<COVER>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to
_____________________
Commission file number 1-6146
UNION PACIFIC RAILROAD COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 94-6001323
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 271-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
------ ------
As of April 30, 1999, 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: Consolidated Financial Statements:
STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended March 31, 1999 and 1998 1
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
At March 31, 1999 and December 31, 1998 2
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998 3
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5-9
Item 2: Management's Narrative Analysis of the Results of
Operations 10-15
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 15-16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE> 1
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Statement of Consolidated Income (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary
and Affiliate Companies
For the Three Months Ended March 31, 1999 and 1998
- ---------------------------------------------------------------------------
Millions of Dollars, Except Ratios 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues Rail............................ $2,479 $2,284
--------------------------------------------------------
Operating Expenses Salaries, wages and employee
benefits..................... 905 884
Equipment and other rents....... 311 356
Depreciation (Note 4)........... 258 246
Fuel and utilities (Note 3).... 178 208
Materials and supplies.......... 133 132
Casualty costs.................. 100 105
Other costs (Note 8)............ 230 300
--------------------------------------------------------
TOTAL .......................... 2,115 2,231
--------------------------------------------------------
Income Operating Income................ 364 53
Other income (Note 6)........... 23 18
Interest expense................ (156) (134)
--------------------------------------------------------
Income(Loss) before Income Taxes 231 (63)
Income taxes.................... (82) 31
--------------------------------------------------------
Net Income (Loss)............... $ 149 $ (32)
--------------------------------------------------------
Ratio of Earnings to Fixed
Charges (Note 7)............ 2.1 0.6
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an
integral part of these statements.
<PAGE> 2
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Consolidated Financial Position (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary
and Affiliate Companies
- ----------------------------------------------------------------------------
March 31, Dec.31,
Millions of Dollars 1999 1998
- ----------------------------------------------------------------------------
Assets
<S> <C> <C> <C>
Current Assets Cash and temporary investments. $ 66 $ 35
Accounts receivable (Note 3)... 480 494
Inventories.................... 343 337
Current deferred tax asset..... 130 130
Other current assets.......... 87 85
-------------------------------------------------------
Total.......................... 1,106 1,081
-------------------------------------------------------
Investments Investments in and advances
(Note 2) to affiliated companies..... 618 520
Other investments.............. 137 171
-------------------------------------------------------
Total.......................... 755 691
-------------------------------------------------------
Properties Cost........................... 32,656 32,334
(Note 4) Accumulated depreciation....... (6,085) (5,871)
-------------------------------------------------------
Net............................ 26,571 26,463
-------------------------------------------------------
Other Other assets................... 101 122
-------------------------------------------------------
Total Assets................... $28,533 $28,357
- ----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
-------------------------------------------------------
Current Liabilities Accounts payable............... $ 496 $ 493
Accrued wages and vacation
payable.................. 432 380
Accrued casualty costs......... 350 364
Income and other taxes payable. 297 297
Debt due within one year....... 176 178
Interest payable............... 100 110
Other current
liabilities (Note 2)..... 680 730
-------------------------------------------------------
Total.......................... 2,531 2,552
-------------------------------------------------------
Other Liabilitiesand Intercompany borrowing
and Stockholders' from UPC..................... 5,515 5,368
Equity Third-party debt due after
one year..................... 2,571 2,606
Deferred income taxes.......... 6,822 6,759
Accrued casualty costs......... 991 928
Retiree benefit obligations.... 746 737
Other long-term
liabilities (Notes 2 and 8).. 632 781
Redeemable preference shares... 27 27
Common stockholders'
equity (Page 4).............. 8,698 8,599
-------------------------------------------------------
Total Liabilities and
Stockholders' Equity......... $28,533 $28,357
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an
integral part of these statements.
