<PAGE> 1
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 June 30, 2000
- 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.)
1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 271-5777
(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, 2000, there were 247,860,433 shares of the Registrant's
Common Stock outstanding.
<PAGE> 2
UNION PACIFIC CORPORATION
AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements:
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
For the Three Months Ended June 30, 2000 and 1999..................................... 1
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
For the Six Months Ended June 30, 2000 and 1999....................................... 2
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
At June 30, 2000 (Unaudited) and December 31, 1999.................................... 3
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2000 and 1999....................................... 4
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (Unaudited)
For the Six Months Ended June 30, 2000................................................ 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)................................... 6-14
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.... 15-22
Item 3: Quantitative and Qualitative Disclosures about Market Risk............................... 22-23
PART II. OTHER INFORMATION
Item 1: Legal Proceedings........................................................................ 23
Item 6: Exhibits and Reports on Form 8-K......................................................... 23
Signature......................................................................................... 24
</TABLE>
(i)
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Three Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Millions, Except Per Share and Ratios 2000 1999
------------------------------------- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES Rail, trucking and other (Note 2).................... $ 2,979 $ 2,773
------- -------
OPERATING EXPENSES Salaries, wages and employee benefits................ 1,040 1,057
Equipment and other rents............................ 321 325
Depreciation......................................... 283 268
Fuel and utilities (Note 4)......................... 311 202
Materials and supplies............................... 155 146
Casualty costs....................................... 84 95
Other costs.......................................... 243 239
------- -------
Total................................................ 2,437 2,332
------- -------
INCOME Operating Income..................................... 542 441
Other income (Note 7)................................ 24 24
Interest expense..................................... (180) (184)
------- -------
Income before Income Taxes........................... 386 281
Income taxes......................................... (142) (87)
------- -------
Net Income........................................... $ 244 $ 194
------- -------
EARNINGS PER SHARE Basic - Net Income................................... $ 0.99 $ 0.79
(NOTE 6) Diluted - Net Income................................. $ 0.96 $ 0.77
------- -------
Weighted Average Number of Shares (Basic)............ 246.4 246.5
Weighted Average Number of Shares (Diluted).......... 269.4 270.6
------- -------
Cash Dividends Per Share............................. $ 0.20 $ 0.20
------- -------
Ratio of Earnings to Fixed Charges (Note 8).......... 2.7 2.2
------- -------
</TABLE>
The accompanying notes to the financial statements are
an integral part of these statements.
- 1 -
<PAGE> 4
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Millions, Except Per Share and Ratios 2000 1999
------------------------------------- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES Rail, trucking and other (Note 2)...................... $ 5,892 $ 5,513
------- -------
OPERATING EXPENSES Salaries, wages and employee benefits.................. 2,105 2,133
Equipment and other rents.............................. 648 656
Depreciation........................................... 565 538
Fuel and utilities (Note 4)............................ 622 391
Materials and supplies................................. 311 290
Casualty costs......................................... 178 206
Other costs............................................ 469 496
------- -------
Total.................................................. 4,898 4,710
------- -------
INCOME Operating Income....................................... 994 803
Other income (Note 7).................................. 44 49
Interest expense....................................... (362) (370)
------- -------
Income before Income Taxes............................. 676 482
Income taxes........................................... (247) (159)
------- -------
Net Income............................................. $ 429 $ 323
------- -------
EARNINGS PER SHARE Basic - Net Income..................................... $ 1.74 $ 1.31
(NOTE 6) Diluted - Net Income................................... $ 1.70 $ 1.31
------- -------
Weighted Average Number of Shares (Basic).............. 246.4 246.4
Weighted Average Number of Shares (Diluted)............ 269.4 247.7
------- -------
Cash Dividends Per Share............................... $ 0.40 $ 0.40
------- -------
Ratio of Earnings to Fixed Charges (Note 8)............ 2.6 2.0
------- -------
</TABLE>
The accompanying notes to the financial statements are
an integral part of these statements.
-2-
<PAGE> 5
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
(Unaudited)
June 30, Dec. 31,
Millions of Dollars 2000 1999
------------------- ----------- --------
<S> <C> <C>
ASSETS
Current Assets Cash and temporary investments....................... $ 72 $ 175
Accounts receivable (Note 4)......................... 569 581
Inventories.......................................... 324 337
Current deferred tax asset........................... 114 111
Other current assets................................. 115 110
-------- --------
Total................................................ 1,194 1,314
-------- --------
Investments Investments in and advances to affiliated companies.. 599 657
Other investments.................................... 107 96
-------- --------
Total................................................ 706 753
-------- --------
Properties Cost................................................. 34,964 34,370
Accumulated depreciation............................. (7,139) (6,851)
-------- --------
Net.................................................. 27,825 27,519
-------- --------
Other Other assets......................................... 477 302
-------- --------
Total Assets......................................... $ 30,202 $ 29,888
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities Accounts payable..................................... $ 633 $ 598
Accrued wages and vacation........................... 430 409
Accrued casualty costs............................... 394 385
Income and other taxes............................... 253 256
Dividends and interest............................... 258 290
Debt due within one year............................. 206 214
Other current liabilities............................ 668 733
-------- --------
Total................................................ 2,842 2,885
-------- --------
Other Liabilities and Debt due after one year (Note 5)..................... 8,365 8,426
Stockholders' Equity Deferred income taxes................................ 6,921 6,715
Accrued casualty costs............................... 873 934
Retiree benefit obligations.......................... 794 791
Other long-term liabilities.......................... 568 636
Company-obligated Mandatorily Redeemable
Convertible Preferred Securities (Note 5)....... 1,500 1,500
Common stockholders' equity (Page 5)................. 8,339 8,001
-------- --------
Total Liabilities and Stockholders' Equity........... $ 30,202 $ 29,888
-------- --------
</TABLE>
The accompanying notes to the financial statements are
an integral part of these statements.
