<COVER PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to _____________________
Commission file number 1-6146
UNION PACIFIC RAILROAD COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 94-6001323
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 271-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
As of October 31, 1998, the Registrant had outstanding 7,130 shares
of Common Stock, $10 par value, and 620 shares of Class A Stock, $10 par
value.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS
FORM WITH THE REDUCED DISCLOSURE FORMAT.
<INDEX PAGE>
UNION PACIFIC RAILROAD COMPANY
INDEX
PART I. FINANCIAL INFORMATION
------------------------------
Page Number
-----------
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED STATEMENT OF CONSOLIDATED INCOME
AND RETAINED EARNINGS - For the Three Months
and Nine Months Ended September 30, 1998 and 1997. . . . 1
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL
POSITION - At September 30, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . 2
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
For the Nine Months Ended
September 30, 1998 and 1997. . . . . . . . . . . . . . . 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 2: MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS
OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. . . . . . . . . . . . . . . . . . . . . . . 19
PART II. OTHER INFORMATION
----------------------------
ITEM 1: LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . 20
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 22
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
<PAGE> 1
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
For The Three and Nine Months Ended September 30, 1998 and 1997
---------------------------------------------------------------
(Millions of Dollars, Except Ratio)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
Operating Revenues . . . . . . . . . $2,360 $2,538 $6,961 $7,712
------ ------ ------ ------
Operating Expenses:
Salaries and benefits . . . . . . . 898 853 2,671 2,565
Equipment and other rents . . . . . 324 331 1,024 955
Depreciation and amortization . . . 251 242 745 725
Fuel and utilities (Note 3) . . . . 191 228 600 761
Purchased services. . . . . . . . . 142 147 437 451
Materials and supplies. . . . . . . 130 117 396 387
Other costs (Note 5). . . . . . . . 199 162 927 558
------ ------ ------ ------
Total . . . . . . . . . . . . . . 2,135 2,080 6,800 6,402
------ ------ ------ ------
Operating Income . . . . . . . . . . 225 458 161 1,310
Other Income - Net . . . . . . . . . 45 79 113 132
Interest Expense . . . . . . . . . . (162) (119) (443) (360)
------ ------ ------ ------
Income (Loss) Before Income Taxes. . 108 418 (169) 1,082
Income Tax Expense (Benefit) . . . . 41 143 (82) 387
------ ------ ------ ------
Net Income (Loss) . . . . . . . . $ 67 $ 275 $ (87) $ 695
====== ====== ====== ======
Retained Earnings:
Beginning of period . . . . . . . . $3,736 $4,145 $4,110 $3,939
Net income (loss) . . . . . . . . . 67 275 (87) 695
Dividends to parent . . . . . . . . (50) (127) (270) (341)
------ ------ ------ ------
End of Period. . . . . . . . . $3,753 $4,293 $3,753 $4,293
====== ====== ====== ======
Ratio of Earnings to Fixed
Charges (Note 4). . . . . . . . . - - 0.6 3.2
====== ====== ====== ======
The accompanying accounting policies and notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE> 2
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
------------------------------------------------------
(Millions of Dollars)
(Unaudited)
September 30, December 31,
ASSETS 1998 1997
------ ------------- ------------
Current Assets:
Cash and temporary investments . . . . $ 41 $ 50
Accounts receivable - net (Note 3) . . 375 456
Materials and supplies . . . . . . . . 307 288
Other current assets . . . . . . . . . 200 251
------- -------
Total Current Assets . . . . . . . . 923 1,045
------- -------
Investments:
Investments in and advances to
affiliated companies . . . . . . . . . 508 443
Other investments . . . . . . . . . . . 156 181
------- -------
Total Investments . . . . . . . . . . 664 624
------- -------
Properties, at cost:
Road and other . . . . . . . . . . . . 24,624 23,610
Equipment . . . . . . . . . . . . . . . 7,497 7,084
------- -------
Total Properties . . . . . . . . . . 32,121 30,694
Accumulated depreciation . . . . . . . (5,633) (5,208)
------- -------
Properties - Net . . . . . . . . . . 26,488 25,486
------- -------
Other Assets . . . . . . . . . . . . . . 104 92
------- -------
Total Assets . . . . . . . . . . . . $28,179 $27,247
======= =======
The accompanying accounting policies and notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE> 3
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
------------------------------------------------------
(Millions of Dollars, Except Share and Per Share Amounts)
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ------------- ------------
Current Liabilities:
Accounts payable . . . . . . . . . . . . . $ 488 $ 660
Accrued wages and vacation . . . . . . . . 401 382
Income and other taxes. . . . . . . . . . . 281 263
Accrued casualty costs . . . . . . . . . . 319 318
Debt due within one year . . . . . . . . . 176 229
Other current liabilities (Notes 2 and 5) . 854 915
------- -------
Total Current Liabilities . . . . . . . . 2,519 2,767
------- -------
Debt Due After One Year . . . . . . . . . . 2,539 2,361
Deferred Income Taxes . . . . . . . . . . . 6,623 6,698
Accrued Casualty Costs . . . . . . . . . . . 669 671
Retiree Benefit Obligations . . . . . . . . 763 749
Due to Parent . . . . . . . . . . . . . . . 5,578 3,993
Other Liabilities (Note 2) . . . . . . . . . 925 1,087
Redeemable Preference Shares . . . . . . . . 28 29
Series A, $10,000 par value; 4,829 shares
outstanding and Series B, $10,000 par
value; 436 shares outstanding
Stockholders' Equity (Note 2):
Common stock - $10.00 par value; 9,200
shares authorized and 4,465 outstanding . - -
Class A stock - $10.00 par value; 800
shares authorized and 388 outstanding . . - -
Capital surplus . . . . . . . . . . . . . . 4,782 4,782
Retained earnings . . . . . . . . . . . . . 3,753 4,110
------- -------
Total Stockholders' Equity . . . . . . . 8,535 8,892
------- -------
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . $28,179 $27,247
======= =======
The accompanying accounting policies and notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE> 4
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
-----------------------------------------------------
(Millions of Dollars)
(Unaudited)
1998 1997
-------- --------
Cash from Operations:
Net Income (Loss) . . . . . . . . . . $ (87) $ 695
Non-Cash Charges to Income:
Depreciation and amortization . . . 745 725
Deferred income taxes . . . . . . . (83) 228
Other - net . . . . . . . . . . . . (234) (484)
Changes in current assets and
liabilities . . . . . . . . . . . . (135) 87
------- -------
Cash Provided by Operations . . . . 206 1,251
------- -------
Investing Activities:
Capital investments . . . . . . . . . . (1,753) (1,398)
Other - net . . . . . . . . . . . . . . 88 155
------- -------
Cash Used in Investing Activities . . (1,665) (1,243)
------- -------
Equity and Financing Activities:
Debt repaid . . . . . . . . . . . . . . (245) (188)
Financings . . . . . . . . . . . . . . 380 180
Dividends paid to parent. . . . . . . . (270) (315)
Advances from affiliated
companies - net. . . . . .. . . . . . 1,585 309
------- -------
Cash Provided (Used) by Equity
and Financing Activities . . . . . 1,450 (14)
------- -------
Net Change in Cash and Temporary
Investments. . . . . . . . . . . . $ (9) $ (6)
======= =======
The accompanying accounting policies and notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE> 5
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS: The condensed consolidated
financial statements of Union Pacific Railroad Company (the Company or
the Railroad) are unaudited and reflect all adjustments (consisting
only of normal and recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position
and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. The results of operations for the three months and
nine months ended September 30, 1998 are not necessarily indicative of
the results for the year ending December 31, 1998. The financial
statements present the results of operations and financial position of
the Company combined with Southern Pacific Rail Corporation (Southern
Pacific or SP), a holding company wholly-owned by Union Pacific
Corporation (UPC or the Corporation), which owns 2,665 shares of common
stock, $10 par value, of Union Pacific Railroad Company and 232 shares
of Class A stock, $10 par value of Union Pacific Railroad Company.
Certain 1997 amounts have been reclassified to conform to the 1998
financial statement presentation.
2. ACQUISITION OF SOUTHERN PACIFIC: UPC consummated the acquisition of
Southern Pacific in September 1996. The acquisition of Southern
Pacific has been accounted for using the purchase method. During 1997
and 1998, the Company executed several mergers to legally merge SP's
rail operations with those of the Railroad and its predecessor company
Union Pacific Railroad Company, a Utah corporation (UPRR-Utah). These
mergers were accounted for in a manner similar to a pooling-of-interest
combination of entities under common control since both entities
involved in the merger were indirect wholly-owned subsidiaries of UPC
at the date of the mergers and with the surviving entity continuing as
such.
In connection with the continuing integration of the rail operations of
UPRR-Utah and Southern Pacific, the Company is continuing to eliminate
duplicate positions (primarily positions other than train crews),
relocate positions, merge or dispose of redundant facilities, dispose
of certain rail lines and cancel uneconomical and duplicative SP
contracts. The Company has also repaid certain of Southern Pacific's
debt obligations. The Company recognized a $958 million liability in
the Southern Pacific purchase price allocation for costs associated
with SP's portion of these activities.