<PAGE> 3
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Consolidated Cash Flows (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary
and Affiliate Companies
For the Three Months Ended March 31, 1999 and 1998
- ----------------------------------------------------------------------------
Millions of Dollars 1999 1998
<S> <C> <C> <C>
Cash from Operations Net Income (Loss)............. $ 149 $ (32)
Non-cash charges to income:
Depreciation................ 258 246
Deferred income taxes....... 63 (27)
Other - net................. (30) (54)
Changes in current assets
and liabilities............. (15) (272)
-------------------------------------------------------
Cash Provided by (Used in)
Operations.................. 425 (139)
-------------------------------------------------------
Investing Activities Capital investments........... (363) (518)
Other - net (Note 2).......... (91) (25)
-------------------------------------------------------
Cash Used in Investing
Activities.................. (454) (543)
-------------------------------------------------------
Equity and Financing Debt repaid................... (37) (132)
Activities Net financings................ - 91
Dividends paid to parent...... (50) (110)
Advances from affiliated
companies - net............... 147 831
-------------------------------------------------------
Cash Provided by Equity
and Financing Activities... 60 680
-------------------------------------------------------
Net Change in Cash and
Temporary Investments...... 31 (2)
Cash at Beginning of Period... 35 50
-------------------------------------------------------
Cash at End of Period......... $ 66 $ 48
Change in Current Accounts receivable........... $ 14 $ 46
Assets and Inventories................... (6) (13)
Liabilities Other current assets.......... (2) 59
Accounts, wages and
vacation payable........... 55 (216)
Debt due within one year...... (2) (100)
Other current liabilities..... (74) (48)
-------------------------------------------------------
Total......................... $ (15) $ (272)
- -----------------------------------------------------------------------------
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE> 4
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Changes in Common Stockholders' Equity (Unaudited)
Union Pacific Railroad and Consolidated Subsidiary and
Affiliate Companies
For the Three Months Ended March 31, 1999
- ----------------------------------------------------------------------------
Millions of Dollars
<S> <C> <C>
Common Stock Common stock, $10.00 par value
(Note 5) (authorized 9,200 shares) balance at
beginning and end of period
(4,465 shares issued)................. $ -
-------------------------------------------------------
Class A Stock Class A Stock, $10.00 par value
(Note 5) (authorized 800 shares) balance at
beginning and end of period
(388 shares issued)................... -
-------------------------------------------------------
Paid-in Surplus Balance at beginning and
end of period...................... 4,782
-------------------------------------------------------
Retained Earnings Balance at beginning of period........ 3,817
Net Income............................ 149
-------------------------------------------------------
Total................................. 3,966
Dividends declared.................... (50)
-------------------------------------------------------
Balance at end of period.............. 3,916
-------------------------------------------------------
Total Common Stockholders' Equity..... $8,698
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an
integral part of these statements.
<PAGE> 5
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. Responsibilities for Financial Statements - Union
Pacific Railroad Company (the Registrant), a Class I
railroad incorporated in Delaware and a wholly-owned
subsidiary of Union Pacific Corporation (the Corporation or
UPC), together with a number of wholly-owned and majority-
owned subsidiaries, certain affiliates and various minority-
owned terminal and bridge companies (collectively, the
Company or Railroad), operates various railroad and railroad-
related businesses. The Company's rail operations include
for all periods the operations of Union Pacific Railroad
Company, a Utah corporation and predecessor to the
Registrant (UPRR), and the rail operating subsidiaries of
Southern Pacific Rail Corporation (Southern Pacific or SP)
(see Note 5). The consolidated financial statements of the
Company are unaudited and reflect all adjustments
(consisting only of normal and recurring adjustments) that
are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results
for the interim periods presented. The 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, 1998. The results of operations
for the three months ended March 31, 1999 are not
necessarily indicative of the results for the year ending
December 31, 1999. Certain 1998 amounts have been
reclassified to conform to the 1999 financial statement
presentation.
2. Acquisitions
Southern Pacific - UPC consummated the acquisition of
Southern Pacific in September 1996. The acquisition of
SP was accounted for as a purchase and was fully
consolidated into UPC's results in October 1996. The
various SP rail-operating subsidiaries were then
subsequently legally merged with the Railroad.
Merger Consolidation Activities - In connection with the
acquisition and continuing integration of UPRR and
Southern Pacific's rail operations, the Company is in the
process of eliminating 5,200 duplicate positions, which
are primarily employees involved in activities other than
train, engine and yard activities. In addition, the
Company is relocating 4,700 positions, merging or
disposing of redundant facilities, and disposing of
certain rail lines. The Company is also canceling
uneconomical and duplicative SP contracts.
To date the Company has severed 2,450 employees and
relocated 3,900 employees due to merger implementation
activities. The Company recognized a $958 million pre-tax
liability as part of the SP purchase price allocation for
costs associated with SP's portion of these activities.
In addition, the Railroad expects to incur $160 million
in pre-tax acquisition-related costs for severing or
relocating UPRR employees, disposing of certain UPRR
facilities, and training and equipment upgrading over the
merger implementation period. Earnings for the three
months ending March 31, 1999 and 1998 included $9 million
and $18 million after-tax, respectively, for acquisition-
related costs for UPRR consolidation activities.
<PAGE> 6
The components of the merger liability as of March 31,
1999 were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Original Cumulative Current
Millions of Dollars Reserve Activity Reserve
----------------------------------------------------------------
<S> <C> <C> <C>
Contractual obligations........... $361 $361 $ -
Severance costs................... 343 257 86
Contract cancellation fees and
facility and line closure costs.. 145 125 20
Relocation costs.................. 109 81 28
----------------------------------------------------------------
Total............................. $958 $824 $134
----------------------------------------------------------------
</TABLE>
Merger Liabilities - Merger liability activity reflected
cash payments for merger consolidation activities and
reclassifications of contractual obligations from merger
liabilities to contractual liabilities. The Company
expects that the remaining merger payments will be made
over the course of the next three years as labor
negotiations are completed and implemented and related
merger consolidation activities are finalized.