-3-
<PAGE> 6
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Millions of Dollars 2000 1999
------------------- ---- ----
<S> <C> <C> <C>
CASH PROVIDED BY Net Income................................................... $ 429 $ 323
OPERATIONS Non-cash charges to income:
Depreciation............................................. 565 538
Deferred income taxes.................................... 200 161
Other - net.............................................. (172) (174)
Changes in current assets and liabilities.................... (26) 130
------ ------
Cash Provided by Operations.................................. 996 978
------ ------
INVESTING ACTIVITIES Capital investments.......................................... (817) (824)
Other - net.................................................. (117) (17)
------ ------
Cash Used in Investing Activities............................ (934) (841)
------ ------
EQUITY AND FINANCING Dividends paid............................................... (101) (98)
ACTIVITIES Debt repaid ................................................. (539) (528)
Net financings............................................... 478 642
Other - net.................................................. (3) 2
------ ------
Cash Provided by (Used in) Equity and Financing Activities... (165) 18
------ ------
Net Change in Cash and Temporary Investments................. (103) 155
Cash at Beginning of Period.................................. 175 176
------ ------
Cash at End of Period........................................ $ 72 $ 331
------ ------
CHANGES IN CURRENT Accounts receivable.......................................... $ 12 $ 82
ASSETS AND LIABILITIES Inventories.................................................. 13 2
Other current assets......................................... (8) (10)
Accounts, wages and vacation payable......................... 56 106
Debt due within one year..................................... (8) 34
Other current liabilities.................................... (91) (84)
------ ------
Total........................................................ $ (26) $ 130
------ ------
</TABLE>
The accompanying notes to the financial statements are
an integral part of these statements.
-4-
<PAGE> 7
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Accumulated
[a] [b] Other
Common Paid-in- Retained Treasury Comprehensive
Millions of Dollars Shares Surplus Earnings Stock Income Total
------------------- ------ -------- -------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999........... $ 691 $ 4,019 $ 5,053 $ (1,756) $ (6) $ 8,001
----- ------- ------- -------- ---- -------
Net Income............................. -- -- 429 -- -- 429
Other Comprehensive Income:
Foreign Currency Translation........ -- -- -- -- 4 4
-------
Comprehensive Income................... -- -- -- -- -- 433
-------
Conversions, exercises of stock
options, forfeitures and other.......
-- -- -- 3 -- 3
Dividends declared ($0.40 per share)... -- -- (98) -- -- (98)
----- ------- ------- -------- ---- -------
Balance at June 30, 2000............... $ 691 $ 4,019 $ 5,384 $ (1,753) $ (2) $ 8,339
----- ------- ------- -------- ---- -------
</TABLE>
[a] Common stock $2.50 par value; 500,000,000 shares authorized; 276,294,217
shares issued at beginning of period; 276,321,151 shares issued at end of
period.
[b] 28,477,845 treasury shares at end of period, at cost.
The accompanying notes to the financial statements are
an integral part of these statements.
-5-
<PAGE> 8
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, 1999 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's (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,
1999. The results of operations for the three months and six months ended
June 30, 2000 are not necessarily indicative of the results for the entire
year ending December 31, 2000.
2. SEGMENTATION - Union Pacific Corporation consists of one reportable
segment, rail transportation, and UPC's other product lines (Other
Operations). The rail segment includes the operations of the Corporation's
wholly owned subsidiary, Union Pacific Railroad Company (UPRR) and UPRR's
subsidiaries and rail affiliates (the Railroad). Other Operations include
the trucking product line (Overnite Transportation Company or Overnite),
as well as the "other" product lines that include technology,
self-insurance activities, corporate holding company operations, which
largely support the Railroad, and all appropriate consolidating entries.
The following table details reportable financial information for
UPC's rail transportation segment and Other Operations for the three
months and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales and revenues from external customers [a]:
Rail........................................... $ 2,687 $ 2,491 $ 5,324 $ 4,970
Trucking....................................... 283 273 552 526
Other [b]...................................... 9 9 16 17
-------- -------- -------- --------
Consolidated................................... $ 2,979 $ 2,773 $ 5,892 $ 5,513
-------- -------- -------- --------
Net income (loss):
Rail........................................... $ 264 $ 206 $ 478 $ 355
Trucking....................................... 13 11 15 20
Other [b]...................................... (33) (23) (64) (52)
-------- -------- -------- --------
Consolidated................................... $ 244 $ 194 $ 429 $ 323
-------- -------- -------- --------
Assets:
Rail........................................... $ 29,087 $ 28,640 $ 29,087 $ 28,640
Trucking....................................... 888 869 888 869
Other [b]...................................... 227 278 227 278
-------- -------- -------- --------
Consolidated................................... $ 30,202 $ 29,787 $ 30,202 $ 29,787
-------- -------- -------- --------
</TABLE>
[a] The Corporation does not have significant intercompany sales
activities.
[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.
-6-
<PAGE> 9
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 eliminated 3,600 positions and relocated 4,500
employees due to merger consolidation 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 between $10 million and $30 million over the
remaining merger implementation period in pre-tax, acquisition-related
costs for severing or relocating UPRR employees, disposing of certain UPRR
facilities, training and equipment upgrading. Earnings for the three months
ended June 30, 2000 and 1999 included $5 million and $8 million after-tax,
respectively, and the six months ended June 30, 2000 and 1999, included $11
million and $17 million, after-tax, respectively, for acquisition-related
costs for UPRR consolidation activities.
The components of the merger liability as of June 30, 2000 were as
follows:
<TABLE>
<CAPTION>
Original Cumulative Current
Millions of Dollars Reserve Activity Reserve
------------------- ------- -------- -------
<S> <C> <C> <C>
Labor protection related to legislated and contractual obligations... $ 361 $ 361 $ --
Severance costs...................................................... 343 269 74
Contract cancellation fees and facility and line closure costs....... 145 141 4
Relocation costs..................................................... 109 94 15
----- ----- ----
Total................................................................ $ 958 $ 865 $ 93
----- ----- ----
</TABLE>
Merger liability activity reflects cash payments for merger
consolidation activities and reclassification of contractual obligations
from merger liabilities to contractual liabilities. In addition, where
merger implementation has varied from the original merger plan, the
Corporation has adjusted the merger liability and the fair value allocation
of SP's purchase price to fixed assets to eliminate the variance. Where the
merger implementation has caused the Corporation to incur more costs than
were envisioned in the original merger plan, such costs are charged to
expense in the period incurred. The Corporation charged $2 million and $6
million against the merger liability during the three and six months ended
June 30, 2000, respectively. The Corporation expects that the remaining
merger payments will be made over the course of the next 18 months as labor
negotiations are completed and implemented, and related merger
consolidation activities are finalized.
