<COVER>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 1-6075
UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 13-2626465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 April 30, 1999, there were 247,732,651 shares of
the Registrant's Common Stock outstanding.
<INDEX>
UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1: Consolidated Financial Statements:
STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended
March 31, 1999 and 1998..................... 1
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
At March 31, 1999 and December 31, 1998..... 2
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Three Months Ended
March 31, 1999 and 1998..................... 3
STATEMENT OF CHANGES IN COMMON
STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999... 4
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.................................. 5-11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 12-19
Item 3: Quantitative and Qualitative Disclosures
About Market Risk......................... 19
PART II. OTHER INFORMATION
Item 1: Legal Proceedings......................... 19-20
Item 4: Submission of Matters to a Vote of
Security Holders.......................... 20
Item 6: Exhibits and Reports on Form 8-K.......... 21
Signature.......................................... 22
<PAGE> 1
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Consolidated Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Three Months Ended March 31, 1999 and 1998
- -------------------------------------------------------------------------
Millions, Except Per Share and Ratios 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues Rail and other (Note 2)...... $2,740 $2,586
- -------------------------------------------------------------------------
Operating Expenses Salaries, wages and employee
benefits................... 1,076 1,078
Equipment and other rents..... 331 382
Depreciation (Note 5)......... 270 263
Fuel and utilities (Note 4)... 189 221
Materials and supplies........ 144 144
Casualty costs................ 111 117
Other costs (Note 10)......... 257 348
--------------------------------------------------
Total......................... 2,378 2,553
--------------------------------------------------
Income Operating Income.............. 362 33
Other income (Note 8)......... 31 23
Interest expense (Note 4)..... (192) (161)
--------------------------------------------------
Income (Loss) before Income
Taxes...................... 201 (105)
Income taxes.................. (72) 43
--------------------------------------------------
Net Income (Loss)............. $ 129 $ (62)
- -------------------------------------------------------------------------
Earnings Per Share Basic - Net Income (Loss)..... $ 0.52 $(0.25)
(Note 7) Diluted - Net Income (Loss)... $ 0.52 $(0.25)
--------------------------------------------------
Weighted Average Number of
Shares (Basic)............. 246.3 246.0
Weighted Average Number of
Shares (Diluted)........... 247.4 246.0
--------------------------------------------------
Cash Dividends Per Share...... $ 0.20 $ 0.20
--------------------------------------------------
Ratio of Earnings to Fixed
Charges (Note 9).......... 1.8 0.4
</TABLE>
The accompanying notes to the financial statements are an integral part
of these statements.
<PAGE> 2
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Consolidated Financial Position (Unaudited)
Union Pacific Corporation and Subsidiary Companies
- -------------------------------------------------------------------------
March 31, Dec. 31,
Millions of Dollars 1999 1998
- -------------------------------------------------------------------------
Assets
--------------------------------------------------
<S> <C> <C> <C>
Current Assets Cash and temporary investments. $ 107 $ 176
Accounts receivable (Note 4)... 632 643
Inventories.................... 350 343
Current deferred tax asset..... 245 244
Other current assets........... 102 96
--------------------------------------------------
Total.......................... 1,436 1,502
Investments (Note 3) Investments in and advances to
affiliated companies........ 618 520
Other investments.............. 137 171
--------------------------------------------------
Total.......................... 755 691
--------------------------------------------------
Properties (Note 5) Cost........................... 33,470 33,145
Accumulated depreciation....... (6,428) (6,206)
--------------------------------------------------
Net............................ 27,042 26,939
--------------------------------------------------
Other Other assets................... 222 242
--------------------------------------------------
Total Assets................... $29,455 $29,374
- -------------------------------------------------------------------------
Liabilities and Stockholders' Equity
--------------------------------------------------
Current Liabilities Accounts payable............... $ 584 $ 586
Accrued wages and vacation
payable..................... 470 410
Accrued casualty costs......... 388 400
Income and other taxes payable. 299 301
Dividends and interest payable. 279 289
Debt due within one year
(Note 6).................... 180 181
Other current liabilities
(Note 3).................... 739 765
--------------------------------------------------
Total.......................... 2,939 2,932
--------------------------------------------------
Other Liabilities and Debt due after one year
Stockholder's Equity (Note 6)................... 8,539 8,511
Deferred income taxes.......... 6,370 6,308
Accrued casualty costs......... 1,058 995
Retiree benefit obligations.... 816 803
Other long-term liabilities
(Notes 3 and 10)............ 755 932
Company-Obligated Mandatorily
Redeemable Convertible
Preferred Securities
(Note 6)................... 1,500 1,500
Common stockholders'equity
(Page 4).................... 7,478 7,393
--------------------------------------------------
Total Liabilities and
Stockholders' Equity........ $29,455 $29,374
</TABLE>
The accompanying notes to the financial statements are an integral
part of these statements.
<PAGE> 3
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Consolidated Cash Flows (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Three Months Ended March 31, 1999 and 1998
- -------------------------------------------------------------------------
Millions of Dollars 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Cash from Operations Net Income (Loss).............. $ 129 $ (62)
Non-cash charges to income:
Depreciation................ 270 263
Deferred income taxes....... 60 (29)
Other - net................. (50) 18
Changes in current assets and
liabilities................. 4 (307)
--------------------------------------------------
Cash Provided by (Used in)
Operations.................. 413 (117)
--------------------------------------------------
Investing Activities Capital investments............ (372) (531)
Other - net (Note 3)........... (90) (22)
--------------------------------------------------
Cash Used in Investing
Activities.................. (462) (553)
--------------------------------------------------
Equity and Financing Dividends paid................. (49) (106)
Activities (Note 6) Debt repaid.................... (369) (888)
Net financings................. 398 1,766
Other - net.................... - (1)
--------------------------------------------------
Cash Provided by (Used in) Equity
and Financing Activities..... (20) 771
--------------------------------------------------
Net Change in Cash and Temporary
Investments................. $ (69) $ 101
Cash at Beginning of Period.... 176 90
--------------------------------------------------
Cash at End of Period.......... $ 107 $ 191
- -------------------------------------------------------------------------
Change in Current Accounts receivable............ $ 11 $ 23
Assets and Liabilities Inventories.................... (7) (13)
Other current assets........... (7) 102
Accounts, wages and vacation
payable..................... 58 (218)
Debt due within one year
(Note 6).................... (1) (100)
Other current liabilities...... (50) (101)
--------------------------------------------------
Total.......................... $ 4 $ (307)
- -------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral
part of these statements.
