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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 68179
(Address of principal executive offices) (Zip Code)
The Registrant's telephone number, including area code (402) 271-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each Class which registered
Missouri Pacific Railroad Company New York Stock
Exchange, Inc.
4-1/4% First Mortgage Bonds due 2005
Missouri Pacific Railroad Company New York Stock
Exchange, Inc.
4-3/4% General Income Mortgage Bonds
due 2020 and 2030
Missouri Pacific Railroad Company New York Stock
Exchange, Inc.
5% Debentures due 2045
Texas and Pacific Railway Company New York Stock
Exchange, Inc.
5% First Mortgage Bonds due 2000
Missouri-Kansas-Texas Railroad Company New York Stock
Exchange, Inc.
5-1/2% Subordinated Income Debentures
due 2033
Securities registered pursuant to
Section 12(g) of the Act: None
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THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ].
None of the Registrant's voting stock is held by non-affiliates. The
Registrant is a wholly-owned subsidiary of Union Pacific Corporation.
As of March 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.
DOCUMENTS INCORPORATED BY REFERENCE - None
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PART I
Item 1. Business
COMPANY: Union Pacific Railroad Company and its subsidiaries (the
Company, Registrant or Railroad), a Class I railroad incorporated in
Delaware and a wholly-owned subsidiary of Union Pacific Corporation
(the Corporation or UPC), together with a number of terminal and
bridge companies in which the Company has a minority ownership
interest, operate various railroad and railroad-related transportation
operations.
The Company operates the largest rail system in the United States,
with approximately 35,000 route miles linking Pacific Coast and Gulf
Coast ports to the Midwest and eastern U.S. gateways and providing
several north/south corridors to key Mexican gateways. The Railroad
serves the western two-thirds of the country and maintains coordinated
schedules with other carriers for the handling of freight to and from
the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest,
Canada and Mexico. Export and import traffic is moved through Gulf
Coast and Pacific Coast ports and across the Mexican and (primarily
through interline connections) Canadian borders.
Product Mix - In 1997, the Railroad had operating revenues of nearly
$10 billion, approximately 97 percent of which were derived from rail
freight operations. The percentages of revenue ton-miles (RTM) and
reported rail commodity revenue for major commodities during 1997,
1996 and 1995 were as follows:
1997 1996 1995
-------------- --------------- ---------------
Commodity Commodity Commodity
RTM Revenue RTM Revenue RTM Revenue
-------------- --------------- ---------------
(Percent of Total)
Agricultural Products 15.2% 14.6% 18.0% 16.4% 19.7% 17.6%
Automotive 3.4 9.8 3.3 10.4 3.2 10.5
Chemicals 12.2 17.8 12.3 18.0 12.8 19.1
Energy 36.1 19.7 39.3 22.0 39.8 21.2
Industrial Products 17.3 20.3 14.5 17.9 13.3 17.1
Intermodal 15.8 17.8 12.6 15.3 11.2 14.5
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Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
Amount in Billions 451.8 $9.7 369.7 $7.4 291.6 $6.1
===== ===== ===== ===== ===== =====
Competition - The Railroad is subject to competition from other railroads,
motor carriers and barge operators. The Company's main rail competitor is
the
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Burlington Northern Santa Fe Corporation and
its rail subsidiary, the Burlington Northern and Santa Fe Railway
Company (BNSF), which manages the nation's second largest Class I
railroad and operates parallel routes in many of the Company's main
traffic corridors. In addition, the Company's operations are
conducted in corridors served by other competing railroads and by
motor carriers. Motor carrier competition is particularly strong for
intermodal traffic. Because of the proximity of the Railroad's routes
to major inland and Gulf Coast waterways, barge competition can be
particularly pronounced especially for grain and bulk commodities.
Workforce - Approximately 90% of the Railroad's 52,000 employees are
represented by rail unions. Under the conditions imposed by
the Surface Transportation Board of the U.S. Department of Transportation
(STB) in connection with UPC's acquisition of Southern Pacific
Transportation Corporation (SP or Southern Pacific), labor agreements between
the Registrant and the unions must be negotiated before the Southern
Pacific rail system can be fully integrated into that of the
Registrant. To date, the Registrant has successfully reached
agreements with the shopcraft, carmen, clerical and maintenance of way
unions. The negotiations with the operating crafts are proceeding on
schedule, with seven hub-and-spoke agreements currently in place.
Under the hub-and-spoke concept, train crews are allowed to operate
trains on multiple tracks in and out of major rail centers and return
to a permanent home terminal, in contrast to traditional labor
agreements that only allow train crew members to operate over a single
line. The terms of ratified and pending labor agreements are not
expected to have a material adverse effect on the Registrant's results
of operations. The Registrant expects the remaining agreements to be
finalized in 1998.
INTEGRATION OF SOUTHERN PACIFIC: The Company expects to complete the
full integration of the operations of the Registrant and the Southern
Pacific rail subsidiaries during 1999. The Company believes that the
full implementation of the merger will result in shorter routes,
faster transit times, better on-time performance, expanded single-line
service and more efficient traffic flow. Some of the key on-going
elements of integration are (i) the institution of directional running
on parallel tracks in certain corridors to improve average train
velocity and allow more traffic to be handled efficiently, (ii) the
negotiation and implementation of "hub-and-spoke" labor agreements to
allow more efficient use of train crews, (iii) the integration of the
computer systems of both companies to improve overall operations and
service and (iv) merger-related capital spending to expand capacity
and improve service, now estimated at $400 million for 1998.
1997 CONGESTION AND SERVICE ISSUES: In the third quarter of 1997,
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 Registrant's operations and earnings. System congestion
started in the Gulf Coast region and spread throughout the system as
the Registrant shifted resources to help mitigate the
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need for locomotives due to slower average train velocity. The congestion
was brought on by, among other things, crew shortages and restricted track
access caused by necessary track maintenance on former Southern
Pacific lines, increased demand, washouts due to severe weather,
derailments and congestion at Texas/Mexico gateways. Traffic slowed
further as rail yards in the Gulf Coast region filled, slowing access
into and out of the yards and forcing trains to be held on sidings.
Service Recovery Plan - To restore service to acceptable levels, the
Registrant announced on October 1, 1997, that it was implementing a
Service Recovery Plan (the Plan). 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. Key elements of
the Plan include:
- Power: Bringing more locomotives into the Gulf
Coast region through acquisitions, leasing from
other railroads and moving locomotives from
selected areas of the Registrant's system;
- People: Engaging in an extensive hiring program,
allocating additional managers and operating
personnel and revising operating plans to relieve
congested terminals and remove trains from
congested lines; and
- Cooperation: Working with customers and other
railroads to curtail additional congestion and to
provide alternative transportation.
Recent Actions Under the Plan - Implementation of the Plan has
resulted in improvement in the overall operation of the Railroad and
has generally eliminated congestion problems outside the Gulf Coast
region and the surrounding southeast portion of the Company's rail
system (although weather problems have caused intermittent periods of
congestion, primarily in the Midwest). However, significant
congestion has continued in the Gulf Coast region, which has been
aggravated recently by several severe storms and congestion caused by
operational problems on Mexican railroad lines south of Laredo, Texas.
As discussed below, the Company has announced that it has embargoed
most southbound traffic destined for the Laredo gateway to address
worsening congestion at that gateway. In connection with its
integration with Southern Pacific, the Registrant has implemented (i)
Transportation Control System (TCS) in the southeast portion of the
Registrant's system, which includes the Gulf Coast region, where the
cutover 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.
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In addition to decreased revenues and increased operating costs
resulting from the congestion-related slowdown in the Company's
traffic, discussed above, certain customers have submitted claims or
stated their intention to submit claims to the Company for damages
related to delays in shipments. The Company will continue to evaluate
the adequacy of its reserves for these claims and expects to add to
such reserves as appropriate.
In order to address the congestion problem and to realize the benefits
to the Registrant and its customers of the merger implementation steps
outlined above, the Registrant has recently initiated certain actions
under the Plan:
- Power: Arranging for the deployment of
approximately 200 locomotives in the Gulf Coast
region through selective redeployment and short-term leases
and loans from other railroads to
reduce congestion in yards and remove trains from
sidings.
- People: Continuing its hiring program and
redeploying personnel to (i) improve management of
certain major terminals, (ii) update TCS
information in congested areas to improve
operational reliability and (iii) identify empty
cars and expedite them to shipper facilities for
loading to reduce the number of cars in yards and
on sidings.
- Cooperation: Working with the Registrant's
connecting railroads to expedite the interchange of
traffic and entering into arrangements with
competitors to share tracks and coordinate
dispatching. For example, the recent agreement
between the Registrant and the BNSF, which, among
other things, grants certain trackage rights to the
Registrant in the Houston area and provides for
joint dispatching of various lines in the Houston
area and between Houston and New Orleans.
On March 24, 1998, the Company announced that it would embargo most
southbound traffic destined for the Laredo, Texas gateway commencing
Saturday, March 28, 1998, to clear the backlog of cars waiting to
cross into Mexico. The embargo applies to grain, chemicals,
industrial products and coal, but not finished automobiles, auto parts
or intermodal traffic or any northbound traffic through Laredo. The
Company is attempting to reroute some of the embargoed traffic through
other Company gateways, none of which are subject to the embargo. The
Company believes that this embargo is necessary because congestion
problems principally within Mexico that affect the Laredo gateway have
worsened during recent weeks and are affecting other areas within the
southeast region of its system. As of March 26, 1998, there were more
than 5,800 cars waiting to move south to Laredo as compared with
approximately 3,100 cars, which is considered normal. These car
numbers include a small amount of traffic terminating in Laredo. The
Company's crossings at Laredo have declined from a daily average of
375 southbound cars in January to 335 cars in February and 305 for the
first 24 days of March. Although the Company is unable to predict the
duration of the
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embargo, it currently expects it to last for at least one month.
The Registrant believes that the steps it is taking to continue the
integration of Southern Pacific and implement the Plan (including the
limited embargo at the Laredo gateway) will alleviate the congestion
and service issues affecting the Registrant and that substantial
operational improvement will begin to occur in the near term. The
Registrant is also prepared to take additional action, including
transferring business to other carriers and arranging other temporary
embargos on shipments to allow the Registrant to clear the system, if
such actions become necessary. However, the Registrant does not
believe that such additional actions are necessary at this time.
In conjunction with the Plan, the Registrant is engaged in a
comprehensive examination of its long-term capital spending program in
the areas affected by congestion. The study focuses on further
upgrading the Registrant's operations infrastructure in order to keep
pace with business growth primarily driven by current and anticipated
chemical plant expansion along the Gulf Coast as well as intermodal,
automotive, industrial products, grain and Mexico business. The scope
of the examination includes all terminal operations, yards, industrial
complexes, joint operations, connecting routes and Mexican gateways in
the El Paso-New Orleans corridor. The Registrant currently plans to
spend more than $570 million on capital projects in Texas and
Louisiana in 1998 and 1999. Management remains committed to capital
spending to continue capacity expansion on its main lines and in its
yards, upgrade and augment equipment to meet customer needs and
develop and implement new technology.
Financial Impact of Congestion - The cost of the congestion-related
problems in 1997 was approximately $450 million, after tax, which
reflected the combined effects of lost business, higher costs
associated with system congestion, and 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 have an adverse impact on 1998
results, and on February 26, 1998, UPC announced that the problems
would likely result in a loss during the first quarter of 1998. In
addition, as a result of recent operating losses incurred by the
Company and in order to fund its capital programs, the Company has
incurred substantial incremental debt since December 31, 1997, and
expects to incur significant additional debt during the remainder of
1998. The timing of the Company's return to profitability will be
determined by how rapidly it is able to eliminate congestion in the
Gulf Coast region and at the Laredo gateway, and return to normal
operations throughout its system.
FEDERAL RAILROAD ADMINISTRATION (FRA) REVIEW: The Registrant suffered
a number of severe accidents in 1997, although most safety measures
for the year improved significantly, with reportable injuries, lost
work days and grade crossing accidents all declining in excess of 20%.
As a result of these accidents in 1997, the FRA reviewed the
Registrant's operations and concluded that safety
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problems at the Registrant were the result of, among other things, a loss of
focus on safety, personnel shortages and crew management problems. The FRA
made several recommendations, including creating a joint committee of
Railroad management, labor and the FRA to review and monitor all
aspects of safety, adding an executive position for safety reporting
directly to the President of the Railroad, creating a safety hotline
(direct to the Railroad's President), re-evaluating all existing
training programs and increasing the monitoring of train crew
performance, crew fatigue and crew scheduling. All such FRA proposals
have been implemented by the Railroad. The Railroad has also
implemented a guaranteed time-off program for train employees to
combat crew fatigue. On February 25, 1998, the FRA released a report
stating that it was encouraged by the Registrant's initial progress
but requiring the Registrant to submit written safety action plans and
indicating that it would continue to monitor the Registrant's
operations through site-specific inspections. The FRA has announced
its intention to impose fines totaling $131,000 as a result of its
review.
UPC ACQUISITIONS: In April 1995, UPC acquired the remaining 71.6% of
Chicago and North Western Transportation Company's (CNW) outstanding
common stock not previously owned by UPC for $1.2 billion. Prior to
the acquisition, CNW was the nation's eighth largest Class I railroad.
In September 1996, UPC completed the acquisition of Southern Pacific
after receipt of a favorable decision from the STB regarding the
Corporation's acquisition of SP. The aggregate purchase price was
$4.1 billion ($2.5 billion in UPC common stock and $1.6 billion in
cash funded with borrowings by UPC both of which were subsequently
pushed down to the Registrant). Prior to the acquisition, SP was the
nation's sixth largest Class I railroad. CNW's rail operations have
been completely integrated with the Registrant's rail operations,
while the integration of SP's rail operations are continuing with full
operational integration expected by the end of 1999.
LEGAL MERGERS: Since August 1, 1995, the Registrant and its
predecessors have been merged with and into several entities (the
Legal Mergers) in order to consolidate all of UPC's principal rail
operations into one legal entity. The Legal Mergers have been
accounted for in a manner similar to a pooling-of-interest combination
of entities under common control since all entities involved in the
Legal Mergers were direct or indirect wholly-owned subsidiaries of UPC
at the date of the Legal Mergers with the surviving entity continuing
as such following the Legal Mergers.
The consolidated financial statements of the Company are presented on
a pooled basis' back to the effective date on which the STB approval
for common control was granted to the Corporation. As a result, the
consolidated financial statements include the results of SP and its rail
operating subsidiaries--the Denver and Rio Grande Western Railroad
Company (DRGW), SPCSL Corp. (SPCSL), St. Louis and Southwestern
Railway Company (SSW) and Southern Pacific Transportation Company
(SPT)--as of October 1, 1996; CNW's rail operating subsidiaries--
Western Railroad Properties, Inc. (WRPI) and Chicago and North Western
Railway Company
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(CNWR)--as of May 1, 1995; and Missouri Pacific
Corporation's rail operating subsidiary--the Missouri Pacific Railroad
Company (MPRR)--as of January 1, 1983, the effective dates on which
the STB approval for common control was granted to the Corporation for
these acquisitions. A detailed description of the Legal Mergers
follows:
On August 1, 1995, WRPI, a wholly-owned, indirect subsidiary of
the Corporation following the acquisition of CNW, which operated
the sole joint main line (shared with BNSF) out of the Powder
River Basin in Wyoming and leased a connector line from UP Leasing
Corporation, a wholly-owned subsidiary of the Corporation (UP
Leasing), was merged with and into the Registrant's predecessor,
Union Pacific Railroad Company, a Utah corporation (UPRR), with
UPRR continuing as the surviving entity.