Mexican Railway Concession - During 1997, the Company
and a consortium of partners were granted a 50-year
concession to operate the Pacific-North and Chihuahua
Pacific lines in Mexico and a 25% stake in the Mexico
City Terminal Company at a price of $525 million. The
consortium assumed operational control of both lines in
1998. In March 1999, the Company purchased an additional
13% ownership interest for $87 million from one of its
partners. The Railroad now holds a 26% ownership share in
the consortium. The investment is accounted for under
the equity method.
3. Financial Instruments - The Company uses derivative
financial instruments in limited instances and 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 and rate movements; however, it has also limited
future gains from favorable movements.
Credit Risk - The total credit risk associated with the
Company 's counterparties was $17 million at March 31,
1999. The Company has not been required to provide
collateral; however, the Company has received collateral
relating to its hedging activity where the concentration
of credit risk was substantial.
Valuation - The fair market values of the Company's
derivative financial instrument positions at March 31,
1999 and December 31, 1998 were determined based upon
current fair market values as quoted by recognized
dealers or developed based upon the present value of
future cash flows discounted at the applicable U.S.
treasury rate and swap spread.
<PAGE> 7
The following is a summary of the Company's financial
instruments at March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Millions of Dollars March 31, December 31,
Except Percentages and Average Commodity Prices 1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Rail Fuel Hedging:
Fuel purchases hedged for 1999............ $ 257 $ 343
Percentage of forecasted 1999 fuel
consumption hedged................... 64 64
Average price of 1999 hedges
outstanding (per gallon) [a]......... $0.41 $0.41
Fuel purchases hedged for 2000............ $ 54 -
Percentage of forecasted 2000 fuel
consumption hedged................... 12 -
Average price of 2000 hedges
outstanding (per gallon) [a]......... $0.39 -
-------------------------------------------------------------------------
</TABLE>
[a]Excludes taxes and transportation costs.
The asset and liability positions of the Company's
outstanding financial instruments at March 31, 1999 and
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
March 31, December 31,
Millions of Dollars 1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Rail Fuel Hedging:
Gross fair market asset position............. $17 $ -
Gross fair market (liability) position....... - (49)
--------------------------------------------------------------------------
Total asset (liability) position.............. $17 $(49)
--------------------------------------------------------------------------
</TABLE>
The Company's use of financial instruments had the
following impact on pre-tax income for the quarters ended
March 31, 1999 and 1998:
--------------------------------------------------------------------------
March 31, March 31,
Millions of Dollars 1999 1998
--------------------------------------------------------------------------
Reduction in Pre-Tax Income $19 $14
--------------------------------------------------------------------------
Sale of Receivables - The Railroad has sold, on a
revolving basis, an undivided percentage ownership
interest in a designated pool of accounts receivable to
third parties through a bankruptcy-remote subsidiary (the
Subsidiary). The Subsidiary is collateralized by a $76
million note from the Registrant. The amount of
receivables sold fluctuates based upon the availability
of the designated pool of receivables and is directly
affected by changing business volumes and credit risks.
At March 31, 1999 and December 31, 1998, accounts
receivable are presented net of $580 million of
receivables sold.
4. Properties - Major property accounts were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
March 31, December 31,
Millions of Dollars 1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Land and other property................. $ 5,000 $ 4,992
Track, structures and facilities........ 20,065 19,803
Locomotives............................. 4,480 4,486
Freight cars............................ 2,583 2,536
Other equipment......................... 528 517
- ----------------------------------------------------------------------------
Total................................... $32,656 $32,334
- ----------------------------------------------------------------------------
</TALBE>
<PAGE> 8
Accumulated depreciation accounts were as follows:
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
March 31, December 31,
Millions of Dollars 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Track, structures and facilities........ $3,458 $3,308
Locomotives............................. 1,407 1,384
Freight cars............................ 1,084 1,070
Other equipment......................... 136 109
- ----------------------------------------------------------------------------
Total................................... $6,085 $5,871
- ----------------------------------------------------------------------------
</TABLE>
5. Capital Stock - The number of shares shown in the
Common Stock section of the Statement of Changes in Common
Stockholders' Equity on page 4 excludes 2,665 shares of
Common Stock and 232 shares of Class A Stock owned by
Southern Pacific Rail Corporation, an affiliate of the
Registrant, whose results are included in the consolidated
financial statements.
6. Other Income - Other income included the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Millions of Dollars March 31, March 31,
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Net gain on asset dispositions............. $11 $14
Rental income.............................. 12 11
Interest income............................ 2 3
Other - net................................ (2) (10)
-------------------------------------------------------------------------
Total...................................... $23 $18
- ----------------------------------------------------------------------------
</TABLE>
7. Ratio of Earnings to Fixed Charges - The ratio of
earnings to fixed charges has been computed on a
consolidated basis. Earnings represent net income (loss)
less equity in undistributed earnings of unconsolidated
affiliates, plus income taxes and fixed charges. Fixed
charges represent interest, amortization of debt discount
and the estimated interest portion of rental charges.
