<COVER PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to _____________________
Commission file number 1-6146
UNION PACIFIC RAILROAD COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 94-6001323
(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) 271-5000
(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, 1998, the Registrant had outstanding 4,465 shares of
Common Stock, $10 par value, and 388 shares of Class A Stock, $10 par
value.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS
FORM WITH THE REDUCED DISCLOSURE FORMAT.
<INDEX PAGE>
UNION PACIFIC RAILROAD COMPANY
INDEX
PART I. FINANCIAL INFORMATION
------------------------------
Page Number
-----------
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED STATEMENT OF CONSOLIDATED INCOME
AND RETAINED EARNINGS - For the Three
Months Ended March 31, 1998 and 1997 . . . . . . . . . . 1
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL
POSITION - At March 31, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . 2
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
- For the Three Months Ended
March 31, 1998 and 1997. . . . . . . . . . . . . . . . . 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 2: MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS
OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
----------------------------
ITEM 1: LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . 18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>1
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
For The Three Months Ended March 31, 1998 and 1997
--------------------------------------------------
(Millions of Dollars)
(Unaudited)
1998 1997
--------- ---------
Operating Revenues . . . . . . . . . . $2,284 $2,563
------ ------
Operating Expenses:
Salaries, wages and employee
benefits. . . . . . . . . . . . . . 884 855
Equipment and other rents . . . . . . 356 314
Fuel and utilities (Note 3). . . . . 208 281
Depreciation and amortization . . . . 246 240
Materials and supplies. . . . . . . . 132 148
Purchased services. . . . . . . . . . 141 159
Other costs (Note 5). . . . . . . . . 264 213
------ ------
Total . . . . . . . . . . . . . . . 2,231 2,210
Operating Income . . . . . . . . . . . 53 353
Other Income - Net . . . . . . . . . . 18 36
Interest Expense (Note 3). . . . . . . (134) (122)
------ ------
Income (Loss) Before Income Taxes. . . (63) 267
Income Tax Expense (Benefit) . . . . . (31) 97
------ ------
Net Income (Loss) . . . . . . . . . $ (32) $ 170
====== ======
Retained Earnings:
Beginning of period . . . . . . . . . 4,110 3,939
Net income (loss) (Note 6). . . . . . (32) 170
Dividends to parent . . . . . . . . . (110) (109)
------ ------
End of Period. . . . . . . . . . $3,968 $4,000
====== ======
Ratio of Earnings to Fixed
Charges (Note 4). . . . . . . . . . .6 2.5
== ===
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
<PAGE>2
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
------------------------------------------------------
(Millions of Dollars)
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
------ ----------- ------------
Current Assets:
Cash and temporary investments . . . . . $ 48 $ 50
Accounts receivable - net (Note 3) . . . 390 456
Materials and supplies . . . . . . . . . 301 288
Other current assets . . . . . . . . . . 193 251
------- -------
Total Current Assets . . . . . . . . . 932 1,045
------- -------
Investments:
Investments in and advances to
affiliated companies . . . . . . . . . . 652 595
Other investments . . . . . . . . . . . . 29 29
------- -------
Total Investments . . . . . . . . . . . 681 624
------- -------
Properties, at cost:
Road and other . . . . . . . . . . . . . 23,867 23,610
Equipment . . . . . . . . . . . . . . . . 7,241 7,084
------- -------
Total Properties . . . . . . . . . . . 31,108 30,694
Less accumulated depreciation and
amortization . . . . . . . . . . . . . 5,365 5,208
------- -------
Properties - Net . . . . . . . . . . . 25,743 25,486
------- --------
Other Assets . . . . . . . . . . . . . . . 123 92
------- --------
Total Assets . . . . . . . . . . . . . $27,479 $27,247
======= =======
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
<PAGE>3
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
------------------------------------------------------
(Millions of Dollars)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
------------------------------------ --------- ------------
Current Liabilities:
Accounts payable . . . . . . . . . . . $ 448 $ 660
Accrued wages and vacation . . . . . . 377 382
Taxes payable . . . . . . . . . . . . . 263 263
Casualty and other reserves . . . . . . 365 364
Debt due within one year . . . . . . . 129 229
Other current liabilities (Note 2). . . 800 869
------- -------
Total Current Liabilities . . . . . . 2,382 2,767
------- -------
Debt Due After One Year . . . . . . . . 2,415 2,361
Deferred Income Taxes . . . . . . . . . 6,670 6,698
Retiree Benefit Obligations . . . . . . 759 749
Due to UPC Long-Term . . . . . . . . . . 4,824 3,993
Other Liabilities (Note 2 and 5) . . . . 1,650 1,758
Redeemable Preference Shares . . . . . . 29 29
Series A, $10,000 par value; 4,829 shares
Series B, $10,000 par value; 436 shares
Stockholder's Equity (Note 2):
Common stock - $10.00 par value; 9,200
shares authorized and 4,465 . . . . . - -
Class A stock - $10.00 par value; 800
shares authorized and 388 . . . . . . - -
Capital surplus . . . . . . . . . . . . 4,782 4,782
Retained earnings . . . . . . . . . . . 3,968 4,110
------- -------
Total Stockholder's Equity . . . . . 8,750 8,892
------- -------
Total Liabilities and Stockholder's
Equity . . . . . . . . . . . . . . $27,479 $27,247
======= =======
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
<PAGE>4
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
--------------------------------------------------
(Millions of Dollars)
(Unaudited)
1998 1997
Cash from Operations:
Net Income (Loss) (Note 5). . . . . . . . $ (32) $ 170
Non-Cash Charges to Income:
Depreciation and amortization . . . . . 246 240
Deferred income taxes . . . . . . . . . (27) 35
Other - net . . . . . . . . . . . . . . (54) (48)
Changes in current assets and
liabilities . . . . . . . . . . . . . . (272) (98)
----- -----
Cash Provided (Used) by
Operations. . . . . . . . . . . (139) 299
----- -----
Investing Activities:
Capital investments . . . . . . . . . . . (518) (402)
Other - net . . . . . . . . . . . . . . . (25) (30)
----- -----
Cash Used in Investing Activities . . . (543) (432)
----- -----
Equity and Financing Activities:
Debt repaid . . . . . . . . . . . . . . . (132) (89)
Financings . . . . . . . . . . . . . . . 91 80
Dividends paid to parent . . . . . . . . (110) (109)
Advances from affiliated
companies - net. . . . . . . . . . . . . 831 237
----- -----
Cash Provided by Equity and
Financing Activities . . . . . . . . 680 119
----- -----
Net Change in Cash and Temporary
Investments . . . . . . . . . . $ (2) $ (14)
===== =====
The accompanying accounting policies and notes to condensed financial
statements are an integral part of these statements.
<PAGE>5
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS: The condensed consolidated
inancial statements of Union Pacific Railroad Company (the Company or
the Railroad) are unaudited and reflect all adjustments (consisting
only of normal and recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position
and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. The results of operations for the three months
ended March 31, 1998 are not necessarily indicative of the results for
the year ending December 31, 1998. Certain 1997 amounts have been
reclassified to conform to the 1998 financial statement presentation.
2. ACQUISITION OF SOUTHERN PACIFIC RAIL CORPORATION (SOUTHERN PACIFIC OR
SP): Union Pacific Corporation (UPC or the Corporation) consummated
the acquisition of Southern Pacific in September 1996. The acquisition
of Southern Pacific has been accounted for using the purchase method.
On February 1, 1998, Union Pacific Railroad Company, a Utah Corporation
(UPRR-Utah), was merged with and into Southern Pacific Transportation
Company, a Delaware Corporation (SPT), the principal SP rail affiliate
(the SPT Merger), with SPT continuing as the surviving corporation and
changing its name to "Union Pacific Railroad Company" (UPRR),
immediately following the SPT Merger. Immediately prior to the SPT
Merger, SPT was a wholly-owned, indirect subsidiary of UPC, and
UPRR-Utah was a subsidiary of UPC, with all of the issued and
outstanding shares of voting stock of UPRR-Utah being owned, directly
or indirectly, by UPC. UPRR-Utah and SPT operated as a unified system
before and after the SPT Merger.
The SPT Merger has been accounted for in a manner similar to a
pooling-of-interest combination of entities under common control since
both entities involved in the merger were indirect wholly-owned
subsidiaries of UPC at the date of the SPT Merger and with the surviving
entity continuing as such.
