UNION PACIFIC RAILROAD CO/DE, 10-Q, 2000-11-14

UNION PACIFIC RAILROAD CO/DE
10-Q, 2000-11-14
RAILROADS, LINE-HAUL OPERATING

Previous: BB&T CORP, POS AM, 2000-11-14

Next: UNION PACIFIC RAILROAD CO/DE, 10-Q, EX-12.(A), 2000-11-14

<PAGE> 1
FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000

- OR -

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from______________ to ______________

Commission file number 1-6146

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, 2000 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.

<PAGE> 2

UNION PACIFIC RAILROAD COMPANY
AND CONSOLIDATED SUBSIDIARY AND AFFILIATE COMPANIES
INDEX

<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION

Page Number
-----------
<S> <C> <C>
Item 1: Consolidated Financial Statements:
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
For the Three Months Ended September 30, 2000 and 1999............ 1

STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
For the Nine Months Ended September 30, 2000 and 1999............. 2

STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
At September 30, 2000 (Unaudited) and December 31, 1999........... 3

STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2000 and 1999............. 4

STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(Unaudited) For the Nine Months Ended September 30, 2000.......... 5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)................. 6-12

Item 2: Management's Narrative Analysis of the Results of Operations........... 13-17

Item 3: Quantitative and Qualitative Disclosures about Market Risk............. 18

PART II. OTHER INFORMATION

Item 1: Legal Proceedings...................................................... 18-20

Item 6: Exhibits and Reports on Form 8-K....................................... 20

Signature....................................................................... 21
</TABLE>

(i)
<PAGE> 3

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For the Three Months Ended September 30, 2000 and 1999

<TABLE>
<CAPTION>
Millions of Dollars, Except Ratios 2000 1999
---------------------------------- ------ ------

<S> <C> <C> <C>
OPERATING REVENUES Rail and other................................... $2,773 $2,606
------ ------

OPERATING EXPENSES Salaries, wages and employee benefits............ 877 915
Equipment and other rents........................ 325 315
Depreciation..................................... 272 259
Fuel and utilities (Note 3)..................... 326 199
Materials and supplies........................... 135 135
Casualty costs................................... 81 70
Other costs...................................... 194 198
------ ------
Total............................................ 2,210 2,091
------ ------
INCOME Operating Income................................. 563 515
Other income (Note 5)............................ 16 23
Interest expense................................. (146) (158)
------ ------
Income before Income Taxes....................... 433 380
Income taxes..................................... (159) (146)

Net Income....................................... $ 274 $ 234
------ ------
Ratio of Earnings to Fixed Charges (Note 6)...... 3.2 2.8
------ ------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

-1-
<PAGE> 4

STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For the Nine Months Ended September 30, 2000 and 1999

<TABLE>
<CAPTION>
Millions of Dollars, Except Ratios 2000 1999
---------------------------------- ------ ------

<S> <C> <C>
OPERATING REVENUES Rail and other.................................. $8,097 $7,576
------ ------

OPERATING EXPENSES Salaries, wages and employee benefits........... 2,618 2,694
Equipment and other rents....................... 923 930
Depreciation.................................... 812 773
Fuel and utilities (Note 3)..................... 913 567
Materials and supplies.......................... 421 401
Casualty costs.................................. 239 254
Other costs..................................... 604 641
------ ------

Total........................................... 6,530 6,260
------ ------

INCOME Operating Income................................ 1,567 1,316
Other income (Note 5)........................... 58 63
Interest expense................................ (444) (469)
------ ------

Income before Income Taxes...................... 1,181 910
Income taxes.................................... (429) (321)
------ ------

Net Income...................................... $ 752 $ 589
------ ------

Ratio of Earnings to Fixed Charges (Note 6)..... 3.1 2.4
------ ------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

-2-
<PAGE> 5

STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies

<TABLE>
<CAPTION>
(Unaudited)
Sept. 30, Dec. 31,
Millions of Dollars 2000 1999
------------------- ------- -------

ASSETS

<S> <C> <C>
Current Assets Cash and temporary investments....................... $ 39 $ 83
------- -------
Accounts receivable (Note 3)......................... 457 418
Inventories.......................................... 321 329
Current deferred tax asset........................... 48 48
Other current assets................................. 67 78
------- -------
Total................................................ 932 956
------- -------
Investments Investments in and advances to affiliated companies.. 622 657
Other investments.................................... 84 95
------- -------
Total................................................ 706 752
------- -------
Properties Cost................................................. 34,497 33,536
Accumulated depreciation............................. (6,795) (6,490)
------- -------
Net.................................................. 27,702 27,046
------- -------
Other Other assets......................................... 148 126
------- -------
Total Assets......................................... $29,488 $28,880
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities Accounts payable..................................... $ 490 $ 496
Accrued wages and vacation........................... 399 377
Accrued casualty costs............................... 348 344
Income and other taxes............................... 251 252
Debt due within one year............................. 210 210
Interest............................................. 74 97
Other current liabilities............................ 547 669
------- -------
Total................................................ 2,319 2,445
------- -------
Other Liabilities and
Stockholders' Equity Intercompany borrowing from UPC...................... 5,247 5,357
Third-party debt due after one year.................. 2,425 2,419
Deferred income taxes................................ 7,630 7,266
Accrued casualty costs............................... 823 911
Retiree benefit obligations.......................... 676 677
Other long-term liabilities.......................... 487 533
Redeemable preference shares......................... 24 25
Common stockholders' equity (Page 5)................. 9,857 9,247
------- -------
Total Liabilities and Stockholders' Equity........... $29,488 $28,880
======= =======