On October 1, 1995, UP Leasing, which financed the Powder River
Basin connector line for WRPI in exchange for monthly rental
payments, was merged into UPRR, with UPRR continuing as the
surviving entity. In addition, CNWR, a wholly-owned, indirect
subsidiary of the Corporation, which was the principal rail
subsidiary of CNW, was merged with and into UPRR, with UPRR
continuing as the surviving entity (the CNWR Merger). CNWR and
UPRR operated as a unified rail system before and after the CNWR
Merger.
On January 1, 1997, MPRR was merged with and into UPRR (the MPRR
Merger), with UPRR continuing as the surviving entity. Prior to the
MPRR Merger, MPRR was a Class I railroad, which operated as a unified
rail system with UPRR and such operations continued following the
MPRR Merger.
On June 30, 1997, DRGW and SPCSL were merged with and into UPRR (the
DRGW and SPCSL Mergers), with UPRR continuing as the surviving
entity. Immediately prior to the DRGW and SPCSL Mergers, DRGW and
SPCSL were wholly-owned, direct subsidiaries of SPT, and UPRR and SPT
at that time and immediately thereafter were wholly-owned, indirect
subsidiaries of UPC.
On September 30, 1997, SSW was merged with and into SSW Merger Corp,
with SSW Merger Corp continuing as the surviving entity, and
immediately thereafter, SSW Merger Corp was merged with and into UPRR
(collectively, the SSW Merger), with UPRR continuing as the surviving
entity. Immediately prior to the SSW Merger, SSW was a direct
subsidiary of SPT, and UPRR and SPT were at that time and immediately
thereafter wholly-owned, indirect subsidiaries of the Corporation.
On February 1, 1998, UPRR was merged with and into SPT, a Delaware
corporation and the principal SP rail affiliate (the SPT Merger),
with SPT continuing as the surviving corporation and changing its
name to "Union Pacific Railroad Company" immediately following the
SPT Merger and thereby creating the current Registrant. Immediately
prior to the SPT Merger, SPT
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and UPRR were wholly-owned, indirect subsidiaries of UPC. UPRR
and SPT operated as a unified system before and after the SPT Merger.
SIGNIFICANT INVESTMENTS: In June 1997, the Railroad and a consortium
of partners were granted a 50-year concession for the Pacific-North
and Chihuahua Pacific rail lines in Mexico and a 25% stake in the
Mexico City Terminal Company at an aggregate price of $525 million.
The Railroad holds a 13% ownership share in the consortium and has
accounted for its interest by the equity method. The consortium
assumed operational control of both lines in February 1998.
GOVERNMENTAL REGULATION: The Registrant's operations are currently
subject to a variety of Federal, state and local regulations. The
Railroad is subject to the regulatory jurisdiction of the STB, FRA and
other Federal and state agencies. The STB has jurisdiction over rates
charged on certain regulated rail traffic; freight car compensation;
transfer, extension or abandonment of rail lines; and acquisition of
control of rail and motor carriers by rail common carriers. Other
Federal agencies have jurisdiction over safety, movement of hazardous
materials, movement and disposal of hazardous waste and equipment
standards. Various state and local agencies have jurisdiction over
disposal of hazardous wastes and seek to regulate movement of
hazardous materials (see also Item 3. Legal Proceedings).
ENVIRONMENTAL REGULATION: The Railroad is subject to various
environmental statutes and regulations, including the Resource
Conservation and Recovery Act (RCRA), the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA), and the
Clean Air Act (CAA).
RCRA applies to hazardous waste generators and transporters, as well
as to persons engaged in treatment and disposal of hazardous waste,
and specifies standards for storage areas, treatment units and land
disposal units. All generators of hazardous waste are required to
label shipments in accordance with detailed regulations and to prepare
a detailed manifest identifying the material and stating its
destination before waste can be released for offsite transport. The
transporter must deliver the hazardous waste in accordance with the
manifest and only to a treatment, storage or disposal facility
qualified for RCRA interim status or having a final RCRA permit.
The Environmental Protection Agency (EPA) regulations under RCRA have
established a comprehensive system for the management of hazardous
waste. These regulations identify a wide range of industrial
by-products and residues as hazardous waste, and specify requirements for
"cradle-to-grave" management of such waste from the time of generation
through the time of disposal and beyond. States that have adopted
hazardous waste management programs with standards at least as
stringent as those promulgated by the EPA may be authorized by the EPA
to administer all or part of RCRA on behalf of the EPA.
<PAGE> 9
CERCLA was designed to establish a strategy for cleaning up facilities
at which hazardous waste or other hazardous substances have created
actual or potential environmental hazards. The EPA has designated
certain facilities as requiring cleanup or further assessment. Among
other things, CERCLA authorizes the Federal government either to clean
up such facilities itself or to order persons responsible for the
situation to do so. The act created a multi-billion dollar fund to be
used by the Federal government to pay for such cleanup efforts. In
the event the Federal government pays for such clean-up, it will seek
reimbursement from private parties upon which CERCLA imposes
liability.
CERCLA imposes strict liability on the owners and operators of
facilities in which hazardous waste and other hazardous substances are
deposited or from which they are released or are likely to be released
into the environment. It also imposes strict liability on the
generators of such waste, and the transporters of the waste who select
the disposal or treatment sites. Liability may include cleanup costs
incurred by third persons and damage to publicly-owned natural
resources. The Registrant is subject to potential liability under
CERCLA as a generator and/or a transporter of hazardous waste. Some
states have enacted, and other states are considering enacting,
legislation similar to CERCLA. Certain provisions of these acts are
more stringent than CERCLA. States that have passed such legislation
are currently active in designating more facilities as requiring
cleanup and further assessment.
The operations of the Registrant are subject to the requirements of
the CAA. The 1990 amendments to the CAA include a provision under
Title V requiring that certain facilities obtain operating permits.
EPA regulations require all states to develop Federally-approvable
permit programs. Affected facilities must submit air operating permit
applications to the respective states within one year of the EPA's
approval of the state programs. Certain of the Registrant's
facilities may be required to obtain such permits. In addition, in
December 1997, the EPA issued final regulations which require that
most locomotives purchased or remanufactured after 1999 or 2000 meet
certain stringent emissions criteria. While the cost of meeting these
requirements may be significant, expenditures are not expected to have
a material adverse affect on the Registrant's financial condition or
results of operations.
The Registrant is also subject to other laws protecting the
environment, including permit requirements for wastewater discharges
pursuant to the National Pollutant Discharge Elimination System and
storm-water runoff regulations under the Federal Water Pollution
Control Act.
CAUTIONARY INFORMATION: Certain information included in this report
contains, and other materials filed or to be filed by the Registrant
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 Registrant) contain or will contain, forward-looking
statements within the meaning of the Securities Act of
<PAGE> 10
1933, as amended, and the Securities Exchange Act of 1934, as amended.
Such forward-looking information may include, without limitation,
statements that the Registrant does not expect that lawsuits,
environmental costs, commitments, contingent liabilities, labor
negotiations or other matters will have a material adverse effect on
its consolidated financial condition, results of operations or
liquidity and other similar expressions concerning matters that are
not historical facts, and projections or predictions as to the
Registrant's financial or operational results. Such forward-looking
information is or will be based on information available at that time
and is or will be subject to risks and uncertainties that could cause
actual results to differ materially from those expressed in the
statements. Important factors that could cause such differences
include, but are not limited to, whether the Registrant is fully
successful in overcoming its congestion-related problems and
implementing its Service Recovery Plan and other financial and
operational initiatives, industry competition and regulatory
developments, natural events such as floods and earthquakes, the
effects of adverse general economic conditions, 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.
Item 2. Properties
OPERATING EQUIPMENT: At December 31, 1997, the Railroad owned or
leased from others 6,966 locomotives, 118,607 freight cars and 10,045
units of work equipment. Substantially all railway equipment secures
various outstanding equipment obligations.
RAIL PROPERTY: The Railroad operates approximately 35,000 miles of
track, including 27,400 miles of main line and 7,500 miles of branch
line. Approximately 13 percent of the main line track consists of
trackage rights over track owned by others. A substantial portion of
the right-of-way and track is subject to one or more mortgages.
Item 3. Legal Proceedings
SOUTHERN PACIFIC ACQUISITION: As previously reported, various appeals
have been filed with respect to the STB's August 12, 1996 decision
(the Decision) approving the acquisition of control of Southern
Pacific by the Corporation. All of the appeals have been consolidated
in the U.S. Court of Appeals for the District of Columbia Circuit. On
April 23, 1997, the City of Wichita and Sedgwick County, Kansas, moved
to withdraw their petition for review, and the Court granted their
motion on April 30, 1997. On August 11, 1997, the Court established
a briefing schedule under which briefs for petitioners and supporting
intervenors were due on October 10, 1997; the brief for respondents
was due December 9, 1997; briefs for intervenors supporting
respondents were due December 30, 1997; and reply briefs were due
January 20, 1998. On August 18, 1997, Geneva Steel Company moved
<PAGE> 11
to withdraw its petitions for review, and the Court granted its motion on
September 8, 1997. On October 3, 1997, the Corporation and its
affiliates moved to dismiss their petitions for review and the Court
granted their motion on October 7, 1997. On October 6, 1997, Kansas
City Southern Railway Company (KCS) moved to dismiss its petitions for
review; on October 7, 1997, Texas Mexican Railway Company (Tex Mex)
moved to dismiss its petition for review; and on October 10, 1997, the
United Transportation Union-General Committee of Adjustment (GO 401)
moved to dismiss its petition for review. The Court granted these
motions on October 22, 1997. The Registrant believes that it is
unlikely that the disposition of the remaining appeals will have an
adverse material impact on its consolidated financial condition or its
results of operations.
On May 7, 1997, the STB served a decision commencing the first annual
proceeding to implement the oversight condition it had imposed in the
Decision. The Corporation and its affiliates, and the BNSF, filed
reports required by the STB on July 1, 1997. BNSF and other parties
filed comments on August 1, 1997. The Corporation and its affiliates,
and others, filed replies on August 20, 1997. On October 27, 1997,
the STB served a decision containing its findings and recommendations
based on the record compiled in the first oversight proceeding. The
STB concluded that the merger, as conditioned, had thus far not caused
any substantial competitive harm, and it rejected various requested
adjustments to the merger conditions. The STB ordered the Corporation
and BNSF to continue to report quarterly on merger implementation, and
to provide a comprehensive summary presentation in the progress
reports due on July 1, 1998. The STB order requires interested
parties to file comments concerning the next annual oversight
proceeding on August 14, 1998, and replies are due September 1, 1998
(see also Rail Service Proceedings below).
SHIPPER CLAIMS: Certain customers have submitted claims or stated
their intention to submit claims to the Registrant for damages related
to shipments delayed as a result of congestion problems, and certain
customers have filed lawsuits seeking relief related to such delays.
The nature of the damages sought by claimants includes, but is not
limited to, contractual liquidated damages, freight loss or damage,
alternative transportation charges, additional production costs, lost
business and lost profits. In addition, some customers have asserted
that they have the right to cancel contracts as a result of alleged
material breaches of such contracts by Registrant. While the Company
does not believe that such claims will have a material adverse effect
on its consolidated financial condition, it is not possible to
determine fully the effects of all asserted and unasserted claims. As
the congestion problems continue, 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.
<PAGE> 12
RAIL SERVICE PROCEEDINGS: On October 2, 1997, the STB initiated a
proceeding to investigate rail service problems in the western United
States. On October 31, 1997, the STB issued an emergency service
order that, among other things, (i) allows Texas Mexican Railway
Company (Tex Mex) and, following a subsequent expansion of the order,
BNSF to divert some traffic from the Registrant in order to reduce
congestion on the Registrant's lines in Houston, Texas, (ii) directs
the Registrant to suspend rail transportation service contract
obligations of certain shippers at Houston that wish to route
shipments over the Tex Mex system instead of the Registrant during the
period of the service order and (iii) requires the Registrant to
report to the STB weekly regarding service statistics. The emergency
order was extended and expanded in certain respects on December 4,
1997 and again on February 25, 1998, when the STB, citing the gravity
of the Registrant's congestion problems and characterizing them as
"not yet close to being resolved", extended the duration of the
emergency service order until August 2, 1998, the maximum period
allowable under the law for the original order, and ordered the
Registrant to augment its reporting on service issues and proposed
infrastructure improvements for the Houston, Texas area.
In the rail service proceedings, the STB rejected proposals by various
parties for additional emergency measures. For example, the Railroad
Commission of Texas (the "RTC") submitted proposals to the STB under
which the Registrant would be required, among other things, to
transfer certain lines in the Gulf Coast region to Tex Mex or a
Houston terminal railroad. On February 17, 1998, the STB served an
order declining to reconsider its denial of the RTC's proposals. Tex
Mex and KCS have filed a petition for similar relief in the UP/SP
merger oversight proceeding, and the Corporation and the Registrant
have opposed that petition as being unsupported by any evidence and
without merit.
KCS and Tex Mex have also filed petitions with the STB challenging
actions taken by the Registrant and BNSF to rationalize the operations
of the Houston Belt & Terminal Railway Company (HBT), of which the
Registrant and BNSF each owns 50 percent. The Registrant, BNSF and
HBT have opposed those petitions.
If continued implementation of financial and operational initiatives
undertaken by the Company ultimately proves unsuccessful in
alleviating the congestion and related service problems experienced by
the Registrant, certain parties may request the STB to order the
Registrant to take additional actions including, among other things,
further diversions of traffic or the transfer of certain the
Registrant's rail lines or other facilities to other railroads. While
the Company believes that it is unlikely, there can be no assurance
that one or more of such proposals, or proposals seeking similar
relief might not be approved in some form, particularly if the
Registrant is not successful in resolving its congestion problems in
the Gulf Coast region within a reasonable period. In addition, if the
congestion problems persist, the STB may institute a new proceeding at
the end of the current one in light of developments concerning the
Registrant's operations in 1998.
<PAGE> 13
BOTTLENECK PROCEEDINGS: As previously reported, on August 27, 1996,
the STB initiated a proceeding asking for arguments and evidence on
the issue of whether it should modify its existing regulations
regarding the prescription of, and challenge to, rates for rail
service involving a segment that it served by only one railroad
between an interchange point and an exclusively-served shipper
facility (i.e., a bottleneck segment). The STB proceeding also
referred to pending motions to dismiss three individual complaint
proceedings filed by shippers challenging a class rate charged for the
movement of coal, two of which named the Registrant and SPT as a party
thereto. Neither complaint proceeding individually involved a
significant exposure for reparations. However, if existing regulation
of bottleneck movements were changed, future revenue from such
movements, including those covered by the complaint proceedings, could
be substantially reduced. On December 31, 1996, the STB served a
decision which generally reaffirmed earlier rulings regarding a rail
carrier's obligation to provide rates for bottleneck segments and
assured the right of rail carriers to differentially price traffic.