-7-
<PAGE> 10
MEXICAN RAILWAY CONCESSION - During 1997, the Corporation's rail
subsidiary, 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, UPRR 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. The Corporation's portion of the consortium's assets and
liabilities is translated into U.S. dollars using the exchange rate in
effect at the balance sheet date. The Corporation's portion of the
consortium's net income is translated into U.S. dollars at weighted-average
exchange rates prevailing during the year. The resulting translation
adjustments are reflected within the stockholders' equity component,
accumulated other comprehensive income.
4. FINANCIAL INSTRUMENTS
STRATEGY AND RISK - The Corporation and its subsidiaries use derivative
financial instruments in limited instances and for other than trading
purposes to manage risk related to changes in fuel prices and interest
rates. The Corporation uses swaps, futures and/or forward contracts to
mitigate the downside risk of adverse price and rate movements; however,
the use of these instruments also limits future gains from favorable
movements. The purpose of these programs is to protect the Corporation's
operating margins and overall profitability from adverse fuel price changes
or interest rate fluctuations. The Corporation manages its overall exposure
to fluctuations in interest rates by adjusting the proportion of fixed and
floating rate debt instruments within its debt portfolio over a given
period. Derivatives are used in limited circumstances as one of the tools
to obtain the targeted mix. The mix of fixed and floating rate debt is
largely managed through the issuance of targeted amounts of each as debt
matures or as incremental borrowings are required. The Corporation also
obtains additional flexibility in managing interest costs and the interest
rate mix within its debt portfolio by issuing callable fixed-rate debt
securities.
MARKET AND CREDIT RISK - The Corporation addresses market risk related to
these instruments by selecting instruments whose value fluctuations highly
correlate with the underlying item being hedged. Credit risk related to
derivative financial instruments, which is minimal, is managed by requiring
high credit standards for counterparties and periodic settlements. The
total credit risk associated with the Corporation's counterparties was $27
million at June 30, 2000. 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.
DETERMINATION OF FAIR VALUE - The fair market values of the Corporation's
derivative financial instrument positions at June 30, 2000 and December 31,
1999, detailed below, were determined based upon current fair market values
as quoted by recognized dealers or developed based upon the present value
of expected future cash flows discounted at the applicable U.S. Treasury
rate and swap spread.
-8-
<PAGE> 11
The following is a summary of the Corporation's derivative financial
instruments at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
Millions June 30, December 31,
Except Percentages and Average Commodity Prices 2000 1999
----------------------------------------------- -------- ------------
<S> <C> <C>
Interest Rate Hedging:
Amount of debt hedged ........................................... $ -- $ 54
Percentage of total debt portfolio .............................. -- 1%
Rail Fuel Hedging:
Number of gallons hedged for 2000 ............................... 63 126
Percentage of forecasted 2000 fuel consumption hedged ........... 9% 10%
Average price of 2000 hedges outstanding (per gallon) [a] ....... $ 0.40 $ 0.40
Trucking Fuel Hedging:
Number of gallons hedged for 2000 ............................... 3 5
Percentage of forecasted 2000 fuel consumption hedged ........... 9% 10%
Average price of 2000 hedges outstanding (per gallon) [a] ....... $ 0.39 $ 0.39
</TABLE>
[a] Excluding taxes, transportation costs and regional pricing spreads.
The asset and liability positions of the Corporation's outstanding
derivative financial instruments at June 30, 2000 and December 31, 1999
were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
Millions of Dollars 2000 1999
------------------- -------- ------------
<S> <C> <C>
Interest Rate Hedging:
Gross fair market asset position ................................ $ -- $ 56
Gross fair market (liability) position .......................... -- (1)
Rail Fuel Hedging:
Gross fair market asset position ................................ 26 22
Gross fair market (liability) position .......................... -- --
Trucking Fuel Hedging:
Gross fair market asset position ................................ 1 1
Gross fair market (liability) position .......................... -- --
---- ----
Total net asset position ............................................. $ 27 $ 78
---- ----
</TABLE>
The Corporation's use of derivative financial instruments had the
following impact on pre-tax income for the three months and six months
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------- --------------
Millions of Dollars 2000 1999 2000 1999
------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Increase in interest expense from interest rate hedging .............. $ -- $ 1 $ -- $ 1
Increase (decrease) in fuel expense from Rail fuel hedging ........... (10) -- (20) 19
Increase (decrease) in fuel expense from Trucking fuel hedging ....... -- -- (1) 1
----- ---- ---- ----
Reduction (Increase) in pre-tax income ............................... $ (10) $ 1 $ (21) $ 21
----- ---- ---- ----
</TABLE>
-9-
<PAGE> 12
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 $66 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 June 30, 2000 and December 31, 1999,
accounts receivable are presented net of $576 million receivables sold.
5. DEBT
CREDIT FACILITIES - On June 30, 2000, the Corporation had $2.0 billion in
revolving credit facilities, of which $1.0 billion expires in 2001, with
the remaining $1.0 billion expiring in 2004. The facilities, which were
entered into during March 2000, are designated for general corporate
purposes and replaced a $2.8 billion facility due to expire in 2001.
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.
SHELF REGISTRATION STATEMENT - Under currently effective shelf registration
statements, the Corporation may issue, from time to time, any combination
of debt securities, preferred stock, or warrants for debt securities or
preferred stock in one or more offerings. At June 30, 2000, the Corporation
had $600 million remaining for issuance under the shelf registration. The
Corporation has no immediate plans to issue equity securities.
SIGNIFICANT NEW BORROWINGS - During June 2000, the Corporation issued $250
million of floating rate debt under its shelf registration statement with a
maturity date of July 1, 2002. The proceeds from the issuance of this debt
were used for repayment of debt and other general corporate purposes.