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

-3-
<PAGE> 6

STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For the Nine Months Ended September 30, 2000 and 1999

Millions of Dollars 2000 1999
------------------- ------- -------

<S> <C> <C> <C>
OPERATING ACTIVITIES Net Income...................................... $ 752 $ 589
------- -------
Non-cash charges to income:
Depreciation................................ 812 773
Deferred income taxes....................... 360 456
Other - net................................. (309) (315)
Changes in current assets and liabilities....... (146) 19
------- -------
Cash Provided by Operations..................... 1,469 1,522
------- -------
INVESTING ACTIVITIES Capital investments............................. (1,392) (1,317)
Other - net..................................... 128 39
------- -------
Cash Used in Investing Activities............... (1,264) (1,278)
------- -------
EQUITY AND FINANCING Debt repaid..................................... (159) (143)
ACTIVITIES Net financings.................................. 171 34
Dividends paid to parent........................ (150) (150)
Advances from affiliated companies - net........ (111) 33
------- -------
Cash Used in Equity and Financing Activities.... (249) (226)
------- -------
Net Change in Cash and Temporary Investments.... (44) 18
Cash at Beginning of Period..................... 83 35
------- -------
Cash at End of Period $ 39 $ 53
======= =======
CHANGES IN CURRENT Accounts receivable............................. $ (39) $ 40
ASSETS AND LIABILITIES Inventories..................................... 8 9
Other current assets............................ 11 76
Accounts payable, accrued wages and vacation.... 16 61
Debt due within one year........................ -- 25
Other current liabilities....................... (142) (192)
------- -------
Total........................................... $ (146) $ 19
======= =======
Supplemental cash flow information
Cash paid (received) during the year for:
Interest.................................. $ 170 $ 176
Income taxes, net......................... 58 (151)
------- -------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

-4-
<PAGE> 7

STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (Unaudited)
Union Pacific Railroad and Consolidated Subsidiary and Affiliate Companies

For the Nine Months Ended September 30, 2000

Accumulated
[a] [b] Other
Common Class A Paid-in- Retained Comprehensive
Millions of Dollars Shares Shares Surplus Earnings Income Total
------------------- -------- -------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ....... -- -- $ 4,782 $ 4,471 $ (6) $ 9,247
-------- -------- -------- -------- ------------- --------
Net Income ......................... -- -- -- 752 -- 752
Other Comprehensive Income:
Foreign Currency Translation .... -- -- -- -- 8 8
--------
Comprehensive Income ............... -- -- -- -- -- 760

Dividends declared ................. -- -- -- (150) -- (150)
-------- -------- -------- -------- ------------- --------
Balance at September 30, 2000 ...... -- -- $ 4,782 $ 5,073 $ 2 $ 9,857
</TABLE>

---------
[a] Common stock $10.00 par value; 9,200 shares authorized; 4,465 shares issued
at beginning and end of period.
[b] Class A Stock, $10.00 par value; 800 shares authorized; 388 shares issued
at beginning and end of period.

The accompanying notes are an integral part of these
consolidated financial statements.

-5-
<PAGE> 8

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 or UPRR), 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 companies
(collectively, the Company or Railroad), operates various railroad and
railroad-related businesses. 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, 1999. The results of operations
for the three and nine months ended September 30, 2000 are not necessarily
indicative of the results for the year ending December 31, 2000.

2. ACQUISITIONS

SOUTHERN PACIFIC (Southern Pacific or SP) - UPC consummated the acquisition
of Southern Pacific in September 1996. Southern Pacific was acquired for
$4.1 billion (60% of the outstanding Southern Pacific common shares were
converted into UPC common stock, and the remaining 40% of the outstanding
shares were acquired for cash). UPC's investment in Southern Pacific was
subsequently pushed down to the Railroad. The acquisition of Southern
Pacific has been accounted for using the purchase method of accounting and
was fully consolidated into the Company's results beginning October 1996.

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 eliminated approximately 3,620 positions and
relocated approximately 4,510 employees due to merger consolidation
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 between $10
million and $30 million over the remaining merger implementation period in
pre-tax, acquisition-related costs for severing or relocating UPRR
employees, disposing of certain UPRR facilities, training and equipment
upgrading. Earnings for the three months ending September 30, 2000 and 1999
included $4 million and $13 million after-tax, respectively, and for the
nine months ending September 30, 2000 and 1999, included $15 million and
$30 million after-tax, respectively, for acquisition-related costs for UPRR
consolidation activities.

