1
EXHIBIT 13
Pages 4 through 53, inclusive, of Union Pacific's Annual Report to Stockholders
for the year ended December 31, 1997, but excluding photographs set forth on
pages 4 through 17, none of which supplements the text and which are not
otherwise required to be disclosed in this Annual Report on Form 10-K.
AN UPDATE ON
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THE MERGER
Shorter routes, faster transit times, better on-time performance, expanded
single-line service, more efficient traffic flows and specialized use of
parallel routes were some of the many improvements and benefits Union Pacific
outlined when it first announced the historic merger with Southern Pacific.
Nearly 18 months after the merger was approved, the Railroad is beginning to
realize some of those benefits as it works its way through the congestion
issues. The information below and on the facing page provides a snapshot of key
merger activities for 1997.
COMPUTER SYSTEMS
From the outset, the efficient transfer of car and equipment information to
Union Pacific's Transportation Control System (TCS) was identified as a
keystone in providing customers with merger-enhanced service and operating
efficiencies. These cutovers were given top priority, with scheduling
accelerated to complete three of them by the end of 1997: the Denver and Rio
Grande Western territory; the Cotton Belt, running from St. Louis through
Texas; and the highly complex SP-East line that extends from New Mexico east
through the Texas-Louisiana Gulf Coast. The final cutover is set for this
spring and will link operations along the West Coast's Interstate 5 Corridor
with the remainder of the Sunset Route, which runs from Los Angeles through
Houston to New Orleans.
CAPITAL INVESTMENTS
In 1997, the Railroad's $2.0 billion capital program - including almost $500
million of merger-related investments-focused on boosting freight car quality,
increasing the locomotive fleet, expanding rail and yard capacity and improving
overall system quality.
HUB-AND-SPOKE
To achieve greater flexibility in moving trains and to provide maximum manpower
utilization, the Railroad and its labor unions initiated the hub-and-spoke
concept on certain areas of the rail system during the latter part of the
year. With hub-and-spoke, a major terminal is designated an operational "hub
of the region, and lines leading in and out of that hub are the "spokes."
Train crews can work any of those runs and return to a permanent home terminal
at the hub. (For further details see page 10.)
(One photograph, not incorporated by reference - see prefacing comment on
Exhibit 13 Cover Page.)
4 Merger Update
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Map Description - Page 5
One page white map of Continental United States, starting at the eastern border
of Illinois and continuing westward, on a light grey background.
Symbols and colored lines marking the location of capital investment projects,
Transportation Control System cutover dates and location of operational hubs
created by hub-and-spoke labor agreements are indicated on the map as follows:
Capital Investment projects:
Roseville, California Yard
Livonia, Louisiana Classification Yard
Marion, Arkansas Intermodal Facility
Kansas Pacific Route
Transportation Control System cutover dates:
Denver and Rio Grande Western Territory - May 1, 1997
The Cotton Belt - August 1, 1997
Southern Pacific-East Line - December 1, 1997
Interstate 5 Corridor - May 1, 1998
Operational hubs created by hub-and-spoke labor agreements:
Roseville, California
Salt Lake City, Utah
Denver, Colorado
Salina, Kansas
Little Rock/Pine Bluff, Arkansas
Longview, Texas
Houston, Texas
Other towns and track lines indicated on the map are for reference purposes.
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[PHOTO]
(One photograph, not incorporated by reference - see prefacing comment on
Exhibit 13 Cover Page.)
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UNION PACIFIC RAILROAD
Heading into 1997, Union Pacific Railroad was singularly focused on the
implementation of its historic merger with Southern Pacific, one that we believe
will bring about new levels of operational and customer service and significant
gains in quality and productivity. But unexpected crew shortages and track
maintenance on SP lines, increased demand, derailments, severe weather
conditions and congestion in the major Texas/Mexico gateways prior to
privatization of the Mexican railroad system caused significant congestion in
the latter part of the year, and had an adverse impact on the Railroad's 1997
financial and operating results.
Union Pacific Railroad, including the full-year effects of the SP merger,
realized net income of $620 million, compared to last year's $871 million, on a
pro forma basis. Carloadings declined approximately 4 percent compared to 1996.
Our service interruptions also negatively affected the Railroad's operating
ratio, which increased to 87.4, compared to 83.5 last year, on a pro forma
basis. As the many efficiencies created by the implementation of the SP merger
begin to take hold, however, the Railroad expects to improve service and
customer satisfaction, as well as lower its operating ratio.
COMMODITY RESULTS FOR 1997
The overall decline in carloadings reflected the congestion the Railroad
experienced in the latter part of the year. However, the Railroad's traffic
volume and revenue in autos increased slightly in 1997, and there was a
continued increase in carloads in and out of Mexico. The Railroad also completed
construction projects for 1998 business from Ford's new vehicle mixing center in
Kansas City, including building facilities in San Antonio and Amarillo, Texas
and Santa Rosa, California.
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Operating Revenues (millions) $9,981 $7,680 $6,326
- --------------------------------------------------------------------------------
Operating Income (millions) $1,253 $1,602 $1,384
- --------------------------------------------------------------------------------
Carloadings (thousands) 8,453 6,632 5,568
- --------------------------------------------------------------------------------
Operating Ratio (%) 87.4 79.1 78.1
- --------------------------------------------------------------------------------
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
Review of Operations 7
5
THE RAILROAD CONTINUES TO HIRE EMPLOYEES, EXPAND ITS LOCOMOTIVE FLEET AND INVEST
CAPITAL TO ENHANCE OPERATIONS.
Volume fell slightly in the petrochemical business, led by declines in
liquid and dry chemicals, LP gas, petroleum and phosphate rock. A 5 percent
increase in plastics, joined by a 4 percent gain in fertilizer and a 2 percent
increase in soda ash, provided a partial offset.
Through the SP merger, the Railroad is positioned to offer intermodal
customers improved delivery schedules and service on critical routes, including
northern California to Chicago and Los Angeles to Kansas City. The Railroad also
has picked up a significant amount of electronics business in and out of Mexico
and from southern California ports. For the year, intermodal business was
essentially unchanged.
The Railroad made a number of business investments in 1997 to improve
service and delivery capabilities with its grain customers -- upgrading
facilities, advancing rail car technology, improving tracks and expanding
computer systems. These steps, coupled with the development of business
partnerships with customers, are aimed at putting the Railroad in a much
stronger position to serve its customers and overcoming the 9 percent drop in
grain business from last year's level.
Coal tonnage in 1997 was relatively flat compared to last year, while on
average, nearly 24 trains a day came out of the Powder River Basin, with
additional trains originating from Colorado and Utah. To make its hauls more
efficient, the Railroad is now running more than 30 percent of its coal trains
with distributed power, which allows longer trains by using evenly distributed
locomotive placement. It is also pursuing an aggressive capital campaign to
increase capacity along major coal corridors.
BUSINESS WITH MEXICO
Revenues from Mexican traffic were off slightly compared to last year, due
mostly to a decline in agricultural shipments. However, volume in the
automotive, energy, industrial products and intermodal segments increased, and
despite service delays, the Railroad had record border crossings at Laredo,
Texas. The Railroad was also part of a consortium with Grupo Mexico and Grupo
ICA that won a 50-year concession to operate the Pacific-North Railway line of
Mexico. The partners in the consortium have established a stand-alone Mexican
corporation to manage and operate this railroad.
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
8 Review of Operations
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(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
EXPEDITED SERVICE
With the implementation of the merger, the Railroad was able to begin providing
intermodal customers with expedited service in key corridors. Following are
three examples of that service:
* Midwest-California: restructured intermodal service connecting Chicago, St.
Louis and Kansas City with northern California. Service started March 1997.
* Interstate 5 Corridor: first-ever dedicated intermodal trains between Los
Angeles and Seattle, providing third-morning deliveries in both cities.
Service began June 1997.
* Sunset Route: entirely redesigned Southern Pacific's intermodal services
connecting Memphis, New Orleans, Houston and San Antonio with El Paso,
Tucson, Phoenix and southern California. Service begins June 1998.
Review of Operations 9
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THE RAILROAD, ALONG WITH ITS LABOR UNIONS AND FEDERAL OFFICIALS, INSTITUTED A
NEW SYSTEM TO A MONITOR SAFETY PROGRESS.
LABOR AGREEMENTS
This past year, members of the operating unions around the Railroad system
ratified unique hub-and-spoke agreements, replacing multiple seniority districts
and multiple collective bargaining pacts. The hub-and-spoke concept allows
engineers, conductors and brakemen to operate trains on all tracks in and out of
major rail centers, whereas traditional labor agreements only allow train crew
members to operate over one line in and out of major rail centers. Currently,
agreements have been ratified at seven locations: Salt Lake City, Denver,
Salina, Houston, Longview, North Little Rock/Pine Bluff and Roseville. These
agreements promise to increase flexibility in train crew assignments and will
help the Railroad provide merger-related service improvements to its customers.
The remainder of the agreements are expected to be finalized in 1998.
SEVERE DIFFICULTIES THROUGHOUT THE SYSTEM
The Railroad's operations and revenues suffered as a result of system-wide
congestion in the latter part of the year. To address the congestion problems,
on October 1 the Railroad presented its Service Recovery Plan to the federal
government's Surface Transportation Board (STB).
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
10 Review of Operations
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(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
The Railroad is currently focusing on lowering car inventory, reducing
congestion, increasing terminal flow and accelerating mainline velocity. Key
steps aimed at meeting these goals include:
* hiring of nearly 3,500 new employees, including 1,000 train and engine
service employees;
* forging historic union agreements that will allow critical hub-and-spoke
operations across the network;
* implementing UPRR's Transportation Control System across the 35,000-mile
system;
* instituting directional running on lines radiating from Houston;
* adding new locomotives; and
* rerouting trains around congested yards by using smaller satellite
facilities for switching.
The STB held two hearings during the latter part of 1997 to assess progress
of the Railroad's Plan. An Emergency Service Order issued by the STB allows it
to monitor the Railroad's improvements.
The Railroad also has joined with its unions and the Federal Railroad
Administration in implementing the Safety Assurance and Compliance Program that
is designed to address such fundamental operating issues as crew management,
employee fatigue and training. The initiatives grew out of several serious
accidents last year. Unfortunately, these accidents overshadowed the fact that
the number of reportable injuries, grade crossing accidents and train
derailments were all reduced substantially over the last five years.
Review of Operations 11
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WITH THE HELP OF A FOCUSED TEAM OF EMPLOYEES, OVERNITE IMPROVED CUSTOMER SERVICE
LEVELS AND RAISED ON-TIME DELIVERY TO 96 PERCENT.
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
Review of Operations 12
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OVERNITE TRANSPORTATION
In 1997, Overnite Transportation completed a dramatic turnaround, recording net
income of $24 million before goodwill, compared to a net loss of $23 million
before goodwill in 1996. Its operating ratio also improved to 96.8 from 105.0
last year.
FOCUSED EMPLOYEE INVOLVEMENT
Overnite restored its position as a leader in the less-than-truckload (LTL)
industry by aggressively engaging its 12,000 employees in four critical areas of
the business: service quality, cost control, profitable revenue growth and yield
improvement.
A company-wide program focused on raising service levels and delivering
shipments to customers on time and damage free. Overnite also instituted
management development sessions, upgraded the sales force and intensified its
training, and created revenue enhancement teams.
To generate more usable data, Overnite introduced a sophisticated tracking
system that improved its ability to gather and analyze sales and operating
information on each of its more than 100,000 customers, and produce up-to-date
profitability status reports of each service center. The Company also placed a
shipment tracking system, its Rate EDGE pricing system and other key tools on
its website to provide customers with fast, convenient information.
OPERATIONAL CHANGES
In a bold move, Overnite tightened transit times on the majority of its shipping
lanes -- over 13,000 routes -- through its Lane Enhancement Action Plan (LEAP),
making its number of one- and two-day service routes unsurpassed in the
industry. Overnite then launched Quantum LEAP, which uses sleeper teams to
provide three- and four-day service to and from the West Coast from the Midwest
and the East Coast.
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Operating Revenues (millions) $ 946 $ 961 $ 976
- --------------------------------------------------------------------------------
Operating Income (Loss)(millions) $ 10 $ (68) $ (49)
- --------------------------------------------------------------------------------
Operating Ratio (%)[a] 96.8 105.0 103.0
- --------------------------------------------------------------------------------
[a] Excludes goodwill amortization.
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
Review of Operations 13
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At the same time, Overnite significantly improved its on-time delivery --
consistently maintaining a 96 percent level throughout the year -- and reduced
freight damage and shortage claims by 25 percent.
BUSINESS SEGMENTS
In 1997, Overnite focused on growing profitable revenue on two fronts. Through
the growth of its small business segment, Overnite was able to strengthen its
customer base. Sales promotions, employee training, the development of an inside
sales department and driver-customer contact all contributed to a 29 percent
revenue growth in this sector.
Overnite's philosophy with large customers was to build steady, long-term
growth and create working partnerships. To that end, Overnite instituted a yield
improvement strategy, which shares vital cost-related information with
customers; dedicated additional personnel to these major accounts, in some cases
putting them directly on site; and started a Customer Advisory Council that
meets periodically to discuss service quality levels and new ideas for improving
business operations.
With these actions, the Company was able to increase customer satisfaction,
reduce costs through improved shipment planning, and in many cases improve
profitability without raising rates.
EXPANSION
Overnite also increased its traffic in 1997 by introducing or expanding
ancillary high-yield businesses, such as Cross Border and International
Services, Trade Show and Guaranteed Transportation Solutions. These segments
provide Overnite higher margin revenue and complement its existing network of
lanes and service centers.
Renewed profitability allowed Overnite to expand for the first time in
three years, as 11 service points were added in Texas, providing direct service
to more than 95 percent of the state.
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
14 Review of Operations
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THROUGH THE GROWTH OF ITS SMALL BUSINESS SEGMENT, OVERNIGHT STRENGTHENED ITS
CUSTOMER BASE; WITH LARGE CUSTOMERS, CREATING WORKING PARTNERSHIPS WAS A KEY TO
SUCCESS.
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
Review of Operations 15
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UNION PACIFIC TECHNOLOGIES
In 1997 -- for the 10th consecutive year -- Union Pacific Technologies continued
its track record of delivering sophisticated products and services to the Union
Pacific companies and expanding its role in the commercial marketplace.
INTERNAL BUSINESS
The key focus for Technologies is its ongoing support of the Union
Pacific-Southern Pacific merger. Working with the Railroad's Information
Technologies Department, UP Tech implemented three regional cutovers of the
Transportation Control System (TCS) on the SP system, with completion of the
fourth scheduled for this spring.
At the same time, Technologies has been updating TCS to be Year 2000
compliant, which is scheduled for completion by the fourth quarter of 1998.
Major work has begun on network optimization tools that the Company believes,
when linked to TCS, will improve the Railroad's ability to manage business
volumes, service schedules and resources effectively.
UP Tech has been contributing to Overnite's successes by providing key
staff and technical support for new financial and human resources systems.
Technologies also is involved in the development of software to provide improved
linehaul operations.
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
16 Review of Operations
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COMMERCIAL BUSINESS
Technologies has begun the process of implementing the Transportation Control
System (TCS) on the English, Welsh, and Scottish Railway (EWS) in the United
Kingdom. This multi-year effort represents UP Tech's first major European
venture and will help the EWS consolidate customer service operations, schedule
and track the movement of cars, and exchange information more easily with its
customers.