Through September 30, 1998, approximately $460 million in
merger-related costs were charged by the Company against these reserves,
principally consisting of approximately $246 million and $76 million,
<PAGE> 6
respectively, for severance and relocation payments made to
approximately 4,400 Southern Pacific employees and approximately $96
million for labor protection payments. The Company expects the
remaining merger payments will be made over the course of the next
three years as the rail operations of UPRR-Utah and SP are integrated
and labor negotiations are completed and implemented.
In addition, the Company expects to incur approximately $165 million in
acquisition-related costs for severing or relocating Railroad
employees, disposing of certain Railroad facilities, training and
equipment upgrading. These costs will be charged to expense as
incurred over the next three years. Results for the three and nine
months ended September 30, 1998 include $7 million and $36 million
(after tax), respectively, in acquisition-related operating costs.
3. Financial Instruments - The Company uses derivative financial
instruments in limited instances for other than trading purposes to
manage risk as it relates to fuel prices. Where the Company has fixed
fuel prices through the use of swaps, futures or forward contracts, the
Company has mitigated the downside risk of adverse price movements;
however, it has also limited future gains from favorable movements. The
Company's credit risk associated with its counterparties as of
September 30, 1998 was less than $1 million. The Company has not been
required to provide, nor has it received, any collateral relating to
its hedging activities.
The fair market value of the Company's derivative financial instrument
positions at September 30, 1998 was determined based upon current fair
market values as quoted by recognized dealers.
Fuel - At September 30, 1998, the Company had hedged approximately 49%
of its estimated remaining 1998 diesel fuel consumption at $0.51 per
gallon, on a Gulf Coast basis and approximately 37% of its estimated
1999 diesel fuel consumption at $0.42 per gallon, on a Gulf Coast
basis. At September 30, 1998, the Company had outstanding swap
agreements covering $291 million of fuel purchases, with gross and net
asset positions of less than $1 million. Fuel hedging increased third
quarter 1998 fuel expense by $25 million and third quarter 1997 fuel
expense by approximately $1 million. For the nine months ended
September 30, fuel hedging increased 1998 fuel expense by $59 million
and 1997 fuel expense by approximately $1 million.
Sale of Receivables - The Company has sold, on a revolving basis, an
undivided percentage ownership interest in a designated pool of
accounts receivable. The amount of receivables sold fluctuates based
upon the availability of the designated pool of receivables and is
directly affected by changing business volumes and credit risks. At
December 31, 1997 and September 30, 1998, accounts receivable are
presented net of the $650 million and $580 million, respectively, of
receivables sold.
4. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed
charges has been computed on a total enterprise basis. Earnings
<PAGE> 7
represent income from continuing operations less equity in
undistributed earnings of unconsolidated affiliates, plus income taxes
and fixed charges. Fixed charges represent interest, amortization of
debt discount and expense, and the estimated interest portion of rental
charges. For the nine months ended September 30, 1998, fixed charges
exceeded earnings by approximately $203 million.
5. Commitments and Contingencies - There are various claims and lawsuits
pending against the Company and certain of its subsidiaries. Certain
customers have submitted claims for damages related to shipments
delayed by the Railroad as a result of congestion problems, and certain
customers have filed lawsuits seeking relief related to such delays.
The nature of the damages sought by claimants includes, but is not
limited to, contractual liquidated damages, freight loss or damage,
alternative transportation charges, additional production costs, lost
business and lost profits. In addition, some customers have asserted
that they have the right to cancel contracts as a result of alleged
material breaches of such contracts by the Railroad. The Company
continues to evaluate the adequacy of its reserves for customer claims.
The Railroad is also party to certain regulatory proceedings before the
Surface Transportation Board of the U.S. Department of Transportation
(STB). One proceeding pertains to rail service problems in the western
United States. As an outgrowth of this proceeding, the STB issued an
emergency service order imposing certain temporary measures on the
Railroad designed, among other things, to reduce congestion on the
Railroad's lines in the Houston, Texas area. On July 31, 1998, the STB
terminated the emergency service order. The STB kept in place the
requirement that the Railroad report certain service data, which the
Railroad had acknowledged the STB had the authority to impose under a
provision of the Interstate Commerce Act separate from the emergency
service provision. The STB also prescribed, under another statutory
provision separate from the emergency service provision, a 45-day
"wind-down" period during which certain rights that Texas Mexican
Railway Company (Tex Mex) and The Burlington Northern and Santa Fe
Railway Company (BNSF) had received under the emergency service order
to handle Railroad traffic in Houston would be continued. The 45-day
"wind-down" period expired September 17, 1998. A second proceeding,
initiated under the STB's continuing oversight jurisdiction with
respect to the merger of the Corporation and Southern Pacific (and
separate from the STB's regularly scheduled annual proceeding to review
the implementation of the merger and the effectiveness of the
conditions that the STB imposed on it), is for the purpose of
considering the justification for and advisability of any proposals for
new remedial conditions to the merger as they pertain to service in the
Houston, Texas area, and surrounding coastal areas of Texas and
Louisiana. Various parties have filed applications in this proceeding
seeking the imposition of additional conditions to the merger
including, among other things, the granting of overhead trackage rights
on certain of the Railroad's lines in Texas, "neutral switching
supervision" on certain of the Railroad's branch lines, the opening to
other railroads and switching by a "neutral switching company" of
<PAGE> 8
numerous industries now exclusively served by the Railroad in the
Houston area, and the compulsory sale or lease to other carriers of
certain of the Railroad's lines and facilities. The Company's response
in opposition to the condition requests was filed on September 18,
1998, and rebuttal in support of the condition applications was filed
on October 16, 1998. The Railroad believes that the applications are
without merit and vigorously opposed them in its September 18
submission. Separately from this proceeding, a shortline railroad, the
Arkansas, Louisiana and Mississippi Railroad (AL&M), has filed a
request that an additional condition be imposed on the merger allowing
AL&M to interchange traffic with BNSF. The Railroad has also opposed
this request. In addition, the STB has initiated various inquiries and
formal rulemaking proceedings regarding certain elements of rail
regulation following two days of hearings by the STB in April 1998 at
the request of two members of Congress and in response to shippers'
expressions of concern regarding railroad service quality, railroad
rates and allegedly inadequate regulatory remedies. There can be no
assurance that the proposals advanced by parties in the remedial
conditions proceeding or the proceedings initiated in response to the
rail regulation hearings will not be approved in some form. Should the
STB or Congress take aggressive action in the rail regulation
proceedings (e.g., by making purportedly competition-enhancing changes
in rate and route regulation and "access" provisions), the adverse
effect on the Railroad and other rail carriers could be material.
The Company is also subject to Federal, state and local environmental
laws and regulations, and is currently participating in the
investigation and remediation of numerous sites. Where the remediation
costs can be reasonably determined, and where such remediation is
probable, the Company has recorded a liability. In addition, the
Company periodically enters into financial and other commitments and
has retained certain contingent liabilities upon the disposition of
formerly-owned operations.
In addition, UPC and certain of its officers and directors are
currently defendants in two purported class actions, which have been
consolidated into one proceeding. The consolidated complaint alleges,
among other things, that UPC violated the federal securities laws by
failing to disclose material facts and making materially false and
misleading statements concerning the service, congestion and safety
problems encountered following the Corporation's acquisition of
Southern Pacific in 1996. These lawsuits were filed in late 1997 in
the United States District Court for the Northern District of Texas and
seek to recover unspecified amounts of damages. UPC management
believes that the plaintiffs' claims are without merit and intends to
defend them vigorously. The defendants have moved to dismiss this
action, and the motion has been fully briefed.
In addition to the class action litigation, certain current and former
directors of UPC and the Company were named as defendants in a
purported derivative action filed on behalf of UPC and the Company in
the United States District Court for the Northern District of Texas in
late 1997. The derivative action alleged, among other things, that the
<PAGE> 9
named current and former directors breached their fiduciary duties to
UPC and the Company by approving the acquisition of Southern Pacific.
The defendants moved to dismiss the derivative action. In response,
the plaintiffs sought to voluntarily dismiss their claims, and the
derivative action was dismissed, without prejudice, by order of the
court dated May 26, 1998.
On September 14, 1998, a different shareholder plaintiff filed a new
purported derivative action on behalf of the Corporation and the
Company in the District Court of Tarrant County, Texas, naming as
defendants the Corporation, the Company, and the current and certain
former directors of the Corporation and the Company. This new
derivative action alleges, among other things, that the named current
and former directors breached their fiduciary duties to the Corporation
and the Company by approving and implementing the Southern Pacific
merger without informing themselves of its impact or ensuring that
adequate controls were put in place and by causing the the Corporation
and the Company to make misrepresentations about the Company's service
problems to the financial markets and regulatory authorities. The
defendants believe that these claims are without merit and intend to
defend them vigorously.
It is not possible at this time for the Company to fully determine the
effect of all unasserted claims on its consolidated financial
condition, results of operations or liquidity; however, to the extent
possible, where unasserted claims can be estimated and where such
claims are considered probable, the Company has recorded a liability.
