UNION PACIFIC CORP, 8-K, 1996-09-16

UNION PACIFIC CORP
8-K, 1996-09-16
RAILROADS, LINE-HAUL OPERATING

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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

__________

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) September 11, 1996
-------------------

UNION PACIFIC CORPORATION
- ----------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)

Utah 1-6075 13-2626465
- ----------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)

Eighth and Eaton Avenues, Bethlehem, Pennsylvania 18018
- -----------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code (610) 861-3200
______________

N/A
- ------------------------------------------------------------------------------
Former Name or Former Address, if Changed Since Last Report)

<PAGE> 2

Item 2. Acquisition or Disposition of Assets.

On September 11, 1996, pursuant to the Amended and Restated Agreement
and Plan of Merger (the "Merger Agreement"), dated as of July 12, 1996, by and
among Union Pacific Corporation (the "Company"), Union Pacific Railroad
Company, Southern Pacific Rail Corporation ("Southern Pacific"), UP Holding
Company, Inc. ("Holding") and Union Pacific Merger Co., Southern Pacific was
merged with and into Holding (the "Merger") with Holding as the surviving
corporation. Immediately following the Merger, the name of the surviving
corporation was changed to "Southern Pacific Rail Corporation." As a result
of the Merger, each share of Southern Pacific common stock, par value $.001
per share (the "SP Shares"), was converted into the right to receive, in
accordance with the elections filed by the stockholders of Southern Pacific,
(a) $25.00 per SP Share in cash, without interest thereon, (b) .4065 shares of
the Company's common stock, par value $2.50 per share ("UPC Common Stock"),
for each SP Share, or (c)a combination thereof, subject to proration, all as
more fully set forth in the Merger Agreement. The purchase price was estab-
lished through arms-length negotiations between the Company and Southern
Pacific. The Company intends to integrate Southern Pacific's rail operations
with the rail operations of the Company.

The Company consummated the Merger by issuing approximately 38.1 million
shares of UPC Common Stock in exchange for approximately 93.7 million SP
Shares and paying $586 million for approximately 23.4 million SP Shares (i.e.,
$25 for each such Share). As a result of a first step cash tender offer
completed in September 1995, the Company made an initial investment in
Southern Pacific of $976 million - $25 per share for approximately 39 million
SP Shares (approximately 25% of Southern Pacific's then outstanding common
stock). The combination of these transactions has resulted in the Company's
acquisition of 100% ownership of Southern Pacific. For accounting purposes,
the UPC Common Stock issued in connection with the Merger is valued at $65 per
share, the average of the high and low trading prices as reported on the New
York Stock Exchange on August 3, 1995, the day the Merger was first announced,
for a total value of $2.48 billion. As a result, the total consideration paid
for Southern Pacific, including both cash and stock and including the first
step cash tender offer, is approximately $4.04 billion. The Merger has been
accounted for as a purchase.

The Company funded the cash paid to Southern Pacific shareholders
pursuant to the Merger through the use of its outstanding credit facilities
and other borrowings from private or public lenders.

Prior to the Merger, Mr. Philip F. Anschutz, The Anschutz Corporation,
an affiliate of Mr. Anschutz, and Anschutz Foundation, of which Mr. Anschutz
is a director (collectively, the "Anschutz Shareholders"), beneficially owned
40,322,612 SP Shares or approximately 25.8% of the outstanding SP Shares. As
a result of the Merger, the Anschutz Shareholders received 12.68 million
shares of UPC Common Stock, which represents approximately 5.2% of the total
UPC Common Stock outstanding.

A copy of the press release announcing the consummation of the Merger is
attached as Exhibit 99.1 and is incorporated herein by reference in its
entirety.

Certain additional information about the Merger which is required by
Item 2 of this Current Report on Form 8-K is set forth in the Joint Proxy
Statement/Prospectus, dated July 16, 1996, of Southern Pacific and the
Company, which is hereby incorporated by reference in this report.

Item 5. Other Events.

On September 12, 1996, the Company declared a special dividend of all
shares of common stock of Union Pacific Resources Group Inc. owned by the
Company. A copy of the press release announcing this dividend declaration is

<PAGE> 3

attached as Exhibit 99.4 and is incorporated herein by reference in its
entirety.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

(a) Financial Statements of Business Acquired. The historical
financial statements of Southern Pacific and its subsidiary companies which
are required to be reported in this Current Report on Form 8-K are attached as
Exhibits 99.2 and 99.3 and are incorporated herein by reference in their
entirety. A manually signed independent auditors' report is included in the
financial statements set forth in Exhibit 99.3.

(b) Pro Forma Financial Information. Because regulatory
restrictions prevented the Company from performing customary due diligence
subsequent to August 1995, the Company has determined that it is impracticable
to provide the pro forma financial information required to be reported in this
Current Report on Form 8-K at this time. The Company will file the required
pro forma financial information under cover of an amendment to this Current
Report on Form 8-K as soon as practicable but in no event later than November
25, 1996.

20 Joint Proxy Statement/Prospectus, dated July 16, 1996, of Southern
Pacific Rail Corporation and Union Pacific Corporation, incorporated by
reference to the Post-Effective Amendment No. 2 to the Registration
Statement on Form S-4 as filed with the Securities and Exchange Commis-
sion on July 16, 1996.

23 Consent of KPMG Peat Marwick LLP, Independent Auditors.

99.1 Text of Press Release, dated September 11, 1996, issued by Union Pacific
Corporation announcing consummation of the Southern Pacific Merger.

99.2 Financial Statements of Southern Pacific and Subsidiary Companies as of
June 30, 1996 and December 31, 1995 and for the six months ended June
30, 1996 and 1995 and the three months ended June 30, 1996 and 1995 as
set forth in the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996, of Southern Pacific.

99.3 Financial Statements of Southern Pacific and Subsidiary Companies as of
December 31, 1995 and 1994 and for the three-year period ended December
31, 1995 as set forth in the Annual Report on Form 10-K for the year
ended December 31, 1995, of Southern Pacific.

99.4 Text of Press Release, dated September 12, 1996, issued by the Union
Pacific Corporation announcing a special dividend of all the remaining
shares of common stock of Union Pacific Resources Group Inc. owned by
Union Pacific.

<PAGE> 4

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

Dated: September 16, 1996

UNION PACIFIC CORPORATION

By: /s/ L. White Matthews, III
---------------------------------
L. White Matthews, III
Executive Vice President-Finance,
Chief Financial Officer and Director

<PAGE> 5

EXHIBIT INDEX

Exhibit Description

20 Proxy Statement/Prospectus, dated July 16, 1996, of
Southern Pacific Rail Corporation and Union Pacific
Corporation, incorporated by reference to the Post-
Effective Amendment No. 2 to the Registration Statement
on Form S-4 as filed with the Commission on July
16, 1996.

23 Consent of KPMG Peat Marwick LLP, Independent Auditors.

99.1 Text of Press Release, dated September 11, 1996,
issued by the Union Pacific Corporation announcing
consummation of the Southern Pacific Merger.

99.2 Financial Statements of Southern Pacific and Subsidiary
Companies as of June 30, 1996 and December 31, 1995
and for the six months ended June 30, 1996 and 1995
and the three months ended June 30, 1996 and 1995
as set forth in the Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996, of Southern
Pacific.

99.3 Financial Statements of Southern Pacific and Subsidiary
Companies as of December 31, 1995 and 1994 and
for the three-year period ended December 31, 1995 as
set forth in the Annual Report on Form 10-K for the
year ended December 31, 1995, of Southern Pacific.

99.4 Text of Press Release, dated September 12, 1996,
issued by the Union Pacific Corporation announcing a
special dividend of all the remaining shares of common
stock of Union Pacific Resources Group Inc. owned by
Union Pacific.

EXHIBIT 23
----------

Accountants' Consent
--------------------

To Board of Directors

We consent to the incorporation by reference in Registration Statement No.'s
2-79663, 33-12513, 33-18877, 33-22106, 33-44236, 33-53968, 33-49785, 33-49849,
33-51071, 33-51735, 33-54811, 33-58563 and 333-10797 on Form S-8, No. 33-59323
on Form S-3 and No. 33-64707 on Form S-4 of Union Pacific Corporation of our
report dated January 26, 1996 with respect to the consolidated balance sheets
of Southern Pacific Rail Corporation and Subsidiary Companies as of December
31, 1995 and 1994, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1995, which report appears in the Form
8-K of Union Pacific Corporation dated September 11, 1996, to which appearance
we also consent.

As discussed in Note 12 to the financial statements, effective January 1, 1993
the Company changed its method of accounting for post-retirement benefits
other than pensions.

/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
San Francisco, California

September 13, 1996

EXHIBIT 99.1
------------

Union Pacific Merger with Southern Pacific Becomes Effective

Bethlehem, PA, September 11 -- Union Pacific Corporation today announced that
it has completed the necessary filings and transactions to finalize its merger
with Southern Pacific Rail Corporation.

"This is an historic day for Union Pacific," said Drew Lewis, Union
Pacific chairman and chief executive officer. "A lot of people have worked
extremely hard to make this day a reality. It's a proud moment for the entire
Union Pacific family, and we look forward to putting the two railroads together
as efficiently as possible for the benefit of our customers."

Lewis said UP and SP will start to combine administrative functions
shortly, with total implementation, including the merger of operations, taking
at least two years.

The combined UP/SP system will operate 31,000 miles of track in 24 states.
It will operate more than 2,000 trains each day, using 6,400 locomotives and
more than 142,000 freight cars.