It also dismissed the two complaint proceedings in which the
Registrant and SPT were defendants. On April 30, 1997, the STB served
a decision generally declining to reconsider its December 31, 1996
decision, but clarifying that in certain circumstances a "bottleneck"
destination carrier that does not serve the origin for a traffic
movement may be required to provide a separately-challengeable common
carrier rate for the "bottleneck" portion of the movement. The STB
decisions are pending on appeal before the Eighth Circuit Court of
Appeals.
RAIL ACCESS AND COMPETITION: By order served February 20, 1998, the
STB indicated that, in response to a Congressional request, it was
commencing a review of rail access and competition issues and would
hold a hearing in April 1998 concerning those issues. In previous
proceedings, the STB and its predecessor, the Interstate Commerce
Commission, have rejected various proposals for "open access" or
changes in the regulation of rates and routes allegedly aimed at
increasing rail competition, concluding that such proposals are
outside the statutory authority of the agency. The railroads have
presented evidence in those proceedings that such measures would in
fact diminish competition, and would seriously harm the industry's
ability to sustain necessary investments and earn an adequate return.
The Registrant does not believe the STB is likely to change its
previous interpretations of present law. However, should Congress
adopt "open access" measures such as universal trackage rights to
allow multiple railroads to serve shipper facilities that are
presently served by one railroad or purportedly competition-enhancing
changes in rate and route regulation, the adverse effect on the
Registrant and other railroads could be material.
FRA REVIEW: As a result of a number of accidents in 1997, the
Company's operations were reviewed by the FRA. Following its review,
the FRA made several recommendations which have been implemented by
the Company and continues to monitor the Company's operations through
site-specific inspections (see also "Item 1. Business - Federal
Railroad Administration (FRA) Review").
<PAGE> 14
SHAREHOLDER LITIGATION: The Corporation and certain of its officers
and directors who are also officers and directors of the Registrant
are currently defendants in two purported class action securities
lawsuits, and certain current and former officers and directors of the
Corporation and the Registrant 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 Registrant's service and safety problems and
thereby issued materially false and misleading statements concerning
the merger with Southern Pacific and the safe, efficient operation of
the Registrant's 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
Southern Pacific and CNW into the Corporation without ensuring that
the Corporation or the Registrant had adequate systems in place to
effectively integrate those companies into the operations of the
Corporation and the Registrant. These lawsuits were filed in late
1997 in the Federal District Court for the Northern District of Texas
and seek to recover unspecified amounts of damages. The Corporation
and the Registrant believe that these claims are without merit and
intends to defend them vigorously.
ENVIRONMENTAL MATTERS: The EPA has brought a civil action against
certain subsidiaries of Southern Pacific which have been merged into
the Registrant, in the U.S. District Court for the District of
Colorado alleging violation of the Clean Water Act and the Oil
Pollution Act. The complaint identifies seven incidents involving the
alleged release of hazardous substances into the waters of the United
States and seeks civil penalties of $25,000 per day and unspecified
injunctive relief to prevent future violations. The incidents are all
related to derailments dating back to 1992 and include six incidents
in which the alleged releases were from ruptured locomotive fuel tanks
and one incident in 1996 involving an alleged release of sulfuric acid
near the Tennessee Pass.
In July 1995, the Butte County (Oroville, California) District
Attorney advised that a civil penalty action would be filed against
the Registrant for violations resulting from a derailment and spill of
diesel fuel into the Feather River in Peo, California on April 14,
1995. In late July, the California Regional Water Quality Control
Board also filed a separate penalty action seeking $40,000 for the
same incident. This latter action was settled for $40,000. In 1996,
the District Attorney and California Department of Fish and Game
asserted claims for natural resource damages and penalties which could
exceed $100,000.
The Corporation and its affiliates (including the Registrant) have
received notices from the EPA and state environmental agencies
alleging that they are or may be liable under certain Federal or state
environmental laws for remediation costs at various sites throughout
the United States, including sites which are on the Superfund National
Priorities List or state superfund lists. Although specific claims
have been made by the EPA and state regulators with respect to some of
these sites, the ultimate impact of these proceedings and suits by third
<PAGE> 15
parties cannot be predicted at this time because of the number
of potentially responsible parties involved, the degree of
contamination by various wastes, the scarcity and quality of
volumetric data related to many of the sites and/or the speculative
nature of remediation costs. Nevertheless, at many of the superfund
sites, the Registrant believes it will have little or no exposure
because no liability should be imposed under applicable law, one or
more other financially able parties generated all or most of the
contamination, or a settlement of the Registrant's exposure has been
reached although regulatory proceedings at the sites involved have not
been formally terminated. Additional information on the Registrant's
potential environmental costs is set forth under Note 10 to the
Registrant's financial statements on pages F-22 through F-23.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted in accordance with General Instruction I of Form 10-K.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
All of the Common Stock and Class A Stock of the Company is
owned by the Corporation or a wholly-owned indirect subsidiary
of the Corporation. Accordingly, there is no market for the
Company's Common and Class A Stock. Dividends on the Company's
Common Stock, which are paid on a quarterly basis, totaled $420
million in 1997 (dividends also included $29 million of asset
transfers between the Company and UPC), $400 million in 1996
(dividends also included $1,241 million of dividends to UPC
associated with the Legal Mergers) and $331 million in 1995
(dividends also included $105 million of asset transfers
between UPC and the Company--see Notes 2, 6 and 8 to the
Financial Statements for a discussion of dividend restrictions
on the Common Stock and Class A Stock).
As a result of the SPT Merger, all of the outstanding capital
shares of UPRR, which consisted of 62,220,244 shares of UPRR
Common Stock, par value $10.00 per share, 5,410,456 shares of
UPRR Class A Stock, par value $10.00 per share, 4,829 UPRR
Redeemable Preference Shares (Series A), initial par value
$10,000 per share, and 436 shares of UPRR Redeemable Preference
Shares (Series B), initial par value $10,000 per share, were
converted into 5,888 shares of Common Stock, $10.00 par value
per share, of the Company (the Company's Common Stock), 512
shares of Class A Stock, $10.00 par value per share, of the
Company (the Company's Class A Stock), 4,829 Redeemable
Preference Shares (Series A), initial par value $10,000 per
share, of the Company (the Company's Series A Preference
Shares), and 436 Redeemable
<PAGE> 16
Preference Shares (Series B),
initial par value $10,000 per share, of the Company (the
Company's Series B Preference Shares), respectively. In
addition, in connection with the SPT Merger, the 1,350 shares
of SPT Common Stock owned by SP immediately prior to the Merger
were converted into 1,242 shares of the Company's Common Stock
and 108 shares of the Company's Class A Stock.
Item 6. Selected Financial Data
Omitted in accordance with General Instruction I of Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Omitted in accordance with General Instruction I of Form 10-K.
In lieu thereof, a narrative analysis is presented
beginning on Page F-25.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosure concerning market risk-sensitive instruments is
set forth in Note 4 to the Financial Statements, pages F-13
and F-14 herein.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary information
related thereto, listed on the Index to Financial
Statements, are provided on pages F-1 through F-37 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Omitted in accordance with General Instruction I of Form 10-K.
Item 11. Executive Compensation
Omitted in accordance with General Instruction I of Form 10-K.
<PAGE> 17
Item 12. Security Ownership of Certain Beneficial Owners and Management
Omitted in accordance with General Instruction I of Form 10-K.
Item 13. Certain Relationships and Related Transactions
Omitted in accordance with General Instruction I of Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
(a) (1) and (2) Financial Statements and Schedules
See Index to Financial Statements.
(a) (3) Exhibits
2(a) Agreement and Plan of Merger, dated as of
November 21, 1996, between UPRR and MPRR, is
incorporated by reference to Exhibit 2 to
UPRR's Current Report on Form 8-K dated January 16,
1997.
2(b) Agreement and Plan of Merger, dated as of January
29, 1998, between UPRR and SPT is incorporated by
reference to Exhibit 2 to the Registrant's
Current Report on Form 8-K dated February 13, 1998.
3(a) Amended Certificate of Incorporation of the
Registrant, effective as of February 1, 1998,
is incorporated herein by reference to
Exhibit 3.1 to the Registrant's Current
Report on Form 8-K dated February 13, 1998.
3(b) By-Laws of the Registrant, as amended
effective as of February 1, 1998, are
incorporated herein by reference to Exhibit
3.2 to the Registrant's Current Report on
Form 8-K dated February 13, 1998.
4 Pursuant to various indentures and other
agreements, the Registrant has issued long-term
debt; however, no such agreement has
securities or obligations covered thereby
which exceed 10% of the Registrant's total
consolidated assets. The Registrant agrees
to furnish the Commission with a copy of any
such indenture or agreement upon request by
the Commission.
10(a) Amended and Restated Anschutz Shareholders
Agreement, dated as of July 12, 1996, among
UPC, UPRR, The Anschutz
<PAGE> 18
Corporation (TAC),
Anschutz Foundation (the Foundation), and Mr.
Philip F. Anschutz (Mr. Anschutz), is
incorporated herein by reference to Annex D
to the Joint Proxy Statement/Prospectus
included in Post-Effective Amendment No. 2 to
UPC's Registration Statement on Form S-4 (No.
33-64707).
10(b) Amended and Restated MSLEF Shareholder
Agreement, dated as of July 12, 1996, between
UPC and The Morgan Stanley Leveraged Equity
Fund II, L.P., is incorporated herein by
reference to Annex E to the Joint Proxy
Statement/Prospectus included in Post-
Effective Amendment No. 2 to UPC's
Registration Statement on Form S-4 (No. 33-64707).
10(c) Amended and Restated Parent Shareholders
Agreement, dated as of July 12, 1996, among
UPC, Union Pacific Merger Co. (UP Merger) and
SP is incorporated herein by reference to
Annex F to the Joint Proxy
Statement/Prospectus included in Post-Effective Amendment
No. 2 to UPC's Registration Statement on Form S-4
(No. 33-64707).
10(d) Amended and Restated Anschutz/Spinco
Shareholders Agreement, dated as of July 12,
1996, among Union Pacific Resources Group
Inc. (Resources), TAC, the Foundation and Mr.
Anschutz is incorporated herein by reference
to Annex G to the Joint Proxy
Statement/Prospectus included in Post-
Effective Amendment No. 2 to UPC's
Registration Statement on Form S-4 (No. 33-64707).
10(e) Amended and Restated Registration Rights
Agreement, dated as of July 12, 1996, among
UPC, TAC, and the Foundation is incorporated
herein by reference to Annex H to the Joint
Proxy Statement/Prospectus included in Post-
Effective Amendment No. 2 to UPC's
Registration Statement on Form S-4 (No. 33-64707).
10(f) Amended and Restated Registration Rights
Agreement, dated as of July 12, 1996, among
Resources, TAC, and the Foundation is
incorporated herein by reference to Annex I
to the Joint Proxy Statement/Prospectus
included in Post-Effective Amendment No. 2 to
UPC's Registration Statement on Form S-4 (No.
33-64707).
<PAGE> 19
10(g) Amended and Restated Registration Rights
Agreement, dated as of July 12, 1996, among
UPC, UP Holding Company, Inc., UP Merger and
SP is incorporated herein by reference to
Annex J to the Joint Proxy
Statement/Prospectus included in Post-
Effective Amendment No. 2 to UPC's
Registration Statement on Form S-4 (No. 33-64707).
10(h) Agreement, dated September 25, 1995, among
UPC, the Registrant, MPRR and SP, SPT, D&RGW,
SLSRC and SPCSL, on the one hand, and
Burlington Northern Railroad Company (BN) and
The Atchison, Topeka and Santa Fe Railway
Company (Santa Fe), on the other hand, is
incorporated by reference to Exhibit 10.11 to
UPC's Registration Statement on Form S-4 (No.
33-64707).
10(i) Supplemental Agreement, dated November 18,
1995, between UPC, UPRR, MPRR and SP, SPT,
D&RGW, SLSRC and SPCSL, on the one hand, and
BN and Santa Fe, on the other hand, is
incorporated herein by reference to Exhibit
10.12 to UPC's Registration Statement on Form
S-4 (No. 33-64707).
12 Ratio of Earnings to Fixed Charges
24 Powers of Attorney
27 Financial Data Schedule
(b) Reports on Form 8-K
On November 17, 1997, UPRR filed a Current Report on Form 8-K
regarding the service situation and estimated financial impact
of the service recovery effort.
On February 13, 1998, the Registrant filed a Current Report on
Form 8-K as a result of the merger of Union Pacific Railroad
Company, a Utah corporation, into SPT, and in the Report
indicated its intention to file the historic and pro forma
financial information required by that Form by amendment on or
prior to April 17, 1998. The financial information set forth
in this Annual Report on Form 10-K is substantially similar to
the financial information required by Form 8-K. Therefore,
pursuant to General Instruction B.3 of Form 8-K, the Registrant
is not required to file any further information by amendment
to its February 13, 1998 Form 8-K Report.
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on
this the 30th day of March, 1998.
UNION PACIFIC RAILROAD COMPANY
By /s/ Richard K. Davidson
-----------------------
Richard K. Davidson,
Chairman, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below, on this 30th day of March, by the
following persons on behalf of the Registrant and in the capacities
indicated.
By /s/ Richard K. Davidson
-----------------------
Richard K. Davidson,
Chairman, Chief Executive Officer and Director
/s/ L. White Matthews, III
--------------------------
L. White Matthews, III,
Chief Financial Officer and Director
/s/ John J. Koraleski
---------------------
John J. Koraleski,
Executive Vice President-Finance
/s/ Joseph E. O'Connor, Jr.
---------------------------
Joseph E. O'Connor, Jr.,
Chief Accounting Officer
<PAGE> 21
SIGNATURES - (Continued)
DIRECTORS:
Philip F. Anschutz* Judith Richards Hope*
Robert P. Bauman* Richard J. Mahoney*
Richard B. Cheney* John R. Meyer*
E. Virgil Conway* Thomas A. Reynolds, Jr.*
Spencer F. Eccles* James D. Robinson, III*
Elbridge T. Gerry, Jr.* Richard D. Simmons*
William H. Gray, III*
* By /s/ Thomas E. Whitaker
----------------------
(Thomas E. Whitaker, Attorney-in-fact)
<PAGE> F-1 FINANCIAL STATEMENT INDEX
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report............................... F-2
Financial Statements:
Statement of Consolidated Financial Position -
At December 31, 1997 and 1996............................... F-3 - F-4
Statement of Consolidated Income and Retained
Earnings - For the Years Ended December 31, 1997,
1996 and 1995............................................... F-5
Statement of Consolidated Cash Flows - For the Years
Ended December 31, 1997, 1996 and 1995...................... F-6
Accounting Policies......................................... F-7
Notes to Consolidated Financial Statements.................. F-8 - F-24
Management's Narrative Analysis of the Results of Operations F-25 - F-37
Schedules are omitted because they are not applicable or the required
information is set forth in the financial statements referred to above.
