<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each Class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Missouri Pacific Railroad Company New York Stock Exchange, Inc.
4-1/4% First Mortgage Bonds due 2005
Missouri Pacific Railroad Company New York Stock Exchange, Inc.
4-3/4% General Income Mortgage Bonds due 2020 and 2030
Missouri Pacific Railroad Company New York Stock Exchange, Inc.
5% Income Debentures due 2045
Texas and Pacific Railway Company New York Stock Exchange, Inc.
5% First Mortgage Bonds due 2000
Missouri-Kansas-Texas Railroad Company New York Stock Exchange, Inc.
5-1/2% Subordinated Income Debentures due 2033
Securities registered pursuant to Section 12(g) of the Act: None
</TABLE>
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THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ].
---
None of the Registrant's voting stock is held by non-affiliates. The Registrant
is a wholly owned subsidiary of Union Pacific Corporation.
As of February 29, 2000, the Registrant had outstanding 7,130 shares of Common
Stock, $10 par value, and 620 shares of Class A Stock, $10 par value.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
------
Item 1. Business
--------
Company
Union Pacific Railroad Company (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 companies
(collectively, the Company or Railroad), operates various railroad and railroad-
related businesses.
The Company has over 33,000 route miles linking Pacific Coast and Gulf Coast
ports to the Midwest and eastern U.S. gateways and providing several north/south
corridors to key Mexican gateways. The Railroad serves the western two-thirds
of the country and maintains coordinated schedules with other carriers for the
handling of freight to and from the Atlantic Coast, the Pacific Coast, the
Southeast, the Southwest, Canada and Mexico. Export and import traffic is moved
through Gulf Coast and Pacific Coast ports and across the Mexican and (primarily
through interline connections) Canadian borders.
Product Mix - In 1999, the Railroad had operating revenues of nearly $10.2
billion, approximately 97 percent of which were derived from rail freight
operations. The percentages of revenue ton-miles (RTM) and rail commodity
revenue for major commodities during 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
Commodity Commodity Commodity
RTM Revenue RTM Revenue RTM Revenue
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Agriculture............ 14.7% 14.4% 14.1% 14.4% 15.3% 14.8%
Automotive............. 3.2 10.6 3.1 10.3 3.4 9.8
Chemicals.............. 11.3 16.2 11.4 16.9 12.1 17.7
Energy................. 40.0 22.0 40.1 22.0 36.1 19.7
Industrial............. 16.2 19.3 16.5 19.7 17.2 20.1
Intermodal............. 14.6 17.5 14.8 16.7 15.9 17.9
----------------------- ----------------------- -----------------------
Total.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----------------------- ----------------------- -----------------------
Total (Billions)....... 473.1 $ 9.9 432.1 $ 9.1 451.8 $ 9.7
======================= ======================= =======================
</TABLE>
Competition - The Railroad is subject to price and service competition from
other railroads, motor carriers and barge operators. The Company's main rail
competitor is Burlington Northern Santa Fe Corporation. Its rail subsidiary,
The Burlington Northern and Santa Fe Railway Company (BNSF), operates parallel
routes in many of the Company's main traffic corridors. In addition, the
Company's operations are conducted in corridors served by other competing
railroads and by motor carriers. Motor carrier competition is particularly
strong for intermodal traffic. Because of the proximity of the Railroad's
routes to major inland and Gulf Coast waterways, barge competition can be
particularly pronounced, especially for grain and bulk commodities.
Employees - Approximately 87 percent of the Railroad's 52,000 employees are
represented by rail unions. During 1996, nearly the entire unionized workforce
of the Union Pacific Railroad Company, a Utah corporation (UPRR) and predecessor
to the Registrant, ratified five-year national agreements, which include a
combination of general wage increases and lump-sum payments. In addition, the
agreements provide for increased flexibility in work rules. Negotiations under
the Railway Labor Act for a new national agreement for all crafts began in late
1999 and are in the initial stages. Under the conditions imposed by the Surface
Transportation Board of the U.S. Department of Transportation (STB) in
connection with the Corporation's acquisition of Southern Pacific Rail
Corporation (SP or Southern Pacific), labor agreements between the Railroad and
the unions representing SP employees must be negotiated before the UPRR and SP
rail systems can be fully integrated. The Railroad has successfully reached
agreements with the shopcraft, carmen, clerical and maintenance-of-way unions.
By the end of 1999, negotiations
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with other operating crafts were nearly complete, with only one hub-and-spoke
agreement (Los Angeles) left to implement in early 2000. The terms of ratified
and pending labor agreements are not expected to have a material adverse effect
on the Company's results of operations.
Acquisitions
Mexican Railway Concession - In 1999, the Company increased its investment in
the Pacific-North and Chihuahua Pacific lines in Mexico. During 1997, the
Company and a consortium of partners were granted a 50-year concession to
operate the Pacific-North and Chihuahua Pacific lines 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 and accounts for
the investment under the equity method.
Southern Pacific - During 1999, the Company continued its integration of
Southern Pacific's rail operations. This process is expected to be completed
over the next 24 months (see Note 2 to the Consolidated Financial Statements on
pages F-8 and F-9). The Corporation's investment in Southern Pacific has been
pushed down to the Railroad. The acquisition of Southern Pacific has been
accounted for using the purchase method and was fully consolidated into the
Company's results beginning October 1996.
Other Information
Governmental Regulation - The Company's operations are currently subject to a
variety of federal, state and local regulations. The most significant areas of
regulation are described below. See also the discussion of certain regulatory
proceedings in "Item 3. Legal Proceedings," which is incorporated herein by
-----------------
reference.
The Railroad is subject to the regulatory jurisdiction of the STB and other
federal and state agencies. The STB has jurisdiction over rates charged on
certain regulated rail traffic; freight car compensation; transfer, extension or
abandonment of rail lines; and acquisition of control of rail and motor carriers
by rail common carriers. Other federal agencies have jurisdiction over safety,
movement of hazardous materials, movement and disposal of hazardous waste, and
equipment standards. Various state and local agencies have jurisdiction over
disposal of hazardous wastes and seek to regulate movement of hazardous
materials.
Environmental Regulation - The Railroad is subject to various environmental
statutes and regulations, including the Resource Conservation and Recovery Act
(RCRA), the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 (CERCLA), and the Clean Air Act (CAA).
RCRA applies to hazardous waste generators and transporters, as well as to
persons engaged in treatment and disposal of hazardous waste, and specifies
standards for storage areas, treatment units and land disposal units. All
generators of hazardous waste are required to label shipments in accordance with
detailed regulations and to prepare a detailed manifest identifying the material
and stating its destination before waste can be released for offsite transport.
The transporter must deliver the hazardous waste in accordance with the manifest
and only to a treatment, storage or disposal facility qualified for RCRA interim
status or having a final RCRA permit.
The Environmental Protection Agency (EPA) regulations under RCRA have
established a comprehensive system for the management of hazardous waste. These
regulations identify a wide range of industrial by-products and residues as
hazardous waste, and specify requirements for "cradle-to-grave" management of
such waste from the time of generation through the time of disposal and beyond.
States that have adopted hazardous waste management programs with standards at
least as stringent as those promulgated by the EPA may be authorized by the EPA
to administer all or part of RCRA on behalf of the EPA.
CERCLA was designed to establish a strategy for cleaning up facilities at
which hazardous waste or other hazardous substances have created actual or
potential environmental hazards. The EPA has designated certain
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facilities as requiring cleanup or further assessment. Among other things,
CERCLA authorizes the federal government either to clean up such facilities
itself or to order persons responsible for the situation to do so. The act
created a multi-billion dollar fund to be used by the federal government to pay
for such cleanup efforts. In the event the federal government pays for such
cleanup, it will seek reimbursement from private parties upon which CERCLA
imposes liability.
CERCLA imposes strict liability on the owners and operators of facilities in
which hazardous waste and other hazardous substances are deposited or from which
they are released or are likely to be released into the environment. It also
imposes strict liability on the generators of such waste and the transporters of
the waste who select the disposal or treatment sites. Liability may include
cleanup costs incurred by third persons and damage to publicly owned natural
resources. The Company is subject to potential liability under CERCLA as an
owner or operator of facilities at which hazardous substances have been disposed
of, or as a generator or a transporter of hazardous substances disposed of at
other locations. Some states have enacted, and other states are considering
enacting, legislation similar to CERCLA. Certain provisions of these acts are
more stringent than CERCLA. States that have passed such legislation are
currently active in designating more facilities as requiring cleanup and further
assessment.
The operations of the Company are subject to the requirements of the CAA.
The 1990 amendments to the CAA include a provision under Title V requiring that
certain facilities obtain operating permits. EPA regulations require all states
to develop federally-approvable permit programs. Affected facilities must submit
air operating permit applications to the respective states within one year of
the EPA's approval of the state programs. Certain of the Company's facilities
may be required to obtain such permits. In addition, in December 1997 the EPA
issued final regulations which require that most locomotives purchased or
remanufactured after 1999 or 2000 meet certain stringent emissions criteria.
While the cost of meeting these requirements may be significant, expenditures
are not expected to affect materially the Company's financial condition or
results of operations.
The operations of the Company are also subject to other laws protecting the
environment, including permit requirements for wastewater discharges pursuant to
the National Pollutant Discharge Elimination System and storm-water runoff
regulations under the Federal Water Pollution Control Act.
Information concerning environmental claims and contingencies and estimated
attendant remediation costs is set forth in "Management's Narrative Analysis of
Results of Operations - Other Matters - Environmental Costs" at page F-27. Such
information is incorporated herein by reference.
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 its consolidated financial position, results of operations or
liquidity; and statements concerning projections, predictions, expectations,
estimates or forecasts as to the Company's 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
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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 is fully successful in implementing its
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; the impact of
latent year 2000 systems problems; and the outcome of claims and litigation,
including claims arising from environmental investigations or proceedings.
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.
Item 2. Properties
----------
Operating Equipment
At December 31, 1999, the Railroad owned or leased from others 6,974
locomotives, 114,729 freight cars and 9,927 units of work equipment.
Substantially all railway equipment secures various outstanding equipment
obligations.
Rail Property
The Railroad operates over 33,000 miles of track, including 27,000 miles of main
line and over 6,000 miles of branch line. Approximately 12 percent of the main
line track consists of trackage rights over track owned by others. A substantial
portion of the right-of-way and track is subject to one or more mortgages.
Item 3. Legal Proceedings
-----------------
Southern Pacific Acquisition
On August 12, 1996, the STB served a decision (the Decision) approving the
acquisition of control of Southern Pacific by UPC, subject to various
conditions. The acquisition was consummated on September 11, 1996. Various
appeals were filed with respect to the Decision, all such appeals were
ultimately consolidated in the U.S. Court of Appeals for the District of
Columbia Circuit and all of the appeals have since been withdrawn or denied.
Among the conditions to the STB's approval of the Southern Pacific
acquisition was the requirement that the STB retain oversight jurisdiction for
five years to examine whether the conditions imposed under the Decision remain
effective to address the competitive harms caused by the merger. On November 30,
1999, the STB served a decision in the third annual general oversight proceeding
to review the implementation of the merger and the effectiveness of the
conditions imposed under the Decision. The Board concluded that merger
implementation continued to be positive, the conditions ensured effective
competition and no new conditions were warranted. The STB established July 3,
2000 as the date for the next comprehensive summary to be filed by the Railroad.
The STB order also requires interested parties to file comments concerning the
next annual oversight proceeding on August 18, 2000, with replies being due
September 5, 2000.
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Bottleneck Proceedings
The STB initiated a proceeding in 1996 on the issue of whether it should modify
existing law regarding a railroad's obligation to offer, and a shipper's rights
to challenge, rates for rail service over a bottleneck segment. A bottleneck
segment is a line of railroad that is served by only one railroad between a
junction and an exclusively served shipper facility. The STB proceeding also
encompassed motions to dismiss three individual complaint proceedings filed by
shippers challenging class rates charged for or allegedly applicable to the
movement of coal, two of which named the Company and Southern Pacific
Transportation Company (SPT) as a defendant. On December 31, 1996, the STB
served a decision that generally reaffirmed earlier rulings holding that a rail
carrier is not obligated to provide rates for bottleneck segments and confirmed
the right of rail carriers to set rates differentially based upon demand. It
created an exception, requiring a bottleneck carrier that does not have its own
route between origin and destination to provide a common carrier rate,
challengeable by a shipper, for the bottleneck segment when the shipper obtains
a contract rate for the remainder of the movement. It also dismissed the two
complaint proceedings in which the Company and SPT were defendants. The STB
subsequently served a decision generally declining to reconsider its December
31, 1996 decision. Shippers appealed the STB decisions to the U.S. Court of
Appeals for the Eighth Circuit. In February 1999, the Court of Appeals affirmed
the STB's decision and the dismissal of the two complaints against the Company
and SPT. A petition for a writ of certiorari filed in the United States Supreme
Court was denied in October 1999. The Court of Appeals also dismissed as
premature a cross-appeal by the railroads challenging the contract rate
exception.