EXHIBIT 99.2
------------
<PAGE>
<TABLE>
<CAPTION>

SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)

June 30, December 31,
1996 1995
------------- ------------
(in millions)
<S> <C> <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents. . . . . . $ 129.7 $ 105.8
Accounts receivable, net of
allowance for doubtful
accounts . . . . . . . . . . . . . 102.8 104.1
Accounts receivable sales proceeds
receivable . . . . . . . . . . . . 157.3 205.5
Materials and supplies, at cost . . 79.6 76.0
Notes receivable . . . . . . . . . . 7.3 7.7
Other current assets . . . . . . . . 53.6 58.7
-------- --------
Total current assets . . . . . . . 530.3 557.8
-------- --------

REAL ESTATE HELD FOR SALE. . . . . . . 344.0 341.9
-------- --------

PROPERTY, AT COST
Roadway and structures . . . . . . . 2,719.0 2,584.2
Railroad equipment . . . . . . . . . 1,556.3 1,557.3
Other property . . . . . . . . . . . 311.4 320.7
-------- --------
Total property . . . . . . . . . . 4,586.7 4,462.2
Less accumulated depreciation
and amortization . . . . . . 827.3 773.2
-------- --------
Property, net . . . . . . . . . . 3,759.4 3,689.0
-------- --------

OTHER ASSETS AND DEFERRED CHARGES
Note receivable and other investments 84.6 85.6
Other . . . . . . . . . . . . . . . . 79.0 75.1
-------- --------
Total other assets. . . . . . . . . 163.6 160.7
-------- --------
Total assets . . . . . . . . . . $4,797.3 $4,749.4
======== ========

(Continued)

See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)

June 30, December 31,
1996 1995
------------- ------------
(in millions)

<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts and wages payable. . . . . $ 186.2 $ 145.9
Accrued payables . . . . . . . . . 165.5 181.2
Current portion of long term debt . 57.4 58.9
Redeemable preference shares of a
subsidiary. . . . . . . . . . . . 2.0 2.0
Other current liabilities . . . . . 575.8 632.6
-------- --------
Total current liabilities . . . . 986.9 1,020.6
-------- --------

LONG-TERM DEBT. . . . . . . . . . . . 1,776.7 1,699.3
-------- --------

DEFERRED INCOME TAXES . . . . . . . . 237.4 218.6
-------- --------

OTHER LIABILITIES . . . . . . . . . . 691.1 729.9
-------- --------

REDEEMABLE PREFERENCE SHARES OF A
SUBSIDIARY . . . . . . . . . . . . . 19.9 20.1
-------- --------

STOCKHOLDERS' EQUITY
Common stock . . . . . . . . . . . . 0.2 0.2
Additional paid-in capital . . . . . 1,122.2 1,121.8
Accumulated deficit. . . . . . . . . (37.1) (61.1)
-------- --------
Total stockholders' equity . . . . . 1,085.3 1,060.9
-------- --------
Total liabilities and
stockholders' equity . . . . . . . $4,797.3 $4,749.4
======== ========

See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Six Months
Ended June 30, Ended June 30,
--------------------- --------------------
1996 1995 1996 1995
-------- --------- -------- --------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Railroad . . . . . . . . . $ 803.7 $ 782.8 $1,567.2 $1,527.0
Other . . . . . . . . . . . 24.4 21.7 46.4 44.3
-------- -------- -------- --------
Total . . . . . . . . . . 828.1 804.5 1,613.6 1,571.3
-------- -------- -------- --------
OPERATING EXPENSES
Railroad. . . . . . . . . . 747.3 723.2 1,458.7 1,411.6
Special charge (Note 5) . . - 64.6 - 64.6
Other . . . . . . . . . . . 25.1 21.6 46.0 43.3
-------- -------- -------- --------
Total . . . . . . . . . . 772.4 809.4 1,504.7 1,519.5
-------- -------- -------- --------

OPERATING INCOME (LOSS). . . 55.7 (4.9) 108.9 51.8
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Gains from sales of property
and real estate . . . . . 27.0 1.0 42.1 14.8
Real estate and other
rentals, net. . . . . . . 5.5 3.9 10.1 7.8
Interest. . . . . . . . . . 2.3 2.8 4.8 6.5
Other expense, net. . . . . (17.7) (11.2) (38.6) (28.9)
-------- -------- -------- --------
Total . . . . . . . . . . 17.1 (3.5) 18.4 0.2
-------- -------- -------- --------

INTEREST EXPENSE . . . . . . 43.5 31.4 87.9 64.3
-------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES . . . . . . . 29.3 (39.8) 39.4 (12.3)
-------- -------- -------- --------

INCOME TAX (BENEFIT)
Current . . . . . . . . . . - (0.4) - (0.1)
Deferred. . . . . . . . . . 11.4 (15.4) 15.4 (4.7)
-------- -------- -------- --------
Total . . . . . . . . . . 11.4 (15.8) 15.4 (4.8)
-------- -------- -------- --------

NET INCOME (LOSS). . . . . . $ 17.9 $(24.0) $ 24.0 $ (7.5)
======== ======== ======== ========
INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS . . . . $ 17.9 $(24.0) $ 24.0 $ (7.5)
======== ======== ======== ========

EARNINGS (LOSS) PER SHARE. . $ 0.11 $(0.15) $ 0.15 $ (0.05)
======== ======== ======== ========

See accompanying notes to consolidated condensed financial statements.

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1996
(Unaudited)

Common Stock
----------------- Additional
Number of Paid-in Accumulated
Shares Amount Capital Deficit Total
-------- ------- --------- -------- --------
(in millions)

<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 . . . . 156 $ 0.2 $1,121.8 $ (61.1) $1,060.9
Net income . . . . . . . . - - - 24.0 24.0
Issuance of Common Stock . - - 0.4 - 0.4
-------- ------- --------- -------- --------
Balances at
June 30, 1996. . . . . . 156 $ 0.2 $1,122.2 $ (37.1) $1,085.3
======== ======= ========= ======== ========

See accompanying notes to consolidated condensed financial statements.

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
------------------------

1996 1995
---------- -----------
(in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . $ 24.0 $ (7.5)
--------- ---------
Adjustments to net income (loss):
Gains from sales of property and real estate. . (42.1) (14.8)
Depreciation and amortization . . . . . . . . . 87.4 73.5
Deferred income taxes . . . . . . . . . . . . . 15.4 (4.7)
Special charge. . . . . . . . . . . . . . . . . - 64.6
Other adjustments . . . . . . . . . . . . . . . (16.5) (118.7)
--------- ---------
Total adjustments . . . . . . . . . . . . . . 44.2 (0.1)
--------- ---------
Net cash provided by (used for) operating
activities . . . . . . . . . . . . . . . . . 68.2 (7.6)
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES
Property sold and retired . . . . . . . . . . . . 52.9 16.7
Capital expenditures. . . . . . . . . . . . . . . (154.7) (174.8)
Decrease in short-term investments. . . . . . . . - 95.0
Change in notes receivable and other
investments, net. . . . . . . . . . . . . . . . (2.4) (5.8)
--------- ---------
Net cash used for investing activities. . . . (104.2) (68.9)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt, net of costs. . . 100.0 25.0
Debt and revolver repayment . . . . . . . . . . . (39.2) (71.4)
Redeemable preference shares repayment. . . . . . (0.9) (0.8)
--------- ---------
Net cash provided by (used for)
financing activities. . . . . . . . . . . . 59.9 (47.2)
--------- ---------

NET CHANGE IN CASH AND CASH EQUIVALENTS. . . . . . 23.9 (123.7)

CASH AND CASH EQUIVALENTS-BEGINNING OF THE PERIOD. 105.8 145.6
--------- ---------

CASH AND CASH EQUIVALENTS-END OF THE PERIOD. . . . $ 129.7 $ 21.9
========= =========

See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>

SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)

(1) OWNERSHIP AND PRINCIPLES OF CONSOLIDATION
Southern Pacific Rail Corporation ("SPRC") is the parent company of Southern
Pacific Transportation Company ("SPT"), which includes St. Louis Southwestern
Railway Company ("SSW"), SPCSL Corp. ("SPCSL") and The Denver and Rio Grande
Western Railroad Company ("D&RGW"). SPRC together with its subsidiaries is
referred to as the Company. The consolidated financial statements are prepared
on the purchase accounting basis and include the accounts of the Company and
its subsidiaries on a consolidated basis. The railroad subsidiaries report
their financial position and results of operations on the historical cost
basis. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended December 31, 1995. In the opinion of management, all adjust-
ments (consisting of normal, recurring accruals) necessary for a fair present-
ation of interim period results have been included. However, these results are
not necessarily indicative of results for a full year.

(2) RECLASSIFICATIONS
Certain of the prior period amounts have been reclassified to conform to the
June 30, 1996 consolidated condensed financial statement presentation.

(3) MERGER WITH UNION PACIFIC
On August 3, 1995, the Board of Directors of SPRC approved an agreement
providing for the merger of SPRC and the Union Pacific Railroad Company
("UPRR"), a wholly-owned subsidiary of Union Pacific Corporation ("UP").
Under the terms of the agreement, a subsidiary of UP acquired 25% of the
common stock of SPRC at a price of $25.00 per share pursuant to a tender
offer. The merger was approved in an oral voting conference by the Surface
Transportation Board ("STB") of the Department of Transportation (successor to
the Interstate Commerce Commission ("ICC")) on July 3, 1996. At that time,
the STB announced the following decision: to approve the merger subject to a
number of conditions, principally (a) a settlement agreement between UP/SP and
BNSF (as defined herein) under which BNSF will receive trackage rights over
more than 4,000 miles of UP/SP track and will purchase over 300 miles of UP/SP
lines, augmented in a number of ways to expand BNSF's ability to gain access to
traffic (e.g., through transloading facilities (facilities where goods are
transferred between trucks and railcars) and build-ins of rail lines to
exclusively-served customers, through serving new shipper facilities on the
lines over which it will have trackage rights, and through opening to BNSF 50%
of all traffic now committed under contracts to UP or SP by shippers served by
UP and SP and no other railroad), (b) a settlement agreement between UP/SP and
the Chemical Manufacturers Association which provides certain additional
protections to shippers, (c) a settlement agreement between UP/SP and Utah
Railway Company ("Utah Railway") under which Utah Railway will receive access
to certain coal mines and loading facilities in Utah and trackage rights over
SP from Utah Railway's line in Utah to Grand Junction, Colorado, (d) the grant
of trackage rights to the Texas Mexican Railway ("Tex Mex") over UP/SP lines
between Corpus Christi/Robstown, Texas, and Beaumont, Texas, via Houston,
Texas, restricted to traffic moving on Tex Mex's Laredo-Corpus Christi/Robstown
Line, including terminal-area trackage rights in Houston, (e) environmental
mitigation conditions, including a condition restricting increases in train
volumes through Reno, Nevada, and Wichita, Kansas, for 18 months following the
merger while a consultant conducts a study of

<PAGE>

possible measures to reduce the
potential adverse impact of increased rail traffic through those communities
and the STB decides upon such measures, (f) standard labor protective
conditions and (g) a 5-year oversight process, pursuant to which the STB will
review whether the conditions imposed on the merger have effectively addressed
competitive issues. Consummation of the merger remains subject to issuance of
a final written order by the STB, which is expected by August 12, 1996. Upon
issuance of that order, the two companies would be permitted to close the
transaction 30 days later. If, as expected, the written order does not contain
terms materially different from those voted upon by the STB on July 3, 1996,
UP has indicated that it expects to proceed with the transaction in accordance
with and subject to the terms and conditions of the Amended Merger Agreement.