-10-
<PAGE> 13
6. EARNINGS PER SHARE - The following table provides a reconciliation between
basic and diluted earnings per share for the three months and six months
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
Millions, Except Per Share Amounts 2000 1999
---------------------------------- ------ -------
<S> <C> <C>
Income Statement Data:
Net income available to common stockholders - Basic ............. $ 244 $ 194
Dilutive effect of interest associated with the CPS ............. 15 15
------- -------
Net income available to common stockholders - Diluted ........... $ 259 $ 209
------- -------
Weighted-Average Number of Shares Outstanding:
Basic ........................................................... 246.4 246.5
Dilutive effect of common stock equivalents ..................... 23.0 24.1
------- -------
Diluted ......................................................... 269.4 270.6
------- -------
Earnings Per Share:
Basic - net income .............................................. $ 0.99 $ 0.79
Diluted - net income ............................................ $ 0.96 $ 0.77
------- -------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
Millions, Except Per Share Amounts 2000 1999
---------------------------------- ------ -------
<S> <C> <C>
Income Statement Data:
Net income available to common stockholders - Basic ............. $ 429 $ 323
Dilutive effect of interest associated with the CPS [a] ......... 30 --
------- -------
Net income available to common stockholders - Diluted ........... $ 459 $ 323
------- -------
Weighted-Average Number of Shares Outstanding:
Basic ........................................................... 246.4 246.4
Dilutive effect of common stock equivalents [b] ................. 23.0 1.3
------- -------
Diluted ......................................................... 269.4 247.7
------- -------
Earnings Per Share:
Basic - net income .............................................. $ 1.74 $ 1.31
Diluted - net income ............................................ $ 1.70 $ 1.31
------- -------
</TABLE>
[a] In 1999, the effect of $30 million of interest associated with the CPS
was anti-dilutive (Note 5).
[b] 1999 excludes the effect of anti-dilutive common stock equivalents
related to the CPS, which were 21.8 million.
7. OTHER INCOME - Other income included the following for the three months and
six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
Millions of Dollars 2000 1999
------------------- ---- ----
<S> <C> <C>
Net gain on asset dispositions ....................................... $ 12 $ 7
Rental income ........................................................ 15 13
Interest income ...................................................... 3 4
Other - net .......................................................... (6) --
---- ----
Total ................................................................ $ 24 $ 24
---- ----
</TABLE>
-11-
<PAGE> 14
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
Millions of Dollars 2000 1999
------------------- ---- ----
<S> <C> <C>
Net gain on asset dispositions ....................................... $ 22 $ 18
Rental income ........................................................ 29 25
Interest income ...................................................... 5 8
Other - net .......................................................... (12) (2)
---- ----
Total ................................................................ $ 44 $ 49
---- ----
</TABLE>
8. RATIO OF EARNINGS TO FIXED CHARGES - The ratio of earnings to fixed charges
has been computed on a consolidated basis. Earnings represent net income
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.
9. 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 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 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, results of operations or
liquidity. Certain potentially significant contingencies relating to the
Corporation's and its subsidiaries' businesses are detailed below.
Customer Claims - Some customers have submitted claims for damages related
to shipments delayed by the Railroad as a result of congestion problems in
1997 and 1998, and certain customers have filed lawsuits seeking relief
related to such delays. Some customers also asserted that they have the
right to cancel contracts as a result of alleged material breaches of such
contracts by the Railroad. The Corporation accrued amounts for these claims
in 1997 and 1998. No additional amounts were accrued in 1999 or the six
months ended June 30, 2000.
Environmental Issues - For environmental sites where remediation costs can
be reasonably determined, and where such remediation is probable, the
Corporation has recorded a liability.
Shareholder Lawsuits - UPC and certain of its directors and officers (who
are also directors of the Railroad) are defendants in two purported class
actions that have been consolidated into one proceeding (the "Class
Action"). The consolidated complaint alleges, among other things, that UPC
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 UPC'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 has been defending them
vigorously. The defendants moved to dismiss this action, and the motion was
briefed and submitted to the Court for decision in 1998. In February 2000,
prior to a ruling on the motion, the parties jointly advised the Court that
they were engaged in discussions concerning the possible settlement of the
action and asked the Court to defer ruling on the motion to dismiss pending
the outcome of these discussions. The Court entered an order dated February
29, 2000
-12-
<PAGE> 15
agreeing to such deferral, subject to the motion of either party to
reactivate the action and the pending motion to dismiss at any time.
In addition to the Class Action, a purported derivative action was
filed on behalf of UPC and the Railroad in September 1998 in the District
Court for Tarrant County, Texas, naming as defendants the then-current and
certain former directors of UPC and the Railroad and, as nominal
defendants, UPC and the Railroad (the "Derivative Action" and together with
the Class Action, the "Actions"). The derivative action alleges, among
other things, that the named directors breached their fiduciary duties to
UPC and the Railroad 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 the Railroad to make
misrepresentations about the Railroad's service problems to the financial
markets and regulatory authorities. UPC's Board of Directors established a
special litigation committee consisting of three independent directors to
review the plaintiff's allegations and determine whether it was in UPC's
best interest to pursue them. In February 1999, the committee rendered its
report, in which it unanimously concluded that further prosecution of the
derivative action on behalf of UPC and the Railroad was not in the best
interest of either such company. Accordingly, UPC and the Railroad have
filed a motion with the Court to dismiss the derivative action. The
individual defendants also believe that these claims are without merit and
have defended them vigorously.
As of June 28, 2000, counsel for UPC, the Railroad and certain officers
and directors of UPC and the Railroad entered into a Memorandum of
Understanding, with counsel for the plaintiffs in the Class Action and
Derivative Action. The Memorandum of Understanding provides, among other
things, that the Class Action will be settled for $34,025,000 in cash (the
"Settlement Payment"), the full amount of which is expected to be covered
by UPC's insurance carriers. The fees and expenses of counsel for the
plaintiffs in the Class Action will be paid out of the Settlement Payment.
The Memorandum of Understanding also provides that, in settlement of the
Derivative Action, UPC will adopt certain additional procedures which will
reinforce its continuing effort to ensure both the effective implementation
of its merger with Southern Pacific and its ongoing commitment to rail
safety. In addition, in the event of any proposed merger or other
transaction involving consolidation of UPC and a rail system of greater
than 1,000 miles in length of road, UPC will commission a study, to be
completed in advance of any formal application to a U.S., Canadian or
Mexican federal regulatory board, to analyze prospective safety and
congestion-related issues. As part of the terms of the Derivative Action
settlement, counsel for the plaintiffs will receive such fees and expenses
as may be awarded by the Court, up to an aggregate amount of $975,000. Such
amount is also expected to be fully covered by UPC's insurance carriers.
The settlement of each of the Actions is subject to, among other
conditions, the negotiation and execution of definitive Stipulations of
Settlement and such other documentation as may be required in connection
with such settlement and the approval of each settlement by the respective
courts in which each Action is pending. Notwithstanding the existence of
the Memorandum of Understanding, there can be no assurances that a
definitive settlement will be consummated with respect to either Action.