Expanding its role in Mexico, UP Tech is providing a Spanish version of TCS
to the first two concessionaires of the Mexican Railway privatization effort,
while still supporting the state-owned Ferrocarriles Nacionales de Mexico.
Technologies has also been making significant investments in TCS,
standardizing all versions for domestic and international customers, which will
vastly improve its ability to bring new products to market. In addition, work is
under way to improve the user interaction with graphic display and new decision
support capabilities.
Shipment Management Services, which tracks both rail and truck shipments
against predetermined schedules, has continued to grow as more customers have
recognized the value of accurate information in support of the supply chain
management process. Technologies is introducing Internet access to shipment
information this spring.
THIS YEAR UNION PACIFIC TECHNOLOGIES IMPLEMENTED THREE TRANSPORTATION CONTROL
SYSTEM CUTOVERS ON THE SOUTHERN PACIFIC RAIL NETWORK AND EXPANDED ITS COMMERCIAL
BUSINESS.
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)
Review of Operations 17
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FINANCIAL REVIEW
CONSOLIDATED RESULTS OF OPERATIONS
This review and the accompanying charts should be read with the financial
statements, notes and supplementary information.
CORPORATE REORGANIZATION
Over the past three years, Union Pacific Corporation (UPC or the Corporation)
completed several strategic transactions that refocused the Corporation on its
core transportation operations.
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY (CNW) - In April 1995, UPC
acquired the remaining 71.6% of CNW's outstanding common stock not previously
owned by UPC for $1.2 billion. The acquisition of CNW was accounted for as a
purchase and CNW's financial results were consolidated with UPC beginning in May
1995.
NATURAL RESOURCES DIVESTITURE - In July 1995, UPC's Board of Directors approved
a formal plan to dispose of its oil, gas and mining business by an initial
public offering (IPO) of 17% of the common stock of Union Pacific Resources
Group Inc. (Resources) followed by a distribution of UPC's remaining interest in
Resources to the Corporation's stockholders on a tax-free, pro-rata basis (the
Spin-Off) (see Note 3 to the Financial Statements). In October 1995, Resources
completed the IPO, and after UPC's receipt of a favorable Internal Revenue
Service ruling as to the tax-free nature of the Spin-Off in September 1996, UPC
completed its divestiture of Resources. The Corporation's share of Resources'
financial results through September 1996 are presented as discontinued
operations in the Corporation's consolidated financial statements.
SOUTHERN PACIFIC RAIL CORPORATION (SOUTHERN PACIFIC OR SP) ACQUISITION - In
September 1995, UPC acquired 25% of Southern Pacific, and in September 1996, it
acquired the remaining 75% after receipt of a favorable decision from the
Surface Transportation Board of the U.S. Department of Transportation (STB) on
the Corporation's acquisition of SP. The aggregate Southern Pacific purchase
price was $4.1 billion ($2.5 billion in UPC common stock and $1.6 billion in
cash). The acquisition of Southern Pacific was accounted for as a purchase. The
statement of consolidated income includes equity income equal to 25% of Southern
Pacific's net income through September 10, 1996, reflecting UPC's ownership of
Southern Pacific during such period and 100% of Southern Pacific's net income
thereafter. Southern Pacific's results were fully consolidated with the
Corporation's results effective October 1, 1996 (see Note 2 to the Financial
Statements).
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 and providing several
North/South corridors to key Mexican gateways.
MEXICAN RAILWAY CONCESSION - During 1997, the Corporation's major subsidiary,
Union Pacific Railroad Company (UPRR and collectively with SP's rail operations,
the Railroad), 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 Railroad
holds a 13% ownership share and has accounted for its interest by the equity
method. The consortium expects to assume operational control of both lines in
early 1998.
1997 YEAR IN REVIEW
The Corporation began 1997 with the primary goal of integrating Southern
Pacific's rail operations with those of UPRR. Although operational difficulties
began in the third quarter, the integration is expected to be substantially
complete in 1999.
In the third quarter, congestion began to adversely impact operations and
earnings. System congestion started in the Gulf Coast area and spread throughout
the system as the Railroad shifted resources to help
18 Financial Review
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STOCK PRICE
PER SHARE AT YEAR-END
UNION PACIFIC CORPORATION
Dollars
[CHART]
93 94 95 96* 97
- ------ ------ ------ ------ ------
$62.63 $45.38 $66.00 $84.69 $62.63
* Year-end value of Resources shares distributed in the Spin-Off
BOOK VALUE
UNION PACIFIC CORPORATION
Dollars Per Share
[CHART]
93 94 95 96 97
- ------ ------ ------ ------ ------
23.81 24.92 30.96 33.35 33.30
mitigate the problem in the Gulf Coast. Factors leading to the congestion
included, among other things, crew shortages and necessary track maintenance on
SP lines, increased demand, washouts due to severe weather, derailments and
congestion in the major Texas/Mexico gateways prior to privatization of the
Mexican railroad system.
To restore service to acceptable levels, the Railroad implemented a Service
Recovery Plan (the Plan). 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. The cost of the congestion-related problems in 1997 was
approximately $450 million, after tax, which reflected the combined effects of
lost business, higher costs associated with congestion, costs associated with
implementation of the Plan, alternate transportation and customer claims.
Although progress has been made in improving service and recovering lost
business, the Railroad expects some adverse impact of these problems in 1998
financial results.
Overnite Transportation Company (Overnite), the Corporation's interstate
trucking company specializing in less-than-truckload (LTL) shipments, returned
to profitability in 1997, having successfully realigned its operations to be
more competitive in the current trucking industry environment. Net income for
1997 was $24 million (excluding goodwill amortization).
Also in 1997, UPC adopted a plan to sell its investment in Skyway Freight
Systems, Inc. (Skyway), a wholly-owned subsidiary engaged in contract logistics
and supply chain management. In connection with the planned sale, UPC recognized
a $40 million after tax loss.
1997 COMPARED TO 1996
CONSOLIDATED RESULTS
The Corporation reported net income of $432 million ($1.76 per basic share and
$1.74 per diluted share) in 1997 compared to $904 million ($4.17 per basic share
and $4.14 per diluted share) in 1996, which included Resources as discontinued
operations.
RESULTS OF CONTINUING OPERATIONS
CONSOLIDATED - In 1997, the Corporation reported income from continuing
operations of $432 million ($1.76 per basic share and $1.74 per diluted share),
compared to 1996 results of $733 million ($3.38 per basic share and $3.36 per
diluted share). This decline in earnings is the result of congestion and
related service issues that arose in the third quarter.
Operating revenues increased $2.29 billion (26%) to $11.08 billion in 1997,
reflecting increased volumes at the Railroad (the result of the full-year effect
of the Southern Pacific merger, which was offset by declines resulting from
congestion and related service problems and slightly lower volumes at Overnite.
Operating expenses increased $2.57 billion (35%) to $9.83 billion in 1997,
primarily the result of the addition of Southern Pacific's operations,
congestion costs at the Railroad and inflation. These factors resulted in
increases in salaries, wages and employee benefits ($906 million); equipment and
other rents ($454 million); fuel and utility costs ($252 million); purchased
services ($202 million); and materials and supplies ($91 million). Depreciation
charges rose $281 million, primarily due to the addition of SP and UPC's
continued reinvestment in its equipment and rail infrastructure. Other costs
increased $387 million, primarily related to the service and congestion issues
($138 million); personal injury costs ($78 million); other taxes ($43 million);
repair and maintenance expenses ($27 million); and casualty costs ($18 million).
Financial Review 19
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CARLOADINGS
UNION PACIFIC RAILROAD
Thousands
93 94 95 96 96 97
- ------ ------ ------ ------ ------ ------
4,619 4,991 5,568 8,814* 6,632 8,453
* Carloadings on a pro forma basis
COMMODITY
REVENUE DIVERSITY
UNION PACIFIC RAILROAD
[PIE CHART]
Energy 19.7%
Chemical 17.8%
Automotive 9.8%
Agriculture 14.6%
Intermodal 17.8%
Industrial Products 20.3%
Consolidated operating income declined $280 million (18%) to $1.25 billion
in 1997, the result of a $349 million decrease at the Railroad, partially offset
by improved results at Overnite. Other income declined $45 million, primarily
attributable to the loss recognized in connection with the Corporation's
investment in Skyway. Interest expense increased $104 million, the result of
higher debt levels associated with the Southern Pacific acquisition. Income from
continuing operations as a percentage of operating revenues declined to 3.9%
from 8.3% in 1996. Return on average common stockholders' equity dropped to 5.3%
in 1997 from 12.4% a year ago, reflecting the impact of the service and
congestion issues.
RAILROAD - The following discussion is based upon pro forma 1996 results which
assumes the SP acquisition occurred on January 1, 1996:
The Railroad earned $620 million in 1997 compared to $871 million a year
ago. This decline in earnings is the result of the service and congestion issues
that arose in the third quarter.
Operating revenues were 1% lower in 1997. Average commodity revenue per car
increased 3% resulting from improved traffic mix, but carloadings declined 4%.
Offsetting increases and decreases in commodity revenues occurred in some areas,
as noted below:
- --------------------------------------------------------------------------------
COMMODITY REVENUE % Change Versus
Millions of Dollars 1997 Pro Forma 1996
- --------------------------------------------------------------------------------
Automotive....................... $ 953 1.9
Agricultural..................... 1,419 (4.9)
Intermodal....................... 1,728 0.9
Chemicals........................ 1,728 (2.2)
Energy........................... 1,913 0.9
Industrial....................... 1,972 (2.0)
------ ----
Total........................... $9,713 (1.1)
- --------------------------------------------------------------------------------
Operating income declined $418 million (25%) to $1.25 billion in 1997,
while the operating ratio increased from 83.5 to 87.4 in 1997.
Revenue Summary (Pro Forma) - Carloadings for the year were down 4% from 1996
loads. Declines were principally caused by traffic congestion and related
service problems, implementation of the Service Recovery Plan and the first
quarter 1997 sale of the Duck Creek North line. Overall, average revenue per car
(ARC) was up $35 to $1,149 for the year, as a result of improved traffic mix.
Agricultural Products - Carloadings fell 9% and related commodity revenue fell
$73 million (5%) to $1.42 billion. These decreases reflected a reduction in base
business carloadings in most lines of business, the result of slow cycle times
on wheat and corn shuttles as well as congestion problems and related equipment
shortages. Strong worldwide wheat competition in the first half of 1997 hurt
wheat exports and contributed to a 13% decline in wheat carloadings. Meals and
oils reported a 5% increase in volume, the result of strong export markets in
Mexico. Average commodity revenue per car rose 4% resulting from more
longer-haul export traffic and higher rates from maintaining a car inventory
available for grain customers.
Automotive - Commodity revenue grew 1.9% to $953 million as carloadings
increased 3% on continued auto industry sales growth. Strong import and domestic
demand caused finished vehicle carloadings to increase 3%, in spite of
industry-wide equipment shortages and unscheduled auto plant shutdowns. Auto
parts volumes grew by 2%, as strong Mexico volumes exceeded congestion-related
diversions of traffic. Average commodity revenue per car declined $10 or 1%.
Chemicals - Carloadings were flat while commodity revenue fell 2% to $1.73
billion in 1997. Strong market demand could not be met due to the system
congestion and equipment shortages. This resulted in some diversion of business
to alternate transportation modes and competitors. Average commodity revenue per
car fell $32 or 2%, due to strong competitive pressures and a shift in the
business mix (increased short-haul business of low-ARC products).
20 Financial Review
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TONNAGE BY CATEGORY
OVERNITE TRANSPORTATION
[PIE CHART]
Less-Than-Truckload 93.4%
Truckload 6.6%
REVENUE PER
HUNDREDWEIGHT
OVERNITE TRANSPORTATION
Dollars
[CHART]
93 94 95 96 97
- ------ ------ ------ ------ ------
9.28 9.82 9.55 9.97 11.24
Energy - Commodity revenue (primarily coal) was essentially flat at $1.91
billion in 1997, while carloadings fell 2%. Average commodity revenue per car
increased 3%, driven by higher-rated business and an improved business mix.
Volume decreases reflected the impact of congestion on the ability of the
Railroad to meet both domestic and foreign utilities' demand for low-sulfur,
Powder River Basin (PRB) coal. Severe weather, derailments in key corridors and
congestion had a significant impact on PRB train cycles in 1997. During the
worst of the congestion, daily trains out of the PRB averaged only 21 trains per
day versus 25 trains per day prior to the congestion and 24 trains per day in
1996.
Industrial Products - Carloadings decreased 15% and commodity revenue declined
2% to $1.97 billion. Volume decreases primarily reflected the impact of
congestion and the first quarter 1997 sale of the Duck Creek North line. The
largest decline was seen in metallic minerals (55%), due to reduced iron ore
shipments associated with the Duck Creek North line and smaller decreases in
most other industrial product lines. Average commodity revenue per car grew 16%,
reflecting a longer average length of haul due to the above-mentioned line sale.
Intermodal - Commodity revenue was flat at $1.73 billion, as traffic also
remained essentially unchanged. Strong market demand and new business
opportunities were offset by congestion issues later in the year, including the
temporary suspension of business in specific areas as part of the Service
Recovery Plan, industry-wide equipment shortages and related diversions to truck
and other railroads. Average commodity revenue per car remained flat compared to
1996.
Expense Summary (Pro Forma) - Operating expenses rose $286 million (3%) to $8.73
billion in 1997, primarily from congestion costs and inflation, offset somewhat
by merger benefits and cost containment programs. Salaries, wages and employee
benefits increased $50 million, the result of higher recrew rates due to
congestion in the latter part of 1997, one-time merger severance payments and
wage inflation from new national labor agreements. This was offset by reduced
volumes and staff levels from merger-related severance and productivity and
other gains. Equipment and other rent expense increased $139 million from
longer congestion-related car cycle times and incremental costs associated with
providing grain cars, more operating leases and price increases, which were
somewhat offset by reduced volumes and merger efficiencies. Fuel and utility
costs rose $3 million, the result of a slight increase in fuel prices (net of
fuel hedging), slightly offset by a reduced fuel consumption rate and lower
volumes. Depreciation charges rose $72 million, primarily reflecting the
Railroad's continued reinvestment in its equipment and rail infrastructure.
Other miscellaneous costs increased $40 million, primarily reflecting
congestion costs including alternate transportation and customer claims, as
well as one-time merger costs. These were somewhat offset by spending
reductions and merger benefits.
Other Income and Expense Summary (Pro Forma)- Other income and expense, net,
improved $48 million to $301 million, primarily the result of refinancing
activities, lower interest rates and higher asset sales - including real estate,
rail line and other assets.
TRUCKING - Throughout 1997, Overnite continued to benefit from several strategic
initiatives implemented in 1996 to better compete in the current trucking
industry environment. Actions taken included workforce reductions, service
center consolidations, centralization of the linehaul management process and
pricing initiatives targeting Overnite's lowest margin customers. As a result,
Overnite reported a net income of $4 million in 1997 compared to a net loss of
$43 million in 1996. Results for both periods included goodwill amortization of
$20 million.
Overnite's operating revenues decreased $15 million (2%) to $946 million as
a 13% decrease in volumes more than offset a similar increase in average
Financial Review 21
19
REVENUES PER EMPLOYEE
UNION PACIFIC CORPORATION
$ Thousands
93 94 95 96 97
- ------ ------ ------ ------ ------
136.3 143.0 151.4 160.3 168.9
prices resulting from Overnite's pricing initiatives. Lower volumes were driven
by a 10% decrease in LTL tonnage and a 38% decrease in truckload tonnage.