A Special Meeting of the stockholders of SPRC will be held on August 16,
1996 for the purpose of voting on the approval and adoption of an Amended and
Restated Agreement and Plan of Merger, dated as of July 12, 1996 (the "Amended
Merger Agreement"), by and among SPRC, UP, UPRR, UP Holding Company, Inc., a
wholly owned subsidiary of UP ("Holding") and Union Pacific Merger Co., a
wholly owned subsidiary of UP ("Mergerco"). The Amended Merger Agreement
amends and restates the Agreement and Plan of Merger, dated as of August 3,
1995, as amended (the "Original Merger Agreement"), by and among SPRC, UP,
UPRR and UP Acquisition Corporation, a former indirect wholly owned subsidiary
of UP, that was approved and adopted by the SPRC stockholders at a special
meeting of SPRC stockholders on January 17, 1996, pursuant to which SPRC would
be merged into UPRR. Pursuant to the Amended Merger Agreement, among other
things, (i) SPRC will be merged with and into UPRR, with UPRR as the surviving
corporation, as provided in the Original Merger Agreement, or, in the
alternative, SPRC will be merged with and into either Holding or Mergerco,
with Holding or Mergerco as the surviving corporation (such alternative mergers
hereinafter referred to as the "Merger"), and (ii) as also provided in the
Original Merger Agreement, each share of SPRC common stock, par value $.001
per share, will be converted into the right to receive, in accordance with
the election to be filed by each stockholder, (a) $25.00 per Share in cash,
without interest thereon, (b) .4065 shares of Union Pacific common stock, par
value $2.50 per share, or (c) a combination thereof, all as more fully set
forth in the Amended Merger Agreement. Of the shares of SPRC common stock
outstanding immediately prior to the merger (other than the shares previously
acquired by UP in the tender offer), 20% would be acquired for cash and 80%
would be acquired in exchange for shares of UP common stock.

The reason for the alternative structure is to maximize UP's flexibility
after the merger in achieving additional service improvements and operating
efficiencies, while maintaining the same tax consequences to SPRC stockholders.
The amendment to the Merger Agreement will have no substantive impact on SPRC
stockholders. Except for the UP subsidiary with which SPRC could be merged,
all aspects of the Merger, including the UP common stock and cash to be
received by SPRC stockholders, remain unchanged.

The merger agreement provides that prior to completion of the merger, or
termination of the merger agreement if that occurs before the merger is
completed, the business of the Company and its subsidiaries generally will be
conducted in the ordinary course of business consistent with past practice, or
pursuant to "customary actions." Customary actions are defined as actions in
the ordinary course of a person's business where the action is generally
recognized as being customary and prudent for other major enterprises in the
person's line of business. The merger agreement may be terminated by the
Board of Directors of either the Company or UP if the merger has not occurred
on or prior to March 31, 1997. The agreement restricts the Company, with
certain exceptions, from amending its articles or bylaws, paying dividends,
issuing stock, redeeming or repurchasing shares of its stock, making
compensation changes, making loans, advances, capital contributions or
investments (except for railroad and real estate joint ventures and certain
other transactions) and engaging in transactions with affiliates. In addition,
among other things, the agreement restricts the Company from incurring debt
other than pursuant to arrangements existing on the date of the merger
agreement (the Company's $450 million of bank credit facilities and replace-
ments therefor and refinancings thereof, and capital leases to finance the
rebuilding of freight cars and purchase of equipment under existing commit-
ments), plus borrowings not to exceed $25 million in the fiscal year ending
December 31, 1996, and $12.5 million in the fiscal quarter ending
March 31, 1997.

<PAGE>

The Company has incurred expenses of $18.7 million in 1995 and 1996
associated with the proposed merger and, if the merger is completed, has
committed to continuity, enhanced severance for certain employees and trans-
action expenses of up to an additional $40 million. The accompanying financial
statements do not include accruals for merger expenses or adjustments relating
to decisions regarding the Company's operations and assets that might result
from the merger.

(4) SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1996 1995
---------- ---------
(in millions)
<S> <C> <C>
Cash payments:
Interest . . . . . . . . . . . $ 92.6 $ 46.6
Income taxes . . . . . . . . . (4.2) 1.2

Non-cash transactions:
Capital lease obligations for
rail equipment . . . . . . . 13.6 359.3
Issuance of common stock . . 0.4 5.8

</TABLE>

(5) SPECIAL CHARGE

In June 1995, the Board of Directors approved plans aimed at reducing future
operating costs and increasing productivity which resulted in a $64.6 million
pretax charge. Approximately $41 million of the charge is related to severance
payments to be made for approximately 582 employees (both management and
labor), approximately $4 million of the charge is related to costs associated
with terminating certain leased facilities, and approximately $20 million is
for the expected loss associated with the sale, lease or abandonment of 600
miles of light density rail lines. Through the first six months of 1996,
severance payments totaling $4.3 million for 83 employees whose positions have
been terminated have been charged to the severance reserve. As a result of
the July 3, 1996 decision approving the merger, the Company has suspended its
plans for the severance and relocation of a substantial portion of these
employees. The Company continues to review these plans pending receipt and
review of a written merger decision on August 12, 1996 and closing of the
merger.

(6) LONG TERM DEBT

Certain of the Company's debt agreements contain quarterly financial
covenants and restrictions based on minimum tangible net worth, a maximum
funded debt to net worth ratio and a minimum fixed charge coverage ratio. As
a result of not achieving certain ratios and covenants in its $375 million
Senior Notes at December 31, 1995, the Company is restricted in incurring
additional indebtedness, except for certain limited categories of debt,
including $200 million available under its revolving bank credit facility.
Because continued compliance with the financial terms and covenants under its
bank credit facilities would require more gains than was contemplated from the
sales of properties in the first and second quarters of 1996, the Company and
its banks amended those covenants through the second quarter of 1996 to
eliminate the fixed charge coverage test for these periods. Effective as of
the end of the third quarter, the fixed charge coverage test must be satisfied.
If the merger were not consummated in the third quarter of 1996 and the
Company's earnings did not meet the reinstated fixed charge coverage test as of
the end of that quarter, the Company would be in default on both its revolver
and term loan unless it were able to obtain waivers or amendments to its loan
agreements. Management of the Company currently does not believe the Company
will meet its revised financial covenants in 1996, unless property sales
significantly exceed current expectations. If these covenants were not
satisfied, there is no assurance that necessary waivers and amendments could be
obtained. If the Company were unable to meet these covenants, or obtain
waivers or amendments, substantially all of the Company's outstanding
indebtedness could be declared in default and payment thereon accelerated,
creating a serious liquidity problem.

<PAGE>

(7) COMMITMENTS AND CONTINGENCIES

The Company is 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 Company has recorded a liability.
It is possible that additional losses will be incurred, but such amounts cannot
be reasonably estimated. The Company does not believe that disposition of
environmental matters known to the Company will have a material adverse effect
on the Company's financial condition or liquidity; however, there can be no
assurance that the impact of these matters on its results of operations for any
given reporting period will not be material.

EXHIBIT 99.3
------------
<PAGE>

Independent Auditors' Report

The Board of Directors
Southern Pacific Rail Corporation

We have audited the accompanying consolidated balance sheets of Southern
Pacific Rail Corporation and Subsidiary Companies as of December 31, 1995 and
1994, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three year period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 an 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
Pacific Rail Corporation and Subsidiary Companies as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1995 in conformity with
generally accepted accounting principles.

As discussed in Note 12 to the financial statements, effective January 1, 1993
the Company changed its method of accounting for post-retirement benefits other
than pensions.

/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP

San Francisco, California
January 26, 1996

SOUTHERN PACIFIC RAIL CORPORATION
Consolidated Balance Sheets
(in millions)

December 31,
---------------------
1995 1994
---------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . .$ 105.8 $ 145.6
Short-term investments . . . . . . . . . . . . . . . . . -- 95.0
Accounts and notes receivable, net of allowance for
doubtful accounts of $8.0 in 1995 and $8.1 in
1994 (Note 4) . . . . . . . . . . . . . . . . . . . . . 104.1 178.2
Accounts receivable sales proceeds receivable (Note 4) . 205.5 111.2
Materials and supplies at cost . . . . . . . . . . . . . 76.0 71.8
Other notes receivable . . . . . . . . . . . . . . . . . 7.7 7.2
Other current assets . . . . . . . . . . . . . . . . . . 58.7 63.6
---------------------
Total Current Assets . . . . . . . . . . . . . . . 557.8 672.6
---------------------
Real Estate Held For Sale (Note 5) . . . . . . . . . . . 341.9 361.4
---------------------
Property, at cost (Notes 5, 7, 11 and 14)
Roadway and structures . . . . . . . . . . . . . . . . . 2,584.2 2,204.4
Railroad equipment . . . . . . . . . . . . . . . . . . . 1,557.3 1,013.4
Other property . . . . . . . . . . . . . . . . . . . . . 320.7 309.0
---------------------
Total Property . . . . . . . . . . . . . . . . . . 4,462.2 3,526.8
Less accumulated depreciation and amortization . . . . . 773.2 597.8
---------------------
Property, net . . . . . . . . . . . . . . . . . . . . . 3,689.0 2,929.0
---------------------
Other Assets and Deferred Charges
Notes receivable and other investments . . . . . . . . . 85.6 79.2
Other (Note 4) . . . . . . . . . . . . . . . . . . . . . 75.1 109.9
---------------------
Total Other Assets . . . . . . . . . . . . . . . . 160.7 189.1
---------------------
Total Assets . . . . . . . . . . . . . . . . . . .$ 4,749.4 $ 4,152.1
=====================
- ------------------------------------------------------------------------------

(continued)

See accompanying notes to consolidated financial statements.

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SOUTHERN PACIFIC RAIL CORPORATION
Consolidated Balance Sheets
(in millions)

December 31,
---------------------
1995 1994
---------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and wages payable . . . . . . . . . . . . . . .$ 145.9 $ 158.0
Accrued payables
Taxes .. . . . . . . . . . . . . . . . . . . . . . . 59.1 52.8
Interest . . . . . . . . . . . . . . . . . . . . . . 55.7 50.0
Vacation pay . . . . . . . . . . . . . . . . . . . . 66.4 66.3
Current portion of long-term debt (Note 7) . . . . . . . 58.9 59.5
Redeemable preference shares of a subsidiary (Note 9) . 2.0 1.9
Other current liabilities (Note 6) . . . . . . . . . . . 632.6 627.3
---------------------
Total Current Liabilities . . . . . . . . . . . . 1,020.6 1,015.8
---------------------
Long-Term Debt (Note 7) . . . . . . . . . . . . . . . . 1,699.3 1,089.3
---------------------
Deferred Income Taxes (Note 8) . . . . . . . . . . . . . 218.6 223.4
---------------------
Other Liabilities (Notes 6 and 12) . . . . . . . . . . . 729.9 744.2
---------------------
Redeemable Preference Shares of a Subsidiary (Note 9). . 20.1 20.7
---------------------
Commitments and Contingencies (Notes 8, 11, 12 and 14) . -- --
---------------------
Stockholders' Equity
Common stock, par value $.001 per share; 300,000,000
shares authorized; 156,137,884 and 155,826,120 shares
issued and outstanding in 1995 and 1994, respectively
(Note 10). . . . . . . . . . . . . . . . . . . . . . . 0.2 0.2
Additional paid-in capital (Note 10) . . . . . . . . . . 1,121.8 1,116.2
Accumulated deficit. . . . . . . . . . . . . . . . . . . (61.1) (57.7)
---------------------
Total Stockholders' Equity . . . . . . . . . . . . . 1,060.9 1,058.7
---------------------
Total Liabilities and Stockholders' Equity . . . . .$4,749.4 $4,152.1
=====================
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SOUTHERN PACIFIC RAIL CORPORATION
Consolidated Statements of Operations
(in millions, except per share amounts)