In connection with the continuing integration of UPRR-Utah and Southern
Pacific's rail operations (collectively, the Railroad), the Company is
continuing to eliminate duplicate positions, (primarily positions other
than train crews), relocate positions, merge or dispose of redundant
facilities, dispose of certain rail lines and cancel uneconomical and
duplicative SP contracts. The Company has also repaid certain of
Southern Pacific's debt obligations. The Company recognized a $958
million liability in the Southern Pacific purchase price allocation for
<PAGE>6
costs associated with SP's portion of these activities.
Through March 31, 1998, approximately $323 million in merger-related
costs were paid by the Company and charged against these reserves,
principally composed of approximately $160 million and $70 million,
respectively, for severance and relocation payments made to
approximately 3,700 Southern Pacific employees and approximately $63
million for labor protection payments. The Company expects the
remaining merger payments will be made over the course of the next five
years as the rail operations of UPRR-Utah and the SP are integrated and
labor negotiations are completed and implemented.
In addition, the Company expects to incur approximately $206 million in
acquisition-related costs through 1999 for severing or relocating
UPRR-Utah employees, disposing of certain UPRR-Utah facilities, training
and equipment upgrading. These costs will be charged to expense as
incurred over the next two years. Results for the three months ended
March 31, 1998 include $18 million (after tax) in acquisition-related
operating costs.
3. FINANCIAL INSTRUMENTS:
Risk Management: The Company uses derivative financial instruments in
limited instances for other than trading purposes to manage risk as it
relates to fuel prices and interest rates. Where the Company has fixed
interest rates or fuel prices through the use of swaps, futures or
forward contracts, the Company has mitigated the downside risk of
adverse price and rate movements; however, it has also limited future
gains from favorable movements.
The Company 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
minimum credit standards for counterparties and monthly settlements.
The total credit risk associated with the Company's counterparties was
$36 million at March 31, 1998. The Company has not been required to
provide, nor has it received, any collateral relating to its hedging
activity.
The fair market value of the Company's derivative financial instrument
positions at March 31, 1998 were determined based upon current fair
market values as quoted by recognized dealers, or developed based on
the present value of expected future cash flows discounted at the
applicable zero coupon U.S. treasury rate and swap spread.
Fuel: Over the past three years, fuel costs approximated 10% of the
Company's total operating expenses. As a result of the significance of
the fuel costs and the historical volatility of fuel prices, the
Company periodically uses swaps, futures and forward contracts to
mitigate the impact of fuel price volatility. The intent of this
program is to protect the Company's operating margins and overall
<PAGE>7
profitability from adverse fuel price changes. At March 31, 1998, the
Company had hedged 49% of its estimated remaining 1998 fuel consumption
at $0.51 per gallon on a Gulf Coast basis and had outstanding swap
agreements covering its fuel purchases of $267 million, with gross and
net liability positions of $28 million. Fuel hedging increased the
Company's first quarter 1998 and 1997 fuel costs by $14.5 million and
$.1 million, respectively.
Interest Rates: The Company controls its overall risk relating to
fluctuations in interest rates by managing the proportion of fixed and
floating rate debt instruments within its debt portfolio over a given
period. Derivatives are used in limited circumstances as one of the
tools to obtain the targeted mix. The mix of fixed and floating rate
debt is largely managed through the issuance of targeted amounts of
such debt as debt maturities occur or as incremental borrowings are
required. The Company also obtains additional flexibility in managing
interest cost and the interest rate mix within its debt portfolio by
issuing callable fixed rate debt securities.
At March 31, 1998, the Company had outstanding interest rate swaps on
$109 million of notional principal amount of debt (4% of the total debt
portfolio, excluding obligations to the Corporation) with gross and net
liability positions of $8 million. These contracts mature over the next
one to eight years. Interest rate hedging activity increased interest
expense in both the first quarter of 1998 and 1997 by less than $1
million.
Sale of Receivables: The Company has sold, on a revolving basis, an
undivided percentage ownership interest in a designated pool of
accounts receivable. At December 31, 1997 and March 31, 1998, accounts
receivable are presented net of the $650 million of receivables sold.
4. RATIO OF EARNINGS TO FIXED CHARGES: The ratio of earnings to fixed
charges has been computed on a total enterprise basis. Earnings
represent income from continuing operations less equity in
undistributed earnings of unconsolidated affiliates, plus income taxes
and fixed charges. Fixed charges represent interest, amortization of
debt discount and expense, and the estimated interest portion of rental
charges. For the three months ended March 31, 1998, fixed charges
exceeded earnings by approximately $73 million.
5. COMMITMENTS AND CONTINGENCIES: There are various claims and lawsuits
pending against the Company. Certain customers have submitted claims
or stated their intention to submit claims to the Company for damages
related to shipments delayed in transit as a result of congestion
problems and certain customers have filed lawsuits seeking to recover
damages for 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
<PAGE>8
Railroad. The Company expects additional claims by shippers. The
Company will continue to evaluate the adequacy of its reserves for
claims and expects to add to such reserves as appropriate.
The Railroad is also party to certain regulatory proceedings before the
Surface Transportation Board of the U.S. Department of Transportation
(STB). One proceeding pertains to rail service problems in the western
United States. As an outgrowth of this proceeding, the STB has issued
an emergency service order imposing certain temporary measures on the
Railroad designed, among other things, to reduce congestion on the
Railroad's lines in the Houston, Texas area. A second proceeding,
initiated under the STB's continuing oversight jurisdiction with
respect to the Corporation's acquisition of Southern Pacific and
consolidation of Southern Pacific with UPRR-Utah (and separate from the
STB's regularly-scheduled annual proceeding to review the
implementation of the merger and the effectiveness of the conditions
that the STB imposed on it), is for the purpose of considering the
justification for and advisability of any proposals for new remedial
conditions to the merger as they pertain to service in the Houston,
Texas/Gulf Coast area, including, proposals by Kansas City Southern
Railway Company (KCS), Texas Mexican Railway Company (Tex Mex) and the
Greater Houston Partnership (GHP) for the forced transfer by the
Railroad to Tex Mex of certain lines and facilities in and around
Houston, the establishment of a "neutral" switching operation in the
greater Houston area and the permanent adoption of provisions in the
STB's emergency service order that expanded Tex Mex's right to handle
traffic to and from Houston. In addition, the STB has initiated
various inquiries and formal rule-making proceedings regarding certain
elements of rail regulation following two days of hearings by the STB
at the request of two members of Congress and in response to shippers'
expressions of concern regarding railroad service quality, railroad
rates and allegedly inadequate regulatory remedies. If the Railroad is
unsuccessful in eliminating the remaining congestion and service
problems affecting its system, the STB could issue a new emergency
service order with the expiration of the current one and order the
Railroad to take additional actions including, among other things,
further diversions of traffic or the transfer of certain rail lines or
other facilities to other railroads. In addition, there can be no
assurance that the proposals advanced by parties in the remedial
conditions proceeding or the proceedings initiated in response to the
rail regulation hearings will not be approved in some form. Should the
STB or Congress take aggressive action in the rail regulation
proceedings (e.g., by making purportedly competition-enhancing changes
in rate and route regulation and "access" provisions), the adverse
effect on the Railroad and other rail carriers could be material.
The Company is also subject to Federal, state and local environmental
laws and regulations, and is currently participating in the
investigation and remediation of numerous sites. Where the remediation
costs can be reasonably determined, and where such remediation is
probable, the Company has recorded a liability. In addition, the
Company periodically enters into financial and other commitments and
<PAGE>9
has retained certain contingent liabilities upon the disposition of
formerly-owned operations.
In addition, UPC and certain of its officers and directors are
currently defendants in two purported class action securities lawsuits,
and certain current and former directors of the Corporation are
currently defendants in a purported derivative action filed on behalf
of the Corporation. The class action suits allege, among other things,
that management failed to properly disclose the Railroad's service and
safety problems and thereby issued materially false and misleading
statements concerning the merger with SP and the safe, efficient
operation of its rail network. The derivative action alleges, among
other things, that the named current and former directors breached
their fiduciary duties to the Corporation by approving the mergers of
SP and Chicago and Northwestern Transportation Company into the
Corporation without ensuring that the Corporation or the Railroad had
adequate systems in place to effectively integrate those acquisitions
into the operations of the Corporation and the Railroad. Because both
the size of the class and the damages are uncertain, UPC and the
Railroad are unable at this time to determine the potential liability,
if any, which might arise from these lawsuits. Management believes
that these claims are without merit and intends to defend them
vigorously.
It is not possible at this time for the Company to fully determine the
effect of all unasserted claims on its consolidated financial
condition, results of operations or liquidity; however, to the extent
possible, where unasserted claims can be estimated and where such
claims are considered probable, the Company has recorded a liability.