<PAGE> F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Union Pacific Railroad Company
Omaha, Nebraska
We have audited the accompanying statement of consolidated financial position
of Union Pacific Railroad Company (a wholly-owned subsidiary of Union Pacific
Corporation) and subsidiary companies as of December 31, 1997 and 1996, and
the related statements of consolidated income and retained earnings and of
consolidated cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Union Pacific Railroad Company
and subsidiary companies at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
-------------------------
Deloitte & Touche LLP
Omaha, Nebraska
January 22, 1998
<PAGE> F-3
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
December 31, 1997 and 1996
(Millions of Dollars)
ASSETS
1997 1996
Current Assets:
Cash and temporary investments . . . . . $ 50 $ 76
Accounts receivable - net (Note 4) . . . 456 384
Income tax receivable. . . . . . . . . . 28 -
Materials and supplies . . . . . . . . . 288 295
Other current assets (Note 5). . . . . . 223 272
------- -------
Total Current Assets . . . . . . . . 1,045 1,027
------- -------
Investments:
Investments in and advances to
affiliated companies (Note 2) . . . . . 595 565
Other investments . . . . . . . . . . . 29 46
------- -------
Total Investments . . . . . . . . . . 624 611
------- -------
Properties, at cost (Notes 6 and 7):
Road and other . . . . . . . . . . . . . 23,610 22,664
Equipment . . . . . . . . . . . . . . . 7,084 6,573
------- -------
Total Properties . . . . . . . . . . 30,694 29,237
Less accumulated depreciation and
amortization . . . . . . . . . . . . 5,208 4,732
------- -------
Properties - Net . . . . . . . . . . 25,486 24,505
------- -------
Other Assets . . . . . . . . . . . . . . 92 151
------- -------
Total Assets . . . . . . . . . . . . $27,247 $26,294
======= =======
The accompanying accounting policies and notes to consolidated financial
statements are an integral part of these statements.
<PAGE> F-4
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
December 31, 1997 and 1996
(Millions of Dollars)
LIABILITIES AND STOCKHOLDER'S EQUITY
1997 1996
Current Liabilities:
Accounts payable . . . . . . . . . . . . $ 660 $ 445
Accrued wages and vacation . . . . . . . 382 392
Taxes payable . . . . . . . . . . . . . 263 286
Casualty and other reserves. . . . . . . 364 439
Debt due within one year (Note 6) . . . 229 124
Other current liabilities . . . . . . . 869 919
------- -------
Total Current Liabilities . . . . . . 2,767 2,605
------- -------
Debt Due After One Year (Notes 6 and 7) . 2,361 2,526
------- -------
Deferred Income Taxes (Note 5) . . . . . 6,698 6,322
------- -------
Retiree Benefit Obligations (Note 9). . . 749 563
------- -------
Due to UPC Long-Term (Note 2) . . . . . . 3,993 3,555
------- -------
Other Liabilities (Note 10) . . . . . . . 1,758 2,001
------- -------
Redeemable Preference Shares. . . . . . . 29 38
Series A, $10,000 par value; 4,829 shares ------- -------
outstanding as of merger date
Series B, $10,000 par value; 436 shares
outstanding as of merger date
Stockholder's Equity (Notes 2 and 8):
Common stock - $10.00 par value; 9,200 shares
authorized and 4,465 outstanding as of the
merger date . . . . . . . . . . . . . - -
Class A stock - $10.00 par value; 800 shares
authorized and 388 outstanding as of the
merger date . . . . . . . . . . . . . - -
Capital surplus . . . . . . . . . . . . 4,782 4,745
Retained earnings . . . . . . . . . . . 4,110 3,939
------- -------
Total Stockholder's Equity . . . . . 8,892 8,684
------- -------
Total Liabilities and Stockholder's
Equity . . . . . . . . . . . . . . $27,247 $26,294
======= =======
The accompanying accounting policies and notes to consolidated financial
statements are an integral part of these statements.
<PAGE> F-5
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
For The Years Ended December 31, 1997, 1996 and 1995
(Millions of Dollars)
1997 1996 1995
Operating Revenues (Note 2) . . . $9,981 $ 7,680 $6,326
------ ------- ------
Operating Expenses:
Salaries, wages and employee benefits
(Note 9) . . . . . . . . . . . . 3,467 2,502 2,064
Equipment and other rents . . . 1,309 857 669
Fuel and utilities . . . . . . . 987 725 514
Depreciation, amortization and
retirements. . . . . . . . . . . 972 686 568
Purchased services . . . . . . . 607 404 325
Materials and supplies . . . . . 515 418 326
Other costs. . . . . . . . . . . 871 486 476
------ ------- ------
Total. . . . . . . . . . . . . 8,728 6,078 4,942
------ ------- ------
Operating Income. . . . . . . . . 1,253 1,602 1,384
Other Income - Net (Note 11). . . 172 138 120
Interest Expense (Notes 2, 3, 4 and 6) (473) (323) (194)
------ ------- ------
Income Before Income Taxes. . . . 952 1,417 1,310
Income Taxes (Note 5) . . . . . . 332 477 443
------ ------- ------
Net Income . . . . . . . . . . . $ 620 $ 940 $ 867
====== ======= ======
Retained Earnings:
Beginning of year. . . . . . . . . $3,939 $ 4,640 $4,000
Net income . . . . . . . . . . . 620 940 867
Dividends to parent (Note 2) . . (449) (1,641) (227)
------ ------- ------
End of Year. . . . . . . . . . $4,110 $ 3,939 $4,640
====== ======= ======
The accompanying accounting policies and notes to consolidated financial
statements are an integral part of these statements.
<PAGE> F-6
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
For The Years Ended December 31, 1997, 1996 and 1995
(Millions of Dollars)
1997 1996 1995
Net Income. . . . . . . . . . . . $ 620 $ 940 $ 867
Non-Cash Charges to Income:
Depreciation, amortization and
retirements . . . . . . . . . 972 686 568
Deferred income taxes. . . . . . 336 236 175
Other, net . . . . . . . . . . . (287) (167) (455)
Changes in current assets and liabilities 118 72 331
------- ------- -------
Cash from Operations. . . . . 1,759 1,767 1,486
------- ------- -------
Investing Activities:
Capital investments. . . . . . . (2,035) (1,339) (970)
SP acquisition (Note 2). . . . . - (586) (976)
CNW acquisition. . . . . . . . . - - (1,155)
Other investing activities . . . 265 233 129
------- ------- -------
Cash Used for Investing Activities (1,770) (1,692) (2,972)
------- ------- -------
Financing Activities:
Cash dividends paid to parent (Note 2) (420) (1,000) (331)
Financings . . . . . . . . . . . 180 422 86
Debt repaid. . . . . . . . . . . (210) (908) (1,148)
Advances, net (Note 2) . . . . . 438 910 2,852
Proceeds from sale of stock (Note 2). - 600 -
Other. . . . . . . . . . . . . . (3) (39) 35
------- ------- -------
Cash Provided by (Used in) Financing
Activities . . . . . . . . (15) (15) 1,494
------- ------- -------
Change in Cash and Temporary
Investments (Note 13). . . $ (26) $ 60 $ 8
======= ======= =======
Changes in Current Assets and Liabilities (omitting working capital
generated by the 1996 SPT Merger and the 1995 CNWR Merger see Note 2):
Accounts receivable. . . . . . . . . . . . . $ (72) $ 122 $ 28
Materials and supplies . . . . . . . . . . . 7 12 (26)
Other current assets . . . . . . . . . . . . 21 53 33
Accounts, wages and vacation payable . . . . 205 3 52
Other current liabilities. . . . . . . . . . (43) (118) 244
------- ------- -------
Total . . . . . . . . . . . . . . . . . . $ 118 $ 72 $ 331
======= ======= =======
The accompanying accounting policies and notes to consolidated financial
statements are an integral part of these statements.
<PAGE> F-7
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Union Pacific Railroad Company and all subsidiaries and
affiliates (collectively, the Company, Registrant or Railroad--see Note 2).
The Company is a wholly-owned subsidiary of Union Pacific Corporation (the
Corporation or UPC). Investments in affiliated companies (20 percent to 50
percent owned) are generally accounted for on the equity method. All
material intercompany transactions are eliminated.
CASH AND TEMPORARY INVESTMENTS - Temporary investments are stated at cost
that approximates fair value and consist of investments with original
maturities of three months or less.
MATERIALS AND SUPPLIES - Materials and supplies are carried at the lower of
average cost or market.
REVENUE RECOGNITION - Transportation revenues are recognized on a
percentage-of-completion basis, while delivery costs are recognized as
incurred.
PROPERTIES - Properties are stated at cost. Upon sale or retirement of
units of depreciable operating property, gains and losses are charged to
accumulated depreciation. With respect to all other property sold or
retired (principally land sold for industrial development or as surplus
property), cost and any related accumulated depreciation are removed from
the accounts and a gain or loss is recognized upon disposition.
DEPRECIATION - Provisions for depreciation are computed principally on the
straight-line method based on estimated service lives of depreciable
properties.
HEDGING TRANSACTIONS - The Company periodically hedges fuel purchases and
interest rates. Unrealized gains and losses from swaps, futures and
forward contracts are deferred and recognized as the fuel is consumed. The
differential to be paid or received on interest rate swaps is accrued as
interest rates change and recognized as interest expense over the life of
the agreements (see Note 4).
USE OF ESTIMATES - The consolidated financial statements of the Company
include estimates and assumptions of certain assets, liabilities, revenues
and expenses and the disclosure of certain contingent assets and
liabilities. Actual future results may differ from such estimates.
CHANGE IN PRESENTATION - Certain prior year amounts have been reclassified
to conform with the 1997 financial statement presentation.
<PAGE> F-8
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1. Nature of Operations
The Company, a Class I railroad incorporated in Delaware and a wholly-owned
subsidiary of the Corporation, together with a number of wholly-owned and
majority-owned subsidiaries of the Company and various terminal companies
in which the Company has minority interests, operates various railroad and
railroad-related businesses.
The Railroad operates the largest rail system in the United States, with
approximately 35,000 route miles linking Pacific Coast and Gulf Coast ports
to the Midwest and eastern U.S. gateways and providing several north/south
corridors to key Mexican gateways. The Railroad serves the western
two-thirds of the country and maintains coordinated schedules with other
carriers for the handling of freight to and from the Atlantic Coast, the
Pacific Coast, the Southeast, the Southwest, Canada and Mexico. Export and
import traffic is moved through Gulf Coast and Pacific Coast ports and
across the Mexican and (primarily through interline connections) Canadian
borders.
The Railroad's future results can be affected by, among other things,
system congestion, changes in the economic environment and fluctuations in
fuel prices. Several of the commodities transported by the Railroad come
from industries with cyclical business operations. As a result, prolonged
negative changes in U.S. and global economic conditions can have an adverse
effect on the Railroad's ongoing results. In addition, the Railroad's
operating results can be affected adversely by increases in diesel fuel
costs, to the extent that such costs are not recovered through higher
revenues and improved fuel conservation, or mitigated by hedging activity.
Approximately 90 percent of the Railroad's employees are represented by
rail unions. During 1996, nearly all of the Railroad's unionized workforce
ratified five-year national agreements, which include a combination of
general wage increases and lump-sum payments.
2. Acquisitions, Legal Mergers and Significant Investments
UPC Acquisitions: In April 1995, UPC acquired the remaining 71.6% of
Chicago and North Western Transportation Company's (CNW) outstanding common
stock not previously owned by UPC for $1.2 billion. Prior to the
acquisition, CNW was the nation's eighth largest Class I railroad. In
<PAGE> F-9
September 1996, UPC completed the acquisition of Southern Pacific
Transportation Corporation (Southern Pacific or SP) after receipt of a
favorable decision from the Surface Transportation Board of the U.S.
Department of Transportation (STB) regarding the Corporation's acquisition
of SP. The aggregate purchase price was $4.1 billion ($2.5 billion in UPC
common stock and $1.6 billion in cash funded with borrowings by UPC both of
which were subsequently pushed down to the Registrant). Prior to the
acquisition, SP was the nation's sixth largest Class I railroad. CNW's
rail operations have been completely integrated with the Registrant's rail
operations, while the integration of SP's rail operations are continuing
with full operational integration expected by the end of 1999.
Legal Mergers: Since August 1, 1995, the Registrant and its predecessors
have been merged with and into several entities (the Legal Mergers) in
order to consolidate all of UPC's principal rail operations into one legal
entity. The Legal Mergers have been accounted for in a manner similar to a
pooling-of-interest combination of entities under common control since all
entities involved in the Legal Mergers were direct or indirect wholly-owned
subsidiaries of UPC at the date of the Legal Mergers with the surviving
entity continuing as such following the Legal Mergers.
The consolidated financial statements of the Company are presented on a
pooled basis' back to the effective date on which the STB approval for
common control was granted to the Corporation. As a result, the
consolidated financial statements include the results of SP and its rail
operating subsidiaries--the Denver and Rio Grande Western Railroad Company
(DRGW), SPCSL Corp. (SPCSL), St. Louis and Southwestern Railway Company
(SSW) and Southern Pacific Transportation Company (SPT)--as of October 1,
1996; CNW's rail operating subsidiaries--Western Railroad Properties, Inc.
(WRPI) and Chicago and North Western Railway Company (CNWR)--as of May 1,
1995; and Missouri Pacific Corporation's rail operating subsidiary--the
Missouri Pacific Railroad Company (MPRR)--as of January 1, 1983, the
effective dates on which the STB approval for common control was granted to
the Corporation for these acquisitions. A detailed description of the
Legal Mergers follows:
On August 1, 1995, WRPI, a wholly-owned, indirect subsidiary of the
Corporation following the acquisition of CNW, which operated the sole
joint main line (shared with BNSF) out of the Powder River Basin in
Wyoming and leased a connector line from UP Leasing Corporation, a
wholly-owned subsidiary of the Corporation (UP Leasing), was merged
with and into the Registrant's predecessor, Union Pacific Railroad
Company, a Utah corporation (UPRR), with UPRR continuing as the
surviving entity.
<PAGE> F-10
On October 1, 1995, UP Leasing, which financed the Powder River Basin
connector line for WRPI in exchange for monthly rental payments, was
merged into UPRR, with UPRR continuing as the surviving entity. In
addition, CNWR, a wholly-owned, indirect subsidiary of the Corporation,
which was the principal rail subsidiary of CNW, was merged with and
into UPRR, with UPRR continuing as the surviving entity (the CNWR
Merger). CNWR and UPRR operated as a unified rail system before and
after the CNWR Merger.
On January 1, 1997, MPRR was merged with and into UPRR (the MPRR
Merger), with UPRR continuing as the surviving entity. Prior to the
MPRR Merger, MPRR was a Class I railroad, which operated as a unified
rail system with UPRR and such operations continued following the MPRR
Merger.
On June 30, 1997, DRGW and SPCSL were merged with and into UPRR (the
DRGW and SPCSL Mergers), with UPRR continuing as the surviving entity.
Immediately prior to the DRGW and SPCSL Mergers, DRGW and SPCSL were
wholly-owned, direct subsidiaries of SPT, and UPRR and SPT at that time
and immediately thereafter were wholly-owned, indirect subsidiaries of
UPC.