<PAGE> 4
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Changes in Common Stockholders' Equity (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Three Months Ended March 31, 1999
- -------------------------------------------------------------------------
Millions of Dollars 1999
- -------------------------------------------------------------------------
<S> <C> <C>
Common Stock Common stock, $2.50 par value
(authorized 500,000,000 shares)
Balance at beginning of
period (276,335,423
shares issued)................... $ 691
--------------------------------------------------
Conversions, exercises of stock options
and retention stock forfeitures
for the period (27,543 net shares
forfeited)....................... -
--------------------------------------------------
Balance at end of period
(276,307,880 shares issued)......... 691
--------------------------------------------------
Paid-in Surplus Balance at beginning of period...... 4,053
Conversions, exercises of stock
options and forfeitures.......... (6)
--------------------------------------------------
Balance at end of period............ 4,047
--------------------------------------------------
Retained Earnings Balance at beginning of period...... 4,441
Net Income.......................... 129
--------------------------------------------------
Total............................... 4,570
Cash dividends declared
($0.20 per share)................ (49)
--------------------------------------------------
Balance at end of period............ 4,521
--------------------------------------------------
Treasury Stock Balance at March 31, at cost
(28,711,253 shares).............. (1,781)
--------------------------------------------------
Total Common Stockholders' Equity... $ 7,478
- -------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral
part of these statements.
<PAGE> 5
UNION PACIFIC CORPORATION AND CONSOLIDATED SUBSIDIARY
COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. Responsibilities for Financial Statements - The consolidated
financial statements are unaudited and reflect all adjustments
(consisting only of normal and recurring adjustments) that are,
in the opinion of management, necessary for a fair presentation
of the financial position and operating results for the interim
periods presented. The Statement of Consolidated Financial
Position at December 31, 1998 is derived from audited financial
statements. The consolidated financial statements should be
read in conjunction with the consolidated financial statements
and notes thereto contained in the Union Pacific Corporation (the
Corporation or UPC) Annual Report to Shareholders incorporated
by reference in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1998. The results of operations
for the three months ended March 31, 1999 are not necessarily
indicative of the results for the entire year ending December
31, 1999. Certain 1998 amounts have been reclassified to conform
to the 1999 financial statement presentation.
2. Segmentation - UPC consists of one reportable segment, rail
transportation (Rail), and UPC's other product lines (Other
Operations). The Rail segment includes the operations of Union
Pacific Railroad Company (UPRR), its subsidiaries and rail
affiliates (collectively, the Railroad). Other Operations
include the trucking product line (Overnite Transportation
Company), as well as technology and insurance product lines,
and corporate holding company operations, which largely support
the Rail segment, and all appropriate consolidating entries.
The following tables detail reportable financial information
for UPC's Rail segment and Other Operations for the three months
ended March 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
March 31, 1999 Rail Other Operations [a] Consolidated
--------------------
Millions of Dollars Trucking Other [b]
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenues
from external
customers [c]....... $ 2,479 $ 253 $ 8 $ 2,740
Net income (loss)...... 149 9 (29) 129
Assets................. 28,533 845 77 29,455
--------------------------------------------------------------------
March 31, 1999 Rail Other Operations [a] Consolidated
--------------------
Millions of Dollars Trucking Other [b]
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenues
from external
customers [c]....... $ 2,284 $ 257 $ 45 $ 2,586
Net income (loss)...... (32) 5 (35) (62)
Assets................. 27,595 1,366 233 29,194
---------------------------------------------------------------------
</TABLE>
[a] "Other Operations" includes all product lines that are not
significant enough to warrant reportable segment classification.
[b] Included in the "Other" product line are the results of the
corporate holding company, Union Pacific Technologies, a provider
of transportation-related technologies, Wasatch Insurance Limited,
a captive insurance company, and all necessary consolidating entries.
[c] The Corporation does not have significant intercompany sales
activities.
<PAGE> 6
3. Acquisitions
Southern Pacific Rail Corporation (Southern Pacific or SP) - UPC
consummated the acquisition of Southern Pacific in September 1996.
The acquisition of SP was accounted for as a purchase and was fully
consolidated into UPC's results beginning in October 1996.
Merger Consolidation Activities - In connection with the acquisition
and continuing integration of UPRR and Southern Pacific's rail
operations, UPC is in the process of eliminating 5,200 duplicate
positions, which are primarily employees involved in activities other
than train, engine and yard activities. In addition, UPC is relocating
4,700 positions, merging or disposing of redundant facilities, and
disposing of certain rail lines. The Corporation is also canceling
uneconomical and duplicative SP contracts.
To date, UPC has severed 2,450 employees and relocated 3,900
employees due to merger implementation activities. UPC recognized a
$958 million pre-tax liability as part of the SP purchase price
allocation for costs associated with SP's portion of these activities.
In addition, the Railroad expects to incur $160 million in pre-tax
acquisition-related costs for severing or relocating UPRR employees,
disposing of certain UPRR facilities, and training and equipment
upgrading over the merger implementation period. Earnings for the
three months ended March 31, 1999 and 1998 included $9 million and
$18 million after-tax, respectively, for acquisition-related costs
for UPRR consolidation activities.
The components of the merger liability as of March 31, 1999
were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Original Cumulative Current
Millions of Dollars Reserve Activity Reserve
---------------------------------------------------------------------
<S> <C> <C> <C>
Contractual obligations.............. $361 $361 $ -
Severance costs...................... 343 257 86
Contract cancellation fees and
facility and line closure costs... 145 125 20
Relocation costs..................... 109 81 28
---------------------------------------------------------------------
Total................................ $958 $824 $134
---------------------------------------------------------------------
</TABLE>
Merger Liabilities - Merger liability activity reflected cash payments
for merger consolidation activities and reclassifications of contractual
obligations from merger liabilities to contractual liabilities. The
Corporation expects that the remaining merger payments will be made over
the course of the next three years as labor negotiations are completed
and implemented and related merger consolidation activities are finalized.
Mexican Railway Concession - During 1997, UPRR and a consortium of
partners were granted a 50-year concession to operate the Pacific-North
and Chihuahua Pacific lines in Mexico and a 25% stake in the Mexico City
Terminal Company at a price of $525 million. The consortium assumed
operational control of both lines in 1998. In March 1999, the Railroad
purchased an additional 13% ownership interest for $87 million from one
of its partners. The Railroad now holds a 26% ownership share in the
consortium. The investment is accounted for under the equity method.
<PAGE> 7
4. Financial Instruments - The Corporation and its subsidiaries use
derivative financial instruments in limited instances and for other
than trading purposes to manage risk as it relates to fuel prices and
interest rates. Where the Corporation has fixed interest rates or fuel
prices through the use of swaps, futures or forward contracts, the
Corporation has mitigated the downside risk of adverse price and rate
movements; however, it has also limited future gains from favorable
movements.
Credit Risk - The total credit risk associated with the Corporation's
counterparties was $63 million at March 31, 1999. The Corporation has
not been required to provide collateral; however, UPC has received
collateral relating to its hedging activity where the concentration of
credit risk was substantial.
Valuation - The fair market values of the Corporation's derivative
financial instrument positions at March 31, 1999 and December 31, 1998
were determined based upon current fair market values as quoted by
recognized dealers or developed based upon the present value of future
cash flows discounted at the applicable U.S. Treasury rate and swap
spread.