Operating expenses decreased $93 million to $936 million. Salaries, wages and
employee benefit costs decreased $51 million, reflecting improved productivity,
workforce reductions and lower volumes, partially offset by wage and benefit
inflation. A shift from the use of intermodal rail service to contract linehaul
carriers in 1997 caused a $16 million decrease in purchased services. Fuel and
utility costs declined $10 million, driven by a 7% decrease in fuel prices, a
13% volume-related reduction in fuel consumption and improved fuel economy
resulting from an upgraded fleet. Overnite reported 1997 operating income of $10
million, compared to an operating loss of $68 million in 1996, while Overnite's
operating ratio (including goodwill amortization) decreased to 98.9 in 1997 from
107.0 in 1996.
CORPORATE SERVICES AND OTHER OPERATIONS - Expenses related to Corporate services
and other operations (consisting of corporate expenses, third-party interest
charges, intercompany interest allocations, other income and income taxes
related to the Corporation's holding company operations and the results of other
operating units) increased $28 million to $192 million in 1997. This increase
largely reflects the relocation of the corporate offices to Texas and the loss
recognized in connection with the planned sale of Skyway, offset by income
realized in connection with UPC's sale of three aircraft. Other operating units
reported a net operating loss of $1 million in 1997, no change from the
operating loss of $1 million reported in 1996.
1996 COMPARED TO 1995
CONSOLIDATED RESULTS
The Corporation reported net income of $904 million ($4.17 per basic share and
$4.14 per diluted share) in 1996 compared to $946 million ($4.62 per basic share
and $4.60 per diluted share) in 1995.
RESULTS OF CONTINUING OPERATIONS
CONSOLIDATED - In 1996, the Corporation reported income from continuing
operations of $733 million ($3.38 per basic share and $3.36 per diluted share),
compared to 1995 results of $619 million ($3.02 per basic share and $3.01 per
diluted share). This earnings improvement resulted primarily from continued
strong financial performance at the Railroad.
Operating revenues increased $1.30 billion (17%) to $8.79 billion in 1996,
reflecting increased volumes at the Railroad (the result of increased base
business, the addition of Southern Pacific volumes from October 1, 1996 and the
full-year effect of the CNW acquisition), slightly offset by lower volumes at
Overnite.
Operating expenses increased $1.11 billion (18%) to $7.25 billion in 1996.
The addition of Southern Pacific's fourth quarter 1996 operations, a full year
of CNW operations, base rail volume growth and inflation were the primary
factors causing increases in salaries, wages and employee benefits ($434
million); equipment and other rents ($190 million); materials and supplies ($92
million); purchased services ($81 million); casualty accruals ($48 million); and
other taxes ($16 million). Fuel and utility costs rose $216 million (38%), the
result of increased volumes at the Railroad and a 14% increase in fuel prices.
Depreciation charges rose $120 million, primarily due to the addition of
Southern Pacific and CNW properties and UPC's continued reinvestment in its
equipment and rail infrastructure. Repair and maintenance expenses decreased $66
million, reflecting the Railroad's more efficient maintenance practices,
improved equipment utilization and increased credits related to repairs of other
railroads' freight cars. Insurance costs decreased $17 million, principally
reflecting the refund of premiums associated with the liquidation of an
insurance company investment, slightly offset by Southern Pacific insurance
costs.
Consolidated operating income advanced $192 million (14%) to $1.53 billion
in 1996, the result of a $218 million improvement at the Railroad, partially
offset by weaker results at UPC's other businesses.
22 Financial Review
20
REVENUE TON-MILES
PER EMPLOYEE
UNION PACIFIC RAILROAD
$ Millions
93 94 95 96 97
- ------ ------ ------ ------ ------
7.66 8.21 8.82 9.40 8.68
Other income rose $41 million, principally reflecting higher gains on property
sales. Interest expense increased $51 million, the result of higher debt levels
associated with the CNW and Southern Pacific acquisitions, partially offset by
the favorable impact of the Resources' IPO dividend and debt refinancing
activities. Income from continuing operations as a percentage of operating
revenues remained unchanged from 1995 at 8.3%. Return on average common
stockholders' equity declined to 12.4% in 1996 from 16.5% a year ago, reflecting
the additional stock issued in connection with the Southern Pacific acquisition.
RAILROAD - The Railroad earned $940 million in 1996 compared to $867 million in
1995. Earnings improvements reflected base volume growth, the full-year effect
of the CNW acquisition and the addition of Southern Pacific's fourth quarter
1996 operations. Earnings from these acquisitions more than offset the
incremental interest costs incurred in 1996 associated with related acquisition
financings.
Operating revenues grew $1.35 billion (21%) to $7.68 billion in 1996. This
increase primarily relates to a $1.31 billion (22%) increase in commodity
revenue, reflecting the addition of Southern Pacific and CNW volumes, base
business growth and a 2% increase in average commodity revenue per car,
resulting from a longer average length of haul. Carloadings grew 19% (over one
million cars), detailed as follows:
Agricultural Products - Carloadings rose 13% and commodity revenue increased
$138 million (13%) to $1.22 billion. These increases reflect the addition of CNW
carloadings offset by a reduction in base business carloadings, the result of
low U.S. corn inventories, reduced export demand and the absence of a record
1995 grain harvest. Average commodity revenue per car was unchanged from 1995.
Automotive - Commodity revenue rose 20% to $767 million as carloadings increased
20% on continued auto industry sales growth and the addition of Southern Pacific
volumes. Finished autos and auto parts carloadings rose 16% and 28%,
respectively, reflecting strong Mexico business. Average commodity revenue per
car was unchanged from 1995.
Chemicals - Carloadings advanced 14% and commodity revenue increased $169
million (14%) to $1.34 billion, principally from the addition of Southern
Pacific volumes and increased base business sparked by growth in domestic
fertilizer shipments and a rise in automotive industry plastics demand. Average
commodity revenue per car was unchanged from 1995.
Energy - Commodity revenue (primarily coal) rose 26% to $1.63 billion in 1996,
driven by a 13% increase in carloadings and a 12% increase in average commodity
revenue per car. Volume increases reflected demand from both domestic and
foreign utilities for low-sulfur, Powder River Basin coal and the addition of
Southern Pacific volumes. The Railroad averaged 24 longer and heavier trains per
day out of the Powder River Basin in 1996 compared to 23 trains per day in 1995.
Average commodity revenue per car improvements resulted from a longer average
length of haul related to the CNW integration.
Industrial Products - Carloadings increased 26% and commodity revenue rose $287
million (28%) to $1.33 billion, principally resulting from the addition of
Southern Pacific and CNW volumes. Average commodity revenue per car grew 2%,
reflecting a longer average length of haul.
Intermodal - Commodity revenue rose 29% to $1.14 billion as a 26% increase in
carloadings - the result of new business, the addition of Southern Pacific and
CNW volumes and strengthening domestic intermodal demand - combined with a 2%
customer-mix-related increase in average commodity revenue per car.
Operating expenses rose $1.14 billion (23%) to $6.08 billion in 1996. The
addition of Southern Pacific's fourth quarter 1996 operations, a full year of
CNW operations, base rail volume growth and inflation were the primary factors
causing increases in
Financial Review 23
21
salaries, wages and employee benefits ($438 million); equipment and other rents
($188 million); materials and supplies ($92 million); purchased services ($79
million); casualty accruals ($53 million); and other taxes ($20 million). Fuel
and utility costs rose $211 million, the result of increased volumes and a 13%
increase in fuel prices (net of fuel hedging), slightly offset by an improved
fuel consumption rate. Depreciation charges rose $118 million, primarily
reflecting the addition of Southern Pacific and CNW properties and the
Railroad's continued reinvestment in its equipment and rail infrastructure.
Repair and maintenance expenses decreased $67 million, resulting from more
efficient maintenance practices, improved equipment utilization and increased
credits related to repairs of other railroads' freight cars. Insurance costs
decreased $16 million, principally due to the refund of premiums associated with
the liquidation of an insurance company investment, slightly offset by Southern
Pacific insurance costs.
Operating income improved $218 million (16%) to $1.60 billion in 1996,
while the operating ratio increased to 79.1 in 1996 from 78.1 last year. On a
pro forma basis, including Southern Pacific and CNW for a full year in both
periods, the operating ratio would have improved to 83.5 in 1996 from 84.2 in
1995. Interest expense increased $149 million, principally from higher debt
levels associated with Southern Pacific and CNW acquisition financings. Other
income increased $38 million, the result of increased real estate sales
activity.
TRUCKING - During 1996, Overnite implemented several strategic initiatives aimed
at better matching its operations to the current trucking industry environment.
Actions taken included workforce reductions, service center consolidations,
centralization of the linehaul management process and pricing initiatives
targeting Overnite's lowest margin customers. Nonetheless, aggressive pricing
from regional LTL and truckload carriers continued to impact Overnite's
operating results. For these reasons, Overnite reported a net loss of $43
million in 1996 compared to a net loss of $30 million in 1995. Results for both
periods included goodwill amortization of $20 million.
Overnite's operating revenues decreased $15 million (2%) to $961 million as
a 6% decrease in volumes more than offset a 4% increase in average prices
resulting from Overnite's pricing initiatives. Lower volumes resulted from a 3%
decrease in LTL tonnage and a 29% decrease in truckload volumes.
Operating expenses increased $4 million to $1.03 billion. Salaries, wages
and employee benefit costs decreased $8 million, reflecting workforce reductions
and lower volumes, partially offset by wage and benefit inflation and a $3
million workforce reduction charge. The use of intermodal rail service and
contract linehaul carriers in the first half of 1996 caused a $7 million
increase in purchased services. Fuel costs rose $5 million, driven by a 24%
increase in fuel prices that was partially offset by a 7% volume-related
reduction in fuel consumption. Overnite's operating loss grew $19 million to $68
million in 1996, while Overnite's operating ratio (including goodwill
amortization) increased to 107.0 in 1996 from 105.0 in 1995.
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 $54 million to $164 million in 1996. This
decrease largely reflects lower Corporate interest costs resulting from the
utilization of Resources' IPO dividend to reduce debt levels. Other operating
units generated an operating loss of $1 million in 1996 compared to operating
income of $6 million in 1995.
RESULTS OF DISCONTINUED OPERATIONS
Resources reported net income of $207 million through September 26, 1996 (the
record date for the Spin-Off), compared to $351 million for the full year of
1995. As a result of Resources' October 1995 IPO
24 Financial Review
22
CASH FROM CONTINUING
OPERATIONS
UNION PACIFIC CORPORATION
$ Millions
93 94 95 96 97
- ------ ------ ------ ------ ------
975 1,079 1,454 1,657 1,600
CAPITAL INVESTMENTS
UNION PACIFIC CORPORATION
$ Millions
93 94 95 96 97
- ------ ------ ------ ------ ------
899 876 1,058 1,360 2,101
and the subsequent Spin-Off, UPC recognized $171 million (approximately 83%) of
Resources' net income through September 1996 in discontinued operations. The
Corporation's 1995 results included 100% of Resources' net income to the date of
the IPO and approximately 83% of Resources' net income thereafter in
discontinued operations. These percentages reflected the Corporation's ownership
of Resources during the indicated periods.
Resources' 1996 results benefitted from higher hydrocarbon sales volumes
and prices, offset by a volume-related increase in exploration and production
costs, additional general and administrative expenses related to operating
Resources as a stand-alone company and higher interest charges resulting from
debt incurred in connection with Resources' IPO dividend to UPC.
CASH FLOWS, LIQUIDITY AND
FINANCIAL RESOURCES
In 1997, cash from continuing operations was $1.60 billion, compared to $1.66
billion in 1996. This $60 million decrease primarily reflects lower earnings and
additional merger-related spending partially offset by a higher proportion of
non-cash expenses included in net income.
Cash used in investing activities was $1.77 billion in 1997 compared to
$1.09 billion in 1996. This increase primarily reflects higher capital
expenditures ($741 million), reflecting the capital spending requirements
resulting from the Southern Pacific acquisition.
Cash provided by financing activities was $71 million in 1997 compared to
cash used by financing activities of $602 million in 1996. This change resulted
from increased debt levels as a result of the fourth quarter losses at the
Railroad. The ratio of debt to capital employed increased to 50.9% at December
31, 1997 compared to 49.4% a year ago. In the event congestion and related
service problems continue to impact earnings, the Corporation's cost of
borrowing may be adversely affected.
In December 1996, the Corporation completed the registration of $1 billion
of securities for public issuance. Issuances under the registration statement
are expected to occur during 1998 and 1999, and will be used for general
corporate purposes, including repayment of borrowings, working capital
requirements and capital expenditures.
At year-end 1997, the Corporation had $2.8 billion of outstanding credit
facilities expiring in 2001, of which $0.9 billion was available for use.
OTHER MATTERS
FEDERAL RAILROAD ADMINISTRATION (FRA) REVIEW - The Railroad suffered a number of
severe accidents in 1997. As a result of these incidents, the FRA reviewed the
Railroad's operations and made several recommendations, including creating a
joint committee of Railroad management, labor and the FRA to review and monitor
all aspects of safety, adding an executive position for safety reporting
directly to the President of the Railroad, creating a safety hotline (direct to
the Railroad's President), re-evaluating all existing training programs and
increasing the monitoring of train crew performance, crew fatigue and crew
scheduling. All such FRA proposals have been implemented by the Railroad. The
Railroad has also implemented a guaranteed time-off program for train and engine
employees.
The Railroad has established extensive safety initiatives focused on
improving safety in the workplace. Over the past five years, these initiatives
have significantly reduced the number of reportable injuries, lost work days and
grade crossing accidents.
STB PROCEEDINGS - In October 1997, the STB instituted a proceeding to
investigate rail service problems in the West. As a result of this proceeding,
UPRR regularly reports to the STB concerning the recent service problems and the
Service Recovery Plan. In late
Financial Review 25
23
LOCOMOTIVES AT YEAR-END
UNION PACIFIC RAILROAD
Locomotives
93 94 95 96 97
- ------ ------ ------ ------ ------
3,142 3,132 4,136 6,755 6,966
October, the STB issued an emergency service order, which imposed several
temporary measures designed, among other things, to allow the Texas Mexican
Railway Company (Tex Mex) to divert some traffic from UPRR in order to reduce
congestion on UPRR lines in Houston, Texas. The STB also directed UPRR to
suspend rail transportation service contract obligations of all shippers at
Houston that wish to route shipments over the Tex Mex instead of UPRR during the
period of the service order. On December 3, 1997, the STB opted to extend the
emergency service order until March 15, 1998 and expanded the order in certain
other respects. Unless UPRR is successful in recovering from the congestion and
related service problems, certain parties may request the STB to order UPRR to
take additional actions, including, among other things, further diversions of
traffic or the transfer of certain UPRR rail lines or other facilities to other
railroads.
PERSONAL INJURY - Over the past 10 years, work-related injuries have declined by
more than 10% annually, reflecting aggressive safety and training programs. In
addition, after several years of rising costs, the average settlement cost per
claim in 1997 has declined. Annual expenses for the Railroad's injury-related
events were $328 million in 1997 (which includes a full year of Southern
Pacific), $251 million in 1996 and $222 million in 1995. Compensation for
work-related accidents is governed by the Federal Employers' Liability Act
(FELA). Under FELA, damages are assessed based on a finding of fault through
litigation or on out-of-court settlements. The Railroad offers a comprehensive
variety of services and rehabilitation programs for employees who are injured at
work.