On September 30, 1997, SSW was merged with and into SSW Merger Corp,
with SSW Merger Corp continuing as the surviving entity, and
immediately thereafter, SSW Merger Corp was merged with and into UPRR
(collectively, the SSW Merger), with UPRR continuing as the surviving
entity. Immediately prior to the SSW Merger, SSW was a direct
subsidiary of SPT, and UPRR and SPT were at that time and immediately
thereafter wholly-owned, indirect subsidiaries of the Corporation.
On February 1, 1998, UPRR was merged with and into SPT, a Delaware
corporation and the principal SP rail affiliate (the SPT Merger), with
SPT continuing as the surviving corporation and changing its name to
"Union Pacific Railroad Company" immediately following the SPT Merger
and thereby creating the current Registrant. Immediately prior to the
SPT Merger, SPT and UPRR were wholly-owned, indirect subsidiaries of
UPC. UPRR and SPT operated as a unified system before and after the SPT
Merger.
The acquisition of Southern Pacific was accounted for by UPC using the
purchase method. As a result, all purchase accounting entries have been
pushed down to the accounts of the Company as of the effective date of the
SP acquisition made by the Corporation, as follows:
<PAGE> F-11
(Millions of Dollars)
Purchase price to be allocated. . . . . . . . . . . . . . $4,097
Pre-tax merger costs:
Current . . . . . . . . . . . . . . . . . . . . . . . . 532
Long-term . . . . . . . . . . . . . . . . . . . . . . . 426
Equity acquired . . . . . . . . . . . . . . . . . . . . . (1,083)
------
Unallocated purchase price. . . . . . . . . . . . . . . . $3,972
======
Purchase price allocation:
Property and equipment
Land. . . . . . . . . . . . . . . . . . . . . . . . . $3,509
Roadway, equipment and other. . . . . . . . . . . . . 2,522
Debt and preference share revaluation. . . . . . . . . . (200)
Deferred income taxes (including the effect of
merger costs) . . . . . . . . . . . . . . . . . . . . . (1,859)
------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $3,972
======
In connection with the acquisition and continuing integration of the UPRR's
and the former Southern Pacific's rail operations, the Company is in the
process of eliminating 5,200 duplicate positions, which are primarily
non-train crews. In addition, the Company is relocating 4,700 positions,
merging or disposing of redundant facilities, disposing of certain rail
lines and is also canceling uneconomical and duplicative SP contracts. The
Company recognized a $958 million liability in the SP purchase price
allocation for costs associated with SP's portion of these activities. The
components of the $958 million liability are as follows:
(Millions of Dollars)
Labor protection related to legislated
and contractual obligations
to SP union employees. . . . . . . . . . . . . . . . . . $361
Severance costs . . . . . . . . . . . . . . . . . . . . . 343
Contract cancellation fees. . . . . . . . . . . . . . . . 145
Relocation costs. . . . . . . . . . . . . . . . . . . . . 109
----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $958
====
Through December 31, 1997, approximately $280 million in merger-related
costs were paid by the Company and charged against these reserves,
principally comprised of $153 million and $65 million, respectively, for
severance and relocation payments made to approximately 3,500 Southern
Pacific employees. The Company expects that the remaining merger payments
will be made over the course of the next five years as the rail operations
of the Company and the former SP are integrated and labor negotiations are
completed and labor agreements are implemented.
<PAGE> F-12
In addition, the Railroad expects to incur $235 million in acquisition-related
costs through 1999 for severing or relocating UPRR employees (those
employed by the Registrant prior to the September 1996 purchase of SP by
UPC), disposing of certain facilities owned by the Railroad prior to the SP
acquisition, training and equipment upgrading. These costs will be charged
to expense as incurred over the next two years. Net income for 1997
included $60 million of acquisition-related operating costs, after tax.
The pro forma results presented below have been prepared to reflect the
Southern Pacific acquisition as if the date of common control was January
1, 1995. The pro forma results presented below do not reflect synergies
expected to result from the integration of UPRR's and Southern Pacific's
rail operations, and accordingly, do not account for any potential increase
in revenue or operating income, estimated cost savings, or one-time costs
associated with the elimination of UPRR's duplicate facilities and
relocation or severance payments to UPRR employees. The effects of the
foregoing could be substantial. This unaudited pro forma information is
not necessarily indicative of the results of operations that might have
occurred had common control of the Southern Pacific actually occurred on
the date indicated, or of future results of operations of the resulting
entity. Pro forma results for the year ended December 31, 1995 also
reflect the pro forma effect of UPC's acquisition of CNW as if common
control had occurred at the beginning of that period.
(Unaudited)
(Millions of Dollars) Pro Forma
1996 1995
Operating Revenues . . . . . . . . . . . . . . . $10,113 $9,871
Operating Income . . . . . . . . . . . . . . . . 1,671 1,559
Net Income . . . . . . . . . . . . . . . . . . . 871 780
In June 1996, prior to the Legal Mergers, the Company sold 4,916,863
shares of its Common Stock to a subsidiary of the Corporation
for $600 million in cash. At the same time, the Company declared a
cash dividend to its shareholders of $600 million. Also, in June
1996, the Company declared a dividend of its 25% ownership in SP
to the Corporation, which then was recorded as a contribution of capital of
of $641 million back to the Company. These transactions were necessary to
facilitate the SP acquisition.
Significant Investments: In June 1997, the Railroad and a consortium of
partners were granted a 50-year concession for the Pacific-North and
Chihuahua Pacific rail lines in Mexico and a 25% stake in the Mexico City
Terminal Company at an aggregate price of $525 million. The Railroad holds
a 13% ownership share in the consortium and has accounted for its interest
by the equity method. The consortium assumed operational control of both
lines in February 1998.
<PAGE> F-13
3. Related Party Transactions
Amounts due to and from affiliates, including advances to and borrowings
from the Corporation, bear interest at an annually determined rate which
considers the Corporation's cost of debt. Net intercompany interest
expense charged on such amounts was $279 million in 1997 and net
intercompany interest income earned was $192 million and $95 million in
1996 and 1995, respectively.
4. Financial Instruments
Risk Management - The Company uses derivative financial instruments (in
limited instances and for other than trading purposes) to manage risk as it
relates to fuel prices and interest rates. Where the 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 high credit
standards for counterparties and periodic settlements. The Company did
not have any credit risk associated with its counterparties at December
31, 1997. The Company has not been required to provide, nor has it
received, any collateral relating to its hedging activity.
The fair market values of the Company's derivative financial instrument
positions at December 31, 1997 and 1996 described below were determined
based on 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 have represented more than 10
percent of the Company's total operating expenses. As a result of the
significance of fuel costs and the historical volatility of fuel prices,
the Company periodically use 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 profitability
from adverse fuel price changes. However, the use of these contracts also
limits the benefit of favorable fuel price changes.
<PAGE> F-14
At year-end 1997, the Company had hedged 42% of its forecasted 1998 fuel
consumption at $0.515 per gallon, while at December 31, 1996, the Company
had not hedged any of its anticipated 1997 fuel consumption. At year-end
1997, the Railroad had outstanding swap agreements covering its anticipated
1998 fuel purchases of $298 million, with gross and net liability positions
of $13 million. Fuel hedging had no significant effect on the Railroad's
1997 fuel costs, lowered 1996 fuel costs by $34 million and had no
significant effect on 1995 fuel costs.
Interest Rates - Within the Corporation's overall debt strategy, the
Company controls its overall risk of 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 as one of the
tools to obtain the targeted mix. At December 31, 1997, the total notional
principal amount of debt affected by these instruments was $110 million,
with an unrecognized mark-to-market loss of $8 million. At December 31,
1996, the total notional principal amount of debt affected by these
instruments was $117 million, with an unrecognized mark-to-market loss of
$9 million. The Company's interest expense and weighted-average borrowing
rate were not materially impacted by interest rate hedging activity in
1997, 1996 or 1995.
Fair Value of Financial Instruments - The fair value of the Company's long-
and short-term debt has been estimated using quoted market prices or
current borrowing rates. At December 31, 1997, the fair value of total
debt exceeded the carrying value by approximately 4 percent. The carrying
value of all other financial instruments approximates fair value.
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 1996, accounts receivable are
presented net of the $650 million of receivables sold.
5. Income Taxes
The Company is included in the consolidated income tax return of the
Corporation. The consolidated income tax liability of the Corporation is
allocated among the parent and its subsidiaries on the basis of their
separate contributions to the consolidated income tax liability, with full
benefit of tax losses and credits made available through consolidation by
allocation to the individual companies generating such losses and credits.
Components of income tax expense (benefit) for the Company are as follows:
<PAGE> F-15
(Millions of Dollars) 1997 1996 1995
Current
Federal. . . . . . . . . . . . . . . . $ 4 $231 $266
State. . . . . . . . . . . . . . . . . (8) 10 2
---- ---- ----
Total current . . . . . . . . . . . . (4) 241 268
Deferred
Federal. . . . . . . . . . . . . . . . . 304 217 154
State. . . . . . . . . . . . . . . . . 32 19 21
---- ---- ----
Total deferred . . . . . . . . . . . 336 236 175
---- ---- ----
Total . . . . . . . . . . . . . . . . . . $332 $477 $443
==== ==== ====
The tax effect of differences in the timing of revenues and expenses for
tax and financial reporting purposes is as follows:
(Millions of Dollars) 1997 1996
Net current deferred tax asset. . . . . . . $ (92) $ (85)
------ ------
Excess tax over book depreciation . . . . . 7,064 6,929
State taxes - net . . . . . . . . . . . . . 540 553
SP merger reserve . . . . . . . . . . . . . 235 353
Alternative minimum tax . . . . . . . . . . (3) (3)
Long-term liabilities . . . . . . . . . . . (158) (195)
Retirement benefits . . . . . . . . . . . . (255) (236)
Net operating loss. . . . . . . . . . . . . (528) (528)
Other . . . . . . . . . . . . . . . . . . . (197) (551)
------ ------
Net long-term deferred tax liability. . . . 6,698 6,322
------ ------
Net deferred tax liability. . . . . . . . . $6,606 $6,237
====== ======
The Company has a deferred tax asset reflecting the benefits of $1,509
million in net operating loss carryforwards (NOL), which expire as follows:
Millions of Dollars Expiring December 31,
$ 455 2002
262 2003
134 2004
136 2005
226 2006
- 2007
202 2008
94 2009
------
$1,509
======
<PAGE> F-16
The Internal Revenue Code of 1986, as amended, limits a corporation's
ability to utilize its NOLs with certain changes in the ownership of a
corporation's stock. The Company does not expect that those limitations
will have an adverse impact on its ability to utilize the NOLs. The
Company has analyzed its NOLs and other deferred tax assets and believes a
valuation allowance is not necessary.
A reconciliation between Federal statutory and effective tax rates is as
follows:
1997 1996 1995
Statutory tax rate .. . . . . . . . . . . 35.0% 35.0% 35.0%
State taxes - net . . . . . . . . . . . . 1.6 1.3 1.1
Other . . . . . . . . . . . . . . . . . . (1.7) (2.6) (2.3)
---- ---- ----
Effective tax rate . . . . . . . . . . . 34.9% 33.7% 33.8%
==== ==== ====
Payments of income taxes were $49 million in 1997, $162 million in 1996,
and $300 million in 1995. The Company believes it has adequately provided
for income taxes.
6. Debt
Long-term debt at December 31, 1997 and 1996 is summarized below:
(Millions of Dollars) 1997 1996
Capitalized leases, 5.43% to 20.00%, due
through 2018 . . . . . . . . . . . . . . $1,243 $1,126
Equipment obligations, 5.80% to 10.30%
due through 2012 . . . . . . . . . . . . 910 1,048
Mortgage bonds, 4.25% to 5.00%, due
through 2030. . . . . . . . . . . . . . . 175 176
Income debentures, 5.00%, due 2045 and 2054 102 102
ICTF Refunding Revenue bonds, 1989 Series A,
7.45% to 7.7%, due through 2014. . . . . . 45 46
Senior notes, 9.4%, due 2005. . . . . . . . 37 37
Certificates constituting a charge on income -
non-interest bearing, payable only from
available income . . . . . . . . . . . . . 29 29
Subordinated income debentures, 5.50%, due 2033 26 26
Other outstanding obligations . . . . . . . 67 80
Unamortized discount. . . . . . . . . . . . (44) (20)
------ ------
Total debt . . . . . . . . . . . . . . . . 2,590 2,650
Less: Debt due within one year. . . . . . 229 124
------ ------
Total debt due after one year . . . . . . . $2,361 $2,526
====== ======
<PAGE> F-17
Maturities of long-term debt (in millions of dollars) for each year 1998
through 2002 are $229, $139, $163, $162 and $214, respectively. Interest
payments approximate gross interest expense. Substantially all railway
equipment secures outstanding equipment obligations.
As described in Note 2 to the Financial Statements, on January 1, 1997,
MPRR was merged with and into UPRR. As a result of the MPRR Merger and the
subsequent SPT Merger, the Company assumed all indebtedness of MPRR and
SPT. Certain mortgage bonds of the former MPRR contain terms which limit
the payment of interest and impose sinking fund and other restrictions in
the event all interest is not paid. All interest was paid on these
mortgage bonds by the Company in 1997 and by MPRR in 1996 and 1995.
Substantially all of the right-of-way and track formerly owned by MPRR is
subject to mortgage liens. Certain debt agreements of the former MPRR may
also impose dividend restrictions on the Company (see Note 8). At December
31, 1997, the amount of Company's retained earnings available for dividends
was $2.9 billion.
As a result of MPRR's acquisition of Missouri-Kansas-Texas Railroad Company
(MKT) in 1988, the Company is now the obligor under MKT's 5-1/2 percent
Subordinated Income Debentures (the Debentures). Current interest on the
Debentures must be paid only to the extent that there is available income
remaining after allocation to a capital fund for the purpose of reimbursing
the Company, as successor to MPRR, for certain capital expenditures.
Unpaid interest accumulates to an amount not in excess of 16-1/2 percent of
the principal amount of the Debentures and is paid only to the extent that
there is available income remaining after payment of current interest.
Certain certificates constituting a charge on income (the Certificates)
issued by MKT have also been assumed by the Company. The Certificates do
not bear interest and payments to a sinking fund for the Certificates are
made only from available income, as defined in such Certificates.
Available income must be applied to the capital fund, current and
accumulated interest on the Debentures and a sinking fund for the
Debentures before any payment is made to the sinking fund for the
Certificates.
UPRR generated available income of $46.3 million in 1997. As a result, an
interest payment on the Debentures of $1.5 million will be made in 1998 for
1997 interest. In addition, $25.2 million of available income will be
applied to the capital fund, $7.3 million will be applied to the sinking
funds for the Debentures and the Certificates, and $12.4 million will be
accrued as dividends on the Company's Class A stock (see Note 8). Interest
and sinking fund payments for 1997 will be made out of UPRR's available
income only and in 1998 and thereafter will be made out of available income
for the Company. Amounts payable to sinking funds may be covered by the
<PAGE> F-18
cost of securities previously repurchased by the Company or its
predecessors. Amounts in the capital fund which are unused or
unappropriated for the reimbursement of capital expenditures may not exceed
$4.0 million at any time; and after the application of 1997 available
income, there will be no unused or unappropriated capital fund balance.
