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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number 1-6075
UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 13-2626465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 Main Street, Dallas, Texas
(Address of principal executive offices)
75201
(Zip Code)
(214) 743-5600
(Registrant's telephone number, including area code)
Eighth and Eaton Avenues, Bethlehem, Pennsylvania 18018
(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
______ ______
As of October 31, 1997, there were 247,205,314 shares of the Registrant's
Common Stock outstanding.
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UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page Number
-----------
Item 1: Condensed Consolidated Financial Statements:
CONDENSED STATEMENT OF CONSOLIDATED INCOME - For the
Three Months and Nine Months Ended September 30, 1997
and 1996.............................................. 1
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION -
At September 30, 1997 and December 31, 1996........... 2 - 3
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS - For
the Nine Months Ended September 30, 1997 and 1996..... 4
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS -
For the Nine Months Ended September 30, 1997 and 1996. 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.... 5 - 10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 11 - 20
PART II. OTHER INFORMATION
Item 1: Legal Proceedings..................................... 21 - 24
Item 6: Exhibits and Reports on Form 8-K...................... 24
Signature...................................................... 25
<PAGE 1>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED INCOME
For the Three Months and Nine Months Ended September 30, 1997 and 1996
(Amounts in Millions, Except Ratio and Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------- ------- ------- -------
Operating Revenues (Note 2)............... $ 2,825 $ 1,996 $ 8,518 $ 5,976
------- ------- ------- -------
Operating Expenses (Note 2):
Salaries, wages and employee benefits... 1,040 716 3,103 2,233
Equipment and other rents............... 356 208 1,022 649
Fuel and utilities (Note 5)............. 241 164 803 508
Depreciation and amortization........... 260 170 779 516
Materials and supplies.................. 130 106 421 333
Other costs............................. 333 213 1,079 664
------- ------- ------- -------
Total................................ 2,360 1,577 7,207 4,903
------- ------- ------- -------
Operating Income.......................... 465 419 1,311 1,073
Other Income - Net........................ 102 52 159 102
Interest Expense (Notes 2 and 5).......... (156) (115) (453) (346)
Corporate Expenses........................ (42) (24) (96) (75)
Income before Income Taxes................ 369 332 921 754
------- ------- ------- -------
Income Taxes.............................. (129) (121) (337) (250)
------- ------- ------- -------
Income from Continuing Operations......... 240 211 584 504
Income from Discontinued Operations (Note 3) - 64 - 171
------- ------- ------- -------
Net Income ............................... $ 240 $ 275 $ 584 $ 675
======= ======= ======= =======
Earnings Per Share (Notes 2 and 3):
Income from Continuing Operations....... $ 0.96 $ 1.00 $ 2.35 $ 2.42
Income from Discontinued Operations..... - 0.30 - 0.82
------- ------- ------- -------
Net Income ............................. $ 0.96 $ 1.30 $ 2.35 $ 3.24
======= ======= ======= =======
Weighted Average Number of Shares (Note 2) 248.0 211.9 248.0 208.5
Cash Dividends Per Share.................. $ 0.43 $ 0.43 $ 1.29 $ 1.29
Ratio of Earnings to Fixed Charges (Note 6) -- -- 2.5 2.7
<PAGE 2>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Millions of Dollars)
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
------------- ------------
Current Assets:
Cash and temporary investments............... $ 201 $ 191
Accounts receivable ......................... 797 494
Inventories.................................. 295 304
Other current assets......................... 306 345
--------- ---------
Total Current Assets.................... 1,599 1,334
--------- ---------
Investments:
Investments in and advances to affiliated
companies (Note 4)........................ 433 387
Other investments............................ 207 226
--------- ---------
Total Investments....................... 640 613
--------- ---------
Properties (Note 2):
Railroad:
Road and other............................. 23,272 22,665
Equipment.................................. 6,932 6,573
--------- ---------
Total Railroad.......................... 30,204 29,238
Trucking..................................... 734 736
Other........................................ 56 123
--------- ---------
Total Properties........................ 30,994 30,097
Accumulated depreciation..................... (5,375) (5,053)
--------- ---------
Properties - Net........................ 25,619 25,044
--------- ---------
Excess Acquisition Costs - Net................. 683 700
Other Assets................................... 125 223
--------- ---------
Total Assets............................ $ 28,666 $ 27,914
========= =========
<PAGE 3>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Amounts in Millions, Except Share and Per Share Amounts)
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------- ------------
Current Liabilities:
Accounts payable................................ $ 580 $ 705
Accrued wages and vacation...................... 452 427
Accrued casualty costs.......................... 327 332
Dividends and interest.......................... 282 293
Income and other taxes.......................... 260 250
Debt due within one year (Note 2)............... 210 127
Other current liabilities (Note 2).............. 1,193 922
--------- ---------
Total Current Liabilities.................... 3,304 3,056
--------- ---------
Debt Due After One Year (Note 2).................. 8,185 7,900
Deferred Income Taxes ............................ 6,175 5,939
Accrued Casualty Costs ........................... 813 730
Retiree Benefits Obligation ...................... 757 720
Other Long-Term Liabilities (Notes 2 and 7)....... 948 1,344
Commitments and Contingencies (Note 7)
Stockholders' Equity:
Common stock, $2.50 par value, authorized
500,000,000 shares, 275,881,561 shares issued
in 1997, 274,595,151 shares issued in 1996 ... 690 686
Paid-in surplus ................................ 4,046 4,009
Retained earnings............................... 5,528 5,262
Treasury stock, at cost, 28,685,466 shares in
1997, 27,935,628 shares in 1996............... (1,780) (1,732)
--------- ---------
Total Stockholders' Equity................... 8,484 8,225
--------- ---------
Total Liabilities and Stockholders' Equity... $ 28,666 $ 27,914
========= =========
<PAGE 4>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(Millions of Dollars)
(Unaudited)
1997 1996
---- ----
Cash Flows from Operating Activities:
Net income........................................ $ 584 $ 675
Non-cash charges to income:
Depreciation and amortization.................. 779 516
Deferred income taxes.......................... 231 29
Other - net.................................... (388) 105
Income from discontinued operations (Note 3)...... - (171)
Changes in current assets and liabilities......... (35) 125
------- -------
Cash from continuing operations............... 1,171 1,279
------- -------
Cash Flows from Investing Activities:
Capital investments............................... (1,427) (888)
Southern Pacific acquisition (Note 2)............. - (539)
Cash provided by discontinued operations........... - 31
Asset sales....................................... 229 81
Other - net....................................... (14) (32)
------- -------
Cash used in investing activities............. (1,212) (1,347)
------- -------
Cash Flows from Equity and Financing Activities:
Dividends paid.................................... (317) (265)
Debt repaid....................................... (442) (861)
Financings........................................ 836 1,144
Other - net....................................... (26) (32)
------- -------
Cash (used in) provided by equity and
financing activities........................... 51 (14)
------- -------
Net increase (decrease) in cash and
temporary investments........................... $ 10 $ (82)
======= =======
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS
For the Nine Months Ended September 30, 1997 and 1996
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
1997 1996
---- ----
Balance at Beginning of Year......................... $ 5,262 $ 5,327
Net Income........................................... 584 675
------- -------
Total......................................... 5,846 6,002
Dividend of Resources Common Stock (Note 3).......... - (598)
Cash Dividends Declared ($1.29 per share in
1997 and 1996).................................. (318) (266)
------- -------
Balance at End of Period........................ $ 5,528 $ 5,138
======= =======
<PAGE 5>
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Responsibilities for Financial Statements - The condensed consolidated
financial statements are unaudited and reflect all adjustments (consisting
only of normal and recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The Condensed Statement of
Consolidated Financial Position at December 31, 1996 is derived from audited
financial statements. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Union Pacific Corporation (the Corporation or
UPC) Annual Report to Stockholders incorporated by reference in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
1996. The results of operations for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results for the
entire year ending December 31, 1997.