-6-
<PAGE> 9

The components of the merger liability as of September 30, 2000 were as follows:

Original Cumulative Current
Millions of Dollars Reserve Activity Reserve
------------------- ---------- ---------- -------
<S> <C> <C> <C>
Labor protection related to legislated and contractual obligations ... $ 361 $ 361 $ --
Severance costs ...................................................... 343 271 72
Contract cancellation fees and facility and line closure costs ....... 145 141 4
Relocation costs ..................................................... 109 95 14
---------- ---------- -------
Total ................................................................ $ 958 $ 868 $ 90
</TABLE>

Merger liability activity reflects cash payments for merger
consolidation activities and reclassification of contractual obligations
from merger liabilities to contractual liabilities. In addition, where
merger implementation has varied from the original merger plan, the Company
has adjusted the merger liability and the fair value allocation of SP's
purchase price to fixed assets to eliminate the variance. Where the merger
implementation has caused the Company to incur more costs than were
envisioned in the original merger plan, such costs are charged to expense
in the period incurred. For the three and nine months ended September 30,
2000, the Company charged $3 million and $9 million against the merger
liability, respectively. The Company expects that the remaining merger
payments will be made over the course of the next 15 months 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 Company now holds a 26% ownership share in the
consortium. The investment is accounted for under the equity method. The
Company's portion of the consortium's assets and liabilities is translated
into U.S. dollars using the exchange rate in effect at the balance sheet
date. The Company's portion of the consortium's net income is translated
into U.S. dollars at weighted-average exchange rates prevailing during the
year. The resulting translation adjustments are reflected within the
stockholders' equity component, accumulated other comprehensive income.

3. FINANCIAL INSTRUMENTS

STRATEGY AND RISK - The Company uses derivative financial instruments in
limited instances and for other than trading purposes to manage risk as it
relates to changes in fuel prices. The Company uses swaps, futures and/or
forward contracts to mitigate the downside risk of adverse price movements;
however, the use of these instruments also limits future gains from
favorable price movements. The purpose of this program is to protect the
Company's operating margins and overall profitability from adverse fuel
price changes.

MARKET AND CREDIT RISK - The Company addresses market risk related to these
instruments by selecting instruments whose value fluctuations highly
correlate with the underlying item being hedged. Credit risk related to
derivative financial instruments, which is minimal, is managed by requiring
high credit standards for counterparties and periodic settlements. The
total credit risk associated with the Company's

-7-
<PAGE> 10

counterparties was $16 million at September 30, 2000. 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.

DETERMINATION OF FAIR VALUE - The fair market values of the Company's
derivative financial instrument positions at September 30, 2000 and
December 31, 1999, detailed below, were determined based upon current fair
market values as quoted by recognized dealers or developed based upon the
present value of future cash flows discounted at the applicable U.S.
treasury rate and swap spread.

The following is a summary of the Company's derivative financial
instruments at September 30, 2000 and December 31, 1999:

Millions September 30, December 31,
Except Percentages and Average Commodity Prices 2000 1999
----------------------------------------------- ------------- ------------
<S> <C> <C>
Fuel Hedging:
Number of gallons hedged for the remainder of 2000 .......... 32 126
Percentage of forecasted 2000 fuel consumption hedged ....... 9% 10%
Average price of 2000 hedges outstanding (per gallon)[a] .... $ 0.40 $ 0.40
------------- ------------
</TABLE>

----------
[a] Excluding taxes, transportation costs, and regional pricing spreads.

The asset and liability positions of the Company's outstanding
derivative financial instruments at September 30, 2000 and December 31,
1999 are as follows:

September 30, December 31,
Millions of Dollars 2000 1999
------------------- ------------- -------------
<S> <C> <C>
Fuel Hedging:
Gross fair market asset position .......................... $ 16 $ 22
Gross fair market (liability) position .................... -- --
------------- -------------
Total net asset position .................................... $ 16 $ 22
------------- -------------
</TABLE>

The Company's use of derivative financial instruments for fuel hedging
decreased fuel costs by $15 million and $26 million for the three months
ended September 30, 2000 and 1999, respectively, and decreased fuel costs
by $35 million and $7 million for the nine months ended September 30, 2000
and 1999, respectively.

SALE OF RECEIVABLES - The Railroad has sold, on a revolving basis, an
undivided percentage ownership interest in a designated pool of accounts
receivable to third parties through a bankruptcy-remote subsidiary (the
Subsidiary). The Subsidiary is collateralized by a $66 million note from
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 September 30, 2000 and
December 31, 1999, accounts receivable are presented net of $603 million
and $576 million, respectively, of receivables sold.

4. CAPITAL STOCK - The number of shares shown in the Common Stock section of
the Statement of Changes in Common Stockholders' Equity on page 5 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.

-8-
<PAGE> 11

5. OTHER INCOME - Other income included the following for the three and nine
months ended September 30, 2000 and 1999:

<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
Millions of Dollars 2000 1999 2000 1999
------------------- ------------ ------------ ------------ ------------

<S> <C> <C> <C> <C>
Net gain on asset dispositions ..... $ 15 $ 17 $ 37 $ 35
Rental income ...................... 14 15 43 40
Interest income .................... 1 1 4 5
Other - net ........................ (14) (10) (26) (17)
------------ ------------ ------------ ------------
Total .............................. $ 16 $ 23 $ 58 $ 63
</TABLE>

6. RATIO OF EARNINGS TO FIXED CHARGES - The ratio of earnings to fixed charges
has been computed on a consolidated basis. Earnings represent net income
less equity in undistributed earnings of unconsolidated affiliates, plus
income taxes and fixed charges. Fixed charges represent interest,
amortization of debt discount and the estimated interest portion of rental
charges.

7. 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 periodically enters into financial and
other commitments in connection with its business, and has 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 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, results of operations or liquidity. Certain
potentially significant contingencies relating to the Company are detailed
below:

Customer Claims - Some customers have submitted claims for damages related
to shipments delayed by the Railroad as a result of congestion problems in
1997 and 1998, and certain customers have filed lawsuits seeking relief
related to such delays. Some customers also asserted that they have the
right to cancel contracts as a result of alleged material breaches of such
contracts by the Railroad. The Company accrued amounts for these claims in
1997 and 1998. No additional amounts were accrued in 1999 or the nine
months ended September 30, 2000.