For the three months ended March 31, 1998, fixed charges
exceeded earnings by approximately $72 million.
8. Commitments and Contingencies - There are various claims
and lawsuits pending against the Company. The Company is
also subject to Federal, state and local environmental
laws and regulations, pursuant to which it is currently
participating in the investigation and remediation of
numerous sites. In addition, the Company also
periodically enters into financial and other commitments
and guarantees in connection with its businesses, and
have retained certain contingent liabilities upon the
disposition of formerly owned operations.
It is not possible at this time for the Company to
determine fully the effect of any or all unasserted
claims on its consolidated financial condition; however,
to the extent possible, where unasserted claims can be
estimated and where such claims are considered probable,
the 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.
Certain potentially significant contingencies relating to
the Company's business are detailed below:
Customer Claims - Certain customers have submitted claims
for damages related to shipments delayed by the Railroad
as a result of congestion problems, and certain customers
have filed lawsuits seeking relief related to such
delays. The nature of the damages sought by claimants
includes, but is not limited to,
<PAGE> 9
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 has made no
additional provisions for such claims in 1999.
Shareholder Lawsuits - UPC and certain of its officers
and directors (who are also directors of the Registrant)
are defendants in two purported class actions that have
been consolidated into one proceeding. The consolidated
complaint alleges, among other things, that the
Corporation violated the Federal securities laws by
failing to disclose material facts and making materially
false and misleading statements concerning the service,
congestion and safety problems encountered following the
Corporation's acquisition of Southern Pacific in 1996.
These lawsuits were filed in late 1997 in the United
States District Court for the Northern District of Texas
and seek to recover unspecified amounts of damages.
Management believes that the plaintiffs' claims are
without merit and intends to defend them vigorously. The
defendants have moved to dismiss this action, and the
motion has been fully briefed and is awaiting a decision
by the Court.
In addition to the class action litigation, a purported
derivative action was filed on behalf of the Corporation
and the Registrant in September 1998 in the District
Court for Tarrant County, Texas, naming as defendants the
then-current and certain former directors of the
Corporation and the Registrant and, as nominal
defendants, the Corporation and the Registrant. The
derivative action alleges, among other things, that the
named directors breached their fiduciary duties to the
Corporation and the Registrant by approving and
implementing the Southern Pacific merger without
informing themselves of its impact or ensuring that
adequate controls were put in place and by causing UPC
and the Registrant to make misrepresentations about the
Registrant's service problems to the financial markets
and regulatory authorities. The Corporation's Board of
Directors established a special litigation committee
consisting of three independent directors to review the
plaintiff's allegations and determine whether it is in
UPC's best interest to pursue them. The committee has
unanimously concluded that further prosecution of the
derivative action on behalf of the Corporation and the
Registrant is not in the best interest of either such
company. Accordingly, the Corporation and the Registrant
have filed a motion with the Court to dismiss the
derivative action. The individual defendants also
believe that these claims are without merit and intend to
defend them vigorously.
9. Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), that will be effective January 1,
2000. While management is still in the process of
determining the full effect FAS 133 will have on the
Company's financial statements, management has determined
that FAS 133 will increase the volatility of the
Company's asset, liability and equity (comprehensive
income) positions as the change in the fair market value
of all financial instruments the Company uses for fuel or
interest rate hedging purposes will, upon adoption of FAS
133, be recorded in the Company's Statement of Financial
Position (See Note 3). In addition, to the extent fuel
hedges are ineffective due to pricing differentials
resulting from the geographic dispersion of the Company's
operations, income statement recognition of the
ineffective portion of the hedge position will be
required. Management does not anticipate that the final
adoption of FAS 133 will have a material impact on the
Company's consolidated financial statements.
<PAGE> 10
Item 2. Management's Narrative Analysis of the Results of
Operations
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
RESULTS OF OPERATIONS
Quarter ended March 31, 1999 Compared to March 31, 1998
Service Issues - The results of operations of Union Pacific
Railroad Company (Registrant) together with its wholly-owned
and majority-owned subsidiaries, and certain affiliates
(collectively, the Company or the Railroad), in the first
quarter of 1998 were adversely affected by congestion that
began in the third quarter of 1997. However, service
recovery efforts resulted in significant improvements in
operating and financial results beginning in the latter half
of 1998 and continuing into the first quarter of 1999.
Net Income - Rail operations reported net income of $149
million for the first quarter of 1999 compared to a 1998 net
loss of $32 million. Higher earnings resulted primarily
from the positive effects of continuing service recovery
efforts. The following table demonstrates the impact of
service issues over the previous two years and the
continuing operating improvement made over the last three
quarters that was driven, in part, by benefits derived from
decentralization of Rail operations, merger synergies,
capacity expansion and service recovery actions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Averages, Except Ratios 1Q97 2Q97 3Q97 4Q97 1Q98 2Q98 3Q98 4Q98 1Q99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Seven-Day Loadings(000's).168.1 170.7 166.9 153.2 152.5 154.9 155.3 160.6 161.4
Train Speed (MPH)......... 18.6 18.4 15.0 13.2 13.8 14.0 14.4 15.5 17.5
Car Cycle Times (Days)... 12.6 12.7 15.2 17.5 17.6 16.4 15.9 14.4 13.6
Operating Ratio (%)...... 86.2 80.9 82.0 102.5 97.7 105.1 90.5 88.7 85.3
- --------------------------------------------------------------------------------
</TABLE>
Operating Revenues - Rail operating revenues increased $195
million (9%) to $2,479 million in 1999, as operations
continued to recover from congestion-affected 1998 results.