2. Acquisition of Southern Pacific Rail Corporation (Southern Pacific or SP) -
The Corporation completed the acquisition of Southern Pacific in September
1996 by acquiring the remaining 75% of Southern Pacific common shares not
previously owned by UPC. As a result of the initial cash tender offer in
1995 for 25% of Southern Pacific's outstanding shares and the acquisition of
the remaining 75% of Southern Pacific shares, 60% of the outstanding
Southern Pacific shares were converted into 38.1 million shares of the
Corporation's common stock, and the remaining 40% of the outstanding shares
were acquired for $1,562 million in cash. The Corporation initially funded
the cash portion of the acquisition with credit facility borrowings, all of
which have been subsequently refinanced with commercial paper borrowings.
The acquisition of Southern Pacific has been accounted for as a purchase.
Results for the three and nine months ended September 30, 1996 included
equity income equal to 25% of Southern Pacific's net income during that
period, reflecting UPC's ownership interest in SP. Southern Pacific's
results were fully consolidated with the Corporation effective October 1,
1996. The purchase price was determined as follows and was based on a market
value of the Corporation's common stock at the time the merger was announced
of $65.00 per share:
(In Millions)
-------------
Initial 25% investment in SP on September 15, 1995,
including equity income................................ $ 990
Second step cash purchase (23.4 million shares at
$25.00 per SP share) on September 11, 1996............. 586
Merger exchange of SP shares (93.7 million SP
shares converted into 38.1 million shares of UPC
common stock at $65.00 per UP share) on
September 11, 1996..................................... 2,476
Transaction costs....................................... 45
------
Purchase price.......................................... $4,097
======
<PAGE 6>
The Southern Pacific purchase price has been allocated as follows:
(In Millions)
-------------
Purchase price to be allocated......................... $ 4,097
Pre-tax merger costs:
Current............................................... 532
Long-term............................................. 426
Equity acquired........................................ (1,083)
-------
Unallocated purchase price........................... $ 3,972
=======
Purchase price allocation:
Property and equipment:
Land.................................................. $ 3,509
Roadway, Equipment and Other.......................... 2,522
Debt and preference share revaluation.................. (200)
Deferred income taxes (including the effect of merger costs) (1,859)
--------
Total................................................ $ 3,972
========
In connection with the acquisition and continuing integration of Union
Pacific Railroad Company's (UPRR) and Southern Pacific's rail operations
(collectively, the Railroad), UPC is in the process of eliminating 5,200
duplicate positions, which are primarily non-train crew. In addition, UPC
is relocating 4,700 positions, merging or disposing of redundant facilities,
and disposing of certain rail lines. The Corporation is also canceling
uneconomical and duplicative SP contracts and has refinanced $621 million of
SP's debt obligations. UPC recognized a $958 million liability in the SP
purchase price allocation for costs associated with SP's portion of these
activities.
The components of the $958 million liability are as follows:
(In Millions)
-------------
Labor protection related to legislated and contractual
obligations to SP union employees..................... $361
Severance costs........................................ 343
Contract cancellation fees............................. 145
Relocation costs....................................... 109
----
Total.............................................. $958
====
Through September 30, 1997, $210 million in merger-related costs were paid
by the Corporation and charged against these reserves, principally
comprised of $117 million and $67 million, respectively, for severance and
relocation payments made to approximately 1,800 Southern Pacific employees.
The Corporation expects that the remaining payments will be made over the
course of the next five years as the rail operations of UPRR and SP are
integrated and labor negotiations are completed and implemented.
In addition, the Railroad expects to incur $370 million in acquisition-
related costs through 1999 for severing or relocating UPRR employees,
disposing of certain UPRR facilities, training and equipment upgrading.
These costs will be charged to expense as incurred over the next two years.
<PAGE 7>
Net income for the three and nine months ended September 30, 1997 was
reduced by $10 million and $46 million, respectively, for acquisition-
related operating costs, net of tax.
The pro forma results presented below have been prepared to reflect the
consummation of the Southern Pacific acquisition and the subsequent
pro-rata distribution of the shares of Union Pacific Resources Group Inc.
(Resources) owned by the Corporation to UPC's stockholders (see Note 3 to
the Condensed Consolidated Financial Statements), as if such events
occurred on January 1, 1996. The pro forma results presented below do not
reflect synergies expected to result from the integration of UPRR's and
Southern Pacific's rail operations and, accordingly, do not account for any
potential increase in revenue or operating income, estimated cost savings,
or one-time costs associated with the elimination of UPRR's duplicate
facilities and relocation or severance payments to UPRR's employees. The
effects of the foregoing could be substantial. This unaudited pro forma
information is not necessarily indicative of the results of operations that
might have occurred had the Southern Pacific acquisition and the
distribution of Resources shares actually occurred on the date indicated,
or of future results of operations of the resulting entity.
------------------------------------------------------------------
Millions of Dollars Three-Months Ended Nine-Months Ended
Except Per Share Amounts September 30, 1996 September 30, 1996
------------------------------------------------------------------
Operating Revenues $ 2,825 $ 8,409
Operating Income 446 1,146
Net Income 194 435
Net Income per Share $ 0.79 $ 1.78
------------------------------------------------------------------
3. Resources - In July 1995, UPC's Board of Directors approved a formal plan
to divest UPC's natural resources business in an initial public offering
(IPO) by Resources, followed by a pro-rata distribution of Resources shares
owned by the Corporation to its stockholders (the Spin-Off).
The IPO of 42.5 million Resources shares at $21 per share was completed in
October 1995 and generated net proceeds of $844 million. At that time,
Resources distributed to UPC a dividend of $1,621 million ($912 million in
cash, $650 million in 8.5% notes, which were repaid on the Spin-Off date,
and a $59 million intercompany balance owed by the Corporation). UPC used
the cash proceeds from the IPO dividend (including the notes receivable
repayment) to reduce outstanding commercial paper.
In September 1996, the Corporation's Board of Directors declared a special
dividend consisting of the shares of Resources common stock owned by UPC.
As a result of the Spin-Off, each of the Corporation's stockholders
received 0.846946 of a share of Resources common stock for each share of
UPC common stock held by such stockholder at the September 26, 1996 record
date for the distribution.
Resources' results prior to the Spin-Off were reported as a discontinued
operation in the Corporation's consolidated financial statements. UPC's
results for the three and nine months ended September 30, 1996 include
income from discontinued operations of $64 million and $171 million,
respectively, (approximately 83% of Resources' net income for the period).
<PAGE 8>
4. Mexican Railway Concession - On June 26, 1997, the Railroad and a
consortium of partners were granted a 50-year concession for the Pacific
North and Chihuahua Pacific lines in Mexico, and a 25% stake in the Mexico
City Terminal Company at a price of $525 million. The Railroad holds a 13%
ownership share, and has accounted for its interest by the equity method.
The consortium plans to assume operational control of both lines in late
1997.