The Company does not expect that any known lawsuits, claims,
environmental costs, commitments or guarantees will have a material
adverse effect on its consolidated financial condition.
6. ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 130, "Reporting
Comprehensive Income" (FAS 130), that is effective for all periods in
1998, including interim periods. The Company has adopted the
provisions of FAS 130 effective January 1, 1998. The components of
comprehensive income include, among other things, changes in the market
value of futures contracts which qualify for hedge accounting and a net
loss recognized as an additional pension liability but not yet
recognized as net periodic pension cost. There is no impact from
adopting FAS 130 for the three months ended March 31, 1998.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," that is
effective in 1998. The Company currently complies with most provisions
of this Statement, and any incremental disclosure required by that
Statement is expected to be minimal.
<PAGE>10
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," that is
effective in 1998 (FAS 132). FAS 132 revises and standardizes
disclosures required by FAS 87, 88, and 106. Restatement of the
retirement plans footnote will be required for all earlier periods
presented in comparative financial statements at December 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to March 31, 1997
------------------------------------------------------------
Mergers
-------
On February 1, 1998, Union Pacific Railroad Company, a Utah Corporation
(UPRR-Utah), was merged with and into Southern Pacific Transportation
Company, a Delaware Corporation (SPT), the principal SP rail affiliate
(the SPT Merger), with SPT continuing as the surviving corporation and
changing its name to "Union Pacific Railroad Company" (UPRR), immediately
following the SPT Merger. Immediately prior to the SPT Merger, SPT was a
wholly-owned, indirect subsidiary of UPC, and UPRR-Utah was a subsidiary
of UPC, with all of the issued and outstanding shares of voting stock of
UPRR-Utah being owned, directly or indirectly, by UPC. UPRR-Utah and SPT
operated as a unified system before and after the SPT Merger.
The SPT Merger has been accounted for in a manner similar to a
pooling-of-interest combination of entities under common control since
both entities involved in the merger were indirect wholly-owned
subsidiaries of UPC at the date of the SPT Merger and with the surviving
entity continuing as such.
Congestion and Service Issues
-----------------------------
As previously reported in the Company's 1997 Annual Report on Form 10-K,
congestion in and around Houston and the coastal areas of Texas and
Louisiana (the Gulf Coast region) began to have a material adverse effect
on the Company's operations and earnings in the third quarter of 1997.
System congestion started in the Gulf Coast region and spread throughout
the system as the Railroad shifted resources to help mitigate the problem
in the Gulf Coast region. The congestion was brought on by, among other
things, crew shortages and restricted track access caused by necessary
track maintenance on former Southern Pacific lines, increased demand,
washouts due to severe weather, derailments and congestion at Texas/Mexico
gateways. Traffic slowed further as rail yards in the Gulf Coast region
<PAGE>11
filled, slowing access into and out of the yards and forcing trains to be
held on sidings. Slower average train velocity led to a greater need for
locomotives in the region. As traffic in the region backed up and the
Railroad redeployed locomotives to the Gulf Coast region to help alleviate
local congestion, congestion problems spread to other parts of the
Railroad's system during the third and fourth quarters of 1997.
To restore service to acceptable levels, the Railroad implemented a
Service Recovery Plan (the Plan) in October, 1997. The Plan focuses on
reducing the number of cars on the system and restoring system velocity,
which, in turn, results in more reliable service to customers.
Implementation of the Plan has resulted in improvement in the overall
operation of the Railroad and is addressing congestion problems in the
Gulf Coast region and the surrounding southeast portion of the Railroad's
system (although intermittent periods of congestion continue to arise in
other regions, primarily in the Midwest). In late March and early April
1998, congestion in the Gulf Coast region was aggravated by several severe
storms and congestion caused by operational problems on Mexican railroad
lines south of Laredo, Texas. However, operational initiatives
subsequently implemented by the Railroad, including the Railroad's embargo
of most southbound traffic destined for the Laredo gateway, have
substantially reduced congestion on the Railroad's lines in the Gulf Coast
region.
In connection with its integration with Southern Pacific, the Company has
implemented (i) TCS in the southeast portion of UPRR's system, which
includes the Gulf Coast region, where the cut over to TCS occurred on
December 1, 1997, (ii) directional running from Dexter Junction, Missouri,
on the north, across Arkansas, western Louisiana and eastern Texas to the
Houston and San Antonio areas on the south, beginning on February 1, 1998
and (iii) the hub-and-spoke labor agreements in Texas and Arkansas.
Although the Company believes that the full implementation of these
changes is essential to achieving significant long-term benefits, their
implementation also contributed to the persistence of congestion in the
affected Gulf Coast region during late 1997 and early 1998.
On March 28, 1998, the Railroad embargoed most southbound traffic destined
for the Laredo, Texas gateway to address worsening congestion at that
gateway and clear the backlog of cars waiting to cross into Mexico. The
embargo applied to grain, chemicals, industrial products and coal, but not
finished automobiles, auto parts or intermodal traffic or any northbound
traffic through Laredo. The Railroad rerouted some of the embargoed
traffic through other Railroad gateways to Mexico, none of which were
subject to the embargo. The Railroad believed that this embargo was
necessary because congestion problems principally within Mexico and
agricultural inspection delays at the border that affected the Laredo
gateway had worsened during the weeks preceding the imposition of the
embargo and were affecting other areas within the southeast region of its
system, resulting in a substantial backlog of cars waiting to move south
to Laredo. Imposition of the embargo quickly resulted in a significant
reduction in the backlog of cars. Accordingly, on April 14, 1998, the
<PAGE>12
Railroad amended the embargo to introduce permitting to control traffic
volumes. The permitting system allowed customers to move traffic that had
been embargoed while allowing the Railroad to meter southbound traffic to
prevent any surge of business that could again block the Laredo crossing.
On April 16, 1998, the Railroad further amended the embargo to eliminate
permit requirements for domestic shipments terminating at Laredo, and on
April 22, 1998, the Railroad canceled the embargo.
Financial Impact of Congestion - The Railroad has estimated that the cost
of the congestion-related problems for the three months ended March 31,
1998 was approximately $260 million, after tax, which reflected the
combined effects of lost business, higher costs associated with system
congestion, costs associated with implementation of the Plan, alternate
transportation and customer claims. Although progress has been made in
improving service, the Railroad expects these problems to continue to have
an adverse impact on 1998 results. In addition, as a result of recent
operating losses incurred by the Railroad and in order to fund its capital
programs, the Corporation has incurred substantial incremental debt since
December 31, 1997, and obtained additional financing on April 1, 1998 from
a private placement of $1.5 billion of 6-1/4% preferred securities of
Union Pacific Capital Trust, a statutory business trust sponsored by the
Corporation, which securities are convertible into common stock of the
Corporation at an initial conversion price of $68.90. The timing of the
Corporation's return to profitability will be determined by how rapidly it
is able to eliminate congestion, and return to normal operations
throughout its system.
Results of Operations
----------------------
The Company reported a loss of $32 million in the first quarter of 1998,
compared to $170 million of reported net income in 1997. This decline in
earnings is the result of the continuing effects of congestion on the
Company's operations, which was estimated to cost the Company
approximately $260 million after-tax in the first quarter of 1998. Both
periods included the impact of one-time SP merger-related costs for
severance, relocation and training of employees ($18 million reduction in
net income in 1998 and $9 million reduction in net income in 1997).
The operating ratio for the first quarter of 1998 was 97.7, which included
approximately 15 points estimated to be attributable to congestion costs
(both lost business and incremental operating costs). This compares to an
operating ratio of 86.2 for the same period in 1997. Operating revenues
fell $279 million (11%) to $2.28 billion in 1998. This decrease reflects
continuing congestion, the impact of the Asian crisis on export grain and
intermodal markets and weak grain demand as farmers delay shipments due to
the current grain price environment. Average commodity revenue per car
(ARC) fell 1% to $1,149 per car, while total carloadings fell 9%
(approximately 189,000 cars). Commodity revenue in 1998 fell 10% over the
same period in 1997 as shown in the table below:
<PAGE>13
Commodity Revenue
Three Months Ended 3/31/98
----------------------------
Versus 1997
Commodity -----------------
(Revenue in 000's) Cars ARC Revenue Change %
------------------ ------- ------ --------- ---------- ----
Automotive 159,400 $1,446 $ 230,464 $ (6,973) (3)
Agricultural 203,177 1,554 315,786 (87,410) (22)
Intermodal 590,115 606 357,506 (56,924) (14)
Chemicals 222,798 1,749 389,773 (43,719) (10)
Energy 442,094 1,124 496,988 (15,207) (3)
Industrial 320,602 1,359 435,709 (40,502) (9)
--------- ------ ---------- ---------- ----
Total Commodity 1,938,186 $1,149 $2,226,226 $(250,735) (10)
========= ====== ========== ========== ====
Automotive: Commodity revenue fell $7 million or 3% to $230 million,
despite a 1% increase in carloadings, reflecting new business
opportunities and steady economic conditions in the Automotive industry.