In a separate case, the Railroad sought review of the contract rate
exception. A December 1997 STB decision required the Railroad to publish
separately challengeable bottleneck segment rates for the shipper's use in
connection with a contract rate on another carrier. On February 15, 2000, the
U.S. Court of Appeals for the District of Columbia affirmed the STB's decision
and the exception. The shipper's complaint concerning the Railroad's rates and
other rates is awaiting decision by the STB.
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 damages related to such delays. Some
customers have 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 1998 and 1997. No additional
amounts were accrued in 1999.
Shareholder Litigation
The Corporation 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 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 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. Although
settlement discussions are proceeding in good faith, there can be no assurance
that they will be successful.
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In addition to the class action litigation, a purported derivative action
was filed on behalf of the Corporation 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 the Corporation and the Railroad and, as nominal
defendants, the Corporation and the Railroad. The derivative action alleges,
among other things, that the named directors breached their fiduciary duties to
the Corporation 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 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. In February 1999, the committee rendered its
report, in which it unanimously concluded that further prosecution of the
derivative action on behalf of the Corporation and the Railroad is not in the
best interest of either such company. Accordingly, the Corporation and the
Railroad have filed a motion with the Court to dismiss the derivative action.
The plaintiff has not yet responded to the motion. The individual defendants
also believe that these claims are without merit and intend to defend them
vigorously.
Other Matters
On August 29, 1997, an Amtrak train, operating on the Railroad's tracks, struck
a car at a crossbuck-protected crossing near Warrensburg, Missouri, injuring
Kimberley R. Alcorn, a passenger in the car. Ms. Alcorn brought suit against
the Railroad and Amtrak in the Circuit Court of Jackson County, Missouri
Division No. 10. On September 24, 1999, a jury found that Amtrak and the
Railroad were negligent in causing the accident. The jury awarded Ms. Alcorn
approximately $40.3 million in compensatory damages, and, on September 29, 1999,
found the Railroad liable for an additional $120 million in punitive damages.
On January 19, 2000, the Circuit Court reduced the jury's award to $25 million
for compensatory damages and $50 million for punitive damages, an amount that is
less than ten percent of the Railroad's current assets on December 31, 1999.
The Railroad believes that the damage awards are not supported by the facts or
the law, and is continuing to assist Amtrak's appeal to the Missouri Supreme
Court seeking a new trial or relief from the damage awards. Under the terms of
an existing agreement, Amtrak will continue to defend the Railroad's interests
in this litigation and appeal, and the Railroad believes that Amtrak and its
insurers, under the terms of the agreement, will hold the Railroad harmless from
any final judgment.
Environmental Matters
The Railroad was named as a defendant in a civil action brought by the
California Department of Fish and Game, Office of Spill Prevention and Response
on April 10, 1998. The complaint alleged violations of California Fish and Game
Code Section 5650, California Business and Professions Code Section 17200, Civil
Code Sections 3479 and 3480, and damage to the waters of California for which
the Department of Fish and Game allege trusteeship. The complaint resulted from
derailments and alleged releases of diesel fuel oil during 1995 in the Feather
River Canyon in Butte County, California. The Complaint sought penalties,
exemplary damages, natural resource damages and unspecified injunctive relief.
In 1999, a settlement was reached in this case between the Railroad and the
governmental entities in which the Railroad agreed to various measures to assess
and mitigate rockslide hazards and to pay stipulated civil penalties for future
releases.
The Railroad was named as a defendant in a criminal misdemeanor action
brought by the State of California in the Municipal Court of Placer County,
California on February 24, 1998. The complaint alleged a violation of California
Fish and Game Code Section 5650 as a result of a diesel fuel spill in Norden,
California in February 1997. In addition, the California Department of Fish and
Game sought penalties, monitoring costs and natural resource damages under state
water statutes, and the EPA sought penalties for violation of the Clean Water
Act in connection with the same incident. In 1999, a settlement was reached in
this case between the Railroad and the governmental entities in which the
Railroad agreed to remediate the spill and pay total penalties of approximately
$305,000.
The Railroad received approximately 20 Notices of Violation (NOVs) from the
South Coast Air Quality Management District (the District) relating to fumes
emitted from idling diesel locomotives at Slover siding near
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the Railroad's yard in West Colton, California. Trains awaiting crews or room to
enter the West Colton yard were parked at Slover siding with their engines
running for various amounts of time, causing exhaust fumes to enter the
backyards and homes of residents living along the siding. The District had cited
the Railroad for creating a public nuisance pursuant to the California Health
and Safety Code and the District's regulations. Each violation carried a maximum
civil penalty of $25,000 per day, which could be increased in some circumstances
to $50,000 per day. Although the Railroad modified its operating procedures for
trains entering the West Colton yard to reduce the problem, the District entered
an order with respect to the situation which the Railroad believed to be an
impermissible burden on interstate commerce preempted by applicable federal law.
In 1999, the Railroad and the government reached a settlement in this case.
Under the terms of the settlement, the Railroad paid a penalty of $500,000 and
made certain operating changes.
The Railroad received notification that the District Attorney for San
Bernardino County, California opened an investigation into the Railroad's
handling of several hazardous material spills in Barstow and West Colton,
California. The incident in Barstow involved a rear-end collision between two
trains near Barstow in August 1997 that resulted in a spillage of locomotive
diesel fuel and leakage from two tank cars containing toxic chemicals. Three
incidents in the West Colton yard in 1998 involved leaking tank cars and spills
of diesel fuel from a derailed locomotive. The District Attorney's office was
investigating allegations that cleanup procedures were not undertaken promptly
and required notices were not given in connection with these incidents. In
1999, the Railroad and the government reached a settlement in this case. Under
the terms of the settlement, the Railroad paid a civil penalty of $350,000 and
agreed to certain spill handling and reporting requirements.
In March 1998, the Railroad received notice that the Railroad and Clean
Harbors, a waste disposal firm, were the subjects of a criminal investigation by
the EPA and the Federal Bureau of Investigation. Tank cars containing hazardous
waste billed to Clean Harbors' transload facility in Sterling, Colorado were
held in the Railroad's Sterling, Colorado rail yard for periods longer than ten
days prior to placement in Clean Harbors' facility, allegedly in violation of
hazardous waste regulations. The Railroad is cooperating with the investigation
and has responded to grand jury subpoenas. A finding of violation could result
in significant criminal or civil penalties.
The Corporation and its affiliates have received notices from the EPA and
state environmental agencies alleging that they are or may be liable under
certain federal or state environmental laws for remediation costs at various
sites throughout the United States, including sites which are on the Superfund
National Priorities List or state superfund lists. Although specific claims have
been made by the EPA and state regulators with respect to some of these sites,
the ultimate impact of these proceedings and suits by third parties cannot be
predicted at this time because of the number of potentially responsible parties
involved, the degree of contamination by various wastes, the scarcity and
quality of volumetric data related to many of the sites, and/or the speculative
nature of remediation costs. Nevertheless, at many of the superfund sites, the
Corporation believes it will have little or no exposure because no liability
should be imposed under applicable law, one or more other financially able
parties generated all or most of the contamination, or a settlement of the
Corporation's exposure has been reached although regulatory proceedings at the
sites involved have not been formally terminated.
Information concerning environmental claims and contingencies and estimated
attendant remediation costs is set forth in "Management's Narrative Analysis of
the Results of Operations - Other Matters - Environmental Costs" at page F-27.
Such information is incorporated by reference.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Omitted in accordance with General Instruction I of Form 10-K.
9
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
As of the date of filing this Report, the Registrant had the following
amounts of capital stock issued and outstanding: 7,130 shares of Common
Stock, par value $10.00 per share (the Company Common Stock), 620
shares of Class A Stock, par value $10.00 per share (the Company Class
A Stock), 4,829 Redeemable Preference Shares (Series A), initial par
value $10,000 per share, and 436 Redeemable Preference Shares (Series
B), initial par value $10,000 per share (collectively, the Preference
Shares). All of the Company Common Stock and the Company Class A Stock,
which constitutes all of the voting capital stock of the Registrant, is
owned by the Corporation or a wholly owned subsidiary of the
Corporation, and all of the Preference Shares, which are non-voting
stock, are owned by the Federal Railroad Administration. Accordingly,
there is no market for the Registrant's capital stock.
Dividends on the Company Common Stock, which are paid on a
quarterly basis, totaled $200 million in 1999, $308 million in 1998 and
$411 million in 1997. The 1997 dividends included $29 million of asset
transfers between the Company and UPC. There were no dividends paid on
the Company Class A stock in 1999, $12 million in 1998 and $9 million
in 1997. Information concerning restrictions on the Registrant's
ability to pay dividends on the Company Common Stock and the Company
Class A Stock is set forth in Note 6 on pages F-12 and F-13 and Note 9
on pages and F-16 and F-17 to the Consolidated Financial Statements.
All such information is incorporated herein by reference.
Item 6. Selected Financial Data
-----------------------
Omitted in accordance with General Instruction I of Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Omitted in accordance with General Instruction I of Form 10-K. In lieu
thereof, a narrative analysis is presented beginning on Page F-21.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Information concerning market risk sensitive instruments is set forth
in "Management's Narrative Analysis of the Results of Operations -
Other Matters - Financial Instruments" on page F-28 and in Note 4 to
the Consolidated Financial Statements on pages F-9 and F-10. All such
information is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements and supplementary information related thereto,
listed on the Index to Financial Statements, are provided on pages F-1
through F-30 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Omitted in accordance with General Instruction I of Form 10-K.
10
<PAGE>
Item 11. Executive Compensation
----------------------
Omitted in accordance with General Instruction I of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Omitted in accordance with General Instruction I of Form 10-K.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Omitted in accordance with General Instruction I of Form 10-K.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) (1) and (2) Financial Statements and Schedules
----------------------------------------------
See Index to Financial Statements.
(3) Exhibits
------------
2(a) Agreement and Plan of Merger, dated as of January 29, 1998,
between UPRR and SPT is incorporated herein by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K
dated February 13, 1998.
3(a) Amended Certificate of Incorporation of the Registrant,
effective as of February 1, 1998, is incorporated by
reference to Exhibit 3(a) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
3(b) By-Laws of the Registrant, as amended effective as of
November 19, 1998, are incorporated by reference to Exhibit
3(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
4 Pursuant to various indentures and other agreements, the
Registrant has issued long-term debt; however, no such
agreement has securities or obligations covered thereby
which exceed 10% of the Registrant's total consolidated
assets. The Registrant agrees to furnish the Commission
with a copy of any such indenture or agreement upon request
by the Commission.
10(a) Amended and Restated Anschutz Shareholders Agreement, dated
as of July 12, 1996, among UPC, UPRR, The Anschutz
Corporation, Anschutz Foundation and Mr. Philip F.
Anschutz, is incorporated herein by reference to Annex D to
the Joint Proxy statement/Prospectus included in Post-
Effective Amendment No. 2 to UPC's Registration Statement
on Form S-4 (No. 33-64707).
10(b) Agreement, dated September 25, 1995, among UPC, UPRR, MPRR,
SP, SPT, DRGW, SSW and SPCSL, on the one hand, and
Burlington Northern Railroad Company ("BN") and The
Atchison, Topeka and Santa Fe Railway Company ("Santa Fe"),
on the other hand, is incorporated by reference to Exhibit
10.11 to UPC's Registration Statement on Form S-4 (No. 33-
64707).
11
<PAGE>
10(c) Supplemental Agreement, dated November 18, 1995, between
UPC, UPRR, MPRR, SP, SPT, DRGW, SSW and SPCSL, on the one
hand, and BN and Santa Fe, on the other hand, is
incorporated herein by reference to Exhibit 10.12 to UPC's
Registration Statement on Form S-4 (No. 33-64707).
12 Ratio of Earnings to Fixed Charges.
24 Powers of attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
On January 20, 2000, the Registrant filed a current report on Form
8-K announcing UPC's financial results for the fourth quarter of
1999.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 27th day of March
2000.
UNION PACIFIC RAILROAD COMPANY
By /s/ Richard K. Davidson
---------------------------------------
Richard K. Davidson,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below, on this 27th day of March, by the following persons on
behalf of the Registrant and in the capacities indicated.