5. Financial Instruments - The Corporation and its subsidiaries use derivative
financial instruments in limited instances for other than trading purposes
to manage risk as it relates to fuel prices and interest rates. Where the
Corporation has fixed interest rates or fuel prices through the use of
swaps, futures or forward contracts, the Corporation has reduced the
downside risk of adverse price and rate movements; however, it has also
limited future gains from favorable movements.
The Corporation addresses market-related risk by selecting instruments
whose value fluctuations correlate highly with the underlying item being
hedged. Credit risk related to derivative financial instruments, which is
minimal, is managed by requiring minimum credit standards for
counterparties and periodic settlements. The total credit risk associated
with the Corporation's counterparties was $71 million at September 30,
1997. The Corporation has not been required to provide, nor has it
received, any collateral relating to its hedging activity.
The fair market value of the Corporation's derivative financial instrument
positions at September 30, 1997 was determined based upon current fair
market values as quoted by recognized dealers or developed based upon the
present value of future cash flows discounted at the applicable U.S.
treasury rate and swap spread.
Interest Rates - The Corporation controls its overall risk to fluctuations
in interest rates by managing the proportion of fixed and floating rate
debt instruments within its debt portfolio over a given period.
Derivatives are used in limited circumstances as one of the tools to obtain
the targeted mix. The mix of fixed and floating rate debt is largely
managed through the issuance of targeted amounts of such debt as debt
maturities occur or as incremental borrowings are required. The
Corporation also obtains additional flexibility in managing interest cost
and the interest rate mix within its debt portfolio by issuing callable
fixed rate debt securities.
At September 30, 1997, the Corporation had outstanding interest rate swaps
on $266 million of notional principal amount of debt (3% of the total debt
portfolio) with a gross fair market value asset position of $58 million and
a gross fair market value liability position of $18 million. These
contracts mature over the next one to eight years. Interest rate hedging
activity increased interest expense by $3 million and $4 million in the
third quarter of 1997 and 1996, respectively, and by $11 million and $8
million in the first nine months of 1997 and 1996, respectively.
Fuel - Over the past three years, fuel costs approximated 10% of the
Corporation's total operating expenses. As a result of the significance
of the fuel costs and the historical volatility of fuel prices, the
Corporation's transportation subsidiaries periodically use swaps, futures
and forward contracts to mitigate the impact of fuel price volatility. The
<PAGE 9>
intent of this program is to protect the Corporation's operating margins
and overall profitability from adverse fuel price changes.
At September 30, 1997, the Railroad had hedged 40% and 12% of its
anticipated diesel fuel consumption for the remainder of 1997 and all of
1998, respectively, at $0.52 and $0.53 per gallon, respectively, on a Gulf
Coast basis. In addition, the Railroad had outstanding swap agreements
covering its fuel purchases in 1997 and 1998 of $156 million, with gross
and net asset positions of $13 million. Fuel hedging increased third
quarter 1997 fuel costs by $1 million and lowered third quarter 1996 fuel
costs by $9 million. Fuel hedging increased year-to-date fuel costs by $1
million and lowered year-to-date 1996 fuel costs by $19 million. Overnite
Transportation Company (Overnite) has hedged 56% of its estimated remaining
1997 diesel fuel requirements and had outstanding swap agreements of $8
million, with gross and net asset positions of $1 million.
6. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed charges
has been computed on a total enterprise basis. Earnings represent income
from continuing operations less equity in undistributed earnings of
unconsolidated affiliates, plus income taxes and fixed charges. Fixed
charges represent interest, amortization of debt premium, and the estimated
interest portion of rental charges.
7. Commitments and Contingencies - There are various claims and lawsuits
pending against the Corporation and certain of its subsidiaries. Certain
customers have submitted claims to the Railroad for damages related to
shipments delayed in transit, while others have indicated an intention to
submit claims for damages arising out of delays as a result of congestion
problems. The nature of the damages sought include, but are not limited to,
loss or damages to lading, alternative transportation charges, additional
production costs, lost business and lost profits. In addition, some
customers have asserted that they have the right to cancel contracts as a
result of alleged material breaches of such contracts by the Railroad. The
Federal Railroad Administration has also indicated that it may take
enforcement actions against the Railroad based upon an in-depth inquiry and
review of safety practices.
The Corporation is also subject to Federal, state and local environmental
laws and regulations, and is currently participating in the investigation
and remediation of numerous sites. Where the remediation costs can be
reasonably determined, and where such remediation is probable, the
Corporation has recorded a liability. In addition, the Corporation
periodically enters into financial and other commitments and provides
guarantees for specific financial and contractual obligations of its
subsidiaries and affiliates.
It is not possible at this time for the Corporation to fully determine the
effect of all unasserted claims on its consolidated financial condition,
results of operations or liquidity; however, the Corporation does not
expect that any known lawsuits, claims, environmental costs, commitments
or guarantees will have a material adverse effect on its consolidated
financial condition or operating results.
<PAGE 10>
8. Accounting Pronouncements - In February 1997, the Financial Accounting
Standard Board (FASB) issued Statement No. 128, "Earnings per Share," which
replaces Accounting Principles Board Opinion No. 15, "Earnings per Share."
Statement No. 128 requires dual presentation of Basic and Diluted EPS on
the face of the income statement for all entities with complex capital
structures. Statement No. 128 will be effective for UPC's 1997 Annual
Report, including interim periods to be presented therein; however, earlier
application is not permitted. Had Statement No. 128 been effective for the
three and nine months ended September 30, 1997, Basic and Diluted EPS
(based on income from continuing operations and net income) would have been
$0.98 and $0.96 per share, respectively, for the third quarter of 1997 and
$2.38 and $2.35 per share, respectively, for the nine months ended
September 30, 1997.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" that will be effective in 1998. The Corporation anticipates
minimal impact from this Statement.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" will be effective in
1998. UPC currently complies with most provisions of this Statement, and
any incremental disclosure required by that Statement is expected to be
minimal.
<PAGE 11>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Quarter ended September 30, 1997 Compared to September 30, 1996
CORPORATE REORGANIZATION
During 1996 and 1997, Union Pacific Corporation (UPC or the Corporation)
completed several strategic transactions that refocused the Corporation on its
core transportation operations.
Natural Resources Divestiture - In July 1995, UPC's Board of Directors approved
a formal plan to dispose of its natural resources business through an initial
public offering (IPO) by Union Pacific Resources Group Inc. (Resources) of 17%
of its common stock, followed by a distribution of UPC's interest in Resources
to the Corporation's stockholders on a tax-free, pro-rata basis (the Spin-Off)
(see Note 3 to the Condensed Consolidated Financial Statements). In October
1995, Resources completed the IPO, and, after UPC's receipt of a favorable
Internal Revenue Service ruling as to the tax-free nature of the Spin-Off in
September 1996, UPC completed its divestiture of Resources. The Corporation's
share of Resources' 1996 financial results are presented as discontinued
operations for that period.
Southern Pacific Rail Corporation (Southern Pacific or SP) Acquisition - In
September 1995, UPC acquired 25% of Southern Pacific, and, in September 1996,
it acquired the remaining 75% of SP. The aggregate Southern Pacific purchase
price was $4.1 billion ($2.5 billion in UPC common stock and $1.6 billion in
cash). The acquisition of Southern Pacific was accounted for as a purchase. The
statement of consolidated income for the third quarter of 1996 includes equity
income equal to 25% of Southern Pacific's net income, reflecting UPC's
ownership interest in Southern Pacific for the period. In 1997, Southern
Pacific's results were fully consolidated with the Corporation's results (see
Note 2 to the Condensed Consolidated Financial Statements).
