259 $ 34
---------------------------------------------------------------------------
Weighted-Average Number of Shares Outstanding:
Basic............................................ 246.6 246.1
Dilutive effect of common stock equivalents [b].. 23.5 0.6
---------------------------------------------------------------------------
Diluted.......................................... 270.1 246.7
---------------------------------------------------------------------------
Earnings Per Share:
Basic:
Income from continuing operations............ $0.88 $0.14
Gain on disposal of discontinued operations.. 0.11 -
---------------------------------------------------------------------------
Net income....................................... $0.99 $0.14
---------------------------------------------------------------------------
Diluted:
Income from continuing operations............ $0.86 $0.14
Gain on disposal of discontinued operations.. 0.10 -
---------------------------------------------------------------------------
Net income....................................... $0.96 $0.14
---------------------------------------------------------------------------
[a] In 1998, the effect of $15 million of interest associated with the CPS
was anti-dilutive (Note 6).[b] 1998 excludes the effect of anti-dilutive
common stock equivalents related to the CPS, which were 21.8 million.
12
---------------------------------------------------------------------------
Nine Months Ended
September 30,
------------------
Millions, Except Per Share Amounts 1999 1998
---------------------------------------------------------------------------
Income Statement Data:
Income (Loss) from continuing operations............. $ 541 $ (182)
Income (Loss) available to common stockholders from
continuing operations............................ 541 (182)
Gain (Loss) on disposal of discontinued operations... 27 (262)
---------------------------------------------------------------------------
Net income (loss) available to common
stockholders - Basic............................... 568 (444)
Dilutive effect of interest associated with
the CPS [c]........................................ 44 -
---------------------------------------------------------------------------
Net income (loss) available to common stockholders -
Diluted............................................ $ 612 $ (444)
---------------------------------------------------------------------------
Weighted-Average Number of Shares Outstanding:
Basic................................................ 246.5 246.0
Dilutive effect of common stock equivalents [d]...... 23.1 -
---------------------------------------------------------------------------
Diluted.............................................. 269.6 246.0
---------------------------------------------------------------------------
Earnings Per Share:
Basic:
Income (Loss) from continuing operations......... $2.19 $(0.74)
Gain (Loss) on disposal of discontinued
operations..................................... 0.11 (1.06)
---------------------------------------------------------------------------
Net income (loss).................................... $2.30 $(1.80)
---------------------------------------------------------------------------
Diluted:
Income (Loss) from continuing operations......... $2.17 $(0.74)
Gain (Loss) on disposal of discontinued
operations..................................... 0.10 (1.06)
---------------------------------------------------------------------------
Net income (loss).................................... $2.27 $(1.80)
---------------------------------------------------------------------------
[c] In 1998, the effect of $29 million of interest associated with the CPS
was anti-dilutive (Note 6).[d] 1998 excludes the effect of anti-dilutive
common stock equivalents related to options and the CPS, which were
1.5 million and 14.5 million, respectively.
8. Other Income - Other income included the following for the three months and
nine months ended September 30, 1999 and 1998:
---------------------------------------------------------------------------
Three Months Ended
Millions of Dollars September 30,
--------- ---------
1999 1998
---------------------------------------------------------------------------
Net gain on asset dispositions......................... $ 18 $18
Rental income.......................................... 16 13
Interest income........................................ 2 6
Other - net............................................ (12) (1)
---------------------------------------------------------------------------
Total.................................................. $ 24 $36
---------------------------------------------------------------------------
13
---------------------------------------------------------------------------
Nine Months Ended
Millions of Dollars September 30,
--------- ---------
1999 1998
---------------------------------------------------------------------------
Net gain on asset dispositions........................ $ 36 $62
Rental income......................................... 41 36
Interest income....................................... 10 17
Other - net........................................... (14) (2)
---------------------------------------------------------------------------
Total................................................. $ 73 $113
---------------------------------------------------------------------------
9. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed charges
has been computed on a consolidated basis. Earnings represent income (loss)
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 the estimated
interest portion of rental charges. For the nine months ended September 30,
1998, fixed charges exceeded earnings by approximately $339 million.
10. Commitments and Contingencies - There are various claims and lawsuits
pending against the Corporation and certain of its subsidiaries. The
Corporation is also subject to Federal, state and local environmental laws
and regulations, pursuant to which it is currently participating in the
investigation and remediation of numerous sites. In addition, the
Corporation and its subsidiaries also periodically enter into financial and
other commitments and guarantees in connection with their businesses, and
have retained certain contingent liabilities upon the disposition of
formerly owned operations.
It is not possible at this time for the Corporation to determine fully
the effect of any or all unasserted claims on its consolidated financial
condition; however, to the extent possible, where unasserted claims can be
estimated and where such claims are considered probable, the Corporation has
recorded a liability. The Corporation does not expect that any known
lawsuits, claims, environmental costs, commitments or guarantees will have a
material adverse effect on its consolidated financial condition or results
of operations. Certain potentially significant contingencies relating to the
Corporation's and its subsidiaries' businesses are detailed below:
Customer Claims - Certain customers have submitted claims for damages
related to shipments delayed by the Railroad as a result of congestion
problems during 1997 and 1998, 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 has made no additional provisions for such claims in 1999.
