<COVER>
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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ____________________
Commission file number 1-6075
UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 13-2626465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 Main Street, Suite 5900, Dallas, TX
(Address of principal executive offices)
75201
(Zip Code)
(214) 743-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
As of July 31, 1998, there were 247,308,268 shares of the Registrant's
Common Stock outstanding.
<INDEX>
UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1: Condensed Consolidated Financial Statements:
CONDENSED STATEMENT OF CONSOLIDATED INCOME - For the
Three and Six Months Ended June 30, 1998 and 1997.... 1
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION -
At June 30, 1998 and December 31, 1997............... 2
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS - For
the Six Months Ended June 30, 1998 and 1997.......... 4
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS -
For the Six Months Ended June 30, 1998 and 1997...... 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS... 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
Item 3: Quantitative and Qualitative Disclosures About
Market Risk.......................................... 18
PART II. OTHER INFORMATION
Item 1: Legal Proceedings...................................... 19
Item 2: Changes in Securities and Use of Proceeds ............. 21
Item 6: Exhibits and Reports on Form 8-K....................... 22
Signature....................................................... 24
<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 Six Months Ended June 30, 1998 and 1997
(Amounts in Millions, Except Ratio and Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
Operating Revenues (Note 2)................. $2,362 $2,645 $4,690 $5,241
Operating Expenses (Note 2):
Salaries, wages and employee benefits.... 930 892 1,854 1,783
Equipment and other rents................ 348 314 709 633
Fuel and utilities (Note 4).............. 203 254 411 536
Depreciation and amortization............ 251 246 498 488
Materials and supplies................... 135 123 268 272
Purchased services....................... 176 159 339 329
Other costs (Note 7)..................... 464 187 732 409
------ ------ ------ ------
Total................................. 2,507 2,175 4,811 4,450
Operating Income (Loss)..................... (145) 470 (121) 791
Other Income - Net.......................... 53 19 76 57
Interest Expense (Notes 2 and 4)............ (177) (146) (337) (295)
----- ------ ----- ------
Income (Loss) before Income Taxes........... (269) 343 (382) 553
Income Taxes (Benefit) Expense.............. (111) 128 (159) 204
----- ------ ----- ------
Income (Loss) from Continuing Operations.... (158) 215 (223) 349
Discontinued Operations (Note 3):
Income (Loss) from Operations of
Discontinued Operations.............. 1 1 4 (5)
Estimated Loss on Disposal of
Discontinued Operations (net of
income taxes of $198 million)....... (262) - (262) -
------ ------ ------ ------
Income (Loss) from Discontinued Operations.. (261) 1 (258) (5)
Net Income (Loss)...........................$ (419) $ 216 $ (481) $ 344
====== ====== ====== ======
Earnings Per Share (Note 9):
Basic:
Income(Loss)from Continuing Operations...$ (.64) $ 0.88 $ (.91) $ 1.42
Income(Loss)from Discontinued Operations. (1.06) - (1.05) (.02)
Net Income (Loss)........................$(1.70) $ 0.88 $(1.96) $ 1.40
====== ====== ====== ======
Diluted:
Income(Loss)from Continuing Operations...$ (.64) $ 0.87 $ (.91) $ 1.41
Income(Loss)from Discontinued Operations. (1.06) - (1.05) (.02)
------ ------ ------ ------
Net Income (Loss)........................$(1.70) $ 0.87 $(1.96) $ 1.39
====== ====== ====== ======
Weighted Average Number of Shares (Basic)... 246.0 245.7 246.0 245.6
Weighted Average Number of Shares (Diluted). 269.2 248.0 258.5 247.9
Cash Dividends Per Share.................... 0.20 $ 0.43 0.40 $ 0.86
Ratio of Earnings to Fixed Charges (Note 5). -- -- -- 2.4
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
<PAGE> 2
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Millions of Dollars)
(Unaudited)
June 30, December 31,
ASSETS 1998 1997
Current Assets:
Cash and temporary investments................... $ 297 $ 89
Accounts receivable (Note 4)..................... 389 505
Inventories...................................... 317 288
Other current assets............................. 250 357
Investment in Discontinued Operations (Note 3)... 516 951
-------- --------
Total Current Assets....................... 1,769 2,190
Investments:
Investments in and advances to affiliated
companies.................................... 503 443
Other investments................................ 159 181
-------- --------
Total Investments....................... 662 624
Properties:
Railroad:
Road and other................................ 24,251 23,610
Equipment..................................... 7,521 7,084
-------- --------
Total Railroad............................. 31,772 30,694
Other......................................... 78 70
-------- --------
Total Properties........................... 31,850 30,764
Accumulated depreciation...................... (5,588) (5,240)
-------- --------
Properties - Net .......................... 26,262 25,524
Other Assets.......................................... 251 185
-------- --------
Total Assets............................. $ 28,944 $ 28,523
======== ========
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
<PAGE> 3
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Amounts in Millions, Except Share and Per Share Amounts)
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
Current Liabilities:
Accounts payable................................ $ 573 $ 711
Accrued wages and vacation...................... 448 388
Accrued casualty costs.......................... 319 318
Dividends and interest.......................... 262 293
Income and other taxes.......................... 252 259
Debt due within one year........................ 162 230
Other current liabilities (Note 2 and 7)........ 854 879
-------- --------
Total Current Liabilities..................... 2,870 3,078
Debt Due After One Year.............................. 8,399 8,280
Deferred Income Taxes................................ 5,947 6,284
Accrued Casualty Costs............................... 667 678
Retiree Benefits Obligation.......................... 772 752
Other Long-Term Liabilities (Note 2)................. 1,156 1,226
Company-obligated mandatorily redeemable
Convertible Preferred Securities (Note 6)....... 1,500 -
Stockholders' Equity:
Common stock, $2.50 par value, authorized
500,000,000 shares, 276,203,956 shares issued
in 1998, 275,060,633 shares issued in 1997... 690 690
Paid-in surplus................................. 4,044 4,066
Retained earnings............................... 4,691 5,271
Treasury stock, at cost, 28,884,870 shares in
1998, 29,045,938 shares in 1997.............. (1,792) (1,802)
-------- --------
Total Stockholders' Equity................... 7,633 8,225
-------- --------
Total Liabilities and Stockholders' Equity... $ 28,944 $ 28,523
======== ========
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
<PAGE> 4
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
(Millions of Dollars)
(Unaudited)
1998 1997
Cash from continuing operations:
Income (loss)from continuing operations........ $ (223) $ 349
Non-cash charges to income:
Depreciation and amortization............... 498 488
Deferred income taxes....................... (140) 104
Other - net................................. (58) (164)
Changes in current assets and liabilities.............. (18) (97)
------- -------
Cash from continuing operations............. 59 680
Cash flows from investing activities:
Cash provided by discontinued operations ...... -- 27
Capital investments................................... (1,240) (930)
Other - net.................................... 37 (97)
------- -------
Cash used in investing activities........... (1,203) (1,000)
Cash flows from equity and financing activities:
Dividends paid................................. (155) (211)
Debt repaid.................................... (1,796) (466)
Financings..................................... 3,356 953
Other - net.................................... (53) (18)
------- -------
Cash provided by equity and financing activities 1,352 258
------- -------
Net increase (decrease) in cash and
temporary investments................... $ 208 $ (62)
======= =======
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS
For the Six Months Ended June 30, 1998 and 1997
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
1998 1997
Balance at Beginning of Year......................... $ 5,271 $ 5,262
Net Income (Loss).................................... (481) 344
------- -------
Total..................................... 4,790 5,606
Dividends Declared ($0.40 per share in 1998 and
$0.86 per share in 1997).................. (99) (212)
------- -------
Balance at End of Period........................ $ 4,691 $ 5,394
======= =======
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
<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, 1997 is derived from
audited financial statements. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Union Pacific Corporation
(the Corporation or UPC) Annual Report to Shareholders incorporated by
reference in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997. The results of operations for the three and six
months ended June 30, 1998 are not necessarily indicative of the
results for the entire year ending December 31, 1998. Certain 1997 amounts
have been reclassified to conform to the 1998 financial statement
presentation.
2. Acquisition of Southern Pacific Rail Corporation (Southern Pacific or SP) -
In connection with the continuing integration of Union Pacific Railroad
Company (UPRR) and Southern Pacific's rail operations (collectively, the
Railroad), UPC is continuing to eliminate duplicate positions (primarily
positions other than train crews), relocate positions, merge or dispose of
redundant facilities, dispose of certain rail lines and cancel uneconomical
and duplicative SP contracts. The Corporation has also repaid certain of
Southern Pacific's debt obligations. UPC recognized a $958 million
liability in the Southern Pacific purchase price allocation for costs
associated with SP's portion of these activities.