UPC, the Railroad and the individual defendants named in the Actions
entered into the Memorandum of Understanding solely for the purpose of
avoiding the further expense, inconvenience, burden and uncertainty of the
Actions, and their decision to do so is not an admission or concession or
evidence of any liability or wrongdoing on the part of any party to either
Action, which liability and wrongdoing have consistently been, and continue
to be, denied.
10. ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), that would
-13-
<PAGE> 16
have been effective January 1, 2000. In June 1999, the FASB issued
Statement No. 137, "Accounting for Derivatives Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133"
postponing the effective date for implementing FAS 133 to fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued Statement No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" (FAS 138). FAS 138 addresses certain issues related to the
implementation of FAS 133, but does not change the basic model of FAS 133
or further delay the implementation of FAS 133. Management has determined
that FAS 133 and FAS 138 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
and FAS 138, be recorded in the Corporation's Statement of Financial
Position (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 and FAS 138 will have a
material impact on UPC's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition". SAB 101 provides
additional guidance on revenue recognition criteria and related disclosure
requirements. This SAB is effective beginning in the fourth quarter of
2000. When the SAB becomes effective, it will require implementation as of
the beginning of the current fiscal year. If the impact is material, the
SAB requires retroactive application to all periods presented. Management
is currently assessing the impact that SAB 101 will have on the
Corporation's consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25". The Interpretation clarifies the
application of APB Opinion 25 for certain issues involving employee stock
compensation. The Interpretation is generally effective July 1, 2000.
Management does not anticipate that FIN 44 will have a material impact on
the Corporation's consolidated financial statements.
-14-
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 1999
Union Pacific Corporation (UPC or the Corporation) consists of one reportable
segment, rail transportation, 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 or
Overnite), as well as the "other" product lines that include technology and
self-insurance activities, corporate holding company operations, which largely
support the Railroad, and all appropriate consolidating entries (see Note 2 to
the Consolidated Financial Statements).
CONSOLIDATED
NET INCOME - Net income for the three and six month periods ended June 30, 2000
was $244 million ($0.96 per diluted share) and $429 million ($1.70 per diluted
share), respectively, compared to $194 million ($0.77 per diluted share) and
$323 million ($1.31 per diluted share) for the comparable periods in 1999. These
increases resulted primarily from revenue growth and productivity gains at the
Railroad, partially offset by higher fuel prices. Net income for the second
quarter of 1999 included a $19 million one-time after-tax gain related to prior
year tax settlements.
OPERATING REVENUES - Operating revenues increased $206 million (7%) and $379
million (7%) for the three and six month periods ended June 30, 2000,
respectively, over the comparable periods in 1999. These gains reflect higher
revenues in five of the six business groups at the Railroad as well as increased
revenue at Overnite.
OPERATING EXPENSES - For the three and six month periods ended June 30, 2000,
operating expenses increased $105 million (5%) and $188 million (4%),
respectively, over the comparable periods in 1999. These increases resulted from
higher fuel prices and increased volume at the Railroad. Continued improvement
in productivity and service levels partially offset the higher fuel prices and
volume increase at the Railroad. Operating expense comparisons by category for
the quarters ending June 30, 2000 and June 30, 1999 are discussed below. The
factors primarily responsible for the increase or decrease in each category are
substantially the same for both the three and six month periods, except as
noted.
Salaries, wages, and employee benefits declined due to lower employment
levels and improved productivity at the Railroad and Overnite, partially offset
by higher rail volume and inflation. Equipment and other rents expense also
decreased as a result of improved rail cycle times and lower rental rates,
partially offset by higher rail volumes. Depreciation expense increased as a
result of the Railroad's capital program in 1999 and the first half of 2000.
Fuel and utilities costs were higher as significantly higher fuel prices and
increased volume costs were partially offset by favorable fuel hedging (see Note
4 to the Consolidated Financial Statements). The increase in materials and
supplies reflects more locomotive overhauls and higher volume-related repair
costs. Casualty costs were down due to lower than expected settlement costs at
the Railroad. Other costs increased slightly for the three-month period due to
higher state and local taxes and volume-related costs, partially offset
-15-
<PAGE> 18
by improved productivity and better cost control. For the six-month period,
other costs decreased as productivity, joint facility and cost control offset
higher volume costs and state and local taxes.
OPERATING INCOME - Operating income increased $101 million (23%) and $191
million (24%) for the three and six month periods ended June 30, 2000,
respectively, over the comparable periods in 1999, as revenue growth and
productivity gains at the Railroad and Overnite more than offset higher fuel
prices and rail volume costs.
NON-OPERATING ITEMS - Non-operating income increased $4 million (2%) and $3
million (1%) for the three and six months ended June 30, 2000, respectively. The
gains were primarily the result of lower interest expense, higher income from
real estate sales and rents, partially offset by higher losses from other
miscellaneous items. Income taxes for the three and six month periods of 2000
increased $55 million (63%) and $88 million (55%) over the comparable periods of
1999 as a result of higher pre-tax income levels and a one-time $19 million
after-tax gain in the second quarter of 1999 related to prior-year tax
settlements at the Railroad. The increase was partially offset by favorable
state tax incentive credits at the Railroad in the first six months of 2000.
RAIL SEGMENT
NET INCOME - Rail operations reported net income of $264 million and $478
million for the three and six months ended June 30, 2000, respectively, compared
to net income of $206 million for the second quarter of 1999 and $355 million
for the six month period in 1999. The increases resulted primarily from higher
commodity and other revenue, combined with productivity gains, partially offset
by higher fuel prices and volume-related costs.
OPERATING REVENUES - Rail operating revenues increased $196 million (8%) to a
record $2.7 billion and $354 million (7%) to a record $5.3 billion for the three
and six month periods ended June 30, 2000, respectively, over the comparable
periods in 1999. Revenue carloads increased 5% for the three and six month
periods over the comparable periods in 1999. Other revenue gains were the result
of higher subsidiary revenues and reduced billing claims from customers and
other railroads.