ENVIRONMENTAL COSTS - The Corporation generates and transports hazardous and
nonhazardous waste in its current and former operations, and is subject to
Federal, state and local environmental laws and regulations. The Corporation has
identified approximately 350 sites, including close to 60 sites currently on the
Superfund National Priorities List, at which it is or may be liable for
remediation costs associated with alleged contamination or for violations of
environmental requirements. Certain Federal legislation imposes joint and
several liability for the remediation of identified sites; consequently, the
Corporation's ultimate environmental liability may include costs relating to
other parties, in addition to costs relating to its own activities at each site.
A liability of $240 million has been accrued for future costs at all sites
where the Corporation's obligation is probable and where such costs can be
reasonably estimated; however, the ultimate cost could be lower or as much as
25% higher. The liability includes future costs for remediation and restoration
of sites, as well as for ongoing monitoring costs, but excludes any anticipated
recoveries from third parties. Cost estimates were based on information
available for each site, financial viability of other potentially responsible
parties (PRPs), and existing technology, laws and regulations. The Corporation
believes that it has adequately accrued for its ultimate share of costs at sites
subject to joint and several liability. However, the ultimate liability for
remediation is difficult to determine with certainty because of the number of
PRPs involved, site-specific cost sharing arrangements with other PRPs, the
degree of contamination by various wastes, the scarcity and quality of
volumetric data related to many of the sites, and/or the speculative nature of
remediation costs.
Remediation of identified sites previously used in operations, used by
tenants or contaminated by former owners required spending of $46 million in
1997 and $28 million in 1996. The Corporation is also engaged in reducing
emissions, spills and migration of hazardous materials, and spent $7 million and
$10 million in 1997 and 1996, respectively, for control and prevention, a
portion of which has been capitalized. In 1998, the Corporation anticipates
spending $60 million for remediation and $8 million for control and prevention.
In addition, in connection with the integration of UPRR and Southern Pacific
rail systems, UPC may spend up to $20 million in remediation costs related to
the closure of major Southern Pacific shops and facilities in 1998. The majority
of
26 Financial Review
24
FUEL CONSUMPTION RATE
UNION PACIFIC RAILROAD
Gallons per thousand gross ton-miles
93 94 95 96 97
- ------ ------ ------ ------ ------
1.44 1.41 1.38 1.39 1.43
the December 31, 1997 environmental liability is expected to be paid out over
the next five years, funded by cash generated from operations. Future
environmental obligations are not expected to have a material impact on the
results of operations or financial condition of the Corporation.
LABOR MATTERS - Approximately 90% of the Railroad's 52,000 employees are
represented by rail unions. Under the conditions imposed by the STB in
connection with the Southern Pacific acquisition, labor agreements between the
Railroad and the unions must be negotiated before the UPRR and Southern Pacific
rail systems can be fully integrated. To date, the Railroad has successfully
reached agreements with the shopcraft, carmen, clerical and maintenance of way
unions. The negotiations with the operating crafts are proceeding on schedule,
with seven hub-and-spoke agreements having been reached. Under the hub-and spoke
concept, all operating employees in a central "hub" are placed under a single
set of collective bargaining agreements with the ability to work on the "spokes"
running into and out of the hub. The terms of ratified and pending labor
agreements are not expected to have a material adverse effect on the
Corporation's results of operations.
Overnite continues to oppose the efforts of the Teamsters to unionize
Overnite service centers. Since year-end 1994, 59 of Overnite's 164 service
centers have received petitions for union elections. Where elections have been
held, 35 Overnite service centers voted against representation and two elections
remain unresolved. The employees of three service centers that previously voted
for union representation filed petitions with the National Labor Relations Board
(NLRB) to decertify the Teamsters as their union bargaining representative.
Nineteen service centers, representing approximately 12% of Overnite's
nationwide workforce, have voted for union representation, and the Teamsters
have been certified as the bargaining representative for such employees without
challenge by Overnite. Five other service centers, representing another 5% of
Overnite's nationwide workforce, have either voted for union representation or
it is unclear how such employees have voted. Such elections are currently being
challenged by Overnite before the NLRB or the Federal courts. Overnite has begun
negotiations with the Teamsters at the certified service centers.
INFLATION - The cumulative effect of long periods of inflation has significantly
increased asset replacement costs for capital-intensive companies such as the
Railroad and Overnite. As a result, depreciation charges on an
inflation-adjusted basis, assuming that all operating assets are replaced at
current price levels, would be substantially greater than historically reported
amounts.
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 by using 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.
Interest Rates - The Corporation manages its overall exposure to fluctuations in
interest rates by adjusting 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 each as debt matures or incremental borrowings are required.
The Corporation also obtains additional flexibility in managing interest costs
and the interest rate mix within its debt portfolio by issuing callable fixed
rate debt securities.
Fuel - Over the past three years, fuel costs approximated 10% of the
Corporation's total operating costs. As a result of the significance of fuel
costs and the historical volatility of fuel prices, the Corporation periodically
uses swaps, futures and forward fuel contracts
Financial Review 27
25
DIVIDENDS DECLARED
UNION PACIFIC CORPORATION
$ Millions
93 94 95 96 97
- ------ ------ ------ ------ ------
315 341 353 371 423
to mitigate the risk of fuel price volatility. The intent of this program is to
protect the Corporation's operating margins and overall profitability from
adverse fuel price changes.
Sensitivity Analysis - UPC had a limited number of interest rate swaps and fuel
hedging contracts in place at year-end 1997 (see Note 4 to the Financial
Statements). If market interest rates changed by 5%, the related change in the
value of interest rate swaps would be less than $2 million. If fuel costs
changed by 10%, the related change in the value of fuel hedging contracts would
not have a significant impact (approximately $28 million) on the Corporation's
operating results.
ACCOUNTING PRONOUNCEMENTS - The American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities," effective for 1997, which clarifies the accounting for
environmental remediation liabilities. Adoption did not have a significant
impact on UPC's operating results or financial condition.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share," effective for 1997, which replaces
Accounting Principles Board Opinion No. 15, "Earnings Per Share." Basic earnings
per share are calculated on the weighted-average number of common shares
outstanding during each period. Diluted earnings per share includes shares
issuable upon exercise of outstanding stock options. All prior period earnings
per share amounts have been restated in accordance with FASB No. 128.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" that will be effective in 1998. The Corporation anticipates minimal
impact from this Statement.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" that will be effective in
1998. UPC currently complies with most provisions of this Statement, and any
incremental disclosure required by that Statement is expected to be minimal.
THE OUTLOOK
GENERAL ECONOMIC FACTORS - The Corporation's future results can be affected by
changes in the economic environment and by fluctuations in fuel prices. Several
of the commodities transported by both Overnite and the Railroad come from
industries with cyclical business operations. As a result, prolonged negative
changes in U.S. and global economic conditions can have an adverse effect on the
Corporation's operating results. In addition, operating results at the Railroad
and Overnite can be affected adversely by increases in diesel fuel costs, to the
extent that such costs are not recovered through higher revenues and improved
fuel conservation or mitigated by hedging activity.
1998 CAPITAL SPENDING - The Corporation's 1998 capital expenditures, debt
service requirements and payments related to the integration of Southern
Pacific's rail operations will be funded primarily through cash generated from
operations, additional debt financings and the sale or lease of various
operating and nonoperating properties. The Corporation expects that such sources
will continue to provide sufficient funds to meet cash requirements in the
foreseeable future.
The Corporation expects to increase its level of capital spending to
approximately $2.5 billion in 1998, including over $450 million to integrate the
UPRR and Southern Pacific rail systems. Railroad-related capital expenditures
will be used to continue capacity expansion on its main lines, upgrade and
augment equipment to meet customer needs and develop and implement new
technologies. Overnite will continue to maintain its truck fleet and upgrade
technology.
1998 BUSINESS OUTLOOK - Financial results in 1998 will be affected by the
congestion and related service problems; however, management expects that rail
volumes will improve as the Railroad makes progress in resolving these problems.
The acquisition of Southern Pacific is anticipated to yield significant
annual benefits to operating income, once Southern Pacific's operations have
been fully integrated with UPRR's existing operations. The
28 Financial Review
26
ASSETS
UNION PACIFIC CORPORATION
$ Millions
93 94 95 96 97
- ------ ------ ------ ------ ------
13,797 14,543 19,446 27,927 28,764
Railroad will continue the merger implementation which is expected to be
substantially complete in 1999.
Overnite will continue to streamline its business operations to compete in
the current trucking industry environment. As a result of these efforts, UPC
anticipates that Overnite will continue to improve its financial results during
1998.
YEAR 2000 - In 1995, UPC began modifying its computer systems to process
transactions involving the year 2000 and beyond. Costs to convert these systems,
estimated to total $61 million, are expensed as incurred. At year-end 1997,
approximately 50% of the Corporation's systems have been modified, and the
majority of the remaining systems are expected to be modified by year-end 1998.
During 1999, systems will be tested to assure compliance with year 2000
requirements.
UPC is in the process of contacting entities with whom it exchanges data to
determine the status of their year 2000 modification efforts. In addition, the
Corporation is working with vendors who supply equipment and/or software that
could experience year 2000 problems.
The Corporation believes its systems will be successfully and timely
modified. However, failure to do so or failure on the part of third parties with
whom UPC does business could materially impact operations and financial results
in the year 2000.
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 the Securities Act of 1933, as amended, and 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 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 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 its Service Recovery Plan, industry
competition, 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.
Financial Review 29
27
INDEPENDENT AUDITORS' REPORT
[DELOITTE & TOUCHE LLP LOGO]
Union Pacific Corporation, its Directors and Stockholders:
We have audited the accompanying statement of consolidated financial position of
Union Pacific Corporation and subsidiary companies as of December 31, 1997 and
1996, and the related statements of consolidated income, changes in common
stockholders' equity and consolidated cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Union Pacific Corporation and
subsidiary companies at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
January 22, 1998
RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The accompanying financial statements, which consolidate the accounts of Union
Pacific Corporation and its subsidiaries, have been prepared in conformity with
generally accepted accounting principles.
The integrity and objectivity of data in these financial statements and
accompanying notes, including estimates and judgments related to matters not
concluded by year-end, are the responsibility of management as is all other
information in this Annual Report. Management devotes ongoing attention to
review and appraisal of its system of internal controls. This system is designed
to provide reasonable assurance, at an appropriate cost, that the Corporation's
assets are protected, that transactions and events are recorded properly and
that financial reports are reliable. The system is augmented by a staff of
corporate traveling auditors supplemented by internal auditors in the subsidiary
operating companies; careful attention to selection and development of qualified
financial personnel; programs to further timely communication and monitoring of
policies, standards and delegated authorities; and evaluation by independent
auditors during their audits of the annual financial statements.
The Audit Committee of the Board of Directors, composed entirely of outside
directors, as identified on page 55, meets regularly with financial management,
the corporate auditors and the independent auditors to review the work of each.
The independent auditors and corporate auditors have free access to the Audit
Committee, without management representatives present, to discuss the results of
their audits and their comments on the adequacy of internal controls and the
quality of financial reporting.
/s/ DICK DAVIDSON
Chairman, President and Chief Executive Officer
/s/ L. WHITE MATTHEWS
Executive Vice President-Finance
/s/ JOSEPH E. O'CONNOR JR.
Vice President and Controller
30 Financial Review
28
BUSINESS SEGMENTS
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
- ----------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES Railroad ................................ $ 9,981 $ 7,680 $ 6,326
Trucking ................................ 946 961 976
Corporate services and other operations.. 152 145 184
--------------------------------------------------------------------------------------------
Total ................................... $ 11,079 $ 8,786 $ 7,486
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME Railroad ................................ $ 1,253 $ 1,602 $ 1,384
(LOSS) Trucking ................................ 10 (68) (49)
Corporate services and other operations.. (10) (1) 6
--------------------------------------------------------------------------------------------
Total ................................... $ 1,253 $ 1,533 $ 1,341
- ----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM Railroad ................................ $ 620 $ 940 $ 867
CONTINUING OPERATIONS Trucking ................................ 4 (43) (30)
Corporate services and other operations.. (192) (164) (218)
--------------------------------------------------------------------------------------------
Total ................................... $ 432 $ 733 $ 619
- ----------------------------------------------------------------------------------------------------------------------
CASH FROM CONTINUING Railroad ................................ $ 1,759 $ 1,767 $ 1,486
OPERATIONS Trucking ................................ 79 47 37
Corporate services and other operations.. (238) (157) (69)
--------------------------------------------------------------------------------------------
Total ................................... $ 1,600 $ 1,657 $ 1,454
- ----------------------------------------------------------------------------------------------------------------------
ASSETS (AT YEAR-END) Railroad ................................ $ 26,891 $ 26,278 $ 15,694
Trucking ................................ 1,189 1,225 1,270
Corporate services and other operations.. 684 424 2,482
--------------------------------------------------------------------------------------------
Total ................................... $ 28,764 $ 27,927 $ 19,446
- ----------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND Railroad ................................ $ 972 $ 686 $ 568
AMORTIZATION Trucking ................................ 62 65 64
Corporate services and other operations.. 9 11 10
--------------------------------------------------------------------------------------------
Total ................................... $ 1,043 $ 762 $ 642
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL INVESTMENTS Railroad ................................ $ 2,035 $ 1,339 $ 970
Trucking ................................ 40 10 49
Corporate services and other operations.. 26 11 39
--------------------------------------------------------------------------------------------
Total ................................... $ 2,101 $ 1,360 $ 1,058
This information should be read in conjunction with the accompanying
accounting policies and notes to the financial statements.
Financial Review 31
29
STATEMENT OF CONSOLIDATED INCOME
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
- -----------------------------------------------------------------------------------------------------------------------
Millions of Dollars, Except Per Share Amounts 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES Railroad, trucking and other........... $ 11,079 $ 8,786 $ 7,486
-----------------------------------------------------------------------------------------
OPERATING EXPENSES Salaries, wages and employee benefits.. 4,166 3,260 2,826
Equipment and other rents ............. 1,339 885 695
Fuel and utilities (Note 4) ........... 1,042 790 574
Depreciation and amortization ......... 1,043 762 642
Purchased services .................... 743 541 410
Materials and supplies ................ 560 469 377
Other costs ........................... 933 546 621
-----------------------------------------------------------------------------------------
Total ................................. 9,826 7,253 6,145
-----------------------------------------------------------------------------------------
INCOME Operating Income....................... 1,253 1,533 1,341
Other income (Note 13) ................ 137 182 141
Interest expense (Notes 3, 4 and 7) ... (605) (501) (450)
Corporate expenses .................... (109) (101) (99)
-----------------------------------------------------------------------------------------
Income before Income Taxes ............ 676 1,113 933
Income taxes (Note 6) ................. (244) (380) (314)
-----------------------------------------------------------------------------------------
Income from Continuing Operations ..... 432 733 619
Income from Discontinued Operations
(Note 3) ........................... -- 171 327
-----------------------------------------------------------------------------------------
Net Income ............................ $ 432 $ 904 $ 946
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE BASIC
Income from Continuing Operations... $ 1.76 $ 3.38 $ 3.02
Income from Discontinued Operations. -- 0.79 1.60
Net Income ......................... 1.76 4.17 4.62
DILUTED
Income from Continuing Operations... $ 1.74 $ 3.36 $ 3.01
Income from Discontinued Operations. -- 0.78 1.59
Net Income ......................... 1.74 4.14 4.60
Dividends ............................. $ 1.72 $ 1.72 $ 1.72
The accompanying accounting policies and notes to the financial statements
are an integral part of these statements.