Through June 30, 1998, approximately $357 million in merger-related costs
were paid by the Corporation and charged against these reserves,
principally consisting of approximately $172 million and $73 million,
respectively, for severance and relocation payments made to approximately
4,000 Southern Pacific employees and approximately $84 million for labor
protection payments. The Corporation expects the remaining merger payments
will be made over the course of the next five years as the rail operations
of UPRR and SP are integrated and labor negotiations are completed and
implemented.
In addition, the Railroad expects to incur approximately $184 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. Results for the three and six months ended June 30, 1998
include $11 million and $29 million, after tax, respectively, in
acquisition-related operating costs.
<PAGE> 6
3. Divestiture - In May 1998, the Corporation's Board of Director s approved a
formal plan to divest UPC's investment in Overnite Transportatio n Company
(Overnite or OTC) through an initial public offering (IPO) of its entire
interest in Overnite. As a result, UPC recorded a $262 million after-tax
loss (net of taxes of $198 million) from the planned disposal of OTC.
Although the IPO has been postponed due to market conditions,
management expects the sale to occur by the second quarter of 1999.
OTC's re sults have been reported as a discontinued operation in the
accompanying statement of consolidated income for all periods presented.
Net assets to be disposed of, at their expected net realizable values, have
been separately classified in the accompanying balance sheet as of
June 30, 1998. The December 31, 1997 balance sheet has been restated to
conform with the current year's presentation. Operating revenues for OTC
were $262 million and $519 million, respectively, for the three and six
months ended June 30, 1998 and $946 million and $961 million for the years
ended December 31, 1997 and 1996, respectively. OTC's capital expenditures
were $14 million and $26 million, respectively, for the three and six
months ended June 30, 1998 and $40 million and $10 million for the years
ended December 31, 1997 and 1996, respectively. OTC's net income was
$5 million and $10 million, respectively, for the three and six months
ended June 30, 1998. OTC reported net income of $4 million for the year
ended December 31, 1997 and a net loss of $43 million for the year ended
December 31,1996 (including goodwill amortization of $20 million in both
periods).
UPC intends to use the cash proceeds from the IPO for general corporate
purposes, including repayment of borrowings, working capital requirements
and capital expenditures.
4. Financial Instruments - The Corporation uses derivative financial
instruments in limited instances for other than trading purposes to manage
risk as it relates to fuel prices and interest rates. Where the
Corporation has fixed interest rates or fuel prices through the use of
swaps, futures or forward contracts, the Corporation has mitigated the
downside risk of adverse price and rate movements; however, it has also
limited future gains from favorable movements. The total credit risk
associated with the Corporation's counterparties was $32 million at
June 30, 1998. The Corporation has not been required to provide, nor has
it received, any collateral relating to its hedging activities.
The fair market value of the Corporation's derivative financial instrument
positions at June 30, 1998 was determined based upon current fair market
values as quoted by recognized dealers or developed based upon the present
value of future cash flows discounted at the applicable zero coupon
U.S. Treasury rate and swap spread.
Interest Rates - At June 30, 1998, the Corporation had outstanding interest
rate swaps on $257 million of notional principal amount of debt (3% of the
total debt portfolio) with a gross fair market value asset position of
$32 million and a gross fair market value liability position of $30 million.
These contracts mature over the next one to seven years. Interest rate
hedging activity had no significant effect on interest expense in the
second quarter of 1998 and increased interest expense by $1 million in
the second quarter of 1997.
Fuel - At June 30, 1998, the Railroad had hedged 50% of its estimated
remaining 1998 diesel fuel consumption at $0.51 per gallon, on a Gulf Coast
basis. At June 30, 1998, the Railroad had outstanding swap agreements
covering its fuel purchases of $164 million, with gross and net liability
positions of $34 million. Fuel hedging increased second quarter 1998 fuel
expense by $20 million and second quarter 1997 fuel expense by
approximately $1 million. For the six months ended June 30, fuel hedging
increased
<PAGE> 7
1998 fuel expense by $34 million and 1997 fuel expense by $1 million.
Sale of Receivables - The Railroad has sold, on a revolving basis, an
undivided percentage ownership interest in a designated pool of accounts
receivable. At December 31, 1997 and June 30, 1998, respectively,
accounts receivable are presented net of the $650 million and $602
million of receivables sold.
5. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed charges
has been computed on a total enterprise basis. Earnings represent income
from continuing operations less equity in undistributed earnings of
unconsolidated affiliates, plus income taxes and fixed charges. Fixed
charges represent interest, amortization of debt discount and expense, and
the estimated interest portion of rental charges. For the six months ended
June 30, 1998, fixed charges exceeded earnings by approximately $404
million.
6. Convertible Preferred Securities - On April 1, 1998, the Corporation
completed a private placement of $1.5 billion of 6-1/4% preferred securities
(the Convertible Preferred Securities) of Union Pacific Capital Trust
(the Trust), a statutory business trust sponsored by the Corporation. Each
of the Convertible Preferred Securities has a stated liquidation amount of
$50 and is convertible, at the option of the holder thereof, into shares of
UPC's common stock, par value $2.50 per share (the UPC Common Stock), at
the rate of 0.7257 shares of UPC Common Stock for each of the Convertible
Preferred Securities, equivalent to a conversion price of $68.90 per share
of UPC Common Stock, subject to adjustment under certain circumstances.
The Corporation owns all of the common securities of the Trust. Proceeds
from the sale of the Convertible Preferred Securities were used for
repayment of borrowings.
7. Commitments and Contingencies - There are various claims and lawsuits
pending against the Corporation and certain of its subsidiaries. Certain
customers have submitted claims for damages related to the delay of
shipments by the railroad as a result of congestion problems, and certain
customers have filed lawsuits seeking relief related to such delays. The
nature of the damages sought by claimants includes, but is not limited to,
contractual liquidated damages, freight loss or damage, alternative
transportation charges, additional production costs, lost business and lost
profits. In addition, some customers have asserted that they have the right
to cancel contracts as a result of alleged material breaches of such
contracts by the Railroad. In the second quarter of 1998, the Corporation
took a $155 million after-tax charge for the resolution of customer claims.
UPC will continue to evaluate the adequacy of its reserves for claims and
may add to such reserves if appropriate.
The Railroad is also party to certain regulatory proceedings before the
Surface Transportation Board of the U.S. Department of Transportation (STB).
One proceeding pertains to rail service problems in the western United
States. As an outgrowth of this proceeding, the STB issued an emergency
service order imposing certain temporary measures on the Railroad designed,
among other things, to reduce congestion on the Railroad's lines in the
Houston, Texas area. On July 31, 1998, the STB terminated the emergency
service order. The STB kept in place the requirement that the Railroad
report certain service data, which the Railroad had acknowledged the STB
had the authority to impose under a provision of the Interstate Commerce
Act separate from the emergency service provision. The STB also prescribed,
under another statutory provision separate from the emergency service
provision, a 45-day "wind-down" period during which certain rights that
Texas Mexican Railway Company and The Burlington Northern and Santa Fe
Railway Company (BNSF) had received under the emergency service order to
handle UP traffic in Houston would be continued. A second proceeding,
initiated under the STB's continuing oversight jurisdiction with respect
to the Corporation's acquisition of
<PAGE> 8
Southern Pacific and consolidation of Southern Pacific with UPRR (and
separate from the STB's regularly scheduled annual proceeding to review
the implementation of the merger and the effectiveness of the conditions
that the STB imposed on it), is for the purpose of considering the
justification for and advisability of any proposals for new remedial
conditions to the merger as they pertain to service in the Houston,
Texas/Gulf Coast area. Various parties have filed applications in this
proceeding seeking the imposition of additional conditions to the merger
including, among other things, the granting of overhead trackage rights on
certain of the Railroad's lines in Texas, "neutral switching supervision"
on certain of the Railroad's branch lines, the opening to other railroads
and switching by a "neutral switching company" of numerous industries now
exclusively served by the Railroad in the Houston area, and the compulsory
sale or lease to other carriers of certain of the Railroad's lines and
facilities. The Railroad believes that the applications are without merit
and intends to contest them vigorously. In addition, the STB has initiated
various inquiries and formal rulemaking proceedings regarding certain
elements of rail regulation following two days of hearings by the STB at
the request of two members of Congress and in response to shippers'
expressions of concern regarding railroad service quality, railroad rates
and allegedly inadequate regulatory remedies. There can be no assurance
that the proposals advanced by parties in the remedial conditions
proceeding or the proceedings initiated in response to the rail regulation
hearings will not be approved in some form. Should the STB or Congress
take aggressive action in the rail regulation proceedings (e.g., by making
purportedly competition-enhancing changes in rate and route regulation and
"access" provisions), the adverse effect on the Railroad and other rail
could be material.