PRINCIPAL EXECUTIVE OFFICER: By /s/ Richard K. Davidson
---------------------------------------
Richard K. Davidson,
Chairman and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER: By /s/ James R. Young
---------------------------------------
James R. Young,
Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER: By /s/ Richard J. Putz
---------------------------------------
Richard J. Putz
Chief Accounting Officer and Controller
13
<PAGE>
SIGNATURES - (Continued)
DIRECTORS:
Philip F. Anschutz* Ivor J. Evans*
Robert P. Bauman* Elbridge T. Gerry, Jr.*
Richard B. Cheney* Judith Richards Hope*
E. Virgil Conway* Richard J. Mahoney*
Richard K. Davidson* James A. Shattuck*
Thomas J. Donohue* Richard D. Simmons*
Spencer F. Eccles*
* By /s/ Thomas E. Whitaker
----------------------
Thomas E. Whitaker, Attorney-in-fact
14
<PAGE>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................................. F-2
Financial Statements:
Statement of Consolidated Income
- For the Years Ended December 31, 1999, 1998 and 1997.................. F-3
Statement of Consolidated Financial Position
- At December 31, 1999 and 1998......................................... F-4
Statement of Consolidated Cash Flows - For the Years Ended
December 31, 1999, 1998 and 1997........................................ F-5
Statement of Changes in Common Stockholders' Equity - For the Years Ended
December 31, 1999, 1998 and 1997........................................ F-6
Notes to Consolidated Financial Statements................................. F-7 - F-20
Management's Narrative Analysis of the
Results of Operations...................................................... F-21 - F-30
</TABLE>
No schedules are required to be filed because of the absence of conditions under
which they would be required or because the required information is set forth in
the Consolidated Financial Statements referred to above.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors
Union Pacific Railroad Company
Omaha, Nebraska
We have audited the accompanying statement of consolidated financial
position of Union Pacific Railroad Company (a wholly owned subsidiary of Union
Pacific Corporation) and consolidated subsidiary and affiliate companies as of
December 31, 1999 and 1998, and the related statements of consolidated income,
changes in common stockholders' equity and consolidated cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Union Pacific Railroad Company
and subsidiary and affiliate companies at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Omaha, Nebraska
January 20, 2000
F-2
<PAGE>
PART 1 - FINANCIAL INFORMATION
________________________________________________________________________________
Statement of Consolidated Income
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For The Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Millions of Dollars, Except Ratios 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues Rail............................................ $10,176 $9,368 $9,981
-------------------------------------------------------------------------------
Operating Expenses Salaries, wages and employee benefits (Note 8).. 3,578 3,607 3,467
Equipment and other rents....................... 1,238 1,328 1,309
Depreciation and amortization.................. 1,034 1,003 972
Fuel and utilities (Note 4).................... 783 792 987
Materials and supplies.......................... 538 513 515
Casualty costs.................................. 334 423 432
Other costs..................................... 849 1,269 1,046
-------------------------------------------------------------------------------
Total........................................ 8,354 8,935 8,728
-------------------------------------------------------------------------------
Income Operating income................................ 1,822 433 1,253
Other Income - net (Note 11).................... 115 186 172
Interest expense (Notes 3 and 6)................ (618) (603) (473)
-------------------------------------------------------------------------------
Income before income taxes...................... 1,319 16 952
Income taxes (Note 5)........................... (465) 11 (332)
-------------------------------------------------------------------------------
Net Income...................................... $ 854 $ 27 $ 620
-------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges.............. 2.6 1.0 2.4
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying accounting policies and notes to the financial statements
are an integral part of these statements.
F-3
<PAGE>
________________________________________________________________________________
Statement of Consolidated Financial Position
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
At December 31, 1999 and 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
-------------------------------------------------------------------------------------------
Current Assets Cash and temporary investments........................... $ 83 $ 35
Accounts receivable - net (Note 4)....................... 418 494
Inventories.............................................. 329 337
Current deferred tax asset (Note 5)...................... 48 130
Other current assets..................................... 78 85
-------------------------------------------------------------------------------------------
Total Current Assets..................................... 956 1,081
-------------------------------------------------------------------------------------------
Investments Investments in and advances to affiliated companies
(Note 2)............................................... 657 520
Other investments........................................ 95 171
-------------------------------------------------------------------------------------------
Total.................................................... 752 691
-------------------------------------------------------------------------------------------
Properties Cost (Notes 6 and 7)
Road and other......................................... 25,781 24,789
Equipment.............................................. 7,755 7,545
-------------------------------------------------------------------------------------------
Total.................................................... 33,536 32,334
Accumulated depreciation and amortization................ (6,490) (5,871)
-------------------------------------------------------------------------------------------
Properties - Net......................................... 27,046 26,463
-------------------------------------------------------------------------------------------
Other Other Assets............................................. 126 122
-----------------------------------------------------------------------------------------
Total Assets............................................. $28,880 $28,357
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
-------------------------------------------------------------------------------------------
Current Liabilities Accounts payable......................................... $ 496 $ 493
Accrued wages and vacation............................... 377 380
Accrued casualty costs................................... 344 364
Income and other taxes................................... 252 297
Debt due within one year (Note 6)........................ 210 178
Interest payable......................................... 97 110
Other current liabilities................................ 669 730
-------------------------------------------------------------------------------------------
Total.................................................... 2,445 2,552
-------------------------------------------------------------------------------------------
Other Liabilities and Intercompany borrowings from UPC (Notes 2, 3 & 6)........ 5,357 5,368
Stockholders' Equity Third-party debt due after one year (Notes 6 and 7)...... 2,419 2,606
Deferred income taxes (Note 5)........................... 7,266 6,759
Accrued casualty costs................................... 911 928
Retiree benefit obligations (Note 8)..................... 677 707
Other long-term liabilities (Note 10).................... 533 811
Redeemable preference shares............................. 25 27
Common stockholders' equity (Page F-6)................... 9,247 8,599
-------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity............... $28,880 $28,357
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying accounting policies and notes to consolidated financial
statements are an integral part of these statements.
F-4
<PAGE>
Statement of Consolidated Cash Flows
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For The Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash from Operations Net Income........................................ $ 854 $ 27 $ 620
Non-Cash Charges to Income:
Depreciation and amortization.................. 1,034 1,003 972
Deferred income taxes (Note 5)................. 592 7 336
Other, net..................................... (560) (218) (289)
Changes in current assets and liabilities......... 66 (266) 120
-------------------------------------------------------------------------------------------
Cash from Operations.............................. 1,986 553 1,759
-------------------------------------------------------------------------------------------
Investing Activities Capital investments............................... (1,777) (2,044) (2,035)
Proceeds from sale of assets and other investing
activities..................................... 211 212 265
-------------------------------------------------------------------------------------------
Cash Used in Investing Activities................. (1,566) (1,832) (1,770)
-------------------------------------------------------------------------------------------
Financing Activities Cash dividends paid to parent (Note 9)............ (200) (320) (420)
(Note 2) Debt repaid....................................... (239) (276) (210)
Financings (Note 6)............................... 77 486 180
Advances, net..................................... (10) 1,374 438
Other............................................. - - (3)
-------------------------------------------------------------------------------------------
Cash Provided by (Used in) Financing Activities... (372) 1,264 (15)
-------------------------------------------------------------------------------------------
Net Change in Cash and Temporary Investments...... $ 48 $ (15) $ (26)
Cash at Beginning of Year......................... 35 50 76
-------------------------------------------------------------------------------------------
Cash at End of Year............................... $ 83 $ 35 $ 50
- -------------------------------------------------------------------------------------------------------------------------
Changes in Current Accounts receivable............................... $ 76 $ 58 $ (105)
Assets and Liabilities Inventories....................................... 8 (49) 7
Other current assets.............................. 89 36 21
Accounts, wages and vacation payable.............. - (169) 205
Debt due within one year.......................... 32 (51) 106
Other current liabilities......................... (139) (91) (114)
-------------------------------------------------------------------------------------------
Total............................................. $ 66 $ (266) $ 120
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying accounting policies and notes to consolidated financial
statements are an integral part of these statements.
F-5
<PAGE>
________________________________________________________________________________
Statement of Changes in Common Stockholders' Equity
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For The Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Millions of Dollars 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock Common stock, $10.00 par value:
(Note 9) authorized 9,200 shares and
4,465 outstanding..................... $ - $ - $ -
-----------------------------------------------------------------------------
Class A Stock Class A stock - $10.00 par value:
(Note 9) authorized 800 shares and
388 outstanding....................... - - -
-----------------------------------------------------------------------------
Paid-in Surplus Balance at end and beginning of period.. 4,782 4,782 4,782
-----------------------------------------------------------------------------
Retained Earnings Beginning of year....................... 3,817 4,110 3,939
Net income.............................. 854 27 620
Dividends to parent (Notes 6 and 9)..... (200) (320) (449)
-----------------------------------------------------------------------------
End of Year............................. 4,471 3,817 4,110
-----------------------------------------------------------------------------
Accumulated Other Balance at beginning of period.......... - - -
Comprehensive Minimum pension liability adjustment.... (2) - -
Income (Note 14) Foreign translation adjustment.......... (4) - -
-----------------------------------------------------------------------------
Balance at end of period................ (6) - -
-----------------------------------------------------------------------------
Total Common Stockholder's Equity....... $9,247 $8,599 $8,892
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying accounting policies and notes to consolidated financial
statements are an integral part of these statements
F-6
<PAGE>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of Union Pacific Railroad Company, a Delaware corporation (the
Registrant), and all subsidiaries and certain affiliates (collectively, the
Company or Railroad). The Registrant is a wholly owned subsidiary of Union
Pacific Corporation, a Utah corporation (the Corporation or UPC). Investments in
affiliated companies (20% to 50% owned and/or where the Company exercises
significant influence over an investee's operations) are accounted for on the
equity method. All material intercompany transactions are eliminated.
Cash and Temporary Investments - Temporary investments are stated at cost that
approximates fair value and consist of investments with original maturities of
three months or less.
Inventories - Inventories consist of materials and supplies carried at the lower
of cost or market.
Property and Depreciation - Properties are carried at cost. Provisions for
depreciation are computed principally on the straight-line method based on
estimated service lives of depreciable property.
The cost (net of salvage) of depreciable rail property retired or replaced
in the ordinary course of business is charged to accumulated depreciation. A
gain or loss is recognized in other income for all other property upon
disposition.
The cost of internally developed software is capitalized and amortized over
a five-year period. An obsolescence review of capitalized software is performed
on a periodic basis.
Revenue Recognition - Transportation revenues are recognized on a percentage-of-
completion basis, while delivery costs are recognized as incurred.
Hedging Transactions - The Company periodically hedges fuel purchases.
Unrealized gains and losses from fuel-related swaps, futures and forward
contracts are deferred and recognized as the fuel is consumed. The effect of
maturities, terminations and sales is recorded in earnings in the period the
instrument terminates (Note 4).
Use of Estimates - The consolidated financial statements of the Company include
estimates and assumptions regarding certain assets, liabilities, revenues and
expenses and the disclosure of certain contingent assets and liabilities.
Actual future results may differ from such estimates.
Change in Presentation - Certain prior year amounts have been reclassified to
conform to the 1999 financial statement presentation.
F-7
<PAGE>
1. Nature of Operations - The Registrant, a Class I railroad incorporated in
Delaware and a wholly owned subsidiary of the Corporation, together with a
number of wholly owned and majority-owned subsidiaries, certain affiliates
and various minority-owned companies, 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 as of October 1, 1996, the
rail operating subsidiaries of Southern Pacific Rail Corporation (Southern
Pacific or SP). The Company expects to complete the integration of the
operations of Southern Pacific over the next 24 months. In addition, during
1997, the Railroad and a consortium of partners were granted a 50-year
concession to operate the Pacific-North and Chihuahua Pacific lines in
Mexico (Note 2). The Railroad made an additional investment in the
consortium in 1999.
The Railroad has over 33,000 route miles linking Pacific Coast and Gulf
Coast ports to the Midwest and eastern United States gateways and providing
several north/south corridors to key Mexican gateways. The Railroad serves
the western two-thirds of the country and maintains coordinated schedules
with other carriers for the handling of freight to and from the Atlantic
Coast, the Pacific Coast, the Southeast, the Southwest, Canada and Mexico.
Export and import traffic is moved through Gulf Coast and Pacific Coast
ports and across the Mexican and (primarily through interline connections)
Canadian borders. The Railroad is subject to price and service competition
from other railroads, motor carriers and barge operators.
Approximately 87% of the Railroad's 52,000 employees are represented by
rail unions. During 1996, nearly all of UPRR's unionized workforce ratified
five-year national agreements, which include a combination of general wage
increases and lump-sum payments. In addition, the agreements provide for
increased flexibility in work rules. Negotiations under the Railway Labor
Act for a new national agreement for all crafts began in late 1999 and are
in the initial stages. Under the conditions imposed by the Surface
Transportation Board of the U.S. Department of Transportation (STB) in
connection with the Southern Pacific acquisition, labor agreements between
the Railroad and the unions representing SP employees must be negotiated
before the UPRR and SP rail systems can be fully integrated. The Company has
successfully reached agreements with the shopcraft, carmen, clerical and
maintenance-of-way unions. By the end of 1999, negotiations with other
operating crafts were nearly complete, with only one hub-and-spoke agreement
(Los Angeles) left to implement in early 2000. The terms of ratified and
pending labor agreements are not expected to have a material adverse effect
on the Company's results of operations.