Strong demand and the new Ford business led the 3% increase in finished
autos carloadings, while parts volumes fell 2% resulting from congestion-
related diversions of traffic and inventory control by major
manufacturers. Average commodity revenue per car declined 4%, resulting
from generally shorter-haul Ford business and less long-haul Mexico
business.
Agricultural Products: Commodity revenue fell 22% to $316 million.
Carloadings declined 18% to 203,000 cars, primarily the result of a 25%
decrease in corn volumes due to soft export demand (strong foreign
production and the effect on exchange rates due to the Asian crisis), as
well as, continued congestion. Most agricultural products suffered from
congestion problems and related equipment shortages; meals and oils were
the only bright spot, as U.S. producers benefitted from strong export
markets, primarily to Mexico. Average commodity revenue per car declined
5%, largely the result of weak exports, which significantly reduced the
average length of haul.
Intermodal: Commodity revenue declined 14% to $358 million, while
carloadings fell 12% to 590,000 loads--the result of continued congestion
and related diversions of traffic, as well as equipment imbalances caused
by strong imports and weak exports. Average commodity revenue per car
fell 1%, as unfavorable mix was largely offset by new longer-haul
business.
Chemicals: Carloadings declined 6% to 223,000 cars and commodity revenue
decreased $44 million (10%) to $390 million. The decline in volume
resulted principally from system congestion (partially the result of
congestion of traffic crossing at the Mexican border), which more than
<PAGE>14
offset strong market demand. Average commodity revenue per car declined
4% due to generally shorter hauls (storage-in-transit moves for plastic
and strong growth in short-haul potash moves) and unfavorable product mix.
Energy (Primarily Coal): Commodity revenue fell 3% to $497 million in
1998, driven by a 3% decrease in carloadings. Continued congestion
problems, diversions of business to competing roads and a late February
blizzard led the decline, despite strong demand. Average commodity
revenue per car was flat quarter over quarter. Powder River Basin (PRB)
train cycles fell slightly from first quarter 1997, 24.8 in 1998 vs. 25.1
in 1997; however, longer trains (117.6 cars/train in 1998 vs. 114.1 in
1997) boosted loads by approximately 3,200 units helping to improve PRB
business versus 1997. All other mine locations posted declines, largely
due to congestion and related train cycle time issues.
Industrial Products: Carloadings decreased 10%, while commodity revenue
declined 9% to $436 million. Volume declines resulted primarily from
continued congestion (in the Southern tier and the Pacific Northwest), as
well as, the Company's sale of its Duck Creek North line in 1997. Average
commodity revenue per car improved 1%, the result of the absence of
shorter-haul Duck Creek North business and favorable mix changes.
Operating expenses were $2,231 million, $21 million (1%) higher than the
first quarter 1997 operating costs of $2,210 million. Higher operating
costs reflected approximately $77 million of congestion-related costs
($148 million of congestion-related costs offset by $71 million of volume
savings from lower business levels). The impact of congestion was
partially offset by lower fuel costs, merger benefits and volume-related
cost savings, as carloads were off 9% and gross-ton miles were down 10%.
Labor expense was $29 million (3%) higher than 1997, as net congestion-
related costs and wage inflation were partially offset by merger
consolidation benefits. Quarter-over-quarter, the work force levels were
virtually flat, as merger-related staff reductions and attrition were
offset by new hiring for train and engine crews.
Depreciation expense grew $6 million or 3% to $246 million due to the
Company's extensive capital program in 1997 and 1998. The Company spent
over $2 billion on capital projects in 1997 and anticipates spending $2.2
billion in 1998 of which $400 million will be merger-related.
Materials and Supplies expenditures were down $16 million (11%) from first
quarter 1997. More rebuild projects (which are capitalized) and less
maintenance projects in 1998 plus the absence of large program maintenance
projects on freight cars in 1998 accounted for the quarter-over-quarter
decline.
Fuel and Utilities expenses were down $73 million or 26% from 1997,
reflecting lower fuel prices and congestion-related volume declines. A
reduction in gross-ton miles quarter-over-quarter (down 10%) generated
volume-related fuel savings of $24 million versus 1997. Prices were down
11.7 cents per gallon to 63.6 cents, saving $33 million. The fuel
<PAGE>15
consumption rate of 1.416 gallons per thousand gross-ton miles improved 3%
from last year's 1.457 (largely slower locomotive speeds), lowering the
Company's fuel costs by another $7 million.
Rent Expense was up 13% ($42 million) versus 1997, as system congestion
(which hindered car cycle times) combined with unfavorable rates (strong
market demand for equipment) to drive up equipment rent costs.
Other Costs (including purchased services) increased $33 million(9%) from
1997, reflecting higher costs for customer claims and service recovery
initiatives (focused on combating system congestion). Congestion -related
cost increases were partially offset by merger consolidation benefits
(trackage rights reimbursements and contract pricing savings) and cost
savings from company-wide cost control efforts.
Operating income declined $300 million to $53 million in 1998, reflecting
the effect of continued congestion and inflation. Interest expense
increased $12 million to $134 million, principally resulting from higher
debt levels. Other income, net declined $18 million due to the absence of
the Duck Creek North branch line sale in 1997. Income taxes decreased
$128 million to a benefit of $31 million, primarily reflecting lower
income before income taxes.
Other Matters
--------------
Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130), that is effective for all periods in 1998, including
interim periods. The Company has adopted the provisions of FAS 130
effective January 1, 1998. The components of comprehensive income
include, among other things, changes in the market value of futures
contracts which qualify for hedge accounting and a net loss recognized as
an additional pension liability but not yet recognized as net periodic
pension cost. There is no impact from adopting FAS 130 for the three
months ended March 31, 1998.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," that is effective in
1998. The Company currently complies with most provisions of this
Statement, and any incremental disclosure required by that Statement is
expected to be minimal.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," that is
effective in 1998 (FAS 132). FAS 132 revises and standardizes disclosures
required by FAS 87, 88, and 106. Restatement of the retirement plans
footnote will be required for all earlier periods presented in comparative
financial statements at December 31, 1998.
Commitments and Contingencies - There are various claims and lawsuits
pending against the Company. Certain customers have submitted claims or
<PAGE>16
stated their intention to submit claims to the Company for damages related
to shipments delayed in transit as a result of congestion problems and
certain customers have filed lawsuits seeking to recover damages for 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 Company expects
additional claims by shippers. The Company will continue to evaluate the
adequacy of its reserves for claims and expects to add to such reserves as
appropriate.
The Railroad is also party to certain regulatory proceedings before the
Surface Transportation Board of the U.S. Department of Transportation
(STB). One proceeding pertains to rail service problems in the western
United States. As an outgrowth of this proceeding, the STB has issued an
emergency service order imposing certain temporary measures on the
Railroad designed, among other things, to reduce congestion on the
Railroad's lines in the Houston, Texas area. A second proceeding,
initiated under the STB's continuing oversight jurisdiction with respect
to the Corporation's acquisition of Southern Pacific and consolidation of
Southern Pacific with UPRR-Utah (and separate from the STB's regularly-
scheduled annual proceeding to review the implementation of the merger and
the effectiveness of the conditions that the STB imposed on it), is for
the purpose of considering the justification for and advisability of any
proposals for new remedial conditions to the merger as they pertain to
service in the Houston, Texas/Gulf Coast area, including, proposals by
Kansas City Southern Railway Company (KCS), Texas Mexican Railway Company
(Tex Mex) and the Greater Houston Partnership (GHP) for the forced
transfer by the Railroad to Tex Mex of certain lines and facilities in and
around Houston, the establishment of a "neutral" switching operation in
the greater Houston area and the permanent adoption of provisions in the
STB's emergency service order that expanded Tex Mex's right to handle
traffic to and from Houston. In addition, the STB has initiated various
inquiries and formal rule-making proceedings regarding certain elements of
rail regulation following two days of hearings by the STB at the request
of two members of Congress and in response to shippers' expressions of
concern regarding railroad service quality, railroad rates and allegedly
inadequate regulatory remedies. If the Railroad is unsuccessful in
eliminating the remaining congestion and service problems affecting its
system, the STB could issue a new emergency service order with the
expiration of the current one and order the Railroad to take additional
actions including, among other things, further diversions of traffic or
the transfer of certain rail lines or other facilities to other railroads.