Carloadings for the first quarter of 1999 were 6% higher
than 1998. Average revenue per car (ARC) improved 2% over
1998 to $1,173.
The following table summarizes the quarterly change in
rail commodity revenue (CR):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Carloads in Thousands, Commodity Revenues in Millions of Dollars
1999 Change vs 1Q 1998 % Change vs 1Q 1998
------------------- ----------------- -------------------
Cars ARC CR Cars ARC CR Cars ARC CR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Energy.......... 477 $1,183 $ 564 35 $59 $ 67 8% 5% 13%
Industrial...... 327 1,373 449 14 (8) 16 4 (1) 4
Chemicals....... 225 1,781 401 2 31 11 1 2 3
Intermodal...... 626 620 388 26 17 27 4 3 7
Agriculture..... 223 1,552 347 22 (9) 32 11 (1) 10
Automotive...... 170 1,491 253 11 43 23 7 3 10
-----------------------------------------------------------------------------
Total........... 2,048 $1,173 $2,402 110 $24 $176 6% 2% 8%
------------------------------------------------------------------------------
</TABLE>
Energy - Commodity revenue increased $67 million (13%) to
$564 million in 1999 driven by an 8% increase in
carloadings. ARC also improved $59 per car (5%) quarter-
over-quarter due to changes in product mix, as short-haul
Illinois traffic decreased and longer-haul Powder River
Basin (PRB) traffic increased. PRB trains per day improved
quarter-over-quarter from 24.8 in 1998 to 28.4 in 1999.
This, in addition to longer trains (120.2 cars/train in 1999
vs. 117.6 in 1998), boosted loads by approximately 42
thousand units (16%), helping to improve 1999 PRB business
versus 1998. All other mine locations posted declines,
largely due to decreased demand and business lost to
competitors during 1998's service difficulties.
Industrial - Carloadings and commodity revenue increased 4%
over 1998. Volume increases resulted from stronger demand
and improved cycle times. Traffic gains occurred in lumber,
stone and cement due to strong construction
<PAGE> 11
demand, and
recyclables grew due to new business. Gains were partially
offset by decreased steel loadings that were down due to
higher imports of low-priced foreign steel, which reduced
U.S. production, and lost volumes from a major steel
producer who filed for bankruptcy. ARC declined 1% due to
product mix issues, as volume shortfalls of longer-haul
steel and volume gains of shorter-haul, low-ARC stone were
partially offset by gains in high-ARC lumber.
Chemicals - Carloadings increased 1% to 225 thousand cars,
and commodity revenue increased $11 million (3%) to $401
million. The increase in volume resulted principally from
improved service levels and an increase in chargeable
storage-in-transit moves (short-haul storage moves awaiting
final delivery). Plastics, liquid and dry chemicals,
petroleum products and phosphorous moves all increased.
These gains were partially offset by declines in soda ash
caused by the adverse impact on demand resulting from the
Asian currency crisis, lower sulfur moves resulting from a
major facility closing, and a decline in liquid propane gas
business due to increased rail competition. ARC improved 2%
due to product mix, reflecting traffic improvements in
longer-haul plastics and fewer short-haul, low-ARC export
sulfur moves.
Intermodal - Commodity revenue increased $27 million (7%) to
$388 million, while carloadings were up 4% to 626 thousand
loads as a result of better cycle times. Results were
positively affected by growth in imports from Asia. Import
gains were partially countered by a decline in exports to
Asia, due to the Asian economic crisis, and lost business
caused by the service constraints in 1998. ARC increased 3%
due to positive mix shifts (longer-haul shipments) and price
increases.
Agriculture - Commodity revenues were up $32 million (10%)
over 1998 due primarily to a service-driven increase in
carloadings. Volumes increased 11% to 223 thousand cars, the
result of improved service levels in 1999 which resulted in
a 25% increase in wheat carloadings and 15% increases in
corn and food grain carloadings. However, demand for grain
transportation continued to be adversely affected by
depressed commodity prices. ARC declined 1%, primarily the
result of a higher proportion of shorter-haul Gulf Coast
moves, compared to long-haul West Coast moves.
Automotive - Commodity revenues were up $23 million (10%)
driven mainly by a 7% increase in carloadings. Strong
domestic production, improvements in cycle times and new
business with domestic producers all helped to drive the 11%
improvement in finished vehicle volumes. Parts volumes were
1% lower due to model changeovers and a plant shutdown. ARC
increased $43 (3%) per car due to a combination of price
increases and a higher proportion of higher-ARC finished
vehicle moves.