32 Financial Statements
30
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1997 1996
- --------------------------------------------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------------
Current Assets Cash and temporary investments......................... $ 90 $ 191
Accounts receivable (Note 4)........................... 631 507
Inventories............................................ 296 304
Other current assets (Note 6).......................... 398 345
--------------------------------------------------------------------------------------
Total.................................................. 1,415 1,347
--------------------------------------------------------------------------------------
Investments Investments in and advances to affiliated companies.... 443 387
Other investments...................................... 181 226
--------------------------------------------------------------------------------------
Total.................................................. 624 613
--------------------------------------------------------------------------------------
Properties Cost (Notes 2, 5 and 7)................................ 31,514 30,097
Accumulated depreciation (Note 5)...................... (5,537) (5,053)
--------------------------------------------------------------------------------------
Net.................................................... 25,977 25,044
--------------------------------------------------------------------------------------
Other Excess acquisition costs - net......................... 619 700
Other assets .......................................... 129 223
--------------------------------------------------------------------------------------
Total Assets .......................................... $ 28,764 $ 27,927
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------
Current Liabilities Accounts payable....................................... $ 758 $ 705
Accrued wages and vacation ............................ 421 427
Accrued casualty costs ................................ 333 332
Dividends and interest ................................ 295 293
Income and other taxes................................. 268 250
Debt due within one year (Note 7)...................... 233 127
Other current liabilities (Note 2)..................... 939 922
--------------------------------------------------------------------------------------
Total.................................................. 3,247 3,056
--------------------------------------------------------------------------------------
Other Liabilities Debt due after one year (Notes 2, 3 and 7)............. 8,285 7,900
and Stockholders' Equity Deferred income taxes (Note 6)......................... 6,252 5,939
Accrued casualty costs................................. 695 670
Retiree benefits obligation (Note 9)................... 828 720
Other long-term liabilities (Notes 2 and 12)........... 1,232 1,417
Common stockholders' equity (page 35).................. 8,225 8,225
--------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity............. $ 28,764 $ 27,927
The accompanying accounting policies and notes to the financial statements
are an integral part of these statements.
Financial Statements 33
31
STATEMENT OF CONSOLIDATED CASH FLOWS
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
- ------------------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
CASH FROM CONTINUING Net Income ............................................ $ 432 $ 904 $ 946
OPERATIONS Non-cash charges to income:
Depreciation and amortization ...................... 1,043 762 642
Deferred income taxes (Note 6) ..................... 300 166 151
Other - net ........................................ (196) (559) 358
Income from discontinued operations (Note 3) .......... -- (171) (327)
Changes in current assets and liabilities (Note 2)..... 21 555 (316)
----------------------------------------------------------------------------------------------
Cash from Continuing Operations ....................... 1,600 1,657 1,454
----------------------------------------------------------------------------------------------
INVESTING Capital investments ................................... (2,101) (1,360) (1,058)
ACTIVITIES Cash provided by discontinued operations (Note 3)...... -- 41 467
Proceeds from Resources' notes receivable
repayment (Note 3).................................. -- 650 --
Investments and acquisitions (Note 2).................. -- (539) (2,146)
Proceeds from sale of assets and other
investing activities................................ 329 114 168
----------------------------------------------------------------------------------------------
Cash Used in Investing Activities...................... (1,772) (1,094) (2,569)
----------------------------------------------------------------------------------------------
EQUITY AND FINANCING Dividends paid ........................................ (422) (353) (353)
ACTIVITIES Debt repaid ........................................... (572) (2,047) (1,531)
Financings (Notes 2 and 7) ............................ 1,092 1,741 2,275
Proceeds from Resources' stock offering (Note 3)....... -- -- 844
Other - net............................................ (27) 57 (5)
----------------------------------------------------------------------------------------------
Cash Provided by (Used in) Equity and
Financing Activities ............................... 71 (602) 1,230
----------------------------------------------------------------------------------------------
Net Change in Cash and Temporary Investments........... $ (101) $ (39) $ 115
- ------------------------------------------------------------------------------------------------------------------------------
CHANGES IN CURRENT Accounts receivable.................................... $ (124) $ 1 $ 47
ASSETS AND LIABILITIES Inventories............................................ 8 12 19
(Excluding SP Assets and Other current assets................................... (53) 762 (281)
Liabilities Acquired in 1996) Accounts, wages and vacation payable .................. 47 4 80
Debt due within one year............................... 106 (62) (295)
Other current liabilities ............................. 37 (162) 114
----------------------------------------------------------------------------------------------
Total.................................................. $ 21 $ 555 $ (316)
The accompanying accounting policies and notes to the financial statements
are an integral part of these statements.
34 Financial Statements
32
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
- -------------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCK Common Stock, $2.50 par value
(authorized 500,000,000 shares)
Balance at beginning of year
(274,595,151 shares issued in 1997;
232,317,010 in 1996; 231,837,976 in 1995)... $ 686 $ 581 $ 580
Common stock issued in Southern Pacific
acquisition (38,089,704 shares)(Note 2)..... -- 95 --
Conversions, exercises of stock options
and other (1,452,405 shares in 1997;
4,188,437 in 1996; 479,034 in 1995) ........ 4 10 1
----------------------------------------------------------------------------------------------------
Balance at end of year (276,047,556
shares issued in 1997; 274,595,151
in 1996; 232,317,010 in 1995) .............. 690 686 581
----------------------------------------------------------------------------------------------------
PAID-IN SURPLUS Balance at beginning of year .................. 4,009 2,111 1,428
Common stock issued in Southern Pacific
acquisition (Note 2) ....................... -- 2,381 --
Distribution of investment in
Resources (Note 3).......................... -- (638) --
Issuance of Resources' no par common
stock (Note 3) ............................. -- -- 638
Conversions, exercises of stock options
and other .................................. 57 155 45
----------------------------------------------------------------------------------------------------
Balance at end of year ........................ 4,066 4,009 2,111
----------------------------------------------------------------------------------------------------
RETAINED Balance at beginning of year................... 5,262 5,327 4,734
EARNINGS Net Income .................................... 432 904 946
----------------------------------------------------------------------------------------------------
Total ......................................... 5,694 6,231 5,680
Cash dividends declared ....................... (423) (371) (353)
Distribution of investment in
Resources (Note 3).......................... -- (598) --
----------------------------------------------------------------------------------------------------
Balance at end of year (Note 7)................ 5,271 5,262 5,327
----------------------------------------------------------------------------------------------------
TREASURY STOCK Balance at end of year, at cost
(29,045,938 shares in 1997; 27,935,628
in 1996; 26,737,806 in 1995)................ (1,802) (1,732) (1,655)
----------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity (Note 10) ... $ 8,225 $ 8,225 $ 6,364
The accompanying accounting policies and notes to the financial statements
are an integral part of these statements.
Financial Statements 35
33
NOTES TO THE FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Union Pacific
Corporation (the Corporation or UPC) and all of its subsidiaries. Investments
in affiliated companies (20% to 50% owned) are generally accounted for on the
equity method. All material intercompany transactions are eliminated.
CASH AND TEMPORARY INVESTMENTS
Temporary investments are stated at cost that approximates fair value and
consist of investments with original maturities of three months or less.
INVENTORIES
Inventories consist of materials and supplies carried at the lower of cost or
market.
PROPERTY AND DEPRECIATION
Properties are carried at cost. Provisions for depreciation are computed
principally on the straight-line method based on estimated service lives of
depreciable property.
The cost (net of salvage) of depreciable rail property retired or
replaced in the ordinary course of business is charged to accumulated
depreciation. A gain or loss is recognized in other income for all other
property upon disposition.
LONG-LIVED AND INTANGIBLE ASSETS
Amortization of costs in excess of the fair value of net assets of acquired
businesses is generally recorded over 40 years on a straight-line basis. The
Corporation regularly assesses the recoverability of its long-lived and
intangible assets through a review of undiscounted cash flows and fair values
of those assets.
REVENUE RECOGNITION
Transportation revenues are recognized on a percentage-of-completion basis,
while delivery costs are recognized as incurred.
HEDGING TRANSACTIONS
The Corporation periodically hedges fuel purchases and interest rates.
Unrealized gains and losses from swaps, futures and forward contracts are
deferred and recognized as the fuel is consumed. The differential to be paid
or received on interest rate swaps is accrued as interest rates change and
recognized as interest expense over the life of the agreements (see Note 4).
EARNINGS PER SHARE
Earnings per share (EPS) are calculated in accordance with Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings Per Share" (FASB 128).
Basic earnings per share are calculated on the weighted-average number of
common shares outstanding during each period. Diluted earnings per share
include shares issuable upon exercise of outstanding stock options (see Note
10). All prior period earnings per share amounts have been restated in
accordance with FASB 128.
USE OF ESTIMATES
The consolidated financial statements of the Corporation include estimates and
assumptions regarding certain assets, liabilities, revenues and expenses and
the disclosure of certain contingent assets and liabilities. Actual future
results may differ from such estimates.
CHANGE IN PRESENTATION
Certain prior year amounts have been reclassified to conform to the 1997
financial statement presentation. Union Pacific Resources Group Inc.
(Resources) is classified as a discontinued operation (see Note 3).
36 Notes to the Financial Review
34
1. NATURE OF OPERATIONS
UPC consists of two major transportation segments, railroad and trucking,
operating principally in the United States.
RAILROAD - The Corporation's largest segment is Union Pacific Railroad Company
(UPRR) (including as of May 1, 1995, Chicago and North Western Transportation
Company (CNW)), and as of October 1, 1996, Southern Pacific Rail Corporation
(Southern Pacific or SP)(see Note 2)(collectively the Railroad). The Railroad
is 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 and providing several north/south corridors to key Mexican gateways.
The Railroad serves the western two-thirds of the country and maintains
coordinated schedules with other carriers for the handling of freight to and
from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest,
Canada and Mexico. Export and import traffic is moved through Gulf Coast and
Pacific Coast ports and across the Mexican and (primarily through interline
connections) Canadian borders. The Railroad is subject to price and service
competition from other railroads, motor carriers and barge operators. The
Corporation completed the integration of CNW in 1996 and expects to complete
the integration of the operations of Southern Pacific during 1999.
Approximately 90% of the Railroad's 52,000 employees are represented
by rail unions. During 1996, nearly all of UPRR's unionized workforce ratified
five-year national agreements, which include a combination of general wage
increases and lump-sum payments. In addition, the agreements provide for
increased flexibility in work rules. Under the conditions imposed by the
Surface Transportation Board of the U.S. Department of Transportation (STB) in
connection with the Southern Pacific acquisition, labor agreements between the
Railroad and the unions representing SP employees must be negotiated before the
UPRR and Southern Pacific rail systems can be fully integrated. The Corporation
has begun negotiations with these unions and expects the remaining revised
agreements to be ratified in 1998.
During 1997, the Railroad 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 Railroad holds a 13% ownership share and has accounted for its
interest by the equity method. The consortium expects to assume operational
control of both lines in early 1998.
TRUCKING - The Corporation's other major line of business is truck
transportation. Overnite Transportation Company (Overnite), a major interstate
trucking company specializing in less-than-truckload shipments, serves all 50
states and portions of Canada and Mexico through 164 service centers located
throughout the United States. Overnite transports a variety of products,
including machinery, tobacco, textiles, plastics, electronics and paper
products. Overnite experiences intense service and price competition from both
regional and national motor carriers.
As the nation's largest non-union single operating trucking company,
Overnite is periodically targeted by major labor organization efforts
instituted by the International Brotherhood of Teamsters (Teamsters) at many of
its service centers. Since year-end 1994, 59 of Overnite's 164 service centers
have received petitions for union elections. Where elections have been held,
35 Overnite service centers voted against representation and two elections
remain unresolved. The employees of three service centers that previously
voted for union representation filed petitions with the National Labor
Relations Board (NLRB) to decertify the Teamsters as their union bargaining
representative. Nineteen service centers, representing approximately 12% of
Overnite's nationwide workforce, voted for union representation, and the
Teamsters have been certified as the bargaining representative for such
employees without challenge by Overnite. Five other service centers,
representing another 5% of Overnite's nationwide workforce, either voted for
union representation or it is unclear how such employees have voted. Such
elections are currently being challenged by Overnite before the NLRB or the
Federal courts. Overnite has begun negotiations with the Teamsters at the
service centers where the Teamsters have been certified as the bargaining
representative.
Notes to the Financial Statements 37
35
During 1997 and 1996, Overnite continued to benefit from several
initiatives implemented in 1996 which were aimed at better matching its
operations to the current trucking industry environment. These actions
included workforce reductions, service center consolidations, centralization of
the linehaul management process and pricing initiatives targeting Overnite's
lowest margin customers.
CONSOLIDATED - The Corporation's future results can be affected by, among other
things, system congestion, changes in the economic environment and fluctuations
in fuel prices. Several of the commodities transported by both Overnite and
the Railroad come from industries with cyclical business operations. As a
result, prolonged negative changes in U.S. and global economic conditions can
have an adverse effect on the Corporation's ongoing results. In addition,
operating results at the Railroad and Overnite can be affected adversely by
increases in diesel fuel costs, to the extent that such costs are not recovered
through higher revenues and improved fuel conservation, or mitigated by hedging
activity.
Business Segments on page 31 provides additional financial information
related to the Corporation's operations.
2. ACQUISITIONS
SOUTHERN PACIFIC - UPC consummated the acquisition of Southern Pacific in
September 1996 by acquiring the remaining 75% of Southern Pacific common shares
not previously owned by the Corporation for $25.00 per SP share in cash, 0.4065
shares of the Corporation's common stock per SP share, or a combination
thereof, at the holder's election and subject to proration. As a result of the
initial cash tender offer in 1995 for 25% of Southern Pacific's outstanding
shares and the acquisition of the remaining 75% of Southern Pacific shares, 60%
of the outstanding Southern Pacific shares were converted into 38.1 million
shares of UPC common stock, and the remaining 40% of the outstanding shares
were acquired for $1.56 billion in cash. UPC initially funded the cash portion
of the acquisition with credit facility borrowings, all of which have been
subsequently refinanced with other borrowings.
The acquisition of Southern Pacific has been accounted for using the
purchase method. Results for 1996 include equity income equal to 25% of
Southern Pacific's net income through September 10, 1996, reflecting UPC's
ownership of SP during such period, and 100% of Southern Pacific's net income
thereafter. SP's results have been fully consolidated with the Corporation
effective October 1, 1996. The purchase price was determined as follows and was
based on a market value of the Corporation's common stock at the time the
merger was announced of $65.00 per share.