2. Acquisitions
Southern Pacific - 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 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,
primarily employees involved in activities other than train, engine and yard
activities. The Company is also 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 3,100 employees and relocated 4,300
employees due to merger implementation activities. The Company recognized a
$958 million pre-tax liability in the SP purchase price allocation for costs
associated with SP's portion of these activities. In addition, the Company
expects to incur between $65 million and $95 million over the remaining
merger implementation period in pre-tax, acquisition-related costs for
severing or relocating UPRR employees, disposing of certain UPRR facilities,
and training and equipment upgrading. Earnings for 1999 and 1998 included
$63 million pre-tax or $39 million after-tax, and
F-8
<PAGE>
$69 million pre-tax or $43 million after-tax, respectively, for acquisition-
related costs for UPRR consolidation activities.
The components of the merger liability as of December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
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....................................................... 343 265 78
Contract cancellation fees and facility and line closure costs........ 145 141 4
Relocation costs...................................................... 109 92 17
----------------------------------------------------------------------------------------------------------------
Total................................................................. $958 $859 $99
----------------------------------------------------------------------------------------------------------------
</TABLE>
Merger Liabilities - Merger liability activity reflected 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. The Company charged $45 million and $474 million
against the merger liability in 1999 and 1998, respectively. The Company
expects that the remaining merger payments will be made over the course of
the next 24 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 are translated into U.S.
dollars using current exchange rates 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 (Note
14). The resulting translation adjustments are reflected within the
stockholders' equity component, accumulated other comprehensive income.
3. Related Party Transactions - Amounts due to and from affiliates, including
advances to and borrowings from the Corporation, bear interest at an
annually determined rate which considers the Corporation's cost of debt. Net
intercompany interest expense charged on such amounts was $420 million, $399
million and $279 million in 1999, 1998 and 1997, respectively.
4. Financial Instruments
Strategy and Risk - The Company uses derivative financial instruments in
limited instances and for other than trading purposes to manage risk related
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
movements.
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 counterparties was $22 million at
December 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.
F-9
<PAGE>
Determination of Fair Value - The fair market values of the Company's
derivative financial instrument positions at December 31, 1999 and 1998,
detailed below, were determined based upon current fair market values as
quoted by recognized dealers or developed based upon the present value of
expected future cash flows discounted at the applicable U.S. Treasury rate
and swap spread.
Fuel Strategy - Fuel costs are a significant portion of the Company's total
operating expenses. As a result of the significance of fuel costs and the
historical volatility of fuel prices, the Company periodically use swaps,
futures and/or forward contracts to mitigate the impact of fuel price
volatility. The purpose of this program is to protect the Company's
operating margins and overall profitability from adverse fuel price changes.
The following is a summary of the Company's financial instruments at
December 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Millions, Except Percentages and Average Commodity Prices 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Fuel Hedging:
Number of gallons hedged for 1999................................... - 844
Percentage of forecasted 1999 fuel consumption hedged............... - 64%
Average price of 1999 hedges outstanding (per gallon) [a]........... - $0.41
Number of gallons hedged for 2000................................... 126 -
Percentage of forecasted 2000 fuel consumption hedged............... 10% -
Average price of 2000 hedges outstanding (per gallon) [a]........... $0.40 -
</TABLE>
[a] Excluded taxes and transportation costs.
The asset and liability positions of the Company's outstanding financial
instruments at December 31, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Millions of Dollars 1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Fuel Hedging:
Gross fair market asset position................. $ 22 $ -
Gross fair market (liability) position........... - (49)
--------------------------------------------------------------------------
Total asset (liability) position.................... $ 22 $ (49)
--------------------------------------------------------------------------
</TABLE>
The Company's use of financial instruments for fuel hedging decreased
fuel costs by $53 million in 1999, increased 1998 fuel costs by $87 million
and had no significant effect on 1997 fuel costs.
Fair Value of Debt Instruments - The fair value of the Company's long- and
short-term debt has been estimated using quoted market prices or current
borrowing rates. At December 31, 1999, the fair value of total debt was less
than the carrying value by approximately $55 million. Approximately $445
million of fixed-rate debt securities contain call provisions that allow the
Company to retire the debt instruments prior to final maturity subject, in
certain cases, to the payment of premiums.
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 December 31, 1999 and
December 31, 1998, accounts receivable are presented net of $576 million and
$580 million, respectively, of receivables sold.
5. Income Taxes - The Company is included in the consolidated income tax return
of the Corporation. The consolidated income tax liability of the Corporation
is allocated among the parent and its subsidiaries on the basis of their
separate contributions to the consolidated income tax liability, with full
benefit of tax losses and
F-10
<PAGE>
credits made available through consolidation by allocation to the individual
companies generating such losses and credits.
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
(Millions of Dollars) 1999 1998 1997
--------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal................................. $(124) $ (15) $ 4
State................................... (3) (3) (8)
--------------------------------------------------------------------------
Total current........................ (127) (18) (4)
--------------------------------------------------------------------------
Deferred:
Federal................................. 566 286 304
State................................... 26 15 32
Benefit of net operating loss........... - (294) -
--------------------------------------------------------------------------
Total deferred....................... 592 7 336
--------------------------------------------------------------------------
Total...................................... $ 465 $ (11) $ 332
--------------------------------------------------------------------------
</TABLE>
Deferred tax liabilities (assets) comprise the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
(Millions of Dollars) 1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Net current deferred tax asset................ $ (48) $ (130)
--------------------------------------------------------------------------
Excess tax over book depreciation............. 7,493 7,322
State taxes - net............................. 546 530
SP merger reserves............................ (35) (50)
Long-term liabilities......................... (314) (328)
Retirement benefits........................... (254) (272)
Alternative minimum tax....................... (5) (5)
Net operating loss............................ (486) (719)
Other......................................... 321 281
--------------------------------------------------------------------------
Net long-term deferred tax liability.......... 7,266 6,759
--------------------------------------------------------------------------
Net deferred tax liability.................... $7,218 $6,629
--------------------------------------------------------------------------
</TABLE>
The Company has a deferred tax asset reflecting the benefits of $1,388
million in net operating loss carryforwards, which expire as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
(Millions of Dollars)
--------------------------------------------------------------------------
<S> <C>
Expiring December 31:
2002....................................................... $ 139
2003....................................................... 262
2004....................................................... 134
2005....................................................... 136
2006....................................................... 226
2007-2018.................................................. 491
--------------------------------------------------------------------------
Total...................................................... $1,388
--------------------------------------------------------------------------
</TABLE>
The Internal Revenue Code limits a corporation's ability to utilize net
operating loss carryforwards. The Company does not expect these limits to
impact its ability to utilize its carryforwards. The Company has analyzed
its deferred tax assets and believes a valuation allowance is not necessary.
F-11
<PAGE>
A reconciliation between Federal statutory and effective tax rates is as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate........................... 35.0% 35.0% 35.0%
State taxes - net............................ 1.1 (75.0) 1.6
Dividend exclusion........................... (0.9) (75.0) (1.2)
Tax settlements.............................. (1.2) - (0.6)
Non-deductible expenses...................... 1.3 62.7 0.9
Property contributions....................... (0.3) (18.8) (0.9)
Other........................................ 0.2 2.3 0.1
--------------------------------------------------------------------------
Effective tax rate........................... 35.2% (68.8)% 34.9%
--------------------------------------------------------------------------
</TABLE>
The Company is part of the IRS Coordinated Examination Program;
therefore every year is examined by the IRS. All years prior to 1986 are
either closed or have only immaterial issues outstanding. Years 1986-1998
are currently under examination. The Company believes it has adequately
provided for federal and state income taxes.
Net payments (refunds) of income taxes were $(134) million in 1999,
$(49) million in 1998 and $49 million in 1997.
6. Debt
Total debt is summarized below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
(Millions of Dollars) 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Intercompany borrowings from UPC, 7.5%..................... $5,357 $5,368
Capitalized leases, due through 2018....................... 1,341 1,429
Equipment obligations, 6.0% to 10.3% due through 2019...... 921 857
Notes and debentures, 0% to 11.5% due through 2054......... 227 253
Mortgage bonds, 4.3% to 5.0% due through 2030.............. 175 175
Term floating rate debt, 6.2% through 2012................. - 105
Tax-exempt financings, 4.2% through 2015................... 12 12
Unamortized discount....................................... (47) (47)
------------------------------------------------------------------------------------
Total debt.............................................. 7,986 8,152
------------------------------------------------------------------------------------
Less current portion....................................... (210) (178)
------------------------------------------------------------------------------------
Total long-term debt....................................... $7,776 $7,974
------------------------------------------------------------------------------------
</TABLE>
Debt Maturities - For each year, 2000 through 2004, debt maturities are $210
million, $209 million, $198 million, $333 million and $258 million,
respectively. Interest payments approximate gross interest expense.
Mortgaged Properties - Approximately 30% of all rail equipment and other
railroad properties secures outstanding equipment obligations and mortgage
bonds.
Income-Based Securities - The Company has certain debt instruments which
contain provisions that limit the payment of interest, require sinking fund
installments and impose certain restrictions in the event all interest is
not paid. Other debt instruments contain provisions that may impose
restrictions on the Company's ability to declare dividends on certain
classes of capital stock (Note 9). A description of those debt instruments
follows.
MPRR Mortgage Bonds - The Company is the obligor under the Missouri Pacific
Railroad Company 4 1/4% First Mortgage Bonds due 2005 (the MPRR First
Mortgage Bonds) and the Missouri Pacific Railroad Company 4 3/4% General
(Income) Mortgage Bonds, Series A and Series B, due 2020 and 2030,
respectively (the MPRR General Mortgage Bonds). Payment of current interest
on the MPRR First Mortgage Bonds is mandatory, but current
F-12
<PAGE>
interest on the MPRR General Mortgage Bonds must be paid only to the extent
that there is available income, as defined in the mortgages, remaining after
allocation to a capital fund for the purpose of reimbursing the Company for
certain capital expenditures and to the payment of certain sinking fund
installments required on the MPRR First Mortgage Bonds. If available income
is insufficient to pay interest in any calendar year, the unpaid interest
accumulates to an amount not in excess of 13 1/2% of the principal amount of
the MPRR General Mortgage Bonds and is paid in subsequent years only to the
extent that there is available income remaining after payment of current
interest.
MPRR Debentures - The Company is the obligor under the Missouri Pacific
Railroad Company 5% Income Debentures due 2045 (the MPRR Debentures).
Current interest on the MPRR Debentures must be paid only to the extent that
there is available income, as defined in the debenture, remaining after
allocation to a capital fund for the purpose of reimbursing the Company for
certain capital expenditures, to the payment of certain sinking fund
installments on the MPRR First Mortgage Bonds, to the payment of current and
accumulated interest on the MPRR General Mortgage Bonds and to the payment
of certain sinking fund installments on the MPRR General Mortgage Bonds.
MKT Subordinated Income Debentures - The Company is the obligor under
Missouri-Kansas-Texas Railroad Company (MKT) 5 1/2% Subordinated Income
Debentures due 2033 (the MKT Debentures). Current interest on the MKT
Debentures must be paid only to the extent that there is available income,
as defined in the indenture, remaining after allocation to a capital fund
for the purpose of reimbursing the Company for certain capital expenditures.
Unpaid interest accumulates to an amount not in excess of 16 1/2% of the
principal amount of the MKT Debentures and is paid only to the extent that
there is available income remaining after payment of current interest.
Amounts in the capital fund for the MKT Debentures which are unused or
unappropriated for the reimbursement of capital expenditures may not exceed
$4.0 million at any time.
MKT Income Certificates - The Company has also assumed certain certificates
constituting a charge on income (the Certificates) issued by MKT. The
Certificates do not bear interest, and payments to a sinking fund for the
Certificates are made only from available income, as defined in such
Certificates. Available income must be applied to the capital fund, current
and accumulated interest on the MKT Debentures and a sinking fund for the
MKT Debentures before any payment is made to the sinking fund for the
Certificates.
Interest Payments - Interest is payable annually on April 1 based on the
previous year's available income. The Company paid no interest for 1998 and
$3.5 million for 1997 on the MPRR General Mortgage Bonds, no interest for
1998 and $5.0 million for 1997 on the MPRR Debentures, and no interest in
1998 and $1.5 million for 1997 on the MKT Debentures. The Company generated
available income in 1999. As a result, 1999 and 1998 interest payments of
$7.0 million will be made on the MPRR General Mortgage Bonds, 1999 and 1998
interest payments of $2.8 million on the MKT Debentures, and the 1999
interest payments of $5.0 million on the MPRR Debentures.