Environmental Issues - For environmental sites where remediation costs can
be reasonably determined, and where such remediation is probable, the
Company has recorded a liability.

Shareholder Lawsuits - UPC and certain of its directors and officers (who
are also directors of the Railroad) are defendants in two purported class
actions that have been consolidated into one proceeding (the Class Action).
The consolidated complaint alleges, among other things, that UPC violated
the federal securities laws by failing to disclose material facts and
making materially false and misleading statements concerning the service,
congestion and safety problems encountered following UPC's acquisition of
Southern Pacific in 1996. These lawsuits were filed in late 1997 in the
United States District Court for the Northern District of Texas and seek to
recover unspecified amounts of damages. Management believes that the
plaintiffs' claims are without merit and has been defending them
vigorously. The defendants moved to dismiss this action, and the motion was
briefed and submitted to the Court for decision in 1998. In February 2000,
prior

-9-
<PAGE> 12

to a ruling on the motion, the parties jointly advised the Court that they
were engaged in discussions concerning the possible settlement of the
action and asked the Court to defer ruling on the motion to dismiss pending
the outcome of these discussions. The Court entered an order dated February
29, 2000 agreeing to such deferral, subject to the motion of either party
to reactivate the action and the pending motion to dismiss at any time.

In addition to the Class Action, a purported derivative action was
filed on behalf of UPC and the Railroad in September 1998 in the District
Court for Tarrant County, Texas, naming as defendants the then-current and
certain former directors of UPC and the Railroad and, as nominal
defendants, UPC and the Railroad (the Derivative Action and together with
the Class Action, the Actions). The Derivative Action alleges, among other
things, that the named directors breached their fiduciary duties to UPC and
the Railroad by approving and implementing the Southern Pacific merger
without informing themselves of its impact or ensuring that adequate
controls were put in place and by causing UPC and the Railroad to make
misrepresentations about the Railroad's service problems to the financial
markets and regulatory authorities. The individual defendants also believe
that these claims are without merit and have defended them vigorously.

In December 1998, UPC's Board of Directors established a special
litigation committee consisting of three independent directors to review
the plaintiff's allegations under the Derivative Action to determine
whether it was in UPC's best interest to pursue them. In February 1999, the
committee rendered its report, in which it unanimously concluded that
further prosecution of the Derivative Action on behalf of UPC and the
Railroad was not in the best interest of either such company. Accordingly,
UPC and the Railroad filed a motion with the Court to dismiss the
Derivative Action.

Prior to any ruling on the motions to dismiss the Class Action and the
Derivative Action, counsel for UPC, the Railroad and certain officers and
directors of UPC and the Railroad entered into a Memorandum of
Understanding (the MOU), dated June 28, 2000, with counsel for the
plaintiffs in the Class Action and Derivative Action, providing for the
settlement of the Actions. The MOU provides, among other things, that the
Class Action will be settled for $34,025,000 in cash (the Settlement
Payment), the full amount of which will be covered by UPC's insurance
carriers. Counsel for the plaintiffs in the Class Action will apply to the
court for any award of their fees and expenses, to be paid out of the
Settlement Payment. The MOU also provides that, in settlement of the
Derivative Action, UPC will adopt certain additional procedures which will
reinforce its continuing effort to ensure both the effective implementation
of its merger with Southern Pacific and its ongoing commitment to rail
safety. In addition, in the event of any proposed merger or other
transaction involving consolidation of UPC and a rail system of greater
than 1,000 miles in length of road, UPC will commission a study, to be
completed in advance of any formal application to a U.S., Canadian or
Mexican federal regulatory board, to analyze prospective safety and
congestion-related issues. As part of the terms of the Derivative Action
settlement, counsel for the plaintiffs will receive such fees and expenses
as may be awarded by the Court, up to an aggregate amount of $975,000. Such
amount will also be fully covered by UPC's insurance carriers.

-10-
<PAGE> 13

expenses and disbursements to be awarded to plaintiffs' counsel. By order
dated October 23, 2000, the court in which the Derivative Action is pending
preliminarily approved the settlement of that Action and scheduled a
hearing, also for December 13, 2000, on the question of whether the
proposed settlement of that action is fair, reasonable and in the best
interest of UPC, its shareholders and the Railroad and the amount of fees,
expenses and disbursements to be awarded to plaintiff's counsel. As of
October 26, 2000, pursuant to the court orders in each of the Actions,
notice of the proposed settlements and fairness hearings were mailed to
those UPC shareholders affected by the Actions.

The settlement of each of the Actions is subject to, among other
conditions, the entry of a final judgment approving each settlement by the
respective courts in which each Action is pending. Notwithstanding the
existence of the MOU, the Stipulations, and the court orders preliminarily
approving the proposed settlements, there can be no assurances that a
definitive settlement will be consummated with respect to either Action.
UPC, the Railroad and the individual defendants named in the Actions
entered into the MOU and Stipulations solely for the purpose of avoiding
the further expense, inconvenience, burden and uncertainty of the Actions,
and their decision to do so is not an admission or concession or evidence
of any liability or wrongdoing on the part of any party to either Action,
which liability and wrongdoing have consistently been, and continue to be,
denied.

8. ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement No.133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), that would have been
effective January 1, 2000. In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivatives Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133" postponing the effective date
for implementing FAS 133 to fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (FAS 138). FAS 138
addresses certain issues related to the implementation of FAS 133, but does
not change the basic model of FAS 133 or further delay the implementation
of FAS 133. Management has determined that FAS 133 and FAS 138 will
increase the volatility of the 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 hedging purposes will,
upon adoption of FAS 133 and FAS 138, be recorded in the Company's
Statement of Financial Position (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
and FAS 138 will have a material impact on the Company's consolidated
financial statements.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition". SAB 101 provides
additional guidance on revenue recognition criteria and related disclosure
requirements. This SAB is effective beginning in the fourth quarter of
2000. When the SAB becomes effective, it will require implementation as of
the beginning of the current fiscal year. If the impact is material, the
SAB requires retroactive application to all periods presented. Management
is currently assessing the impact that SAB 101 will have on the Company's
consolidated financial statements.

-11-
<PAGE> 14

amendments of the collateral provisions originally presented in FAS 125.
All other provisions are effective for transfers of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The
provisions are to be applied prospectively with certain exceptions.
Management is currently assessing the impact that FAS 140 will have on the
Corporation's consolidated financial statements.

-12-
<PAGE> 15

ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED
SUBSIDIARY AND AFFILIATE COMPANIES
RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999

NET INCOME - Rail operations reported net income of $274 million and $752
million for the three and nine months ended September 30, 2000, respectively,
compared to net income of $234 million for the third quarter of 1999 and $589
million for the nine month period in 1999. The increases resulted primarily from
higher commodity and other revenue, combined with productivity gains, partially
offset by higher fuel prices and volume-related costs.

OPERATING REVENUES - Rail operating revenues increased $167 million (6%) to a
record $2.8 billion and $521 million (7%) to a record $8.1 billion for the
three- and nine-month periods ended September 30, 2000, respectively, over the
comparable periods in 1999. Revenue carloads increased 4% and 5%, respectively,
for the three- and nine-month periods over the comparable periods in 1999. Other
revenue gains were the result of higher subsidiary revenues and reduced billing
claims from customers and other railroads.

The following tables summarize rail commodity revenue, revenue carloads and
average revenue per car for the periods indicated:

<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- % Commodity Revenue --------------------------- %
2000 1999 Change In Millions 2000 1999 Change
-------- -------- ------ -------------------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
$ 363 $ 367 (1) Agricultural $ 1,047 $ 1,042 --
280 239 17 Automotive 877 767 14
412 398 3 Chemicals 1,248 1,195 4
586 560 5 Energy 1,605 1,656 (3)
502 492 2 Industrial Products 1,519 1,416 7
506 459 10 Intermodal 1,418 1,273 11
-------- -------- ------ -------------------- ----------- ---------- -----
$ 2,649 $ 2,515 5 Total $ 7,714 $ 7,349 5
-------- -------- ------ -------------------- ----------- ---------- -----

<CAPTION>
Revenue Carloads
In Thousands
--------------------
217 233 (7) Agricultural 651 670 (3)
196 167 18 Automotive 609 521 17
237 238 - Chemicals 713 696 2
513 478 7 Energy 1,432 1,403 2
363 365 (1) Industrial Products 1,094 1,045 5
767 719 7 Intermodal 2,181 2,026 8

-------- -------- ------ -------------------- ----------- --------- -----
2,293 2,200 4 Total 6,680 6,361 5
-------- -------- ------ -------------------- ----------- --------- -----
</TABLE>

-13-
<PAGE> 16

Average Revenue
Per Car
-------- -------- ------ -------------------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
$ 1,673 $ 1,576 6 Agricultural $ 1,607 $ 1,555 3
1,425 1,430 - Automotive 1,439 1,472 (2)
1,738 1,673 4 Chemicals 1,752 1,717 2
1,141 1,172 (3) Energy 1,120 1,181 (5)
1,383 1,350 2 Industrial Products 1,389 1,356 2
661 638 4 Intermodal 650 628 4
-------- -------- ------ -------------------- ----------- ---------- -------
$1,155 $ 1,144 1 Total $ 1,155 $ 1,155 -
-------- -------- ------ -------------------- ----------- ---------- -------
</TABLE>

Agricultural - Agricultural revenue decreased in the third quarter of 2000 and
was flat for the nine-month period over the comparable periods in 1999. Carloads
decreased primarily due to reduced market demand for wheat and corn and a lack
of producer selling in anticipation of higher prices. Revenue was up for fresh
fruits and vegetables primarily as a result of new express train service from
northern California to eastern markets. Average revenue per car increased for
the quarter and year to date primarily due to an increase in longer haul traffic
and slower growth in shorter haul, lower average revenue per car traffic.

Automotive - Automotive revenue and carloads increased for both the three- and
nine-month periods of 2000 over the comparable periods in 1999. The
year-over-year gain resulted from strong demand for finished vehicles and
materials. Average revenue per car decreased slightly principally due to an
increase in lower average revenue per car materials moves utilizing containers,
rather than boxcars.

Chemicals - Chemicals revenue increased for both the three- and nine-month
periods of 2000 over the comparable periods in 1999. Third quarter gains were
driven primarily by increases in average revenue per car for soda ash,
fertilizer and liquid and dry shipments and selected price increases. Carload
volume in the third quarter declined slightly due to a softening economy and
higher inventories at end-user locations. Year-to-date gains were driven by
improved service levels, customer plant expansions and economic strength in the
first half of the year. Domestic soda ash, plastics and liquid and dry chemicals
showed the highest gains in revenue.