The Corporation is also subject to Federal, state and local environmental
laws and regulations, and is currently participating in the investigation
and remediation of numerous sites. Where the remediation costs can be
reasonably determined, and where such remediation is probable, the
Corporation has recorded a liability. In addition, the Corporation
periodically enters into financial and other commitments and has retained
certain contingent liabilities upon the disposition of formerly-owned
operations.
In addition, UPC and certain of its officers and directors are currently
defendants in two purported class action securities lawsuits. The class
action suits allege, among other things, that management failed to properly
disclose the Railroad's service and safety problems and thereby issued
materially false and misleading statements concerning the merger with SP
and the safe, efficient operation of its rail network. Because both the
size of the class and the damages are uncertain, UPC and the Railroad are
unable at this time to determine the potential liability, if any, which
might arise from these lawsuits. Management believes that these claims
are without merit and intends to defend them vigorously.
It is not possible at this time for the Corporation to fully determine the
effect of all unasserted claims on its consolidated financial condition,
results of operations or liquidity; however, to the extent possible, where
unasserted claims can be estimated and where such claims are considered
probable, the Corporation has recorded a liability. The Corporation does
not expect that any known lawsuits, claims, environmental costs,
commitments or guarantees will have a material adverse effect on its
consolidated financial condition.
8. Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130) that is effective for all periods in 1998, including
interim periods. UPC has adopted the provisions of FAS 130 effective
January 1, 1998. The components of comprehensive income
<PAGE> 9
include, among other things, changes in the market value of futures
contracts which qualify for hedge accounting and a net loss recognized as an
additional pension liability but not yet recognized as net periodic pension
cost. The impact of adopting FAS 130 for the six months ended June 30, 1998
was approximately $2 million.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" that is effective
in 1998. The Corporation currently complies with the provisions of this
Statement.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" that is
effective in 1998 (FAS 132). FAS 132 revises and standardizes disclosures
required by FAS 87, 88, and 106. Restatement of the retirement plans
footnote will be required for all earlier periods presented in comparative
financial statements at December 31, 1998.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133) that will be effective in
2000. Management has not yet determined the effect, if any, FAS 133 will
have on UPC's consolidated financial statements.
9. Earnings Per Share - The following table provides a reconciliation between
basic and diluted earnings per share, in accordance with FAS 128, "Earnings
Per Share":
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
(Dollars in Millions, Except Per Share Amounts)
Net Income (Loss)............. $ (419) $ 216 $ (481) $ 344
Weighted Average Number of Shares Outstanding
Basic ...................... 246.0 245.7 246.0 245.6
Dilutive effect of common stock
equivalents .......... 23.2 2.3 12.5 2.3
----- ----- ----- -----
Diluted .................... 269.2 248.0 258.5 247.9
Earnings Per Share:
Basic:
Net Income (Loss)........ $(1.70) $ 0.88 $(1.96) $ 1.40
Diluted:
Net Income (Loss)........ $(1.70)(a) $ 0.87 $(1.96)(a)$ 1.39
(a) Excludes the effect of common stock equivalents, which are anti-dilutive
in a loss period.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Overview - During the second quarter, the Corporation restated all periods to
reflect the planned sale of Overnite Transportation Company as discontinued
operations. Since Union Pacific Railroad Company (UPRR) is the remaining
significant operating company of the Corporation, corporate expenses,
previously considered non-operating expenses, are now included in Other Costs
for all periods presented. Previously, such expenses were presented below
operating income. The impact of reclassifying such expenses as operating
expenses was to reduce operating income by $25 million and $51 million,
respectively, for the three and six months ended June 30, 1998 and $26
million and $54 million, respectively, for the three and six months ended
June 30, 1997.
Quarter Ended June 30, 1998 Compared to June 30, 1997
Southern Pacific Rail Corporation (Southern Pacific or SP) Acquisition - In
September 1996, the Corporation completed its acquisition of Southern Pacific
and, throughout 1997 and 1998, continued the process of integrating the
operations of SP's rail subsidiaries into UPRR's operations (collectively,
the Railroad). The Corporation expects to complete the full integration of the
operations of UPRR and the Southern Pacific rail subsidiaries during 1999.
The Corporation believes that the full implementation of the merger will
result in shorter routes, faster transit times, better on-time performance,
expanded single-line service and more efficient traffic flow.
As a result of the SP acquisition, UPC now operates the largest rail system in
the United States, with 35,000 route miles linking Pacific Coast and Gulf
Coast ports to the Midwest and eastern U.S. gateways.
Overnite Transportation Company (Overnite or OTC) Divestiture - In May 1998,
the Corporation's Board of Directors approved a formal plan to divest UPC's
investment in Overnite through an initial public offering (IPO) of its entire
interest in Overnite. As a result, UPC recorded a $262 million after-tax loss
(net of taxes of $198 million) from the planned disposal of OTC. Although the
IPO has been postponed due to market conditions, management expects the sale
to occur by the second quarter of 1999.
OTC's results have been reported as a discontinued operation in the
accompanying statement of consolidated income for all periods presented. Net
assets to be disposed of, at their expected net realizable values, have been
separately classified in the accompanying balance sheet as of June 30, 1998.
The December 31, 1997 balance sheet has been restated to conform with the
current year's presentation. Operating revenues for OTC were $262 million
and $519 million, respectively, for the three and six months ended
June 30, 1998 and $946 million and $961 million for the years ended
December 31, 1997 and 1996, respectively. OTC's capital expenditures were
$14 million and $26 million, respectively, for the three and six months ended
June 30, 1998 and $40 million and $10 million for the years ended
December 31, 1997 and 1996, respectively. OTC's net income was $5 million and
$10 million, respectively, for the three and six months ended June 30, 1998.
OTC reported net income of $4 million for the year ended December 31, 1997
and a net loss of $43 million for the year ended December 31,1996 (including
goodwill amortization of $20 million in both periods).
<PAGE> 11
UPC intends to use the cash proceeds from the IPO for general corporate
purposes, including repayment of borrowings, working capital requirements
and capital expenditures.
CONGESTION AND SERVICE ISSUES
As previously reported, congestion in and around Houston and the coastal areas
of Texas and Louisiana (the Gulf Coast region) began to have a material
adverse effect on the Corporation's operations and earnings in the third
quarter of 1997. System congestion started in the Gulf Coast region and
spread throughout the system as the Railroad shifted resources to help mitigate
the problem in the Gulf Coast region. The congestion was brought on by,
among other things, crew shortages and restricted track access caused by
necessary track maintenance on former Southern Pacific lines, increased demand,
washouts due to severe weather, derailments and congestion at Texas/Mexico
gateways. Traffic slowed further as rail yards in the Gulf Coast region
filled, slowing access into and out of the yards and forcing trains to be held
on sidings. Slower average train velocity led to a greater need for
locomotives in the region. As traffic in the region backed up and the
Railroad redeployed locomotives to the Gulf Coast region to help alleviate
local congestion, congestion problems spread to other parts of the Railroad's
system during the third and fourth quarters of 1997.
The Railroad has adopted certain measures to alleviate the congestion
problems, including the implementation of a Service Recovery Plan (the Plan)
on October 1, 1997. The Plan focuses on reducing the number of cars on the
system and restoring system velocity, which, in turn, results in more reliable
service to customers. In addition to implementation of the Plan, the Company
has taken other measures to address the service and congestion problems,
including (i) a concentrated effort to hire more train and engine employees,
(ii) the implementation of directional running, which provides for the
movement of trains primarily in opposing directions on parallel lines and
results in the avoidance of numerous daily train "meets" on those lines, on
parallel tracks between Houston and St. Louis, and (iii) the establishment of
a coordinated dispatching center in Houston, which is designed to provide
close coordination of operations of UPRR and The Burlington Northern and Santa
Fe Railway Company (BNSF) in the Houston area and ensure the best possible
handling of all rail traffic there. Implementation of the Plan and the other
service recovery measures described above have significantly alleviated
congestion in the Gulf Coast region. Recently, service in UPRR's Central
Corridor between Chicago and Utah has been slowed by track maintenance and
capacity expansion work which is expected to be completed by year-end.
In addition, UPRR has recently experienced congestion on its lines in the
Los Angeles basin and on the Sunset Route west of El Paso, Texas, caused in
part by two derailments, tight crew supply and limited track capacity in that
region, and the learning curve associated with the integration of the computer
system of Southern Pacific in the region into UPRR's computer system, which
commenced July 1, 1998. UPRR has been working to reduce this congestion by
rerouting trains from this region to other portions of its system.