The following is a summary of the Corporation's financial instruments
at March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Millions of Dollars March 31, December 31,
Except Percentages and Average Commodity Prices 1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Interest Rate Hedging:
Amount of debt hedged...................... $ 150 $ 150
Percentage of total debt portfolio......... 2 2
Rail Fuel Hedging:
Fuel purchases hedged for 1999............. $ 257 $ 343
Percentage of forecasted 1999 fuel
consumption hedged.................... 64 64
Average price of 1999 hedges outstanding
(per gallon) [a]...................... $0.41 $0.41
Fuel purchases hedged for 2000............. $ 54 -
Percentage of forecasted 2000 fuel
consumption hedged.................... 12 -
Average price of 2000 hedges outstanding
(per gallon) [a]...................... $0.39 -
Trucking Fuel Hedging:
Fuel purchases hedged for 1999........ $ 8 $ 10
Percentage of forecasted 1999 fuel
consumption hedged.................... 40 41
Average price of 1999 hedges outstanding
(per gallon) [a]....................... $0.45 $0.45
Fuel purchases hedged for 2000............. $ 2 -
Percentage of forecasted 2000 fuel
consumption hedged.................... 38 -
Average price of 2000 hedges outstanding
(per gallon) [a]...................... $0.39 -
-------------------------------------------------------------------------
</TABLE>
[a] Excludes taxes and transportation costs.
<PAGE> 8
The asset and liability positions of the Corporation's outstanding
financial instruments at March 31, 1999 and December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
March 31, December 31,
Millions of Dollars 1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Interest Rate Hedging:
Gross fair market asset position $46 $ 41
Gross fair market (liability) position (9) (5)
Rail Fuel Hedging:
Gross fair market asset position 17 -
Gross fair market (liability) position - (49)
Trucking Fuel Hedging:
Gross fair market asset position - -
Gross fair market (liability) position - (2)
------------------------------------------------------------------------
Total asset (liability) position $54 $(15)
------------------------------------------------------------------------
</TABLE>
The Corporation's use of financial instruments had the following
impact on pre-tax income for the quarters ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
March 31, March 31,
Millions of Dollars 1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Increase in interest expense from interest
rate hedging.................................. $ - $ 1
Increase in fuel expense from Rail fuel hedging.... 19 14
Increase in fuel expense from trucking fuel
hedging....................................... 1 1
------------------------------------------------------------------------
Reduction in Pre-Tax Income........................ $20 $16
------------------------------------------------------------------------
</TABLE>
Sale of Receivables - The Railroad has sold, on a revolving
basis, an undivided percentage ownership interest in a designated
pool of accounts receivable to third parties through a bankruptcy-remote
subsidiary (the Subsidiary). The Subsidiary is collateralized by a
$76 million note from UPRR. The amount of receivables sold fluctuates
based upon the availability of the designated pool of receivables and
is directly affected by changing business volumes and credit risks. At
March 31, 1999 and December 31, 1998, accounts receivable are presented
net of $580 million of receivables sold.
5. Properties - Major property accounts were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
March 31, December 31,
Millions of Dollars 1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Rail
Land and other property............. $ 5,000 $ 4,992
Track, structures and facilities.... 20,065 19,803
Locomotives......................... 4,480 4,486
Freight cars........................ 2,583 2,536
Other equipment..................... 528 517
------------------------------------------------------------------------
Total Rail.............................. 32,656 32,334
Trucking................................ 785 785
Other................................... 29 26
------------------------------------------------------------------------
Total................................... $33,470 $33,145
------------------------------------------------------------------------
</TABLE>
<PAGE> 9
Accumulated depreciation accounts were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
March 31, December 31,
Millions of Dollars 1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Rail
Track, structures and facilities...... $3,458 $3,308
Locomotives........................... 1,407 1,384
Freight cars.......................... 1,084 1,070
Other equipment....................... 136 109
--------------------------------------------------------------------------
Total Rail................................ 6,085 5,871
Trucking.................................. 329 325
Other..................................... 14 10
--------------------------------------------------------------------------
Total..................................... $6,428 $6,206
--------------------------------------------------------------------------
</TABLE>
6. Debt
Credit Facilities - The Corporation had $1.2 billion of credit
facilities with various banks designated for general corporate
purposes that expired in the first quarter of 1999. Because of
improvements in earnings and operating cash flows during the first
quarter of 1999, the Corporation no longer required this credit
capacity for operational purposes. A $2.8 billion credit facility,
which expires in 2001, remains outstanding.
Convertible Preferred Securities - Union Pacific Capital Trust (the
Trust), a statutory business trust sponsored and wholly owned by the
Corporation, has issued $1.5 billion aggregate liquidation
amount of 6-1/4% Convertible Preferred Securities (the CPS). Each
of the CPS has a stated liquidation amount of $50 and is
convertible, at the option of the holder, into shares of UPC's common
stock, par value $2.50 per share (the Common Stock), at the rate of
0.7257 shares of Common Stock for each of the CPS, equivalent to a
conversion price of $68.90 per share of Common Stock, subject to
adjustment under certain circumstances. The CPS accrue and pay cash
distributions quarterly in arrears at the annual rate of 6-1/4% of the
stated liquidation amount. The Corporation owns all of the common
securities of the Trust. The proceeds from the sale of the CPS
and the common securities of the Trust were invested by the Trust
in $1.5 billion aggregate principal amount of the
Corporation's Convertible Junior Subordinated Debentures due 2028,
which debentures represent the sole assets of the Trust.
For financial reporting purposes, the Corporation has recorded
distributions payable on the CPS as an interest charge to earnings in
the statement of consolidated income.
Significant New Borrowings - During January 1999, the Corporation
issued $600 million of 6-5/8% debentures with a maturity date of
February 1, 2029. The proceeds from the issuance of these debentures
were used for repayment of debt and other general corporate purposes.
Shelf Registration Statement - Under currently effective shelf
registration statements, the Corporation may sell, from time to time,
up to $1 billion in the aggregate of any combination of debt securities,
preferred stock, or warrants for debt securities or preferred stock in
one or more offerings. The Corporation has no immediate plans to issue
equity securities.
<PAGE> 10
7. Earnings Per Share - The following table provides a reconciliation
between basic and diluted earnings per share for the periods ended:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
March 31, March 31,
Millions, Except Per Share Amounts 1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Income Statement Data:
Net income (loss) available to common stockholders. $ 129 $ (62)
Weighted-Average Number of Shares Outstanding:
Basic.............................................. 246.3 246.0
Dilutive effect of common stock equivalents [a].... 1.1 -
---------------------------------------------------------------------------
Diluted............................................ 247.4 246.0
---------------------------------------------------------------------------
Earnings Per Share:
Basic - net income (loss).......................... $0.52 $(0.25)
Diluted - net income (loss)........................ $0.52 $(0.25)
---------------------------------------------------------------------------
</TABLE>
[a] Excludes the effect of anti-dilutive common stock equivalents related
to options and the CPS (see Note 6), which were 21.8 million and 1.7
million for the three months ended March 31, 1999 and 1998,
respectively.