In addition, there can be no assurance that the proposals advanced by
parties in the remedial conditions proceeding or the proceedings initiated
in response to the rail regulation hearings will not be approved in some
form. Should the STB or Congress take aggressive action in the rail
regulation proceedings (e.g., by making purportedly competition-enhancing
changes in rate and route regulation and "access" provisions), the adverse
effect on the Railroad and other rail carriers could be material.
<PAGE>17
The Company is also subject to Federal, state and local environmental laws
and regulations, and is currently participating in the investigation and
remediation of numerous sites. Where the remediation costs can be
reasonably determined, and where such remediation is probable, the Company
has recorded a liability. In addition, the Company periodically enters
into financial and other commitments and has retained certain contingent
liabilities upon the disposition of formerly-owned operations.
In addition, UPC and certain of its officers and directors are currently
defendants in two purported class action securities lawsuits, and certain
current and former directors of the Corporation are currently defendants
in a purported derivative action filed on behalf of the Corporation. The
class action suits allege, among other things, that management failed to
properly disclose the Railroad's service and safety problems and thereby
issued materially false and misleading statements concerning the merger
with SP and the safe, efficient operation of its rail network. The
derivative action alleges, among other things, that the named current and
former directors breached their fiduciary duties to the Corporation by
approving the mergers of SP and Chicago and Northwestern Transportation
Company into the Corporation without ensuring that the Corporation or the
Railroad had adequate systems in place to effectively integrate those
acquisitions into the operations of the Corporation and the Railroad.
Because both the size of the class and the damages are uncertain, UPC and
the Railroad are unable at this time to determine the potential liability,
if any, which might arise from these lawsuits. Management believes that
these claims are without merit and intends to defend them vigorously.
It is not possible at this time for the Company to fully determine the
effect of all unasserted claims on its consolidated financial condition,
results of operations or liquidity; however, to the extent possible, where
unasserted claims can be estimated and where such claims are considered
probable, the Company has recorded a liability. The Company does not
expect that any known lawsuits, claims, environmental costs, commitments
or guarantees will have a material adverse effect on its consolidated
financial condition.
Cautionary Information
----------------------
Certain information included in this report contains, and other materials
filed or to be filed by the Company 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 Company) contain or will
contain, forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking information may
include, without limitation, statements that the Company does not expect
that lawsuits, environmental costs, commitments, contingent liabilities,
labor negotiations, claims 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 Company's
<PAGE>18
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 Company is fully successful in overcoming its congestion-
related problems and implementing the Plan and other operational and
financial initiatives, industry competition and regulatory developments,
natural events such as floods and earthquakes, the effects of adverse
general economic conditions, fuel prices, labor strikes, the impact of
year 2000 systems problems and the ultimate outcome of shipper claims
related to congestion, environmental investigations or proceedings and
other types of claims and litigation.
PART II. OTHER INFORMATION
---------------------------
Item 1. LEGAL PROCEEDINGS
SOUTHERN PACIFIC ACQUISITION: As previously reported in the Company's
1997 Annual Report on Form 10-K, various appeals have been filed with
respect to the STB's August 12, 1996 decision (the Decision) approving the
acquisition of control of Southern Pacific by UPC. All of the appeals
have been consolidated in the U.S. Court of Appeals for the District of
Columbia Circuit. Oral argument in the case is scheduled for September 11,
1998. Various appellants have withdrawn their appeals, leaving only
Burlington Northern and Santa Fe Railway Company (BNSF), the Western Coal
Traffic League (WCTL), Enterprise Products Company and the City of Reno,
Nevada with appeals pending. On April 10, 1998 WCTL filed a motion to
vacate and remand the Decision in light of a proceeding the STB commenced
on March 31, 1998, under its continuing oversight jurisdiction over the
merger, to consider whether any additional conditions are justified and
should be imposed to deal with service problems in the Houston/Gulf Coast
area. The STB, the Corporation, the Company and BNSF have opposed this
motion. The Corporation and the Company believe that it is unlikely that
the disposition of the remaining appeals will have a material adverse
impact on its consolidated financial condition or its results of
operations.
RAIL SERVICE PROCEEDINGS AND RELATED MATTERS: As previously reported in
the Company's 1997 Annual Report on Form 10-K, UPRR is currently subject
to an emergency service order issued by the STB on October 31, 1997, as an
outgrowth of a proceeding initiated by the STB on October 2, 1997 to
investigate rail service problems in the western United States. The
original service order, which, among other things, imposed several
temporary measures designed to reduce congestion on UPRR's lines in the
Houston area, was modified and extended by a supplemental order dated
December 4, 1997. On February 25, 1998, the STB, citing the gravity of
UPRR's congestion problems and characterizing them as "not yet close to
being resolved," further modified the emergency service order and extended
it until August 2, 1998, the maximum period allowable under the law for
the original order.
<PAGE>19
On March 31, 1998, the STB initiated a proceeding under its continuing
oversight jurisdiction with respect to the merger of the Corporation and
Southern Pacific to consider proposals for new remedial conditions to the
merger as they pertain to service in the Houston, Texas/Gulf Coast area.
This proceeding, which is separate from the STB's regularly scheduled
annual proceeding to review the implementation of the merger and the
effectiveness of the conditions that the STB imposed on it, was initiated
in response to submissions by Texas Mexican Railway Company (Tex Mex) and
Kansas City Southern Railway Company (KCS) and by the Greater Houston
Partnership ("GHP"), proposing that the Railroad be directed to transfer
certain lines and facilities in the Gulf Coast region to other rail
carriers, that a "neutral" switching operation be established in the
greater Houston area and that provisions in the STB's emergency service
order that expanded Tex Mex's right to handle traffic to and from Houston
be adopted permanently. The STB's decision announcing the proceeding
established a procedural schedule for the submission of evidence, replies
and rebuttal.
If continued implementation of the Plan and other operational and
financial initiatives undertaken by the Company ultimately proves
unsuccessful in alleviating the remaining congestion and related service
problems experienced by the Railroad, the STB could issue a new emergency
service order upon the expiration of the current one and order the
Railroad to take additional actions including, among other things, further
diversions of traffic or the transfer of certain of the Railroad's rail
lines or other facilities to other railroads. In addition, there can be no
assurance that the proposals advanced by Tex Mex, KCS, GHP or other
parties in the remedial conditions proceeding will not be approved in some
form.
RAIL ACCESS AND COMPETITION: Acting pursuant to requests from two members
of Congress and responding to shippers' concerns about railroad service
quality, railroad rates and allegedly inadequate regulatory remedies, the
STB on April 17, 1998, following two days of hearings, issued a decision
opening inquiries into certain elements of rail regulation. The STB noted
that no parties to the hearings had shown how aggressive remedies designed
to produce lower rates and enhance competition would permit the industry
to cover system costs and support reinvestment. Nevertheless, it (i)
directed a panel of disinterested economic experts to recommend
appropriate standards to measure railroad revenue adequacy, which is used
to determine whether rates are lawful (this portion of the decision was
subsequently modified to permit, as an alternative, discussions of this
issue between railroad and shipper representatives); (ii) initiated a
rule-making proceeding to consider revisions to "competitive access"
regulations in order to address quality of service issues; (iii) ordered
interested parties to identify modifications to regulations governing
access on non-service-related grounds; (iv) began a proceeding to consider
eliminating product and geographic competition as factors to be considered
in deciding whether a railroad has market dominance over rail traffic; (v)
ordered large and small railroads to negotiate arrangements that would
increase the role of short-line rail carriers; and (vi) directed the
railroads to establish "formalized dialogue" immediately with large and
<PAGE>20
small shippers and rail labor. Should the STB or Congress take aggressive
action, (e.g., by making purportedly competition-enhancing changes in rate
and route regulation and "access" provisions), the adverse effect on the
Railroad and other railroads could be material.
ENVIRONMENTAL MATTERS: The Railroad has been named as a defendant in a
civil action brought by the California Department of Fish and Game, Office
of Spill Prevention and Response on April 10, 1998. The complaint alleges
violations of California Fish and Game Code Section 5650, California
Business and Professions Code Section 17200, Civil Code Sections 3479 and
3480, and damage to the waters of California for which the Department of
Fish and Game allege trusteeship. The complaint results from derailments
and alleged releases of diesel fuel oil during 1995 in the Feather River
Canyon in Butte County, California. The Complaint seeks penalties,
exemplary damages, natural resource damages and unspecified injunctive
relief.