Operating Expenses - Operating expenses decreased $116
million (5%) to $2,115 million in 1999. Rail operations
continued to improve in key operating areas over the last
three quarters, which has driven the expense decline. The
following table provides explanations for variances in the
Railroad's operating expenses from the quarter ended March
31, 1999 compared to the quarter ended March 31, 1998:
<PAGE> 12
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Millions of Dollars 1999 Cost Drivers
------------------------------------------
Over Volume Productivity Merger
Increase (Decrease) 1998 Price [c} [d] Benefits Other
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits........ $ 21 $ 16 $22 $ (9) $ (8) $ -
Equipment and other rents.. (45) (6) 6 (39) - (6)
Depreciation................. 12 - 12 - - -
Fuel and utilities........... (30) (40) 16 (4) - (2)
Materials and supplies....... 1 - 1 - - -
Casualty costs............... (5) - - (5) - -
Other [a].................... (70) - - (8) (29) (33)
- --------------------------------------------------------------------------------
Total........................ $(116) $(30) $57 $(65) $(37) $(41)
- --------------------------------------------------------------------------------
</TABLE>
[a] Includes a $53 million reduction in service recovery costs over 1998.
[b] Impact of changes in prices paid for goods and services.
[c] Impact of changing business levels.
[d] Impact of quality and process improvement.
Salaries, wages and employee benefits - Labor expenses were
$21 million (2%) higher than 1998 caused by higher rail
volumes and wage inflation that were partially mitigated by
merger consolidation benefits and productivity improvements.
Equipment and other rents - Rent expense decreased $45
million (13%) versus 1998 due primarily to improved cycle
times (13.6 days in 1999 compared to 17.6 days in 1998),
lower prices and shorter length of haul, which were
partially offset by higher volume as gross ton-miles
increased 9% year-over-year.
Depreciation - Depreciation expense grew $12 million or 5%
to $258 million due to the Railroad's capital spending in
1998 and 1997, as well as through the first quarter of 1999.
The Railroad spent over $2 billion on capital projects in
1998 and $363 million on capital projects during the first
quarter of 1999.
Fuel and utilities - Fuel expenses were down $30 million or
14% from 1998, reflecting lower fuel prices and improved
consumption rates, which were partially offset by higher
volume. A 9% increase in gross-ton miles quarter-over-
quarter added volume-related fuel costs of $16 million
versus 1998. Prices were down 14 cents per gallon to 50
cents, saving $40 million. The fuel consumption rate of 1.39
gallons per thousand gross-ton miles improved 2% from last
year, lowering fuel costs by another $4 million. The
Railroad hedged 70% of its first quarter fuel consumption in
1999, which increased fuel costs by $19 million, or 6 cents
per gallon. Expected fuel consumption for the remaining nine
months of 1999 is 64% hedged at an average of 55 cents per
gallon (including taxes and transportation charges).
Materials and supplies - Materials and supplies expense
increased $1 million (1%) from first quarter 1998. Increased
material costs for locomotive and rebuilt parts, reflecting
a general increase in repair levels, were offset by higher
credits received for parts rebuilt.
Casualty costs - Casualty costs declined $5 million (5%)
from 1998 due to a decline in the average cost of injury
settlement claims, which was partially offset by an increase
in the number of claims. In addition, insurance costs and
costs for repairs on cars from other railroads were lower
quarter-over-quarter.
Other costs - Other costs decreased $70 million (23%) from
1998 due to the effects of service recovery efforts, which
resulted in a reduction of third-party transportation costs
and the elimination of contract penalties and customer
claims, as well as merger savings.
<PAGE> 13
Operating Income - Operating income increased $311 million
to $364 million in 1999. Both periods included the impact
of one-time merger-related costs for severance, relocation
and training of employees ($9 million reduction in net
income in 1999 and $18 million reduction in net income in
1998). The operating ratio for the first quarter of 1999
was 85.3, 12.4 points better than 1998's 97.7 operating
ratio. Operational improvements due to service recovery
were the key drivers of the improvement in the operating
ratio.
Non-Operating Items - Other income increased $5 million
(28%). Interest expense increased $22 million, the result
of higher debt levels. Income taxes increased $113 million,
reflecting higher income before income taxes.
OTHER MATTERS
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, guarantees and
contingencies is set forth in Note 8 to the Consolidated
Financial Statements, which is incorporated herein by
reference.
Accounting Pronouncements - In June 1998 the Financial
Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), that will be effective January 1,
2000. While management is still in the process of
determining the full effect FAS 133 will have on the
Company's financial statements, management has determined
that FAS 133 will increase the volatility of the Company's
asset, liability and equity (comprehensive income) positions
as the change in the fair market value of all financial
instruments the Company uses for fuel or interest rate
hedging purposes will, upon adoption of FAS 133, be recorded
in the Company's Statement of Financial Position (See Note
3). In addition, to the extent fuel hedges are ineffective
due to pricing differentials resulting from the geographic
dispersion of the Company's operations, income statement
recognition of the ineffective portion of the hedge position
will be required. Management does not anticipate that the
final adoption of FAS 133 will have a material impact on the
Company's consolidated financial statements.