The Company does not expect that any known lawsuits, claims,
environmental costs, commitments or guarantees will have a material
adverse effect on its consolidated financial condition.
6. Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 130, "Reporting
Comprehensive Income" (FAS 130), that is effective for all periods in
1998, including interim periods. The Company has adopted the
provisions of FAS 130 effective January 1, 1998. The components of
comprehensive income include, among other things, changes in the market
value of derivative instruments which qualify for hedge accounting
under Statement No. 133, when adopted, and net loss recognized as an
additional pension liability but not yet recognized as net periodic
pension cost. There is no impact from adopting FAS 130 for the nine
months ended September 30, 1998.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", that is effective in
1998. The Company currently complies with the provisions of this
Statement.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", that is
effective in 1998 (FAS 132). FAS 132 revises and standardizes
disclosures required by FAS 87, 88, and 106. This Statement will only
<PAGE> 10
affect footnote disclosure and will not otherwise have an effect on the
financial statements of the Company.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133), that will be
effective in 2000. Management is just beginning the process of
determining the effect, if any, FAS 133 will have on the Company's
financial statements.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Mergers
In September 1996, Union Pacific Corporation (the Corporation or UPC)
completed its acquisition of Southern Pacific Rail Corporation (Southern
Pacific or SP) and, throughout 1997 and 1998, continued the process of
integrating the operations of SP's rail subsidiaries into those of Union
Pacific Railroad Company (the Company or the Railroad) and its
predecessor, Union Pacific Railroad Company, a Utah Corporation
(UPRR-Utah). The legal mergers facilitating the SP operational
integration were completed in February 1998. The Company expects to
complete the full integration of the operations of the Southern Pacific
rail subsidiaries over the next three years. 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.
As a result of the SP acquisition, the Company now operates the largest
rail system in the United States, with 35,000 route miles linking Pacific
Coast and Gulf Coast ports to the Midwest and eastern U.S. gateways.
Congestion and Service Issues
As previously reported, congestion in and around Houston and the coastal
areas of Texas and Louisiana (the Gulf Coast region) began to have a
material adverse effect on the Company's operations and earnings in the
third quarter of 1997. System congestion started in the Gulf Coast region
and spread throughout the system during the third and fourth quarters of
1997, and continued to adversely affect the Railroad's operations and
financial results during the first nine months of 1998. The Railroad has
adopted certain measures to alleviate the congestion problems, and
implementation of these service recovery measures has significantly
relieved congestion in the Gulf Coast region.
During the third quarter of 1998, service in the Railroad's Central
Corridor between Chicago and Utah was slowed by track maintenance and
<PAGE> 11
capacity expansion work which is expected to be completed during 1999.
The Company also experienced congestion on its lines in Northern
California, in the Los Angeles Basin and on the Sunset Route west of El
Paso, Texas, caused in part by two derailments on July 8 and July 9, 1998,
tight crew supply and limited track capacity in that region, and the
learning curve associated with the integration of the computer system of
Southern Pacific in the region with the Railroad's computer system, which
commenced July 1, 1998. The Railroad has eliminated this
congestion by various measures, including rerouting trains from this region
to other portions of its system. During the late third quarter and early
fourth quarter of 1998, the Railroad's operations were also adversely
affected by severe weather in the southern portion of its system, including
Hurricane Georges, which disrupted operations in New Orleans and other
parts of Louisiana during the last three days of September, heavy rains
that moved from northern Texas through Oklahoma and into the Kansas City
area on October 3 and 4, heavy rains that resulted in severe flooding in
central and southern Texas later in the month of October, and heavy rains
and flooding across parts of Oklahoma and Kansas in early November.
Despite these weather problems, the Railroad has been able to respond
quickly to reroute traffic, repair damages caused by washouts and restore
service without severe or lengthy disruptions to the Railroad's operations,
reflecting the Railroad's overall progress in addressing the service and
congestion problems. Although progress has been made in improving service,
the Company expects these problems to continue to have an adverse impact
on 1998 results.
During the third quarter of 1998, the Company announced a new long-term
strategy to improve the effectiveness of the organization. This effort
will be focused on culture change, business process improvement and
decentralization, each of which is designed to improve customer
satisfaction, increase employee engagement, and improve financial results.
Results of Operations
Quarter Ended September 30, 1998 Compared to September 30, 1997
The Railroad returned to profitability in the third quarter of 1998 after
three consecutive quarterly losses by posting earnings of $67 million,
down from $275 million in the third quarter of 1997. Despite service
improvements during the quarter, year-over-year results were affected by
service problems in the western part of the Railroad's system, which were
resolved during the quarter, traffic slow-downs related to major track
maintenance and capacity expansion efforts along the Railroad's Central
Corridor (scheduled to be completed during 1999), severe weather in the
southern portion of the Railroad's system and the cost of continued service
recovery. Operating income of $225 million for the third quarter of 1998
compares to $458 million in last year's third quarter, reflecting a
year-over-year increase in pre-tax service-related costs and lost revenues,
as service issues began late in the third quarter of 1997. The operating
ratio for the third quarter of 1998 was 90.5%, up 8.5 points from 1997's
82.0%. Lost revenue and costs related to service performance were the key
drivers of the change.
<PAGE> 12
REVENUE SUMMARY - Rail operating revenues were down $178 million (7%) at
$2,360 million. Carloadings for the third quarter of 1998 of 2,021,969
were down 149,127 units, or 7%, from year-ago loads of 2,171,096.
Declines were led by continuing service issues, weakening demand for whole
grain exports (due to strong worldwide crop yields) and a soft export market
(caused by the Asian currency crisis impact). Average revenue per car
(ARC) was down slightly for the quarter at $1,126 per car from last year's
$1,131. The decline in ARC was driven by large volumes of very low-ARC
empty repositioning moves for intermodal traffic, higher low-ARC stone
moves, shortfalls of high-ARC steel traffic, and large volumes of very
low-ARC storage-in-transit (SIT) moves in the chemical business. The
following table summarizes the quarter-over-quarter change in rail
commodity revenue (CR) and ARC by commodity type (carloads in thousands and
commodity revenues in millions):
Change % Change
Cars ARC CR Cars ARC CR Cars ARC CR
---- ------ ------ ---- ---- ----- ---- --- ----
Automotive 141 $1,447 $ 204 (8) $(14) $ (14) (6) (1) (6)
Agriculture 213 1,566 334 (11) 38 (9) (5) 2 (3)
Intermodal 633 604 382 (106) (34) (89) (14) (5) (19)
Chemicals 232 1,657 385 (18) (71) (47) (7) (4) (11)
Energy 449 1,148 516 10 51 33 2 5 7
Industrial 354 1,289 456 (16) (88) (53) (4) (6) (10)
----- ------ ------ --- ---- ----- --- --- ----
Total 2,022 $1,126 $2,277 (149) $ (5) $(179) (7) -- (7)
===== ====== ====== === ==== ===== === === ====
Agricultural Products revenues fell 3% for the quarter, as loads finished
down 5% and ARC improved 2%. Key drivers included diversions of wet corn
milling products from the Railroad to trucks and other rails; congestion,
which limited canned and packaged, wheat, frozen and food grains categories
of agricultural products business; inexpensive corn replacing feed-additives
which lowered livestock/feed moves; and depressed corn prices and very
soft export demand which hurt corn traffic. Quarter-over-quarter ARC was
up 2% primarily due to price increases and improvements in haul length for
wheat moves.
Automotive revenues were down 6%, reflecting a 6% decline in volume and a
1% decrease in ARC. Finished vehicles volumes were down 1% primarily due
to the impact of the General Motors (GM) strike, which cost the Railroad
approximately $21 million for the quarter. International business,
down 22% in loadings, experienced lower Asian imports in addition to
service-related diversions. These declines were partially offset by Ford's
new Mixing Center business and strong Chrysler volumes (up 18%). Parts
volumes lost 10% year-over-year as Ford's volumes fell from the Railroad's
equipment shortages and GM switched from intermodal containers to boxcars,
which switch lowered parts carloadings as more parts fit in each boxcar.
ARC fell 1% as a result of large shortfalls of higher-ARC finished vehicles
due to the GM strike.
Chemicals shipments fell 7%, while ARC dropped 4% when compared to 1997
results. Congestion-related diversions to truck, barge and other
railroads plagued most business lines (especially liquid and dry
chemicals). In addition, the Asian crisis significantly reduced the
demand for export soda ash, as carloads were down nearly 11%, while an
unplanned mine shutdown not only reduced traffic for phosphate rock, but
<PAGE> 13
also reduced the overall demand for phosphorus. The 4% decline in ARC was
largely due to lower high-ARC liquid and dry and soda ash moves, strong
movements of low-ARC plastics (softness in international market and
weakening prices hurt higher-ARC volumes) and the loss of long-haul
business due to slow train speeds.