Shareholder Lawsuits - UPC and certain of its directors and officers are
defendants in two purported class actions that have been consolidated into
one proceeding. The consolidated complaint alleges, among other things, that
the Corporation violated the Federal securities laws by failing to disclose
material facts and making materially false and misleading statements
concerning the service, congestion and safety problems encountered following
the Corporation's acquisition of Southern Pacific in 1996. These lawsuits
were filed in late 1997 in the United States District Court for the Northern
District of Texas and seek to recover unspecified amounts of damages.
Management believes that the plaintiffs' claims are without merit and
intends to defend them vigorously. The defendants have moved to dismiss this
action, and the motion has been fully briefed and is awaiting a decision by
the Court.
14
In addition to the class action litigation, a purported derivative
action was filed on behalf of the Corporation and UPRR in September 1998 in
the District Court for Tarrant County, Texas, naming as defendants the
then-current and certain former directors of the Corporation and UPRR and,
as nominal defendants, the Corporation and UPRR. The derivative action
alleges, among other things, that the named directors breached their
fiduciary duties to the Corporation and UPRR by approving and implementing
the Southern Pacific merger without informing themselves of its impact or
ensuring that adequate controls were put in place and by causing UPC and
UPRR to make misrepresentations about UPRR's service problems to the
financial markets and regulatory authorities. The Corporation's Board of
Directors established a special litigation committee consisting of three
independent directors to review the plaintiff's allegations and determine
whether it is in UPC's best interest to pursue them. The committee has
unanimously concluded that further prosecution of the derivative action on
behalf of the Corporation and UPRR is not in the best interest of either
such company. Accordingly, the Corporation and UPRR have filed a motion with
the Court to dismiss the derivative action. The plaintiff has not yet
responded to the motion. The individual defendants also believe that these
claims are without merit and intend to defend them vigorously.
11. Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133), that would have been effective January 1,
2000. In June 1999, the Financial Accounting Standards Board issued
Statement No. 137, "Accounting for Derivatives Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133"
postponing the effective date for implementing FAS 133 to fiscal years
beginning after June 15, 2000. While management is still in the process of
determining the full effect FAS 133 will have on the Corporation's financial
statements, management has determined that FAS 133 will increase the
volatility of the Corporation's asset, liability and equity (comprehensive
income) positions as the change in the fair market value of all financial
instruments the Corporation uses for fuel or interest rate hedging purposes
will, upon adoption of FAS 133, be recorded in the Corporation's Statement
of Financial Position (Note 5). In addition, to the extent fuel hedges are
ineffective due to pricing differentials resulting from the geographic
dispersion of the Corporation's operations, income statement recognition of
the ineffective portion of the hedge position will be required. Management
does not anticipate that the final adoption of FAS 133 will have a material
impact on UPC's consolidated financial statements.
15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1999 Compared to
Three Months and Nine Months Ended September 30, 1998
Union Pacific Corporation (the Corporation or UPC) consists of one reportable
segment, rail transportation (Rail), and UPC's other product lines (Other
Operations). The Rail segment includes the operations of Union Pacific Railroad
Company (UPRR), its subsidiaries and rail affiliates (collectively, the
Railroad). Other Operations include the trucking product line (Overnite
Transportation Company or Overnite), as well as technology and insurance product
lines, corporate holding company operations, which largely support the Rail
segment, and all appropriate consolidating entries. All earnings per share
information is stated on a diluted basis.
CONSOLIDATED
Net Income - Net income for the three months and nine months ended September 30,
1999 was $245 million ($0.96 per share) and $568 million ($2.27 per share),
respectively, compared to $34 million ($0.14 per share) and a loss of $444
million ($1.80 per share) for the comparable periods in 1998. The increase was
driven primarily by improved operations and service levels at UPC's Rail unit
which resulted in higher revenues and lower expenses. Net income for the third
quarter of 1999 included a one-time after-tax gain of $27 million ($0.10 per
share) from the adjustment of a liability established in connection with the
discontinued operations of a former subsidiary. Net income for the nine months
ended September 30, 1998 included a $262 million after-tax provision for the
expected loss from the proposed sale of Overnite. In the fourth quarter of 1998,
the Corporation reclassified Overnite's results to continuing operations and
reversed the loss from discontinued operations (see Note 4 to the Consolidated
Financial Statements).
Operating Revenues - Operating revenues increased $233 million (9%) and $537
million (7%) for the three month and nine month periods ended September 30,
1999, respectively, over the comparable periods in 1998. The increase was
primarily due to higher volumes and revenues in all commodity lines of the Rail
unit, partially offset by the impact of selling Skyway Freight Systems, Inc.
(Skyway) in November of 1998. Skyway generated $44 million and $133 million in
revenue during the third quarter and first nine months of 1998, respectively.