As a result of the SP acquisition, UPC now operates the largest rail system in
the United States, with nearly 36,000 route miles linking Pacific Coast and
Gulf Coast ports to the Midwest and Eastern U.S. gateways. The Corporation
also owns Overnite Transportation Company (Overnite), a major interstate
trucking company specializing in less-than-truckload (LTL) shipments.
Mexican Railway Concession - On June 26, 1997, the Corporation's principal
subsidiary, Union Pacific Railroad Company (collectively with SP's rail
operations, the Railroad) and a consortium of partners were granted a 50-year
concession for the Pacific North and Chihuahua Pacific lines in Mexico, and a
25% stake in the Mexico City Terminal Company at a price of $525 million. The
Railroad holds a 13% ownership share, and has accounted for its interest by the
equity method. The consortium plans to assume operational control of both
lines in late 1997.
RAILROAD OPERATIONS
Third quarter 1997 rail operations were disrupted by service and congestion
issues. System congestion started in the Gulf Coast area during the summer and
spread throughout the system as the Railroad shifted resources to help mitigate
<PAGE 12>
the problem in the Gulf Coast. Factors leading to the congestion included crew
shortages and necessary track maintenance on SP lines, washouts due to severe
weather and congestion in the major Texas/Mexico gateways.
The cost of the congestion-related problems was approximately $100 million,
after tax, which reflected the combined effect of lost business and higher
operating costs. Fourth quarter 1997 Railroad operations and financial
performance will be more severely affected by congestion-related problems than
in the third quarter--including lower revenue and incremental costs associated
with the implementation of the Service Recovery Plan--significantly reducing
the Corporation's financial results for the period. As a result, earnings per
share for all of 1997 are expected to be less than 1996 pro forma results,
and there may well be a net loss for the fourth quarter 1997. There can be no
assurance that these problems will not continue to impact the Railroad
during the first quarter of 1998.
The Service Recovery Plan - To restore service to acceptable levels, the
Railroad implemented a Service Recovery Plan (the Plan) in early October 1997.
The Plan is focused on reducing the number of cars on the system and restoring
system velocity, which will result in more reliable service to customers.
Although the Railroad expects that the Plan will relieve current congestion
problems across the system by late 1997, a prolonged service recovery could
have an adverse material effect on UPC's future earnings and cash flow.
The Plan includes a number of temporary steps currently underway to reduce the
number of trains operating over the Railroad and to improve system velocity and
service levels. These steps include: diverting trains from congested Southern
Corridor routes to less congested alternatives; temporarily transferring
business to several other railroads including Kansas City Southern Railway
Company, Burlington Northern and Santa Fe Railway Company (BNSF) and Norfolk
Southern Corporation; combining shorter trains; reducing the number of
locomotives in use on local and maintenance-of-way service; accelerating the
delivery of new locomotives; adding manpower and capacity at locomotive repair
shops; moving switching activities from all of the major congested yards to
other locations; transferring switching to shortline railroads; hiring
additional train and engine employees; and taking a number of actions to use
train crews more efficiently in congested terminals.
Status Report - Through mid-November 1997, the Railroad has made ongoing
progress in reducing car inventories on the system and improving system
velocity. These results are being reported weekly to the Surface
Transportation Board. Based upon results to date, the Corporation anticipates
that service levels will continue to improve through the last quarter of 1997.
FINANCIAL RESULTS
CONSOLIDATED - The Corporation reported net income of $240 million or $0.96 per
share for the third quarter of 1997, compared to net income of $275 million or
$1.30 per share for the same period in 1996. Earnings for the period included
the effects of the completion of the Southern Pacific acquisition and one-time
SP merger-related costs of $16 million pre tax or $10 million after tax.
Results for 1997 also reflected the impact of recent congestion problems. Net
income for 1996 included $64 million in discontinued operations, representing
approximately 83% of Resources' net income (see Note 3 to the Condensed
Consolidated Financial Statements).
<PAGE 13>
Results of Continuing Operations
CONSOLIDATED - In the third quarter of 1997, the Corporation reported income
from continuing operations of $240 million ($0.96 per share), compared to
results for the third quarter of 1996 of $211 million ($1.00 per share). This
earnings increase resulted primarily from the integration of SP operations and
improved operating results at Overnite. The dilution of earnings per share
reflects the issuance of 38.1 million UPC shares in connection with the
Southern Pacific acquisition (see Note 2 to the Condensed Consolidated
Financial Statements).
Operating revenues increased $829 million (42%) to $2.83 billion in 1997,
reflecting the acquisition of SP and a 7% increase in revenues at Overnite.
Operating expenses increased $783 million (50%) to $2.36 billion in 1997. The
addition of Southern Pacific operations, as well as congestion costs at the
Railroad, were slightly offset by merger integration benefits and continued
cost reductions at Overnite. The addition of Southern Pacific operations,
congestion costs at the Railroad and inflation were the primary factors causing
increases in salaries, wages and employee benefits costs ($324 million);
equipment and other rents ($148 million); fuel and utility costs ($77 million)
and materials and supplies ($24 million). Depreciation charges rose $90
million, primarily due to the addition and revaluation of Southern Pacific
properties and UPC's continued reinvestment in its equipment and rail
infrastructure. Other costs increased by $120 million, reflecting merger-
related increases in purchased services ($68 million); casualty accruals ($36
million); employee relocation costs ($15 million) and property and use taxes
($11 million), partially offset by merger consolidation benefits at the
Railroad.
Operating income rose $46 million (11%) to $465 million in 1997, principally
because of increases at the Railroad and Overnite ($24 million and $23 million,
respectively). Other income rose $50 million, reflecting the sale of three
aircraft and the Railroad's signboard business. Interest expense increased $41
million, the result of higher debt levels associated with the Southern Pacific
acquisition, partially offset by the favorable impact of debt reduction from
the proceeds of the Resources notes payable repayment. Income taxes increased
$8 million to $129 million, primarily reflecting higher income before income
taxes, which was partially offset by a Railroad tax settlement and tax benefits
from property donations.
RAILROAD (Reported) - Net income of $275 million for the three months ended
September 30, 1997 increased $16 million (6%), compared to reported results of
$259 million during the same period in 1996. This increase was principally the
result of the integration of Southern Pacific. Operating income rose $24
million (6%) to $457 million compared to reported third quarter 1996 results
of $433 million. The operating ratio for the third quarter of 1997 was 82.0,
which is an increase from reported third quarter 1996 results of 74.9. This
increase reflects the integration of SP operations, as SP had an operating
ratio of 92.4 for the third quarter of 1996. The addition of SP business drove
up operating revenues for the third quarter of 1997 to $2.5 billion, or 47%
higher than reported 1996 operating revenues, while operating costs grew $783
million to $2.36 billion.
The following discussion is based upon Pro Forma third quarter 1996 results
which assumes the SP acquisition occurred on January 1, 1996:
<PAGE 14>
RAILROAD (Pro Forma) - Net income of $275 million was up $34 million, or 14%
from 1996 results of $241 million. Results for 1997 included $16 million ($10
million after tax) of one-time merger costs. Operating income of $457 million
was down $1 million from third quarter 1996, while the operating ratio for the
third quarter of 1997 was 82.0, 0.1 points better than pro forma 1996.
However, excluding one-time merger costs, the operating ratio improved 0.7
points to 81.4. Estimated congestion costs added 2.6 points to the operating
ratio in 1997. Operating revenues were $2,538 million, down $17 million (1%)
versus third quarter 1996 as a 3% increase in average revenue per car (ARC) was
more than offset by a 4% decline in carloadings. Commodity revenue also
declined 1% from 1996 pro forma levels as shown in the table below.