Sinking Fund Contributions - In addition, because the Company generated
available income in 1999, $2.2 million will be applied to the sinking fund
for the MPRR First Mortgage Bonds and the MPRR General Mortgage Bonds, $62.3
million to the capital funds related to the MKT Debentures and Certificates
and $1.2 million to the sinking funds for the MKT Debenture and the
Certificates. Amounts payable to the MPRR First Mortgage Bonds, MPRR General
Mortgage Bonds, the MKT Debentures or the Certificates sinking funds may be
covered by the cost of securities previously repurchased by the Company or
its predecessors.
Dividend Restriction - At December 31, 1999, the amount of retained earnings
available for dividends under the MPRR Mortgage Bonds and MPRR Debentures
was $3.6 billion.
7. Leases - The Company leases certain locomotives, freight cars, trailers and
other property. Future minimum lease payments for capital and operating
leases with initial or remaining non-cancelable lease terms in excess of one
year as of December 31, 1999 are as follows:
F-13
<PAGE>
<TABLE>
<CAPTION>
Operating Capital
(Millions of Dollars) Leases Leases
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2000......................................................................... $ 399 $ 214
2001......................................................................... 373 220
2002......................................................................... 301 192
2003......................................................................... 223 183
2004......................................................................... 202 197
Later years.................................................................. 1,868 1,176
- ---------------------------------------------------------------------------------------------------------------
Total minimum payments...................................................... $3,366 2,182
- ---------------------------------------------------------------------------------------------------------------
Amount representing interest................................................ (841)
- ---------------------------------------------------------------------------------------------------------------
Present value of minimum lease payments..................................... $1,341
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Rent expense for operating leases with terms exceeding one month was
$609 million in 1999, $573 million in 1998 and $495 million in 1997.
Contingent rentals and sub-rentals are not significant.
8. Retirement Plans
Benefit Summary - The Company provides defined benefit retirement income to
eligible non-union employees through qualified and non-qualified
(supplemental) pension plans of the Company. In addition, all non-union and
certain of the Company's union employees participate in defined contribution
medical and life insurance programs for retirees. All Railroad employees are
covered by the Railroad Retirement System (System).
Funding and Benefit Payments - Qualified and non-qualified pension benefits
are based on years of service and the highest compensation during the latest
years of employment. The qualified plans are funded based on the Projected
Unit Credit actuarial funding method and are funded at not less than the
minimum funding standards set forth in the Employee Retirement Income
Security Act of 1974, as amended. The Company has settled a portion of the
non-qualified unfunded supplemental plan's accumulated benefit obligation by
purchasing annuities. The Company also provides medical and life insurance
benefits on a cost sharing basis for qualifying employees. These costs are
funded as incurred. In addition, contributions made to the System are
expensed as incurred and amounted to approximately $426 million in 1999,
$411 million in 1998 and $392 million in 1997.
The following illustrates the change in the Company's projected
benefit obligation for 1999 and 1998:
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
---------------------------------------------------------------
(Millions of Dollars) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net benefit obligation at beginning of year........... $1,516 $1,385 $ 378 $ 368
Service cost.......................................... 26 20 4 4
Interest cost......................................... 98 100 25 25
Plan amendments....................................... 33 2 - (1)
Actuarial (gain) loss................................. (201) 95 (19) 6
Gross benefits paid................................... (90) (86) (31) (24)
- ---------------------------------------------------------------------------------------------------------------------
Net benefit obligation at end of year................. $1,382 $1,516 $ 357 $ 378
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
Changes in the Company's benefit plan assets are summarized as follows for
1999 and 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
---------------------------------------------------------------
(Millions of Dollars) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning of year........ $1,557 $1,390 $ - $ -
Actual return on plan assets.......................... 254 249 - -
Employer contributions................................ 30 4 31 24
Gross benefits paid................................... (90) (86) (31) (24)
- ---------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year.............. $1,751 $1,557 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of funded status of the benefit plans for 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
---------------------------------------------------------------
(Millions of Dollars) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status at end of year.......................... $ 369 $ 41 $(357) $(378)
Unrecognized net actuarial gain....................... (747) (399) (18) (20)
Unrecognized prior service cost (credit).............. 111 71 (53) (36)
Unrecognized net transition obligation................ (8) (10) - -
- ---------------------------------------------------------------------------------------------------------------------
Net liability recognized at end of year............... $(275) $(297) $(428) $(434)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1999 and 1998, $26 million and $24 million, respectively, of total
pension and other postretirement liability were reclassified as a current
liability. Amounts recognized for the benefit plan liabilities in the
statement of consolidated financial position for 1999 and 1998 consist of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
---------------------------------------------------------------
(Millions of Dollars) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid benefit cost.................................. $ 2 $ 2 $ - $ -
Accrued benefit cost.................................. (277) (299) (428) (434)
Additional minimum liability.......................... (31) (14) - -
Intangible asset...................................... 28 14 - -
Accumulated other comprehensive income................ 3 - - -
- ---------------------------------------------------------------------------------------------------------------------
Net liability recognized at end of year............... $(275) $(297) $(428) $(434)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
The components of the Company's net periodic pension costs for the
years ended December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
---------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost...................................... $ 26 $ 20 $ 16 $ 4 $ 4 $ 4
Interest cost..................................... 98 100 87 25 25 26
Expected return on assets......................... (116) (107) (81) - - -
Amortization of:
Transition obligation........................... (2) 3 3 - - -
Prior service cost (credit)..................... 11 8 7 (3) (3) (3)
Actuarial gain (loss)............................. (9) 3 (9) (1) (1) (2)
- -----------------------------------------------------------------------------------------------------------------------------
Total net periodic benefit cost................... $ 8 $ 27 $ 23 $ 25 $ 25 $ 25
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of year-end 1999 and 1998, approximately 25% and 31%, respectively,
of the funded plans' assets were held in fixed-income and short-term
securities, with the remainder in equity securities.
The weighted-average actuarial assumptions for the years ended
December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate.................................... 8.0% 6.75% 7.0% 8.0% 6.75% 7.0%
Expected return on plan assets................... 10.0 9.0 9.0 N/A N/A N/A
Rate of compensation increase.................... 5.0 4.75 5.0 5.0 4.75 5.0
Health care cost trend:
Current........................................ N/A N/A N/A 7.7 9.0 9.0
Level in 2005.................................. N/A N/A N/A 5.5 4.5 4.5
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amount reported for health care plans. A one-percentage point change in the
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
One percentage One percentage
(Millions of Dollars) point increase point decrease
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total service and interest cost components............. $ 3 $ (3)
Effect on postretirement benefit obligation...................... 34 (29)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
9. Capital Stock and Dividend Restrictions - The Board of Directors of the
Registrant has restricted the availability of retained earnings for payment
of dividends by $131 million. This represents (a) the amount by which the
estimated fair value of the Registrant's investment in its non-transportation
subsidiaries, as determined by the Board of Directors of the Registrant,
exceeded the net book value of such investment, which was transferred to the
Corporation by means of a dividend in June 1971 ($110 million) and (b) the
amount by which the fair market value exceeded the book value of certain
investment securities which were transferred to the Corporation by means of a
dividend in November 1972 ($21 million).
The Company's capital structure consists of Class A Stock and Common
Stock. The Class A Stock is entitled to a cash dividend whenever a dividend is
declared on the Common Stock, in an amount which equals 8 percent of the sum
of the dividends on both the Class A Stock and the Common Stock. However,
dividends may be declared and paid on the Class A Stock only when there is
unappropriated available income in respect
F-16
<PAGE>
of prior calendar years which is sufficient to make a sinking fund payment
equal to 25 percent of such dividend for the benefit of the MKT Debentures
or the Certificates (Note 6). To the extent that dividends are paid on the
Common Stock but not the Class A Stock because the amount of unappropriated
available income is insufficient to make such a sinking fund payment, a
special cash dividend on the Class A Stock shall be paid when sufficient
unappropriated available income exists to make the sinking fund payment.
Such insufficiency does not affect the Company's right to declare dividends
on the Common Stock. For calendar year 1998, the Company did not have
sufficient available income to declare a special cash dividend on the Class
A Stock (Note 6). Dividends in arrears on the Class A Stock total $99
million.
The number of shares shown in the Statement of Changes in
Stockholders' Equity on page F-6 excludes 2,665 shares of Common Stock and
232 shares of Class A Stock owned by Southern Pacific Rail Corporation,
whose results are included in the consolidated financial statements.
10. 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
1998 and 1997. No additional amounts were accrued in 1999.
Environmental Issues - For environmental sites where remediation costs can
be reasonably determined, and where such remediation is probable, the
Company has recorded a liability. At December 31, 1999, the Company had
accrued $197 million for estimated future environmental costs and believes
it is reasonably possible that actual environmental costs could be lower or
significantly higher than the recorded reserve.
Shareholder Lawsuits - The Corporation 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
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 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. Although settlement discussions are
proceeding in good faith, there can be no assurance that they will be
successful.
In addition to the class action litigation, a purported derivative
action was filed on behalf of the Corporation 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 the Corporation and the
Railroad and, as nominal defendants, the
F-17
<PAGE>
Corporation and the Railroad. The derivative action alleges, among other
things, that the named directors breached their fiduciary duties to the
Corporation 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 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. In February 1999, the
committee rendered its report, in which it unanimously concluded that
further prosecution of the derivative action on behalf of the Corporation
and the Railroad is not in the best interest of either such company.
Accordingly, the Corporation and the Railroad have filed a motion with the
Court to dismiss the derivative action. The plaintiff has not yet responded
to the motion. The individual defendants also believe that these claims are
without merit and intend to defend them vigorously.
11. Other Income - Other income included the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(Millions of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net gain on asset dispositions....................................... $ 71 $ 124 $ 102
Rental income........................................................ 63 55 75
Interest income...................................................... 10 20 15
Other - net.......................................................... (29) (13) (20)
- --------------------------------------------------------------------------------------------------------------------
Total.............................................................. $ 115 $ 186 $ 172
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
12. Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board 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 Financial Accounting Standards
Board 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. 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 hedging purposes will, upon adoption
of FAS 133, be recorded in the Company's Statement of Financial Position
(Note 4). 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 Company's consolidated financial statements
13. Quarterly Financial Information (Unaudited) - Selected unaudited quarterly
financial information for the Company for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(Millions of Dollars) Mar. 31 Jun. 30 Sep. 30 Dec. 31 Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating 1999 $2,479 $2,491 $2,606 $2,600 $10,176
Revenues: [a] 1998 2,284 2,317 2,360 2,407 9,368
- --------------------------------------------------------------------------------------------------------------------
Operating 1999 364 437 515 506 1,822
Income (Loss):[a] 1998 53 (117) 225 272 433
- --------------------------------------------------------------------------------------------------------------------
Net Income 1999 149 206 234 265 854
(Loss):[a] 1998 (32) (122) 67 114 27
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
[a] 1998 results were negatively impacted by congestion (see Service Recovery
on page F-23).
F-18
<PAGE>
14. Comprehensive Income - The Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" in 1998.
The components of comprehensive income were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income.......................................................... $ 854 $ 27 $ 620
Other comprehensive income (loss):
Minimum pension liability adjustment
(net of tax benefit of $1)..................................... (2) - -
Change in accumulated translation adjustment
(net of tax benefit of $2)..................................... (4) - -
- ------------------------------------------------------------------------------------------------------------------
Total comprehensive income.......................................... $ 848 $ 27 $ 620
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
15. Stock Options and Other Stock Plans
Options - The Railroad participates in the Corporation's stock incentive
programs. The Corporation applies Accounting Principles Board Opinion 25
and related interpretations in accounting for its stock plans. Pursuant to
the Corporation's stock option and retention stock plans for officers and
key employees, 4,807,783, 4,493,578 and 8,997,375 common shares were
available for grant at December 31, 1999, 1998 and 1997, respectively.
Options are granted at market value on the grant date and are exercisable
for a period of 10 years from the grant date. Options generally become
exercisable no earlier than one year after grant.
Retention Stock - The plans provide for awarding retention shares of common
stock or stock units (the right to receive shares of common stock) to
eligible employees. These awards are subject to forfeiture if employment
terminates during the prescribed retention period or, in some cases, if
certain prescribed stock price or other financial criteria are not met.
During 1999, 18,700 retention shares and stock units were issued at a
weighted-average fair value of $53.03. During 1998, 253,736 retention
shares were issued at a weighted-average fair value of $50.87. No retention
shares were issued in 1997. A portion of the retention awards issued in
1999 and 1998 are subject to stock price or performance targets. The cost
of retention shares is amortized to expense over the vesting period. In
1999, 1998 and 1997, UPC expensed approximately $2 million, $12 million and
$18 million, respectively, to amortize Railroad retention stock awards.