The following tables summarize rail commodity revenue, revenue carloads and
average revenue per car for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- % Commodity Revenue ------------------------- %
2000 1999 Change In Millions 2000 1999 Change
---- ---- ------ ----------- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
$ 334 $ 328 2 Agricultural $ 684 $ 675 1
307 275 12 Automotive 597 528 13
424 395 7 Chemicals 836 796 5
490 533 (8) Energy 1,019 1,097 (7)
525 475 11 Industrial Products 1,017 924 10
471 426 11 Intermodal 912 814 12
------- ------- --- ------- ------- ---
$ 2,551 $ 2,432 5 Total $ 5,065 $ 4,834 5
------- ------- --- ------- ------- ---
</TABLE>
-16-
<PAGE> 19
<TABLE>
<CAPTION>
Revenue Carloads
In Thousands
----------------
<S> <C> <C> <C> <C> <C> <C>
213 214 -- Agricultural 434 437 (1)
214 184 16 Automotive 413 354 17
244 233 5 Chemicals 476 458 4
439 448 (2) Energy 919 925 (1)
376 353 7 Industrial Products 731 680 7
727 681 7 Intermodal 1,414 1,307 8
------- ------- --- ------- ------- ---
2,213 2,113 5 Total 4,387 4,161 5
------- ------- --- ------- ------- ---
</TABLE>
<TABLE>
<CAPTION>
Average Revenue
Per Car
---------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,568 $ 1,536 2 Agricultural $ 1,575 $ 1,544 2
1,437 1,492 (4) Automotive 1,446 1,492 (3)
1,741 1,701 2 Chemicals 1,759 1,741 1
1,115 1,188 (6) Energy 1,109 1,185 (6)
1,398 1,345 4 Industrial Products 1,392 1,359 2
647 624 4 Intermodal 645 622 4
------- ------- --- ------- ------- ---
$ 1,153 $ 1,151 -- Total $ 1,155 $ 1,162 (1)
------- ------- --- ------- ------- ---
</TABLE>
Agricultural - Agricultural revenue increased for both the three and six months
periods of 2000 over the comparable periods in 1999 despite a slight decline in
carloads. Carloads decreased primarily due to reduced market demand for wheat
and a lack of producer selling in anticipation of higher future prices. Carload
growth for corn, beverages, and fresh fruits and vegetables partially offset
these declines. Average revenue per car increased primarily due to longer hauls
and declines in lower average revenue per car wheat movements.
Automotive - The Railroad recorded back-to-back record quarters for automotive
revenue and carloads in the first six months of 2000. The year-over-year gain
resulted from increased share in a market characterized by record vehicle sales.
Average revenue per car decreased principally due to an increase in lower
average revenue per car materials moves and greater use of containers, rather
than boxcars, to haul materials shipments.
Chemical - Chemical revenue and carloads increased for both the three and six
month periods of 2000 over the comparable periods in 1999 due to improved
service levels, customer plant expansions and strength in the economy,
especially the plastics and liquid and dry chemical markets. Average revenue per
car increased reflecting growth in high average revenue per car plastics moves
and selected price increases ranging from 2% to 5%.
Energy - Energy carloads decreased for both the three and six month periods in
2000 over the comparable periods in 1999. Market growth was more than offset by
mine production problems, high coal inventory levels at utilities as a result of
Y2K concerns and mild winter weather. Revenue was down due to the lower volume
and lower average revenue per car as a result of contract pricing provisions
with certain major customers, which are expected to impact year-over-year
commodity revenue comparisons through the third quarter of 2000.
Industrial Products - Industrial Products revenue increased for both the three
and six month periods of 2000 over the comparable periods in 1999 due to
stronger commodity demand and improved service. Carloads of steel and ferrous
scrap increased with the mild recovery of the domestic steel market. Increases
in carloads of lumber, cement, roofing materials and other construction products
resulted from strong construction activity
-17-
<PAGE> 20
and mild weather. Average revenue per car increased due to gains in high average
revenue per car steel and lumber and selected price increases.
Intermodal - Intermodal revenue increased for both the three and six month
periods of 2000 over the comparable periods in 1999 as a result of increased
carloads and higher average revenue per car, setting quarterly records for both
measures. Carloads improved due to strong growth in imports from Asia and
service improvements. Average revenue per car increased as a result of gains in
the premium segment of the business and demand-driven price increases.
OPERATING EXPENSES - Operating expenses increased $94 million (5%) and $151
million (4%) for the three and six month periods ended June 30, 2000,
respectively. Operating expense comparisons by category for the quarter and
six-month period ending June 30, 2000 and 1999 are discussed below. The factors
primarily responsible for the increase or decrease in each category are
substantially the same for both the three and six month periods, except as
noted.
Salaries, Wages and Employee Benefits - Costs decreased $17 million (2%) and $38
million (2%) for the three and six month periods, respectively, over the
comparable periods in 1999. The lower expenses were driven primarily by
merger-related workforce reductions, higher train crew productivity, and lower
training expenses.
Equipment and Other Rents - Expenses decreased $7 million (2%) and $17 million
(3%) for the three and six month periods, respectively, due primarily to
improvements in cycle time, lower prices, and increased rent receipts from other
railroads. Higher volume costs partially offset these decreases.
Depreciation - Depreciation increased $15 million (6%) and $26 million (5%) for
the three and six month periods, respectively, over comparable periods in 1999,
as a result of the Railroad's capital program in 1999 and the first half of
2000. Capital spending was $812 million in the six months ended June 30, 2000
compared to $802 million in the six months ended June 30, 1999.
Fuel and utilities - Expenses were up $104 million (55%) and $219 million (60%)
for the three and six month periods, respectively. Higher fuel prices added $89
million of expense in the second quarter and $189 million of expense in the
first six months of 2000 over comparable periods in 1999. Volume costs and a
higher consumption rate added $7 million for the second quarter and $17 million
for the first six months of 2000 compared to 1999. The Railroad hedged
approximately 10% of its fuel consumption for the three and six month periods,
which decreased fuel costs by $10 million and $20 million, respectively. As of
June 30, 2000, expected fuel consumption for the remaining six months of 2000 is
9% hedged at 40 cents per gallon excluding taxes, transportation costs and
regional pricing spreads (see Note 4 to the Consolidated Financial Statements).
Materials and Supplies - Expenses increased $9 million (7%) and $20 million (8%)
for the three and six month periods, respectively, due to volume-related
increases in locomotive overhauls and repairs.
Casualty Costs - Expenses declined $10 million (12%) and $26 million (14%) for
the three and six month periods, respectively, primarily due to the effect of
lower than expected settlement and insurance costs.
Other Costs - Expenses were flat for the second quarter of 2000 and down $33
million (7%) for the first six months compared to comparable periods in 1999.