- --------------------------------------------------------------
Millions of Dollars, Except Per Share Amounts
- --------------------------------------------------------------
Initial 25% investment in SP on September 15, 1995
including equity income............................. $ 990
Second-step cash purchase (23.4 million shares at
$25.00 per SP share) on September 11, 1996.......... 586
Merger exchange of SP shares (93.7 million SP shares
converted into 38.1 million shares of UPC common
stock at $65.00 per share) on September 11, 1996.... 2,476
Transaction costs..................................... 45
- --------------------------------------------------------------
Purchase price to be allocated........................ $4,097
- --------------------------------------------------------------
The Southern Pacific purchase price has been allocated as follows:
- --------------------------------------------------
Millions of Dollars
- --------------------------------------------------
Purchase price to be allocated .. $ 4,097
Pre-tax merger costs:
Current ........................ 532
Long-term ...................... 426
Equity acquired ................. (1,083)
- --------------------------------------------------
Unallocated purchase price ...... $ 3,972
- --------------------------------------------------
Purchase price allocation:
Property and equipment
Land ........................ $ 3,509
Roadway, equipment & other .. 2,522
Debt and preference share
revaluation .................. (200)
Deferred income taxes (including
the effect of merger costs) .. (1,859)
- --------------------------------------------------
Total ........................... $ 3,972
- --------------------------------------------------
38 Notes to the Financial Statements
36
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 non-train crews. 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 and has refinanced $621 million of SP's debt
obligations. UPC recognized a $958 million liability in the SP purchase price
allocation for costs associated with SP's portion of these activities.
The components of the $958 million liability are as follows:
- ------------------------------------------------
Millions of Dollars
- ------------------------------------------------
Labor protection related to legislated and
contractual obligations to
SP union employees................. $ 361
Severance costs...................... 343
Contract cancellation fees .......... 145
Relocation costs .................... 109
- ------------------------------------------------
Total................................ $ 958
- ------------------------------------------------
Through December 31, 1997, approximately $280 million in merger-related
costs were paid by the Corporation and charged against these reserves,
principally comprised of $153 million and $65 million, respectively, for
severance and relocation payments made to approximately 3,500 Southern Pacific
employees. The Corporation expects that the remaining merger payments will be
made over the course of the next five years as the rail operations of UPRR and
SP are integrated and labor negotiations are completed and implemented.
In addition, the Railroad expects to incur $235 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 1997 includes $60 million for acquisition-related
operating costs, net of tax.
The pro forma results presented below have been prepared to reflect the
consummation of the Southern Pacific acquisition and the subsequent pro-rata
distribution of the shares of Resources owned by the Corporation to UPC's
stockholders (see Note 3), as if such events occurred at the beginning of each
period presented. The pro forma results presented below do not reflect synergies
expected to result from the integration of UPRR's and Southern Pacific's rail
operations, and accordingly, do not account for any potential increase in
revenue or operating income, estimated cost savings, or one-time costs
associated with the elimination of UPC's duplicate facilities and relocation or
severance payments to UPC employees. The effects of the foregoing could be
substantial. This unaudited pro forma information is not necessarily indicative
of the results of operations that might have occurred had the Southern Pacific
acquisition and the distribution of Resources shares actually occurred on the
date indicated, or of future results of operations of the resulting entity. Pro
forma results for the year ended December 31, 1995 also reflect the pro forma
effect of UPC's acquisition of CNW as if such transaction had occurred at the
beginning of that period.
- -------------------------------------------------------------
Millions of Dollars, Pro Forma
Except Per Share Amounts 1996 1995
- -------------------------------------------------------------
Operating Revenues..... $ 11,219 $ 11,031
Operating Income ...... 1,606 1,523
Net Income ............ 664 583
EPS (basic) ........... 2.73 2.40
EPS (diluted) ......... 2.71 2.39
- -------------------------------------------------------------
CNW - In April 1995, UPC completed the acquisition of the remaining 71.6% of
CNW's outstanding common stock not previously owned by the Corporation for
approximately $1.2 billion, funded by the issuance of additional long-term
debt. The acquisition of CNW has been accounted for as a purchase, and CNW's
financial results were consolidated with the Corporation effective May 1, 1995.
Notes to the Financial Statements 39
37
3. DIVESTITURES
SKYWAY - In January 1998, the Corporation announced its intention to sell its
investment in Skyway Freight Systems, Inc., a wholly-owned subsidiary engaged
in contract logistics and supply chain management. In connection with the
planned sale, the Corporation recognized a $40 million after tax loss.
RESOURCES - In July 1995, the Corporation's Board of Directors approved a
formal plan to divest UPC's natural resources business through an initial
public offering (IPO) by Resources, followed by a pro-rata distribution of the
Resources shares owned by the Corporation to its stockholders (the Spin-Off).
The IPO of 42.5 million Resources shares at $21.00 per share was
completed in October 1995 and generated net proceeds of $844 million. At that
time, Resources distributed to UPC a dividend of $1.62 billion ($912 million in
cash, $650 million in 8.5% notes due within 90 days of the Spin-Off and a $59
million intercompany balance owed by the Corporation). UPC used the cash
proceeds from the IPO dividend to repay outstanding commercial paper.
In September 1996, after UPC's receipt of a favorable Internal Revenue
Service ruling as to the tax-free nature of the Spin-Off, the Corporation's
Board of Directors declared a special dividend consisting of the shares of
Resources common stock owned by UPC. As a result of the Spin-Off, each of the
Corporation's stockholders received 0.846946 of a share of Resources common
stock for each UPC share of common stock held by such stockholder at the
September 26, 1996 record date for the distribution. In October 1996, Resources
repaid $650 million in notes to UPC, the proceeds of which were used by the
Corporation to repay outstanding commercial paper. The Spin-Off was recorded as
a reduction in paid-in surplus (representing the equity generated by the IPO)
and retained earnings (see Page 35).
Resources' results have been reported as discontinued operations in the
Corporation's consolidated financial statements for 1996 and 1995. UPC's results
reflect 100% of Resources' net income up to the date of the IPO and
approximately 83% of Resources' net income from the date of the IPO to the
Spin-Off. The Corporation's share of Resources' net income was $171 million and
$327 million in 1996 and 1995, respectively. These amounts are net of income
taxes of $82 million and $100 million in 1996 and 1995, respectively. For the
years ended December 31, 1996 and 1995, Resources' operating revenues were $1.83
billion and $1.48 billion, respectively.
4. FINANCIAL INSTRUMENTS
RISK MANAGEMENT
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.
The Corporation addresses market risk related to these instruments by
selecting instruments whose value fluctuations highly correlate with the
underlying item being hedged. Credit risk related to derivative financial
instruments, which is minimal, is managed by requiring high credit standards for
counterparties and periodic settlements. The total risk associated with the
Corporation's counterparties was $61 million at December 31, 1997. The
Corporation has not been required to provide, nor has it received, any
collateral relating to its hedging activity.
The fair market values of the Corporation's derivative financial
instrument positions at December 31, 1997 and 1996 described below were
determined based on current fair market values as quoted by recognized dealers,
or developed based on the present value of expected future cash flows discounted
at the applicable zero coupon U.S. treasury rate and swap spread.
40 Notes to the Financial Statements
38
INTEREST RATES - The Corporation controls its overall risk of 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 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 costs and the interest rate mix within its debt portfolio by issuing
callable fixed rate debt securities.
At December 31, 1997, the Corporation had outstanding interest rate
swaps on $255 million of notional principal amount of debt (3% of the total debt
portfolio) with a gross fair market value asset position of $61 million and a
gross fair market value liability position of $23 million. These contracts
mature over the next one to eight years. At December 31, 1996, the Corporation
had outstanding interest rate swaps on $265 million of notional principal amount
of debt (3% of the total debt portfolio) with a gross fair market value asset
position of $31 million and a gross fair market value liability position of $12
million. Interest rate hedging activity increased interest expense by $5 million
in 1997, $3 million in 1996 and $7 million in 1995, raising the weighted-average
borrowing rate by no more than 20 basis points in any year.
FUEL - Over the past three years, fuel costs approximated 10% of the
Corporation's total operating expenses. As a result of the significance of
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
profitability from adverse fuel price changes. However, the use of these
contracts also limits the benefit of favorable fuel price changes.
At December 31, 1997, the Railroad and Overnite had hedged 42% and 34%
of their forecasted 1998 fuel consumption, respectively. At December 31, 1996,
neither the Railroad nor Overnite had hedged any of its forecasted 1997 fuel
consumption. In addition, at year-end 1997, the Railroad had outstanding swap
agreements covering its fuel purchases in 1998 of $298 million, with gross and
net liability positions of $13 million. Fuel hedging had no significant effect
on the Railroad's 1997 fuel costs, lowered 1996 fuel costs by $34 million and
had no significant effect on 1995 fuel costs. At year-end 1997, Overnite had
outstanding swap agreements of $10 million, with gross and net liability
positions of $1 million. Fuel hedging had no significant effect on fuel costs
for Overnite for the periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Corporation's long- and short-term debt has been
estimated using quoted market prices or current borrowing rates. At December
31, 1997, the fair value of total debt exceeded the carrying value by
approximately 3%. Of the Corporation's total debt portfolio, approximately
$1.6 billion of fixed rate debt securities contain call provisions that allow
the Corporation to retire the debt instruments prior to final maturity, subject
in certain cases to the payment of premiums.
The carrying value of all other financial instruments approximates fair
value.
SALE OF RECEIVABLES
The Corporation has sold, on a revolving basis, an undivided percentage
ownership interest in a designated pool of accounts receivable. At December 31,
1997 and 1996, accounts receivable are presented net of the $650 million of
receivables sold.
Notes to the Financial Statements 41
39
5. PROPERTIES
Major property accounts are as follows:
- ---------------------------------------------------
Millions of Dollars 1997 1996
- ---------------------------------------------------
Railroad:
Road and other.... $23,610 $22,665
Equipment ........ 7,084 6,573
- ---------------------------------------------------
Total Railroad ..... 30,694 29,238
Trucking ........... 750 736
Other .............. 70 123
- ---------------------------------------------------
Total .............. $31,514 $30,097
- ---------------------------------------------------
Accumulated depreciation accounts are as follows:
- -------------------------------------------------
Millions of Dollars 1997 1996
- -------------------------------------------------
Railroad:
Road and other ... $2,938 $2,551
Equipment ........ 2,270 2,181
- -------------------------------------------------
Total Railroad ..... 5,208 4,732
Trucking ........... 297 272
Other .............. 32 49
- -------------------------------------------------
Total .............. $5,537 $5,053
- -------------------------------------------------
6. INCOME TAXES
Components of income tax expense, excluding discontinued operations, are as
follows:
- --------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- --------------------------------------------------------------
Current:
Federal .......... $ (50) $ 200 $ 166
State ............ (6) 14 (3)
- --------------------------------------------------------------
Total current .. (56) 214 163
- --------------------------------------------------------------
Deferred:
Federal .......... 270 149 130
State ............ 30 17 21
- --------------------------------------------------------------
Total Deferred ... 300 166 151
- --------------------------------------------------------------
Total .............. $ 244 $ 380 $ 314
- --------------------------------------------------------------
Deferred tax liabilities (assets), excluding discontinued operations,
comprise the following:
- ------------------------------------------------------------------------
Millions of Dollars 1997 1996
- ------------------------------------------------------------------------
Net current deferred tax asset ......... $ (127) $ (118)
- ------------------------------------------------------------------------
Excess tax over book depreciation ...... 7,050 6,891
State taxes - net ...................... 504 517
SP merger reserves ..................... (235) (357)
Long-term liabilities .................. (208) (292)
Retirement benefits .................... (307) (288)
Alternative minimum tax ................ (201) (173)
Net operating loss ..................... (528) (560)
Other .................................. 177 201
- ------------------------------------------------------------------------
Net long-term deferred tax liability ... 6,252 5,939
- ------------------------------------------------------------------------
Net deferred tax liability ............. $ 6,125 $ 5,821
- ------------------------------------------------------------------------
The Corporation has a deferred tax asset reflecting the benefits of
$1.5 billion in Southern Pacific net operating loss carryforwards (NOL), which
expire as follows:
- -------------------------------------------
Millions of Dollars
- -------------------------------------------
Expiring December 31:
2002 ................ $ 455
2003 ................ 262
2004 ................ 134
2005 ................ 136
2006 ................ 226
2007 ................ --
2008 ................ 202
2009 ................ 94
- -------------------------------------------
Total ......................... $ 1,509
- -------------------------------------------
The Internal Revenue Code of 1986, as amended, limits a corporation's
ability to utilize its NOLs with certain changes in the ownership of a
corporation's stock. The Corporation does not expect that those limitations will
have an adverse impact on its ability to utilize the NOLs. The Corporation has
analyzed its NOLs and other deferred tax assets and believes a valuation
allowance is not necessary.
42 Notes to the Financial Statements
40
A reconciliation between statutory and effective tax rates of
continuing operations is as follows:
- -------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------
Statutory tax rate ...... 35.0% 35.0% 35.0%
State taxes - net ....... 2.3 1.8 1.2
Goodwill amortization ... 1.3 0.7 0.9
Dividend exclusion ...... (1.6) (1.4) (2.3)
Tax settlement .......... (0.9) (2.3) --
Other ................... (0.1) 0.3 (1.1)
- -------------------------------------------------------------------------
Effective tax rate ...... 36.0% 34.1% 33.7%
- -------------------------------------------------------------------------
Net payments of income taxes were $64 million in 1997, $108 million in 1996 and
$91 million in 1995.
7. DEBT
Total debt is summarized below:
- ------------------------------------------------------------------------------
Millions of Dollars 1997 1996
- ------------------------------------------------------------------------------
Notes and debentures, 3.00% to
10.00% due through 2054 ................... $ 3,929 $ 4,051
Capitalized leases .......................... 1,251 1,137
Equipment obligations, 5.80% to
10.30% due through 2012 ................... 910 1,048
Commercial paper and bid notes, average
of 6.10% in 1997 and 5.82% in 1996 ........ 1,743 899
Term floating rate debt, 5.71% to
6.16% due through 2002 .................... 392 392
Mortgage bonds, 4.25% to 5.00%
due through 2030 .......................... 176 176
Credit facility borrowings, average
of 5.70% in 1996 .......................... -- 175
Tax-exempt financings, 3.99% to
4.27% due through 2026 .................... 168 168
Unamortized discount ........................ (51) (19)
- ------------------------------------------------------------------------------
Total debt .................................. 8,518 8,027
Less current portion ........................ (233) (127)
- ------------------------------------------------------------------------------
Total long-term debt ........................ $ 8,285 $ 7,900
- ------------------------------------------------------------------------------
Debt maturities for each year, 1998 through 2002, are $233 million,
$426 million, $620 million, $2.4 billion and $612 million, respectively.
Interest payments approximate gross interest expense.
Approximately 24% of all rail equipment and other railroad properties
secures outstanding equipment obligations and mortgage bonds.
The Corporation has $2.8 billion of credit facilities with various
banks designated for general corporate purposes, of which $0.9 billion is unused
at December 31, 1997. These facilities expire in 2001. Commitment fees and
interest rates payable under these facilities are similar to fees and rates
available to comparably rated corporate borrowers.
To the extent the Corporation has long-term credit facilities
available, commercial paper borrowings and other current maturities of long-term
debt of $1.9 billion, which are due within one year, have been classified as
long-term debt maturing in the year 2001. This classification reflects the
Corporation's intent to refinance these short-term borrowings and current
maturities of long-term debt on a long-term basis through the issuance of
additional commercial paper or new long-term financings, or by using currently
available long-term credit facilities if alternative financing is not available.
The Corporation is subject to certain restrictions related to the
payment of cash dividends. The amount of retained earnings available for
dividends under the most restrictive test was $2.7 billion at December 31, 1997.