Year 2000 - The Year 2000 (Y2K) compliance project at the
Company includes software (internally developed and
purchased), hardware and embedded chips inside equipment and
machinery. The Company's enterprise-wide project encompasses
computer systems and equipment in multiple data centers and
a telecommunications network spread over 23 states.
Equipment containing embedded computer chips includes
locomotives, automated train switching systems, computer
aided train dispatching systems, signaling systems,
computerized fueling stations, weigh-in-motion scales,
cranes, lifts, PBX systems, elevators, and computerized
monitoring systems throughout the Company. The Y2K project
started with research in 1994 and an impact analysis of the
Company's 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:
Mainframe Systems - These systems have been converted,
tested and deemed to be Y2K compliant as of December 31,
1998. Periodic audits are planned during 1999 to ensure
these systems remain Y2K compliant.
Client Server Systems - Modifications of these systems are
on schedule, and the Company believes that all critical
client server systems have been converted, tested, and
deemed to be Y2K compliant as of December 31, 1998. The non-
critical client server systems are scheduled to be certified
as Y2K compliant by mid-1999.
<PAGE> 14
User Department Developed Systems - These systems consist of
both mainframe and PC-based systems developed by internal
user departments. Modifications of these systems are on
schedule, and the Company estimates that approximately 99%
of the systems are complete as of March 31, 1999, and the
remaining 1% are mostly low priority systems that are
scheduled to be completed in the first half of 1999.
Vendor Supplied and Embedded Systems - These systems consist
of vendor-supplied software, desktop, mainframe and server
hardware, databases and operating systems, as well as
equipment and machinery with embedded systems. One hundred
percent of the identified critical suppliers of these
systems have indicated that they have a comprehensive Year
2000 plan. To help assure safety and Y2K compliance, the
Company is testing selected critical software, hardware and
embedded systems, even if the vendor has already certified
the product. The Company is sharing information on the
compliance and testing of safety critical components common
to the industry with the cooperation of the Association of
American Railroads.
Electronic Commerce Systems - These systems consist of all
electronic exchanges of information with customers, vendors,
other railroads and financial institutions. The railroad
industry has agreed on a standard 4-digit year for all
electronic interchanges. The Railroad can now transmit and
receive the new EDI standard that involves a 4-digit year.
The Company plans additional Y2K testing with customers and
trading partners using current and older versions of EDI
transactions in 1999.
For each of these initiatives, seven major categories of
events have been identified for contingency plans. These
categories are (1) key data - integrity/loss, (2) critical
software, (3) critical hardware, (4) communications, (5)
critical supplies and suppliers, (6) facilities, and (7) key
personnel. The contingency plans also include a Y2K command
center that will be staffed 24 hours a day in the fourth
quarter of 1999 and continuing into early 2000 for any
problems that might occur due to Y2K. The staff will be
composed of technical experts to fix or advise what to fix
if systems fail, and knowledgeable representatives from each
business unit. Contingency plans continue to be developed
and will be refined and adjusted throughout 1999.
As of March 31, 1999, approximately 98% of the Company's
systems have been converted, tested, and deemed to be Y2K
compliant, and the remaining systems are expected to be
modified by the second quarter of 1999. Costs to convert
the Company's systems are expensed as incurred. As of March
31, 1999, more than 80% of the costs of the Y2K project,
estimated to be $46 million in total, have been expensed.
Although the Company believes its systems will be
successfully modified, failure by it, or by those from whom
the Company purchases equipment, or by other entities with
whom the Company exchanges data, or on whom it relies for
data, to successfully modify their systems, could materially
impact operations and financial results in the year 2000.
CAUTIONARY INFORMATION
Certain information included in this report contains, and
other materials filed or to be filed by the 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
<PAGE> 15
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
recovering from the effects of its congestion-related
problems and implementing its financial and operational
initiatives; regaining its customers who switched to
alternative transportation arrangements during the service
crisis; industry competition and legislative and/or
regulatory developments; natural events such as severe
weather, floods and earthquakes; the effects of adverse
general economic conditions; changes in fuel prices; labor
strikes; the impact of year 2000 systems problems; the
outcome of shipper claims related to congestion; and claims
arising from environmental investigations or proceedings and
other types of claims and litigation. The Company assumes
no obligation to update forward-looking information to
reflect actual results, changes in assumptions or changes in
other factors affecting forward-looking information.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion of certain legal proceedings affecting the
Registrant and/or certain of its subsidiaries set forth in
Note 8 to the Consolidated Financial Statements included in
Item 1 of Part I of this Report is incorporated herein by
reference. In addition to those matters, the following
proceedings, or developments in proceedings presently
pending, arose or occurred during the first quarter of 1999.