8. Other Income - Other income included the following for the periods ended:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
March 31, March 31,
Millions of Dollars 1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Net gain on asset dispositions......................... $11 $15
Rental income.......................................... 12 11
Interest income........................................ 4 5
Other - net............................................ 4 (8)
---------------------------------------------------------------------------
Total.................................................. $31 $23
---------------------------------------------------------------------------
</TABLE>
9. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed
charges has been computed on a consolidated basis. Earnings
represent net income (loss) less equity in undistributed earnings of
unconsolidated affiliates, plus income taxes and fixed charges. Fixed
charges represent interest, amortization of debt discount and the
estimated interest portion of rental charges. For the three months ended
March 31, 1998, fixed charges exceeded earnings by approximately $114
million.
10. Commitments and Contingencies - There are various claims and
lawsuits pending against the Corporation and certain of its
subsidiaries. The Corporation is also subject to Federal, state and
local environmental laws and regulations, pursuant to which it is
currently participating in the investigation and remediation of
numerous sites. In addition, the Corporation and its subsidiaries
also periodically enter into financial and other commitments and
guarantees in connection with their businesses, and have retained
certain contingent liabilities upon the disposition of formerly
owned operations.
It is not possible at this time for the Corporation to determine
fully the effect of any or all unasserted claims on its consolidated
financial condition; however, to the extent possible, where unasserted
claims can be estimated and where such claims are considered probable,
the Corporation has recorded a liability. The Corporation does not expect
that any known lawsuits, claims, environmental costs, commitments or
guarantees will have a material adverse effect on its consolidated
financial condition. Certain potentially significant contingencies
relating to the Corporation's and its subsidiaries' businesses are
detailed below:
<PAGE> 11
Customer Claims - Certain customers have submitted claims for damages
related to shipments delayed 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. The Corporation has made no additional
provisions for such claims in 1999.
Shareholder Lawsuits - UPC and certain of its directors and officers
are defendants in two purported class actions that have been
consolidated into one proceeding. The consolidated complaint alleges,
among other things, that the Corporation violated the Federal securities
laws by failing to disclose material facts and making materially
false and misleading statements concerning the service, congestion and
safety problems encountered following the Corporation's acquisition
of Southern Pacific in 1996. These lawsuits were filed in late 1997
in the United States District Court for the Northern District of
Texas and seek to recover unspecified amounts of damages. Management
believes that the plaintiffs' claims are without merit and intends
to defend them vigorously. The defendants have moved to dismiss this
action, and the motion has been fully briefed and is awaiting a
decision by the Court.
In addition to the class action litigation, a purported derivative
action was filed on behalf of the Corporation and UPRR in September
1998 in the District Court for Tarrant County, Texas, naming as
defendants the then-current and certain former directors of the
Corporation and UPRR and, as nominal defendants, the Corporation and
UPRR. The derivative action alleges, among other things, that the named
directors breached their fiduciary duties to the Corporation and UPRR by
approving and implementing the Southern Pacific merger without informing
themselves of its impact or ensuring that adequate controls were put in
place and by causing UPC and UPRR to make misrepresentations
about UPRR's service problems to the financial markets and
regulatory authorities. The Corporation's Board of Directors
established a special litigation committee consisting of three
independent directors to review the plaintiff's allegations and
determine whether it is in UPC's best interest to pursue them. The
committee has unanimously concluded that further prosecution of the
derivative action on behalf of the Corporation and UPRR is not in the
best interest of either such company. Accordingly, the Corporation
and UPRR have filed a motion with the Court to dismiss the derivative
action. The plaintiff has not yet responded to the motion. The
individual defendants also believe that these claims are without merit
and intend to defend them vigorously.
11. Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133), that will
be effective January 1, 2000. While management is still in the
process of determining the full effect FAS 133 will have on the
Corporation's financial statements, management has determined
that FAS 133 will increase the volatility of the Corporation's
asset, liability and equity (comprehensive income) positions as
the change in the fair market value of all financial instruments
the Corporation uses for fuel or interest rate hedging purposes
will, upon adoption of FAS 133, be recorded in the Corporation's
Statement of Financial Position (See Note 4). In addition, to the
extent fuel hedges are ineffective due to pricing differentials
resulting from the geographic dispersion of the Corporation's operations,
income statement recognition of the ineffective portion of the
hedge position will be required. Management does not anticipate
that the final adoption of FAS 133 will have a material impact on UPC's
consolidated financial statements.
<PAGE 12>
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 March 31, 1999 Compared to March 31, 1998
SERVICE ISSUES
The results of operations of Union Pacific Corporation (the Corporation or
UPC) and its rail segment (Rail), which includes the operations of Union
Pacific Railroad Company (UPRR), and its subsidiaries and rail
affiliates (collectively, the Railroad), in the first quarter of 1998 were
adversely affected by the congestion that began in the third quarter of 1997.
However, service recovery efforts resulted in significant improvements in
operating and financial results beginning in the latter half of 1998 and
continuing into the first quarter of 1999.
CONSOLIDATED
Net Income - The Corporation reported net income of $129 million or $0.52
per basic and diluted share for the first quarter of 1999, compared to a net
loss of $62 million or $0.25 per basic and diluted share in 1998. This
earnings increase resulted primarily from improved operations and service
levels at UPC's Rail unit.
Operating Revenues - Operating revenues increased $154 million (6%) to
$2,740 million in 1999, reflecting increased volumes from its Rail unit,
partially offset by the impact of selling Skyway Freight Systems, Inc.
(Skyway) in November of 1998. Skyway generated $44 million in revenue during
the first quarter of 1998.
Operating Expenses - Operating expenses decreased $175 million (7%) to
$2,378 million in 1999. Salaries, wages and employee benefit costs were $2
million lower than 1998, as inflation and volume growth were more than
offset by improved productivity at UPC's Rail unit and the sale of Skyway.
Equipment and other rents were $51 million (13%) lower than 1998, caused
primarily by improved rail cycle times, which reduced the need for
leased rail cars. Depreciation expense was $7 million (3%) higher than
1998, reflecting increased capital spending for track replacement and
capacity projects. Fuel and utilities were $32 million (14%) lower than 1998
due to lower fuel prices and improved fuel efficiency, which were partially
mitigated by higher volumes. Materials and supplies were unchanged at
$144 million in both 1999 and 1998. Casualty costs decreased $6 million (5%)
as the cost of rail-related accident claims continued to decline. Other
costs decreased $91 million (26%) to $257 million in 1999 reflecting
lower service claims costs in 1999, the sale of Skyway and increased cost
reductions from merger implementation.
Operating Income - Operating income increased $329 million to $362
million in 1999 reflecting improvements in rail operations and service
levels.
Non-Operating Items - Other income increased $8 million (35%) reflecting
asset sales and a one-time favorable contract settlement. Interest
expense increased $31 million, the result of higher debt levels ($25 million)
and the cost associated with the early retirement of debt ($6 million).
Income taxes increased $115 million to a $72 million expense
reflecting higher income before income taxes.