Cost control and productivity gains offset volume-related cost increases and
higher state and local taxes.
-18-
<PAGE> 21
OPERATING INCOME - Operating income increased $102 million to $539 million and
$203 million to $1.0 billion for the three and six months ended June 30, 2000,
respectively. The operating ratio for the second quarter of 2000 was 79.9%, 2.6
percentage points better than 1999's 82.5% operating ratio. The operating ratio
for the first six months of 2000 was 81.1%, 2.8 percentage points better than
1999's 83.9%.
NON-OPERATING ITEMS - Non-operating expense decreased $13 million (9%) and $15
million (6%) for the three and six months ended June 30, 2000, respectively. The
gains were primarily the result of lower interest expense, higher income from
real estate sales and rents, partially offset by higher losses from other
miscellaneous items. Income taxes increased $57 million for the second quarter
and $95 for the first six months of 2000 reflecting higher income levels and a
one-time, $19 million after-tax gain in the second quarter of 1999 related to
prior year tax settlements. The increase was partially offset by favorable state
tax incentive credits in the first six months of 2000.
OTHER OPERATIONS
TRUCKING PRODUCT LINE
NET INCOME - Trucking net income was $13 million and $15 million, for the three
and six month periods ended June 30, 2000, respectively, up from $11 million and
down from $20 million for the comparable periods in 1999. Net income, although
significantly improved from the first quarter of 2000, continued to be impacted
by expenses resulting from higher fuel prices and the International Brotherhood
of Teamsters (Teamsters) job action and related activity.
OPERATING REVENUES - For the three and six month periods ended June 30, 2000,
trucking revenues increased $10 million (4%) to $283 million and $26 million
(5%) to $552 million, respectively, over the comparable periods in 1999. The
growth resulted primarily from a fuel surcharge and a general rate increase
instituted in September of 1999. Revenue growth was achieved despite a 6% and 5%
decline in volume in the second quarter and first six-month period of 2000,
respectively, over comparable periods in 1999.
OPERATING EXPENSES - For the three and six month periods ended June 30, 2000,
operating expenses increased $8 million (3%) to $266 million and $34 million
(7%) to $535 million, respectively, over the comparable periods in 1999. For the
quarter, salaries, wages and employee benefit costs decreased $2 million (1%) to
$165 million due to lower volume-related employee levels, partially offset by
wage increases. For the six-month period, salaries, wages and employee benefits
increased $5 million (2%) to $330 million as wage and benefit increases more
than offset lower employee levels. Fuel and utilities costs increased $6 million
(55%) to $17 million for the quarter and $13 million (59%) to $35 million for
the six-month period. This increase was a result of higher fuel prices (83 cents
per gallon in the second quarter of 2000 compared to 51 cents in the second
quarter of 1999) and increased volume-related consumption (longer average haul),
partially offset by favorable hedge activity. Nine percent of estimated
remaining 2000 fuel purchases are hedged at an average of 39 cents per gallon
excluding taxes, transportation costs and regional pricing spreads (see Note 4
to the Consolidated Financial Statements). Equipment and other rents increased
$2 million (9%) for the quarter and $7 million (18%) for the six-month period
over 1999 due to increased purchased transportation costs. For the three and six
month periods, other expenses increased $1 million (4%) and $8 million (17%),
respectively, primarily due to higher security, legal and travel expenses
related to the Teamsters activity.
OPERATING INCOME - Trucking operations generated operating income of $17 million
in the three-month period and $17 million for the first six months of 2000
compared to $15 million and $25 million for the comparable
-19-
<PAGE> 22
periods in 1999. The operating ratio for trucking decreased to 94.1% in 2000
from 94.5% in 1999 for the second quarter and increased to 96.9% in 2000 from
95.2% in 1999 for the six months ended June 30, 2000.
OTHER PRODUCT LINES
Other operations include the technology product lines and self-insurance
activities, as well as the corporate holding company operations and all
necessary consolidating entries (see Note 2 to the Consolidated Financial
Statements). For the three and six month periods ended June 30, 2000, operating
income decreased $2 million and $4 million, respectively, reflecting decreased
revenue at UP Technologies and slightly increased expenses at the corporate
holding company.
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
FINANCIAL CONDITION - During the first six months of 2000, cash provided by
operations was $996 million, compared to $978 million in 1999. Higher net income
was partially offset by working capital increases, associated with higher
business levels, and higher casualty related payments.
Cash used in investing activities was $934 million during the first six
months of 2000, compared to $841 million in 1999. Capital spending was
approximately even with 1999. However, the receipt of a cash dividend from an
affiliate was more than offset by acquired equipment awaiting financing. 1999
reflects the purchase of an additional 13% ownership interest in the consortium
operating the Pacific-North and Chihuahua Pacific lines in Mexico for $87
million.
Cash used by equity and financing activities was $165 million in the first
six months of 2000, compared to cash provided of $18 million in 1999. This
increase in usage is the result of slightly higher debt payments ($539 million
in 2000 compared to $528 million in 1999) coupled with lower net borrowings
($478 million in 2000 versus $642 million in 1999).
Including the Convertible Preferred Stock as an equity instrument, the
ratio of debt to total capital employed was 46.6% at June 30, 2000 and 47.6% at
December 31, 1999.
FINANCING ACTIVITIES
CREDIT FACILITIES - As of June 30, 2000, the Corporation had $2.0 billion in
revolving credit facilities, of which $1.0 billion expires in 2001, with the
remaining $1.0 billion expiring in 2004. The facilities, which were entered into
during March 2000, are designated for general corporate purposes and replaced a
$2.8 billion facility due to expire in 2001.
SHELF REGISTRATION - Under currently effective shelf registration statements,
the Corporation may issue, from time to time, up to $600 million 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.
SIGNIFICANT NEW BORROWINGS - During June 2000, the Corporation issued $250
million of floating rate debt under its shelf registration statement with a
maturity date of July 1, 2002. The proceeds from the issuance of this debt were
used for repayment of debt and other general corporate purposes.
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<PAGE> 23
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 9 to the Consolidated
Financial Statements, which is incorporated herein by reference.
ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), that would have been effective January 1,
2000. In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivatives Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133" postponing the effective date for implementing FAS 133
to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" (FAS 138). FAS 138 addresses certain issues related to the
implementation of FAS 133, but does not change the basic model of FAS 133 or
further delay the implementation of FAS 133. Management has determined that FAS
133 and FAS 138 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 and FAS 138, be
recorded in the Corporation's Statement of Financial Position (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 and
FAS 138 will have a material impact on UPC's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition". SAB 101 provides
additional guidance on revenue recognition criteria and related disclosure
requirements. This SAB is effective beginning in the fourth quarter of 2000.
When the SAB becomes effective, it will require implementation as of the
beginning of the current fiscal year. If the impact is material, the SAB
requires retroactive application to all periods presented. Management is
currently assessing the impact that SAB 101 will have on the Corporation's
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25". The Interpretation clarifies the application of APB Opinion 25
for certain issues involving employee stock compensation. The Interpretation is
generally effective July 1, 2000. Management does not anticipate that FIN 44
will have a material impact on the Corporation's consolidated financial
statements.
CERTAIN OTHER MATTERS - On May 27, 2000 a Union Pacific train carrying hazardous
materials derailed near Eunice, Louisiana causing a fire and explosion that
resulted in the evacuation of approximately 3,800 residents of the surrounding
area and numerous claims for personal injuries, property damage and business
interruption. Investigation into the cause and impact of the derailment is
proceeding. To date, 25 lawsuits, most containing class action allegations, have
been filed and are currently pending in the United States District Court for the
District of Western Louisiana. While it is not possible to predict the ultimate
outcome of these proceedings, the Railroad believes it has substantial defenses
and, although losses may exceed self-insured retention amounts, the Railroad
believes its insurance coverage is adequate to cover material damage claims. In
addition to the claims asserted by private parties, the release of hazardous
materials into the environment caused by the derailment could result in the
imposition of fines and penalties by state and/or federal agencies. On July 14,
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<PAGE> 24
2000 the Railroad received a Notice of Potential Penalty of an unspecified
amount from the State of Louisiana. Whether any fines or penalties will be
imposed and, if imposed, the amount of such any such fines or penalties is
uncertain.
FENIX LLC - During the second quarter of 2000, UPC announced the formation of a
new subsidiary, Fenix LLC, to develop and expand UPC's technology and
telecommunication assets beyond UPC's core transportation businesses. UPC's
three existing technology companies will become members of the Fenix group, and
it is anticipated that a telecommunications company, which will also be a member
of the Fenix group, will be formed.
CAUTIONARY INFORMATION
Certain statements in this report are, and statements in other material filed or
to be filed 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) are or will be, forward-looking within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934. These
forward-looking statements include, without limitation, statements regarding:
expectations as to operational improvements; expectations as to cost savings,
revenue growth and earnings; the time by which certain objectives will be
achieved; estimates of costs relating to environmental remediation and
restoration; expectations as to product applications; expectations that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material adverse
effect on the Corporation's consolidated financial position, results of
operations or liquidity; and statements concerning projections, predictions,
expectations, estimates or forecasts as to the Corporation's and its
subsidiaries' business, financial and operational results, and future economic
performance, statements of management's goals and objectives and other similar
expressions concerning matters that are not historical facts.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or 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 and its subsidiaries are fully successful in
implementing their financial and operational initiatives; industry competition,
conditions, performance and consolidation; legislative and/or regulatory
developments, including possible enactment of initiatives to re-regulate the
rail business; natural events such as severe weather, floods and earthquakes;
the effects of adverse general economic conditions, both within the United
States and globally; changes in fuel prices; changes in labor costs; labor
stoppages; and the outcome of claims and litigation.
Forward-looking statements speak only as of the date the statement was
made. 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. If the Corporation does
update one or more forward-looking statements, no inference should be drawn that
the Corporation will make additional updates with respect thereto or with
respect to other forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided
in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Disclosure concerning market risk-sensitive instruments is set forth in Note 4
to the
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<PAGE> 25
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
SURFACE TRANSPORTATION BOARD MATTERS
As previously reported, in May 2000 the Surface Transportation Board ("STB")
dismissed a complaint filed with the STB by the Western Coal Traffic League
("WCTL") alleging that the Railroad improperly accounted for certain costs
associated with the acquisition of SP and service difficulties in its 1997
annual report filed with the STB. On June 1, 2000 the WCTL petitioned the STB
for a rehearing. The Railroad filed its reply on June 21, 2000, arguing that the
STB's decision was correct.
Also as previously reported, in May 2000 the STB served a decision in a
complaint filed by FMC challenging the Railroad's tariff rates on 16 different
movements. The decision found rates on 15 of the movements were excessive. On
June 1, 2000, the Railroad petitioned for reconsideration, alleging that
multiple errors caused the decision to understate costs and therefore prescribe
rates where not jurisdictionally permitted or prescribe lower rates than
warranted. FMC has replied to the Petition. The Railroad and FMC have each filed
a petition for review of the decision in the United States Circuit Court of
Appeals for the D.C. Circuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10(a) - UPC 2000 Directors Stock Plan (Incorporated by reference
to Exhibit 99 to UPC's Current Report on Form 8-K filed
March 9, 2000.)
10(b) - The 1988 Stock Option and Restricted Stock Plan of UPC, as
amended as of May 25, 2000.
10(c) - The 1993 Stock Option and Retention Stock Plan of UPC, as
amended as of May 25, 2000.
12(a) - Computation of ratio of earnings to fixed charges for the
Three Months Ended June 30, 2000.
12(b) - Computation of ratio of earnings to fixed charges for the
Six Months Ended June 30, 2000.
27 - Financial data schedule.
(b) REPORTS ON FORM 8-K
On April 20, 2000, UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the first quarter of 2000.
On July 7, 2000, UPC filed a Current Report on Form 8-K announcing
developments in certain litigation.
On July 27, 2000, UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the second quarter of 2000.
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<PAGE> 26
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 14, 2000
UNION PACIFIC CORPORATION
(Registrant)
By /s/ Richard J. Putz
--------------------------------------
Richard J. Putz
Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer)
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<PAGE> 27
UNION PACIFIC CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10(b) The 1988 Stock Option and Restricted Stock Plan of UPC, as amended as of May 25, 2000.
10(c) The 1993 Stock Option and Retention Stock Plan of UPC, as amended as of May 25, 2000.
12(a) Computation of ratio of earnings to fixed charges for the Three Months Ended June 30, 2000.
12(b) Computation of ratio of earnings to fixed charges for the Six Months Ended June 30, 2000.
27 Financial data schedule.
</TABLE>