Financial Impact of Congestion - The Corporation has estimated that the cost
of the congestion-related problems for the three months ended June 30, 1998
was approximately $434 million, after tax, which reflected the combined
effects of lost business, higher costs associated with system congestion,
and costs associated with service recovery efforts, alternate transportation
and customer claims. Congestion-related costs for the quarter include a
$155 million after-tax charge for the resolution of customer claims. Although
progress has been made in improving service, the Corporation expects these
problems to continue to have an adverse impact on 1998 results. In addition,
as a result of operating losses incurred by the Railroad and in order to fund
its capital programs, the Corporation has incurred substantial incremental
debt since December 31, 1997, most of which has been repaid with the proceeds
of the issuance of the Convertible Preferred Securities (defined herein).
(See Changes in Financial Condition and Other Developments.) The timing of the
<PAGE> 12
Corporation's retur n to profitability will be determined by how rapidly it is
able to eliminate congestion and return to normal operations throughout its
system.
FINANCIAL RESULTS
The Corporation reported a net loss of $419 million or $1.70 per diluted share
for the second quarter of 1998, compared to 1997 net income of $216 million or
$0.87 per diluted share. This earnings decrease resulted from continued
congestion and service issues at the Railroad and a $262 million after-tax
loss from discontinued operations associated with the planned sale of
Overnite. Both periods included the impact of one-time SP merger-related
costs for severance, relocation, and training of employees ($11 million and
$27 million reduction in net income in 1998 and 1997, respectively). The
operating ratio for the second quarter of 1998 was 106.1, which includes an
estimated 26.2 points attributable to congestion costs (both lost business
and incremental operating costs). This compares to an operating ratio of
82.2 for the same period in 1997. Operating revenues decreased $283 million
(11%) to $2,362 million in 1998. This decrease reflects slower system speed
and related crew shortages congestion, the impact of the ongoing Asian
financial crisis on export markets and weak grain demand resulting from
strong worldwide crops. Average commodity revenue per car (ARC) fell 2% to
$1,128 per car, while total carloadings fell 10% to 2 million. Commodity
revenue in 1998 fell 12% over the same period in 1997 as shown in the table
below.
Commodity Revenue
Three Months Ended June 30, 1998 Versus 1997
Commodity
(Revenue in Thousands) Cars ARC Revenue Change %
Agricultural 193,787 $1,506 $ 291,850 $ (69,341) (19)
Automotive 165,250 1,471 243,036 (8,119) (3)
Chemicals 226,710 1,691 383,406 (70,549) (16)
Energy 427,055 1,143 488,191 (6,926) (1)
Industrial 346,254 1,350 467,380 (64,835) (12)
Intermodal 636,441 592 376,709 (80,917) (18)
--------- ------ ---------- --------- --
Total Commodity 1,995,497 $1,128 $2,250,572 $(300,687) (12)
Agricultural Products: Commodity revenue fell 19% to $292 million. Carloadings
declined 14% to approximately 194,000 cars, primarily the result of a 15%
decrease in corn volumes due to soft export demand caused by strong foreign
harvests (primarily in China), as well as the continueation of system velocity
issues. Other agricultural products suffered from slow train cycles and
related equipment shortages as well; wheat revenues and carloadings increased
slightly over low 1997 results as warmer winter weather led to an early
harvest. Average commodity revenue per car declined 6%, primarily the result
of weak exports, which reduced the average length of haul by approximately
10% as business movements shifted from the Pacific Northwest to the Gulf
Coast region.
Automotive: Commodity revenue fell 3% to $243 million, while carloadings fell
1% to approximately 165,000 cars. Lower parts volumes (down 10%) led the
decline in traffic, primarily the result of slow cycle times and diverted
business due to service issues. This was partially offset by a 5% increase
in finished vehicles, the result of strong Ford and Chrysler gains. Finished
vehicle results were also affected by strike-related declines at GM, which
reduced revenues by approximately $9 million and carloadings by approximately
7,000. Average commodity revenue per car declined 2%, resulting from the
addition of new shorter haul Ford business and less long-haul Mexico parts
business.
Chemicals: Carloadings declined 12% to approximately 227,000 cars and
commodity revenue decreased 16% to $383 million. The decline in volume
resulted principally from congestion-related diversions to other modes of
transportation as well as to other rails. Rain in
<PAGE> 13
certain parts of the country lowered the demand for petroleum products,
fertilizer and potash. In addition, the Asian crisis reduced demand for
exports of soda ash while warm weather in some areas hurt demand for LP gas.
Average commodity revenue per car declined 4% due to generally shorter hauls
(storage-in-transit moves for plastic and growth in short-haul potash moves)
and unfavorable product mix.
Energy (Primarily Coal): Commodity revenue fell 1% to approximately $488
million in 1998, driven by a 2% decrease in carloadings. Slow systems speeds,
diversions of business to competing railroads and weak export
markets led the decline, despite strong domestic demand. Average commodity
revenue per car rose 1% to $1,143 as generally shorter hauls were offset by
favorable product mix. Powder River Basin (PRB) train cycles rose slightly
quarter-over-quarter, 24.4 in 1998 vs. 23.8 in 1997, and longer trains (118.5
cars/train in 1998 vs. 116.3 in 1997) boosted carloads by nearly 10,000 units
over 1997. Most other mine locations posted declines, largely due to
train cycle issues.
Industrial Products: Carloadings decreased 11%, while commodity revenue
declined 12% to $467 million. Volume declines resulted primarily from
equipment shortages and service, including diversions of traffic to other
modes of transportation and to other rails. Other contributing factors were
strong competition, the Mexican embargo (affecting appliances and consumer
products) and capacity constraints (affecting cement production). Average
commodity revenue fell 1% to $1,350, the result of offsetting double-digit
gains and losses seen in various product lines.
Intermodal: Commodity revenue declined 18% to $377 million while carloadings
fell 13% to 636,000 loads, the result of lower system speed and related
diversions of traffic to BNSF and other rails, as well as weak exports.
Average commodity revenue per car fell 6% due to unfavorable mix and a large
volume of low ARC equipment repositioning moves due to equipment imbalances
caused by the Asian crisis.
Consolidated operating expenses were $2,507 million, $332 million (15%) higher
than the second quarter 1997 operating costs of $2,175 million. Higher
operating costs reflect approximately $300 million of congestion-related
costs. The impact of congestion was slightly offset by lower fuel costs,
merger and cost reduction benefits and volume-related cost savings, as carloads
were off 10% and gross-ton miles were down 8%.
Salaries, wages and employee benefits were $38 million (4%) higher than 1997,
as net congestion-related costs and wage inflation (generated by the National
Labor Agreement) were partially offset by merger consolidation benefits.
Quarter-over-quarter, the work force levels were up slightly, as hiring
exceeded merger-related reductions, attrition, and the effect of lower volumes.
Depreciation expense grew $5 million to $251 million due to UPC's continued
reinvestment in new equipment and rail infrastructure. The Railroad spent
over $2 billion on capital projects in 1997 and anticipates spending
$2.2 billion in 1998 of which $400 million will be merger-related.
Materials & Supplies costs for the quarter were up $12 million (10%) from
second quarter 1997, reflecting higher material freight charges, and freight
car and roadway machine material.
Fuel & Utilities expenses were down $51 million or 20% from 1997, reflecting
lower fuel prices and congestion-related volume declines. A reduction in
gross-ton miles quarter-over-quarter (down 8%) generated volume-related fuel
savings of $18 million versus 1997. Prices were down 8.4 cents per gallon to
62.6 cents, saving $24 million. The fuel consumption
<PAGE> 14
rate of 1.418 gallons per thousand gross-ton miles improved 1% from last
year's 1.429, lowering UP's fuel costs by $2 million.
Rent Expense was up $34 million (11%) versus 1997, as system congestion (which
hindered car cycle times) combined with unfavorable rates (strong market
demand for equipment) to drive up equipment rent costs. Congestion-related
increases in car cycle times increased costs by $40 million, which was
partially offset by volume-related savings of $27 million.
Other Costs, including purchased services, increased $294 million (85%) from
1997, primarily driven by the $250 million charge made in the second quarter
for the resolution of customer claims. In addition, increased costs were seen
in higher state and local taxes, overruns on contract services and
legal expenses.
Consolidated operating income fell $615 million (131%) to a loss of $145
million in 1998, due to the factors mentioned above. Other income increased
$34 million, primarily reflecting increased real estate sales and a recovery
of funds from insurers related to first quarter 1997 flood damage. Interest
expense increased $31 million, the result of higher debt levels and higher
interest rates resulting from a the recent credit rating downgrade. Income
taxes (excluding the tax impact of discontinued operations) decreased
$239 million to an income tax benefit of $111 million, primarily reflecting a
loss before income taxes.