<PAGE) 13
RAIL SEGMENT
Net Income - Rail operations reported net income of $149 million for the
first quarter of 1999 compared to a 1998 net loss of $32 million. Higher
earnings resulted primarily from the positive effects of continuing
service recovery efforts. The following table demonstrates the impact of
service issues over the previous two years and the continuing
operating improvement made over the last three quarters that was driven, in
part, by benefits derived from the decentralization of Rail operations,
merger synergies, capacity expansion and service recovery actions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Averages, Except Ratios 1Q97 2Q97 3Q97 4Q97 1Q98 2Q98 3Q98 4Q98 1Q99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Seven-Day Loadings(000's). 168.1 170.7 166.9 153.2 152.5 154.9 155.3 160.6 161.4
Train Speed (MPH)......... 18.6 18.4 15.0 13.2 13.8 14.0 14.4 15.5 17.5
Car Cycle Times (Days).... 12.6 12.7 15.2 17.5 17.6 16.4 15.9 14.4 13.6
Operating Ratio (%)....... 86.2 80.9 82.0 102.5 97.7 105.1 90.5 88.7 85.3
- --------------------------------------------------------------------------------
</TABLE>
Operating Revenues - Rail operating revenues increased $195 million (9%) to
$2,479 million in 1999, as the Rail unit continued to recover from
congestion-affected 1998 results. Carloadings for the first quarter of 1999
were 6% higher than 1998. Average revenue per car (ARC) improved 2% over
1998 to $1,173.
The following table summarizes the quarter-over-quarter change in rail
commodity revenue (CR):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Carloads in Thousands, Commodity Revenues in Millions of Dollars
1999 Change vs 1Q 1998 % Change vs 1Q 1998
-------------------- ------------------- --------------------
Cars ARC CR Cars ARC CR Cars ARC CR
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Energy......... 477 $1,183 $ 564 35 $59 $ 67 8% 5% 13%
Industrial..... 327 1,373 449 14 (8) 16 4 (1) 4
Chemicals...... 225 1,781 401 2 31 11 1 2 3
Intermodal..... 626 620 388 26 17 27 4 3 7
Agriculture.... 223 1,552 347 22 (9) 32 11 (1) 10
Automotive..... 170 1,491 253 11 43 23 7 3 10
- ------------------------------------------------------------------------------
Total......... 2,048 $1,173 $2,402 110 $24 $176 6% 2% 8%
- -------------------------------------------------------------------------------
</TABLE>
Energy - Commodity revenue increased $67 million (13%) to $564 million
in 1999 driven by an 8% increase in carloadings. ARC also improved
$59 per car (5%) quarter-over-quarter due to changes in product mix, as
short-haul Illinois traffic decreased and longer-haul, high-ARC Powder River
Basin (PRB) traffic increased. PRB trains per day improved
quarter-over-quarter from 24.8 in 1998 to 28.4 in 1999. This, in addition
to longer trains (120.2 cars/train in 1999 vs. 117.6 in 1998), boosted loads
by approximately 42 thousand units (16%), helping to improve 1999 PRB
business versus 1998. All other mine locations posted declines, largely
due to decreased demand and business lost to competitors during 1998's
service difficulties.
Industrial - Carloadings and commodity revenue increased 4% over 1998.
Volume increases resulted from stronger demand and improved cycle times.
Traffic gains occurred in lumber, stone and cement due to strong
construction demand, and recyclables grew due to new business. Gains were
partially offset by decreased steel loadings that were down due to higher
imports of low-priced foreign steel, which reduced U.S. production, and
lost volumes from a major steel producer who filed for bankruptcy. ARC
declined 1% due to product mix issues, as volume shortfalls of long-haul
steel and volume gains of shorter-haul, low-ARC stone were partially
offset by gains in high-ARC lumber.
Chemicals - Carloadings increased 1% to 225 thousand cars, and commodity
revenue increased $11 million (3%) to $401 million. The increase in
volume resulted principally from improved service levels and an increase
in chargeable storage-in-transit moves (short-haul storage moves, awaiting
final delivery). Plastics, liquid and
<PAGE> 14
dry chemicals, petroleum products and phosphorous moves all increased.
These gains were partially offset by declines in soda ash caused by the
adverse impact on demand resulting from the Asian currency crisis, lower
sulfur moves resulting from a major facility closing, and a decline in liquid
propane gas business due to increased rail competition. ARC improved 2% due
to favorable product mix, reflecting traffic improvements in
longer-haul plastics and fewer short-haul, low-ARC export sulfur moves.
Intermodal - Commodity revenue increased $27 million (7%) to $388 million,
while carloadings were up 4% to 626 thousand loads as a result of better
cycle times. Results were positively affected by growth in imports from
Asia. Import gains were partially countered by a decline in exports to
Asia, due to the Asian economic crisis, and lost business caused by the
service constraints in 1998. ARC increased 3% due to positive mix shifts
(longer-haul shipments) and price increases.
Agriculture - Commodity revenues were up $32 million (10%) over 1998 due
primarily to a service-driven increase in carloadings. Volumes increased 11%
to 223 thousand cars, the result of improved service levels in 1999 that
resulted in a 25% increase in wheat carloadings and 15% increases in corn and
food grain carloadings. However, demand for grain transportation
continued to be adversely affected by depressed commodity prices. ARC
declined 1%, primarily the result of a higher proportion of shorter-haul
Gulf Coast moves compared to long-haul West Coast moves.
Automotive - Commodity revenues were up $23 million (10%) driven mainly
by a 7% increase in carloadings. Strong domestic production, improvements
in cycle times and new business with domestic producers all helped to drive
the 11% improvement in finished vehicle volumes. Parts volumes were 1% lower
due to model changeovers and a plant shutdown. ARC increased $43 (3%) per
car due to a combination of price increases and a higher proportion of
higher-ARC finished vehicle moves.
Operating Expenses - Operating expenses decreased $116 million (5%) to
$2,115 million in 1999. Rail operations continued to improve in key
operating areas over the last three quarters, which has driven the expense
decline. The following table provides explanations for variances in Rail
operating expenses from the quarter ended March 31, 1999 compared to the
quarter ended March 31, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Millions of Dollars Cost Drivers
1999 -------------------------------------------
Over Price Volume Productivity Merger
Increase (Decrease) 1998 [b] [c] [d] Benefits Other
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits..... $ 21 $16 $22 $(9) $(8) $ -
Equipment and other rents. (45) (6) 6 (39) - (6)
Depreciation.............. 12 - 12 - - -
Fuel and utilities........ (30) (40) 16 (4) - (2)
Materials and supplies.... 1 - 1 - - -
Casualty costs............ (5) - - (5) - -
Other [a]................. (70) - - (8) (29) (33)
- ----------------------------------------------------------------------------
Total.....................$(116) $(30) $57 $(65) $(37) $(41)
- ----------------------------------------------------------------------------
</TABLE>
[a] Includes a $53 million reduction in service recovery costs over 1998.
[b] Impact of changes in prices paid for goods and services.
[c] Impact of changing business levels.
[d] Impact of quality and process improvement.