Year Ended December 31,
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Operating Revenues
Railroad .. . . . . . . . . . . . . . $ 3,060.5 $ 3,056.4 $ 2,837.7
Other . . . . . . . . . . . . . . 90.8 86.2 80.9
----------------------------------
Total .. . . . . . . . . . . . . . 3,151.3 3,142.6 2,918.6
----------------------------------
Operating Expenses
Railroad
Labor and fringe benefits (Note 12) 1,119.7 1,085.1 1,132.5
Fuel .. . . . . . . . . . . . . . 262.3 251.3 252.4
Materials and supplies . . . . . . 173.4 187.3 217.6
Equipment rental . . . . . . . . . 324.2 328.0 331.0
Depreciation and amortization
(Note 5) . . . . . . . . . . . . 161.3 139.8 133.2
Other .. . . . . . . . . . . . . . 807.7 723.7 665.4
Special charge (Note 2) . . . . . . 64.6 -- --
--------------------------------
Total Railroad . . . . . . . . . . 2,913.2 2,715.2 2,732.1
Other .. .. . . . . . . . . . . . . . 89.2 81.7 83.3
--------------------------------
Total .. . . . . . . . . . . . . . 3,002.4 2,796.9 2,815.4
--------------------------------
Operating Income . . . . . . . . . . . 148.9 345.7 103.2
Other Income
Gains from sales of property and real
estate (Note 5) . . . . . . . . . . . 30.7 262.4 25.1
Real estate and other rentals, net . . 17.5 25.5 20.3
Interest income . . . . . . . . . . . 13.4 15.4 7.4
Other expense, net (Notes 3 and 4) . . (64.8) (82.3) (75.2)
--------------------------------
Total .. . . . . . . . . . . . . . (3.2) 221.0 (22.4)
--------------------------------
Interest Expense (Note 7). . . . . . . 145.5 158.2 156.0
--------------------------------
Income (loss) Before Income Taxes. . . 0.2 408.5 (75.2)
--------------------------------
Income Tax Expense (Benefit) (Note 8)
Current .. . . . . . . . . . . . . . (0.6) 3.7 --
Deferred .. . . . . . . . . . . . . . 4.2 157.0 (30.3)
--------------------------------
Total .. . . . . . . . . . . . . . 3.6 160.7 (30.3)
--------------------------------
Net Income (loss) before cumulative
effect of change in accounting. . . . (3.4) 247.8 (44.9)
Cumulative effect of change in accounting
for post-employment benefits in 1994 and
post-retirement benefits other than
pensions in 1993 (Net of income tax
benefits of $3.8 million and $64.3
million, respectively) (Note 12). . . -- (6.0) (104.2)
--------------------------------
Net income (Loss) . . . . . . . . . $ (3.4) $ 241.8 $ (149.1)
--------------------------------
Income (Loss) Applicable to Common
Stockholders . . . . . . . . . . . $ (3.4) $ 241.8 $ (154.9)
--------------------------------
Primary Earnings (Loss) Per Share
Net income (loss) before cumulative
effect of change in accounting . . . . $ (0.02) $ 1.63 $ (0.54)
Cumulative effect of change in
accounting. . . . . . . . . . . . . . $ -- $ (0.04) $ (1.11)
--------------------------------
Net Income (Loss) . . . . . . . . . $ (0.02) $ 1.59 $ (1.65)
----------------------------------
Fully Diluted Earnings (Loss) Per Share
Net income (loss) before cumulative effect
of change in accounting . . . . . . . $ (0.02) $ 1.63 $ (0.46)
Cumulative effect of change in
accounting . . . . . . . . . . . . . $ -- $ (0.04) $ (0.93)
---------------------------------
Net Income (Loss) . . . . . . . . . $ (0.02) $ 1.59 $ (1.39)
---------------------------------
See accompanying notes to consolidated financial statements.

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SOUTHERN PACIFIC RAIL CORPORATION
Consolidated Statements of
Stockholders' Equity (Deficit)
(in millions, except per share amounts)

Common Stock
------------------- Additional Common Stock
Number of Paid-in Accumulated Subject to
Shares Amount Capital Deficit Repurchase Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992. 100 $ 0.1 $ 221.2 $ (132.7) $ (165.5) $ (76.9)
Net loss .. . . . . . . . . . . -- -- -- (149.1) -- (149.1)
Dividends on preferred stock
($78 per share) . . . . . . . . -- -- -- (5.8) -- (5.8)
Common stock issued (Note 10). . 31 -- 390.7 -- 165.5 556.2
Cancellation of notes receivable
from The Anschutz Corporation . -- -- -- (11.9) -- (11.9)
- --------------------------------------------------------------------------------------------------------
Balances at December 31, 1993. . 131 0.1 611.9 (299.5) -- 312.5
Net income . . . . . . . . . . -- -- -- 241.8 -- 241.8
Common stock issued (Note 10). . 25 0.1 503.5 -- -- 503.6
Common stock issued to
management . . . . . . . . . . -- -- 0.8 -- -- 0.8
- --------------------------------------------------------------------------------------------------------
Balances at December 31, 1994. . 156 0.2 1,116.2 (57.7) -- 1,058.7
Net loss .. . . . . . . . . . . -- -- -- (3.4) -- (3.4)
Common stock issued to management -- -- 5.6 -- -- 5.6
- ----------------------------------------------------------------------------------------------------------
Balances at December 31, 1995. . 156 $ 0.2 $ 1,121.8 $ (61.1) $ -- $ 1,060.9
==========================================================================================================
See accompanying notes to consolidated financial statements.

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SOUTHERN PACIFIC RAIL CORPORATION
Consolidated Statements of Cash Flows
(in millions)

Year Ended December 31,
----------------------------------
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) . . . . . . . . . . $ (3.4) $ 241.8 $ (149.1)
----------------------------------
Adjustments to net income (loss)
Depreciation and amortization. . . . 161.3 139.8 133.2
Deferred income taxes . . . . . . . 4.2 153.2 (94.6)
Gains from sales of property and
real estate . . . . . . . . . . . . (30.7) (262.4) (25.1)
Special charge (Note 2) . . . . . . 64.6 -- --
Cumulative effect of change in accounting
for post-employment benefits in 1994 and
post-retirement benefits in 1993. . -- 9.8 168.5
Changes in:
Receivables . . . . . . . . . . . . (20.6) (105.2) (18.4)
Materials and supplies . . . . . . . (4.2) (14.8) (3.1)
Taxes payable. . . . . . . . . . . . 6.3 (0.1) (13.9)
Other current and noncurrent assets. 5.4 5.3 23.5
Other current and noncurrent
liabilities . . . . . . . . . . . (58.8) 60.8 (126.4)
----------------------------------
Total Adjustments . . . . . . . 127.5 (13.6) 43.7
----------------------------------
Net Cash Provided By (Used For)
Operating Activities . . . . . . . 124.1 228.2 (105.4)
----------------------------------
Cash Flows From Investing Activities
Capital expenditures . . . . . . . . (412.4) (300.5) (311.2)
Property sold and retired. . . . . . 48.7 343.4 53.8
Change in short-term investments . . 95.0 (95.0) --
Change in notes receivable and other
investments, net . . . . . . . . . 21.5 (11.8) (2.9)
----------------------------------
Net Cash Used For Investing
Activities. . . . . . . . . . . . . (247.2) (63.9) (260.3)
----------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of debt, net
of costs . . . . . . . . . . . . . 225.0 55.6 796.6
Debt and revolver repayment . . . . (139.8) (641.5) (734.5)
Proceeds from issuance of common
stock, net of costs . . . . . . . . -- 503.6 390.7
Redemption of preferred stock . . . -- -- (75.0)
Dividends paid . . . . . . . . . . . -- -- (5.8)
Redeemable preference shares
repayment . . . . . . . . . . . . . (1.9) (1.9) (2.1)
----------------------------------
Net Cash Provided By (Used For)
Financing Activities . . . . . . . 83.3 (84.2) 369.9
----------------------------------

Net Change in Cash and Cash
Equivalents. . . . . . . . . . . . (39.8) 80.1 4.2
Cash and Cash Equivalents - Beginning
of Year . . . . . . . . . . . . . . 145.6 65.5 61.3
----------------------------------
Cash and Cash Equivalents - End
of Year . . . . . . . . . . . . . . $ 105.8 $ 145.6 $ 65.5
==================================

See accompanying notes to consolidated financial statements.

</TABLE>
<PAGE>

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Ownership, Business and Basis of Presentation

Southern Pacific Rail Corporation ("SPRC") is the parent company of the
Southern Pacific Transportation Company ("SPT"), which includes St. Louis
Southwestern Railway Company ("SSW"), The Denver and Rio Grande Western
Railroad Company ("D&RGW") and SPCSL Corp. ("SPCSL"). SPT and its subsidiaries
provide railroad freight transportation service in the Western United States.
SPRC together with its subsidiaries is referred to as the Company.

The consolidated financial statements are prepared on the purchase accounting
basis and include the accounts of the Company and its subsidiaries on a
consolidated basis. The railroad subsidiaries report their financial position
and results of operations on the historical cost basis. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash and Cash Equivalents, and Short-Term Investments

For statement of cash flow purposes, the Company considers commercial paper,
municipal securities and certificates of deposit with original maturities when
purchased of three months or less to be cash equivalents. Short-term invest-
ments consist primarily of commercial paper, municipal securities and certifi-
cates of deposit with original maturities beyond three months and less than
twelve months. Such short-term investments are carried at cost, which
approximates fair value due to the short period of time to maturity.

Investments

Investments in affiliated companies (those in which the Company has a 20% to
50% ownership interest) are accounted for by the equity method. Other invest-
ments are stated at cost which does not exceed market.

Real Estate Held for Sale

At the time of the acquisitions of D&RGW and SPT, the Company identified for
sale certain real estate properties that were not essential to its
transportation operations. These properties have been classified as Real
Estate Held for Sale. Real estate properties held for sale are stated at the
lower of cost or amounts expected to be realized upon sale. No properties have
been added to this classification. In order to facilitate disposition of these
properties, the Company may participate in joint ventures or other arrangements
that do not result in immediate sales.