Notes to the Financial Statements 43
41
8. LEASES
The Corporation leases certain locomotives, freight cars, trailers and other
property. Future minimum lease payments for capital and operating leases with
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1997 are as follows:
- --------------------------------------------------------------
Operating Capital
Millions of Dollars Leases Leases
- --------------------------------------------------------------
1998 ............................... $ 419 $ 170
1999 ............................... 394 183
2000 ............................... 342 169
2001 ............................... 280 186
2002 ............................... 218 163
Later years ........................ 1,659 1,447
- --------------------------------------------------------------
Total minimum payments ............. $3,312 2,318
- ------------------------------------------------
Amount representing interest ....... (1,067)
- --------------------------------------------------------------
Present value of minimum lease payments $ 1,251
- --------------------------------------------------------------
Rent expense for operating leases with terms exceeding one month was
$387 million in 1997, $350 million in 1996 and $236 million in 1995. Contingent
rentals and sub-rentals are not significant.
9. RETIREMENT PLANS
The Corporation provides defined benefit pension plan benefits to eligible
non-union employees through qualified and non-qualified (supplemental) pension
plans. Railroad employees are covered by the Railroad Retirement System
(System). Contributions made to the System are expensed as incurred and
amounted to approximately $392 million in 1997, $275 million in 1996 and $200
million in 1995. In addition, retiree medical benefits and life insurance are
provided for eligible non-union employees through unfunded benefit plans.
PENSION BENEFITS
Qualified and non-qualified pension benefits are based on years of service and
the highest compensation during the latest years of employment. The qualified
plans are funded based on the Projected Unit Credit actuarial funding method
and are funded at not less than the minimum funding standards set forth in the
Employee Retirement Income Security Act of 1974, as amended. The Corporation
has settled a portion of the non-qualified unfunded supplemental plan's
accumulated benefit obligation by purchasing annuities.
Pension cost includes the following components:
- -----------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- -----------------------------------------------------------------------
Service cost - benefits
earned during the period ... $ 33 $ 31 $ 28
Interest on projected
benefit obligation ......... 122 89 80
Return on assets:
Actual (gain)loss .......... (271) (163) (181)
Deferred gain (loss) ....... 152 77 111
Net amortization costs ....... 1 6 8
- -----------------------------------------------------------------------
Charge to operations ......... $ 37 $ 40 $ 46
- -----------------------------------------------------------------------
The projected benefit obligation was determined using a discount rate
of 7.00% and 7.50% in 1997 and 1996, respectively. The estimated rate of salary
increase approximated 5.00% and 5.50% in 1997 and 1996, respectively. The
expected long-term rate of return on plan assets was 8.00% in both years. The
change in assumptions will not significantly affect 1998 pension cost. As of
year-end 1997 and 1996, approximately 32% and 37%, respectively, of the funded
plans' assets were held in fixed-income and short-term securities, with the
remainder in equity securities.
44 Notes to the Financial Statements
42
The funded status of the Corporation's defined benefit pension plans is
as follows:
- -------------------------------------------------------------------------------------------------------------
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets (a)
Millions of Dollars 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
Plan assets at fair value .................. $ 1,436 $ 1,239 $ 421 $ 395
- -------------------------------------------------------------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested benefits .......................... 1,108 904 501 431
Non-vested benefits ...................... 80 58 6 11
- -------------------------------------------------------------------------------------------------------------
Accumulated benefit
obligation ............................... 1,188 962 507 442
Additional benefits
based on estimated
future salaries .......................... 139 132 16 54
- -------------------------------------------------------------------------------------------------------------
Projected benefit
obligation ............................... 1,327 1,094 523 496
- -------------------------------------------------------------------------------------------------------------
Plan assets (over) under projected benefit
obligation ............................... (109) (145) 102 101
Unamortized net transaction asset
(obligation) ............................. 20 24 (5) (11)
Unrecognized prior service
cost ..................................... (119) (38) 2 (26)
Unrecognized net gain ...................... 415 324 3 2
Minimum liability .......................... -- -- 32 42
- -------------------------------------------------------------------------------------------------------------
Pension liability .......................... $ 207 $ 165 $ 134 $ 108
- -------------------------------------------------------------------------------------------------------------
(a) Includes the Corporation's non-qualified supplemental pension plan and the
Southern Pacific qualified pension plan in both 1997 and 1996.
OTHER POSTRETIREMENT BENEFITS
The Corporation also provides medical and life insurance benefits on a cost
sharing basis for qualifying non-union employees.
Components of the postretirement health care and life insurance benefit
expense are as follows:
- --------------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- --------------------------------------------------------------------------
Service cost - benefits
earned during the period ....... $ 8 $ 7 $ 8
Interest costs on accumulated
benefit obligation ............. 29 22 20
Net amortization costs ........... (9) (8) (12)
- --------------------------------------------------------------------------
Charge to operations ............. $ 28 $ 21 $ 16
- --------------------------------------------------------------------------
The liability for postretirement benefit plans is as follows:
- ------------------------------------------------------------------
Millions of Dollars 1997 1996
- ------------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees ............................. $290 $294
Fully eligible active employees ...... 39 34
Other active employees ............... 96 89
- ------------------------------------------------------------------
Total accumulated postretirement
benefit obligation ................... 425 417
Unrecognized prior service gain ........ 32 39
Unrecognized net gain .................. 55 54
- ------------------------------------------------------------------
Postretirement benefit liability ....... $512 $510
- ------------------------------------------------------------------
The accumulated postretirement benefit obligation was determined using
a discount rate of 7.00% and 7.50% in 1997 and 1996, respectively. This change
in assumption will not significantly affect 1998 postretirement benefit costs.
The health care cost trend rate is assumed to decrease gradually from 9.00% for
1998 to 4.50% for 2005 and all future years. If the assumed health care cost
trend rates are increased by one percentage point, the aggregate of the service
and interest cost components of annual postretirement benefit expense would
increase by $3 million, and the accumulated postretirement benefit obligation
would rise by $34 million.
UNION RETIREE BENEFIT PLANS
Certain of the Corporation's union retirees participate in defined contribution
medical and life insurance programs. The costs of these plans are expensed as
payments are made.
10. STOCK OPTION PLANS, RETENTION STOCK PLANS AND OTHER CAPITAL STOCK
The FASB issued Statement No. 123, "Accounting for Stock-Based Compensation,"
(FASB 123) which was effective for 1996 financial statements. FASB 123
requires either recognition of compensation expense for stock options and other
stock-based compensation or supplemental disclosure of the impact such expense
recognition would have had on the Corporation's results of operations had the
Corporation recognized such expense. The Corporation has elected the
supplemental disclosure option.
Notes to the Financial Statements 45
43
Pursuant to the Corporation's stock option, retention and restricted
stock plans for directors, officers and key employees, 8,997,375, 8,586,773 and
10,359,406 common shares or options for common shares were available for grant
at December 31, 1997, 1996 and 1995, respectively. Options under the plans are
granted at 100% of market value at the date of grant and are exercisable for a
period of 10 years from the grant date. Options become exercisable no earlier
than one year after grant. In addition, multi-year awards were made in 1996,
with retention requirements extending to 2000. Shares under option at the date
of the Spin-Off were increased and revalued to reflect the market value change
resulting from the Spin-Off. Granted shares in 1995 included the effect of the
conversion of CNW employee options into UPC options. In addition, 1995 options
expired and surrendered included the forfeiture of UPC options by certain
Resources employees in exchange for options of Resources common stock.
The plans also provide for awarding restricted shares of common stock
to eligible employees, generally subject to forfeiture if employment terminates
during the prescribed restricted period. During 1996 and 1995, 1,533,586 and
249,860 retention and restricted shares, respectively, were issued at a
weighted-average fair value of $56.78 and $64.75 per share in 1996 and 1995,
respectively. No retention or restricted shares were issued in 1997.
At the Spin-Off date, 472,818 additional retention and restricted
shares were issued to reflect the market value change resulting from the
Spin-Off. A portion of the retention shares issued in 1996 and 1995 were subject
to stock price or performance targets.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1995, respectively: dividend
yields of 3.04% and 2.60%; risk-free interest rates are different for each grant
and range from 5.94% to 6.14%; expected lives of four and five years; and
volatility of 21.06% and 21.90%. There were no options granted during 1997.
Pro forma net income and earnings per share for 1997, 1996 and 1995
including compensation expense computed pursuant to FASB 123 (as though the
value of options were charged to income over the vesting period) are as follows:
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
Net Income (millions) .... $ 418 $ 901 $ 946
EPS (basic) .............. $ 1.70 $ 4.16 $ 4.61
EPS (diluted) ............ $ 1.69 $ 4.13 $ 4.60
- ---------------------------------------------------------------------------
Changes in common stock options outstanding are as follows:
- ----------------------------------------------------------------------
Weighted-
Shares Average Price
Under Option Per Share
- ----------------------------------------------------------------------
Balance December 31, 1994 .... 8,450,110 $ 49.06
Granted ...................... 681,793 48.31
Exercised .................... (495,235) 40.46
Expired/Surrendered .......... (1,545,216) 49.12
- ----------------------------------------------------------------------
Balance December 31, 1995 .... 7,091,452 49.58
Granted ...................... 5,687,448 56.35
Exercised .................... (2,081,752) 39.39
Expired/Surrendered .......... (326,082) 51.43
Spin-Off Conversion .......... 2,833,601 (16.51)
- ----------------------------------------------------------------------
Balance December 31, 1996 .... 13,204,667 43.42
GRANTED ...................... -- --
EXERCISED .................... (1,620,648) 32.85
EXPIRED/SURRENDERED .......... (247,676) 55.61
- ----------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 .... 11,336,343 $ 44.65
- ----------------------------------------------------------------------
Stock options outstanding at December 31, 1997 are as follows:
- -------------------------------------------------------------------
Weighted- Weighted-
Average Average
Number of Years to Exercise
Range of Exercise Prices Options Expiration Price
- -------------------------------------------------------------------
$6.02 to $22.80 ........... 282,554 3 $ 15.81
$22.91 to $37.99 ........... 4,258,096 6 32.10
$42.87 to $56.50 ........... 6,795,693 8 53.72
- -------------------------------------------------------------------
BALANCE AT DEC. 31, 1997..... 11,336,343 7 $44.65
- -------------------------------------------------------------------
46 Notes to the Financial Statements
44
Stock options exercisable at December 31, 1997 are as follows:
- ----------------------------------------------------------------------
Weighted- Weighted-
Average Average
Number of Years to Exercise
Range of Exercise Prices Options Expiration Price
- ----------------------------------------------------------------------
$6.02 to $22.80.............. 282,554 3 $ 15.81
$22.91 to $37.99 ............ 4,258,096 6 32.10
$42.87 to $56.50 ............ 1,465,843 6 43.63
- ----------------------------------------------------------------------
BALANCE AT DEC. 31, 1997...... 6,006,493 6 $ 34.14
- ----------------------------------------------------------------------
11. EARNINGS PER SHARE
The FASB issued Statement No. 128, "Earnings Per Share," which is effective for
1997 financial statements. FASB 128 requires dual presentation of basic and
diluted EPS, as well as restatement of EPS for all periods for which an income
statement or summary of earnings is presented.
The following table provides a reconciliation between basic and diluted
earnings per share.
- -------------------------------------------------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
For the Year Ended 1997 (Millions, Except Per Share Amounts)
- -------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available
to common
stockholders ................................................. $432.2 245.7 $ 1.76
Effect of dilutive
securities and
stock options ................................................ -- 2.4
- -------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available
to common
stockholders and
assumed
conversions .................................................. $432.2 248.1 $ 1.74
- -------------------------------------------------------------------------------------------------------------
For the Year Ended 1996 (Millions, Except Per Share Amounts)
- -------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available
to common
stockholders ................................................. $903.5 216.7 $ 4.17
Effect of dilutive
securities and
stock options ................................................ -- 1.3
- -------------------------------------------------------------------------------------------------------------
Diluted EPS:
Income available
to common
stockholders and
assumed
conversions .................................................. $903.5 218.0 $ 4.14
- -------------------------------------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
There are various claims and lawsuits pending against the Corporation and
certain of its subsidiaries. Certain customers have submitted claims or stated
their intention to submit claims to the Railroad for damages related to
shipments delayed in transit as a result of congestion problems (see the
Financial Review section elsewhere in this Annual Report) and certain customers
have filed lawsuits seeking to recover damages for such delays. The nature of
the damages sought by claimants includes, but is not limited to, freight loss
or damages, 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 Railroad is also party to regulatory proceedings at the STB
investigating railroad service problems in the West. The STB has imposed certain
temporary measures on the Railroad pursuant to this proceeding, including, among
other things, the diversion of traffic from the Railroad's lines; and unless the
Railroad is successful in recovering from the congestion and related service
problems, certain parties may request the STB to order the Railroad to take
additional actions, including, among other things, further diversions of traffic
or the transfer of certain UPRR rail lines or other facilities to other
railroads.
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. At December 31, 1997, the Corporation had
accrued $240 million for estimated future environmental costs and believes it is
reasonably possible that actual environmental costs could be lower than the
recorded reserve or as much as 25% higher. In addition, the Corporation and its
subsidiaries periodically enter into financial and other commitments in
connection with their businesses, and have retained certain contingent
liabilities upon the disposition of formerly-owned operations.
Notes to the Financial Statements 47
45
The Corporation and certain of its officers and directors are also
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 properly
disclose 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 CNW into
UPRR without ensuring that the Corporation or UPRR had adequate systems in place
to effectively integrate those companies into the operations of the Corporation
and UPRR. Because both the size of the class and the damages are uncertain, the
Corporation is 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, operating results or liquidity.
13. OTHER INCOME
Other income includes the following:
- -----------------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- -----------------------------------------------------------------------------
Rental income ..................... $ 75 $ 38 $ 22
Net gain on
property dispositions ........... 102 92 76
Interest on Resources
notes receivable (Note 3) ....... -- 33 15
Loss on planned sale of Skyway .... (65) -- --
Other - net ....................... 25 19 28
- -----------------------------------------------------------------------------
Total ............................. $ 137 $ 182 $ 141
- -----------------------------------------------------------------------------
14. ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities," effective for 1997,
which clarified the accounting for environmental remediation liabilities.
Adoption did not have a significant impact on UPC's operating results or
financial condition.
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" that will be effective in 1998. The Corporation
anticipates minimal impact from this Statement.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information" that will be effective
in 1998. UPC currently complies with most provisions of this Statement, and any
incremental disclosure required by that Statement is expected to be minimal.