Southern Pacific Acquisition - As reported in the Company's
Annual Report on Form 10-K for the year ended December 31,
1998 (the Railroad 1998 10-K), on August 12, 1996 the STB
served a decision (the Decision) approving the acquisition
of control of Southern Pacific by the Corporation, subject
to various conditions. The acquisition was consummated on
September 11, 1996. Various appeals were filed with respect
to the Decision, and all such appeals were ultimately
consolidated in the U.S. Court of Appeals for the District
of Columbia Circuit. All the appeals were subsequently
withdrawn except the appeal of the Western Coal Traffic
League. On March 23, 1999, the Court of Appeals entered an
order affirming the Decision in all respects.
Bottleneck Proceedings - As reported in the Railroad 1998 10-
K, the U.S. Court of Appeals for the Eighth Circuit entered
an order on February 10, 1999 that affirmed a prior decision
by the Surface Transportation Board of the U.S. Department
of Transportation (STB). That decision generally reaffirmed
the STB's existing position regarding the obligation of rail
carriers to provide rates for "bottleneck" segments (lines
of railroad that are served by a single railroad between a
junction and an exclusively-served shipper facility) and
dismissed two complaint proceedings filed by shippers
challenging a class rate charged for the movement of coal,
to which the Registrant and Union Pacific Railroad Company,
a Utah corporation, a predecessor to the Registrant, were
parties. The STB's decision was originally served on
December 31, 1996 and subsequently clarified on April 30,
1997. On March 23, 1999, two of the shippers involved in the
complaint proceedings filed a petition for rehearing with
the Eighth Circuit Court of Appeals, which was denied by the
Court on April 20, 1999.
Environmental Matters - As reported in the Railroad 1998 10-
K, the Railroad had received notification that the District
Attorney for San Bernardino County, California had opened an
investigation into the Railroad's handling of several
hazardous material spills and releases in Barstow and West
Colton, California. As a result of the investigation, the
District Attorney's office had alleged that the Railroad had
not taken sufficient action to prevent the spills and
releases and had not promptly reported them to the proper
agencies. The District Attorney further alleged that the
required business plans for releases of hazardous materials
at West Colton had not been filed with the county fire
department for several years. During the first quarter of
1999, a final
<PAGE> 16
settlement was negotiated with the District
Attorney's office disposing of all pending cases pertaining
to these incidents in consideration of the payment of a
civil penalty in the amount of $350,000 and the Railroad's
agreement to promptly report and handle any future spills.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
12 - Computation of ratio of earnings to fixed charges.
27 - Financial data schedule.
(b) Reports on Form 8-K
-------------------
On January 21, 1999, the Company filed a Current
Report on Form 8-K announcing UPC's financial
results for the fourth quarter of 1998.
[SIGNATURE]
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Dated: May 14, 1999
UNION PACIFIC RAILROAD COMPANY
(Registrant)
By /s/ James R. Young
------------------
James R. Young
Senior Vice President-Finance
(Chief Accounting Officer
and Duly Authorized Officer)
By /s/ Richard J. Putz
-------------------
Richard J. Putz
Assistant Vice President
and Controller
(Duly Authorized Officer)
<EXHIBIT INDEX> INDEX
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
EXHIBIT INDEX
Exhibit No. Description of Exhibits Filed with this Statement
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
Exhibit 12
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Three Months Ended March 31,
----------------------------
Millions of Dollars Except Ratios 1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
Earnings:
Net Income (Loss)................... $149 $(32)
Undistributed equity earnings....... (10) (9)
- -------------------------------------------------------------------
Total............................... 139 (41)
- -------------------------------------------------------------------
Income Taxes......................... 82 (31)
- -------------------------------------------------------------------
Fixed Charges:
Interest expense including
amortization of debt discount... 156 134
Portion of rentals representing
an interest factor................ 44 43
- -------------------------------------------------------------------
Total............................... 200 177
- -------------------------------------------------------------------
Earnings Available for Fixed Charges. 421 105
- -------------------------------------------------------------------
Fixed Charges -- as above............ $200 $177
- -------------------------------------------------------------------
Ratio of earnings to fixed
charges (Note 7)................. 2.1 0.6
- -------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This is a legend.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 66
<SECURITIES> 0
<RECEIVABLES> 480
<ALLOWANCES> 0
<INVENTORY> 343
<CURRENT-ASSETS> 1106
<PP&E> 32656
<DEPRECIATION> 6085
<TOTAL-ASSETS> 28533
<CURRENT-LIABILITIES> 2531
<BONDS> 2571
0
27
<COMMON> 0
<OTHER-SE> 8698
<TOTAL-LIABILITY-AND-EQUITY> 28533
<SALES> 0
<TOTAL-REVENUES> 2479
<CGS> 0
<TOTAL-COSTS> 2115
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 231
<INCOME-TAX> 82
<INCOME-CONTINUING> 149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