- ----------------------------------------------------------------------------
Commodity Revenue
Three Months Ended 9/30/97 Versus Pro Forma 1996
- ----------------------------------------------------------------------------
Commodity
(Revenue in Thousands) Cars ARC Revenue Change %
- ----------------------------------------------------------------------------
Automotive 149,263 $1,461 $ 218,011 $ 2,598 1
Agricultural 218,547 1,543 337,214 3,138 1
Intermodal 737,824 638 470,992 26,156 6
Chemicals 248,962 1,743 433,876 (18,426) (4)
Energy 439,478 1,099 482,809 (34,268) (7)
Industrial 377,022 1,360 512,792 (7,992) (2)
----------------------------------------------------
Total Commodity 2,171,096 $1,131 $2,455,694 $(28,794) (1)
====================================================
REVENUE SUMMARY (Pro Forma)- Carloadings for the quarter were down 4% from 1996
loads of 2,265,893. Declines were principally caused by congestion, the United
Parcel Service strike and the first quarter 1997 sale of the Duck Creek North
line, which generated 31,126 cars in the third quarter of 1997. Average
revenue per car was up $35 for the quarter, as a result of higher intermodal
ARC (new premium service and longer-haul traffic), improved corn ARC (more
longer-haul export traffic and higher rates from maintaining a car inventory
available for grain customers), and higher industrial products ARC (mainly due
to the Duck Creek North sale).
Automotive - Traffic was up 1% versus 1996, while ARC rose $8 per car (1%)
accounting for a $3 million improvement in revenue. The higher ARC reflects
fewer low-ARC container moves partially offset by new lower ARC domestic
business and shorter-haul import moves. Finished vehicle volumes (up 1%)
benefited from new domestic business and strong import and domestic demand.
These positives were offset by congestion and unscheduled auto plant shutdowns.
Parts traffic was flat, as strong Mexico volumes were countered by congestion-
related diversions of traffic and auto plant shutdowns.
Agricultural Products - Loads finished down 4% for the quarter; however, ARC
improved 5% ($73 a car) pushing revenues up $3 million (1%) over 1996. The
higher ARC reflects longer-haul import and export traffic, service-related
diversions of short-haul traffic and higher rates associated with maintaining
a car fleet available for grain customers. Agricultural products were plagued
by low cycle times on wheat shuttles (2 vs. 4 turns per month from 1996), while
canned and packaged products, as well as, sweeteners suffered from service
problems. However, corn was up for the quarter, compared lower than normal
volumes in 1996, and meals and oils benefitted from strong export markets.
<PAGE 15>
Intermodal - Traffic grew 4% in the quarter with revenue up 6% or $26 million
over 1996. ARC grew 1% from 1996 levels ($9 per car), reflecting new premium
service, longer-haul business and better car utilization. Strong market demand
generated volume gains in the Railroad's LTL partners' businesses. New premium
service, strong international markets and new business opportunities generated
additional volume improvements for the quarter, partially countered by service-
related traffic defections, the United Parcel Service strike and congestion.
Chemicals - Shipments fell 3%, while ARC declined $28 per car (2%) when
compared to 1996 results, accounting for a 4% ($18 million) revenue shortfall
versus 1996. The lower ARC was due to a shift in the business mix within
plastics, sulphur and petroleum, and price reductions in response to BNSF and
truck competition. Strong market demand was countered by system congestion in
the key chemical corridors in the Gulf Coast area and service-related
diversions to truck, barge and BNSF. Other volume drivers included the timing
of fall applications that held down fertilizer demand, a new pipeline that
diverted LP gas volumes and some demand softness that hurt the liquid and dry
chemicals business.
Energy - Movements were down 8% from third quarter 1996, causing a $34 million
revenue shortfall despite an ARC improvement of 1% ($11 per carload). ARC
growth was driven by new higher-rated business and growth in long-haul European
export loads. Severe weather (that periodically shut down the Black Thunder
mine) and minor derailments in key corridors caused Powder River Basin,
Wyoming, train cycles to fall by almost one train a day (24.3 in 1997 from 25.0
a year ago), despite gains early in the third quarter from new business added
in the first half of 1997 and strong demand. Southern Illinois coal volumes
fell 29% from 1996 levels, as the Railroad diverted traffic to Illinois Central
due to congestion. Colorado and Utah coal volumes were also lower as higher
European export business could not cover diversions of UP business to BNSF
served mines.
Industrial Products - A 17% volume decline occurred, offset by an 18%
improvement in ARC (due to the sale of the Duck Creek North Escanaba Mine
business, which was very short-haul, low ARC traffic), as revenue fell 2% ($8
million). In 1996, the Duck Creek North line generated 31,126 cars. Volumes
also suffered from equipment shortages and service issues, as a large portion
of industrial products moves are in the Gulf Coast area where congestion has
been most acute. Other factors affecting volumes were soft demand for frac
sand (used in deep drilling activities), a high 1996 base for cement,
competition in California's I-5 corridor, a major steel and wire plant shutdown
and project timing in hazardous waste and recycling.
EXPENSE SUMMARY (Pro Forma)- Operating expenses were $2,081 million, $16
million (1%) better than third quarter 1996 operating costs of $2,097 million.
Labor expense was $9 million higher than 1996, as congestion-related costs and
inflation were partially offset by merger and volume savings.
Depreciation expense grew $20 million or 9% to $242 million due to the
Railroad's extensive capital programs in 1996 and 1997.
Materials and Supplies costs were down $15 million. Key drivers included
merger-related savings in contract pricing and materials management, and less
heavy material intensive locomotive and freight car repairs.
<PAGE 16>
Fuel and Utilities expenses were down $11 million or 5% from 1996, reflecting
lower fuel prices and volumes. A 4% reduction in gross ton-miles generated
volume-related fuel savings of $9 million, while lower prices (down 0.8 cents
per gallon to 67 cents) resulted in savings of $2 million and a 1% decline in
the consumption rate generated an additional $2 million in savings.
Rent expense was up 13% ($37 million) versus 1996, as system congestion,
changes in business mix and costs associated with maintaining a fleet of grain
cars on hand for grain customers (GCAS) drove up equipment rent costs. System
congestion accounted for increased costs of $27 million, GCAS added $12 million
(largely offset by higher commodity revenue) and higher intermodal mix added
$12 million. Cost increases were partially offset by lower volume costs of $7
million (cars down 4%) and ongoing contract savings from the SP acquisition of
$6 million.
Other Costs decreased $56 million from 1996, reflecting $17 million of net
merger savings (joint facility savings, trackage rights and contract price
savings), reduced costs due to the sale of SP's truck operations of $15
million, lower property and use taxes and lower administrative costs,
reflecting cost control efforts.
NON-OPERATING SUMMARY (Pro Forma) - Other income was up $37 million from last
year. Asset sales gains grew $38 million due to the sale of the Railroad's
signboard business. Income taxes (State and Federal) were just slightly higher
than 1996 levels at $143 million, as a 9% increase in pre-tax income was offset
by the benefits of property donations and a prior year tax settlement. As a
result, the tax rate improved to 34.2% from 36.9% in 1996.