Salaries, wages and employee benefits - Labor expenses were $21 million
(2%) higher than 1998 caused by higher rail volumes and wage inflation that
were partially mitigated by merger consolidation benefits and productivity
improvements.
<PAGE> 15
Equipment and other rents - Rent expense decreased $45 million (13%)
versus 1998 due primarily to improved cycle times (13.6 days in 1999
compared to 17.6 days in 1998), lower prices and shorter length of
haul, which were partially offset by higher volume as gross
ton-miles increased 9% year-over-year.
Depreciation - Depreciation expense grew $12 million or 5% to $258 million
due to the Railroad's capital spending in 1998 and 1997, as well as through
the first quarter of 1999. The Railroad spent over $2 billion on capital
projects in 1998 and $363 million on capital projects during the first
quarter of 1999.
Fuel and utilities - Fuel expenses were down $30 million or 14% from 1998,
reflecting lower fuel prices and improved consumption rates, which were
partially offset by higher volume. A 9% increase in gross-ton miles
quarter-over-quarter added volume-related fuel costs of $16 million
versus 1998. Prices were down 14 cents per gallon to 50 cents, saving $40
million. The fuel consumption rate of 1.39 gallons per thousand gross-ton
miles improved 2% from last year, lowering fuel costs by another $4
million. The Railroad hedged 70% of its first quarter fuel consumption in
1999, which increased fuel costs by $19 million, or 6 cents per gallon.
Expected fuel consumption for the remaining nine months of 1999 is 64% hedged
at an average of 55 cents per gallon (including taxes and transportation
charges).
Materials and supplies - Materials and supplies expense increased $1
million (1%) from first quarter 1998. Increased material costs for locomotive
and rebuilt parts, reflecting a general increase in repair levels, were
offset by higher credits received for parts rebuilt.
Casualty costs - Casualty costs declined $5 million (5%) from 1998 due
to a decline in the average cost of injury settlement claims, which was
partially offset by an increase in the number of claims. In addition,
insurance costs and costs for repairs on cars from other railroads were
lower quarter-over-quarter.
Other costs - Other costs decreased $70 million (23%) from 1998 due to the
effects of service recovery efforts, which resulted in a reduction of
third-party transportation costs and the elimination of contract
penalties and customer claims, as well as merger savings.
Operating Income - Operating income increased $311 million to $364 million
in 1999. Both periods included the impact of one-time merger-related costs
for severance, relocation and training of employees ($9 million reduction
in net income in 1999 and $18 million reduction in net income in 1998).
The operating ratio for the first quarter of 1999 was 85.3, 12.4 points
better than 1998's 97.7 operating ratio. Operational improvements due to
service recovery were the key drivers of the improvement in the operating
ratio.
Non-Operating Items - Other income increased $5 million (28%). Interest
expense increased $22 million, the result of higher debt levels. Income
taxes increased $113 million, reflecting higher income before income taxes.
OTHER OPERATIONS
Trucking Product Line
Net Income - Trucking earnings decreased $1 million to $9 million in the
first quarter of 1999 from $10 million in the first quarter of 1998
(excluding goodwill amortization of $5 million in 1998).
Operating Revenues - Trucking revenues decreased $4 million (2%) to $253
million, as steady volumes combined with a 1% decrease in average prices.
Stable volumes reflected weather problems and the absence of a
threatened labor strike that helped boost 1998 volumes.
<PAGE> 16
Operating Expenses - Operating expenses remained flat at $243 million
in 1999, compared to $244 million in 1998 (excluding goodwill
amortization of $5 million in 1998). Salaries, wages and employee
benefit costs increased $4 million (3%) to $158 million reflecting wage
and benefit inflation and the addition of a new product offering in the
eastern and southern United States. Rent expense declined $4 million (18%) to
$18 million due to a shift from third-party to internal transportation
sources. Fuel costs declined $1 million (8%) due to lower fuel prices (44
cents in 1999 compared to 58 cents in 1998). Fuel hedging increased fuel
expense by $600 thousand in 1999, and 40% of estimated remaining 1999
fuel purchases are hedged at an average of 45 cents per gallon.
Operating Income - Trucking operations generated operating income of $10
million for the first quarter of 1999 compared to $13 million for the
comparable period a year ago (excluding goodwill amortization of $5
million in 1998). The operating ratio for trucking operations (excluding
goodwill amortization in 1998) rose to 95.9 in 1999 from 94.9 in 1998.
Other Product Lines
Other operations include the technology and insurance product lines,
as well as the corporate holding company operations and all necessary
consolidating entries (see Note 2 to the Consolidated Financial
Statements). Operating revenues declined $37 million in 1999 due primarily
to the sale of Skyway in November 1998. Operating expenses decreased
$53 million reflecting the absence of 1999 costs associated with Skyway and
the consolidation of portions of the Corporate staff with the Rail unit's
staff in Omaha, Nebraska. Operating losses declined $16 million, also due to
the corporate restructuring and improved operations at the Corporation's
technology division. Net losses from these operations also declined $6
million over 1998.
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
Financial Condition - During the first three months of 1999, cash provided by
operations was $413 million, compared to cash used by operations of $117
million in 1998. This $530 million increase primarily reflects higher
earnings and improvements in working capital in the Corporation's Rail
segment, reflecting the success of service recovery efforts in the first
quarter of 1999 and the last half of 1998.
Cash used in investing activities was $462 million in the first quarter
of 1999, compared to $553 million in 1998. This decrease primarily
reflects lower Rail capital spending, including merger-related spending,
offset by the $87 million investment in the Corporation's Mexican rail
operations (see Note 3 to the Consolidated Financial Statements).
Cash used in equity and financing activities was $20 million in the
first quarter of 1999, compared to $771 million provided by equity and
financing activities in 1998. Cash used in 1999 principally reflects lower
net borrowings ($398 million in 1999 compared to $1.77 billion in 1998)
offset by debt repaid ($369 million in 1999 and $888 million in 1998).
The ratio of debt to total capital employed (treating the Corporation's
6-1/4% Convertible Preferred Securities (CPS) as a debt instrument) was
57.7% at March 31, 1999, compared to 58.0% at December 31, 1998 and 57.8% at
March 31, 1998. Including the CPS (see Note 6 to the Consolidated Financial
Statements) as an equity instrument, the ratio of debt to total capital
employed at March 31, 1999 was 49.3% and at December 31, 1998 was 49.4%.
<PAGE> 17
The Corporation had $1.2 billion of credit facilities with various banks
designated for general corporate purposes that expired in the first
quarter of 1999. Because of improvements in earnings and operating cash
flows during the first quarter of 1999 and the last half of 1998, the
Corporation no longer required this credit capacity for operational
purposes. A $2.8 billion credit facility, which expires in 2001, remains
outstanding. During January 1999 the Corporation issued $600 million of
6-5/8% debentures with a maturity date of February 1, 2029. The proceeds
from the issuance of these debentures were used for repayment of debt and
other general corporate purposes. Under currently effective shelf
registration statements, the Corporation may sell, from time to time, up to
$1 billion in the aggregate of any combination of debt securities, preferred
stock, or warrants for debt securities or preferred stock in one or more
offerings. The Corporation has no immediate plans to issue equity securities.