Energy - Energy revenue increased in the third quarter and decreased for the
nine-month period of 2000 over the comparable periods in 1999. The third
quarter growth was driven by an increase in carloads. For the nine-month
period, revenue decreased due to lower average revenue per car as a result of
contract pricing provisions with certain major customers. Carloads increased in
the third quarter due to market share gains and high demand due to hot summer
weather in the south and southwest. For the nine-month period, the increase in
carloads in the third quarter was partially offset by lower demand at utilities
in the first six months of 2000 due to high inventory levels caused by Y2K
concerns and mild winter weather.

Industrial Products - Industrial Products revenue increased for both the three-
and nine-month periods of 2000 over the comparable periods in 1999 due to
stronger commodity demand and improved service. Carloads decreased slightly in
the third quarter due to a softening economy and declines in government
shipments, recyclables, and stone, partially offset by higher steel carloads.
Year to date, carloads increased over the comparable period in 1999 primarily
due to strong domestic steel demand and the effects of a growing economy on
lumber, cement, scrap metal, and paperboard. Increases in average revenue per
car were due to gains in high average revenue per car steel and lumber moves and
selected price increases.

-14-
<PAGE> 17

Intermodal - Intermodal revenue increased for both the three- and nine-month
periods of 2000 over the comparable periods in 1999. Third quarter revenue
carloads and revenue were both quarterly records. Third quarter and year-to-date
gains were driven by improved service and strong growth in imports from Asia.
Average revenue per car increased primarily as a result of price increases.

OPERATING EXPENSES - Operating expenses increased $119 million (6%) and $270
million (4%) for the three- and nine-month periods ended September 30, 2000,
respectively. Operating expense comparisons by category for the three- and
nine-month periods ending September 30, 2000 and 1999 are discussed below. The
factors primarily responsible for the increase or decrease in each category are
substantially the same for both the three- and nine-month periods, except as
noted.

Salaries, Wages and Employee Benefits - Costs decreased $38 million (4%) and $76
million (3%) for the three- and nine-month periods, respectively, over the
comparable periods in 1999. Wage inflation and volume-related costs were more
than offset by lower expenses from decreased workforce levels, higher train crew
productivity and lower crew training expenses.

Equipment and Other Rents - Expenses increased $10 million (3%) and decreased $7
million (1%) for the three- and nine-month periods, respectively. The third
quarter increase was due primarily to higher volume-related costs, partially
offset by lower prices. For the nine-month period, the decrease was attributable
to improvements in car cycle times, lower prices, and increased car rents from
other railroads. Higher volume costs partially offset the year-to-date
decreases.

Depreciation - Depreciation increased $13 million (5%) and $39 million (5%) for
the three- and nine-month periods, respectively, over comparable periods in
1999, as a result of the Railroad's capital program in 1999 and the first nine
months of 2000. Capital spending was $1.4 billion in the nine months ended
September 30, 2000 compared to $1.3 billion in the nine months ended September
30, 1999.

Fuel and Utilities - Expenses were up $127 million (64%) and $346 million (61%)
for the three- and nine-month periods, respectively. Higher fuel prices added
$115 million of expense in the third quarter and $304 million of expense in the
first nine months of 2000 over comparable periods in 1999. Volume costs added $7
million for the third quarter and $22 million for the first nine months of 2000
compared to 1999. The Railroad hedged approximately 10% of its fuel consumption
for both the three- and nine-month periods, which decreased fuel costs by $15
million and $35 million, respectively. As of September 30, 2000, expected fuel
consumption for the remaining three months of 2000 is 9% hedged at 40 cents per
gallon excluding taxes, transportation costs and regional pricing spreads (see
Note 3 to the Consolidated Financial Statements).

Materials and Supplies - Expenses remained flat for the three-month period and
increased $20 million (5%) for the nine-month period. In the third quarter, cost
reductions and operating efficiencies offset higher volume-related costs and
inflation. Year-to-date expenses were higher than 1999 due to higher locomotive
overhauls and volume-related increases in car and locomotive repairs.

Casualty Costs - Expenses increased $11 million (16%) and decreased $15 million
(6%) for the three- and nine- month periods, respectively. Third quarter 1999
expenses were favorably affected by an insurance refund and lower personal
injury expenses. Year-to-date 2000 casualty costs were also favorably affected
by lower personal injury expenses.

-15-
<PAGE> 18

Other Costs - Expenses decreased $4 million (2%) and $37 million (6%) for the
three- and nine-month periods, respectively, compared to comparable periods in
1999. Cost control and productivity gains offset volume-related cost increases
and higher state and local taxes in both time periods.

OPERATING INCOME - Operating income increased $48 million (9%) to $563 million
and $251 million (19%) to $1,567 million for the three and nine months ended
September 30, 2000, respectively. The operating ratio for the third quarter of
2000 was 79.7%, 0.5 percentage points better than 1999's 80.2% operating ratio.
The operating ratio for the first nine months of 2000 was 80.6%, 2.0 percentage
points better than 1999's 82.6%.

NON-OPERATING ITEMS - Non-operating expense, net, decreased $5 million (4%) and
$20 million (5%) for the three and nine months ended September 30, 2000,
respectively. Third quarter and year-to-date improvements were primarily the
result of lower interest expense, partially offset by lower income from real
estate sales and lower miscellaneous other income. Income taxes increased $13
million (9%) for the third quarter and $108 million (34%) for the first nine
months of 2000 reflecting higher income levels and a one-time, $19 million
after-tax gain in the second quarter of 1999 related to prior year tax
settlements.