Energy movements were up 2% versus 1997, while ARC was up 5%. Maintenance
and capacity-driven congestion in the Central Corridor continued to hamper
Powder River Basin (PRB) trains. However, PRB trains per day showed gains
year-over-year (25.2 in 1998 from 24.3 a year ago), and longer trains
(119.7 cars/train in the third quarter of 1998 vs. 117.3 in 1997) helped
boost quarter-over-quarter volumes. Colorado and Utah volumes were also
up for the quarter due to better service performance than 1997 levels.
The 5% increase in ARC was primarily a result of more high-ARC PRB
traffic.
Industrial Products posted a 4% volume decline and a 6% decline in ARC,
resulting in a 10% drop in revenues. Volumes continued to be plagued by
instances of equipment shortages and service issues (caused by slowed
local switching and congestion). A large portion of industrial products
moves occurred in the South where congestion hit hardest, although service
levels have continued to improve. Construction materials, metallic
minerals, cement, ferrous scrap, and consumer/machinery moves were all
affected by Southern congestion. In addition, several of the same
commodities have also been affected by Central Corridor congestion
(due to maintenance and capacity expansion) and congestion in the Western
portion of the Railroad's system, as the final portion of the Company's
operating system was brought on-line in SP's western territory in the third
quarter of 1998. ARC fell 6% due to product mix issues, largely strong
low-ARC stone moves and shortfalls of high-ARC steel traffic.
Intermodal revenue showed a 19% year-over-year decline, as volumes fell
14% and ARC fell 5%. Congestion issues and related-diversions severely
affected several intermodal segments, especially Intermodal Marketing
Company (IMC)/truckload and less-than-truckload (LTL)/premium. Volumes
also suffered from weak exports (Asian currency crisis). A partial offset
was the impact of new APL business and the high demand for containers.
ARC fell as traffic mix shortfalls (relatively fewer high-ARC
IMC/truckload and LTL/premium loads) were exacerbated by increased volumes
of low-ARC empty repositioning moves--as equipment imbalances precipitated
by strong imports and weak exports caused customers to significantly
increase empty container repositioning moves.
EXPENSE SUMMARY - Operating expenses were $2,135 million for the third
quarter of 1998, $55 million (3%) worse than the third quarter 1997
operating expenses of $2,080 million. However, third quarter 1998
operations did improve significantly from the second quarter of 1998. The
following statistical table reflects the improvements in the Railroad's
operating performance:
<PAGE> 14
1997 1998
2nd 3rd 4th 1st 2nd 3rd
(Average Units, Except Ratios) Qtr Qtr Qtr Qtr Qtr Qtr
----- ----- ----- ----- ----- -----
Seven-Day Loadings (000's) 170.7 165.9 153.6 152.5 154.9 155.3
Train Speed (MPH) 18.4 15.0 13.2 13.8 14.0 14.4
Car Cycle Times (Days) 12.7 15.2 16.8 17.6 16.4 15.9
Operating Ratio 80.9 82.0 102.5 97.7 105.1 90.5
Labor Expense was $45 million (5%) higher than 1997. Slower train speeds,
(which created the need to increase the number of train crews required),
inflation and other service-related cost overruns contributed to higher
costs. These higher costs were partially offset by lower volumes
(gross-ton miles were down 3%) and the elimination of duplicative positions
as part of merger implementation.
Depreciation expense grew $9 million, or 4%, to $251 million, driven by
the Railroad's extensive capital programs in 1997 and 1998. The Railroad
spent over $2 billion on capital projects in 1997 and expects to spend
$2.2 billion in 1998, of which $400 million is merger-related.
Materials and Supplies costs for the quarter were up $13 million to $130
million, or 11%, from third quarter 1997. The increase reflects increased
maintenance of locomotives, freight cars and roadway machines. Material
costs for signal and communications equipment were also higher
year-over-year.
Fuel and Utilities expenses were down $37 million, or 16%, from 1997. A
reduction in gross-ton miles year-over-year (down 3%) generated
volume-related fuel savings of $6 million versus 1997. Prices were down
7 cents per gallon to 60 cents, saving $20 million. The fuel consumption
rate of 1.36 gallons per thousand gross-ton miles improved 3% from last
year's 1.40, lowering the Railroad's fuel costs by $6 million. Hedges of
58% of third quarter fuel volumes increased fuel costs by $25 million,
or 9 cents per gallon (included in the cost per gallon information above).
Hedges have increased fuel expenses by $59 million year-to-date.
Rent Expense was down $7 million, or 2%, versus 1997. Cycle times were
above normal at 15.9 days. However, cycles were only 0.7 days higher than
year-ago levels, resulting in increased year-over-year service-related
costs of $5 million. Locomotives leased for service recovery resulted in
an additional $4 million. However, these increases were more than offset
by lower volumes due to service shortfalls.
Other Costs (Including Purchased Services) increased $32 million, or 10%,
from 1997, reflecting continued customer relations and service recovery
costs. Service recovery increased other costs by $43 million, driven by
higher liquidated damages on coal contracts, while crew transportation
costs were higher by $4 million. These cost increases were offset by
BNSF's increased use of trackage rights and merger-related cost savings on
computer costs and contract pricing.
<PAGE> 15
NON-OPERATING COSTS - Other income, net was $34 million below last year's
levels, reflecting the absence of the sale of the Railroad's signboard
business in 1997. Interest costs were $43 unfavorable to 1997 at $162
million, reflecting higher interest costs from borrowing to fund capital
spending which could not be funded from cash generation at the Railroad
due to the effects of service recovery. Income taxes (State & Federal)
were favorable $102 million compared to 1997, primarily the result of
lower pre-tax income.
Nine Months Ended September 30, 1998 Compared to September 30, 1997
The Railroad posted a loss of $87 million for the first nine months of
1998, compared to earnings of $695 million in 1997. 1998 results were
affected by slow train speeds and service issues that have been lessening
as the year has progressed. Operating income of $161 million for the
period compares to $1,310 million last year, reflecting a year-over-year
increase in pre-tax service-related costs and lost revenues, as service
issues began late in the third quarter of 1997. The year-to-date
operating ratio for 1998 was 97.7%, up 14.7 points from 1997's 83.0%.
REVENUE SUMMARY - Rail operating revenues were down $751 million (10%) at
$6,961 million. Carloadings for the period were down 549,061 units, or
8%, from year-ago loads of 6,504,713. Declines were led by continuing
service issues, weakening demand for whole grain exports (strong worldwide
crop yields), the GM strike and a soft export market (Asian currency
crisis impact). Average revenue per car was off 1% versus last year at
$1,134 per car from last year's $1,151. The decline in ARC was driven by
large volumes of very low-ARC empty repositioning moves for intermodal
traffic; higher low-ARC stone moves and shortfalls of high-ARC steel
traffic; large volumes of very low-ARC storage-in-transit moves in the
chemical business; the absence of long-haul Pacific Northwest grain moves
(due to the Asian currency crisis); and the new shorter-distance Ford
traffic. The following table summarizes the year-over-year change in rail
commodity revenue and ARC by commodity type (carloads in thousands and
commodity revenues in millions):
Change % Change
Cars ARC CR Cars ARC CR Cars ARC CR
----- ------ ------ ----- ----- ------ ---- ---- ----
Automotive 466 $1,455 $ 677 (8) $(38) $ (29) (2) (3) (4)
Agriculture 610 1,543 942 (88) (43) (166) (13) (3) (15)
Intermodal 1,859 601 1,116 (282) (26) (227) (13) (4) (17)
Chemicals 681 1,699 1,158 (63) (72) (161) (8) (4) (12)
Energy 1,319 1,138 1,501 (14) 20 11 (1) 2 1
Industrial 1,021 1,332 1,359 (94) (29) (159) (8) (2) (10)
----- ------ ------ --- ---- ----- --- --- ----
Total 5,956 $1,134 $6,753 (549) $(17) $(731) (8) (1) (10)
===== ====== ====== ==== ==== ===== === === ====
EXPENSE SUMMARY - Operating expenses were $6,800 million for the nine
months ended September 30, 1998, $398 million (6%) higher than 1997
operating costs of $6,402 million. Labor costs were $106 million (4%)
higher than 1997. Slower train speeds caused the need for increased train
crew levels, while inflation and other service-related cost overruns
<PAGE> 16
contributed to higher costs. These higher costs were partially offset by
lower volumes (loads down 8%) and the elimination of duplicative positions
as part of merger implementation. Depreciation expense grew $20 million,
or 3%, to $745 million, driven by the Railroad's extensive capital
programs in 1997 and 1998. Materials and supplies costs were up $9
million to $396 million, or 2%, from 1997, reflecting increased
maintenance of locomotives and freight cars, and higher material costs.
Fuel and utilities expenses were down $161 million, or 21%, from 1997. A
reduction in gross-ton miles year-over-year (down 7%) generated
volume-related fuel savings, while prices fell 9 cents per gallon (13%)
to 62 cents. Rent expense was up $69 million, or 7%, versus 1997. Slower
train speeds caused car cycle times to run 3.1 days above 1997 levels.