48 Notes to the Financial Statements
46
SUPPLEMENTARY INFORMATION (UNAUDITED)
SELECTED QUARTERLY DATA
Selected unaudited quarterly data are as follows:
- -------------------------------------------------------------------------------------------------
Millions of Dollars
Except Per Share Amounts Mar. 31 Jun. 30 Sep. 30 Dec. 31(d)
- -------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------
Operating Revenues ........... $ 2,810 $ 2,883 $ 2,825 $ 2,561
Operating Income (Loss) ...... 345 501 465 (58)
Income (Loss) from Continuing
Operations ................. 128 216 240 (152)
Net Income (Loss) ............ 128 216 240 (152)
Per Share (basic):
Income (Loss) from Continuing
Operations ................ 0.52 0.88 0.98 (0.62)
Net Income (Loss) .......... 0.52 0.88 0.98 (0.62)
Per Share (diluted):
Income (Loss) from Continuing
Operations ................ 0.52 0.87 0.96 (0.62)
Net Income (Loss) .......... 0.52 0.87 0.96 (0.62)
Dividends Per Share .......... 0.43 0.43 0.43 0.43
Common Stock Price:
High ....................... 63.63 71.63 72.44 64.75
Low ........................ 56.75 56.75 61.81 57.94
- -------------------------------------------------------------------------------------------------
1996 - (a)-(b)
- -------------------------------------------------------------------------------------------------
Operating Revenues ........... $ 1,968 $ 2,012 $ 1,996 $ 2,810
Operating Income ............. 265 389 419 460
Income from Continuing
Operations ................. 107 186 211 229
Net Income ................... 156 244 275 229
Per Share (basic):
Income from Continuing
Operations ................ 0.52 0.91 1.00 0.94
Net Income ................. 0.76 1.19 1.30 0.94
Per Share (diluted):
Income from Continuing
Operations ................ 0.52 0.90 0.99 0.93
Net Income ................. 0.76 1.18 1.29 0.93
Dividends Per Share .......... 0.43 0.43 0.43 0.43
Common Stock Price:
High ....................... 73.13 72.25 74.38 62.25(c)
Low ........................ 64.13 65.50 66.63 48.75(c)
- -------------------------------------------------------------------------------------------------
(a) All information presented reflects Resources as a discontinued operation
(see Note 3).
(b) 1996 information includes the effect of the completion of the Southern
Pacific acquisition (see Note 2).
(c) Common stock prices for the fourth quarter of 1996 include the downward
market adjustment of $24.24 per share resulting from the Spin-Off (see Note 3).
(d) Fourth quarter 1997 information includes $567 million pre-tax ($353 million
after tax or $1.42 per diluted share) impact of rail congestion, $65 million
pre-tax ($40 million after tax or $.16 per diluted share) loss on planned sale
of Skyway and $22 million pre-tax ($13 million after tax or $.05 per diluted
share) impact of one-time merger expenses.
STOCKHOLDERS AND DIVIDENDS
The common stock of the Corporation is traded on various stock exchanges,
principally the New York Stock Exchange. At January 30, 1998, there were
247,253,860 shares of outstanding common stock and approximately 49,300 common
stockholders. At that date, the closing price of the common stock on the New
York Stock Exchange was $60.00.
Cash dividends declared on common stock by the Corporation were $1.72
per share in 1997 and 1996. Union Pacific has paid dividends to its common
stockholders during each of the past 98 years. See Note 7 to the Financial
Statements for a discussion regarding restrictions relating to the payment of
cash dividends.
RAIL TRANSPORTATION
Rail transportation data includes Southern Pacific statistics from October 1,
1996 and CNW statistics from May 1, 1995.
COMMODITIES
Revenue ton-miles (RTM) and commodity revenue (CR) for major commodities by
percent and in total are as follows:
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
Percent of Total RTM CR RTM CR RTM CR
- --------------------------------------------------------------------------------------------------------------
Agricultural products ... 15.2% 14.6% 18.0% 16.4% 19.7% 17.6%
Automotive .............. 3.4 9.8 3.3 10.4 3.2 10.5
Chemicals ............... 12.2 17.8 12.3 18.0 12.8 19.1
Energy .................. 36.1 19.7 39.3 22.0 39.8 21.2
Industrial products ..... 17.3 20.3 14.5 17.9 13.3 17.1
Intermodal .............. 15.8 17.8 12.6 15.3 11.2 14.5
- --------------------------------------------------------------------------------------------------------------
Total ................... 100% 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------------------------------------
Total (billions) ........ 451.8 $ 9.7 369.7 $ 7.4 291.6 $ 6.1
- --------------------------------------------------------------------------------------------------------------
Supplementary Information 49
47
EQUIPMENT
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Owned or leased at year-end:
Locomotives ...................... 6,966 6,755 4,136
Freight cars:
Covered hoppers ................. 41,193 42,406 37,341
Box cars ........................ 21,540 22,934 20,559
Open-top hoppers ................ 20,743 20,989 15,941
Gondolas ........................ 16,183 15,325 12,218
Other ........................... 18,948 19,675 8,428
Work equipment ................... 10,045 11,631 10,013
- --------------------------------------------------------------------------------
Purchased or leased during
the year:
Locomotives ..................... 276 245 85
Freight cars .................... 1,525 2,263 2,111
- --------------------------------------------------------------------------------
Average age of equipment
(years):
Locomotives ..................... 14.4 13.7 13.1
Freight cars .................... 19.3 19.2 20.9
- --------------------------------------------------------------------------------
Bad order ratio - freight cars .... 4.4% 4.1% 4.4%
- --------------------------------------------------------------------------------
CAPITAL EXPENDITURES
- -----------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- -----------------------------------------------------------------
Roadway and other .... $1,534 $ 930 $ 691
Equipment ............ 501 409 279
- -----------------------------------------------------------------
Total ................ $2,035 $1,339 $ 970
- -----------------------------------------------------------------
TRACK
- -------------------------------------------------------------------------------
Miles 1997 1996 1995
- -------------------------------------------------------------------------------
Main line .......................... 27,421 27,406 16,599
Branch line ........................ 7,526 8,431 6,186
Yards, sidings and other
main line ........................ 21,588 21,915 14,977
- -------------------------------------------------------------------------------
Total .............................. 56,535 57,752 37,762
- -------------------------------------------------------------------------------
Track miles of continuous
welded rail (at year-end) ........ 23,392 23,172 14,246
Track miles under centralized
traffic-control (at year-end) .... 15,590 15,406 9,932
- -------------------------------------------------------------------------------
Track miles of rail replaced:
New .............................. 716 451 492
Used ............................. 273 362 475
Track miles re-ballasted ........... 3,557 4,503 3,532
Ties replaced (thousands) .......... 3,853 2,919 2,194
- -------------------------------------------------------------------------------
FREIGHT OPERATIONS
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
Operating ratio (%) .......... 87.4 79.1 78.1
Carloadings (thousands) ...... 8,453 6,632 5,568
Average commodity revenue
per car .................... $1,149 $1,119 $1,097
Average price of diesel
fuel (per gallon) .......... 71.0c. 69.2c. 61.0c.
- --------------------------------------------------------------------------
TRUCKING
FREIGHT OPERATIONS
- -----------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------
Shipments (thousands):
Less-than-truckload ......... 7,482 8,184 8,279
Truckload ................... 24 39 53
- -----------------------------------------------------------------------
Total ........................ 7,506 8,223 8,332
- -----------------------------------------------------------------------
Tonnage (thousands):
Less-than-truckload ......... 3,841 4,290 4,430
Truckload ................... 269 436 612
- -----------------------------------------------------------------------
Total ........................ 4,110 4,726 5,042
- -----------------------------------------------------------------------
Revenue per hundredweight .... $11.24 $9.97 $9.55
- -----------------------------------------------------------------------
Operating ratio (%)(a) ....... 96.8 105.0 103.0
- -----------------------------------------------------------------------
(a) Excludes goodwill amortization.
EQUIPMENT AND SERVICE CENTERS
- ---------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------
Owned or leased at year-end:
Tractors ............................. 4,799 5,023 5,414
Trailers ............................. 19,439 19,479 19,809
Straight trucks ...................... 77 77 73
Automobiles and service units ........ 162 177 186
Service centers ...................... 164 161 175
- ---------------------------------------------------------------------------------
Average age of equipment (years):
Tractors ............................. 7.1 7.0 6.8
Trailers ............................. 8.7 7.7 7.2
- ---------------------------------------------------------------------------------
CAPITAL EXPENDITURES
- ------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- ------------------------------------------------------------
Revenue equipment ....... $24 $ 5 $31
Other ................... 16 5 18
- ------------------------------------------------------------
Total ................... $40 $10 $49
- ------------------------------------------------------------
50 Supplementary Information
48
TEN-YEAR FINANCIAL SUMMARY(a)
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------------------------------------------------------
Millions of Dollars, Except Per Share Amounts, Ratios and Employee Statistics
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994(b) 1993(c) 1992 1991(d) 1990 1989 1988
FOR THE YEAR
Operating Revenues .............. $11,079 8,786 7,486 6,492 6,002 5,773 5,687 5,739 5,453 5,128
Operating Income ................ 1,253 1,533 1,341 1,244 1,112 1,082 221 993 993 966
Income (Loss) from
Continuing Operations ........ 432 733 619 568 412 456 (123) 374 398 419
Net Income ...................... 432 904 946 546 530 728 64 618 595 644
Per Share (basic) (e):
Income (Loss) from
Continuing Operations ...... 1.76 3.38 3.02 2.77 2.01 2.24 (0.61) 1.87 1.89 1.85
Net Income ................... 1.76 4.17 4.62 2.66 2.59 3.58 0.32 3.09 2.82 2.85
Per Share (diluted) (e):
Income (Loss) from
Continuing Operations ...... 1.74 3.36 3.01 2.76 2.00 2.24 (0.60) 1.86 1.88 1.84
Net Income ................... 1.74 4.14 4.60 2.66 2.58 3.57 0.31 3.08 2.81 2.83
Dividends Per Share ............. 1.72 1.72 1.72 1.66 1.54 1.42 1.31 1.18 1.12 1.05
Cash from Continuing
Operations ................... 1,600 1,657 1,454 1,079 975 842 794 904 956 978
Capital Investments ............. 2,101 1,360 1,058 876 899 864 667 674 870 917
Total Salaries, Wages
and Employee Benefits (f) .... 4,789 3,603 3,120 2,755 2,689 2,659 2,523 2,538 2,462 2,319
Average Number of Employees ..... 65,600 54,800 49,500 45,400 44,000 42,800 43,800 45,400 45,400 44,100
Revenues Per Employee
(thousands) .................. $ 168.9 160.3 151.4 143.0 136.3 135.0 129.9 126.4 120.0 116.4
- --------------------------------------------------------------------------------------------------------------------------------
AT YEAR-END
Total Assets .................... $28,764 27,927 19,446 14,543 13,797 12,901 12,272 12,063 11,567 11,272
Total Debt ...................... 8,518 8,027 6,364 4,479 4,105 4,035 3,966 3,982 3,975 3,254
Common Stockholders' Equity ..... 8,225 8,225 6,364 5,131 4,885 4,639 4,163 4,277 3,911 4,482
Equity Per Common Share ......... 33.30 33.35 30.96 24.92 23.81 22.75 20.52 21.63 19.50 19.85
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS (%)
Debt to Capital Employed ........ 50.9 49.4 50.0 46.6 45.7 46.5 48.8 48.2 50.4 42.1
Return on Average Common
Stockholders' Equity ......... 5.3 12.4 16.5 10.9 11.1 16.5 1.5 15.1 14.2 13.4
(a) Data include the effects of the acquisitions of Southern Pacific Rail
Corporation as of October 1, 1996, Chicago and North Western
Transportation Company as of May 1, 1995 and Skyway Freight Systems, Inc.
as of May 31, 1993. Information presented reflects the disposition of
the Corporation's natural resources segment in 1996 and waste management
segment in 1995 as discontinued operations.
(b) 1994 net income includes a net after tax loss of $404 million from the
sale of the Corporation's waste management operations. Excluding this
loss, 1994 return on average common stockholders' equity would have been
18.2%.
(c) 1993 net income includes a net after tax charge for the adoption of
changes in accounting methods for income taxes, postretirement benefits
other than pensions and revenue recognition, and a one-time charge for
the deferred tax effect of the Omnibus Budget Reconciliation Act of 1993.
Excluding the impact of these items, income from continuing operations
would have been $468 million ($2.28 per basic share and $2.27 per diluted
share) with a return on average common stockholders' equity of 15.7%.
(d) Earnings excluding the 1991 special charges would have been $639 million
with a return on average common stockholders' equity of 14.2%.
(e) Earnings per share have been restated in accordance with the provisions
of FASB 128.
(f) Includes capitalized salaries, wages and employee benefit costs.
Ten-Year Summary 51
49
UNION PACIFIC CORPORATION
[MAP OF UNITED STATES]
Map Description
- ---------------
Two-page white map of the Continental United States, western provinces of
Canada, and Alaska, on an off-white background.
The locations of significant assets and operations are indicated on the map by
operating company as follows:
A. Union Pacific Corporation
1. Corporate Headquarters in Dallas, Texas.
B. Union Pacific Railroad
1. Headquarters in Omaha, Nebraska.
2. Single and Double Track located in the states of Nebraska, Iowa, Illinois,
Missouri, Kansas, Oklahoma, Arkansas, Tennessee, Arizona, New Mexico,
Louisiana, Minnesota, Wisconsin, Texas, Colorado, Wyoming, Utah, Idaho,
Montana, Nevada, California, Oregon,, and Washington.
3. Triple and Quadruple Track located in the states of Nebraska, Kansas and
Wyoming.
4. Classification Yards located in the states of Nebraska, Kansas and Wyoming.
5. Major Intermodal Trailer/ Container Terminals located in the states of
Nebraska, Illinois, Missouri, Arkansas, Tennessee, Louisiana, Texas,
Arizona, Oregon, Idaho, Wyoming, Nevada, Colorado, Utah, California, and
Washington.
C. Overnite Transportation
1. Headquarters in Richmond, Virginia.
2. Key Terminals spread throughout the eastern half of the Continental
United States; and in the Western states of Washington, Oregon, California,
Nevada, Utah, Arizona, Texas, Oklahoma, Kansas, Nebraska, Iowa, Minnesota,
Missouri, and Colorado; and in the Canadian cities of Toronto and Montreal.
E. Union Pacific Technologies
1. Headquarters in St. Louis, Missouri.
52 Map of Union Pacific
50
[LEGEND]
[MAP OF UNITED STATES, CONTINUED]
Map Description
- ---------------
Two-page white map of the Continental United States, western provinces of
Canada, and Alaska, on an off-white background.
The locations of significant assets and operations are indicated on the map by
operating company as follows:
A. Union Pacific Corporation
1. Corporate Headquarters in Dallas, Texas.
B. Union Pacific Railroad
1. Headquarters in Omaha, Nebraska.
2. Single and Double Track located in the states of Nebraska, Iowa, Illinois,
Missouri, Kansas, Oklahoma, Arkansas, Tennessee, Arizona, New Mexico,
Louisiana, Minnesota, Wisconsin, Texas, Colorado, Wyoming, Utah, Idaho,
Montana, Nevada, California, Oregon,, and Washington.
3. Triple and Quadruple Track located in the states of Nebraska, Kansas and
Wyoming.
4. Classification Yards located in the states of Nebraska, Kansas and Wyoming.
5. Major Intermodal Trailer/ Container Terminals located in the states of
Nebraska, Illinois, Missouri, Arkansas, Tennessee, Louisiana, Texas,
Arizona, Oregon, Idaho, Wyoming, Nevada, Colorado, Utah, California, and
Washington.
C. Overnite Transportation
1. Headquarters in Richmond, Virginia.
2. Key Terminals spread throughout the eastern half of the Continental
United States; and in the Western states of Washington, Oregon, California,
Nevada, Utah, Arizona, Texas, Oklahoma, Kansas, Nebraska, Iowa, Minnesota,
Missouri, and Colorado; and in the Canadian cities of Toronto and Montreal.
E. Union Pacific Technologies
1. Headquarters in St. Louis, Missouri.
Map of Union Pacific 53