Six Months Ended June 30, 1998 Compared to June 30, 1997
The Corporation reported a net loss of $481 million or $1.96 per diluted share
for the six months ended June 30, 1998, compared to 1997 net income of
$344 million or $1.39 per diluted share for the comparable period. Result
s for 1998 reflect the effect of continued congestion and service issues at
the Railroad and a $262 million loss from discontinued operations associated
with the planned sale of Overnite. The Corporation reported a loss from
continuing operations for the period of $223 million compared to income from
continuing operations of $349 million in 1997. Both periods included the
impact of one-time SP merger-related costs for severance, relocation, and
training of employees ($29 million and $36 million reduction in net income in
1998 and 1997, respectively). Operating revenues were $4,690 million for the
period versus $5,241 million in 1997, an 11% drop. These declines are the
result of continued congestion and service issues at the Railroad.
Consolidated operating expenses for the period were $4,811 million, compared
to $4,450 million for the same period in 1997, an increase of $361 million or
8%. Congestion-related costs and wage inflation, partially offset by net
merger benefits and volume-related cost savings, caused salaries, wages and
employee benefits to increase $71 million. Congestion was also a contributing
factor, along with unfavorable rates, to an increase in equipment and other
rents by $76 million. Fuel and utility costs fell $125 million (23%),
principally the result of decreased volumes at the Railroad and a 12% decrease
in fuel prices. Depreciation charges rose $10 million, primarily due to UPC's
extensive capital spending on its equipment and rail infrastructure. Other
costs increased $323 million, primarily driven by the approximately
$300 million charge made for the resolution of customer claims during the
six month period.
Consolidated operating income fell $912 million (115%) to a loss of $121
million in 1998, due to the factors described above. Other income increased
$19 million, primarily reflecting increased real estate sales. Interest
expense increased $42 million, the result of higher debt levels and higher
interest rates resulting from the recent credit rating downgrade. Income
taxes (excluding the tax impact of discontinued operations) decreased
$363 million to an income tax benefit of $159 million, primarily reflecting
lower income before income taxes.
<PAGE> 15
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
FINANCIAL CONDITION - For the six months ended June 30, 1998, cash from
continuing operations was a $59 million, compared to $680 million in 1997.
This $621 million decrease primarily reflects lower earnings and timing of
working capital requirements due to the continuing congestion as well as
merger consolidation spending.
Cash used in investing activities was $1,203 million in the first half of 1998
compared to $1,000 million in 1997. This increase primarily reflects higher
capital spending on the former Southern Pacific lines.
Cash provided by equity and financing activities was $1,352 million in the
first half of 1998 compared to $258 million in 1997. This change in cash
principally reflects an increase in net financings of $2,403 million, offset
by increased debt repaid of $1,330 million. The ratio of debt to debt plus
equity decreased to 48.4% at June 30, 1998, compared to 50.9% at
December 31, 1997 and 50.8% at June 30, 1997. This change resulted from the
private placement of the Convertible Preferred Securities described below,
which are considered as equity in the calculation of the ratio of debt to debt
plus equity, somewhat offset by increased debt levels.
On April 1, 1998, the Corporation completed a private placement of
$1.5 billion of 6-1/4% preferred securities of Union Pacific Capital Trust,
a statutory business trust sponsored by the Corporation, which securities are
convertible into common stock of the Corporation at an initial conversion
price of $68.90 (the Convertible Preferred Securities). Proceeds from the sale
of the securities were used for repayment of borrowings. (See "Part II.
OTHER INFORMATION; Item 2. Changes in Securities and Use of Proceeds.")
The Convertible Preferred Securities are presented as a separate line item in
the consolidated balance sheet as of June 30, 1998 between liabilities and
equity and appropriate disclosures are included in the notes to the financial
statements. (See Footnote 6.) For financial reporting purposes, the
Corporation has recorded distributions payable on the Convertible Preferred
Securities as a financing charge to earnings in the statement of consolidated
income.
In July, 1998 the Corporation entered into a new credit facility which
increased its total lines of credit to $4 billion.
OTHER MATTERS
Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement No. 130, "Reporting Comprehensive Income"
(FAS 130) that is effective for all periods in 1998, including interim
periods. UPC has adopted the provisions of FAS 130 effective January 1, 1998.
The components of comprehensive income include, among other things, changes
in the market value of futures contracts which qualify for hedge accounting
and a net loss recognized as an additional pension liability but not yet
recognized as net periodic pension cost. The impact of adopting FAS 130 for
the six months ended June 30, 1998 was approximately $2 million.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" that is effective in
1998. The Corporation currently complies with the provisions of this Statement.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
<PAGE> 16
about Pensions and Other Postretirement Benefits" (FAS 132) that is
effective in 1998. FAS 132 revises and standardizes disclosures required by
FAS 87, 88, and 106. Restatement of the retirement plans footnote will be
required for all earlier periods presented in comparative financial
statements at December 31, 1998.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133) that will be effective in 2000.
Management has not yet determined the effect, if any, FAS 133 will have on
UPC's consolidated financial statements.
Commitments and Contingencies -There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. Certain customers
have submitted claims for damages related to the delay of shipments by the
railroad as a result of congestion problems, and certain customers have filed
lawsuits seeking relief related to such delays. The nature of the damages
sought by claimants includes, but is not limited to, contractual liquidated
damages, freight loss or damage, alternative transportation charges, additional
production costs, lost business and lost profits. In addition, some customers
have asserted that they have the right to cancel contracts as a result of
alleged material breaches of such contracts by the Railroad. In the second
quarter of 1998, the Corporation took a $155 million after-tax charge for the
resolution of customer claims. UPC will continue to evaluate the adequacy of
its reserves for claims and may add to such reserves if appropriate.
The Railroad is also party to certain regulatory proceedings before the Surface
Transportation Board of the U.S. Department of Transportation (STB). One
proceeding pertains to rail service problems in the western United States. As
an outgrowth of this proceeding, the STB issued an emergency service order
imposing certain temporary measures on the Railroad designed, among other
things, to reduce congestion on the Railroad's lines in the Houston, Texas
area. On July 31, 1998, the STB terminated the emergency service order.
The STB kept in place the requirement that the Railroad report certain service
data, which the Railroad had acknowledged the STB had the authority to impose
under a provision of the Interstate Commerce Act separate from the emergency
service provision. The STB also prescribed, under another statutory provision
separate from the emergency service provision, a 45-day "wind-down" period
during which certain rights that the Texas Mexico Railway Company (Tex Mex)
and BNSF had received under the emergency service order to handle UP traffic
in Houston would be continued. A second proceeding, initiated under
the STB's continuing oversight jurisdiction with respect to the Corporation's
acquisition of Southern Pacific and consolidation of Southern Pacific with
UPRR (and separate from the STB's regularly scheduled annual proceeding to
review the implementation of the merger and the effectiveness of the
conditions that the STB imposed on it), is for the purpose of considering the
justification for and advisability of any proposals for new remedial
conditions to the merger as they pertain to service in the Houston, Texas/Gulf
Coast area. Various parties have filed applications in this proceeding
seeking the imposition of additional conditions to the merger including,
among other things, the granting of overhead trackage rights on certain of the
Railroad's lines in Texas, "neutral switching supervision" on certain of the
Railroad's branch lines, the opening to other railroads and switching by a
"neutral switching company" of numerous industries now exclusively served
by the Railroad in the Houston area, and the compulsory sale or lease to other
carriers of certain of the Railroad's lines and facilities. The Railroad
believes that the applications are without merit and intends to contest them
vigorously. In addition, the STB has initiated various inquiries and formal
rulemaking proceedings regarding certain elements of rail regulation following
two days of hearings by the STB at the request of two members of Congress and
in response to shippers' expressions of concern regarding railroad service
quality, railroad rates and allegedly inadequate regulatory remedies. There
can be no assurance that the proposals advanced by parties in the remedial
conditions
<PAGE> 17
proceeding or the proceedings initiated in response to the rail regulation
hearings will not be approved in some form. Should the STB or Congress take
aggressive action in the rail regulation proceedings (e.g., by making
purportedly competition-enhancing changes in rate and route regulation and
"access" provisions), the adverse effect on the Railroad and other rail
carriers could be material.
The Corporation is also subject to Federal, state and local environmental laws
and regulations, and is currently participating in the investigation and
remediation of numerous sites. Where the remediation costs can be reasonably
determined, and where such remediation is probable, the Corporation has
recorded a liability. In addition, the Corporation periodically enters into
financial and other commitments and has retained certain contingent
liabilities upon the disposition of formerly-owned operations.
In addition, UPC and certain of its officers and directors are currently
defendants in two purported class action securities lawsuits. The class
action suits allege, among other things, that management failed to properly
disclose the Railroad's service and safety problems and thereby issued
materially false and misleading statements concerning the merger with SP and
the safe, efficient operation of its rail network. Because both the size
of the class and the damages are uncertain, UPC and the Railroad are unable
at this time to determine the potential liability, if any, which might arise
from these lawsuits. Management believes that these claims are without merit
and intends to defend them vigorously.