Locomotives leased for service recovery also increased rent costs
year-over-year. These higher costs were offset by lower volumes due to
service shortfalls. Other costs, including purchased services, increased
$355 million, or 35%, from 1997, largely reflecting costs associated with
the resolution of customer claims, as well as higher property taxes,
contract services and legal costs.
NON-OPERATING COSTS - Other income, net declined $19 million reflecting
the absence of the 1997 signboard business sale and various line sales.
Interest costs were $83 million unfavorable to 1997 at $443 million,
reflecting higher interest costs for borrowings to fund capital spending
which could not be funded from operating cash flow at the Railroad due to
the effects of service recovery. Income taxes (State & Federal) were
favorable $469 million compared to 1997, primarily the result of lower
pre-tax income.
Other Matters
Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130), that is effective for all periods in 1998, including
interim periods. The Company has adopted the provisions of FAS 130
effective January 1, 1998. The components of comprehensive income
include, among other things, changes in the market value of derivative
instruments which qualify for hedge accounting under Statement No. 133,
when adopted, and a net loss recognized as an additional pension liability
but not yet recognized as net periodic pension cost. There is no impact
from adopting FAS 130 for the nine months ended September 30, 1998.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", that is effective in
1998. The Company currently complies with the provisions of this
Statement.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," that is
effective in 1998 (FAS 132). FAS 132 revises and standardizes disclosures
required by FAS 87, 88, and 106. This Statement will only affect footnote
disclosure and will not otherwise have an effect on the financial
statements of the Company.
<PAGE> 17
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), that will be effective in
2000. Management is just beginning the process of determining the effect,
if any, FAS 133 will have on the Company's financial statements.
Commitments and Contingencies - There are various claims and lawsuits
pending against the Company and certain of its subsidiaries. In addition,
the Company and its subsidiaries are subject to various Federal, state and
local environmental laws and are currently participating in the
investigation and remediation of various sites. A discussion of certain
claims, lawsuits and contingencies is set forth in Note 7 to the
condensed consolidated financial statements, which is incorporated herein
by reference.
Year 2000 - The Year 2000 (Y2K) compliance project at the Company includes
modifications to software (internally developed and purchased), hardware
and embedded chips inside equipment and machinery. The Railroad's
enterprise-wide project encompasses computer systems, equipment in
multiple data centers and a telecommunications network spread over 23
states. Equipment containing embedded computer chips includes locomotives,
automated train switching systems, computer aided train dispatching systems,
signaling systems, computerized fueling stations, weigh-in-motion scales,
crane, lifts, PBX systems, elevators, and computerized monitoring systems
throughout the Railroad. The Company began work early on its Y2K
project,beginning research in 1994 and completing an impact analysis of its
mainframe COBOL systems in 1995. The Y2K project has been a high priority
since then.
The Company's Y2K Project is divided into five major initiatives, as
follows:
The Mainframe Systems - consists of the Company's enterprise-wide
mainframe systems. Modifications of these systems are ahead of
schedule, and the Railroad estimates that approximately 90% of these
systems have been converted, tested, and certified as Y2K compliant as
of September 30, 1998. The remainder are expected to be completed by
December 31, 1998. Periodic audits are planned during 1999 to ensure
that certified programs remain Y2K complaint.
The Client Server Systems - consists of the Railroad's enterprise-wide
client server systems. Modifications of these systems are on schedule,
and the Railroad estimates that approximately 50% of all critical
client server systems have been converted, tested, and certified as Y2K
compliant as of September 30, 1998. The remainder are expected to be
completed by December 31, 1998. The non-critical client server systems
are scheduled to be certified as Y2K compliant by mid-1999.
The User Department Developed Systems - consists of both mainframe and
PC-based systems developed by internal user departments. Modifications
of these systems are on schedule, and the Company estimates that
approximately 84% of these systems have been converted, tested, and
certified as Y2K compliant as of September 30, 1998. Ninety-eight
percent of the systems will be completed by December 31, 1998, and the
remaining 2% are non-critical systems and will be completed in the
first quarter of 1999.
<PAGE> 18
The Vendor Supplied and Embedded Systems - consists of vendor-supplied
software, desktop, mainframe and server hardware, databases and
operating systems, as well as, equipment and machinery with embedded
systems. Work on these components and systems is on schedule, and the
Company estimates that approximately 90% of the suppliers of these
systems have indicated that they have a solid plan in place to be Year
2000 compliant in a timely manner. The review of the remaining 10%
will be completed in 1998, which will result in either solid plans or
a contingency direction. To assure safety and Y2K compliance, the
Company is testing selected critical software, hardware and embedded
systems, even if the vendor has already certified the product and the
Company is working with other railroads via involvement in various
Association of American Railroad (AAR) committees and is sharing
information on the compliance and testing of safety critical components
common to the industry. In addition, the Company has helped fund the
development of a shared web site for this purpose, and access to this
information is now available to participating railroads.
The Electronic Commerce Systems - consists of all electronic exchanges
of information with customers, vendors, other railroads, and financial
institutions. The railroad industry has agreed on a standard 4-digit
year for all electronic interchanges. The Railroad expects to be able
to transmit and receive the new EDI standard which involves a 4-digit
year by January 1999. In addition, by December 1998, the Railroad will
be in position to continue to handle EDI transactions in existing
formats with proper interpretation of the century date. The Company is
working with the AAR in testing the new standard with other railroads
and with its trading partners.
For each of these initiatives, seven major categories of events have been
identified for which contingency plans are being developed. These
categories are 1) key data - integrity/loss, 2) critical software, 3)
critical hardware, 4) communications, 5) critical supplies and suppliers,
6) facilities, and 7) key personnel. The contingency plans also include
a Y2K command center which will be staffed 24 hours a day in the fourth
quarter of 1999 and continuing into early 2000 for any problems that might
occur due to Y2K. The staff will be comprised of technical experts to fix
or advise what to fix if systems fail, and knowledgeable representatives
from each business unit. Preliminary contingency plans are on schedule to
be completed by year-end 1998 and will be adjusted as needed in 1999.
Costs to convert these systems are expensed as incurred. As of September
30, 1998, more than half of the costs of the Y2K project, estimated to be
$51 million in total, have been expensed. In addition, as of September 30,
1998, approximately 85% of the Company's systems have been certified as
Y2K compliant, and the majority of the remaining systems are expected to
be modified by year-end 1998. Although the Company believes its systems
will be successfully modified, failure to modify its systems and purchased
equipment, or failure on the part of other entities with whom the Company
exchanges or on whom the Company relies for data, to successfully modify
their systems, could materially impact operations and financial results
in the year 2000.
<PAGE> 19
CAUTIONARY INFORMATION
Certain information included in this report contains, and other materials
filed or to be filed by the Company with the Securities and Exchange
Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contain or will
contain, forward-looking statements within the meaning of 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 Company does not expect that claims,
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 Company'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 Company
is fully successful in overcoming its congestion-related problems and
implementing its service recovery plans and other financial and
operational initiatives, industry competition and regulatory developments,
natural events such as severe weather, floods and earthquakes, the effects
of adverse general economic conditions, changes in fuel prices, labor
strikes, the impact of year 2000 systems problems and the ultimate outcome
of shipper claims related to congestion, environmental investigations or
proceedings and other types of claims and litigation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company uses derivative financial instruments in limited instances for
other than trading purposes to manage risk as it relates to fuel prices.
Where the Company has fixed fuel prices through the use of swaps, futures
or forward contracts, the Company has mitigated the downside risk of
adverse price 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 correlate highly with the
underlying item being hedged. Credit risk related to derivative financial
instruments, which is minimal, is managed by requiring minimum credit
standards for counterparties and periodic settlements. The total credit
risk associated with the Company's counterparties was $1 million at
September 30, 1998. The Company has not been required to provide, nor has
it received, any collateral relating to its hedging activities.
The fair market value of the Company's derivative financial instrument
positions at September 30, 1998 was determined based upon current fair
market values as quoted by recognized dealers.
Fuel - Over the past three years, fuel costs approximated 10% of the
Company's total operating expenses. As a result of the significance of
<PAGE> 20
the fuel costs and the historical volatility of fuel prices, the Railroad
periodically use swaps, futures and forward contracts to mitigate the
impact of fuel price volatility. The intent of this program is to protect
the Company's operating margins and overall profitability from adverse
fuel price changes.
At September 30, 1998, the Railroad had hedged approximately 49% of its
estimated remaining 1998 diesel fuel consumption at $0.51 per gallon, on
a Gulf Coast basis and approximately 37% of its estimated 1999 diesel fuel
consumption at $0.42 per gallon, on a Gulf Coast basis. At September 30,
1998, the Railroad had outstanding swap agreements covering fuel purchases
of $291 million, with gross and net asset positions of $1 million. Fuel
hedging increased third quarter 1998 fuel expense by $25 million and third
quarter 1997 fuel expense by approximately $1 million. For the nine
months ended September 30, fuel hedging increased 1998 fuel expense by $59
million and 1997 fuel expense by approximately $1 million.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion of certain legal proceedings affecting the Company and/or
certain of its subsidiaries set forth in Note 5 to the condensed
consolidated financial statements included in Item 1 of Part I of this
Report is incorporated herein by reference. In addition to those matters,
the following proceedings, or developments in proceedings presently
pending, arose or occurred during the third quarter of 1998.