Property

Properties are accounted for on the cost basis. In accordance with the
Company's definition of unit of property, all costs associated with the
installation of rail, ties, ballast and other track improvements are
capitalized. Other costs are capitalized to the extent they increase asset
values or extend useful lives. Retirements are generally recorded using a
first-in, first-out basis. The cost of property and equipment (net of estimated
salvage, removal and restoration costs) is depreciated on the straight line
composite group method, generally based on estimated service lives which are
revised based on periodic depreciation and cost studies. Gains or losses from
disposition of depreciable railroad operating property are credited or charged
to accumulated depreciation except for significant disposal of property.
Certain railroad properties that are not essential to transportation operations
may be sold, some of which are included in real estate held for sale. Gains or
losses resulting from sales of real estate no longer required for railroad
operations are recognized as other income in the consolidated statement of
operations.

<PAGE>

Revenues

Freight revenues from rail transportation operations are recognized based on
the percentage of completed service method. Other railroad revenues and other
revenues are recognized as earned.

Income taxes

The Company records income taxes using the liability method, and deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. A change in the tax laws or rates results in adjustment
to the deferred tax liabilities and assets. The effect of such adjustments are
included in income in the period in which the tax laws or rates are changed.

Earnings Per Share

Earnings per share are determined by dividing net income, after deduction of
preferred stock dividends, by the weighted average number of shares of common
stock outstanding. The weighted average number of shares of common stock
outstanding in the calculation of primary earnings per share excludes the
number of shares of common stock subject to repurchase. These shares are
included in the calculation of fully diluted earnings per share. The following
summarizes the weighted average number of shares used in these calculations:

Shares at Year Ended December 31,
- ------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------
Primary. .. . . . . . . . . . 156,134 151,648 93,575
Fully diluted. . . . . . . . . 156,134 151,648 111,544

Reclassifications

Certain of the amounts previously reported have been reclassified to conform to
the current consolidated financial statement presentation.

2. Special Charge

In June 1995, the Board of Directors approved plans aimed at reducing future
operating costs and increasing productivity which resulted in a $64.6 million
pretax charge. The charge includes $41 million for severance payments to be
made for approximately 582 employees (both management and labor), 64 of whom
were terminated in 1995 with the remainder planned for termination before the
end of 1996, approximately $4 million of the charge is related to costs
associated with terminating certain leased facilities, and approximately $20
million is for the expected loss associated with the sale, lease or abandonment
of 600 miles of light density rail lines. Current liabilities, non-current
liabilities and accumulated depreciation at June 30, 1995 were increased by
approximately $28 million, $17 million and $20 million, respectively, as a
result of this charge. As part of the plans to increase productivity, the
Company also approved the relocation and training of up to 300 employees for
which future expected costs of approximately $8 million will be expensed as
incurred under current accounting principles. As of December 31, 1995, 64
employees have been terminated and $2.0 million has been charged to the
reserve. The Company continues to evaluate the costs and benefits of the plans
approved by the Board in June 1995.

3. Proposed Merger with Union Pacific

On August 3, 1995, the Board of Directors of SPRC approved an agreement
providing for the merger of SPRC and the Union Pacific Railroad Company
("UPRR"), a wholly-owned subsidiary of Union Pacific Corporation ("UP"). Under
the terms of the agreement, a subsidiary of UP acquired 25% of the common stock
of SPRC at a price of $25.00 per share pursuant to a tender offer. The merger
requires approval by the Surface Transportation Board ("STB") of the Department
of Transportation (successor to the Interstate Commerce Commission ("ICC")).
Based on the 255 day procedural schedule adopted by the ICC, the earliest a
decision can be expected is August 1996. The shares purchased in the tender
offer are held in a voting trust pending a decision by the STB. Following
receipt of STB approval and the satisfaction of other conditions, SPRC (and
the UP subsidiary that purchased SPRC stock in the cash tender offer) would be
merged into UPRR. In the merger, each share of SPRC stock would be converted,
at the holder's election (subject to proration), into the right to receive
$25.00 in cash or 0.4065 shares of UP common stock. Of the shares of SPRC
common stock outstanding

<PAGE>

immediately prior to the merger (other than the shares
previously acquired by UP in the tender offer), 20% would be acquired for cash
and 80% would be acquired in exchange for shares of UP common stock. In
accordance with the provisions of the UP merger agreement, all 28 executives
covered by the Equity Incentive Plan (see Note 12) waived their rights under
that plan.

The merger agreement provides that prior to completion of the merger, or
termination of the merger agreement if that occurs before the merger is
completed, the business of the Company and its subsidiaries generally will be
conducted in the ordinary course of business consistent with past practice, or
pursuant to "customary actions". Customary actions are defined as actions in
the ordinary course of a person's business where the action is generally
recognized as being customary and prudent for other major enterprises in the
person's line of business. The merger agreement may be terminated by the Board
of Directors of either the Company or UP if the merger has not occurred on or
prior to March 31, 1997. The agreement restricts the Company, with certain
exceptions, from amending its articles or bylaws, paying dividends, issuing
stock, redeeming or repurchasing shares of its stock, making compensation
changes, making loans, advances, capital contributions or investments (except
for railroad and real estate joint ventures and certain other transactions) and
engaging in transactions with affiliates. In addition, among other things, the
agreement restricts the Company from incurring debt other than pursuant to
arrangements existing on the date of the merger agreement (the Company's $450
million of bank credit facilities and replacements therefore and refinancings
thereof, and capital leases to finance the rebuilding of freight cars and
purchase of equipment under existing commitments), plus borrowing not to exceed
$12.5 million in the fiscal year ended December 31, 1995, $25 million in the
fiscal year ending December 31, 1996 and $12.5 million in the fiscal quarter
ending March 31, 1997.

On November 30, 1995, UPRR and SPRC filed an application for the proposed
merger with the ICC and the application process is ongoing. The earliest
closing of the transaction, if approved, would be September 1996.

On January 17, 1996 at a special meeting called to consider the proposed
merger, the stockholders of SPRC voted to proceed with the transaction.

The Company incurred expenses of $8.1 million associated with the proposed
merger during 1995 and, if the merger is completed, has committed to continu-
ity, severance and transaction expenses of up to an additional $45 million.

4. Sale of Receivables

In November 1995, a special purpose subsidiary of SPRC transferred net railroad
freight and other receivables (including interline accounts) with limited
recourse to an accounts receivable master trust and sold certificates of
interest in the master trust to special purpose commercial paper issuers
associated with major banking institutions. The sale price for the receivables
sold is based upon the face amount of the receivables and is reduced by
discounts for expected defaults, servicing costs and anticipated collection
periods. A maximum aggregate certificate amount of $400 million may be out-
standing at any time. The proceeds from this sale were used to replace the
previous agreements relating to railroad receivables.

<PAGE>

As of December 31, 1995, 1994 and 1993, the Company had sold $469.8 million,
$454.3 million and $391.7 million of net outstanding receivables, respectively,
and had receivables for accounts receivable sold of $205.5 million, $111.2
million and $62.7 million, respectively. In addition, the Company had an
interest bearing receivable of $30 million outstanding at December 31, 1994 and
1993 included in other assets. Included in other income (expense), net is
approximately $(50.8) million in 1995, $(52.5) million in 1994 and $(41.8)
million in 1993 of discounts and other expenses associated with the sales of
accounts receivable. The new facility provides for the continuing sale of
receivables to the special purpose subsidiary of SPRC for a period of 364 days
renewable by agreement of the parties for a period of up to ten years.

5. Property and Real Estate Held for Sale

The average depreciation rates for the Company's property and equipment for
1995 were approximately 5% for roadway and structures and 3% for equipment, in-
cluding locomotives and freight cars. For property placed in service in 1995,
the average depreciation rates were 3% for roadway and structures and 5% for
equipment.

The Company received cash proceeds from sales and retirements of real estate
and property of $48.7 million, $343.4 million and $53.8 million in 1995, 1994
and 1993, respectively. The 1994 amount includes proceeds of $235.0 million for
the sale of a consolidated freight corridor to the ports of Los Angeles and
Long Beach (the "Alameda Corridor"). Gains on sales of property and real estate
on the statements of operations include cash and other consideration and are
reduced by the Company's cost basis in the properties sold (which was $17
million, $79 million and $19 million in 1995, 1994 and 1993, respectively), and
other costs directly relating to the sales (which totaled $3 million, $18
million and $9 million in 1995, 1994 and 1993, respectively). The net gains in
1995 and 1994 were also reduced by $7.9 million and $12.0 million, respective-
ly, for write-downs associated with reduced fair values of non-operating
properties included in real estate held for sale.

Costs incurred attributable to the disposition of environmental matters on
properties held for sale are capitalized as additional cost basis in the
property if expected sales proceeds equal or exceed the current cost basis plus
the estimated costs to be incurred in the future. Otherwise, such costs are
charged to expense or reserves established if the total expected costs are in
excess of expected sales proceeds. Capitalized environmental expenditures were
$9 million and $10 million in 1995 and 1994, respectively. Amounts charged to
expense attributable to environmental matters on properties held for sale were
$0.2 million, $3 million and $12 million in 1995, 1994 and 1993, respectively.

The Company has granted the Peninsula Corridor Joint Powers Board ("JPB")
options to purchase additional rights-of-way and land within five years after
the 1992 closing of the sale of the Peninsula Main Line for $110 million of
which approximately $65 million has not lapsed, been exercised or extinguished.
The Company will retain exclusive freight rights on the sold properties. The
net book value of the rights-of-way and land subject to the JPB options is $9
million.

<PAGE>

6. Other Current Liabilities and Other Liabilities

Other current liabilities include the following amounts
(in millions):

December 31,
- ------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------
Reserve for casualty, freight-related claims
and other (current portion) . . . . . . . . . . $ 210.0 $ 225.4
Accrued repairs, equipment rentals and
other payables . . . . . . . . . . . . . . . . . 364.4 373.2
Post-retirement and post-employment benefit
obligations . . . . . . . . . . . . . . . . . . 19.2 17.2
Reserve for employee separation and relocation
(current portion) . . . . . . . . . . . . . . . 39.0 11.5
-------------------
Total .. . . . . . . . . . . . . . . . . . . . $ 632.6 $ 627.3
===================

Included in other non-current liabilities are $311.9 million and $322.0
million for casualty and freight-related claims and $158.4 million and $157.5
million for post-retirement and post-employment benefits other than pensions at
December 31, 1995 and 1994, respectively.