Executive Stock Purchase Incentive Plan - The Corporation adopted the plan
effective October 1, 1999 in order to encourage and facilitate ownership of
common stock by officers and other key executives of the Corporation and
its subsidiaries and allow the plan participants to share in the same risks
and rewards as the Corporation's other shareholders. Under the plan, the
Railroad participants purchased a total of 542,000 shares of the
Corporation's common stock with the proceeds of 6.02% interest-bearing,
full recourse loans from the Corporation. Loans totaled $25 million.
Deferred cash payments will be awarded to the participants to repay
interest and the loan principal if certain performance and retention
criteria are met within a forty-month period ending January 1, 2003. The
1999 expense amortization attributable to Railroad participants was $1.3
million.
Determination of Fair Value of Options - The fair value of each stock
option granted is estimated for the determination of pro forma expense
using a Black-Scholes option-pricing model. The expense impact of the
option grant is reflected in pro forma results over the options' vesting
period and is determined as of the date of grant. During 1999, 40,750
options were granted at a weighted-average option price of $54.35. The pro
forma expense determination for options granted in 1999 was valued using
the following weighted-average assumptions: dividend yield of 1.8%, risk-
free interest rate of 6.4%, expected option period of four years, and
volatility of 28.3%. During 1998, 14,920,920 options were granted at a
weighted-average option price of $53.27. The pro forma expense
determination for options granted in 1998 was based on the following
weighted-average assumptions: dividend yield of 1.8%, risk-free interest
rate of 4.5%, expected option period of four years, and volatility of
24.2%. The weighted-average fair value of options granted in 1999 and 1998
was $14.84 and
F-19
<PAGE>
$11.73, respectively. There were no options granted during 1997. Pro forma
net income (loss) for 1999, 1998 and 1997 including compensation expense
for options that vested in each year was $805, $(6) and $607, respectively.
Changes in common stock options outstanding were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Weighted-Average
Shares Option Price
Under Option Per Share
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance December 31, 1996....................................... 6,112,726 $43.13
Granted......................................................... - -
Exercised....................................................... (694,775) 32.15
Expired/Surrendered............................................. (70,862) 52.84
- -----------------------------------------------------------------------------------------------------------
Balance December 31,1997........................................ 5,347,089 $44.41
- -----------------------------------------------------------------------------------------------------------
Granted [a]..................................................... 14,920,920 $53.27
Exercised....................................................... (208,984) 24.52
Expired/Surrendered............................................. (44,686) 56.17
- -----------------------------------------------------------------------------------------------------------
Balance December 31, 1998....................................... 20,014,339 $51.19
- -----------------------------------------------------------------------------------------------------------
Granted......................................................... 40,750 $54.35
Exercised....................................................... (276,656) 28.34
Expired/Surrendered............................................. (196,300) 53.04
- -----------------------------------------------------------------------------------------------------------
Balance December 31, 1999....................................... 19,582,133 $51.51
- -----------------------------------------------------------------------------------------------------------
</TABLE>
[a] During 1998, the Corporation implemented a broad-based option program that
granted each Railroad employee 200 options at $55.00 per share. This program
resulted in 11,124,000 new options in 1998.
Stock options outstanding at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Number of Weighted- Average Weighted-Average
Options Years to Expiration Option Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Range of Option Prices:
$6.02 to $42.87............................... 2,300,728 4 $34.40
$45.69 to $48.19.............................. 3,419,220 9 47.42
$52.88 to $60.71.............................. 13,862,185 8 55.37
- -------------------------------------------------------------------------------------------------------------
Balance December 31, 1999...................... 19,582,133 8 $51.51
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options exercisable at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Number of Weighted- Average Weighted-Average
Options Years to Expiration Option Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Range of Option Prices:
$6.02 to $42.87............................... 2,184,062 4 $34.11
$45.69 to $48.19.............................. 3,417,220 9 47.42
$52.88 to $60.71.............................. 13,050,655 8 55.27
- -------------------------------------------------------------------------------------------------------------
Balance December 31, 1999...................... 18,651,937 8 $51.36
- -------------------------------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
1999 COMPARED TO 1998
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.
Net Income - During 1999, the Railroad continued the earnings improvements that
began in the third quarter of 1998. The Railroad continued to benefit from the
service recovery process implemented in 1997 and 1998 described on page F-23.
Rail operations reported net income of $854 million compared to net income of
$27 million in 1998. The increase resulted from improved operations and service
levels, increased revenues in all commodity lines and lower operating costs.
Operating Revenues - Rail operating revenues increased $808 million (9%) to
$10.2 billion. Revenue carloads increased 7% over 1998 with gains in each
commodity group. The increase in revenue carloads resulted from improved
service, market share recovery and a strong economy.
The following tables summarize the year-over-year change in rail commodity
revenue, carloads and average revenue per car by commodity type:
- ---------------------------------------------------------------------------
Commodity Revenue
In Millions of Dollars 1999 1998 % Change
- ---------------------------------------------------------------------------
Agricultural............................ $1,419 $1,303 9
Automotive.............................. 1,048 937 12
Chemicals............................... 1,595 1,535 4
Energy.................................. 2,168 1,996 9
Industrial Products..................... 1,896 1,785 6
Intermodal.............................. 1,725 1,516 14
- ---------------------------------------------------------------------------
Total................................... $9,851 $9,072 9
- ---------------------------------------------------------------------------
Revenue Carloads
In Thousands 1999 1998 % Change
- ---------------------------------------------------------------------------
Agricultural............................ 911 840 8
Automotive.............................. 707 641 10
Chemicals............................... 930 899 3
Energy.................................. 1,872 1,767 6
Industrial Products..................... 1,398 1,320 6
Intermodal.............................. 2,738 2,531 8
- ---------------------------------------------------------------------------
Total................................... 8,556 7,998 7
- ---------------------------------------------------------------------------
Average Revenue Per Car 1999 1998 % Change
- ---------------------------------------------------------------------------
Agricultural............................ $1,558 $1,552 -
Automotive.............................. 1,481 1,461 1
Chemicals............................... 1,715 1,708 -
Energy.................................. 1,158 1,130 2
Industrial Products..................... 1,357 1,352 -
Intermodal.............................. 630 599 5
- ---------------------------------------------------------------------------
Total................................... $1,151 $1,134 2
- ---------------------------------------------------------------------------
F-21
<PAGE>
Agricultural - Revenue increased 9%, reflecting an 8% improvement in carloads.
Carloads increased primarily due to stronger exports and improved service
levels, which resulted in increased shipments of wheat, corn, meals and oils,
fresh products and beverages. Carloads also increased due to pre-harvest
shipments of stored crops to clear storage. Average revenue per car was flat, as
longer hauls in meals and oils and a price increase on wheat shipments were
offset by a shift in corn movements to shorter-haul Gulf Coast moves versus
longer-haul Pacific Northwest moves.
Automotive - Revenue increased 12%, as a result of a 10% increase in carloads
and a 1% rise in average revenue per car. The year-over-year increase was driven
by improved market coverage and price increases in a year of record vehicle
production. Improvements in service and the negative impact in 1998 of a strike
against a major auto manufacturer also contributed to the increase in revenue.
These gains were partially offset by the negative impact on rail traffic, due to
the implementation of the joint acquisition of Conrail by two other major
railroads. Average revenue per car increased 1% due to a change in mix and
pricing actions.
Chemicals - A 3% increase in chemical carloads drove a 4% increase in revenue.
Shipments increased due to improved service levels and increased demand for
plastics, liquid and dry chemicals and phosphorous. These gains were partially
offset by lower sulfur moves resulting from decreased production in response to
weak demand and a decline in fertilizer moves resulting from depressed demand
for U.S. farm commodities. Average revenue per car was level, reflecting traffic
improvements in longer-haul plastics, offset by shorter-haul petroleum and
export sulfur moves.
Energy - Revenue was up 9%, as a result of a 6% improvement in carloads and a 2%
rise in average revenue per car. The volume increase was due to increases in the
number of Powder River Basin trains per day, tons per car and average train
length. Colorado and Utah volumes also increased, due to improved service.
Average revenue per car increased resulting from longer-haul Powder River Basin
traffic and an increase in tons per car.
Industrial Products - Revenue increased 6%, due to stronger demand and improved
service. Carloads were up 6% because of increases in lumber, stone and cement
moves, caused by strong construction demand; shipments of recyclables grew
through new business. Gains were partially offset by decreased steel and ferrous
scrap carloads, due to higher imports of lower-priced foreign steel and lost
volumes from a major steel producer who filed for bankruptcy. Gains were also
partially offset by the negative impact on rail traffic, due to the
implementation of the joint acquisition of Conrail by two other major railroads.
Intermodal - Revenue increased 14%, driven by an 8% increase in carloads and a
5% increase in average revenue per car. Carloads improved due to strong demand
from growth in imports from Asia, service improvements and a new premium service
offering. Average revenue per car increased, due to longer-haul shipments and
demand-driven price increases.
Operating Expenses - Operating expenses decreased $581 million (7%) to $8.4
billion in 1999. The lower expenses reflected improved operating efficiency and
service levels and benefits resulting from the continuing integration of
Southern Pacific operations.
Salaries, Wages and Employee Benefits - Labor costs decreased $29 million (1%),
due to productivity gains that resulted in reduced crew costs and lower recrew
rates, partially offset by increases resulting from volume and inflation and
one-time costs recorded in 1999 related to the Southern Pacific merger (see Note
2 to the Consolidated Financial Statements).
Equipment and Other Rents - Expenses decreased $90 million (7%), due primarily
to improvements in cycle time as well as lower prices, partially offset by
higher volume.
F-22
<PAGE>
Depreciation - Expenses increased $31 million (3%), reflecting increased capital
spending in recent years, partially offset by lower depreciation rates for
equipment and track assets. Capital spending totaled $1.8 billion in 1999
compared to $2.0 billion in 1998.
Fuel and Utilities - Expenses were down $9 million (1%). The decrease was
driven by lower fuel prices and improved consumption rates, partially offset by
higher volume. The Railroad hedged 68% of its fuel consumption for 1999 at an
average of 41 cents per gallon (excluding taxes, transportation charges and
regional pricing spreads), which decreased fuel costs by $53 million. At
December 31, 1999, expected fuel consumption for 2000 was 10% hedged at an
average of 40 cents per gallon (excluding taxes, transportation charges and
regional pricing spreads). At December 31, 1998, 64% of 1999 expected fuel
consumption was hedged (see Note 4 to the Consolidated Financial Statements).
Materials and Supplies - Costs increased $25 million (5%), reflecting higher
volumes and increased fleet maintenance.
Casualty Costs - Costs declined $89 million (21%), primarily due to the effect
of lower than expected settlement costs. The decline also reflected an insurance
refund received in 1999 and decreased costs for repairs on cars from other
railroads.
Other Costs - Costs decreased $420 million (33%), reflecting lower state and
local taxes (primarily sales and property taxes), and the impact in 1998 of
customer claims expense.
Operating Income - Operating income increased $1.4 billion to $1.8 billion in
1999. Both 1999 and 1998 operating income included the impact of one-time costs
related to the Southern Pacific merger for severance, relocation and training of
employees. The operating ratio in 1999 was 82.1%, 13.3 percentage points better
than 1998's 95.4% operating ratio.
Non-Operating Items - Other income decreased $71 million (38%) in 1999, due to
the impact in 1998 of a telecommunications contract buyout, sale of a company
aircraft, sale of the Southern Pacific headquarters building and an insurance
recovery for 1997 flood damage received in 1998. Interest expense increased $15
million (2%) in 1999, as a result of higher average debt levels year-over-year
caused by increased borrowings during 1998. Income taxes increased $476 million
in 1999, reflecting higher income before income taxes, partially offset by
settlements related to prior tax years.
1998 COMPARED TO 1997
Service Recovery - Congestion in and around Houston and the coastal areas of
Texas and Louisiana (the Gulf Coast region) began in the third quarter of 1997.
System congestion started in the Gulf Coast region and spread throughout the
system during the third and fourth quarters of 1997, and continued to adversely
affect the Railroad's operations and financial results in 1998. In response to
its operational difficulties, the Railroad adopted certain measures beginning in
1997 designed to alleviate the congestion problems and improve the efficiency
and flexibility of rail operations. To ease system congestion, the Railroad
focused on reducing the number of cars on the system and restoring system
velocity by hiring additional train and engine employees, accelerating and
expanding locomotive purchases and leases, improving management of train crews,
and using outside carriers for haulage and train switching in congested areas.