SOUTHERN PACIFIC ACQUISITION: As previously reported, various appeals have
been filed with respect to the STB's August 12, 1996 decision (the
Decision) approving the acquisition of control of Southern Pacific by the
Corporation. All of the appeals have been consolidated in the U.S. Court
of Appeals for the District of Columbia Circuit. Oral argument in the case
was held on September 11, 1998, and the case is awaiting decision. The
Company believes that it is unlikely that the disposition of the remaining
appeals will have a material adverse impact on its consolidated financial
condition or its results of operations.
ENVIRONMENTAL MATTERS: As previously reported, the Railroad has received
approximately 20 Notices of Violation (NOVs) from the South Coast Air
Quality Management District (the District) relating to fumes emitted from
idling diesel locomotives at Slover siding near the Railroad's yard in
West Colton, California. Trains awaiting crews or room to enter the West
Colton yard have been parked at Slover siding with their engines running
for various amounts of time, causing exhaust fumes to enter the backyards
and homes of residents living along the siding. The District has cited
the Railroad for creating a public nuisance pursuant to the California
Health and Safety Code and the District's regulations. Each violation
carries a maximum civil penalty of $25,000 per day, which may be increased
in some circumstances to $50,000 per day. Although the Railroad modified
its operating procedures for trains entering the West Colton yard to
reduce the problem, the District entered an order with respect to the
situation which the Railroad believes is an impermissible burden on
<PAGE> 21
interstate commerce and is preempted by applicable federal law. The
Railroad has filed an action in federal district court seeking to overturn
the District's order on those grounds, but the court has not yet ruled on
this matter. The Railroad and the District have not entered into
discussions concerning settlement of the outstanding NOVs pending
resolution of this lawsuit. Accordingly, the exact amount of any payment
to the District in connection with the NOVs cannot be determined at this
time.
The Railroad has received notification that the District Attorney for San
Bernardino County, California has opened an investigation into the
Railroad's handling of several hazardous material spills in Barstow and
West Colton, California. The incident in Barstow involved a rear-end
collision between two trains near Barstow in August 1997 that resulted in
a spillage of locomotive diesel fuel and leakage from two tank cars
containing toxic chemicals. Three incidents in the West Colton yard in
1998 involved leaking tank cars and spills of diesel fuel from a derailed
locomotive. The District Attorney's office is investigating allegations
that cleanup procedures were not undertaken promptly and required notices
were not given in connection with these incidents. An initial indication
of fines exceeding $250,000 with respect to these incidents has been
communicated by the District Attorney's office. While the Railroad
expects to enter into settlement negotiations with the District Attorney's
office, the exact amount of any fines or penalties that may be required to
be paid as a part of any settlement cannot be determined at this time.
<PAGE> 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
3 By-Laws of Union Pacific Railroad Company, as
amended as of September 8, 1998.
10.1 Letter Agreement, dated September 8, 1998, between UPC
and Mr. Ivor J. Evans, is incorporated herein by
reference to Exhibit 10.1 to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998, as filed with the Securities and Exchange Commission
on November 12, 1998
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On July 23, 1998, the Company filed a Current Report on
Form 8-K announcing second quarter 1998 results, which Report
was refiled on July 24, 1998 for the purpose of changing EDGAR
data concerning address information for the Company.
[SIGNATURE]
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 12th day of November, 1998.
UNION PACIFIC RAILROAD COMPANY
By /s/ John J. Koraleski
--------------------------
John J. Koraleski
Executive Vice President-Finance
and Chief Financial Officer
(chief accounting officer and
duly authorized officer)
<EXHIBIT INDEX> INDEX
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
EXHIBIT INDEX
Exhibit No. Description
----------- -----------------------------------------
3 By-Laws of Union Pacific Railroad Company, as
amended as of September 8, 1998.
10.1 Letter Agreement, dated September 8, 1998, between UPC and
Mr. Ivor J. Evans, is incorporated herein by reference to
Exhibit 10.1 to the Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, as
filed with the Securities and Exchange Commission on
November 12, 1998
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
BY-LAWS
OF
UNION PACIFIC RAILROAD COMPANY
(As Amended Effective as of September 8, 1998)
ARTICLE I
STOCKHOLDERS MEETINGS
SECTION 1. Meetings, annual or special, of the stockholders of this
Company may be held at such place or places as shall be ordered by the
Board of Directors or the Executive Committee.
SECTION 2. Annual meetings of the stockholders, for the purpose of
electing directors and transacting any other business, shall be held at
such time as shall be ordered by the Board of Directors or the Executive
Committee, but, unless otherwise ordered, shall be held at 11:00 a.m. on
the third Friday of April in each year.
SECTION 3. A special meeting of the stockholders may be called by the
Board of Directors, the Executive Committee or by any other person who, at
such time, is authorized by the General Corporation Law of the State of
Delaware (the "GCL") to call a special meeting of stockholders. The
objects of a special meeting shall be stated in the order therefor, and
the business transacted shall be confined to such objects.
SECTION 4. Notice of all meetings of the stockholders shall be given,
either personally or by mail, not less than ten nor more than sixty days
prior thereto. If given by mail, the notice shall be sent by United
States mail, postage prepaid, directed to each stockholder at his address
as it appears on the records of the Company. The notice of all special
meetings shall state the objects thereof. The failure to give notice of
an annual meeting, or any irregularity in the notice, shall not affect the
validity of such annual meeting or of any proceedings thereat. Any
stockholder may consent in writing to the holding of a special meeting
without notice.
SECTION 5. The Board of Directors or the Executive Committee may fix in
advance a day and hour, which shall not precede the date upon which the
resolution fixing such day and hour is adopted by the Board of Directors
or the Executive Committee and which shall be not more than sixty nor less
than ten days preceding any annual or special meeting of stockholders or,
in the case of action of stockholders without a meeting, more than ten
days after the date upon which the resolution fixing such day and hour is
adopted by the Board of Directors or the Executive Committee, as the time
for the determination of stockholders entitled to vote at such meeting or
to take such action. Stockholders of record at the time so fixed by the
Board of Directors or the Executive Committee and only such stockholders
shall be entitled to vote at such meeting. Each share of stock shall
entitle such record holder thereof to one vote, in person or by proxy in
writing.
SECTION 6. The Chairman of the Board, and in his absence the Chairman of
the Executive Committee, and in their absence the President or one of the
Vice Presidents, shall call meetings of the stockholders to order and act
as chairman of such meetings. In the absence of all of these officers,
the Board of Directors may appoint a chairman of the meeting to act in
such event; but if the Board shall not make such appointment, then, in the
absence of all of these officers, any stockholder or proxy of any
stockholder may call the meeting to order, and a chairman shall be
elected.
SECTION 7. The Secretary of the Company shall act as secretary at all
meetings of the stockholders; but the Board of Directors or the Executive
Committee may designate an Assistant Secretary for that purpose before the
meeting, and if no such designation shall have been made, then the
presiding officer at the meeting may appoint any person to act as
secretary of the meeting.
SECTION 8. Stockholders may take action on a matter at a meeting only if
a quorum exists with respect to that matter. Unless the certificate of
incorporation or the GCL provide otherwise, a majority of the shares
entitled to vote on the matter, represented in person or by proxy,
constitutes a quorum for action on that matter. If a quorum exists,
action on a matter, other than the election of directors, by stockholders
is approved if the votes cast favoring the action exceed the votes cast
opposing the action, unless the certificate of incorporation or the GCL
require a greater number of affirmative votes. Directors are elected by
a plurality of the votes cast by the shares entitled to vote in the
election, represented in person or by proxy, at a meeting at which a
quorum is present.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the Company shall be managed
under the direction of, the Board of Directors, which shall consist of
fourteen members. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by
a vote of the Board and, if the directors remaining in office consist of
fewer than a quorum of the Board, a majority of directors then in office,
though less than a quorum, may fill the vacancy. A director elected to
fill a vacancy shall be elected for the unexpired term of his predecessor
in office. Any director appointed by the Board of Directors to fill a
directorship caused by an increase in the number of directors shall serve
until the next annual meeting or a special meeting of the stockholders
called for the purpose of electing directors.
SECTION 2. Regular meetings of the Board of Directors shall be held at
such times as the Board shall from time to time designate, and no further
notice of such regular meetings shall be required. Special meetings shall
be held whenever called by order of the Chairman of the Board, the
Chairman of the Executive Committee, or the Executive Committee or any
five members of the Board. Notice of special meetings shall be given, at
least one day prior thereto, by personal service of written notice upon
the directors or by delivering the same at, or transmitting the same by
first class mail, facsimile transmission, telephone or other electronic
means to, their respective residences or offices. Any director may
consent in writing to the holding of a special meeting without notice, and
the attendance or participation of any director at a special meeting shall
constitute a waiver by him of call and notice thereof and a consent to the
holding of said meeting and the transaction of any corporate business
thereat, unless the director at the beginning of the meeting, or promptly
upon the director's arrival, objects to holding the meeting or transacting
business thereat because of lack of notice or defective notice, and does
not thereafter vote for or assent to the action taken at the meeting.