The Railroad has been named as a defendant in a criminal misdemeanor
action brought by the State of California in the Municipal Court of Placer
County, California on February 24, 1998. The complaint alleges a
violation of California Fish and Game Code Section 5650 as a result of a
diesel fuel spill in Norden, California in February 1997. In addition,
the California Department of Fish and Game is seeking penalties,
monitoring costs and natural resource damages under state water statutes,
and the U.S. Environmental Protection Agency (EPA) is seeking penalties
for violation of the Clean Water Act in connection with the same incident.
The Railroad and Clean Harbors, a waste disposal firm, are the subject of
a criminal investigation by the EPA and the Federal Bureau of
Investigation (FBI). Tank cars containing hazardous waste billed to Clean
Harbors' transload facility in Sterling, Colorado were held in the
Railroad's Sterling, Colorado rail yard for periods longer than ten days
prior to placement in Clean Harbor's facility, allegedly in violation of
hazardous waste regulations. A finding of violation could result in
significant criminal or civil penalties.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
3 - By-Laws of Union Pacific Railroad Company, as amended
effective as of April 30, 1998.
12 - Ratio of Earnings to Fixed Charges
27 - Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
On January 23, 1998, the Company filed a Current Report on
<PAGE>21
Form 8-K discussing fourth quarter and full year 1997
earnings of the Corporation.
On February 26, 1998, the Company filed a Current Report on
Form 8-K describing first quarter 1998 results and current
actions taken by UPC's Board of Directors.
On March 25, 1998, the Company filed a Current Report on
Form 8-K announcing that the Company will embargo most
southbound traffic destined for the Laredo, Texas gateway.
<SIGNITURES>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 14th day of May, 1998.
UNION PACIFIC RAILROAD COMPANY
By /s/John J. Koraleski
--------------------
John J. Koraleski
Executive Vice President-Finance
By /s/ Joseph E. O'Connor, Jr.
---------------------------
Joseph E. O'Connor, Jr.
Chief Accounting Officer
<EXHIBIT INDEX> INDEX
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
EXHIBIT INDEX
Exhibit No. Description
----------- -----------------------------------------
3 By-Laws of Union Pacific Railroad Company, as
amended effective April 30, 1998
12 Computation of Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
BY-LAWS
OF
UNION PACIFIC RAILROAD COMPANY
As Amended Effective as of April 30, 1998
BY-LAWS
OF
UNION PACIFIC RAILROAD COMPANY
(As Amended Effective as of April 30, 1998)
________
ARTICLE I
STOCKHOLDERS MEETINGS
SECTION 1. Meetings, annual or special, of the stockholders of
this Company may be held at such place or places as shall be ordered by
the Board of Directors or the Executive Committee.
SECTION 2. Annual meetings of the stockholders, for the purpose of
electing directors and transacting any other business, shall be held at
such time as shall be ordered by the Board of Directors or the Executive
Committee, but, unless otherwise ordered, shall be held at 11:00 a.m. on
the third Friday of April in each year.
SECTION 3. A special meeting of the stockholders may be called by
the Board of Directors, the Executive Committee or by any other person who,
at such time, is authorized by the General Corporation Law of the State of
Delaware (the "GCL") to call a special meeting of stockholders. The
objects of a special meeting shall be stated in the order therefor, and
the business transacted shall be confined to such objects.
SECTION 4. Notice of all meetings of the stockholders shall be given,
either personally or by mail, not less than ten nor more than sixty days
prior thereto. If given by mail, the notice shall be sent by United
States mail, postage prepaid, directed to each stockholder at his address
as it appears on the records of the Company. The notice of all special
meetings shall state the objects thereof. The failure to give notice of
an annual meeting, or any irregularity in the notice, shall not affect the
validity of such annual meeting or of any proceedings thereat. Any
stockholder may consent in writing to the holding of a special meeting
without notice.
SECTION 5. The Board of Directors or the Executive Committee may fix
in advance a day and hour, which shall not precede the date upon which the
resolution fixing such day and hour is adopted by the Board of Directors
or the Executive Committee and which shall be not more than sixty nor less
than ten days preceding any annual or special meeting of stockholders or,
in the case of action of stockholders without a meeting, more than ten
days after the date upon which the resolution fixing such day and hour is
adopted by the Board of Directors or the Executive Committee, as the time
for the determination of stockholders entitled to vote at such meeting or
to take such action. Stockholders of record at the time so fixed by the
Board of Directors or the Executive Committee and only such stockholders
shall be entitled to vote at such meeting. Each share of stock shall
entitle such record holder thereof to one vote, in person or by proxy in
writing.
SECTION 6. The Chairman of the Board, and in his absence the Chairman
of the Executive Committee, and in their absence the President or one of
the Vice Presidents, shall call meetings of the stockholders to order and
act as chairman of such meetings. In the absence of all of these
officers, the Board of Directors may appoint a chairman of the meeting to
act in such event; but if the Board shall not make such appointment, then,
in the absence of all of these officers, any stockholder or proxy of any
stockholder may call the meeting to order, and a chairman shall be
elected.
SECTION 7. The Secretary of the Company shall act as secretary at all
meetings of the stockholders; but the Board of Directors or the Executive
Committee may designate an Assistant Secretary for that purpose before the
meeting, and if no such designation shall have been made, then the
presiding officer at the meeting may appoint any person to act as
secretary of the meeting.
SECTION 8. Stockholders may take action on a matter at a meeting only
if a quorum exists with respect to that matter. Unless the certificate of
incorporation or the GCL provide otherwise, a majority of the shares
entitled to vote on the matter, represented in person or by proxy,
constitutes a quorum for action on that matter. If a quorum exists,
action on a matter, other than the election of directors, by stockholders
is approved if the votes cast favoring the action exceed the votes cast
opposing the action, unless the certificate of incorporation or the GCL
require a greater number of affirmative votes. Directors are elected by
a plurality of the votes cast by the shares entitled to vote in the
election, represented in person or by proxy, at a meeting at which a
quorum is present.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the Company shall be managed
under the direction of, the Board of Directors, which shall consist of
fourteen members. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by
a vote of the Board and, if the directors remaining in office consist of
fewer than a quorum of the Board, a majority of directors then in office,
though less than a quorum, may fill the vacancy. A director elected to
fill a vacancy shall be elected for the unexpired term of his predecessor
in office. Any director appointed by the Board of Directors to fill a
directorship caused by an increase in the number of directors shall serve
until the next annual meeting or a special meeting of the stockholders
called for the purpose of electing directors.
SECTION 2. Regular meetings of the Board of Directors shall be held
at such times as the Board shall from time to time designate, and no further
notice of such regular meetings shall be required. Special meetings shall
be held whenever called by order of the Chairman of the Board, the
Chairman of the Executive Committee, or the Executive Committee or any
five members of the Board. Notice of special meetings shall be given, at
least one day prior thereto, by personal service of written notice upon
the directors or by delivering the same at, or transmitting the same by
first class mail, facsimile transmission, telephone or other electronic
means to, their respective residences or offices. Any director may
consent in writing to the holding of a special meeting without notice, and
the attendance or participation of any director at a special meeting shall
constitute a waiver by him of call and notice thereof and a consent to the
holding of said meeting and the transaction of any corporate business
thereat, unless the director at the beginning of the meeting, or promptly
upon the director's arrival, objects to holding the meeting or transacting
business thereat because of lack of notice or defective notice, and does
not thereafter vote for or assent to the action taken at the meeting.
Meetings of the Board of Directors may be held at such place or places as
shall be ordered by the Executive Committee or by a majority of the
directors in office, but, unless otherwise ordered, all meetings of the
Board of Directors shall be held at the principal executive offices of the
Company in Dallas, Texas.
SECTION 3. A majority of the number of directors prescribed by
Article II, Section 1 shall constitute a quorum at all meetings of the
Board. If a quorum be not present at any meeting, a majority of the
directors present may adjourn the meeting until a later day or hour.
ARTICLE III
EXECUTIVE COMMITTEE
SECTION 1. There shall be an Executive Committee consisting of such
number of directors as shall be elected thereto by the vote of the
majority of the directors then in office, whose terms of office shall
continue during the pleasure of the Board. Except to the extent otherwise
provided in the GCL, the Executive Committee shall, when the Board of
Directors is not in session, have all the powers of the Board of Directors
to manage and direct all the business and affairs of the Company in all
cases in which specific directions shall not have been given by the Board
of Directors.