7. Lease Commitments
The Company leases certain locomotives, freight cars, computer equipment,
and other property under long-term and contingent lease agreements for use
in its rail operations. Future minimum lease payments for capital and
operating leases with initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1997 are as follows:
Operating Capital
(Millions of Dollars) Leases Leases
1998 . . . . . . . . . . . . . . . . . . $ 404 $ 166
1999 . . . . . . . . . . . . . . . . . . 382 179
2000 . . . . . . . . . . . . . . . . . . 336 165
2001 . . . . . . . . . . . . . . . . . . 278 186
2002 . . . . . . . . . . . . . . . . . . 213 163
Later years . . . . . . . . . . . . . . . 1,659 1,447
------ ------
Total minimum lease payments . . . . . $3,272 2,306
Amount representing interest . . . . . ------ (1,063)
------
Present value of net minimum capital lease payments $ 1,243
=======
A summary of rental expense charged to operations is as follows:
(Millions of Dollars) 1997 1996 1995
Transportation equipment rents. . . . . . $1,188 $803 $635
Other rents . . . . . . . . . . . . . . . 121 54 34
------ ---- ----
Total. . . . . . . . . . . . . . . . . $1,309 $857 $669
====== ==== ====
Rent expense included payments under long-term, non-cancelable leases of
$373 million in 1997, $339 million in 1996 and $225 million in 1995.
8. Capital Stock
The Board of Directors of the Company has restricted the availability of
retained earnings for payment of dividends by $131 million. This
represents (a) the amount by which the estimated fair value of the
Company's investment in its non-transportation subsidiaries, as determined
by the Board of Directors of the Company, exceeded the net book value of
such investment which was transferred to the Corporation by means of a
<PAGE> F-19
dividend in June 1971 ($110 million) and (b) the amount by which the fair
market value exceeded the book value of certain investment securities which
were transferred to the Corporation by means of a dividend in November 1972
($21 million).
As a result of the MPRR Merger, the Company's capital structure consists of
Class A Stock and Common Stock. The Class A Stock is entitled to a cash
dividend whenever a dividend is declared on the Common Stock, in an amount
which equals 8 percent of the sum of the dividends on both the Class A
Stock and the Common Stock. However, dividends may be declared and paid on
the Class A Stock only when there is unappropriated available income in
respect of prior calendar years which is sufficient to make a sinking fund
payment equal to 25 percent of such dividend for the benefit of the
Debentures or the Certificates (see Note 6). To the extent that dividends
are paid on the Common Stock but not the Class A Stock because the amount
of unappropriated available income is insufficient to make such a sinking
fund payment, a special cash dividend on the Class A Stock shall be paid
when sufficient unappropriated available income exists to make the sinking
fund payment. Such insufficiency does not affect the Company's right to
declare dividends on the Common Stock. Dividends on the Class A Stock for
1997 will be based on UPRR's available income only, and in 1998 and
thereafter will be based on available income for the Company. UPRR's
available income for 1997 will be sufficient to provide for a $12.4 million
special cash dividend on the Class A Stock to be paid in 1998 (see Note 6).
After such payment, dividends in arrears on the Class A Stock (which
includes arrears on MPRR Class A Stock accruing prior to the MPRR Merger)
will total $67 million.
9. Retirement Plans
The Company provides defined benefit pension plan benefits to eligible
non-union employees through qualified and non-qualified (supplemental) pension
plans, and to eligible union employees through a defined contribution
multi-employer pension plan. In addition, retirement medical benefits and
life insurance are provided for eligible non-union employees through an
unfunded benefit plan and for eligible union employees through multi-employer
plans.
Pension Benefits - Qualified and non-qualified defined pension benefits for
eligible non-union employees are based on years of service and the highest
compensation during the latest years of employment. The qualified plan is
funded based on the Projected Unit Credit actuarial funding method and is
funded at not less than the minimum funding standards set forth in the
Employee Retirement Income Security Act of 1974, as amended. In addition,
the Company's employees are covered by the Railroad Retirement System (the
System). Taxes paid by the Company to the System are expensed as incurred
<PAGE> F-20
and amounted to approximately $392 million in 1997, $275 million in 1996
and $200 million in 1995. The Company has settled a portion of the non-
qualified unfunded supplemental plan's accumulated benefit obligation by
purchasing annuities.
Total pension cost for the Corporation's qualified and supplemental pension
plans, which excludes the Overnite Transportation Company's plan in which
no employee of the Railroad participates, are detailed below. The
Company's employees participate in these plans along with other employees
of the Corporation.
(Millions of Dollars) 1997 1996 1995
Service cost - benefits earned during the period $ 18 $ 14 $ 14
Interest on projected benefit obligation . . . 94 56 58
Return on assets:
Actual gain . . . . . . . . . . . . . . . . (205) (101) (121)
Deferred gain . . . . . . . . . . . . . . . 115 49 73
Net amortization costs. . . . . . . . . . . 2 8 10
---- ---- ----
Charge to operations . . . . . . . . . . . . . $ 24 $ 26 $ 34
==== ==== ====
The projected benefit obligation (PBO) was determined using a discount rate
of 7.0% and 7.5% in 1997 and 1996, respectively. The estimated rate of
salary increase approximated 5.0% and 5.5% in 1997 and 1996, respectively.
The expected long-term rate of return on plan assets was 8.0% in both
years. The change in assumptions will not significantly affect 1998
pension cost. As of year-end 1997 and 1996, approximately 32% and 37%,
respectively, of the funded plans' assets were held in fixed-income and
short-term securities, with the remainder in equity securities.
The funded status of the Corporation's plans in which the Company's
employees participate are as follows:
Assets Exceed Accumulated
Accumulated Benefits Exceed
Benefits Assets(a)
(Millions of Dollars) 1997 1996 1997 1996
Plan assets at fair value . . . . . . . . $ 969 $ 855 $421 $395
----- ----- ---- ----
Actuarial present value of benefit obligations:
Vested benefits. . . . . . . . . . . . . 717 610 500 431
Non-vested benefits . . . . . . . . . . 76 41 6 11
----- ----- ---- ----
Accumulated benefit obligation . . . . . 793 651 506 442
Additional benefits based on estimated
future salaries . . . . . . . . . . . 72 80 15 53
----- ----- ---- ----
<PAGE> F-21
Projected benefit obligation. . . . . . . 865 731 521 495
----- ----- ---- ----
Plan assets (over)/under PBO. . . . . . . (104) (124) 100 100
----- ----- ---- ----
Unamortized net transition asset
(obligation). . . . . . . . . . . . . 11 13 (5) (11)
Unrecognized prior service cost. . . . . (80) (36) 3 (26)
Unrecognized net gain (loss) . . . . . . 369 285 3 3
Minimum liability . . . . . . . . . . . -- -- 31 42
----- ----- ---- ----
Pension liability . . . . . . . . . . . . $ 196 $ 138 $132 $108
===== ===== ==== ====
(a) Includes non-qualified supplemental plan benefits.
Other Postretirement Benefits - The Company also provides medical and life
insurance for qualifying non-union employees through participation in the
Corporation's plans. Components of the postretirement health care and life
insurance benefit expense for the Corporation is detailed below as follows:
(Millions of Dollars) 1997 1996 1995
Service cost - benefits earned during
the period . . . . . . . . . . . . . . . . $ 8 $ 4 $ 4
Interest costs on accumulated benefit
obligation. . . . . . . . . . . . . . . . . 30 15 18
Net amortization costs . . . . . . . . . . . . (10) (4) (7)
--- --- ---
Charge to operations . . . . . . . . . . . . . $28 $15 $15
=== === ===
The liability for the Corporation's postretirement benefit plans in which
the Company's employees participate is as follows:
(Millions of Dollars) 1997 1996
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . $270 $272
Fully eligible active employees. . . . . . . . . . 26 19
Other active employees . . . . . . . . . . . . . . 81 76
---- ----
Total accumulated postretirement benefit obligation . 377 367
Unrecognized prior service gain. . . . . . . . . . . . 22 22
Unrecognized net gain. . . . . . . . . . . . . . . . . 45 54
---- ----
Postretirement benefits liability. . . . . . . . . . . $444 $443
==== ====
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.0% and 7.5% in 1997 and 1996, respectively. This change
in assumption will not significantly affect 1998 postretirement benefit
costs. The health care cost trend rate is assumed to decrease gradually from
9.0% for 1998 to 4.5% for 2005 and all future years. If the assumed health
care cost trend rates are increased by one percentage point, the aggregate of
<PAGE> F-22
the service and interest cost components of annual postretirement benefit
expense would increase by $3 million, and the accumulated postretirement
benefit obligation would rise by $34 million.
Agreement Retiree Benefit Plans - Certain of the Railroad's union retirees
participate in multi-employer pension, medical and life insurance programs.
The costs of these plans have been expensed as payments have been made.
10. Contingent Liabilities
There are various claims and lawsuits pending against the Company and certain
customers have submitted claims or stated their intention to submit claims to
the Railroad for damages related to shipments delayed in transit as a result
of congestion problems (see F-27 and F-30) 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 damages, 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. As the congestion problems continue, 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 regulatory proceedings at the STB investigating
railroad service problems in the West. The STB has imposed certain temporary
measures on the Railroad pursuant to this proceeding, including, among other
things, the diversion of traffic from the Railroad's lines. Unless the
Railroad is successful in recovering from the congestion and related service
problems, certain parties may request the STB to order the Railroad to take
additional actions, including, among other things, further diversions of
traffic or the transfer of certain Company rail lines or other facilities to
other railroads.
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. At December 31, 1997, the Company had accrued $219 million for
estimated future environmental costs and believes it is reasonably possible
that actual environmental costs could be lower than the recorded reserve or
as much as 25% higher. In addition, the Company periodically enters into
financial and other commitments and has retained certain contingent
liabilities upon the disposition of formerly-owned operations.
<PAGE> F-23
In addition, UPC and certain of its officers and directors (who are also
officers and directors of the Company) are currently defendants in two
purported class action securities lawsuits, and certain current and former
directors of the Corporation and the Company 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 CNW into the Company without ensuring that the Corporation or the
Company had adequate systems in place to effectively integrate those
acquisitions into the operations of the Corporation and the Company. 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 or operating
results.
11. Other Income
Other income, net included the following:
(Millions of Dollars) 1997 1996 1995
Net gain on property dispositions . $102 $115 $ 75
Rental income . . . . . . . . . . . 75 38 22
Interest income . . . . . . . . . . 15 15 26
Other - net . . . . . . . . . . . . (20) (30) (3)
---- ---- ----
Total. . . . . . . . . . . . . . $172 $138 $120
==== ==== ====
12. Accounting Pronouncements
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities," effective for 1997,
which clarifies the accounting for environmental remediation liabilities.
Adoption did not have a significant impact on the Company's operating results
or financial condition.
<PAGE> F-24
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" that will be effective in 1998. The Company anticipates minimal
impact from this Statement.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" that will be 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.
13. Supplemental Cash Flow Information
The Corporation contributed $2,476 million, the equity portion of the SP
acquisition, to the Company in conjunction with the SPT Merger (see Note 2),
which caused a non-cash increase in the Company's fixed assets and capital
surplus in 1996--the year common control of SP was acquired.
14. Quarterly Financial Information (Unaudited)
Selected unaudited quarterly financial information for the Company for 1997
and 1996 are as follows (Millions of Dollars):
First Second Third Fourth Total
Operating 1997 $2,564 $2,610 $2,538 $2,269 $9,981
Revenues: 1996 $1,678 $1,723 $1,727 $2,552 $7,680
Operating 1997 $ 353 $ 499 $ 457 $ (56) $1,253
Income
(Loss): 1996 $ 292 $ 407 $ 433 $ 470 $1,602
Net Income 1997 $ 170 $ 250 $ 275 $ (75) $ 620
(Loss): 1996 $ 166 $ 235 $ 259 $ 280 $ 940
Fourth quarter 1997 results were negatively impacted by the onset of
congestion (see F-27 and F-30 for further discussion).
<PAGE> F-25
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
ACQUISITIONS, LEGAL MERGERS AND SIGNIFICANT INVESTMENTS
UPC Acquisitions: In April 1995, Union Pacific Corporation (the Corporation
or UPC) acquired the remaining 71.6% of Chicago and North Western
Transportation Company's (CNW) outstanding common stock not previously owned
by UPC for $1.2 billion. Prior to the acquisition, CNW was the nation's
eighth largest Class I railroad. In September 1996, UPC completed the
acquisition of Southern Pacific Rail Corporation (SP or Southern Pacific)
after receipt of a favorable decision from the Surface Transportation Board
of the U.S. Department of Transportation (STB) regarding the Corporation's
acquisition of SP. The aggregate purchase price was $4.1 billion ($2.5
billion in UPC common stock and $1.6 billion in cash funded with borrowings
by UPC both of which were subsequently pushed down to the Registrant). Prior
to the acquisition, SP was the nation's sixth largest Class I railroad.
CNW's rail operations have been completely integrated with the Registrant's
rail operations, while the integration of SP's rail operations are continuing
with full operational integration expected by the end of 1999.
Legal Mergers: Since August 1, 1995, the Registrant and its predecessors have
been merged with and into several entities (the Legal Mergers) in order to
consolidate all of UPC's principal rail operations into one legal entity.
The Legal Mergers have been accounted for in a manner similar to a pooling-
of-interest combination of entities under common control since all entities
involved in the Legal Mergers were direct or indirect wholly-owned
subsidiaries of UPC at the date of the Legal Mergers with the surviving
entity continuing as such following the Legal Mergers.
The consolidated financial statements of the Company are presented on a
pooled basis' back to the effective date on which the STB approval for
common control was granted to the Corporation. As a result, the consolidated
financial statements include the results of SP and its rail operating
subsidiaries--the Denver and Rio Grande Western Railroad Company (DRGW),
SPCSL Corp. (SPCSL), St. Louis and Southwestern Railway Company (SSW) and
Southern Pacific Transportation Company (SPT)--as of October 1, 1996; CNW's
rail operating subsidiaries--Western Railroad Properties, Inc. (WRPI) and
Chicago and North Western Railway Company (CNWR)--as of May 1, 1995; and
Missouri Pacific Corporation's rail operating subsidiary--the Missouri Pacific
Railroad Company (MPRR)--as of January 1, 1983, the effective dates on which
the STB approval for common control was granted to the Corporation for these
acquisitions. A detailed description of the Legal Mergers follows:
<PAGE> F-26
On August 1, 1995, WRPI, a wholly-owned, indirect subsidiary of the
Corporation following the acquisition of CNW, which operated the sole
joint main line (shared with BNSF) out of the Powder River Basin in
Wyoming and leased a connector line from UP Leasing Corporation, a
wholly-owned subsidiary of the Corporation (UP Leasing), was merged with
and into the Registrant's predecessor, Union Pacific Railroad Company, a
Utah corporation (UPRR), with UPRR continuing as the surviving entity.