Meetings of the Board of Directors may be held at such place or places as
shall be ordered by the Executive Committee or by a majority of the
directors in office, but, unless otherwise ordered, all meetings of the
Board of Directors shall be held at the principal executive offices of the
Company in Dallas, Texas.
SECTION 3. A majority of the number of directors prescribed by Article
II, Section 1 shall constitute a quorum at all meetings of the Board. If
a quorum be not present at any meeting, a majority of the directors
present may adjourn the meeting until a later day or hour.
ARTICLE III
EXECUTIVE COMMITTEE
SECTION 1. There shall be an Executive Committee consisting of such
number of directors as shall be elected thereto by the vote of the
majority of the directors then in office, whose terms of office shall
continue during the pleasure of the Board. Except to the extent otherwise
provided in the GCL, the Executive Committee shall, when the Board of
Directors is not in session, have all the powers of the Board of Directors
to manage and direct all the business and affairs of the Company in all
cases in which specific directions shall not have been given by the Board
of Directors.
SECTION 2. Meetings of the Executive Committee may be called at any time
by the Chairman of the Board, the Chairman of the Executive Committee, or
a majority of the members of the Executive Committee, to convene at such
time and place as may be designated. The rules regarding notice of
meetings of the Board set forth in Section 2 of Article II of these
By-Laws shall apply to meetings of the Executive Committee.
SECTION 3. A majority of the members of the Executive Committee shall
constitute a quorum. If a quorum be not present at any meeting, the
member or members of the Committee present may adjourn the meeting until
a later day or hour.
ARTICLE IV
OFFICERS AND AGENTS
SECTION 1. The Board of Directors may elect such of the following
officers as it deems necessary or desirable: a Chairman of the Board, a
Chairman of the Executive Committee, a Chief Executive Officer, a Vice
Chairman of the Board, a President, a Chief Operating Officer, a Chief
Financial Officer, a Chief Accounting Officer, an Executive Vice
President-Finance and Administration, an Executive Vice President-Marketing
and Sales, an Executive Vice President-Operation, a Vice
President and General Counsel, a Vice President-Taxes, a Controller, a
Secretary, a Treasurer and such other Executive Vice Presidents, Senior
Vice Presidents and Vice Presidents as the Board shall determine, and
there may also be appointed by the Board of Directors or Executive
Committee such Assistant Secretaries, Assistant Treasurers, General Tax
Counsels and other officers and agents as the Board of Directors or
Executive Committee shall from time to time determine.
SECTION 2. The Chairman of the Board shall perform such duties and
possess such powers as may be prescribed or conferred by the Board of
Directors or the Chairman of the Executive Committee.
SECTION 3. The Chairman of the Executive Committee shall preside at
meetings of the Executive Committee and Board of Directors, and shall have
general supervision of all business of the Company and of the interest of
the Company in all companies controlled by it and shall perform such other
duties and possess such powers as may be prescribed or conferred by the
Board of Directors.
SECTION 4. The Chief Executive Officer shall have charge of all
departments and offices of the Company and of the interest of the Company
in all companies controlled by it and shall perform such other duties and
possess such powers as may be prescribed or conferred by the Board of
Directors or the Chairman of the Executive Committee.
SECTION 5. The Vice Chairman of the Board shall perform such duties and
possess such powers as may be prescribed or conferred by the Board of
Directors or the Chief Executive Officer.
SECTION 6. The President shall perform such duties and possess such
powers as may be prescribed or conferred by the Board of Directors or the
Chief Executive Officer.
SECTION 7. The Chief Operating Officer shall have day to day operating
responsibilities for the affairs of the Company, reporting to the Chief
Executive Officer, and shall perform such other duties as may be
prescribed or conferred by the Chief Executive Officer.
SECTION 8. The Chief Financial Officer shall have general supervision of
the financial affairs and investments of the Company and shall perform
such other duties as may be prescribed or conferred by the Chairman of the
Executive Committee.
SECTION 9. The Executive Vice President-Finance and Administration shall
have immediate charge of the financial affairs and investments of the
Company and shall have general supervision of the information technologies
systems of the Company and shall perform such other duties as may be
prescribed or conferred by the President.
SECTION 10. The Executive Vice President-Marketing and Sales shall have
charge of all marketing and sales activities of the Company and shall
perform such other duties as may be prescribed or conferred by the
President.
SECTION 11. The Executive Vice President-Operation shall have charge of
the maintenance and operation of the railroads of the Company and shall
perform such other duties as may be prescribed or conferred by the Chief
Operating Officer.
SECTION 12. The other Executive Vice Presidents and Senior Vice
Presidents elected from time to time shall perform such duties and possess
such powers as may be prescribed or conferred by the Board of Directors or
the President.
SECTION 13. The Vice President and General Counsel shall have general
supervision of all legal business of the Company except as otherwise
provided in Section 13 of this ARTICLE IV, and shall perform such other
duties as may be prescribed or conferred by the Chairman of the Executive
Committee.
SECTION 14. The Vice President-Taxes shall, under the control of the
Chief Financial Officer, have charge of all aspects of federal, foreign,
state and local taxes and shall perform such other duties as may be
prescribed or conferred by the Chief Financial Officer.
SECTION 15. The other Vice Presidents elected from time to time shall
perform such duties and possess such powers as may be prescribed or
conferred by the Board of Directors or the President.
SECTION 16. Except as otherwise provided herein or directed by the Board
of Directors, the Chief Accounting Officer shall have immediate charge of
the general books, accounts and statistics of the Company and shall be the
custodian of all vouchers, drafts, invoices and other evidences of payment
and all bonds, interest coupons and other evidences of indebtedness which
shall have been canceled. He is authorized to approve for payment by the
Treasurer vouchers, payrolls, drafts or other accounts. He shall have
prepared periodically or specially as requested by him with the approval
of and in forms prescribed by the Chief Financial Officer, statements of
operating revenues and expenses and estimates thereof and of expenditures
and estimates on all other accounts; and copies of all statistical data
that may be compiled in regular course and also other information in
reference to the financial affairs and operations of the Company and of
any subsidiary company that may be required by the Chief Financial Officer
or the Board of Directors. He shall submit for each regular meeting of
the Board of Directors, and, at such other times as may be required by
said Board or the Chief Financial Officer, statements of operating
results, of cash resources and requirements and of appropriations for
Capital Expenditures, and shall perform such other duties as the Chief
Financial Officer may from time to time direct.
SECTION 17. The Secretary shall attend all meetings of the stockholders,
the Board of Directors and the Executive Committee, and keep a record of
all their proceedings. He shall procure and keep in his files copies of
the minutes of all meetings of the stockholders, boards of directors and
executive committees of all companies a majority of whose capital stock is
owned by this Company. He shall be the custodian of the seal of the
Company. He shall have the power to affix the seal of the Company to
instruments, the execution of which is authorized by these By-Laws or by
action of the Board of Directors or Executive Committee, and to attest the
same. He shall have supervision of the issuance, transfer and
registration of the capital stock and debt securities of the Company. He
shall perform such other duties as may be assigned to him by the Board of
Directors, the Chairman of the Board or the Chairman of the Executive
Committee.
The Assistant Secretaries shall have power to affix the seal of the
Company to instruments, the execution of which is authorized by these
By-laws or by action of the Board of Directors or Executive Committee, and
to attest the same, and shall exercise such of the other powers and perform
such of the other duties of the Secretary as shall be assigned to them by
the Secretary.
SECTION 18. Except as otherwise provided herein or directed by the Board
of Directors, the Treasurer shall be the custodian of all moneys, stocks,
bonds, notes and other securities of the Company. He is authorized to
receive and receipt for stocks, bonds, notes and other securities
belonging to the Company or which are received for its account. All
stocks, bonds, notes and other securities in the custody of the Treasurer
shall be held in the safe deposit vaults of the Company or in one or more
depositories selected by the Treasurer or other officer authorized by the
Board of Directors, in each case subject to access thereto as shall from
time to time be authorized or required by the Board of Directors, the
Chief Financial Officer or the Treasurer. Stocks, bonds, notes and other
securities shall be deposited in the safe deposit vaults or depositories,
or withdrawn from them, only by persons and pursuant to procedures as
shall be determined by the Board of Directors, the Chief Financial Officer
or the Treasurer. The Treasurer is authorized and empowered to receive
and collect all moneys due to the Company and to receipt therefor. All
moneys received by the Treasurer shall be deposited to the credit of the
Company in such depositories as shall be designated by the Board of
Directors, the Chief Financial Officer, the Treasurer or such other
officers as may be authorized by the Board of Directors; and the Treasurer
or other officer designated by the Treasurer may endorse for deposit
therein all checks, drafts, or vouchers drawn to the order of the Company
or payable to it. He is also authorized to draw checks against any funds
to the credit of the Company in any of its depositories. All such checks
shall be signed by such persons, either by manual or facsimile signature,
as shall be authorized by the Board of Directors and countersigned if
required by the Board of Directors. The Treasurer is authorized to make
disbursements in settlement of vouchers, payrolls, drafts or other
accounts, when approved for paymen by the Chief Accounting Officer; or
such other person as shall be authorized by the Board of Directors, the
Chief Financial Officer or these By-Laws; for payments which have been
otherwise ordered or provided for by the Board of Directors or the Chief
Financial Officer; for interest on bonds and dividends on stock when due
and payable; for vouchers, pay checks, drafts and other accounts properly
certified to by the duly authorized officers of the Company and approved
for payment by or on behalf of the Chief Accounting Officer; and for
vouchers, pay checks, drafts and other accounts approved by the officers
duly authorized to approve for payment of any company which this Company
controls through ownership of stock or otherwise, as may be designated in
writing from time to time by the Chief Financial Officer to the Treasurer.