SECTION 2. Meetings of the Executive Committee may be called at any
time by the Chairman of the Board, the Chairman of the Executive
Committee, or a majority of the members of the Executive Committee, to
convene at such time and place as may be designated. The rules regarding
notice of meetings of the Board set forth in Section 2 of Article II of
these By-Laws shall apply to meetings of the Executive Committee.
SECTION 3. A majority of the members of the Executive Committee shall
constitute a quorum. If a quorum be not present at any meeting, the
member or members of the Committee present may adjourn the meeting until
a later day or hour.
ARTICLE IV
OFFICERS AND AGENTS
SECTION 1. The Board of Directors may elect such of the following
officers as it deems necessary or desirable: a Chairman of the Board, a
Chairman of the Executive Committee, a Chief Executive Officer, a
President, a Chief Operating Officer, a Chief Financial Officer, a Chief
Accounting Officer, an Executive Vice President-Finance and
Administration, an Executive Vice President-Marketing and Sales, an
Executive Vice President-Operation, a Vice President and General Counsel,
a Vice President-Taxes, a Controller, a Secretary, a Treasurer and such
other Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents as the Board shall determine, and there may also be appointed
by the Board of Directors or Executive Committee such Assistant
Secretaries, Assistant Treasurers, General Tax Counsels and other officers
and agents as the Board of Directors or Executive Committee shall from
time to time determine.
SECTION 2. The Chairman of the Board shall perform such duties and
possess such powers as may be prescribed or conferred by the Board of
Directors or the Chairman of the Executive Committee.
SECTION 3. The Chairman of the Executive Committee shall preside at
meetings of the Executive Committee and Board of Directors, and shall have
general supervision of all business of the Company and of the interest of
the Company in all companies controlled by it and shall perform such other
duties and possess such powers as may be prescribed or conferred by the
Board of Directors.
SECTION 4. The Chief Executive Officer shall have charge of all
departments and offices of the Company and of the interest of the Company
in all companies controlled by it and shall perform such other duties and
possess such powers as may be prescribed or conferred by the Board of
Directors or the Chairman of the Executive Committee.
SECTION 5. The President shall perform such duties and possess such
powers as may be prescribed or conferred by the Board of Directors or the
Chief Executive Officer.
SECTION 6. The Chief Operating Officer shall have day to day
operating responsibilities for the affairs of the Company, reporting to
the Chief Executive Officer, and shall perform such other duties as may be
prescribed or conferred by the Chief Executive Officer.
SECTION 7. The Chief Financial Officer shall have general
supervision of the financial affairs and investments of the Company and
shall perform such other duties as may be prescribed or conferred by the
Chairman of the Executive Committee.
SECTION 8. The Executive Vice President-Finance and Administration
shall have immediate charge of the financial affairs and investments of
the Company and shall have general supervision of the information
technologies systems of the Company and shall perform such other duties as
may be prescribed or conferred by the President.
SECTION 9. The Executive Vice President-Marketing and Sales shall
have charge of all marketing and sales activities of the Company and shall
perform such other duties as may be prescribed or conferred by the
President.
SECTION 10. The Executive Vice President-Operation shall have charge
of the maintenance and operation of the railroads of the Company and shall
perform such other duties as may be prescribed or conferred by the Chief
Operating Officer.
SECTION 11. The other Executive Vice Presidents and Senior Vice
Presidents elected from time to time shall perform such duties and possess
such powers as may be prescribed or conferred by the Board of Directors or
the President.
SECTION 12. The Vice President and General Counsel shall have
general supervision of all legal business of the Company except as otherwise
provided in Section 13 of this ARTICLE IV, and shall perform such other
duties as may be prescribed or conferred by the Chairman of the Executive
Committee.
SECTION 13. The Vice President-Taxes shall, under the control of the
Chief Financial Officer, have charge of all aspects of federal, foreign,
state and local taxes and shall perform such other duties as may be
prescribed or conferred by the Chief Financial Officer.
SECTION 14. The other Vice Presidents elected from time to time
shall perform such duties and possess such powers as may be prescribed or
conferred by the Board of Directors or the President.
SECTION 15. Except as otherwise provided herein or directed by the
Board of Directors, the Chief Accounting Officer shall have immediate
charge of the general books, accounts and statistics of the Company and
shall be the custodian of all vouchers, drafts, invoices and other
evidences of payment and all bonds, interest coupons and other evidences
of indebtedness which shall have been canceled. He is authorized to
approve for payment by the Treasurer vouchers, payrolls, drafts or other
accounts. He shall have prepared periodically or specially as requested
by him with the approval of and in forms prescribed by the Chief Financial
Officer, statements of operating revenues and expenses and estimates
thereof and of expenditures and estimates on all other accounts; and
copies of all statistical data that may be compiled in regular course and
also other information in reference to the financial affairs and opera-
tions of the Company and of any subsidiary company that may be required by
the Chief Financial Officer or the Board of Directors. He shall submit
for each regular meeting of the Board of Directors, and, at such other
times as may be required by said Board or the Chief Financial Officer,
statements of operating results, of cash resources and requirements and
of appropriations for Capital Expenditures, and shall perform such other
duties as the Chief Financial Officer may from time to time direct.
SECTION 16. The Secretary shall attend all meetings of the
stockholders, the Board of Directors and the Executive Committee, and keep
a record of all their proceedings. He shall procure and keep in his files
copies of the minutes of all meetings of the stockholders, boards of
directors and executive committees of all companies a majority of whose
capital stock is owned by this Company. He shall be the custodian of the
seal of the Company. He shall have the power to affix the seal of the
Company to instruments, the execution of which is authorized by these By-
Laws or by action of the Board of Directors or Executive Committee, and to
attest the same. He shall have supervision of the issuance, transfer and
registration of the capital stock and debt securities of the Company. He
shall perform such other duties as may be assigned to him by the Board of
Directors, the Chairman of the Board or the Chairman of the Executive
Committee.
The Assistant Secretaries shall have power to affix the seal of the
Company to instruments, the execution of which is authorized by these By-
laws or by action of the Board of Directors or Executive Committee, and to
attest the same, and shall exercise such of the other powers and perform
such of the other duties of the Secretary as shall be assigned to them by
the Secretary.
SECTION 17. Except as otherwise provided herein or directed by the
Board of Directors, the Treasurer shall be the custodian of all moneys,
stocks, bonds, notes and other securities of the Company. He is
authorized to receive and receipt for stocks, bonds, notes and other
securities belonging to the Company or which are received for its account.
All stocks, bonds, notes and other securities in the custody of the
Treasurer shall be held in the safe deposit vaults of the Company or in
one or more depositories selected by the Treasurer or other officer
authorized by the Board of Directors, in each case subject to access
thereto as shall from time to time be authorized or required by the Board
of Directors, the Chief Financial Officer or the Treasurer. Stocks,
bonds, notes and other securities shall be deposited in the safe deposit
vaults or depositories, or withdrawn from them, only by persons and
pursuant to procedures as shall be determined by the Board of Directors,
the Chief Financial Officer or the Treasurer. The Treasurer is authorized
and empowered to receive and collect all moneys due to the Company and to
receipt therefor. All moneys received by the Treasurer shall be deposited
to the credit of the Company in such depositories as shall be designated
by the Board of Directors, the Chief Financial Officer, the Treasurer or
such other officers as may be authorized by the Board of Directors; and
the Treasurer or other officer designated by the Treasurer may endorse for
deposit therein all checks, drafts, or vouchers drawn to the order of the
Company or payable to it. He is also authorized to draw checks against
any funds to the credit of the Company in any of its depositories. All
such checks shall be signed by such persons, either by manual or facsimile
signature, as shall be authorized by the Board of Directors and
countersigned if required by the Board of Directors. The Treasurer is
authorized to make disbursements in settlement of vouchers, payrolls,
drafts or other accounts, when approved for payment by the Chief
Accounting Officer; or such other person as shall be authorized by the
Board of Directors, the Chief Financial Officer or these By-Laws; for
payments which have been otherwise ordered or provided for by the Board of
Directors or the Chief Financial Officer; for interest on bonds and
dividends on stock when due and payable; for vouchers, pay checks, drafts
and other accounts properly certified to by the duly authorized officers
of the Company and approved for payment by or on behalf of the Chief
Accounting Officer; and for vouchers, pay checks, drafts and other
accounts approved by the officers duly authorized to approve for payment
of any company which this Company controls through ownership of stock or
otherwise, as may be designated in writing from time to time by the Chief
Financial Officer to the Treasurer. He shall cause to be kept in his
office true and full accounts of all receipts and disbursements of his
office. He shall also perform such other duties as shall be assigned to
him by the Chief Financial Officer.