7. Long-Term Debt

Long-term debt is summarized as follows (in millions):

December 31,
- ------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------

Equipment obligations (9.25 - 14.25%; due 1996 to 2007). $ 278.6 $ 324.5
Mortgage bonds (8.2%; due 1996 to 2001) . . . . . . . . 29.7 34.7
SPT term loan (6.813% -6.875%; due 1997 to 1999) . . . . 150.0 --
SPRC senior notes (9.375%; due 2005) . . . . . . . . . . 375.0 375.0
Other debt (4.0-6.0%; due 1996 to 2018). . . . . . . . . 92.2 93.0
Capitalized lease obligations (Note 11). . . . . . . . . 841.8 332.6
----------------------
Total .. . . . . . . . . . . . . . . . . . . . . . . 1,767.3 1,159.8
----------------------
Less discount recorded in purchase accounting. . . . . . (9.1) (11.0)
Less current portion . . . . . . . . . . . . . . . . . . (58.9) (59.5)
----------------------
Total long-term . . . . . . . . . . . . . . . . . . . $1,699.3 $1,089.3
======================

During 1995, the Company borrowed $150 million under a term loan facility
and repaid $75 million previously borrowed under the Company's $300 million
revolving credit facility. The term loan facility requires repayment in
installments in 1997 through 1999 and has a variable interest rate based on the
LIBOR rate plus 125 basis points or the prime rate depending on the Company's
credit rating. At December 31, 1995, the effective interest rate on the term
loan facility was 6.875%. The $300 million revolving credit facility has a
final maturity date of November 8, 1997 and has a variable interest rate based
on the LIBOR rate plus 87.5 basis points or the prime rate depending on the
Company's credit rating. The Company also repaid $64.8 million of other debt
during 1995. At December 31, 1995, the Company had $300 million of capacity
available under its revolving credit facility.

<PAGE>

Company will remain leveraged to a significant extent, and its
debt service and capital lease obligations will continue to be substantial.

Contractual maturities of long-term debt (including capital lease
obligations) during each of the five years subsequent to 1995 and thereafter
are as follows:

(in millions)

- -----------------------------------------------

1996 . . . . . . . . . . . . . $ 58.9
1997 . . . . . . . . . . . . . 85.8
1998 . . . . . . . . . . . . . 106.0
1999 . . . . . . . . . . . . . 146.0
2000 . . . . . . . . . . . . . 67.8
Thereafter.. . . . . . . . . . $ 1,302.8
- -----------------------------------------------

Management estimates the fair value of the Company's debt at December 31, 1995
and 1994 was approximately $1,923 million and $1,128 million, respectively,
based on interest rates for similar issues and financings.

At December 31, 1995, the Company was a party to interest rate swap agreements
for which it pays a variable rate on an aggregate notional amount of $40
million, which is used to hedge its fixed interest rate exposure on certain
debt and is accounted for as an adjustment of interest expense over the life of
the debt. The Company receives a fixed rate of interest on the swap of 4.9% and
pays a variable rate based on LIBOR, which was 5.9% at December 31, 1995. The
approximate expense to terminate the swap at December 31, 1995 was $0.6
million.

A significant portion of railroad equipment and certain rail lines are subject
to liens securing the mortgage bonds, equipment obligations, capitalized leases
or other debt.

<PAGE>

8. Income Taxes

The following summarizes income tax expense (benefit) for the years indicated
(in millions):

Year Ended December 31,
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
Current
Federal . . . . . . . . . . . . . . . . $(1.2) $ 3.6 $ --
State . . . . . . . . . . . . . . . . . 0.6 0.1 --
-------------------------------
Total . . . . . . . . . . . . . . . (0.6) 3.7 --
-------------------------------
Deferred
Federal . . . . . . . . . . . . . . . . 3.9 133.5 (25.1)
State . . . . . . . . . . . . . . . . . 0.3 23.5 (5.2)
------------------------------
Total . . . . . . . . . . . . . . . 4.2 157.0 (30.3)
------------------------------
Total income tax expense (benefit)
before cumulative effect of
change in accounting . . . . . . . 3.6 160.7 (30.3)
------------------------------
Deferred taxes on cumulative effect of
change in accounting for post-employment
benefits in 1994 and post-retirement
benefits other than pensions in 1993 .

Federal . . . . . . . . . . . . . . . -- (3.3) (54.6)
State .. . . . . . . . . . . . . . . . -- (0.5) (9.7)
-------------------------------
Total deferred taxes on
cumulative effect. . . . . . . . . -- (3.8) (64.3)
-------------------------------
Total income tax expense
(benefit). . . . . . . . . . . . . $ 3.6 $156.9 $(94.6)
- ------------------------------------------------------------------------------

Deferred tax expense in 1993 includes $1.2 million related to the change in
the federal tax rate. The reconciliation between the actual income tax expense
(benefit) and income taxes at the U.S. Federal statutory rate is
as follows:

Year Ended December 31,
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
Tax expense (benefit) at
Federal statutory rate. . . . . . . . . $ 0.1 $143.0 $(26.3)
State income taxes (net of
Federal income tax benefit) . . . . . . -- 18.0 (3.4)
Cumulative effect of
Federal tax rate change
(from 34% to 35%) . . . . . . . . . . . -- -- 1.2
Other, net. . . . . . . . . . . . . . . . 3.5 (0.3) (1.8)
Income tax --------------------------------
expense (benefit) . . . . . . . . . . . $ 3.6 $160.7 $(30.3)

Other includes permanent items, which are not significant but have a
disproportionate effect in 1995.

<PAGE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in millions):

December 31,
---------------------
1995 1994
---------------------
Deferred tax assets:
Accruals and reserves not deducted for tax
purposes until paid. . . . . . . . . . . . . . . $ 402.5 $ 382.2
Net operating loss carryforwards . . . . . . . . . 626.1 565.5
Capital lease obligations. . . . . . . . . . . . . 321.6 135.5
Other . .. . . . . . . . . . . . . . . . . . . . 48.2 68.2
---------------------
Total gross deferred
tax assets . . . . . . . . . . . . . . . . . 1,398.4 1,151.4
---------------------
Deferred tax liabilities:
Differences in depreciation and cost
capitalization methods (including
deferred gains on property) . . . . . . . . . . (1,615.0) (1,373.6)
Other . . . . . . . . . . . . . . . . . . . . (2.0) (1.2)
---------------------
Total gross deferred
tax liabilities . . . . . . . . . . . . . . . . (1,617.0) (1,374.8)
---------------------
Net deferred tax liability . . . . . . . . . $ (218.6) $ (223.4)
=====================

The Company has analyzed the sources and expected reversal periods of its
deferred tax assets and liabilities. The Company believes that the tax benefits
attributable to deductible temporary differences and operating loss carry-
forwards will be realized by the recognition of future taxable amounts related
to taxable temporary differences for which deferred tax liabilities have been
recorded. Accordingly, the Company believes a valuation allowance for its
deferred tax assets is not necessary.

The former parent of SPT (Santa Fe Pacific Corporation) agreed to indemnify
SPRC, SPT and its subsidiaries against any Federal income tax liability that
may be imposed on the Company or its 80%-owned subsidiaries for tax periods
ending on or prior to October 13, 1988 ("the Acquisition Date"). Years prior
to 1984 are closed. SPRC agreed to pay or cause SPT and its subsidiaries to pay
to the former parent any refund of Federal income taxes attributable to the
80%-owned subsidiaries received by SPRC, SPT or its subsidiaries after the
Acquisition Date for any tax period ending on or prior to the Acquisition Date.
Further, the former parent also agreed to indemnify SPRC, SPT and its subsidi-
aries, at least in part, for state, local and other taxes in respect of
periods to and including the Acquisition Date, but only to the extent that
such taxes are due or reportable for periods prior to the Acquisition Date.

The Federal income tax returns for the periods from October 14, 1988 through
1990 have been examined and are currently being considered by the Appeals
Office of the Internal Revenue Service ("IRS") regarding various unagreed
issues. The Company's consolidated Federal income tax returns are currently
being examined for the years 1991 through 1993. Management believes adequate
provision has been made for any potential adverse result.

The IRS's audit of Rio Grande Holding, Inc.'s (("RGH"), a subsidiary of SPRC
and former parent of D&RGW) returns for 1983 and the period ended October 31,
1984, led to the issuance of a Notice of Deficiency in October 1992 for 1980,
1983 and the period ended October 31, 1984. The audit of The Anschutz
Corporation ("TAC"), of which RGH was a subsidiary from November 1, 1984,
through October 13, 1988, also led to the issuance of a Notice of Deficiency
for the 1979 and 1982 years as the result of the disallowance of net operating
loss carryforward ("NOL") and investment tax credit carrybacks from the
July 31, 1985 through July 31, 1987 periods. Both notices have been petitioned
to the United States Tax Court. RGH does not expect a resolution of these cases
in 1996. RGH's taxable periods from July 1, 1987 through October 13, 1988,
included in the consolidated returns of TAC are currently under IRS audit as
part of the TAC audit. However, management believes adequate reserves have been
provided to cover any anticipated deficiencies for these tax years.

As of December 31, 1995, the Company had approximately $1.5 billion of NOLs
that will expire in 2003 through 2010. The NOLs are subject to review and

<PAGE>

possible disallowance, in whole or in part, by IRS audit of the Federal income
tax returns of the Company.

Section 382 of the Internal Revenue Code of 1986, as amended, limits a
corporation's utilization of its NOLs when certain changes in the ownership of
the corporation's stock occur within a three-year period. Such a change has
occurred with respect to the Company and therefore the Company will be
permitted to deduct only a portion of its NOLs in each taxable year with regard
to losses carried over from years prior to the change in ownership, commencing
with the year ending December 31, 1994. The Company currently does not expect
that the limitation imposed under Section 382 will have a material adverse
impact on the Company's ability to utilize its NOLs prior to their expiration.
However, the limitation could under certain circumstances delay the Company's
utilization of its NOLs and thereby increase the current portion of the
Company's Federal income taxes. Further, the limitation under certain circum-
stances could also cause a portion of the Company's NOLs to expire unutilized.

9. Redeemable Preference Shares of a Subsidiary

SSW, a 99.9%-owned subsidiary of SPT, originally issued $53.5 million ($48.5
million Series A and $5.0 million Series B) of SSW's non-voting redeemable
preference shares. The current carrying amount on the balance sheets at
December 31, 1995 and 1994 reflects the outstanding balances of the redeemable
preference shares of $42.4 million and $44.2 million, respectively, less
purchase accounting discounts of $20.2 million and $21.6 million, respectively.

The Series A shares are subject to mandatory redemption at face value over
a 20-year period commencing in 1991, at which time mandatory dividends shall be
declared and paid over the same period. The overall effective interest rate
since the date of issue is approximately 2.0%. The Series B shares are subject
to mandatory redemption at face value over a 15-year period commencing in 1989.
Mandatory dividends shall be declared and paid over a 10-year period commencing
in 1994. The overall effective interest rate since the date of issue is
approximately 4.9%.

Mandatory redemptions and mandatory dividends of Series A and Series B
shares scheduled for payment during each of the five years subsequent to 1995
are $4.2 million per year.

The Series A and Series B shares restrict certain dividend payments by SSW
to its common and preferred shareholders. Under these provisions, at December
31, 1995, $73.2 million of SSW's historical cost basis retained income was not
restricted. No estimate of the fair value of the preference shares was made by
the Company.