Operating Expenses - For the three and nine month periods ended September 30,
1999, operating expenses decreased $72 million (3%) and $677 million (9%),
respectively, over the comparable periods in 1998. Salaries, wages and employee
benefit costs increased in the third quarter of 1999 over the third quarter of
1998, due to one-time costs related to the Southern Pacific merger recorded in
the third quarter of 1999 (see Note 3 to the Consolidated Financial Statements),
higher rail volume and inflation, partially offset by improved productivity.
Fuel and utilities costs also increased in the third quarter of 1999 over the
third quarter of 1998 due to increased volume, partially offset by lower prices
(see Note 5 to the Consolidated Financial Statements). Depreciation and
materials and supplies both increased slightly for both the three month and nine
month periods ended September 30, 1999 over the comparable periods in 1998. The
increase in depreciation expense reflects increased capital spending, while the
16
increase in materials and supplies reflects higher rail volumes. All other
operating expense categories decreased in the third quarter of 1999 over the
comparable period in 1998. The factors primarily responsible for such decreases
are substantially the same in the three and nine month periods and are discussed
below.
For the nine month period, all operating expense categories decreased over
the comparable 1998 period. Salaries, wages and employee benefit costs decreased
due to improved productivity and lower corporate expenses, partially offset by
higher rail volume and inflation. Equipment and other rents expense decreased
primarily as a result of improved rail cycle times, partially offset by higher
rail volumes. Fuel and utilities costs were lower, as lower fuel prices and
improved fuel efficiency more than offset volume driven increases in fuel
consumption. Casualty costs decreased due to lower than expected settlement
costs at the Rail unit. The decrease in other costs in 1999 reflected the impact
in 1998 of the resolution of customer claims, the impact of the sale of Skyway,
lower state and local taxes (primarily sales and property taxes) and increased
benefits resulting from the continuing integration of Southern Pacific
operations.
Operating Income - Operating income increased $305 million and $1.2 billion for
the three and nine month periods ended September 30, 1999, over the comparable
periods in 1998, reflecting improved operations and service levels at UPC's Rail
unit, which resulted in decreased Rail operating expenses and increased Rail
revenues.
Non-Operating Items - Other income decreased $12 million in the third quarter of
1999 over the comparable period in 1998 due to the impact in the third quarter
of 1998 of a telecommunications contract buyout and the sale of a corporate
aircraft. Other income decreased $40 million for the nine months ended September
30, 1999 over the comparable period in 1998, reflecting the additional impact of
the sale of the Southern Pacific Rail Corporation (SP or Southern Pacific)
headquarters building and an insurance recovery for 1997 flood damage recorded
in the second quarter of 1998. Interest expense decreased in the third quarter
of 1999 over the third quarter of 1998, due to lower average debt in the third
quarter of 1999, but increased for the 1999 nine month period as a result of
increased average debt levels. Income taxes for both the three and nine month
periods increased over the comparable periods in 1998 due to higher income
before income taxes, partially offset by settlements related to prior tax years.
RAIL SEGMENT
Net Income - Rail operations reported net income of $234 million and $589
million for the three months and nine months ended September 30, 1999,
respectively, compared to net income of $67 million for the third quarter of
1998 and a net loss of $87 million for the 1998 nine month period. The increase
for both the three and nine month periods resulted primarily from improved
operations and service levels, increased revenues in all commodity lines and
lower operating costs.
Operating Revenues - Rail operating revenues increased $246 million (10%) to
$2,606 million and $615 million (9%) to $7,576 million for the quarter and nine
months ended September 30, 1999, respectively, over the comparable periods in
1998. Revenue carloads increased 9% and 7% for the three and nine month periods
ended September 30, 1999, respectively, over the comparable periods in 1998.
1999 commodity revenues, primarily automotive and industrial, were adversely
influenced due to the impact on rail traffic of the implementation of the joint
acquisition of Conrail.
17
The following table summarizes rail commodity revenue, revenue carloads and
average revenue per car for the periods indicated:
- -------------------------------------------------------------------------------
Three Months Ended, Nine Months Ended
September 30 September 30,
- ---------------------- Commodity Revenue -------------------
1999 1998 % Change In Millions of Dollars 1999 1998 % Change
- -------------------------------------------------------------------------------
$ 367 $ 333 + 10% Agricultural $1,042 $ 938 + 11%
239 204 + 17 Automotive 767 676 + 13
398 384 + 4 Chemicals 1,195 1,158 + 3
560 516 + 9 Energy 1,656 1,501 + 10
492 455 + 8 Industrial Products 1,416 1,354 + 5
459 385 + 19 Intermodal 1,273 1,126 + 13
- -------------------------------------------------------------------------------
$2,515 $2,277 + 10% Total $7,349 $6,753 + 9%
- -------------------------------------------------------------------------------
Revenue Carloads
In Thousands
- -------------------------------------------------------------------------------
233 212 + 10% Agriculture 670 605 + 11%
167 140 + 19 Automotive 521 464 + 12
238 232 + 3 Chemicals 696 681 + 2
478 449 + 6 Energy 1,403 1,319 + 6
365 349 + 5 Industrial Products 1,045 1,005 + 4
719 640 + 12 Intermodal 2,026 1,882 + 8
- -------------------------------------------------------------------------------
2,200 2,022 + 9% Total 6,361 5,956 + 7%
- -------------------------------------------------------------------------------
Average Revenue per Car
- --------------------------------------------------------------------------------
$1,576 $1,574 -% Agriculture $1,550 $1,555 -%
1,430 1,450 - 1 Automotive 1,472 1,458 + 1
1,673 1,658 + 1 Chemicals 1,717 1,699 + 1
1,172 1,148 + 2 Energy 1,181 1,138 + 4
1,350 1,303 + 4 Industrial Products 1,356 1,348 + 1
638 602 + 6 Intermodal 628 598 + 5
- -------------------------------------------------------------------------------
$1,144 $1,126 + 2% Total $1,155 $1,134 + 2%
- -------------------------------------------------------------------------------
Agricultural - Agricultural revenue increased for both the three and nine month
periods over the comparable periods in 1998, primarily due to stronger exports
and improved service levels, which resulted in increases in wheat, corn and
beverages.