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 7 to the Consolidated
Financial Statements, which is incorporated herein by reference.

ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement No.133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133), that would have been effective January 1, 2000.
In June 1999, the FASB issued Statement No. 137, "Accounting for Derivatives
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133" postponing the effective date for implementing FAS 133 to
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" (FAS 138). FAS 138 addresses certain issues related to the
implementation of FAS 133, but does not change the basic model of FAS 133 or
further delay the implementation of FAS 133. Management has determined that FAS
133 and FAS 138 will increase the volatility of the 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 hedging purposes
will, upon adoption of FAS 133 and FAS 138, be recorded in the Company's
Statement of Financial Position (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 and FAS 138 will have a material
impact on the Company's consolidated financial statements.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition". SAB 101 provides
additional guidance on revenue recognition criteria and related disclosure
requirements. This SAB is effective beginning in the fourth quarter of 2000.
When the SAB becomes effective, it will require implementation as of the
beginning of the current fiscal year. If the impact is material, the SAB
requires retroactive application to all periods presented. Management is
currently assessing the impact that SAB 101 will have on the Company's
consolidated financial statements.

-16-
<PAGE> 19

In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(FAS 140), replacing FAS 125. FAS 140 revises criteria for accounting for
securitizations, other financial asset transfers and collateral, and introduces
new disclosures. FAS 140 is effective for fiscal 2000 in respect to the new
disclosure requirements and amendments of the collateral provisions originally
presented in FAS 125. All other provisions are effective for transfers of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The provisions are to be applied prospectively with certain exceptions.
Management is currently assessing the impact that FAS 140 will have on the
Corporation's consolidated financial statements.

CAUTIONARY INFORMATION

Certain statements in this report are, and statements in other material filed or
to be filed with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) are or will be, forward-looking within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934. These
forward-looking statements include, without limitation, statements regarding:
expectations as to operational improvements; expectations as to cost savings,
revenue growth and earnings; the time by which certain objectives will be
achieved; estimates of costs relating to environmental remediation and
restoration; expectations as to product applications; expectations that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity; and statements concerning projections, predictions, expectations,
estimates or forecasts as to the Company's and its subsidiaries' business,
financial and operational results, and future economic performance, statements
of management's goals and objectives and other similar expressions concerning
matters that are not historical facts.

Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements.

Important factors that could cause such differences include, but are not
limited to, whether the Company and its subsidiaries are fully successful in
implementing their financial and operational initiatives; industry competition,
conditions, performance and consolidation; legislative and/or regulatory
developments, including possible enactment of initiatives to re-regulate the
rail business; natural events such as severe weather, floods and earthquakes;
the effects of adverse general economic conditions, both within the United
States and globally; changes in fuel prices; changes in labor costs; labor
stoppages; and the outcome of claims and litigation.

Forward-looking statements speak only as of the date the statement was
made. The 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. If the Company does update one or more
forward-looking statements, no inference should be drawn that the Company will
make additional updates with respect thereto or with respect to other
forward-looking statements.

-17-
<PAGE> 20

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided
in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Disclosure concerning market risk-sensitive instruments is set forth in Note 3
to the Consolidated Financial Statements included in Item 1 of Part I of this
Report and is incorporated herein by reference.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The discussion of certain legal proceedings affecting the Registrant and/or
certain of its subsidiaries set forth in Note 7 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
third quarter of 2000.

ENVIRONMENTAL MATTERS - As previously reported, the U.S. Environmental
Protection Agency (EPA) had brought a civil action against certain subsidiaries
of Southern Pacific, which have been merged into the Railroad, in the U.S.
District Court for the District of Colorado alleging violation of the Clean
Water Act and the Oil Pollution Act. The complaint identified seven incidents
involving the alleged release of hazardous substances into the waters of the
United States and sought civil penalties of $25,000 per day and unspecified
injunctive relief to prevent future violations. Six of the seven incidents were
related to derailments dating back to 1992. Six of the incidents involved
alleged releases from ruptured locomotive fuel tanks and an incident in 1996
involved an alleged release of sulfuric acid near the Tennessee Pass. During the
third quarter of 2000, a final settlement was negotiated with the EPA disposing
of the action. The Railroad agreed to pay a civil penalty in the amount of
$800,000 and to take various measures to prevent or mitigate the impact of
future incidents, including clean up of right of way, rock slide prevention
measures and a geologic study.

SHAREHOLDER LAWSUITS - UPC and certain of its directors and officers (who are
also directors of the Railroad) are defendants in two purported class actions
that have been consolidated into one proceeding (the Class Action). The
consolidated complaint alleges, among other things, that UPC violated the
federal securities laws by failing to disclose material facts and making
materially false and misleading statements concerning the service, congestion
and safety problems encountered following UPC's acquisition of Southern Pacific
in 1996. These lawsuits were filed in late 1997 in the United States District
Court for the Northern District of Texas and seek to recover unspecified amounts
of damages. Management believes that the plaintiffs' claims are without merit
and has been defending them vigorously. The defendants moved to dismiss this
action, and the motion was briefed and submitted to the Court for decision in
1998. In February 2000, prior to a ruling on the motion, the parties jointly
advised the Court that they were engaged in discussions concerning the possible
settlement of the action and asked the Court to defer ruling on the motion to
dismiss pending the outcome of these discussions. The Court entered an order
dated February 29, 2000 agreeing to such deferral, subject to the motion of
either party to reactivate the action and the pending motion to dismiss at any
time.