OTHER MATTERS
Commitments and Contingencies - There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. In addition,
the Corporation and its subsidiaries are subject to various Federal,
state and local environmental laws and are currently participating in the
investigation and remediation of various sites. A discussion of
certain claims, lawsuits, guarantees and contingencies is set forth in
Note 10 to the Consolidated Financial Statements, which is incorporated
herein by reference.
Accounting Pronouncements - In June 1998 the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133), that will be
effective January 1, 2000. While management is still in the
process of determining the full effect FAS 133 will have on the
Corporation's financial statements, management has determined that
FAS 133 will increase the volatility of the Corporation's asset, liability
and equity (comprehensive income) positions as the change in the fair market
value of all financial instruments the Corporation uses for fuel or
interest rate hedging purposes will, upon adoption of FAS 133, be recorded
in the Corporation's Statement of Financial Position (See Note 4 to the
Consolidated Financial Statements). In addition, to the extent fuel
hedges are ineffective due to pricing differentials resulting from the
geographic dispersion of the Corporation's operations, income
statement recognition of the ineffective portion of the hedge position will
be required. Management does not anticipate that the final adoption of
FAS 133 will have a material impact on UPC's consolidated financial
statements.
Year 2000 - The Year 2000 (Y2K) compliance project at UPC includes
software (internally developed and purchased), hardware and embedded
chips inside equipment and machinery, primarily at it's Rail unit. The
Corporation's enterprise-wide project encompasses computer systems and
equipment in multiple data centers and a telecommunications network
spread over 23 states. Equipment containing embedded computer chips
includes locomotives, automated train switching systems, computer aided
train dispatching systems, signaling systems, computerized fueling stations,
weigh-in-motion scales, cranes, lifts, PBX systems, elevators, and
computerized monitoring systems throughout UPC. The Y2K project started
with research in 1994 and an impact analysis of the Corporation's mainframe
COBOL systems in 1995. The Y2K project has been a high priority since then.
UPC's Y2K Project is divided into five major initiatives as follows:
Mainframe Systems - These systems have been converted, tested and
deemed to be Y2K compliant as of December 31, 1998. Periodic audits are
planned during 1999 to ensure these systems remain Y2K compliant.
<PAGE> 18
Client Server Systems - Modifications of these systems are on schedule,
and the Corporation believes that all critical client server systems have
been converted, tested, and deemed to be Y2K compliant as of December 31,
1998. The non-critical client server systems are scheduled to be tested as
Y2K compliant by mid-1999.
User Department Developed Systems - These systems consist of both mainframe
and PC-based systems developed by internal user departments. Modifications
of these systems are on schedule, and the Corporation estimates that
approximately 99% of the systems are complete as of March 31, 1999, and
the remaining 1% are mostly low priority systems that are scheduled to be
completed in the first half of 1999.
Vendor Supplied and Embedded Systems - These systems consist of
vendor-supplied software, desktop, mainframe and server hardware, databases
and operating systems, as well as equipment and machinery with embedded
systems. One hundred percent of the identified critical suppliers of
these systems have indicated that they have a comprehensive Year 2000 plan.
To help assure safety and Y2K compliance, UPC is testing selected critical
software, hardware and embedded systems, even if the vendor has already
certified the product. The Corporation is sharing information on the
compliance and testing of safety critical components common to the industry
with the cooperation of the Association of American Railroads (AAR).
Electronic Commerce Systems - These systems consist of all electronic
exchanges of information with customers, vendors, other railroads and
financial institutions. The railroad industry has agreed on a standard
4-digit year for all electronic interchanges. The Rail unit can now
transmit and receive the new EDI standard that involves a 4-digit year.
The Corporation plans additional Y2K testing with customers and trading
partners using current and older versions of EDI transactions in 1999.
For each of these initiatives, seven major categories of events have
been identified for contingency plans. These categories are (1) key data -
integrity/loss, (2) critical software, (3) critical hardware, (4)
communications, (5) critical supplies and suppliers, (6) facilities, and (7)
key personnel. The contingency plans also include a Y2K command center that
will be staffed 24 hours a day in the fourth quarter of 1999 and
continuing into early 2000 for any problems that might occur due to Y2K.
The staff will be composed of technical experts to fix or advise what to
fix if systems fail, and knowledgeable representatives from each business
unit. Contingency plans continue to be developed and will be refined and
adjusted throughout 1999.
As of March 31, 1999, approximately 98% of the Corporation's
systems (excluding trucking) have been converted, tested, and deemed to
be Y2K compliant, and the remaining systems are expected to be modified by
the second quarter of 1999. Modification to trucking systems comprises
approximately 10% of UPC's total Y2K workload, and is estimated to be
95% complete. The remaining modification to trucking's systems is expected to
be completed in the second quarter of 1999. Costs to convert UPC's systems are
expensed as incurred. As of March 31, 1999, more than 70% of the costs
of the Y2K project, estimated to be $61 million in total, have been
expensed. Although the Corporation believes its systems will be successfully
modified, failure by it, or by those from whom UPC purchases equipment, or
by other entities with whom UPC exchanges data, or on whom it relies for
data, to successfully modify their systems, could materially impact
operations and financial results in the year 2000.
CAUTIONARY INFORMATION
Certain information included 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
claims, lawsuits, environmental costs, commitments, contingent
liabilities, labor
<PAGE> 19
negotiations or other matters will have a material adverse effect on its
consolidated financial condition, results of operations or liquidity and
other similar expressions concerning matters that are not historical
facts, and projections or predictions as to the Corporation's financial or
operational results. Such forward-looking information is or will be based
on information available at that time, and is or will be subject to risks
and uncertainties that could cause actual results to differ materially from
those expressed in the statements. Important factors that could cause such
differences include, but are not limited to, whether the Corporation is
fully successful in recovering from the effects of the Rail unit's
congestion-related problems and implementing its financial and
operational initiatives; regaining its customers who switched to
alternative transportation arrangements during the service crisis; industry
competition and legislative and/or regulatory developments; natural
events such as severe weather, floods and earthquakes; the effects of
adverse general economic conditions; changes in fuel prices; labor strikes;
the impact of year 2000 systems problems; the outcome of shipper claims
related to congestion; and claims arising from environmental investigations
or proceedings and other types of claims and litigation. The
Corporation assumes no obligation to update forward-looking information to
reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Disclosure concerning market risk-sensitive instruments is set forth in Note
4 to the Consolidated Financial Statements included in Item 1 of Part I
of this Report and is incorporated herein by reference.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion of certain legal proceedings affecting the Corporation
and/or certain of its subsidiaries set forth in Note 10 to the Consolidated
Financial Statements included in Item 1 of Part I of this Report is
incorporated herein by reference. In addition to those matters, the
following proceedings, or developments in proceedings presently
pending, arose or occurred during the first quarter of 1999.