In 1998, these efforts were supplemented by the institution of directional
running in parts of the Gulf Coast region, establishment of a joint dispatching
center in Texas, and extensive track maintenance and capacity expansion efforts
in UPRR's Central Corridor and southern tier. While in some cases the Railroad's
actions temporarily slowed service, they resulted in improved system velocity.
Also in 1998, UPRR instituted several key initiatives including a new long-term
strategy to improve the effectiveness of the organization. This effort focused
on culture change, business process improvement and decentralization, each of
which was designed to improve customer satisfaction, increase employee
involvement and improve operational efficiency and financial results. The
combination of all of the steps described above (the service recovery process)
allowed the Railroad to
F-23
<PAGE>
alleviate congestion and improve operations throughout its system. However,
despite these improvements, the Railroad's operations and financial results were
significantly impacted by congestion in 1998.
Weather and Other Congestion Issues - During 1998, service in the Railroad's
Central Corridor between Chicago and Utah was slowed by track maintenance and
capacity expansion work. The Railroad also experienced congestion on its lines
in northern California, in the Los Angeles Basin and on the Sunset Route west of
El Paso, Texas. This was caused in part by two derailments that occurred in
July 1998, tight crew supply and limited track capacity in that region, and the
learning curve associated with the integration of the computer system of
Southern Pacific in the region with the Railroad's computer system, which
commenced in July 1998. The Railroad alleviated this congestion by various
measures, including temporarily rerouting trains from this region to other
portions of its system. Late in the third quarter and early in the fourth
quarter of 1998, the Railroad's operations were also adversely affected by
severe weather in the southern portion of its system, including Hurricane
Georges, which disrupted operations in New Orleans and other parts of Louisiana
at the end of September, heavy rains that moved from northern Texas through
Oklahoma and into the Kansas City area in early October, heavy rains that
resulted in severe flooding in central and southern Texas later in October, and
heavy rains and flooding across parts of Oklahoma and Kansas in early November.
The Railroad was able to respond quickly to these problems by rerouting traffic,
repairing damages caused by washouts and restoring service without severe or
lengthy disruptions to the Railroad's operations, which reflected the success of
the Railroad's service recovery process in addressing service and congestion
problems. Despite these external difficulties, the Railroad was able to recoup
the financial loss generated in the first half of 1998 and reported net income
for the full year of 1998.
Net Income - The Railroad returned to profitability in the third quarter of
1998, by posting net income of $67 million after three consecutive quarterly
losses, and continued its earnings improvement in the fourth quarter of 1998,
posting net income of $114 million, as the Railroad began to see the benefits of
implementing its service recovery process. Despite service improvements in the
second half of 1998, year-over-year results were significantly affected by the
congestion problems discussed above. As a result, the Railroad reported net
income of $27 million in 1998 compared to $620 million in 1997.
Operating Revenues - 1998 rail operating revenues were down $613 million over
1997 (6%) to $9.4 billion. Revenue carloads for 1998 of 8.0 million were down 5%
from 1997 loads of 8.5 million. These declines resulted from system congestion,
which significantly lowered overall train velocity and efficiency, weakening
demand for whole grain exports (due to strong worldwide crop yields), and a soft
export market caused by the Asian economic crisis. Average revenue per car was
down 1% for 1998 at $1,134 per car from $1,149 in 1997, driven by a shift in
corn shipments from long-haul Pacific Northwest moves to shorter-haul Gulf Coast
traffic and large volumes of empty repositioning moves for intermodal traffic,
partially offset by longer-haul coal traffic.
The following tables summarize the year-over-year change in rail commodity
revenue, carloads and average revenue per car by commodity type:
- ---------------------------------------------------------------------------
Commodity Revenue
In Millions of Dollars 1998 1997 % Change
- ---------------------------------------------------------------------------
Agricultural............................. $1,303 $1,438 (9)
Automotive............................... 937 950 (1)
Chemicals................................ 1,535 1,715 (10)
Energy................................... 1,996 1,914 4
Industrial Products...................... 1,785 1,954 (9)
Intermodal............................... 1,516 1,741 (13)
- ---------------------------------------------------------------------------
Total.................................... $9,072 $9,712 (7)
- ---------------------------------------------------------------------------
F-24
<PAGE>
- ---------------------------------------------------------------------------
Revenue Carloads
In Thousands 1998 1997 % Change
- ---------------------------------------------------------------------------
Agricultural............................ 840 907 (7)
Automotive.............................. 641 638 -
Chemicals............................... 899 972 (8)
Energy.................................. 1,767 1,736 2
Industrial Products..................... 1,320 1,430 (8)
Intermodal.............................. 2,531 2,770 (9)
- ---------------------------------------------------------------------------
Total................................... 7,998 8,453 (5)
- ---------------------------------------------------------------------------
Average Revenue per Car 1998 1997 % Change
- ---------------------------------------------------------------------------
Agricultural............................ $1,552 $1,585 (2)
Automotive.............................. 1,461 1,490 (2)
Chemicals............................... 1,708 1,764 (3)
Energy.................................. 1,130 1,102 3
Industrial Products..................... 1,352 1,366 (1)
Intermodal.............................. 599 629 (5)
- ---------------------------------------------------------------------------
Total................................... $1,134 $1,149 (1)
- ---------------------------------------------------------------------------
Agricultural - Revenue fell 9% for 1998, as loads finished down 7% and average
revenue per car decreased 2%. Low export demand due to strong worldwide crop
yields, the Asian economic crisis and falling corn prices caused a decline in
corn volumes. System congestion limited traffic for canned and packaged
products, fresh fruit and vegetables, beverages, frozen products and food
grains. Livestock feed declined 16%, as feed additives were replaced by less
expensive corn. These volume declines were partially offset by higher wheat and
meals and oils traffic. Average revenue per car declined 2%, as a result of a
drop in longer-haul Pacific Northwest corn moves, due to weak export markets.
Automotive - Revenue was down 1%, reflecting flat volume and a 2% decrease in
average revenue per car. Finished vehicles volumes were up 3%, reflecting new
business and growth in existing business, partially mitigated by the effects of
an automotive strike in mid-1998. Parts volumes lost 4% year-over-year, as
volumes fell because of the Railroad's equipment shortages. Average revenue per
car fell 2%, as a result of the new business that generated a shorter length of
haul than existing business.
Chemicals - Carloads fell 8%, and revenues dropped 10% compared to 1997.
Congestion-related diversions to truck, barge and other railroads plagued most
business lines (especially liquid and dry chemicals and petroleum products).
Liquid propane gas traffic was hurt by the introduction of new pipelines, while
the Asian crisis significantly reduced the movements of soda ash. In addition,
an unplanned furnace shutdown reduced shipments of phosphorous. The 3% decline
in average revenue per car was largely due to more short-haul storage-in-transit
moves, fewer high-average revenue per car liquid and dry chemical and soda ash
moves, and the loss of long-haul business due to system congestion.
Energy - Carloads were up 2%, and revenue was up 4% from 1997 levels. Congestion
caused by, among other things, maintenance and capacity expansion in the Central
Corridor and diversion of Illinois traffic hampered coal volumes throughout
1998. However, efficiency gains in both Powder River Basin trains per day and
train length helped boost year-over-year volumes despite the effects of
congestion caused by maintenance and track expansion in the Railroad's Central
Corridor. Colorado and Utah volumes increased due to better service performance.
The 3% increase in average revenue per car was primarily a result of more high-
average revenue per car Powder River Basin traffic.
Industrial Products - Volumes declined 8%, while average revenue per car
declined 1%, resulting in a 9% drop in revenues. Volumes continued to be plagued
by equipment shortages and service issues caused by slowed local switching and
congestion. A large portion of industrial product moves occurred in the
Railroad's southern region, where congestion hit hardest, although service
levels improved in 1998. Shipments of ferrous scrap and steel were
F-25
<PAGE>
lower due to congestion and higher steel imports. Metallic minerals and
paperboard, newsprint and non-metallic products were affected by congestion. In
addition, several of the same commodities were also affected by Central Corridor
congestion due to, among other things, maintenance and capacity expansion and
congestion in the western portion of the Railroad's system, as the final portion
of UPRR's computerized operating system was brought on-line in Southern
Pacific's western territory in the third quarter of 1998. Average revenue per
car fell 1%, due to product mix issues and shortfalls of high-average revenue
per car steel traffic, lumber and metallic minerals.
Intermodal - Revenue declined 13% as volumes fell 9% and average revenue per car
fell 5%. Congestion-related diversions severely affected several intermodal
segments, especially Intermodal Marketing Company/truckload and less-than-
truckload/premium. Volumes also suffered from weak exports due to the Asian
crisis. A partial offset was increased import volumes from various steamship
lines. Average revenue per car fell due to changes in traffic mix and increased
volumes of empty repositioning moves caused by equipment imbalances.
Operating Expenses - Operating expenses were $8.9 billion for 1998, $207 million
(2%) higher than 1997 operating expenses of $8.7 billion. However, second half
1998 operations improved significantly from the first half of 1998.
The following statistical table reflects the improvements in the Railroad's
operating performance in the second half of 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1997 1998
---------------------------- ---------------------------------------
Averages, Except Ratios 2Q 3Q 4Q 1Q 2Q 3Q 4Q
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Seven-Day Loadings (000)........ 170.7 165.9 153.6 152.5 154.9 155.3 160.6
Train Speed (MPH)............... 18.4 15.0 13.2 13.8 14.0 14.4 15.5
Car Cycle Times (Days).......... 12.7 15.2 17.5 17.6 16.4 15.9 14.4
Operating Ratio (%)............. 80.9 82.0 102.5 97.7 105.1 90.5 88.7
- --------------------------------------------------------------------------------------------------------
</TABLE>
Salaries, Wages and Employee Benefits - Labor expenses were $140 million (4%)
higher than 1997. Slower train speeds increased the recrew rate. Higher recrew
rates, inflation and other congestion- and service-related cost overruns
contributed to higher labor costs. These higher costs were partially offset by
lower volumes (gross-ton miles were down 4%) and the elimination of duplicative
positions as part of the Southern Pacific merger implementation.
Equipment and Other Rents - Expenses were up $19 million (1%) versus 1997. Cycle
times were up 2 days from 1997 causing the Railroad to rent more equipment due
to the decrease in equipment utilization. Locomotives leased to alleviate
congestion and support service recovery also increased equipment costs, as
slower train speeds lowered locomotive utilization and increased the need for
additional locomotive power. However, these increases were partially offset by
lower traffic levels due to congestion-related volume shortfalls.
Depreciation - Expense grew $31 million (3%) to $1.0 billion, driven by the
Railroad's extensive capital programs in 1997 and 1998. The Railroad spent over
$2.0 billion on capital projects in 1998 (including $400 million of SP
integration projects).
Fuel and Utilities - Expenses were down $195 million (20%) from 1997. A
reduction of 4% in gross-ton miles year-over-year generated volume-related fuel
savings of $36 million versus 1997. Prices were down 9 cents per gallon to 62
cents, saving $106 million. The fuel consumption rate of 1.39 gallons per
thousand gross-ton miles improved 2% from 1997's 1.42, lowering the Railroad's
fuel costs by $23 million. Hedges of 57% of 1998 fuel volumes increased fuel
costs by $87 million, or 8 cents per gallon (included in the cost per gallon
information above).
Materials and Supplies - Costs for 1998 were down $2 million from 1997 to $513
million caused by favorable contract pricing from economies of scale achieved
from the Southern Pacific merger and lower material transportation costs,
reflecting UPRR's ability to move materials on its rail system rather than by
truck, partially offset by increased fleet maintenance.
F-26
<PAGE>
Casualty Costs - Costs decreased $9 million to $423 million in 1998. Lower
personal injury costs resulted from a decline in average settlement costs and
were partially offset by higher insurance and damaged freight costs.
Other Costs - Expenses increased $223 million (21%) from 1997, reflecting
increased costs for congestion-related customer claims and liquidated damages on
coal contracts. Increased use of trackage rights by competitors and merger-
related cost savings on computers and contract pricing partially offset these
cost increases.
Operating Income - Operating income of $433 million for 1998 compares to $1.3
billion in 1997, reflecting a year-over-year increase in pre-tax congestion
costs and lost revenues, as congestion issues began late in the third quarter of
1997. The operating ratio for 1998 was 95.4%, up 8 points from 1997's 87.4%.
Lost revenues and costs related to service performance were the key drivers of
the change.
Non-Operating Items - Other income was $14 million above 1997, reflecting
increased asset sales and recovery of funds from insurers for 1997 floods.
Interest costs were $130 million (28%) unfavorable to 1997 at $603 million,
reflecting borrowings to fund capital investments that could not be funded from
cash generated at the Railroad due to the effects of system congestion. State
and federal income taxes were $343 million less than 1997, the result of lower
pre-tax income.