Automotive - Automotive revenue increased for both the three and nine month
periods over the comparable periods in 1998, due to increased carloads caused by
strong domestic production, improvements in cycle times, price increases, and
the negative impact in 1998 of a strike against a major auto manufacturer. These
gains were partially offset by the negative impact on rail traffic of the
implementation of the joint acquisition of Conrail.
Chemical - Chemical revenue increased for both the three and nine month periods
over the comparable periods in 1998, due to improved service levels and recovery
in demand for plastics, liquid and dry chemical and phosphorous, which increased
carloads. These gains were partially offset by declines in soda ash and a
decline in demand for fertilizers. Average revenue per car improved due to
increased longer-haul plastics shipments and fewer shorter-haul petroleum and
export sulfur moves.
17
Energy - Energy revenue increased for both the three and nine month periods over
the comparable periods in 1998 due to increases in the number of Powder River
Basin trains per day, tons per car and average train length. Powder River Basin
traffic was reduced during the Rail unit's planned 10-day maintenance outage in
June 1999. Colorado and Utah volumes also increased due to improved service.
Average revenue per car increased resulting from changes in traffic mix as
longer-haul Powder River Basin traffic increased.
Industrial Products - Industrial Products revenue increased for both the three
and nine month periods over the comparable periods in 1998 due to stronger
demand and improved cycle times. Carloads increased in lumber, stone and cement
due to strong construction demand, and recyclables grew due to new business.
Gains were partially offset by decreased steel loadings due to higher imports of
lower-priced foreign steel and lost volumes from a major steel producer who
filed for bankruptcy. Average revenue per car increased due to a combination of
price increases and product mix changes.
Intermodal - Intermodal revenue increased for both the three and nine month
periods over the comparable periods in 1998 due to increased carloads, and
increased average revenue per car. Carloads improved due to strong demand from
growth in imports from Asia, service improvements and a new premium service
offering. These gains were partially offset by a decline in exports to Asia due
to the Asian economic crisis. Average revenue per car increased due to positive
mix shifts and demand-driven price increases.
Operating Expenses - Operating expenses decreased $44 million (2%) and $540
million (8%) for the quarter and nine months ended September 30, 1999,
respectively.
Salaries, wages and employee benefit costs increased for the three and nine
month periods ended September 30, 1999 over the comparable periods in 1998, due
to one-time costs related to the Southern Pacific merger recorded in the third
quarter of 1999 (see Note 3 to the Consolidated Financial Statements), higher
rail volume and inflation, partially offset by improved productivity.
Equipment and other rents expenses decreased $9 million (3%) and $94
million (9%) for the quarter and nine months ended September 30, 1999,
respectively, due primarily to improvements in cycle time and lower prices,
partially offset by higher volume.
Fuel and utilities expenses were up $8 million (4%) and down $33 million
(6%) for the quarter and nine months ended September 30, 1999, respectively. The
quarterly increase was driven by higher volumes, while the year-to-date decrease
reflects lower fuel prices and improved consumption rates, partially offset by
higher volume. The Railroad hedged 68% and 69% of its fuel consumption for the
three and nine months periods ended September 30, 1999, respectively, which
decreased fuel costs by $26 million and $7 million, respectively. Expected fuel
consumption for the remaining three months of 1999 is 67% hedged at an average
of 41 cents per gallon (excluding taxes, transportation charges and regional
pricing spreads).
Casualty costs declined $34 million (33%) and $62 million (20%) for the
quarter and nine months ended September 30, 1999, respectively, primarily due to
the effect of lower than expected settlement costs. In addition, insurance costs
and costs for repairs on cars from other railroads were lower year over year.
Depreciation and materials and supplies both increased slightly for both
the three and nine month periods ended September 30, 1999 over the comparable
periods in 1998. The increase in depreciation expense reflects increased capital
spending, while the increase in materials and supplies reflects higher rail
volumes.