It is not possible at this time for the Corporation to fully determine the
effect of all unasserted claims on its consolidated financial condition,
results of operations or liquidity; however, to the extent possible, where
unasserted claims can be estimated and where such claims are considered
probable, the Corporation has recorded a liability. The Corporation does not
expect that any known lawsuits, claims, environmental costs, commitments or
guarantees will have a material adverse effect on its consolidated financial
condition.
Year 2000 - In 1995, UPC began modifying its computer systems to process
transactions involving the year 2000 and beyond. Costs to convert these
systems, estimated to total $61 million, are expensed as incurred. At
June 30, 1998, approximately 70% of the Corporation's systems have been
modified, and the majority of the remaining systems are expected to be
modified by year-end 1998. During 1999, systems will be tested to assure
compliance with year 2000 requirements.
UPC is in the process on contacting entities with whom it exchanges data to
determine the status of their year 2000 modifications efforts. In addition,
the Corporation is working with vendors who supply equipment and/or software
that could experience year 2000 problems.
The Corporation believes its systems will be successfully and timely modified.
However, failure to do so or failure on the part of third parties with whom
UPC does business could materially impact operations and financial results
for the year 2000.
CAUTIONARY INFORMATION
Certain information included in this report contains, and other materials
filed or to be filed by the Corporation with the Securities and Exchange
Commission (as well as information included in oral statements or other
written statements made or to be made by the Corporation) contain or will
contain, forward-looking statements within the meaning of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
Such forward-looking information may include, without limitation, statements
that the Corporation does not expect that lawsuits, environmental costs,
commitments, contingent liabilities, labor negotiations or other matters will
have a material adverse effect on its consolidated financial condition, results
of operations or liquidity and other similar expressions concerning matters
that are not historical facts, and projections as to the Corporation's
financial results. Such forward-looking information is or will be based on
information available at that time, and is or will be subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in the statements. Important factors that could cause such
differences include, but are not limited to whether the Corporation is fully
successful in overcoming its congestion-related problems and implementing its
service recovery plans and other financial and operational initiatives,
industry competition and regulatory developments, natural events such as
floods and earthquakes, the effects of adverse general economic conditions,
changes in fuel prices, labor strikes, the impact of year 2000 systems
problems and the ultimate outcome of shipper claims related to congestion,
environmental investigations or proceedings and other types of claims and
litigation.
<PAGE> 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation uses derivative financial instruments in limited instances for
other than trading purposes to manage risk as it relates to fuel prices and
interest rates. Where the Corporation has fixed interest rates or fuel prices
through the use of swaps, futures or forward contracts, the Corporation has
mitigated the downside risk of adverse price and rate movements; however, it
has also limited future gains from favorable movements.
The Corporation addresses market risk related to these instruments by
selecting instruments whose value fluctuations correlate highly with the
underlying item being hedged. Credit risk related to derivative financial
instruments, which is minimal, is managed by requiring minimum credit
standards for counterparties and periodic settlements. The total credit
risk associated with the Corporation's counterparties was $32 million at
June 30, 1998. The Corporation has not been required to provide, nor has it
received, any collateral relating to its hedging activities.
The fair market value of the Corporation's derivative financial instrument
positions at June 30, 1998 was determined based upon current fair market
values as quoted by recognized dealers or developed based upon the present
value of future cash flows discounted at the applicable zero coupon U.S.
Treasury rate and swap spread.
Interest Rates - The Corporation controls its overall risk relating to
fluctuations in interest rates by managing the proportion of fixed and
floating rate debt instruments within its debt portfolio over a given period.
Derivatives are used in limited circumstances as one of the tools to obtain
the targeted mix. The mix of fixed and floating rate debt is largely managed
through the issuance of targeted amounts of such debt as debt maturities
occur or as incremental borrowings are required. The Corporation also
obtains additional flexibility in managing interest cost and the interest
rate mix within its debt portfolio by issuing callable fixed rate debt
securities.
At June 30, 1998, the Corporation had outstanding interest rate swaps on
$257 million of notional principal amount of debt (3% of the total debt
portfolio) with a gross fair market value asset position of $32 million and a
gross fair market value liability position of $30 million. These contracts
mature over the next one to seven years. Interest rate hedging activity had
no significant effect on interest expense in the second quarter of 1998 and
increased interest expense by $1 million in the second quarter of 1997.
Fuel - Over the past three years, fuel costs approximated 10% of the
Corporation's total operating expenses. As a result of the significance of
the fuel costs and the historical volatility of fuel prices, the Railroad
periodically use swaps, futures and forward contracts to mitigate the impact
of fuel price volatility. The intent of this program is to protect the
Corporation's operating margins and overall profitability from adverse fuel
price changes.
At June 30, 1998, the Railroad had hedged 50% of its estimated remaining 1998
diesel fuel consumption at $0.51 per gallon, on a Gulf Coast basis. At
June 30, 1998, the Railroad had outstanding swap agreements covering its fuel
purchases of $164 million, with gross and net liability positions of
$34 million. Fuel hedging increased second quarter 1998 fuel expense by $20
million and second quarter 1997 fuel expense by approximately $1 million.
For the six months ended June 30, fuel hedging increased 1998 fuel expense by
$34 million and 1997 fuel expense by $1 million.
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
SOUTHERN PACIFIC ACQUISITION: As previously reported, various appeals have
been filed with respect to the STB's August 12, 1996 decision (the Decision)
approving the acquisition of control of Southern Pacific by the Corporation.
All of the appeals have been consolidated in the U.S. Court of Appeals for
the District of Columbia Circuit. Oral argument in the case is scheduled for
September 11, 1998. Various appellants have withdrawn their appeals, leaving
only BNSF, the Western Coal Traffic League (WCTL) and the City of Reno, Nevada
with appeals pending. On April 10, 1998, WCTL filed a motion to vacate and
remand the Decision in light of a proceeding the STB commenced on
March 31, 1998, under its continuing oversight jurisdiction over the merger,
to consider whether any additional conditions are justified and should be
imposed to deal with service problems in the Houston/Gulf Coast area. That
motion was denied by the court on May 22, 1998. The Corporation believes that
it is unlikely that the disposition of the remaining appeals will have a
material adverse impact on its consolidated financial condition or its results
of operations.
SHIPPER CLAIMS: Certain customers have submitted claims for damages related
to the delay of shipments by the Railroad as a result of congestion problems,
and certain customers have filed lawsuits seeking relief related to such
delays. The nature of the damages sought by claimants includes, but is not
limited to, contractual liquidated damages, freight loss or damage,
alternative transportation charges, additional production costs, lost business
and lost profits. In addition, some customers have asserted that they have
the right to cancel contracts as a result of alleged material breaches of
such contracts by the Railroad. While the Corporation does not believe that
such claims will have a material adverse effect on its consolidated financial
condition, it is not possible to determine fully the effects of all asserted
and unasserted claims. In the second quarter of 1998, the Corporation took
a $155 million after-tax charge for the resolution of customer claims. UPC
will continue to evaluate the adequacy of its reserves for claims and may
add to such reserves if appropriate.
RAIL SERVICE PROCEEDINGS AND RELATED MATTERS: As previously reported, the
Railroad was subject to an emergency service order issued by the STB on
October 31, 1997, as an outgrowth of a proceeding initiated by the STB on
October 2, 1997 to investigate rail service problems in the western United
States. The original service order, as subsequently modified and extended,
among other things imposed several temporary measures designed to reduce
congestion on the Railroad's lines in the Houston area. On July 31, 1998,
the STB terminated the emergency service order. The STB kept in place the
requirement that the Railroad report certain service data, which the Railroad
had acknowledged the STB had the authority to impose under a provision of the
Interstate Commerce Act separate from the emergency service provision.
The STB also prescribed, under another statutory provision separate from the
emergency service provision, a 45-day "wind-down" period during which certain
rights that Tex Mex and BNSF had received under the emergency service order to
handle UP traffic in Houston would be continued.
Also as previously reported, on March 31, 1998, the STB initiated a proceeding
under its continuing oversight jurisdiction with respect to the merger of the
Corporation and Southern Pacific to consider proposals for new remedial
conditions to the merger as they pertain to service in the Houston, Texas/Gulf
Coast area. This proceeding, which is separate from the STB's regularly
scheduled annual proceeding to review the implementation of the merger and
the effectiveness of the conditions that the STB imposed on it, was initiated
in response to submissions by Tex Mex, Kansas City Southern Railway Company
(KCS)
<PAGE> 20
and the Greater Houston Partnership (GHP), proposing that the Railroad be
directed to transfer certain lines and facilities in the Gulf Coast region to
other rail carriers, that a "neutral" switching operation be established in
the greater Houston area and that provisions in the STB's emergency service
order that expanded Tex Mex's right to handle traffic to and from Houston be
adopted permanently. The STB's decision announcing the proceeding established
a procedural schedule for the submission of evidence, replies and rebuttal.