TRUCKING - Throughout 1997, Overnite continued to benefit from several
initiatives implemented in 1996 that were aimed at better matching its
operations to the current trucking industry business environment. Actions
taken included service center consolidations, centralization of the linehaul
management process, pricing initiatives targeting Overnite's lowest margin
customers, and staff rationalization. As a result, Overnite improved from a
net loss of $9 million in the third quarter of 1996 to net income of $5 million
in the third quarter of 1997. Results for both periods included goodwill
amortization of $5 million.
Overnite's operating revenues increased $16 million (7%) to $250 million,
primarily the result of a 12% increase in average prices, resulting from
Overnite's pricing initiatives. This was partially offset by a 5% decrease in
volumes, reflecting a 4% decrease in LTL tonnage and a 23% decrease in
truckload volumes as Overnite continues to rationalize its traffic base.
Operating expenses decreased $7 million (3%) to $236 million. Salaries, wages
and benefit costs decreased $3 million to $149 million, reflecting workforce
reductions and lower volumes, partially offset by wage and benefit inflation.
An increased use of intermodal rail service and contract linehaul carriers
caused a $1 million increase in rent and purchased transportation. Fuel costs
declined $2 million, which reflected the combined result of an 11% decrease in
fuel prices and a 6% volume-related reduction in fuel consumption. Lower
volumes and spending controls caused decreases in materials and supplies ($1
million), use taxes and licenses ($1 million) and administrative expenses ($1
million). Also, depreciation expense decreased $1 million, a result of the
initiatives implemented in 1996 to eliminate various service centers and excess
<PAGE 17>
equipment. Overnite's operating ratio (excluding goodwill amortization)
improved to 94.5 in 1997 from 103.6 in 1996.
CORPORATE SERVICES AND OTHER OPERATIONS - Expenses related to Corporate
Services and Other Operations (consisting of corporate expenses, third-party
interest charges, intercompany interest allocations, other income and income
taxes related to the Corporation's holding company operations, and the results
of other operating units) increased $1 million to $40 million in the third
quarter of 1997. Corporate services and other operating units generated an
operating loss of $1 million, compared to breaking even in 1996.
Results of Discontinued Operations
Resources reported net income of $77 million in the third quarter of 1996. UPC
recognized its share of Resources' net income (approximately 83%) in
discontinued operations in 1996.
Nine Months Ended September 30, 1997 Compared to September 30, 1996
CONSOLIDATED RESULTS - The Corporation reported net income for the nine months
ended September 30, 1997 of $584 million ($2.35 per share) compared to $675
million ($3.24 per share) for the same period of 1996. Results for 1997
included the effects of the completion of the Southern Pacific acquisition
including one-time SP merger-related costs of $46 million, net of tax. Results
for 1997 also reflected the impact of recent congestion problems. Results for
1996 included $171 million representing approximately 83% of Resources' net
income in discontinued operations.
RESULTS OF CONTINUING OPERATIONS - Income from continuing operations increased
by $80 million (16%) for the period to $584 million ($2.35 per share), as the
impact of the Railroad's SP integration more than offset higher debt service
costs associated with the Southern Pacific acquisition. Operating revenues
increased $2.5 billion (43%) to $8.5 billion for the period, principally
resulting from the addition of SP business.
Operating expenses rose $2.3 billion (47%) to $7.2 billion in 1997. The
addition of Southern Pacific operations, rail volume growth, congestion costs
and inflation caused increases in salaries, wages and employee benefits ($870
million), equipment and other rents ($373 million), fuel and utilities ($295
million) and materials and supplies ($88 million). Depreciation charges rose
$263 million, reflecting the addition and purchase accounting revaluation of
Southern Pacific's properties and UPC's continued reinvestment in its equipment
and rail infrastructure. Other costs increased $415 million, reflecting
merger-related increases in purchased services ($198 million), casualty
accruals ($108 million), other taxes ($36 million), travel ($28 million) and
employee relocation ($16 million).
Operating income increased by $238 million (22%) to $1.3 billion for the nine
months ended September 30, 1997, principally reflecting a $177 million increase
at the Railroad and a $65 million increase in operating results at Overnite.
Other income increased $57 million, primarily the result of UPC's sale of
three aircraft and sale of the Railroad's signboard business. Interest expense
increased $107 million, principally from higher debt levels associated with the
<PAGE 18>
Southern Pacific acquisition offset by the favorable impact of the Resources'
IPO dividend and debt refinancing activities. The Corporation's effective tax
rate for the period increased to 36.6% from 33.2% a year ago, which reflects
the combined effects of various state and federal tax settlements and property
donations.
CHANGES IN CONSOLIDATED FINANCIAL CONDITION
During the first nine months of 1997, cash from continuing operations was $1.2
billion compared to $1.3 billion for the same period in 1996. This $108
million decrease primarily reflects lower earnings and increased working
capital needs due to the SP merger and merger consolidation spending, partially
offset by higher non-cash expenses included in income (higher depreciation,
casualty accruals and deferred taxes).
Cash used in investing activities was $1.2 billion in 1997 compared to $1.3
billion in 1996. This decrease primarily reflects the absence of the $539
million expended for SP shares in September 1996 and increased proceeds from
the sale of assets ($148 million), reflecting the sale of the Railroad's
signboard business and Duck Creek North branch line, and the sale of Corporate
aircraft. These items were partially offset by higher capital spending ($539
million). The Railroad will spend over $2 billion on capital projects in 1997
compared to $1.6 billion in 1996, of which $550 million is merger-related.
Cash provided by financing activities was $51 million in 1997 compared to cash
used for financing activities of $14 million in 1996. This change primarily
reflects lower net debt repayments ($110 million) offset by higher dividends
($52 million) resulting from the 38.1 million additional shares issued in the
Southern Pacific acquisition. The ratio of debt to debt plus equity increased
to 49.7% at September 30, 1997 from 49.4% at December 31, 1996. This change
resulted from a slight increase in debt levels (higher year-over-year capital
spending) from year-end 1996.
OTHER DEVELOPMENTS
Federal Railroad Administration (FRA) Review - The Railroad suffered three
severe accidents in mid-1997. As a result of these incidents, the FRA reviewed
the Railroad's operations and made several recommendations, including creating
a joint committee of Railroad management, labor and the FRA to review and
monitor all aspects of safety, adding an executive position for safety
reporting directly to the President, creating a safety hotline (direct to the
Railroad's President), re-evaluating all existing training programs, and
increasing the monitoring of train crew performance, crew fatigue and crew
scheduling. All such FRA proposals have been implemented by the Railroad. The
Railroad has also proposed a guaranteed time-off program for train and engine
employees.
During the last week of October, 1997, the Railroad experienced two additional
train collisions in Texas, which resulted in non-fatal injuries to train crew
employees. As a result of these incidents, the FRA sent additional inspectors
to Texas and other states to monitor the Railroad's operations.
<PAGE 19>
Derailments in 1997 have cost the Railroad approximately $67 million in capital
and operating expense. During the first nine months of 1996, pro forma
derailment costs were $87 million. This decrease reflects safety improvements
year-to-date over the same pro forma period last year, including a 10% decline
in derailments.
Accounting Pronouncements - In February 1997, the Financial Accounting Standard
Board (FASB) issued Statement No. 128, "Earnings per Share," which replaces
Accounting Principles Board Opinion No. 15, "Earnings per Share." Statement
No. 128 requires dual presentation of Basic and Diluted EPS on the face of the
income statement for all entities with complex capital structures. Statement
No. 128 will be effective for UPC's 1997 Annual Report, including interim
periods to be presented therein; however, earlier application is not permitted.