10. Capital Transactions

In August 1993 and March 1994 the Company closed the offering and sale of
30,783,750 shares and 25,000,000 shares of common stock, respectively, for
total net proceeds of $894.3 million. Proceeds from these transactions were
used to repay debt, purchase equipment operated pursuant to operating leases
and for general corporate purposes.

<PAGE>

11. Leases

The Company leases certain freight cars, locomotives, data processing equipment
and other property. Future minimum lease payments under noncancelable leases as
of December 31, 1995 are summarized as follows:

in millions

Capital Operating
Year ended December 31, Leases Leases
- ------------------------------------------------------------------------------
1996. . . . . . . . . . . . . . . . . . . . $ 76.6 $ 154.7
1997. . . . . . . . . . . . . . . . . . . . 95.4 141.9
1998. . . . . . . . . . . . . . . . . . . . 94.2 127.0
1999. . . . . . . . . . . . . . . . . . . . 100.2 116.5
2000. . . . . . . . . . . . . . . . . . . . 94.6 102.1
Thereafter. . . . . . . . . . . . . . . . . 1,318.0 251.6
----------------------
Total minimum payments . . . . . . . . . 1,779.0 $ 893.8
=========
Less amount representing
interest (at rates ranging
from 7.2% to 13.1%). . . . . . . . . . . (937.2)
-----------
Present value of minimum
lease payments . . . . . . . . . . . . $ 841.8
- ------------------------------------------------------------------

Rental expense for noncancelable operating leases with terms over one year
was $166.0 million, $168.7 million and $156.5 million for the years ended
December 31, 1995, 1994 and 1993, respectively. Contingent rentals and
sublease rentals were not significant. The net book value of equipment under
capital lease is approximately $785 million at December 31, 1995.

The Company has expanded and upgraded its locomotive and freight car fleets
principally through capitalized lease financing. During 1995, the Company
received and financed through capitalized lease 18 remanufactured locomotives,
279 new locomotives, 920 new hopper cars, 1,042 used hopper cars and 1,100
reconditioned freight cars. In addition, the Company finalized capitalized
lease financing during 1995 for approximately 1,600 remanufactured freight cars
delivered in 1994. The total capitalized lease obligations incurred in 1995
were approximately $522 million. The Company plans on completing the acquisit-
ion of approximately 500 reconditioned freight cars by May 1996 for an
estimated $14.1 million in capitalized lease obligations. The Company plans on
acquiring, through operating leases, approximately 3,300 freight cars during
1996 at an estimated annual operating lease expense of $10.1 million in 1996
and approximately $16 million annually thereafter.

In 1984, the Company entered into a long-term lease agreement with the ports
of Los Angeles and Long Beach relating to the Company's Intermodal Container
Transfer Facility ("the Facility"). Under the terms of the lease, the Company
is obligated to make certain future minimum lease payments and is subject to
additional contingent rentals which are based on the annual volume of container
movements at the Facility. The minimum lease payments, which are $4.5 million
for 1996, are included in the adjacent table. However, for each five-year
period from 1997 through 2036, the annual minimum lease payments and contingent
rentals will be determined by the ports based on independent appraisals of the
fair rental value of the property and, therefore, no amounts are included in
the adjacent table for such years. The 1995 expense was $7.9 million.

The Company leases operating rights on tracks owned by other railroads,
including Union Pacific and BN/ATSF, and shares costs of transportation
facilities and operations with other railroads. Subject to required regulatory
approval, the Company has the right to terminate its usage with certain notice
periods. Net rent expense for trackage rights was $14.0 million in 1995, $6.4
million in 1994 and $1.9 million in 1993. The 1993 amount includes the benefit
of the negotiated settlement of a joint facility case of approximately $10
million.

<PAGE>

The Company pays for the use of transportation equipment owned by others and
receives income from others for the use of its equipment. It also shares the
cost of other transportation facilities with other railroads. Rental expense
and income from equipment and the operation of joint facilities are included in
operating expenses on a net basis. Total net equipment lease, rent and car hire
expense was $324 million, $328 million and $331 million for 1995, 1994 and
1993, respectively.

12. Employee Benefit and Compensation Plans

Pension Plan

The SPRC Pension Plan ("Plan") is a defined benefit noncontributory pension
plan covering primarily employees not covered by a collective bargaining
agreement. The Plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"). Pension benefits for normal retirement
are calculated under a formula which utilizes average compensation, years of
benefit service and Railroad Retirement and Social Security pay levels. The
Company's funding policy is to contribute each year an amount not less than the
minimum required contribution under ERISA nor greater than the maximum tax
deductible contribution. The assets of the Plan consist of a variety of invest-
ments including U.S. Government and agency securities, corporate stocks and
bonds and money market funds.

The following summarizes the components of the Company's net periodic
pension cost (in millions):
Year Ended December 31,
---------------------------------
1995 1994 1993
---------------------------------
Service costs - benefits
covered during the year. . . . . . . . . . $ 4.0 $ 5.1 $ 5.5
Interest cost on projected
benefit obligation . . . . . . . . . . . . 31.2 29.9 31.2
Actual (return)/loss on
plan assets . . . . . . . . . . . . . . . (77.6) 0.7 (40.1)
Net amortization
and deferral . . . . . . . . . . . . . . . 49.4 (32.0) 7.5
---------------------------------
Net periodic pension cost . . . . . . $ 7.0 $ 3.7 $ 4.1
---------------------------------

<PAGE>

The following summarizes the funded status and amounts recognized in the
Company's balance sheets for the SPRC Pension Plan (in millions):

December 31,
--------------------
1995 1994
--------------------
Actuarial present value of
benefit obligations
Vested benefits . . . . . . . . . . . . . . $ 377.2 $ 335.1
Non-vested benefits . . . . . . . . . . . . 4.3 6.0
--------------------
Accumulated benefit
obligations . . . . . . . . . . . . . . $ 381.5 $ 341.1
--------------------
Projected benefit obligation . . . . . . . . . $ 429.5 $ 376.9
Fair value of assets in plan . . . . . . . . . 372.9 328.3
--------------------
Projected benefit obligation
in excess of plan assets . . . . . . . . . . (56.6) (48.6)
Unrecognized transition amount . . . . . . . . (3.3) (3.9)
Unrecognized gain or loss. . . . . . . . . . . 8.6 7.8
Unrecognized prior service cost. . . . . . . . 3.9 4.3
--------------------
Net pension liability included
in the balance sheet . . . . . . . . . . $ (47.4) $ (40.4)
- ------------------------------------------------------------------------------

The following summarizes the significant assumptions used in accounting for
the SPRC Pension Plan:
December 31,
---------------------------------
1995 1994 1993
---------------------------------
Weighted average discount rate . . . . . . . 7.25% 8.5% 7.25%
Expected rate of increase
in future compensation levels . . . . . . 6.0 6.0 6.0
Weighted average expected long-term
rate of return on plan assets . . . . . . 9.0 9.0 9.0

Thrift Plan

SPRC has established a defined contribution plan (the "SPRC Thrift Plan") as an
individual account savings and investment plan primarily for employees of SPRC
who are not subject to a collective bargaining agreement. Eligible participants
may contribute a percentage of their compensation and the Company also
contributes using a formula based on participant contributions.

Post-retirement Benefits Other Than Pensions

The Company sponsors several plans which provide health care and life insurance
benefits to retirees who have met age and service requirements. The contribut-
ion rates that are paid by retirees are adjusted annually to offset increases
in health care costs, if any, and fix amounts payable by the Company. The life
insurance plans provide life insurance benefits for certain retirees. The
amount of life insurance is dependent upon length of service, employment dates
and several other factors and increases in coverage beyond certain minimum
levels are borne by the employee.

The Company adopted FAS No. 106, "Employers' Accounting for Post-retirement
Benefits Other Than Pensions", effective January 1, 1993. Prior to January 1,
1993, the Company's policy was to expense and fund the cost of all retiree
welfare benefits only as the benefits were payable. The effect of adopting FAS
No. 106 on net income and the net periodic benefit cost (expense) for 1993 was
a charge to earnings of $168.5 million (less income taxes of $64.3 million).
The Company's policy continues to be to fund the cost of all retiree welfare
benefits only as the benefits are payable. Accordingly, there are no plan
assets.

<PAGE>

The following table summarizes the plan's accumulated post-retirement
benefit obligation (in millions):

December 31,
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
Health Life Health Life
Care Insurance Total Care Insurance Total
- -------------------------------------------------------------------------------
Retirees . . . . . . . $ 42.2 $ 99.7 $ 141.9 $ 41.1 $ 92.0 $ 133.1
Fully eligible plan
participants . . . . 11.5 7.8 19.3 8.6 5.4 14.0
---------------------------------------------------
Accumulated Post-Retirement
Benefit Obligation . . $ 53.7 $ 107.5 $ 161.2 $ 49.7 $ 97.4 $ 147.1
-------------- --------------
Unrecognized net gain . 1.6 13.7
Plan amendment . . . . 3.9 4.1
------- -------
Accrued post-retirement
benefit cost included
in other liabilities . $ 166.7 $ 164.9
======= =======

As of December 31, 1995 and 1994, the current portion of accrued
post-retirement benefit cost was approximately $18.3 million and $16.3 million,
respectively, and the long-term portion was approximately $148.4 million and
$148.6 million, respectively.

The net periodic post-retirement benefit costs include the following
components (in millions):

- -----------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------
Service cost . . . . . . . . . . . . . . . . . . $ 0.6 $ 0.8
Interest cost . . . . . . . . . . . . . . . . . 11.9 12.0
Amortization of plan amendment . . . . . . . . . (0.2) (0.2)
------------------------
Net periodic post-retirement
benefit cost. . . . . . . . . . . . . . . . $ 12.3 $ 12.6

For measurement purposes, the Company has not assumed an annual rate of
increase in the per capita cost of covered benefits for future years since the
Company has limited its future contributions to current levels. The weighted
average discount rate used in determining the benefit obligation was 7.25
percent and 8.5 percent in 1995 and 1994, respectively.

Post-employment Benefits

The Company adopted FAS No. 112 "Employers' Accounting for Post-employment
Benefits" effective January 1, 1994. Prior to January 1, 1994, the Company's
policy was to expense and fund the cost of all post-employment benefits only
as the benefits were payable. The effect of adopting FAS No. 112 on net income
was a charge to earnings of $9.8 million ($6.0 million after tax). The
Company's policy continues to be to fund the cost of post-employment benefits
as the benefits are payable.