Separately from this proceeding, a shortline railroad, the Arkansas, Louisiana
and Mississippi Railroad (AL&M), has filed a request that an additional
condition be imposed on the merger allowing AL&M to interchange with BNSF.
On July 8, 1998, various parties filed applications for conditions in the
remedial conditions proceeding. For example, BNSF sought trackage rights over
UPRR's line between San Antonio and Laredo, Texas, trackage rights on UPRR's
line between Taylor and Milano, Texas, "neutral switching supervision" on
certain branches in the Houston and Beaumont areas, and a variety of other
conditions. KCS and Tex Mex, in a joint filing with the Railroad Commission
of Texas, the Chemical Manufacturers Association, the Society of the Plastics
Industry and several other parties, sought a number of conditions, including
the opening to other railroads and switching by a "neutral switching company"
of numerous industries now exclusively served by UPRR in the Houston area,
the compulsory sale or lease to Tex Mex of a UPRR yard in Houston, the
compulsory sale to Tex Mex of a former SP line between Rosenberg and Victoria,
Texas, the compulsory transfer to KCS and Tex Mex of UPRR's Beaumont
Subdivision between Houston and Beaumont in exchange for a track that KCS and
Tex Mex propose to construct on the right-of-way of the SP line between those
cities, and the adoption on a permanent basis of the provision of the
emergency service order allowing Tex Mex to handle traffic moving between
Houston and points other than Tex Mex's own lines, and of certain other
provisions of that order. A number of shippers, including Dow Chemical
Company, Formosa Plastics Corporation and E.I. DuPont de Nemours and Company,
also individually sought various conditions. UPRR's response in opposition to
the condition requests is due on September 18, 1998. UPRR believes that the
applications are without merit and intends to contest them vigorously.
There can be no assurance that the proposals advanced by BNSF, Tex Mex, KCS,
GHP or other parties in the remedial conditions proceeding or other condition
requests such as the request of AL&M will not be approved in some form.
RAIL ACCESS AND COMPETITION: As previously reported, the STB, acting pursuant
to requests from two members of Congress and responding to shippers' concerns
about railroad service quality, railroad rates and allegedly inadequate
regulatory remedies, issued a decision on April 17, 1998, following two days
of hearings, which opened inquiries into certain elements of rail regulation.
The STB noted that no parties to the hearings had shown how aggressive
remedies designed to produce lower rates and enhance competition would permit
the industry to cover system costs and support reinvestment. Nevertheless,
it (i) directed a panel of disinterested economic experts to recommend
appropriate standards to measure railroad revenue adequacy, which is used to
determine whether rates are lawful (this portion of the decision was
subsequently modified to permit, as an alternative, discussions of this issue
between railroad and shipper representatives); (ii) initiated a rulemaking
proceeding to consider revisions to "competitive access" regulations in order
to address quality of service issues; (iii) ordered interested parties
to identify modifications to regulations governing access on
non-service-related grounds; (iv) began a rulemaking proceeding to consider
eliminating product and geographic competition as factors to be considered in
deciding whether a railroad has market dominance over rail traffic;
(v) ordered large and small railroads to negotiate arrangements that would
increase the role of short-line rail carriers; and (vi) directed the railroads
to establish "formalized dialogue" immediately with large and small shippers
and rail labor. The rulemakings described in clauses (ii) and (iv) of the
preceding sentence are pending. Meetings between
<PAGE> 21
railroad and shipper representatives under the supervision of an
administrative law judge on the topics described in clauses (i) and (iii) of
the foregoing sentence have failed to produce agreement, as have discussions
between representatives of the large railroads and smaller railroads on the
topics described in clause (v). The dialogues described in clause (vi) of the
foregoing sentence are ongoing. Should the STB or Congress take aggressive
action, (e.g., by making purportedly competition-enhancing changes in rate and
route regulation and "access" provisions), the adverse effect on the Railroad
and other railroads could be material.
DERIVATIVE LITIGATION: As previously reported in the Corporation's 1997 Annual
Report on Form 10-K, certain current and former directors of the Corporation
had been named as defendants in a purported derivative action filed on behalf
of the Corporation in the Federal District Court for the Northern District of
Texas in late 1997. The derivative action alleged, among other things, that
the named current and former directors breached their fiduciary duties to the
Corporation by approving the mergers of Southern Pacific and Chicago and North
Western Transportation Company into the Corporation without ensuring that
the Corporation or UPRR had adequate systems in place to integrate effectively
those companies into the operations of the Corporation and UPRR. The
derivative action was voluntarily dismissed by the plaintiffs, without
prejudice, on May 26, 1998.
LABOR MATTERS: As previously reported, the General Counsel of the National
Labor Relations Board ("NLRB") is seeking a bargaining order remedy in
15 cases involving Overnite where a Teamsters local union lost a
representation election. These cases are pending before the NLRB. By
decision dated April 10, 1998, an administrative law judge recommended that
bargaining orders be issued in four locations. Overnite has appealed this
decision to the NLRB, and the cases involving the remaining locations are
currently being tried. Overnite believes it has substantial defenses to these
cases and intends to continue to defend them aggressively.
ENVIRONMENTAL MATTERS: The Railroad has received approximately 20 Notices of
Violation (NOVs) from the South Coast Air Quality Management District
(the District) relating to fumes emitted from idling diesel locomotives at
Slover siding near the Railroad's yard in West Colton, California. Trains
awaiting crews or room to enter the West Colton yard have been parked at
Slover siding with their engines running for various amounts of time, causing
exhaust fumes to enter the backyards and homes of residents living along the
siding. The District has cited the Railroad for creating a public nuisance
pursuant to the California Health and Safety Code and the District's
regulations. Each violation carries a maximum civil penalty of $25,000 per
day, which may be increased in some circumstances to $50,000 per day. The
Railroad has modified its operating procedures for trains entering the West
Colton yard to reduce the problem and may enter into a stipulation with the
District. The Railroad expects to settle the NOVs for an amount that is less
than the maximum permitted by law, but the exact amount cannot be determined
at this time.
Item 2. Changes in Securities and Use of Proceeds.
On April 1, 1998, Union Pacific Capital Trust (the Trust), a statutory
business trust formed under the laws of the State of Delaware and a subsidiary
of the Corporation, closed
<PAGE> 22
a private placement of $1.5 billion in aggregate amount of 6-1/4% Convertible
Preferred Securities (the Convertible Preferred Securities), with a
liquidation amount of $50 per each of the Convertible Preferred Securities.
Each of the Convertible Preferred Securities is convertible, at the option of
the holder thereof, into shares of UPC's common stock, par value $2.50 per
share (the UPC Common Stock), at the rate of 0.7257 shares of UPC Common
Stock for each of the Convertible Preferred Securities, equivalent to a
conversion price of $68.90 per share of UPC Common Stock, subject to
adjustment under certain circumstances. The Corporation owns all of the
common securities of the Trust.
The initial purchasers of the Convertible Preferred Securities (the Initial
Purchasers) were Credit Suisse First Boston Corporation; Merrill Lynch,
Pierce, Fenner & Smith Incorporated; Smith Barney Inc.; and Schroder & Co. Inc.
The Initial Purchasers resold 29,909,600 of the Convertible Preferred
Securities (the QIB Securities) to qualified institutional buyers in
reliance on Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and 32,900 of the Convertible Preferred Securities
(the IAI Securities) to a limited number of institutional "accredited
investors," as such term is defined in Rule 501(a)(1), (2), (3) or (7) under
the Securities Act. The QIB Securities were sold for their liquidation amount
of $50 each or $1,495,480,000 in the aggregate, and the IAI Securities were
sold for their liquidation amount of $50 each or $1,645,000 in the aggregate.
In connection with the purchase of the QIB Securities and the IAI Securities,
the Corporation paid the Initial Purchasers a commission equal to 2.25% of
the purchase price of each of the QIB Securities and the IAI Securities, or
$33,648,300 and $37,012.50, respectively, in the aggregate. In addition to
sales of the QIB and IAI Securities, the initial purchasers also sold 57,500
of the Convertible Preferred Securities outside the United States to certain
persons other than U.S. persons in reliance on Regulation S under the
Securities Act, as previously reported in the Corporation's Current Report
on Form 8K, filed on April 20, 1998.