Had Statement No. 128 been effective for the three and nine months ended
September 30, 1997, UPC's Basic and Diluted EPS (based on income from
continuing operations and net income) would have been $0.98 and $0.96 per
share, respectively, for the third quarter of 1997 and $2.38 and $2.35 per
share, respectively, for the nine months ended September 30, 1997.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" that will be effective in 1998. The Corporation anticipates minimal
impact from this Statement.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." UPC currently complies
with most provisions of this Statement, and any incremental disclosure required
by that Statement is expected to be minimal.
Commitments and Contingencies - There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. Certain customers have
submitted claims to the Railroad for damages related to shipments delayed in
transit, while others have indicated an intention to submit claims for damages
arising out of delays as a result of congestion problems. The nature of the
damages sought include, but are not limited to, loss or damages to lading,
alternative transportation charges, additional production costs, lost business
and lost profits. In addition, some customers have asserted that they have the
right to cancel contracts as a result of alleged material breaches of such
contracts by the Railroad. The FRA has also indicated that it may take
enforcement actions against the Railroad based upon an in-depth inquiry and
review of safety practices.
The Corporation is also subject to Federal, state and local environmental laws
and regulations, and is currently participating in the investigation and
remediation of numerous sites. Where the remediation costs can be reasonably
determined, and where such remediation is probable, the Corporation has
recorded a liability. In addition, the Corporation periodically enters into
financial and other commitments and provides guarantees for specific financial
and contractual obligations of its subsidiaries and affiliates.
It is not possible at this time for the Corporation to fully determine the
effect of all unasserted claims on its consolidated financial condition,
results of operations or liquidity, however, the Corporation does not expect
that any known lawsuits, claims, environmental costs, commitments or guarantees
will have a material adverse effect on its consolidated financial condition or
operating results.
<PAGE 20>
Cautionary Information - Certain information included in this Report contains,
and other materials filed or to be filed by the Corporation with the Securities
and Exchange Commission (as well as information included in oral statements or
other written statements made or to be made by the Corporation) contain, or
will contain, forward-looking statements within the meaning of the Securities
Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
Such forward-looking information may include, without limitation, statements
that the Corporation does not expect that lawsuits, claims, environmental
costs, commitments, guarantees, contingent liabilities, labor negotiations or
other matters will have a material adverse effect on its consolidated financial
condition, results of operations or liquidity and other similar expressions
concerning matters that are not historical facts, and projections as to the
Corporation's financial results. Such forward-looking information is or will
be based on facts available at that time, and is or will be subject to risks
and uncertainties that could cause actual results to differ materially from
those expressed in the statements. Important factors that could cause such
differences include, but are not limited to, whether the Service Recovery Plan
referred to above achieves its goals, industry competition and regulatory
developments, natural events such as severe weather, floods and earthquakes,
the effects of adverse general economic conditions, changes in fuel prices and
the ultimate outcome of environmental investigations or proceedings and other
types of claims and litigation.
<PAGE 21>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Southern Pacific Acquisition: As previously reported in Union Pacific
Corporation's (the "Corporation") Annual Report on Form 10-K for the year ended
December 31, 1996 (the "1996 10-K"), various appeals have been filed with
respect to the Surface Transportation Board's ("STB") August 12, 1996 decision
(the "Decision") approving the acquisition of control of Southern Pacific Rail
Corporation and its rail affiliates (collectively, "SP") by the Corporation and
its affiliates. All of the appeals have been consolidated. On April 23, 1997,
the City of Wichita and Sedgwick County, Kansas, moved to withdraw their
petition for review, and the Court granted their motion on April 30, 1997. On
August 11, 1997, the Court established a briefing schedule under which briefs
for petitioners and supporting intervenors were due on October 10, 1997, the
brief for respondents is due December 9, 1997, briefs for intervenors
supporting respondents are due December 30, 1997, and reply briefs are due
January 20, 1998. On August 18, 1997, Geneva Steel Company moved to withdraw
its petitions for review, and the Court granted its motion on September 8,
1997. On October 3, 1997, the Corporation and its affiliates moved to dismiss
their petitions for review, and the Court granted their motion on October 7,
1997. On October 6, 1997, Kansas City Southern Railway Company ("KCS") moved
to dismiss its petitions for review; on October 7, 1997, Texas Mexican Railway
Company ("Tex Mex") moved to dismiss its petition for review; and on October
10, 1997, the United Transportation Union-General Committee of Adjustment (GO
401) moved to dismiss its petition for review. The Court granted these motions
on October 22, 1997. The Corporation believes that it is unlikely that the
disposition of these appeals will have a material impact on its results of
operations.
On May 7, 1997, the STB served a decision commencing the first annual
proceeding to implement the oversight condition it had imposed in the Decision.
The Corporation and its affiliates, and the Burlington Northern and Santa Fe
Railway Company ("BNSF"), filed reports required by the STB on July 1, 1997.
BNSF and other parties filed comments on August 1, 1997. The Corporation and
its affiliates, and others, filed replies on August 20, 1997. On October 27,
1997, the STB served a decision containing its findings and recommendations
based on the record compiled in the first oversight proceeding. The STB
concluded that the merger, as conditioned, had thus far not caused any
substantial competitive harm, and it rejected various requested adjustments to
the merger conditions. The STB ordered the Corporation and BNSF to continue
to report quarterly on merger implementation, and to provide a comprehensive
summary presentation in the progress reports due on July 1, 1998. The STB
order requires interested parties to file comments concerning the next annual
oversight proceeding on August 14, 1998, and replies are due September 1, 1998.
Bottleneck Proceedings: As previously reported in the 1996 10-K, on August
27, 1996, the STB initiated a proceeding asking for arguments and evidence on
the issue of whether it should modify its existing regulations regarding the
prescription of, and challenge to, rates for rail service involving a segment
that is served by only one railroad between an interchange point and an
exclusively-served shipper facility (i.e., a bottleneck segment). The STB
proceeding also referred to pending motions to dismiss three individual
complaint proceedings filed by shippers challenging a class rate charged for
the movement of coal, two of which named Union Pacific Railroad Company
<PAGE 22>
("UPRR") and Southern Pacific Transportation Company ("SPT") as a party
thereto. Neither complaint proceeding individually involved a significant
exposure for reparations. However, if existing regulation of bottleneck
movements were changed, future revenue from such movements, including those
covered by the complaint proceedings, could be substantially reduced. On
December 31, 1996, the STB served a decision which generally reaffirmed earlier
rulings regarding a rail carrier's obligation to provide rates for bottleneck
segments and assured the right of rail carriers to differentially price
traffic. It also dismissed the two complaint proceedings in which UPRR and SPT
were defendants. On April 30, 1997, the STB served a decision generally
declining to reconsider its December 31, 1996 decision, but clarifying that in
certain circumstances a "bottleneck" destination carrier that does not serve
the origin for a traffic movement may be required to provide a separately-
challengeable common carrier rate for the "bottleneck" portion of the movement.
The STB decisions are pending on appeal before the Eighth Circuit Court of
Appeals, and an oral argument has been scheduled for November 18, 1997.
Rail Service Proceedings: Recently, UPRR has been experiencing serious
congestion problems, especially on SP lines in the Gulf Coast area but also
affecting other lines of the system. In late September 1997, following an
intense analysis and planning effort, UPRR adopted a comprehensive Service
Recovery Plan. The objective of this Plan is to return service to normal
within 90 days. The Service Recovery Plan involves additional expenditures on
locomotives and personnel and the diversion of traffic to other carriers, among
other measures.