On October 1, 1995, UP Leasing, which financed the Powder River Basin
connector line for WRPI in exchange for monthly rental payments, was
merged into UPRR, with UPRR continuing as the surviving entity. In
addition, CNWR, a wholly-owned, indirect subsidiary of the Corporation,
which was the principal rail subsidiary of CNW, was merged with and
into UPRR, with UPRR continuing as the surviving entity (the CNWR
Merger). CNWR and UPRR operated as a unified rail system before and
after the CNWR Merger.
On January 1, 1997, MPRR was merged with and into UPRR (the MPRR
Merger), with UPRR continuing as the surviving entity. Prior to the
MPRR Merger, MPRR was a Class I railroad, which operated as a unified
rail system with UPRR and such operations continued following the MPRR
Merger.
On June 30, 1997, DRGW and SPCSL were merged with and into UPRR (the
DRGW and SPCSL Mergers), with UPRR continuing as the surviving entity.
Immediately prior to the DRGW and SPCSL Mergers, DRGW and SPCSL were
wholly-owned, direct subsidiaries of SPT, and UPRR and SPT at that time
and immediately thereafter were wholly-owned, indirect subsidiaries of
UPC.
On September 30, 1997, SSW was merged with and into SSW Merger Corp,
with SSW Merger Corp continuing as the surviving entity, and immediately
thereafter, SSW Merger Corp was merged with and into UPRR (collectively,
the SSW Merger), with UPRR continuing as the surviving entity.
Immediately prior to the SSW Merger, SSW was a direct subsidiary of SPT,
and UPRR and SPT were at that time and immediately thereafter wholly-owned,
indirect subsidiaries of the Corporation.
On February 1, 1998, UPRR was merged with and into SPT, a Delaware
corporation and the principal SP rail affiliate (the SPT Merger), with
SPT continuing as the surviving corporation and changing its name to
"Union Pacific Railroad Company" immediately following the SPT Merger
and thereby creating the current Registrant. Immediately prior to the
SPT Merger, SPT and UPRR were wholly-owned, indirect subsidiaries of
UPC. UPRR and SPT operated as a unified system before and after the SPT
Merger.
<PAGE> F-27
Integration of Southern Pacific: The Company expects to complete the full
integration of the operations of the Registrant and the Southern Pacific rail
subsidiaries during 1999. The Company believes that the full implementation
of the merger will result in shorter routes, faster transit times, better
on-time performance, expanded single-line service and more efficient traffic
flow. Some of the key on-going elements of integration are (i) the
institution of directional running on parallel tracks in certain corridors to
improve average train velocity and allow more traffic to be handled
efficiently, (ii) the negotiation and implementation of "hub-and-spoke" labor
agreements to allow more efficient use of train crews, (iii) the integration
of the computer systems of both companies to improve overall operations and
service and (iv) merger-related capital spending to expand capacity and
improve service, now estimated at $400 million for 1998.
Significant Investments: In June 1997, the Railroad and a consortium of
partners were granted a 50-year concession for the Pacific-North and
Chihuahua Pacific rail lines in Mexico and a 25% stake in the Mexico City
Terminal Company at an aggregate price of $525 million. The Railroad holds a
13% ownership share in the consortium and has accounted for its interest by
the equity method. The consortium assumed operational control of both lines
in February 1998.
IMPACT OF CONGESTION ON 1997 OPERATIONS
In the third quarter of 1997, 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 Registrant's operations and earnings. System
congestion started in the Gulf Coast region and spread throughout the system
as the Registrant shifted resources to help mitigate the need for locomotives
due to slower average train velocity. The congestion was brought on by,
among other things, crew shortages and restricted track access caused by
necessary track maintenance on former Southern Pacific lines, increased
demand, washouts due to severe weather, derailments and congestion at
Texas/Mexico gateways. Traffic slowed further as rail yards in the Gulf
Coast region filled, slowing access into and out of the yards and forcing
trains to be held on sidings.
Service Recovery Plan - To restore service to acceptable levels, the
Registrant announced on October 1, 1997, that it was implementing a Service
Recovery Plan (the Plan). 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. Key elements of the Plan include:
<PAGE> F-28
Power: Bringing more locomotives into the Gulf Coast region through
acquisitions, leasing from other railroads and moving locomotives from
selected areas of the Registrant's system;
People: Engaging in an extensive hiring program, allocating additional
managers and operating personnel and revising operating plans to
relieve congested terminals and remove trains from congested lines; and
Cooperation: Working with customers and other railroads to curtail
additional congestion and to provide alternative transportation.
Recent Actions Under the Plan - Implementation of the Plan has resulted in
improvement in the overall operation of the Railroad and has generally
eliminated congestion problems outside the Gulf Coast region and the
surrounding southeast portion of the Company's rail system (although weather
problems have caused intermittent periods of congestion, primarily in the
Midwest). However, significant congestion has continued in the Gulf Coast
region, which has been aggravated recently by several severe storms and
congestion caused by operational problems on Mexican railroad lines south of
Laredo, Texas. As discussed below, the Company has announced that it has
embargoed most southbound traffic destined for the Laredo gateway to address
worsening congestion at that gateway. In connection with its integration
with Southern Pacific, the Registrant has implemented (i) Transportation
Control System (TCS) in the southeast portion of the Registrant's system,
which includes the Gulf Coast region, where the cutover 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.
In addition to decreased revenues and increased operating costs resulting
from the congestion-related slowdown in the Company's traffic, discussed
above, certain customers have submitted claims or stated their intention to
submit claims to the Company for damages related to delays in shipments. The
Company will continue to evaluate the adequacy of its reserves for these
claims and expects to add to such reserves as appropriate.
In order to address the congestion problem and to realize the benefits to the
Registrant and its customers of the merger implementation steps outlined
above, the Registrant has recently initiated certain actions under the Plan:
<PAGE> F-29
Power: Arranging for the deployment of approximately 200 locomotives in
the Gulf Coast region through selective redeployment and short-term
leases and loans from other railroads to reduce congestion in yards and
remove trains from sidings.
People: Continuing its hiring program and redeploying personnel to
(i) improve management of certain major terminals, (ii) update TCS
information in congested areas to improve operational reliability and
(iii) identify empty cars and expedite them to shipper facilities for
loading to reduce the number of cars in yards and on sidings.
Cooperation: Working with the Registrant's connecting railroads to
expedite the interchange of traffic and entering into arrangements with
competitors to share tracks and coordinate dispatching. For example,
the recent agreement between the Registrant and the BNSF, which, among
other things, grants certain trackage rights to the Registrant in the
Houston area and provides for joint dispatching of various lines in the
Houston area and between Houston and New Orleans.
On March 24, 1998, the Company announced that it would embargo most southbound
traffic destined for the Laredo, Texas gateway commencing Saturday, March 28,
1998, to clear the backlog of cars waiting to cross into Mexico. The embargo
applies to grain, chemicals, industrial products and coal, but not
finished automobiles, auto parts or intermodal traffic or any northbound
traffic through Laredo. The Company is attempting to reroute some of the
embargoed traffic through other Company gateways, none of which are subject
to the embargo. The Company believes that this embargo is necessary because
congestion problems principally within Mexico that affect the Laredo gateway
have worsened during recent weeks and are affecting other areas within the
southeast region of its system. As of March 26, 1998, there were more than
5,800 cars waiting to move south to Laredo as compared with approximately
3,100 cars, which is considered normal. These car numbers include a small
amount of traffic terminating in Laredo. The Company's crossings at Laredo
have declined from a daily average of 375 southbound cars in January to 335
cars in February and 305 for the first 24 days of March. Although the
Company is unable to predict the duration of the embargo, it currently
expects it to last for at least one month.
The Registrant believes that the steps it is taking to continue the
integration of Southern Pacific and implement the Plan (including the limited
embargo at the Laredo gateway) will alleviate the congestion and service
issues affecting the Registrant and that substantial operational improvement
will begin to occur in the near term. The Registrant is also prepared to
take additional action, including transferring business to other carriers and
arranging other temporary embargos on shipments to allow the Registrant to
<PAGE> F-30
clear the system, if such actions become necessary. However, the Registrant
does not believe that such additional actions are necessary at this time.
In conjunction with the Plan, the Registrant is engaged in a comprehensive
examination of its long-term capital spending program in the areas affected
by congestion. The study focuses on further upgrading the Registrant's
operations infrastructure in order to keep pace with business growth
primarily driven by current and anticipated chemical plant expansion along
the Gulf Coast as well as intermodal, automotive, industrial products, grain
and Mexico business. The scope of the examination includes all terminal
operations, yards, industrial complexes, joint operations, connecting routes
and Mexican gateways in the El Paso-New Orleans corridor. The Registrant
currently plans to spend more than $570 million on capital projects in Texas
and Louisiana in 1998 and 1999. Management remains committed to capital
spending to continue capacity expansion on its main lines and in its yards,
upgrade and augment equipment to meet customer needs and develop and
implement new technology.
ANTICIPATED IMPACT OF CONGESTION ON 1998 OPERATIONS
The cost of the congestion-related problems in 1997 was approximately
$450 million, after tax, which reflected the combined effects of lost
business, higher costs associated with system congestion, and 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 have an adverse impact on 1998 results,
and on February 26, 1998, UPC announced that the problems would likely result
in a loss during the first quarter of 1998. In addition, as a result of
recent operating losses incurred by the Company and in order to fund its
capital programs, the Company has incurred substantial incremental debt since
December 31, 1997, and expects to incur significant additional debt during
the remainder of 1998. The timing of the Company's return to profitability
will be determined by how rapidly it is able to eliminate congestion in the
Gulf Coast region and at the Laredo gateway, and return to normal operations
throughout its system.
RESULTS OF OPERATIONS 1997 COMPARED TO 1996
Reported Results: The Railroad reported 1997 net income of $620 million, a
decline of $320 million from the $940 million reported in 1996. Results for
1996 included SP operating results from October (the effective point of
common control) through December. The earnings decline reflected the impact
of higher operating costs and lower business volumes from system congestion
in 1997 (discussed above) and the full-year effect of incremental
<PAGE> F-31
depreciation and interest costs associated with the purchase of Southern
Pacific.
The following discussion is based upon pro forma 1996 results which assumes
the SP acquisition date of common control occurred on January 1, 1996:
Pro Forma Results: The Railroad earned $620 million in 1997 compared to $871
million a year ago, a 29% year-over-year decline. This decline in earnings
was the result of the business shortfalls and increased operating costs
caused by system congestion that arose in the third quarter of 1997.
Operating revenues were $9,981 million, down 1% from 1996 revenues of $10,113
million. The revenue decline was driven by a congestion-related decrease of
4% in carloadings that was largely offset by a 3% improvement in average
commodity revenue per car (ARC) from improved traffic mix and longer haul
lengths.
Agricultural Products carloadings fell 9% leading to a $73 million (5%)
decline in revenue. The volume decline reflected slow cycle times on wheat
and corn shuttles, as well as congestion problems and related equipment
shortages. In addition, strong worldwide wheat competition in the first
half of 1997 hurt wheat exports. ARC rose 4% (longer-haul export traffic
and higher rates from maintaining an inventory of cars for grain customers)
helping to mitigate some of the revenue shortfall caused by volume
declines.
Automotive revenues grew $18 million (2%) as carloadings increased 3% on
continued auto industry sales growth and new business opportunities with
producers. Strong import and domestic demand caused finished vehicle
carloadings to increase 3%, in spite of industry-wide equipment shortages
and unscheduled auto plant shutdowns. Auto parts volumes grew by 2%, as
strong volumes to and from Mexico out-paced congestion-related traffic
diversions. Average commodity revenue per car declined $10 or 1% due to
new shorter-haul business.
Chemicals business volumes were flat, while ARC fell $32 or 2% (due to
strong competitive pressures and increased short-haul business) leading to
a $39 million (2%) revenue shortfall. Strong market demand could not be
met due to acute system congestion in the Railroad's Southern corridor that
resulted in diversion of business to alternate transportation modes and the
BNSF.
Energy revenues (primarily derived from coal operations) were up $16
million from 1996, as a 2% carloadings decline was more than offset by a 3%
ARC improvement (higher-rated business and longer haul lengths). Volume
decreases reflected the impact of congestion on the ability of the Railroad
<PAGE> F-32
to meet strong domestic and foreign demand for low-sulfur, Powder River
Basin (PRB) coal. During the peak of the congestion in 1997, daily trains
out of the PRB averaged only 21 trains per day compared to 25 trains per
day earlier in 1997 and 24 trains per day in 1996.
Industrial Products carloadings declined 15%, while ARC grew 16% (longer
average length of haul due to the absence of short haul moves eliminated by
the sale of the Duck Creek North line) leading to a $40 million (2%)
revenue decline. Volume decreases primarily reflected the impact of
congestion and the above-mentioned line sale.
Intermodal revenues improved $15 million (1%) reflecting higher volumes and
unchanged ARC. Strong market demand and new business opportunities in the
first half of 1997 were largely offset by congestion issues later in the
year, including the temporary suspension of business in specific traffic
corridors as part of the Plan. Results were also impacted by an industry-
wide equipment shortages which allowed more business to be moved by trucks.
Operating expenses rose $286 million (3%) to $8,728 million in 1997,
primarily from congestion costs, one-time merger SP implementation costs and
inflation. Cost increases were partially offset by merger benefits and
company-wide cost containment efforts.
Salaries, wages and employee benefits increased $50 million (1%), the
result of higher recrew rates in the second half of 1997 caused by
congestion, one-time merger severance payments and wage inflation from new
national labor agreements. This was offset by reduced volumes and staff
levels from merger consolidation and productivity gains.
Equipment and other rent expense increased $139 million (12%) reflecting a
congestion-related increase in car cycle times, which required the Company
to increase the size of its car fleet, and incremental costs associated
with a new program making more equipment available for grain customers.
These higher costs were somewhat offset by a congestion-driven reduction in
business volumes.
Fuel and utility costs increased $3 million as higher year-over-year fuel
prices, including the cost of fuel hedging, were offset by a reduced fuel
consumption rate (improved locomotive efficiency and lower train speeds due
to congestion) and lower volumes (system congestion).
Depreciation charges rose $72 million (8%), primarily reflecting the
Railroad's continued investment in equipment, rail infrastructure, capacity
and technology.
<PAGE> F-33
Materials and supplies costs declined $18 million (3%) as merger
consolidation benefits were only partially offset by deferred maintenance
costs on the SP's locomotive fleet.
Other costs increased $40 million (3%), primarily due to alternate
transportation costs and customer claims related to the system congestion,
as well as one-time merger implementation costs--mainly training. These
cost increases were partially offset by spending reductions and ongoing
merger consolidation benefits.
Operating income declined $418 million (25%) to $1,253 million in 1997, while
the operating ratio deteriorated to 87.4 in 1997 from 83.5 in 1996--reflecting
the effects of system congestion.
Other income and expense, net improved $48 million to $301 million, primarily
the result of lower interest rates and higher asset sales--including real
estate, rail line and other non-operating asset sales.