Equity Incentive Plan

The SPRC Compensation Committee authorized a grant of stock bonuses under
SPRC's Equity Incentive Plan covering up to 1,555,000 shares of SPRC Common
Stock, in the aggregate, to 28 key executive employees of the Company,
contingent upon the attainment of certain pre-established operating ratio
objectives and individual performance goals. In accordance with the provisions
of the UP merger agreement, all 28 executives agreed to cancel these bonus
agreements in order to participate in continuity and severance programs
provided for in the merger agreement (see Note 3). In 1994, the Company charged
to expense approximately $7.5 million representing the value of approximately
413,000 shares which were awarded in January 1995 pursuant to the Equity
Incentive Plan. In 1995, the specified operating ratio objective was not met
and no payments were made under this plan.

<PAGE>

13. Related Parties

Subsidiaries of Anschutz Company, a company wholly-owned by Philip F. Anschutz,
Chairman of the Company, perform specific services for the Company's railroad
subsidiaries primarily relating to the purchase and administration of
locomotive fuel and fuel futures contracts and fiber optic telecommunications.
The amount paid by the Company in 1995, 1994 and 1993 for these transactions
was $6.7 million, $7.9 million and $11.4 million, respectively. The Company
believes that the terms of the transactions are comparable to those that could
be obtained from unaffiliated parties.

In 1994, the Company purchased an office building in Denver for $5.5
million from family trusts in which Mr. Anschutz and certain members of his
family have an interest. The Company obtained an independent appraisal of the
building pursuant to which the fair market value of the building was determined
to be in excess of the purchase price.

14. Commitments and Contingencies

As a holding company, the Company is dependent upon the business activity and
real estate sales of its subsidiaries to meet its consolidated debt obligations
and to make payments for employee severance programs and make capital
expenditures expected to be required by the Company. The various debt
agreements of SPT contain restrictions as to payment of dividends to the
Company. SPT is permitted to make advances or dividends to its parent in order
for certain specified interest to be paid by its parent.

On November 4, 1993, the Company and Integrated Systems Solutions Corpo-
ration ("ISSC"), a subsidiary of IBM, entered into a ten-year agreement under
which ISSC handles all of the Company's management information services ("MIS")
functions. These include systems operations, application development and
implementation of a disaster recovery plan. Pursuant to the agreement, the
Company is obligated to pay annual base charges of between $45 million and $50
million (which covers, among other things, payments for MIS equipment and
personnel) over a ten-year period subject to adjustments for cost of living
increases and variations in the levels of service provided under the agreement.

Inherent in the operations of the Company is the possibility that there may
exist environmental conditions as a result of current and past operations which
might be in violation of various federal and state laws relating to the
environment. In certain instances, the Company has received notices of asserted
violation of such laws and regulations and has taken or plans to take steps to
address the problems cited or to contest the allegations of violation. The
Company has recorded reserves to provide for environmental costs on certain
operating and non-operating properties. Environmental costs include site
remediation and restoration on a site-by-site basis, as well as costs for
initial site surveys and environmental studies of potentially contaminated
sites. The Company has made and will continue to make substantial expenditures
relating to environmental conditions on its properties, including properties
held for sale. In assessing its potential environmental liabilities, the
Company typically causes on-going examinations of newly identified sites and
evaluations of existing cleanup efforts to be performed by environmental
engineers. These assessments which usually consider a combination of factors
such as the engineering reports, site visits, area investigations and other
steps, are reviewed periodically by counsel. Due to uncertainties as to various
issues such as the required level of remediation and the extent of participat-
ion in clean-up efforts by others, the Company's total clean-up costs for en-
vironmental matters cannot be predicted with certainty. The Company has accrued
reserves for environmental matters with respect to operating and non-operating
properties not held for sale, as well as certain properties previously sold,
based on the costs estimated to be incurred when such estimated amounts (or at
least a minimum amount) can be reasonably determined based on information
available. During the years ended December 31, 1995, 1994 and 1993, the Company
recognized expenses of $17.3 million, $17.6 million and $24.2 million,
respectively, related to environmental matters. At December 31, 1995 and 1994
the Company had accrued reserves for environmental contingencies of $52.0
million and $65.2 million, respectively, which includes $13.6 million and $13.4
million, respectively, in current liabilities. These reserves relate to
estimated liabilities for operating and non-operating properties not held for
sale and certain properties previously sold and were exclusive of any
significant future recoveries from insurance carriers. It is possible that
additional losses will be incurred, but such amounts cannot be reasonably
estimated. The Company does not believe that disposition of environmental
matters known to the Company will have a material adverse effect on the
Company's financial condition or liquidity; however, there

<PAGE>

can be no assurance
that the impact of such matters on its results of operations for any given
reporting period will not be material.

A substantial portion of the Company's railroad employees are covered by
collective bargaining agreements with national railway labor organizations that
are organized along craft lines. These agreements are generally negotiated on
a multi-employer basis with the railroad industry represented by a bargaining
committee. The culmination of various Presidential and legislative events in
1992 resulted in the Company negotiating most of its labor agreements
separately. Certain of the wage agreements obtained in 1991, 1992 and 1993 have
reduced the effects of inflation on operating costs but provided for cost of
living increases beginning in 1995.

All of the Company's labor agreements became subject to modification (except
the Western Lines UTU Agreement) in January 1995. Wages for approximately half
of the Company's employees covered by these agreements returned to wage levels
prevailing under nationwide railway collective bargaining agreements in 1995.
Wages for the other employees covered by the agreements (including the Western
Lines UTU) do not require restoration to national wage levels and are subject
to resolution in the current round of negotiations which began in late 1994. In
addition, most of the Company's labor agreements (except for the agreement
related to UTU employees on the Company's Western Lines) provide for
cost-of-living increases on a semi-annual basis beginning July 1, 1995. The
additional cost to the Company of these automatic increases could be
substantial.

As a result of local negotiations in the current bargaining round, the
Company has entered into six agreements which run through 1997 (including the
Western Lines UTU Agreement). Those agreements, which cover in excess of 6,800
employees, have been ratified by the union membership and cover all trainmen
and switchmen on the St. Louis Southwestern Railway Company, the signalmen
systemwide, yardmasters systemwide, switchmen on the Company's Eastern Lines,
shopcraft supervisors on the St. Louis Southwestern Railway Company, locomotive
engineers systemwide, train dispatchers and the Company's intermodal facilities
at Long Beach and Oakland. Those agreements do not provide for general wage
increases; however, they do provide for a 3% lump sum payment based on the
performance of the Company as measured by its operating ratio. A few of these
agreements also provide for cost of living increases on July 1, 1995 and on
July 1, 1996 but none thereafter. As of March 1996, the Company is in
negotiations with its clerical employees, shopcraft employees and maintenance
of way employees representing approximately 8,900 employees.

To ensure stability of its fuel costs, the Company has entered into fuel
hedging agreements covering approximately 47% of its estimated first quarter
1996 fuel needs at an average purchase price of $.485 per gallon (excluding
handling costs). However, in the event that fuel prices decline below the
average purchase price under the hedging agreements, the Company will not
receive any benefit from these fuel hedging agreements and may in fact pay more
for fuel than it would have paid in the absence of such agreements. Further
fuel hedging activity may occur during 1996.

In 1995, the Company settled its claim from insurance companies relating to
the 1993 Midwest flooding. The Company recognized a reduction in operating
expense of $28.5 million and $5.0 million in 1995 and 1994, respectively,
relating to this settlement.

Although the Company has purchased insurance, the Company has retained
certain risks with respect to losses for third-party liability and property
claims. In addition, various claims, lawsuits and contingent liabilities are
pending against the Company. Management has made provisions for these matters
which it believes to be adequate. The Company does not believe that the
disposition of claims, lawsuits and related matters known to the Company will
have a material adverse effect on the Company's financial condition or
liquidity; however, there can be no assurance that the impact of such matters
on its results of operations for any given reporting period will not be
material.

<PAGE>

15. Supplemental Cash Flow Information

Supplemental cash flow information is as follows
(in millions):

Year Ended December 31,
- -----------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------
Cash payments (refunds):
Interest . . . . . . . . . . . . . . $ 105.5 $ 130.2 $ 115.0
Income taxes . . . . . . . . . . . . 1.4 1.7 (0.5)
Non-cash transactions:
Sales of real estate for notes
receivable . . . . . . . . . . . . -- 27.9 --
Capital lease obligations
for railroad equipment . . . . . . 522.3 265.2 57.0

16. Quarterly Data (Unaudited)

- -----------------------------------------------------------------------------
First Second Third Fourth
(in millions) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------
1995
Operating revenues . . . . . $ 766.8 $ 804.5 $ 796.6 $ 783.4
Operating income (loss)(a) . 56.7 (4.9) 47.9 49.2
Other income (expense) . . . 3.8 (3.5) (9.2) 5.7
Net income (loss)(a) . . . . 16.5 (24.0) 1.2 2.9
Earnings per share(a) . . . $ 0.11 $ (0.15) $ 0.01 $ 0.02

1994
Operating revenues . . . . . $ 748.2 $ 806.6 $ 807.3 $ 780.5
Operating income . . . . . . 62.3 107.4 97.1 78.9
Other income (expense)(c) . 1.2 10.5 (4.0) 213.3
Net income (loss)(b)(c) . . 9.0 48.5 33.5 150.7
Earnings per share(c):
Before effect of change in
accounting . . . . . . . $ 0.11 $ 0.31 $ 0.22 $ 0.97
Cumulative effect of change
in accounting . . . . . . (0.05) -- -- --
----------------------------------------------
Total .. . . . . . . . . $ 0.06 $ 0.31 $ 0.22 $ 0.97
=============================================================================

(a) Second quarter 1995 data includes a pre-tax special charge of $64.6 million
($39.7 million after tax).

(b) First quarter 1994 data includes an extraordinary charge of $6.0 million
(net of taxes) for the change in accounting for post-employment benefits
(FAS 112).

Exhibit 99.4
------------

Union Pacific Declares Dividend of Remaining Union Pacific Resources' Stock
Bethlehem, PA September 12 -- The Board of Directors of Union Pacific
Corporation today declared a special stock dividend of the remaining shares of
Common Stock of Union Pacific Resources Group Inc. owned by the corporation.
The dividend is payable October 15, 1996 to shareholders of record
September 26, 1996 (including holders of the Union Pacific shares issued in
the Southern Pacific merger). Based on the number of Union Pacific Corporation
shares currently outstanding, its shareholders would receive approximately
.847 of a share of Resources' Common Stock for each Union Pacific common share
held, with the definitive percentage being determined after the record date.
Union Pacific has received a ruling from the IRS that the distribution will be
tax free for the corporation and its shareholders.

"This transaction completes our strategic transformation of the
corporation," said Drew Lewis, Union Pacific chairman and chief executive
officer. "We believe our merger yesterday with Southern Pacific made Union
Pacific North America's strongest transportation system and the spin off of
Union Pacific Resources creates the nation's premiere independent natural gas
and crude oil production company."

Union Pacific Resources (UPR) is traded on the New York Stock Exchange.