Southern Pacific Acquisition - As reported in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1998 (the UPC
1998 10-K), on August 12, 1996 the STB served a decision (the Decision)
approving the acquisition of control of Southern Pacific by
the Corporation, subject to various conditions. The acquisition was
consummated on September 11, 1996. Various appeals were filed with
respect to the Decision, and all such appeals were ultimately consolidated
in the U.S. Court of Appeals for the District of Columbia Circuit. All
the appeals were subsequently withdrawn except the appeal of the Western Coal
Traffic League. On March 23, 1999, the Court of Appeals entered an order
affirming the Decision in all respects.
Bottleneck Proceedings - As reported in the UPC 1998 10-K, the U.S. Court of
Appeals for the Eighth Circuit entered an order on February 10, 1999 that
affirmed a prior decision by the Surface Transportation Board of the U.S.
Department of Transportation (STB). That decision generally reaffirmed
the STB's existing position regarding the obligation of rail carriers to
provide rates for "bottleneck" segments (lines of railroad that are served
by a single railroad between a junction and an exclusively-served shipper
facility) and dismissed two complaint proceedings filed by shippers
challenging a class rate charged for the movement of coal, to which UPRR and
Southern Pacific Transportation Company, a predecessor to UPRR, were parties.
The STB's decision was originally served on December 31, 1996 and
subsequently clarified on April 30, 1997. On March 23, 1999, two of the
shippers involved in the complaint proceedings filed a petition for
rehearing with the Eighth Circuit Court of Appeals, which was denied by the
Court on April 20, 1999.
<PAGE> 20
Labor Matters - The UPC 1998 10-K disclosed that the General Counsel of the
National Labor Relations Board is seeking a bargaining order remedy in 12
cases involving Overnite Transportation Company (Overnite), where a
Teamsters local union lost a representation election and that a thirteenth
bargaining order case involving Overnite had been tentatively
settled by the parties thereto without imposing a requirement that Overnite
bargain with the Teamsters local involved in the case. During the first
quarter of 1999, the settlement of the thirteenth bargaining order case
was finalized with no material change in the terms upon which the case
had tentatively been settled. Overnite continues to believe it has
substantial defenses in the remaining pending bargaining order cases and
intends to continue to defend them aggressively.
Environmental Matters - As reported in the UPC 1998 10-K, the Railroad
had received notification that the District Attorney for San Bernardino
County, California had opened an investigation into the Railroad's
handling of several hazardous material spills and releases in Barstow and
West Colton, California. As a result of the investigation, the District
Attorney's office had alleged that the Railroad had not taken sufficient
action to prevent the spills and releases and had not promptly reported
them to the proper agencies. The District Attorney further alleged that
the required business plans for releases of hazardous materials at West
Colton had not been filed with the county fire department for several
years. During the first quarter of 1999, a final settlement was negotiated
with the District Attorney's office disposing of all pending cases
pertaining to these incidents in consideration of the payment of a civil
penalty in the amount of $350,000 and the Railroad's agreement to promptly
report and handle any future spills.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders of the Corporation was held on
April 16, 1999.
(c) At the Annual Meeting, the Corporation's shareholders
voted for the election of Philip F. Anschutz (206,131,793 shares
in favor; 3,830,245 shares withheld), Robert P. Bauman
(206,311,323 shares in favor; 3,650,715 shares withheld),
Richard B. Cheney (206,362,463 shares in favor; 3,599,575
shares withheld), E. Virgil Conway (206,361,108 shares in
favor; 3,600,930 shares withheld), Richard K. Davidson
(206,148,255 shares in favor; 3,813,783 shares withheld),
Thomas J. Donohue (206,381,764 shares in favor; 3,580,274
shares withheld), Spencer F. Eccles (206,390,025 shares in
favor; 3,572,013 shares withheld), Ivor J. Evans (206,387,492
shares in favor; 3,574,546 shares withheld), Elbridge T.
Gerry, Jr. (206,390,963 shares in favor; 3,571,075 shares
withheld), William H. Gray, III (206,351,595 shares in favor;
3,610,443 shares withheld), Judith Richards Hope
(205,498,557 shares in favor; 4,463,481 shares withheld),
Richard J. Mahoney (206,415,207 shares in favor; 3,546,831
shares withheld), and Richard D. Simmons (206,345,9832 shares
in favor; 3,616,106 shares withheld), as directors of the
Corporation. In addition, the Corporation's shareholders voted
to ratify the appointment of Deloitte & Touche LLP as
independent auditors of the Corporation (208,519,829 shares in
favor; 752,195 shares against; 690,014 shares withheld) and
voted on a shareholder proposal regarding executive
compensation (14,710,507 shares in favor; 166,459,349 shares
against; 3,350,757 shares withheld and 25,441,425 shares not voted
by brokers).
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 - Computation of ratio of earnings to fixed charges.
27 - Financial data schedule.
(b) Reports on Form 8-K
On January 21, 1999, UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the fourth quarter of 1998.
[SIGNATURE]
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1999
UNION PACIFIC CORPORATION
(Registrant)
/s/ James R. Young
------------------
James R. Young
Senior Vice President - Finance and Controller
(Chief Accounting Officer and Duly Authorized Officer)
<ESHIBIT INDES> INDEX
UNION PACIFIC CORPORATION
EXHIBIT INDEX
Exhibit No. Description of Exhibits Filed with this Statement
- ----------- -------------------------------------------------
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
Exhibit 12
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------
Millions of Dollars Except Ratios 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Earnings
Net Income (Loss).......................................... $129 $(62)
Undistributed equity earnings.............................. (10) (9)
- -------------------------------------------------------------------------------
Total...................................................... 119 (71)
- -------------------------------------------------------------------------------
Income Taxes................................................. 72 (43)
- -------------------------------------------------------------------------------
Fixed Charges:
Interest expense including amortization of debt discount... 192 161
Portion of rentals representing an interest factor......... 45 45
- -------------------------------------------------------------------------------
Total...................................................... 237 206
- -------------------------------------------------------------------------------
Earnings Available for Fixed Charges......................... 428 92
- -------------------------------------------------------------------------------
Total Fixed Charges -- as above.............................. $237 $206
- -------------------------------------------------------------------------------
Ratio of earnings to fixed charges (Note 9)................. 1.8 0.4
- -------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This is a legend.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 107
<SECURITIES> 0
<RECEIVABLES> 632
<ALLOWANCES> 0
<INVENTORY> 350
<CURRENT-ASSETS> 1436
<PP&E> 33470
<DEPRECIATION> 6428
<TOTAL-ASSETS> 29455
<CURRENT-LIABILITIES> 2939
<BONDS> 8539
0
0
<COMMON> 691
<OTHER-SE> 6787
<TOTAL-LIABILITY-AND-EQUITY> 29455
<SALES> 0
<TOTAL-REVENUES> 2740
<CGS> 0
<TOTAL-COSTS> 2378
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 201
<INCOME-TAX> 72
<INCOME-CONTINUING> 129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