19
Other costs decreased $39 million (16%) and $407 million (39%) for the
three and nine month periods ended September 30, 1999, respectively, reflecting
the impact on 1998 results from the resolution of customer claims, lower state
and local taxes (primarily sales and property taxes) and benefits resulting from
the continuing integration of Southern Pacific operations.
Operating Income - Operating income increased $290 million to $515 million and
$1.2 billion to $1.3 billion for the quarter and nine months ended September 30,
1999, respectively. Both 1999 and 1998 included the impact of one-time costs
related to the Southern Pacific merger for severance, relocation and training of
employees. The operating ratio for the third quarter of 1999 was 80.2%, 10.3
percentage points better than 1998's 90.5% operating ratio. The operating ratio
for the first nine months of 1999 was 82.6%, 15.1 percentage points better than
1998's 97.7% operating ratio.
Non-Operating Items - Other income decreased $22 million (49%) in the third
quarter of 1999 over 1998 due to the impact in the third quarter of 1998 of a
telecommunications contract buyout and the sale of a corporate aircraft. Other
income decreased $50 million (44%) for the nine months ended September 30, 1999
over the comparable period in 1998, reflecting the additional impact of the sale
of the SP headquarters building and an insurance recovery for 1997 flood damage
recorded in the second quarter of 1998. Interest expense decreased $4 million
(2%) in the third quarter of 1999 over the third quarter of 1998 due to lower
average debt in the third quarter of 1999. Interest expense increased $26
million (6%) for the nine months ended September 30, 1999 over the comparable
period in 1998 as a result of higher average debt levels year over year. Income
taxes increased $105 million for the three month period and $403 million for the
nine month period, respectively, reflecting higher income before income taxes.
OTHER OPERATIONS
Trucking Product Line
Net Income - Trucking net income was $8 million and $28 million, for the three
and nine month periods ended September 30, 1999, respectively, down from $9
million (excluding goodwill amortization of $5 million) and $29 million
(excluding good will amortization of $15 million) for the comparable periods in
1998. The decrease in net income for both periods was more than accounted for by
expenses related to Overnite's contingency plans in response to activity by the
International Brotherhood of Teamsters (Teamsters) and a brief job action in
July.
Operating Revenues - For the three and nine month periods ended September 30,
1999, trucking revenues increased $20 million (8%) to $277 million and $27
million (3%) to $803 million, respectively, over the comparable periods in 1998.
The revenue increase resulted from higher volume, reflecting a new product
offering in the northeast United States and Texas and from rate improvements
resulting from increased average length of haul and yield improvement.
Operating Expenses - For the three and nine month periods ended September 30,
1999, operating expenses increased $24 million (10%) to $269 million and $32
million (4%) to $770 million, respectively, over the comparable periods in 1998.
For the three and nine months ended September 30, 1999, salaries, wages and
employee benefit costs increased $14 million (9%) to $169 million and $26
million (6%) to $494 million, respectively, reflecting wage and benefit
enhancements and expenses related to Overnite's contingency plans in response to
Teamster activity. Fuel and utilities costs increased $2 million (18%) to $13
million for the three month period and $1 million (3%) to $35 million for the
nine month period, due to higher volumes and increased fuel price per gallon (57
20
cents in the third quarter of 1999 compared to 48 cents in the third quarter of
1998), partially offset by favorable hedge activity. Forty percent of estimated
remaining 1999 fuel purchases are hedged at an average of 45 cents per gallon
(excluding taxes, transportation charges and regional pricing spreads).
Equipment and other rents increased $4 million (20%) for the three month period
due to costs related to Teamster activity and to the alleviation of congestion
caused by closure of a regional competitor.
Operating Income - Trucking operations generated operating income of $8 million
(excluding goodwill amortization of $5 million) for the third quarter of 1999
and $33 million (excluding goodwill amortization of $15 million) for the first
nine months of 1999 compared to $12 million and $38 million for the comparable
periods in 1998. The operating ratio for trucking operations (excluding goodwill
amortization in 1998) increased to 97.1% in 1999 from 95.3% in 1998 for the
third quarter and increased to 95.9% in 1999 from 95.1% in 1998 for the nine
months ended September 30, 1998.
Recent Events - On October 24, 1999, the Teamsters began a job action at certain
Overnite facilities. As of November 9, 1999, approximately 30 Overnite terminals
had some employees who did not cross picket lines, and approximately 870
employees, 6.7% of Overnite's workforce, did not report to work. Overnite is
operating under its strike contingency plan, and has deployed approximately 400
employee volunteers to other Overnite locations and is using approximately 200
temporary third-party replacement workers. The Teamster activity is expected to
negatively impact Overnite's results of operations in the fourth quarter of
1999.
The Teamsters are the certified and recognized bargaining agent at 22 of
Overnite's locations employing approximately 1,800 of Overnite's workforce of
approximately 13,000. Additionally, proceedings are pending in certain cases
where a Teamsters local union lost a representation election. See Part II, Item
1, "Legal Proceedings - Labor Matters."