OTHER MATTERS
Federal Railroad Administration (FRA) Review: The Registrant suffered a
number of severe accidents in 1997, although most safety measures for the
year improved significantly, with reportable injuries, lost work days and
grade crossing accidents all declining in excess of 20%. As a result of
these accidents in 1997, the FRA reviewed the Registrant's operations and
concluded that safety problems at the Registrant were the result of, among
other things, a loss of focus on safety, personnel shortages and crew
management problems. The FRA made several recommendations, including
creating a joint committee of Railroad management, labor and the FRA to
review and monitor all aspects of safety, adding an executive position for
safety reporting directly to the President of the Railroad, creating a safety
hotline (direct to the Railroad's President), re-evaluating all existing
training programs and increasing the monitoring of train crew performance,
crew fatigue and crew scheduling. All such FRA proposals have been
implemented by the Railroad. The Railroad has also implemented a guaranteed
time-off program for train employees to combat crew fatigue. On February 25,
1998, the FRA released a report stating that it was encouraged by the
Registrant's initial progress but requiring the Registrant to submit written
safety action plans and indicating that it would continue to monitor the
Registrant's operations through site-specific inspections. The FRA has
announced its intention to impose fines totaling $131,000 as a result of its
review.
<PAGE> F-34
Rail Service Proceedings: On October 2, 1997, the STB initiated a proceeding
to investigate rail service problems in the western United States. On
October 31, 1997, the STB issued an emergency service order that, among other
things, (i) allows Texas Mexican Railway Company (Tex Mex) and, following a
subsequent expansion of the order, BNSF to divert some traffic from the
Registrant in order to reduce congestion on the Registrant's lines in
Houston, Texas, (ii) directs the Registrant to suspend rail transportation
service contract obligations of certain shippers at Houston that wish to
route shipments over the Tex Mex system instead of the Registrant during the
period of the service order and (iii) requires the Registrant to report to
the STB weekly regarding service statistics. The emergency order was
extended and expanded in certain respects on December 4, 1997 and again on
February 25, 1998, when the STB, citing the gravity of the Registrant's
congestion problems and characterizing them as "not yet close to being
resolved", extended the duration of the emergency service order until August
2, 1998, the maximum period allowable under the law for the original order,
and ordered the Registrant to augment its reporting on service issues and
proposed infrastructure improvements for the Houston, Texas area.
In the rail service proceedings, the STB rejected proposals by various
parties for additional emergency measures. For example, the Railroad
Commission of Texas (the "RTC") submitted proposals to the STB under which
the Registrant would be required, among other things, to transfer certain
lines in the Gulf Coast region to Tex Mex or a Houston terminal railroad. On
February 17, 1998, the STB served an order declining to reconsider its denial
of the RTC's proposals. Tex Mex and KCS have filed a petition for similar
relief in the UP/SP merger oversight proceeding, and the Corporation and the
Registrant have opposed that petition as being unsupported by any evidence
and without merit.
KCS and Tex Mex have also filed petitions with the STB challenging actions
taken by the Registrant and BNSF to rationalize the operations of the Houston
Belt & Terminal Railway Company (HBT), of which the Registrant and BNSF each
owns 50 percent. The Registrant, BNSF and HBT have opposed those petitions.
If continued implementation of financial and operational initiatives
undertaken by the Company ultimately proves unsuccessful in alleviating the
congestion and related service problems experienced by the Registrant,
certain parties may request the STB to order the Registrant to take
additional actions including, among other things, further diversions of
traffic or the transfer of certain the Registrant's rail lines or other
facilities to other railroads. While the Company believes that it is
unlikely, there can be no assurance that one or more of such proposals, or
proposals seeking similar relief might not be approved in some form,
particularly if the Registrant is not successful in resolving its congestion
problems in the Gulf Coast region within a reasonable period. In addition,
<PAGE> F-35
if the congestion problems persist, the STB may institute a new proceeding at
the end of the current one in light of developments concerning the
Registrant's operations in 1998.
Shipper Claims: Certain customers have submitted claims or stated their
intention to submit claims to the Registrant for damages related to shipments
delayed as a result of congestion problems, and certain customers have filed
lawsuits seeking relief related to such delays. The nature of the damages
sought by claimants includes, but is not limited to, contractual liquidated
damages, freight loss or damage, alternative transportation charges,
additional production costs, lost business and lost profits. In addition,
some customers have asserted that they have the right to cancel contracts as
a result of alleged material breaches of such contracts by Registrant. While
the Company does not believe that such claims will have a material adverse
effect on its consolidated financial condition, it is not possible to
determine fully the effects of all asserted and unasserted claims. As the
congestion problems continue, 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.
Personal Injury: Over the past 10 years, work-related injuries have declined
by more than 10% annually, reflecting aggressive safety and training
programs. In addition, after several years of rising costs, the average
settlement cost per claim in 1997 has declined. Annual expenses for the
Railroad's injury-related events were $328 million in 1997 (which includes a
full year of Southern Pacific), $251 million in 1996 and $222 million in
1995. Compensation for work-related accidents is governed by the Federal
Employers' Liability Act (FELA). Under FELA, damages are assessed based on a
finding of fault through litigation or on out-of-court settlements. The
Railroad offers a comprehensive variety of services and rehabilitation
programs for employees who are injured at work.
Workforce: Approximately 90% of the Railroad's 52,000 employees are
represented by rail unions. Under the conditions imposed by the STB in
connection with UPC's acquisition of SP, labor agreements between the
Registrant and the unions must be negotiated before the Southern Pacific rail
system can be fully integrated into that of the Registrant. To date, the
Registrant has successfully reached agreements with the shopcraft, carmen,
clerical and maintenance of way unions. The negotiations with the operating
crafts are proceeding on schedule, with seven hub-and-spoke agreements
currently in place. Under the hub-and-spoke concept, train crews are allowed
to operate trains on multiple tracks in and out of major rail centers and
return to a permanent home terminal, in contrast to traditional labor
agreements that only allow train crew members to operate over a single line.
The terms of ratified and pending labor agreements are not expected to have a
<PAGE> F-36
material adverse effect on the Registrant's results of operations. The
Registrant expects the remaining agreements to be finalized in 1998.
Accounting Pronouncements: The American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities," effective for 1997, which clarifies the accounting for
environmental remediation liabilities. Adoption did not have a significant
impact on the Company's operating results or financial condition.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" that will be effective in 1998. The Company anticipates minimal
impact from this Statement.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" that will be 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.
Year 2000 Costs: In 1995, the Company began modifying its computer systems
to process transactions involving the year 2000 and beyond. Costs to convert
these systems, estimated to total $46 million, are expensed as incurred. At
year-end 1997, approximately 50% of the Company's systems have been modified,
and the majority of the remaining systems are expected to be modified by
year-end 1998. During 1999, systems will be tested to ensure compliance with
year 2000 requirements.
The Company is in the process of contacting entities with whom it exchanges
data to determine the status of their year 2000 modification efforts. In
addition, the Company is working with vendors who supply equipment and/or
software that could experience year 2000 problems.
The Company believes its systems will be successfully and timely modified.
However, failure to do so by the Company or third parties with whom the
Company does business could materially impact operations and financial
results in the year 2000.
Cautionary Information: Certain information included in this report
contains, and other materials filed or to be filed by the Registrant 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 Registrant)
contain or will contain, forward-looking statements within the meaning of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Such forward-looking information may include, without
limitation, statements that the Registrant does not expect that lawsuits,
environmental costs, commitments, contingent liabilities, labor negotiations
<PAGE> F-37
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 Registrant's financial or operational results. Such
forward-looking information is or will be based on information available at
that time and is or will be subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in the
statements. Important factors that could cause such differences include, but
are not limited to, whether the Registrant is fully successful in overcoming
its congestion-related problems and implementing its Service Recovery Plan
and other financial and operational initiatives, industry competition and
regulatory developments, natural events such as floods and earthquakes, the
effects of adverse general economic conditions, 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.
<EXHIBIT INDEX> 1
EXHIBIT INDEX
Exhibit Number
2(a) Agreement and Plan of Merger, dated as of November 21,
1996, between UPRR and MPRR, is incorporated by reference
to Exhibit 2 to UPRR's Current Report on Form 8-K dated
January 16, 1997.
2(b) Agreement and Plan of Merger, dated as of January 29,
1998, between UPRR and SPT is incorporated by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K
dated February 13, 1998.
3(a) Amended Certificate of Incorporation of the Registrant,
effective as of February 1, 1998, is incorporated herein
by reference to Exhibit 3.1 to the Registrant's Current
Report on Form 8-K dated February 13, 1998.
3(b) By-Laws of the Registrant, as amended effective as of
February 1, 1998, are incorporated herein by reference to
Exhibit 3.2 to the Registrant's Current Report on Form 8-K
dated February 13, 1998.
4 Pursuant to various indentures and other agreements, the
Registrant has issued long-term debt; however, no such
agreement has securities or obligations covered thereby
which exceed 10% of the Registrant's total consolidated
assets. The Registrant agrees to furnish the Commission
with a copy of any such indenture or agreement upon
request by the Commission.
10(a) Amended and Restated Anschutz Shareholders Agreement,
dated as of July 12, 1996, among UPC, UPRR, The Anschutz
Corporation (TAC), Anschutz Foundation (the Foundation),
and Mr. Philip F. Anschutz (Mr. Anschutz), is incorporated
herein by reference to Annex D to the Joint Proxy
Statement/Prospectus included in Post-Effective Amendment
No. 2 to UPC's Registration Statement on Form S-4
(No. 33-64707).
10(b) Amended and Restated MSLEF Shareholder Agreement, dated as
of July 12, 1996, between UPC and The Morgan Stanley
Leveraged Equity Fund II, L.P., is incorporated herein by
<EXHIBIT INDEX> 2
reference to Annex E to the Joint Proxy
Statement/Prospectus included in Post-Effective Amendment
No. 2 to UPC's Registration Statement on Form S-4
(No. 33-64707).
10(c) Amended and Restated Parent Shareholders Agreement, dated
as of July 12, 1996, among UPC, Union Pacific Merger Co.
(UP Merger) and SP is incorporated herein by reference to
Annex F to the Joint Proxy Statement/Prospectus included
in Post-Effective Amendment No. 2 to UPC's Registration
Statement on Form S-4 (No. 33-64707).
10(d) Amended and Restated Anschutz/Spinco Shareholders
Agreement, dated as of July 12, 1996, among Union Pacific
Resources Group Inc. (Resources), TAC, the Foundation and
Mr. Anschutz is incorporated herein by reference to Annex
G to the Joint Proxy Statement/Prospectus included in
Post-Effective Amendment No. 2 to UPC's Registration
Statement on Form S-4 (No. 33-64707).
10(e) Amended and Restated Registration Rights Agreement, dated
as of July 12, 1996, among UPC, TAC, and the Foundation is
incorporated herein by reference to Annex H to the Joint
Proxy Statement/Prospectus included in Post-Effective
Amendment No. 2 to UPC's Registration Statement on Form S-4
(No. 33-64707).
10(f) Amended and Restated Registration Rights Agreement, dated
as of July 12, 1996, among Resources, TAC, and the
Foundation is incorporated herein by reference to Annex I
to the Joint Proxy Statement/Prospectus included in Post-
Effective Amendment No. 2 to UPC's Registration Statement
on Form S-4 (No. 33-64707).
10(g) Amended and Restated Registration Rights Agreement, dated
as of July 12, 1996, among UPC, UP Holding Company, Inc.,
UP Merger and SP is incorporated herein by reference to
Annex J to the Joint Proxy Statement/Prospectus included
in Post-Effective Amendment No. 2 to UPC's Registration
Statement on Form S-4 (No. 33-64707).
10(h) Agreement, dated September 25, 1995, among UPC, the
Registrant, MPRR and SP, SPT, D&RGW, SLSRC and SPCSL, on
the one hand, and Burlington Northern Railroad Company
(BN) and The Atchison, Topeka and Santa Fe Railway Company
(Santa Fe), on the other hand, is incorporated by
<EXHIBIT INDEX> 3
reference to Exhibit 10.11 to UPC's Registration Statement
on Form S-4 (No. 33-64707).
10(i) Supplemental Agreement, dated November 18, 1995, between
UPC, UPRR, MPRR and SP, SPT, D&RGW, SLSRC and SPCSL, on
the one hand, and BN and Santa Fe, on the other hand, is
incorporated herein by reference to Exhibit 10.12 to UPC's
Registration Statement on Form S-4 (No. 33-64707).
12 Ratio of Earnings to Fixed Charges
24 Powers of Attorney
27 Financial Data Schedule
EXHIBIT 12
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
RATIO OF EARNINGS TO FIXED CHARGES
For the Years Ended December 31,
(Millions of Dollars, Except for Ratio)
1997 1996 1995
Earnings from continuing operations. . . . . $ 620 $ 940 $ 867
Undistributed equity earnings . . . . . . . (41) (52) (34)
------ ------ ------
Total operating earnings. . . . . . . $ 579 $ 888 $ 833
Income taxes . . . . . . . . . . . . . . . . 332 477 443
Fixed charges:
Interest expense including
amortization of debt discount . . . . 473 323 194
Portion of rentals representing
an interest factor. . . . . . . . . . 158 129 60
------ ------ ------
Total fixed charges . . . . . . . . . 631 452 254
------ ------ ------
Earnings available for fixed charges . . . . $1,542 $1,817 $1,530
====== ====== ======
Ratio of earnings to fixed charges . . . . . 2.4 4.0 6.0
=== === ===
EXHIBIT 24
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
Powers of Attorney
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ PHILIP F. ANSCHUTZ
----------------------
Philip F. Anschutz
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ ROBERT P. BAUMAN
--------------------
Robert P. Bauman
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ RICHARD B. CHENEY
---------------------
Richard B. Cheney
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ E. VIRGIL CONWAY
--------------------
E. Virgil Conway
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ SPENCER F. ECCLES
---------------------
Spencer F. Eccles
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ ELBRIDGE T. GERRY, JR.
--------------------------
Elbridge T. Gerry, Jr.
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ WILLIAM H. GRAY, III
------------------------
William H. Gray, III
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker her true and
lawful attorney-in-fact and agent, to sign on her behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ JUDITH RICHARDS HOPE
------------------------
Judith Richards Hope
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ RICHARD J. MAHONEY
----------------------
Richard J. Mahoney
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ JOHN R. MEYER
-----------------
John R. Meyer
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ THOMAS A. REYNOLDS, III
---------------------------
Thomas A. Reynolds, Jr.
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ JAMES D. ROBINSON, III
--------------------------
James D. Robinson, III
The undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Company), hereby appoints each of L. White Matthews, III,
Carl W. von Bernuth, Richard J. Ressler and Thomas E. Whitaker his true and
lawful attorney-in-fact and agent, to sign on his behalf the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, and any and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
/s/ RICHARD D. SIMMONS
----------------------
Richard D. Simmons
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 50
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<RECEIVABLES> 456
<ALLOWANCES> 0
<INVENTORY> 288
<CURRENT-ASSETS> 1,045
<PP&E> 30,694
<DEPRECIATION> 5,208
<TOTAL-ASSETS> 27,247
<CURRENT-LIABILITIES> 2,767
<BONDS> 2,361
0
29
<COMMON> 0
<OTHER-SE> 8,892
<TOTAL-LIABILITY-AND-EQUITY> 27,247
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