UPRR reported to the STB in the ongoing oversight proceeding regarding the
UP/SP merger concerning the recent service problems and the Service Recovery
Plan. On October 2, 1997, the STB initiated a proceeding entitled Ex Parte No.
573, Rail Service in the Western United States ("Ex Parte No. 573"), to provide
interested persons the opportunity to report on the status of rail service in
the western United States and to review proposals for solving the service
problems that exist. The STB directed interested parties to file written
statements by October 23, 1997, and held a hearing on October 27, 1997. The
Corporation filed a written submission and made an oral presentation at the STB
hearing reporting further on its Service Recovery Plan and the progress that
is being made in implementing it. A number of shippers, shipper organizations,
public bodies and other railroads also submitted both written and oral
testimony. Some participants in the proceeding asked the STB to allow the
Service Recovery Plan time to work, while others requested that the STB take
more active measures to remedy service problems.
In addition, on October 21, 1997, the Society of the Plastics Industry, the
National Industrial Transportation League and the Chemical Manufacturers
Association filed a joint petition asking the STB to issue an emergency
directed service order designed to remedy UPRR's recent service problems, but
without specifying any specific action. The Corporation filed a response
opposing the joint petition on October 24, 1997.
On October 31, 1997, the STB issued an emergency service order that it
described as an outgrowth of the STB proceedings in Ex Parte No. 573. The
service order, which by its terms expires in 30 days, imposes several temporary
measures designed to allow Tex Mex to divert some traffic off of UPRR in order
to reduce congestion on UPRR lines in Houston, Texas. The STB also directed
the Corporation, as the Corporation had offered, to suspend rail transportation
<PAGE 23>
service contract obligations of all shippers at Houston that wish to route
shipments over the Tex Mex instead of UPRR during the period of the service
order. The service order also requires the Corporation to report to the STB
regarding service issues raised at the hearing in Ex Parte No. 573. The STB
rejected the more intrusive proposals that had been presented in connection
with the Ex Parte No. 573 proceedings so as not to impede the implementation
of the Service Recovery Plan. The STB indicated that it will hold a further
hearing on December 3, 1997, at which time the Corporation will be required to
address the progress it has made in addressing the recent service problems,
after which the STB will determine whether an extension of the service order
is required and whether any additional actions are necessary.
Two railroad competitors of UPRR, BNSF and KCS, proposed that they be sold or
given access to, or granted the right to control, various UPRR assets as a
purported remedy for UPRR's service problems. While UPRR has sought and
received constructive assistance from other carriers to deal with the
congestion problems, UPRR declined to agree to the BNSF and KCS proposals on
the grounds that they would worsen the problem, are legally unjustified, and
are aimed at obtaining competitive advantages that were rejected by the STB in
the UP/SP merger proceeding.
Some customers have submitted claims for damages related to shipments delayed
in transit while other customers have indicated an intention to submit claims
for damages arising out of delays to their shipments as a result of the
congestion problems. The nature of the damages sought include, but are not
limited to, loss or damages to lading, alternative transportation charges,
additional production costs, lost business and lost profits. In addition, some
customers have asserted that they have the right to cancel contracts as a
result of alleged material breaches of such contracts by UPRR. It is not
possible at this time to assess the likelihood or magnitude of such liability
or the likelihood that any of such contracts could be canceled by particular
customers. Each claim actually submitted to UPRR is being reviewed and
resolved on the basis of UPRR's contractual relationship with the customer
asserting the claim. As part of this process and the Service Recovery Plan,
UPRR has offered to waive shippers' contract obligations for the duration of
the congestion crisis on a case-by-case basis, wherever routing traffic over
other railroads or other modes would assist the shipper and not worsen the
congestion on UPRR.
UPRR experienced a number of serious accidents in July and August 1997,
although most overall safety measures continue to improve. In August and
September 1997, the Federal Railroad Administration ("FRA") conducted an
in-depth inquiry into UPRR's safety practices and made a number of
recommendations for improvements. Such recommendations include creating
a joint committee of Railroad management, labor and the FRA to review and
monitor all aspects of safety, adding an executive position for safety
reporting directly to the President, creating a safety hotline (direct to the
Railroad's President), re-evaluating all existing training programs and
increasing the monitoring of train crew performance, crew fatigue and crew
scheduling. All such recommendations have been implemented. The FRA has
indicated that it may take enforcement actions against UPRR.
During the last week of October, 1997, the Railroad experienced two additional
train collisions in Texas, which resulted in non-fatal injuries to train crew
employees. As a result of these incidents, the FRA sent additional inspectors
<PAGE 24>
to Texas and other states to monitor the Railroad's operations. UPRR also
agreed voluntarily to introduce a guaranteed time-off program for 3,500 train
and engine employees which would ensure that every such employee has two
consecutive calendar days off after working 14 consecutive calendar days. This
program is pending approval by the joint management, labor and FRA committee
formed to examine and adopt safety initiatives. Once adopted, this program is
expected to be expanded to the rest of UPRR's system by mid-December.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
11 - Computation of earnings per share.
12 - Computation of ratio of earnings to fixed charges.
27 - Financial data schedule.
(b) Reports on Form 8-K
-------------------
Current report filed on October 10, 1997 describing the Railroad's
congestion, safety issues and the Service Recovery Plan.
<PAGE 25>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1997
UNION PACIFIC CORPORATION
(Registrant)
/s/ Joseph E. O'Connor, Jr.
------------------------------
Joseph E. O'Connor, Jr.
Vice President and Controller
(principal accounting officer
and duly authorized officer)
<EXHIBIT INDEX>
UNION PACIFIC CORPORATION
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Computation of earnings per share
12 Computation of ratio of earnings to
fixed charges
27 Financial data schedule
Exhibit 11
----------
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF EARNINGS PER SHARE
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
Nine Months
Ended September 30,
---------------------
1997 1996
---- ----
Average number of shares outstanding (a)....... 245,671 207,314
Average shares issuable on exercise of stock
options less shares repurchasable from
proceeds..................................... 2,322 1,135
-------- --------
Total average number of common and common
equivalent shares............................ 247,993 208,449
======== ========
Income from Continuing Operations.............. $583,607 $504,368
Income from Discontinued Operations............ - 170,673
-------- --------
Net Income..................................... $583,607 $675,041
======== ========
Earnings per share:
Income from Continuing Operations............ $ 2.35 $ 2.42
Income from Discontinued Operations.......... - 0.82
-------- --------
Net Income................................... $ 2.35 $ 3.24
======== ========
(a) In connection with the Southern Pacific acquisition, on September 11,
1996, the Corporation issued 38.1 million shares of its common stock in
exchange for 60% of Southern Pacific's shares.
Exhibit 12
----------
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in Thousands, Except Ratios)
(Unaudited)
Nine Months
Ended September 30,
-------------------
1997 1996
---- ----
Earnings:
Income from continuing operations..............$ 583,607 $ 504,368
Undistributed equity earnings.................. (25,648) (39,425)
---------- ----------
Total................................ 557,959 464,943
Income Taxes..................................... 337,479 250,214
------- -------
Fixed Charges:
Interest expense including amortization of
debt premium............................... 452,526 346,458
Portion of rentals representing an interest
factor..................................... 128,821 83,092
---------- ----------
Total fixed charges.................. 581,347 429,550
---------- ----------
Earnings available for fixed charges.............$1,476,785 $1,144,707
========== ==========
Ratio of earnings to fixed charges............... 2.5 2.7
========== ==========
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 201
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0
0
<COMMON> 690
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