Other Product Lines
Other operations include the technology and insurance product lines, as well as
the corporate holding company operations and all necessary consolidating entries
(see Note 2 to the Consolidated Financial Statements). For the three and nine
month periods ended September 30, 1999, operating revenues declined $33 million
and $105 million, respectively, over the comparable periods in 1998, due
primarily to the sale of Skyway in November 1998. For the three and nine months
ended September 30, 1999, operating expenses decreased $47 million and $154
million, respectively, reflecting the absence of 1999 costs associated with
Skyway and the consolidation of portions of the corporate staff with the Rail
unit's staff in Omaha, Nebraska. Operating losses for the three and nine month
periods ended September 30, 1999 over the comparable periods in 1998 declined
$14 million and $49 million, respectively, and losses from continuing operations
declined $13 million and $33 million, respectively, due to the corporate
reorganization and improved operations at the Corporation's technology division.
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
Financial Condition - During the first nine months of 1999, cash provided by
operations was $1.5 billion, compared to $209 million in 1998. This increase
reflects higher earnings at the Corporation's Rail segment. Working capital
improved due to continued emphasis on receivable collection efforts at the
Railroad and the timing of current liability payments.
21
Cash used in investing activities was $1.3 billion in the first nine months
of 1999, compared to a use of $1.7 billion in 1998. This decrease primarily
reflects lower Rail capital spending, including merger-related spending, offset
by the purchase of an additional 13% ownership interest in the consortium
operating the Pacific-North and Chihuahua Pacific lines in Mexico for $87
million (see Note 3 to Consolidated Financial Statements).
Cash used in equity and financing activities was $138 million in the first
nine months of 1999, compared to $2.0 billion provided in 1998. Cash used in
1999 principally reflects lower net borrowings ($600 million in 1999 compared to
$4.0 billion in 1998) offset by debt repaid ($591 million in 1999 compared to
$1.8 billion in 1998) reflecting the private placement of the Convertible
Preferred Securities (the CPS) on April 1, 1998 (see Note 6 to the Consolidated
Financial Statements).
The ratio of debt to total capital employed (treating the CPS as a debt
instrument) was 56.6% at September 30, 1999 compared to 58.0% at December 31,
1998 and 58.4% at September 30, 1998. Including the CPS as an equity instrument,
the ratio of debt to total capital employed at September 30, 1999 was 48.3%
compared to 49.4% at December 31, 1998 and 50.2% at September 30, 1998.
At September 30, 1999 the Corporation had a $2.8 billion credit facility
outstanding. The facility is designated for general corporate purposes and
expires in 2001. During January 1999 the Corporation issued $600 million of 6
5/8% debentures with a maturity date of February 1, 2029. During September 1999
the Corporation issued $150 million of 7 3/8% notes with a maturity date of
September 15, 2009. The proceeds from the issuance of these debentures and notes
were used for repayment of debt and other general corporate purposes. Under
currently effective shelf registration statements, the Corporation may sell,
from time to time, up to $850 million in the aggregate of any combination of
debt securities, preferred stock, or warrants for debt securities or preferred
stock in one or more offerings. The Corporation has no immediate plans to issue
equity securities.
OTHER MATTERS
Commitments and Contingencies - There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. In addition, the
Corporation and its subsidiaries are subject to various Federal, state and local
environmental laws and are currently participating in the investigation and
remediation of various sites. A discussion of certain claims, lawsuits,
guarantees and contingencies is set forth in Note 10 to the Consolidated
Financial Statements, which is incorporated herein by reference.
Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133), that would have been effective January 1, 2000.
In June 1999, the Financial Accounting Standards Board issued Statement No. 137,
"Accounting for Derivatives Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" postponing the effective date for
implementing FAS 133 to fiscal years beginning after June 15, 2000. While
management is still in the process of determining the full effect FAS 133 will
have on the Corporation's financial statements, management has determined that
FAS 133 will increase the volatility of the Corporation's asset, liability and
equity (comprehensive income) positions as the change in the fair market value
of all financial instruments the Corporation uses for fuel or interest rate
hedging purposes will, upon adoption of FAS 133, be recorded in the
Corporation's Statement of Financial Position (see Note 5 to the Consolidated
Financial Statements). In addition, to the extent fuel hedges are ineffective
22
due to pricing differentials resulting from the geographic dispersion of the
Corporation's operations, income statement recognition of the ineffective
portion of the hedge position will be required. Management does not anticipate
that the final adoption of FAS 133 will have a material impact on UPC's
consolidated financial statements.
Year 2000 - The Year 2000 (Y2K) compliance project at UPC includes software
(internally developed and purchased), hardware and embedded chips inside
equipment and machinery, primarily at its Rail unit. The Corporation's
enterprise-wide project encompasses computer systems and equipment in multiple
data centers and a telecommunications network spread over 23 states. Equipment
containing embedded computer chips includes locomotives, automated train
switching systems, computer aided train dispatching systems, signaling systems,
computerized fueling stations, weigh-in-motion scales, cranes, lifts, PBX
systems, elevators, and computerized monitoring systems throughout UPC. The Y2K
project started with research in 1994 and an impact analysis of the
Corporation's mainframe COBOL systems in 1995. The Y2K project has been a high
priority since then.