On July 24, 1998, the Corporation and the Trust filed a Registration Statement
on Form S-3, Registration No. 333-51617 (the Registration Statement), to
register the resale, under the Securities Act of 1933, as amended, of the
Convertible Preferred Securities, the Corporation's Convertible Junior
Subordinated Debentures due 2028 (the Convertible Debentures), which may be
distributed under certain circumstances to the holders of the Convertible
Preferred Securities, and the shares of the Corporation's common stock, par
value $2.50 per share, issuable upon conversion of the Convertible Preferred
Securities and the Convertible Debentures, by the holders of the Convertible
Preferred Securities named in the Prospectus which forms a part of the
Registration Statement. The Registration Statement was declared effective by
the Securities and Exchange Commission on July 28, 1998.
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.
27.1 Financial data schedule (restated for the quarter
ended March 31, 1998).
27.2 Financial data schedule (restated for the quarters
ended March 31, June 30, and September 30, 1997).
27.3 Financial data schedule (restated for the years ended
December 31, 1997, 1996, and 1995).
27.4 Financial data schedule (restated for the quarters
ended March 31, June 30, and September 30, 1996).
<PAGE> 23
(b) Reports on Form 8-K
On April 1, 1998, UPC filed a Current Report on Form 8-K announcing the
completion of the private placement of $1.5 billion of 6-1/4% preferred
securities of a statutory business trust sponsored by the Corporation, to
provide financial flexibility in funding its capital improvement programs
and restoring quality service to its customers.
On April 20, 1998, UPC filed a Current Report on Form 8-K providing
additional details regarding the private placement of $1.5 billion of 6-1/4%
preferred securities of a statutory business trust sponsored by the
Corporation.
On April 23, 1998, UPC filed a Current Report on Form 8-K announcing first
quarter 1998 results.
On May 29, 1998, UPC filed a Current Report on Form 8-K announcing UPC's
expectation of a loss from continuing operations in the second quarter of 1998.
<PAGE> 24
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: August 11, 1998
UNION PACIFIC CORPORATION
(Registrant)
/s/ John J. Koraleski
---------------------
John J. Koraleski
Controller
(chief accounting officer and
duly authorized officer)
<PAGE> 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
27.1 Financial data schedule (restated for the quarter ended
March 31, 1998).
27.2 Financial data schedule (restated for the quarters ended
March 31, June 30, and September 30, 1997).
27.3 Financial data schedule (restated for the years ended
December 31, 1997, 1996, and 1995).
27.4 Financial data schedule (restated for the quarters ended
March 31, June 30, and September 30, 1996).
Exhibit 11
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Six Months
Ended June 30,
1998 1997
Average number of shares outstanding .......... 245,980 245,581
Average shares issuable on exercise of stock
options less shares repurchasable from
proceeds..................................... 12,527 2,273
--------- --------
Total average number of common and common
equivalent shares............................ 258,507 247,854
========= ========
Income (Loss)from Continuing Operations ....... (222,705) 348,386
Loss from Discontinued Operations ............. (258,363) (4,600)
--------- --------
Net Income (Loss).............................. $(481,068) $343,786
========= ========
Earnings Per Share:
Basic:
Income (Loss) from Continuing Operations..... $ (.91) $ 1.42
Loss from Discontinued Operations............ (1.05) (.02)
------- --------
Net Income (Loss)............................ $ (1.96) $ 1.40
Diluted:
Income (Loss) from Continuing Operations..... $ (.91) $ 1.41
Loss from Discontinued Operations............ (1.05) (.02)
------- --------
Net Income (Loss)............................ $ (1.96) $ 1.39
Exhibit 12
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands, Except Ratios)
(Unaudited)
Six Months
Ended June 30,
1998 1997
Earnings:
Income (Loss) from continuing operations....... $(222,705) $348,386
Undistributed equity earnings.................. (21,933) (15,496)
Total................................ (244,638) 332,890
--------- --------
Income Taxes..................................... (159,640) 204,707
Fixed Charges:
Interest expense including amortization of
debt discount.............................. 337,071 295,279
Portion of rentals representing an interest
factor..................................... 87,533 91,329
--------- --------
Total................................ 424,604 386,608
Earnings available for fixed charges............. $ 20,326 $924,205
========= ========
Total Fixed Charges -- as above.................. $424,604 $386,608
======== ========
Ratio of earnings to fixed charges (Note 5)...... .05 2.4
======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Results for the six months ended June 30, 1998
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<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
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<RECEIVABLES> 389
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<CURRENT-ASSETS> 1769
<PP&E> 31850
<DEPRECIATION> 5588
<TOTAL-ASSETS> 28944
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0
1500
<COMMON> 690
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<NET-INCOME> 481
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
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<TABLE> <S> <C>
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<LEGEND>
Restated results for the three months ended March 31, 1998 to reflect the
discontuanence of Overnite's operations
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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<INTEREST-EXPENSE> 161
<INCOME-PRETAX> 113
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<NET-INCOME> 62
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
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<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
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Restated results for the three, six and nine months ended March 31, June 30,
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</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
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<CASH> 92 424 201
<SECURITIES> 0 0 0
<RECEIVABLES> 600 684 671
<ALLOWANCES> 0 0 0
<INVENTORY> 268 284 288
<CURRENT-ASSETS> 2265 2482 2378
<PP&E> 29747 30378 30261
<DEPRECIATION> 4952 5193 5086
<TOTAL-ASSETS> 27968 28657 28433
<CURRENT-LIABILITIES> 2956 3209 3157
<BONDS> 8068 8286 8179
0 0 0
0 0 0
<COMMON> 688 689 690
<OTHER-SE> 7552 7669 7795
<TOTAL-LIABILITY-AND-EQUITY> 27968 28657 28433
<SALES> 0 0 0
<TOTAL-REVENUES> 2596 5241 7817
<CGS> 0 0 0
<TOTAL-COSTS> 2275 4450 6611
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 150 295 451
<INCOME-PRETAX> 210 553 914
<INCOME-TAX> 77 204 329
<INCOME-CONTINUING> 133 349 585
<DISCONTINUED> 5 5 1
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 128 344 584
<EPS-PRIMARY> 0.52 1.40 2.38
<EPS-DILUTED> 0.52 1.39 2.35
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<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
Restated results for the years ended December 31, 1997 and 1996 and 1995
1997 to reflect the discontuanence of Overnite's operations
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 89 190 230
<SECURITIES> 0 0 0
<RECEIVABLES> 505 410 231
<ALLOWANCES> 0 0 0
<INVENTORY> 288 296 230
<CURRENT-ASSETS> 2190 2158 2578
<PP&E> 30764 29361 18004
<DEPRECIATION> 5240 4781 4406
<TOTAL-ASSETS> 28523 27691 19238
<CURRENT-LIABILITIES> 3078 2891 1768
<BONDS> 8280 7892 6221
0 0 0
0 0 0
<COMMON> 690 686 581
<OTHER-SE> 7535 7538 5783
<TOTAL-LIABILITY-AND-EQUITY> 28523 27691 19238
<SALES> 0 0 0
<TOTAL-REVENUES> 10133 7825 6510
<CGS> 0 0 0
<TOTAL-COSTS> 9000 6325 5219
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 603 499 448
<INCOME-PRETAX> 656 1179 984
<INCOME-TAX> 228 398 329
<INCOME-CONTINUING> 428 781 655
<DISCONTINUED> 4 122 291
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 432 903 946
<EPS-PRIMARY> 1.76 4.17 4.62
<EPS-DILUTED> 1.74 4.14 4.60
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
Restated results for the three, six, and nine months ended March 31, June 30,
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</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 79 73 146
<SECURITIES> 0 0 0
<RECEIVABLES> 315 290 557
<ALLOWANCES> 0 0 0
<INVENTORY> 219 212 284
<CURRENT-ASSETS> 2512 2443 2898
<PP&E> 18263 18459 28704
<DEPRECIATION> 4498 4609 4706
<TOTAL-ASSETS> 19382 19518 29073
<CURRENT-LIABILITIES> 1828 1868 3242
<BONDS> 6119 5914 8366
0 0 0
0 0 0
<COMMON> 582 582 679
<OTHER-SE> 5854 6014 7346
<TOTAL-LIABILITY-AND-EQUITY> 19382 19518 29073
<SALES> 0 0 0
<TOTAL-REVENUES> 1713 3469 5231
<CGS> 0 0 0
<TOTAL-COSTS> 1451 2824 4177
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 116 230 345
<INCOME-PRETAX> 164 466 811
<INCOME-TAX> 39 142 266
<INCOME-CONTINUING> 125 324 545
<DISCONTINUED> 31 76 130
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 156 400 675
<EPS-PRIMARY> 0.52 1.40 2.38
<EPS-DILUTED> 0.52 1.39 2.35
</TABLE>