He shall cause to be kept in his office true and full accounts of all
receipts and disbursements of his office. He shall also perform such
other duties as shall be assigned to him by the Chief Financial Officer.
The Assistant Treasurers may exercise all the powers of the Treasurer
herein conferred in respect of the receipt of moneys and securities,
endorsement for deposit and signature of checks.
ARTICLE V
SUPERVISION, REMOVAL AND SALARIES OF
OFFICERS AND EMPLOYEES
SECTION 1. Any officer or employee elected or appointed by the Board of
Directors may be removed as such at any time by the affirmative vote of a
majority of the directors then in office, with or without cause. Any
other officer or employee of the Company may be removed at any time by
vote of the Board of Directors or of the Executive Committee or by the
officer supervising such officer or employee, with or without cause.
SECTION 2. All officers, agents and employees of the Company, in the
exercise of the powers conferred and the performance of the duties imposed
upon them, by these By-Laws or otherwise, shall at all times be subject to
the direction, supervision and control of the Board of Directors or the
Executive Committee.
SECTION 3. No office or position shall be created and no person shall be
employed at a salary of more than $300,000 per annum, and no salary shall
be increased to an amount in excess of $300,000 per annum, without the
approval of the Board of Directors or Executive Committee.
SECTION 4. Except to the extent otherwise provided in the GCL, the Board
of Directors may from time to time vest general authority in the Chairman
of the Board, the Chairman of the Executive Committee, the Chief Executive
Officer, the President, the Chief Operating Officer, the Head of any
department or office of the Company, or any such other officer of the
Company as any of the foregoing shall designate, for the sole
determination of disposition of any matter which otherwise would be
required to be considered by the Board of Directors or the Executive
Committee under the provisions of this Article.
ARTICLE VI
CONTRACTS AND EXPENDITURES
SECTION 1. All capital expenditures, leases and property dispositions
must be authorized by the Board of Directors or Executive Committee,
except that general or specific authority with regard to such matters may
be delegated to such officers of the Company as the Board of Directors may
from time to time direct to the extent not inconsistent with the
provisions of the GCL.
SECTION 2. Expenditures chargeable to operating expenses may be made by
or under the direction of the Head of the department in which they are
required, without explicit or further authority from the Board of
Directors or Executive Committee, subject to direction, restriction or
prohibition by the Chairman of the Board, the Chairman of the Executive
Committee, the Chief Executive Officer, the President or the Chief
Operating Officer.
SECTION 3. No contract shall be made without the approval of the Board of
Directors or Executive Committee, except as authorized by the Board of
Directors or these By-Laws.
SECTION 4. Contracts for work, labor and services and materials and
supplies, the expenditures for which will be chargeable to operating
expenses, may be made in the name and on behalf of the Company by the
Chairman of the Board, the Chairman of the Executive Committee, the Chief
Executive Officer, the President or the Chief Operating Officer, or by
such officer as he shall designate, without further authority.
SECTION 5. All written contracts and agreements to which the Company may
become a party shall be approved as to form by or under the direction of
counsel for the Company.
SECTION 6. The Chairman of the Board, the Chairman of the Executive
Committee, the Chief Executive Officer, the President, the Chief Operating
Officer and the Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents shall severally have the power to execute on behalf of the
Company any deed, bond, indenture, certificate, note, contract or other
instrument authorized or approved by, or pursuant to authority granted by,
the Board of Directors or the Executive Committee, and to cause the
corporate seal to be thereto affixed and attested by the Secretary or an
Assistant Secretary.
SECTION 7. Except to the extent otherwise provided in the GCL, the Board
of Directors may from time to time vest general or specific authority in
such officers of the Company as the Board of Directors shall designate for
the sole determination of disposition of any matter which otherwise would
be required to be considered by the Board of Directors or the Executive
Committee under the provisions of this Article.
ARTICLE VII
INDEMNIFICATION
SECTION 1. The Company shall indemnify to the full extent permitted by
law any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the
fact that (i) such person is or was a director or officer of the Company
or (ii) while a director or officer of the Company, such person is or was
serving at the request of the Company as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise. The
indemnification provided in this Section 1 of this Article VII shall
include the right to receive payment in advance of the final disposition
of any such action, suit or proceeding of any expenses (including
attorneys' fees) incurred by any such person in defending such action,
suit or proceeding, consistent with the provisions of then applicable law.
For purposes of this Article VII, the term "other enterprise" shall
include any employee benefit plan; and "serving at the request of the
Company" shall include any service as a director or officer of the Company
which imposes duties on, or involves services by, such director or officer
with respect to an employee benefit plan, its participants or
beneficiaries; and any action by a person with respect to an employee
benefit plan taken in good faith and in a manner such person reasonably
believed to be in the interest of the participants and beneficiaries of
such plan shall be deemed to be action not opposed to the best interests
of the Company. This Section 1 of this Article VII shall not apply to any
action, suit or proceeding pending or threatened on the date of adoption
hereof provided that the right of the Company to indemnify any person with
respect thereto shall not be limited hereby.
SECTION 2. Any indemnification under Section 1 of this Article VII
(unless ordered by a court) shall be made by the Company only as
authorized in the specific case upon a determination that indemnification
of the present or former director or officer is proper in the
circumstances because such person has met the applicable standard of
conduct required by law. Such determination shall be made by the persons
authorized by the GCL.
SECTION 3. Notwithstanding Sections 1 and 2 of this Article VII, except
for proceedings to enforce rights to indemnification, the Company shall
not be obligated to indemnify any director or officer in connection with
a proceeding (or part thereof) initiated by such person unless such
proceeding (or part thereof) was authorized or consented to by the Board
of Directors. The indemnification and advancement of expenses provided by
Section 1 of this Article VII shall not be deemed exclusive of any other
rights to which any person seeking indemnification may be entitled under
any law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in such person's official capacity and as to
action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director or officer and shall inure
to the benefit of the heirs, executors and administrators of such a
person. Any amendment or repeal of Section 1 or Section 2 of this Article
VII or this Section 3 shall not limit the right of any person to indemnity
with respect to actions taken or omitted to be taken by such person prior
to such amendment or repeal.
ARTICLE VIII
FINAL
SECTION 1. The common corporate seal is, and, until otherwise ordered
by the Board of Directors, shall be, an impression upon paper or wax,
circular in form, with the words "Union Pacific Railroad Company" and
"Delaware" on the outer edge thereof.
SECTION 2. Except as otherwise proved by the GCL, these By-Laws may be
altered, amended or repealed at a meeting of the stockholders by a
majority vote of those present in person or by proxy or at any meeting
of the Board of Directors by a majority vote of the directors then in
office.
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(In Millions of Dollars, Except Ratios)
(Unaudited)
Nine Months
Ended September 30,
-------------------
1998 1997
----- -----
Earnings:
Net income (loss) . . . . . . . . . . . . . . . $ (87) $ 695
Undistributed equity earnings. . . . . . . . . . (34) (26)
----- ------
Total. . . . . . . . . . . . . . . . . . . . . . (121) 669
----- ------
Income Taxes Expense (Benefit) . . . . . . . . . . (82) 387
----- ------
Fixed Charges:
Interest expense including amortization
of debt discount. . . . . . . . . . . . . . . 443 360
Portion of rentals representing an interest
factor. . . . . . . . . . . . . . . . . . . . 132 123
----- ------
Total . . . . . . . . . . . . . . . . . . . . 575 483
----- ------
Earnings available for fixed charges . . . . . . . $ 372 $1,539
===== ======
Fixed Charges -- as above. . . . . . . . . . . . . $ 575 $ 483
===== ======
Ratio of earnings to fixed charges (Note 5). . . . 0.6 3.2
===== ======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Third Quarter 1998 Financial Data Schedule
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<RECEIVABLES> 375
<ALLOWANCES> 0
<INVENTORY> 307
<CURRENT-ASSETS> 923
<PP&E> 32,121
<DEPRECIATION> 5,633
<TOTAL-ASSETS> 28,179
<CURRENT-LIABILITIES> 2,519
<BONDS> 2,539
28
0
<COMMON> 0
<OTHER-SE> 8,535
<TOTAL-LIABILITY-AND-EQUITY> 28,179
<SALES> 0
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<CGS> 0
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