UPC's Y2K Project is divided into five major initiatives as follows:
Mainframe Systems - These systems have been converted, tested and deemed to be
Y2K compliant as of December 31, 1998. Periodic audits are planned during the
remainder of 1999 to ensure these systems remain Y2K compliant.
Client Server Systems - All critical client server systems have been converted,
tested, and deemed to be Y2K compliant as of December 31, 1998. The non-critical
client server systems were deemed to be Y2K compliant as of June 30, 1999.
User Department Developed Systems - These systems consist of both mainframe and
PC-based systems developed by internal user departments. All of the systems were
deemed to be Y2K compliant as of June 30, 1999.
Vendor Supplied and Embedded Systems - These systems consist of vendor-supplied
software, desktop, mainframe and server hardware, databases and operating
systems, as well as equipment and machinery with embedded systems. One hundred
percent of the identified critical suppliers of these systems have indicated
that they have a comprehensive Year 2000 plan. To help assure safety and Y2K
compliance, UPC is testing selected critical software, hardware and embedded
systems, even if the vendor has already certified the product. The Corporation
is sharing information on the compliance and testing of safety critical
components common to the industry with the cooperation of the Association of
American Railroads (AAR).
Electronic Commerce Systems - These systems consist of all electronic exchanges
of information with customers, vendors, other railroads and financial
institutions. The railroad industry has agreed on a standard 4-digit year for
all electronic data interchange (EDI). The Rail unit can now transmit and
receive the new EDI standard that involves a 4-digit year. The Corporation is
conducting additional Y2K testing with customers and trading partners using
current and older versions of EDI transactions in 1999.
In an effort to ensure that interfacing systems will operate successfully
in the year 2000 the Corporation is conducting integrated testing of individual
systems already deemed to be Y2K compliant. Although the formal testing is
complete, additional verification testing will continue through December 1999.
For each of these initiatives, seven major categories of events have been
identified for contingency plans. These categories are (1) key data -
integrity/loss, (2) critical software, (3) critical hardware, (4)
communications, (5) critical supplies and suppliers, (6) facilities, and (7) key
personnel. The contingency plans also include a Y2K command center that will be
staffed 24 hours a day in the fourth quarter of 1999 and continuing into early
2000 for any problems that might occur due to Y2K. The staff will be composed of
23
technical experts to fix or advise what to fix if systems fail and knowledgeable
representatives from each business unit. Contingency plans continue to be
developed and will be refined and adjusted throughout 1999.
As of June 30, 1999, 100% of the Corporation's systems (excluding trucking)
have been converted, tested, and deemed to be Y2K compliant. Modification to
trucking systems comprises approximately 10% of UPC's total Y2K workload and is
estimated to be 98% complete. The remaining modification to trucking's systems
is expected to be completed in the fourth quarter of 1999. Costs to convert
UPC's systems are expensed as incurred. As of September 30, 1999, more than 88%
of the costs of the Y2K project, estimated to be $61 million (pre-tax) in total,
have been expensed.
Although the Corporation believes its systems will be successfully
modified, failure by it, or by those from whom UPC purchases equipment, or by
other entities with whom UPC exchanges data, or on whom it relies for data, to
successfully modify their systems, could materially impact operations and
financial results in the year 2000.
CAUTIONARY INFORMATION
Certain information included within this report is, and other information
included within materials filed or to be filed 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), are or will be
forward-looking statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934. The forward-looking statements include,
without limitation, statements concerning projections, predictions or
expectations as to Union Pacific Corporation's and its subsidiaries' business,
financial or operational results; future economic performance; management
objectives; the outcome of claims; statements that UPC does not expect that
claims, lawsuits, environmental costs, commitments, contingent liabilities,
labor negotiations or other matters will have a material adverse affect on the
Corporation's consolidated financial position, results of operations or
liquidity; and other similar expressions concerning matters that are not
historical facts. Forward-looking information is based on information available
at the time and/or management's good faith belief with respect to future events,
and is 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
Corporation and its subsidiaries are fully successful in implementing their
financial and operational initiatives; industry competition, conditions and
performance; legislative and/or regulatory developments; natural events such as
severe weather, floods and earthquakes; the effects of adverse general economic
conditions; changes in fuel prices; labor stoppages; the impact of year 2000
systems problems; and the outcome of claims and litigation, including claims
arising from environmental investigations or proceedings. The Corporation
assumes no obligation to update forward-looking information to reflect actual
results, changes in assumptions or changes in other factors affecting
forward-looking information.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosure concerning market risk-sensitive instruments is set forth in Note 5
to the Consolidated Financial Statements included in Item 1 of Part I of this
Report and is incorporated herein by reference.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion of certain legal proceedings affecting the Corporation and/or
certain of its subsidiaries set forth in Note 10 to the Consolidated Financial
Statements included in Item 1 of Part I of this Report is incorporated herein by
reference. In addition to those matters, the following proceedings, or
developments in proceedings presently pending, arose or occurred during the
third quarter of 1999.