The Assistant Treasurers may exercise all the powers of the Treasurer
herein conferred in respect of the receipt of moneys and securities,
endorsement for deposit and signature of checks.
ARTICLE V
SUPERVISION, REMOVAL AND SALARIES OF
OFFICERS AND EMPLOYEES
SECTION 1. Any officer or employee elected or appointed by the Board
of Directors may be removed as such at any time by the affirmative vote of
a majority of the directors then in office, with or without cause. Any
other officer or employee of the Company may be removed at any time by
vote of the Board of Directors or of the Executive Committee or by the
officer supervising such officer or employee, with or without cause.
SECTION 2. All officers, agents and employees of the Company, in the
exercise of the powers conferred and the performance of the duties imposed
upon them, by these By-Laws or otherwise, shall at all times be subject to
the direction, supervision and control of the Board of Directors or the
Executive Committee.
SECTION 3. No office or position shall be created and no person
shall be employed at a salary of more than $300,000 per annum, and no
salary shall be increased to an amount in excess of $300,000 per annum,
without the approval of the Board of Directors or Executive Committee.
SECTION 4. Except to the extent otherwise provided in the GCL, the
Board of Directors may from time to time vest general authority in the
Chairman of the Board, the Chairman of the Executive Committee, the Chief
Executive Officer, the President, the Chief Operating Officer, the Head of
any department or office of the Company, or any such other officer of the
Company as any of the foregoing shall designate, for the sole
determination of disposition of any matter which otherwise would be
required to be considered by the Board of Directors or the Executive
Committee under the provisions of this Article.
ARTICLE VI
CONTRACTS AND EXPENDITURES
SECTION 1. All capital expenditures, leases and property
dispositions must be authorized by the Board of Directors or Executive
Committee, except that general or specific authority with regard to such
matters may be delegated to such officers of the Company as the Board of
Directors may from time to time direct to the extent not inconsistent with
the provisions of the GCL.
SECTION 2. Expenditures chargeable to operating expenses may be made
by or under the direction of the Head of the department in which they are
required, without explicit or further authority from the Board of
Directors or Executive Committee, subject to direction, restriction or
prohibition by the Chairman of the Board, the Chairman of the Executive
Committee, the Chief Executive Officer, the President or the Chief
Operating Officer.
SECTION 3. No contract shall be made without the approval of the
Board of Directors or Executive Committee, except as authorized by the
Board of Directors or these By-Laws.
SECTION 4. Contracts for work, labor and services and materials and
supplies, the expenditures for which will be chargeable to operating
expenses, may be made in the name and on behalf of the Company by the
Chairman of the Board, the Chairman of the Executive Committee, the Chief
Executive Officer, the President or the Chief Operating Officer, or by
such officer as he shall designate, without further authority.
SECTION 5. All written contracts and agreements to which the Company
may become a party shall be approved as to form by or under the direction
of counsel for the Company.
SECTION 6. The Chairman of the Board, the Chairman of the Executive
Committee, the Chief Executive Officer, the President, the Chief Operating
Officer and the Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents shall severally have the power to execute on behalf of the
Company any deed, bond, indenture, certificate, note, contract or other
instrument authorized or approved by, or pursuant to authority granted by,
the Board of Directors or the Executive Committee, and to cause the
corporate seal to be thereto affixed and attested by the Secretary or an
Assistant Secretary.
SECTION 7. Except to the extent otherwise provided in the GCL, the
Board of Directors may from time to time vest general or specific
authority in such officers of the Company as the Board of Directors shall
designate for the sole determination of disposition of any matter which
otherwise would be required to be considered by the Board of Directors or
the Executive Committee under the provisions of this Article.
ARTICLE VII
INDEMNIFICATION
SECTION 1. The Company shall indemnify to the full extent permitted
by law any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the
fact that (i) such person is or was a director or officer of the Company
or (ii) while a director or officer of the Company, such person is or was
serving at the request of the Company as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise. The
indemnification provided in this Section 1 of this Article VII shall
include the right to receive payment in advance of the final disposition
of any such action, suit or proceeding of any expenses (including
attorneys' fees) incurred by any such person in defending such action,
suit or proceeding, consistent with the provisions of then applicable law.
For purposes of this Article VII, the term "other enterprise" shall
include any employee benefit plan; and "serving at the request of the
Company" shall include any service as a director or officer of the Company
which imposes duties on, or involves services by, such director or officer
with respect to an employee benefit plan, its participants or
beneficiaries; and any action by a person with respect to an employee
benefit plan taken in good faith and in a manner such person reasonably
believed to be in the interest of the participants and beneficiaries of
such plan shall be deemed to be action not opposed to the best interests
of the Company. This Section 1 of this Article VII shall not apply to any
action, suit or proceeding pending or threatened on the date of adoption
hereof provided that the right of the Company to indemnify any person with
respect thereto shall not be limited hereby.
SECTION 2. Any indemnification under Section 1 of this Article VII
(unless ordered by a court) shall be made by the Company only as au-
thorized in the specific case upon a determination that indemnification of
the present or former director or officer is proper in the circumstances
because such person has met the applicable standard of conduct required by
law. Such determination shall be made by the persons authorized by the
GCL.
SECTION 3. Notwithstanding Sections 1 and 2 of this Article VII,
except for proceedings to enforce rights to indemnification, the Company
shall not be obligated to indemnify any director or officer in connection
with a proceeding (or part thereof) initiated by such person unless such
proceeding (or part thereof) was authorized or consented to by the Board
of Directors. The indemnification and advancement of expenses provided by
Section 1 of this Article VII shall not be deemed exclusive of any other
rights to which any person seeking indemnification may be entitled under
any law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in such person's official capacity and as to
action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director or officer and shall inure
to the benefit of the heirs, executors and administrators of such a
person. Any amendment or repeal of Section 1 or Section 2 of this Article
VII or this Section 3 shall not limit the right of any person to indemnity
with respect to actions taken or omitted to be taken by such person prior
to such amendment or repeal.
ARTICLE VIII
FINAL
SECTION 1. The common corporate seal is, and, until otherwise
ordered by the Board of Directors, shall be, an impression upon paper or
wax, circular in form, with the words "Union Pacific Railroad Company" and
"Delaware" on the outer edge thereof.
SECTION 2. Except as otherwise proved by the GCL, these By-Laws may
be altered, amended or repealed at a meeting of the stockholders by a
majority vote of those present in person or by proxy or at any meeting of
the Board of Directors by a majority vote of the directors then in office.
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(In Millions of Dollars, Except Ratios)
(Unaudited)
Three Months
Ended March 31,
---------------
1998 1997
---- ----
Earnings:
Income from continuing operations. . . . . . . . $(32) $170
Undistributed equity earnings. . . . . . . . . . (10) (8)
---- ----
Total. . . . . . . . . . . . . . . . . . . . . . (42) 162
---- ----
Income Taxes . . . . . . . . . . . . . . . . . . . (31) 98
---- ----
Fixed Charges:
Interest expense including amortization
of debt discount. . . . . . . . . . . . . . 135 122
Portion of rentals representing an interest
factor. . . . . . . . . . . . . . . . . . . 43 47
---- ----
Total . . . . . . . . . . . . . . . . . . . 178 169
---- ----
Earnings available for fixed charges . . . . . . . 105 429
==== ====
Fixed Charges -- as above. . . . . . . . . . . . . $178 $169
Interest capitalized . . . . . . . . . . . . . . . - -
---- ----
Total fixed charges . . . . . . . . . . . . $178 $169
==== ====
Ratio of earnings to fixed charges (Note 4). . . . .6 2.5
==== ====
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
FINANCIAL DATA SCHEDULE
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 48
<SECURITIES> 0
<RECEIVABLES> 390
<ALLOWANCES> 0
<INVENTORY> 301
<CURRENT-ASSETS> 932
<PP&E> 31108
<DEPRECIATION> 5365
<TOTAL-ASSETS> 27479
<CURRENT-LIABILITIES> 2382
<BONDS> 2415
0
29
<COMMON> 0
<OTHER-SE> 8750
<TOTAL-LIABILITY-AND-EQUITY> 27479
<SALES> 0
<TOTAL-REVENUES> 2284
<CGS> 0
<TOTAL-COSTS> 2231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135
<INCOME-PRETAX> 63
<INCOME-TAX> 31
<INCOME-CONTINUING> 32
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