-18-
<PAGE> 21

things, that the named directors breached their fiduciary duties to UPC and the
Railroad by approving and implementing the Southern Pacific merger without
informing themselves of its impact or ensuring that adequate controls were put
in place and by causing UPC and the Railroad to make misrepresentations about
the Railroad's service problems to the financial markets and regulatory
authorities. The individual defendants also believe that these claims are
without merit and have defended them vigorously.

In December 1998, UPC's Board of Directors established a special litigation
committee consisting of three independent directors to review the plaintiff's
allegations under the Derivative Action to determine whether it was in UPC's
best interest to pursue them. In February 1999, the committee rendered its
report, in which it unanimously concluded that further prosecution of the
Derivative Action on behalf of UPC and the Railroad was not in the best interest
of either such company. Accordingly, UPC and the Railroad filed a motion with
the Court to dismiss the Derivative Action.

Prior to any ruling on the motions to dismiss the Class Action and the
Derivative Action, counsel for UPC, the Railroad and certain officers and
directors of UPC and the Railroad entered into a Memorandum of Understanding
(the MOU), dated June 28, 2000, with counsel for the plaintiffs in the Class
Action and Derivative Action, providing for the settlement of the Actions. The
MOU provides, among other things, that the Class Action will be settled for
$34,025,000 in cash (the Settlement Payment), the full amount of which will be
covered by UPC's insurance carriers. Counsel for the plaintiffs in the Class
Action will apply to the court for any award of their fees and expenses, to be
paid out of the Settlement Payment. The MOU also provides that, in settlement of
the Derivative Action, UPC will adopt certain additional procedures which will
reinforce its continuing effort to ensure both the effective implementation of
its merger with Southern Pacific and its ongoing commitment to rail safety. In
addition, in the event of any proposed merger or other transaction involving
consolidation of UPC and a rail system of greater than 1,000 miles in length of
road, UPC will commission a study, to be completed in advance of any formal
application to a U.S., Canadian or Mexican federal regulatory board, to analyze
prospective safety and congestion-related issues. As part of the terms of the
Derivative Action settlement, counsel for the plaintiffs will receive such fees
and expenses as may be awarded by the Court, up to an aggregate amount of
$975,000. Such amount will also be fully covered by UPC's insurance carriers.

On October 12, 2000, counsel for the respective parties in the Class Action
and the Derivative Action entered into definitive Stipulations of Compromise and
Settlement (the Stipulations), providing for the settlement of the Actions on
the terms described above, subject to court approval. By order dated October 17,
2000, the court in which the Class Action is pending preliminarily approved the
settlement of that Action and scheduled a hearing for December 13, 2000, on the
question of whether the proposed settlement should be approved as fair,
reasonable and adequate to the members of the class, and the amount of fees,
expenses and disbursements to be awarded to plaintiffs' counsel. By order dated
October 23, 2000, the court in which the Derivative Action is pending
preliminarily approved the settlement of that Action and scheduled a hearing,
also for December 13, 2000, on the question of whether the proposed settlement
of that action is fair, reasonable and in the best interest of UPC, its
shareholders and the Railroad and the amount of fees, expenses and disbursements
to be awarded to plaintiff's counsel. As of October 26, 2000, pursuant to the
court orders in each of the Actions, notice of the proposed settlements and
fairness hearings were mailed to those UPC shareholders affected by the Actions.

-19-
<PAGE> 22

The settlement of each of the Actions is subject to, among other
conditions, the entry of a final judgment approving each settlement by the
respective courts in which each Action is pending. Notwithstanding the existence
of the MOU, the Stipulations, and the court orders preliminarily approving the
proposed settlements, there can be no assurances that a definitive settlement
will be consummated with respect to either Action. UPC, the Railroad and the
individual defendants named in the Actions entered into the MOU and Stipulations
solely for the purpose of avoiding the further expense, inconvenience, burden
and uncertainty of the Actions, and their decision to do so is not an admission
or concession or evidence of any liability or wrongdoing on the part of any
party to either Action, which liability and wrongdoing have consistently been,
and continue to be, denied.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

12(a) - Computation of ratio of earnings to fixed charges for
the Three Months Ended September 30, 2000.
12(b) - Computation of ratio of earnings to fixed charges for
the Nine Months Ended September 30, 2000.
27 - Financial data schedule.

(b) REPORTS ON FORM 8-K

On July 7, 2000, the Registrant filed a Current Report on Form
8-K announcing developments in certain litigation.

On July 27, 2000, the Registrant filed a Current Report on Form
8-K announcing UPC's financial results for the second quarter of
2000.

On October 19, 2000, the Registrant filed a Current Report on
Form 8-K announcing UPC's financial results for the third quarter
of 2000.

-20-
<PAGE> 23

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: November 14, 2000

UNION PACIFIC RAILROAD COMPANY
(Registrant)

By /s/ Richard J. Putz
-------------------
Richard J. Putz
Chief Accounting Officer and Controller
(Chief Accounting Officer and Duly Authorized Officer)

<PAGE> 24

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits Filed with this Statement
------- -------------------------------------------------

<S> <C>
12(a) Computation of ratio of earnings to fixed charges for the
Three Months Ended September 30, 2000.

12(b) Computation of ratio of earnings to fixed charges for the
Nine Months Ended September 30, 2000.

27 Financial data schedule.
</TABLE>