Bottleneck Proceedings - As reported in the Corporation's Annual Report on Form
10-K for the year ended December 31, 1998 and Quarterly Report on Form 10-Q for
the quarter period ended March 31, 1999, the U.S. Court of Appeals for the
Eighth Circuit entered an order on February 10, 1999 affirming a prior decision
by the Surface Transportation Board of the U.S. Department of Transportation
(STB). The STB decision generally reaffirmed its existing position regarding the
obligation of rail carriers to provide rates for bottleneck segments (lines of
railroad that are served by a single railroad between a junction and an
exclusively-served shipper facility), and dismissed two complaint proceedings
filed by shippers challenging a class rate for the movement of coal to which
UPRR and a predecessor were parties. On April 23, 1999 the Eighth Circuit denied
a petition for rehearing filed by two of the shippers involved in the complaint
proceeding. On July 19, 1999 the Western Coal Traffic League filed a petition
for a writ of certiorari in the United States Supreme Court. The Supreme Court
denied the petition on October 18, 1999.
Labor Matters - The UPC 1998 10-K disclosed that the General Counsel of the
National Labor Relations Board (NLRB) is seeking a bargaining order remedy in 12
cases involving Overnite Transportation Company (Overnite), where a Teamsters
local union lost a representation election, and that in four of the 12 cases an
administrative law judge has ruled that the bargaining order remedy is
warranted. Overnite appealed that ruling to the NLRB. On November 10, 1999 the
NLRB upheld the decision of the administrative law judge in those four cases.
Overnite has appealed the NLRB's ruling. Additionally, during the second quarter
of 1999, an administrative law judge ruled in the remaining cases, determining
that the bargaining order remedy is warranted in seven of the eight cases.
Overnite has appealed that ruling to the NLRB.
Environmental Matters - As reported in the UPC 1998 10-K, the District Attorney
for San Bernardino County, California was investigating the Railroad's handling
of several hazardous material spills in Barstow and West Colton, California. In
the third quarter of 1999, the District Attorney and the Railroad agreed to a
settlement, and on July 28, 1999 a stipulated judgement against the Railroad in
the amount of $350,000 was entered by the San Bernardino Superior Court. The
Railroad also agreed to pay certain costs of San Bernardino County associated
with the incidents that were the subject of the investigation. These costs are
estimated at $20,000, but may ultimately be more or less than such amount.
Other Matters - On August 29, 1997, an Amtrak train, operating on UPRR tracks,
struck a car at a crossbuck-protected crossing near Warrensburg, Missouri,
injuring Kimberley R. Alcorn, a passenger in the car. Ms. Alcorn brought suit
against UPRR and Amtrak in the Circuit Court of Jackson County, Missouri
Division No. 10. On September 24, 1999, a jury found that Amtrak and UPRR were
negligent in causing the accident. The jury awarded Ms. Alcorn approximately
$40.3 million in compensatory damages, and, on September 29, 1999, found the
Railroad and Amtrak liable for an additional $120 million in punitive damages.
The defendants are pursuing multiple avenues of relief from the jury awards. The
Railroad believes that the damage awards are not supported by the facts or the
law, and that the trial court and/or the appellate courts will either grant a
new trial or will substantially reduce the amount of damages. Under the terms of
an existing agreement, Amtrak will continue to defend UPRR's interests in this
25
litigation and UPRR believes that Amtrak and its insurers, under the terms of
the agreement, will hold UPRR harmless from any final judgment.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(a) Executive Stock Purchase Incentive Plan of Union Pacific
Corporation.
10(b) Written Description of Premium Exchange Program Pursuant to 1993
Stock Option and Retention Stock Plan of Union Pacific
Corporation.
12(a) Computation of Ratio of Earnings to Fixed Charges for the Three
Months Ended September 30, 1999.
12(b) Computation of Ratio of Earnings to Fixed Charges for the Nine
Months Ended September 30, 1999.
27 Financial data schedule.
(b) Reports on Form 8-K
On July 23, 1999, the UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the second quarter of 1999.
On October 21, 1999, UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the third quarter of 1999.
SIGNATURE
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 12, 1999
UNION PACIFIC CORPORATION
(Registrant)
/s/ James R. Young
------------------
James R. Young
Senior Vice President - Finance and Controller
(Chief Accounting Officer and
Duly Authorized Officer)
EXHIBIT INDEX
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT INDEX
Exhibit No. Description of Exhibits Filed with this Statement
10(a) Executive Stock Purchase Incentive Plan of Union Pacific
Corporation.
10(b) Written Description of Premium Exchange Program Pursuant to 1993
Stock Option and Retention Stock Plan of Union Pacific
Corporation.
12(a) Computation of Ratio of Earnings to Fixed Charges for the Three
Months Ended September 30, 1999.
12(b) Computation of Ratio of Earnings to Fixed Charges for the Nine
Months Ended September 30, 1999.
27 Financial Data Schedule.