OTHER MATTERS
Personal Injury - The average cost of injury-related claims settled in 1999
continued to decline, decreasing 15% compared to the cost of claims settled in
1998. Annual expenses for the Railroad's personal injury-related events were
$228 million in 1999, reflecting lower-than-expected settlement costs, $311
million in 1998 and $328 million in 1997. In 1999, the Railroad's work-related
injuries that resulted in lost job time declined 3% compared to 1998.
Compensation for work-related accidents is governed by the Federal Employers'
Liability Act (FELA). Under FELA, damages are assessed based on a finding of
fault through litigation or on out-of-court settlements. The Railroad offers a
comprehensive variety of services and rehabilitation programs for employees who
are injured at work.
Environmental Costs - The Company generates and transports hazardous and
nonhazardous waste in its current and former operations, and is subject to
federal, state and local environmental laws and regulations. The Company has
identified approximately 400 sites, including 45 sites that are the subject of
enforcement actions by the U.S. government, 28 of which are currently on the
Superfund National Priorities List, at which it is or may be liable for
remediation costs associated with alleged contamination or for violations of
environmental requirements. Certain federal legislation imposes joint and
several liability for the remediation of identified sites; consequently, the
Company's ultimate environmental liability may include costs relating to other
parties, in addition to costs relating to its own activities at each site.
As of December 31, 1999, the Company has accrued a liability of $197 million
for future costs where its obligation is probable and where such costs can be
reasonably estimated. However, the actual costs could be lower or significantly
higher. The liability includes future costs for remediation and restoration of
sites, as well as for ongoing monitoring costs, but excludes any anticipated
recoveries from third parties. Cost estimates are based on information available
for each site, financial viability of other potentially responsible parties, and
existing technology, laws and regulations. The Company believes that it has
adequately accrued for its ultimate share of costs at sites subject to joint and
several liability. However, the ultimate liability for remediation is difficult
to determine because of the number of potentially responsible parties involved,
site-specific cost sharing arrangements with other potentially responsible
parties, the degree of contamination by various wastes, the scarcity and quality
of volumetric data related to many of the sites, and/or the speculative nature
of remediation costs. The majority of the December 31, 1999 environmental
liability is expected to be paid out over the next five years, funded by cash
generated from operations.
Remediation of identified sites previously used in operations, used by
tenants or contaminated by former owners required spending of $56 million in
1999, $58 million in 1998, and $46 million in 1997. The Company is also
F-27
<PAGE>
engaged in reducing emissions, spills and migration of hazardous materials, and
spent $5 million and $9 million in 1999 and 1998, respectively, for control and
prevention. In 2000, the Company anticipates spending $60 million for
remediation and $6 million for control and prevention. The impact of current
obligations is not expected to have a material adverse effect on the results of
operations or financial condition of the Company.
Labor Matters - Approximately 87% of the Railroad's 52,000 employees are
represented by rail unions. Under the conditions imposed by the STB in
connection with the Southern Pacific acquisition, labor agreements between the
Railroad and the unions must be negotiated before the UPRR and Southern Pacific
rail systems can be fully integrated. The Railroad has successfully reached
agreements with the shopcraft, carmen, clerical and maintenance-of-way unions.
By the end of 1999, negotiations with other operating crafts were nearly
complete, with only one hub-and-spoke agreement (Los Angeles) left to implement
in early 2000. Under the hub-and-spoke concept, all operating employees in a
central "hub" are placed under a single set of collective bargaining agreements
with the ability to work on the "spokes" running into and out of the hub.
Negotiations under the Railway Labor Act for a new national labor agreement for
all crafts began in late 1999 and are in the initial stages.
Inflation - The cumulative effect of long periods of inflation has significantly
increased asset replacement costs for capital-intensive companies such as the
Railroad. As a result, depreciation charges on an inflation-adjusted basis,
assuming that all operating assets are replaced at current price levels, would
be substantially greater than historically reported amounts.
Financial Instruments - The Company uses derivative financial instruments, which
are subject to market risk, in limited instances for other than trading purposes
to manage risk related 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 movements (see Note 4 to the Consolidated Financial Statements). The
sensitivity analyses presented below illustrate the economic effect that
hypothetical changes in interest rates or fuel prices could have on the
Company's financial instruments. These hypothetical changes do not consider
other factors that would impact actual results.
Interest Rates - The Company manages its overall exposure to fluctuations in
interest rates by adjusting the proportion of fixed and floating rate debt
instruments within its debt portfolio over a given period. The mix of fixed and
floating rate debt is largely managed through the issuance of targeted amounts
of each as debt matures or incremental borrowings are required. The Company also
obtains additional flexibility in managing interest costs and the interest rate
mix within its debt portfolio by issuing callable fixed-rate debt securities.
The Company has variable-rate debt representing less than 1% of its total
debt at December 31, 1999. If interest rates average 10% higher in 2000 than the
December 31, 1999 rate, the Company's interest expense would increase by less
than $1 million after tax. This amount is determined by considering the impact
of the hypothetical interest rates on the balances of the Company's variable-
rate debt at December 31, 1999.
Market risk for fixed-rate debt is estimated as the potential increase in
fair value resulting from a hypothetical 10% decrease in interest rates as of
December 31, 1999, and amounts to approximately $125 million at December 31,
1999. The fair values of the Company's fixed-rate debt were estimated by
considering the impact of the hypothetical interest rates on quoted market
prices and current borrowing rates.
Fuel - Fuel costs are a significant portion of the Company's total operating
costs. As a result of the significance of fuel costs and the historical
volatility of fuel prices, the Company periodically use swaps, futures and
forward contracts to mitigate the impact of fuel price volatility. The purpose
of this program is to protect the Company's operating margins and overall
profitability from adverse fuel price changes.
As of December 31, 1999, the Company had hedged approximately 10% of its
forecasted 2000 fuel consumption. If fuel prices decrease 10% from the December
31, 1999 level, the corresponding decrease in the value of the Company's fuel
hedging contracts would be approximately $5 million after-tax.
F-28
<PAGE>
Commitments and Contingencies - There are various claims and lawsuits pending
against the Company. In addition, the Company is subject to various federal,
state and local environmental laws and is currently participating in the
investigation and remediation of various sites. A discussion of certain claims,
lawsuits, guarantees and contingencies is set forth in Note 10 to the
Consolidated Financial Statements.
Year 2000 - The Company experienced no significant problems related to the Year
2000 (Y2K) conversion either internally or with its electronic commerce systems
that exchange information with customers, vendors, other railroads and financial
institutions. The Company expensed approximately $46 million to convert its
systems and does not expect to incur any future expense related to Y2K. The
Company's Y2K command center has been demobilized and any subsequent Y2K issues
that arise will be handled in the normal course of operations. The Company
believes its systems have been successfully modified. Although minor Y2K
conversion issues may be uncovered during monthly or quarterly processing
cycles, the Company believes that these will be handled by normal support staff,
and that any future problems related to Y2K issues would not materially impact
operations or financial results.
Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board 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 Financial Accounting Standards Board 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. While
management is still in the process of determining the full effect FAS 133 will
have on the Company's consolidated 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 Consolidated Financial Position (see Note 4 to the
Consolidated Financial Statements). 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.
A LOOK FORWARD
2000 Business Outlook - The Railroad anticipates revenue growth as it continues
to recover market share lost during its service difficulties, as well as from
increased demand for transportation and the introduction of new service
offerings. Operating efficiency is also anticipated to improve in 2000, as
higher train velocity generates improvements in cycle times, lowering costs for
equipment and crews. Fuel prices began to rise in late 1999 and are expected to
continue to increase in 2000. As a result, the Railroad will continue to look
for opportunities to decrease future fuel expense. Ten percent of forecasted
2000 fuel consumption was hedged at December 31, 1999. The Railroad will also
continue to implement the Southern Pacific Merger integration plan to achieve
the operational and financial benefits associated with the merger.
2000 Capital Investments - The Company's 2000 capital expenditures, debt service
requirements and payments related to the integration of Southern Pacific's rail
operations are expected to be funded through cash generated from operations,
additional debt financings and the sale or lease of various operating and non-
operating properties. The Company expects that these sources will continue to
provide sufficient funds to meet cash requirements in the foreseeable future.
The Company expects to spend between $1.9 billion and $2.1 billion on capital
projects in 2000. Capital expenditures will be used to continue capacity
expansion on its main lines, maintain tracks and structures, upgrade and augment
equipment to better meet customer needs, build infrastructure in the Texas area
and develop and implement new technologies.
F-29
<PAGE>
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,
law-suits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity; and statements concerning projections, predictions, expectations,
estimates or forecasts as to the Company's 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 is fully successful in implementing its
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; the impact of
latent year 2000 systems problems; and the outcome of claims and litigation,
including claims arising from environmental investigations or proceedings.
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.
F-30
<PAGE>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
Filed with this Statement
- -------------------------
12 Ratio of Earnings to Fixed Charges.
24 Powers of attorney.
27 Financial Data Schedule.
Incorporated by Reference
- -------------------------
2(a) Agreement and Plan of Merger, dated as of January 29, 1998,
between UPRR and SPT is incorporated herein by reference to
Exhibit 2 to the Company's Current Report on Form 8-K dated
February 13, 1998.
3(a) Amended Certificate of Incorporation of the Company,
effective as of February 1, 1998, is incorporated herein by
reference to Exhibit 3(a) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
3(b) By-Laws of the Company, as amended effective as of November
19, 1998, are incorporated herein by reference to Exhibit
3(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
4 Pursuant to various indentures and other agreements, the
Company has issued long-term debt; however, no such
agreement has securities or obligations covered thereby
which exceed 10% of the Company's total consolidated assets.
The Company agrees to furnish the Commission with a copy of
any such indenture or agreement upon request by the
Commission.
10(a) Amended and Restated Anschutz Shareholders Agreement, dated
as of July 12, 1996, among UPC, UPRR, The Anschutz Company,
Anschutz Foundation and Mr. Philip F. Anschutz, is
incorporated herein by reference to Annex D to the Joint
Proxy Statement/Prospectus included in Post-Effective
Amendment No. 2 to UPC's Registration Statement on Form S-4
(No. 33-64707).
10(b) Agreement, dated September 25, 1995, among UPC, UPRR, MPRR,
SP, SPT, DRGW, SSW and SPCSL, on the one hand, and
Burlington Northern Railroad Company (BN) and The Atchison,
Topeka and Santa Fe Railway Company (Santa Fe), on the other
hand, is incorporated by reference to Exhibit 10.11 to UPC's
Registration Statement on Form S-4 (No. 33-64707).
10(c) Supplemental Agreement, dated November 18, 1995, between
UPC, UPRR, MPRR, SP, SPT, DRGW, SSW and SPCSL, on the one
hand, and BN and Santa Fe, on the other hand, is
incorporated herein by reference to Exhibit 10.12 to UPC's
Registration Statement on Form S-4 (No. 33-64707).
<PAGE>
EXHIBIT 12
----------
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
RATIO OF EARNINGS TO FIXED CHARGES
For the Years Ended December 31,
--------------------------------
(Millions of Dollars, Except for Ratio)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 (a) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations.................. $ 854 $ 27 $ 620 $ 940 $ 867
Undistributed equity earnings........................ (45) (44) (37) (47) (30)
- ------------------------------------------------------------------------------------------------------------------------------
Total operating earnings............................ $ 809 $(17) $ 583 $ 893 $ 837
- ------------------------------------------------------------------------------------------------------------------------------
Income taxes......................................... 465 (11) 332 477 443
- ------------------------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense including amortization of
debt discount..................................... $ 618 $603 $ 473 $ 323 $ 193
Portion of rentals representing an interest factor.. 181 175 158 129 60
- ------------------------------------------------------------------------------------------------------------------------------
Total fixed charges.................................. $ 799 $778 $ 631 $ 452 $ 253
- ------------------------------------------------------------------------------------------------------------------------------
Earnings available for fixed charges................. $2,073 $750 $1,546 $1,822 $1,533
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges................... 2.6 1.0 2.4 4.0 6.0
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 1998 earnings were inadequate to cover fixed charges by $28 million.
<PAGE>
EXHIBIT 24
----------
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
Powers of Attorney
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ PHILIP F. ANSCHUTZ
----------------------
Philip F. Anschutz
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ ROBERT P. BAUMAN
--------------------
Robert P. Bauman
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ RICHARD B. CHENEY
---------------------
Richard B. Cheney
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ E. VIRGIL CONWAY
--------------------
E. Virgil Conway
<PAGE>
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ THOMAS J. DONOHUE
---------------------
Thomas J. Donohue
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ SPENCER F. ECCLES
---------------------
Spencer F. Eccles
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ IVOR J. EVANS
-----------------
Ivor J. Evans
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ ELBRIDGE T. GERRY, JR.
--------------------------
Elbridge T. Gerry, Jr.
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ JUDITH RICHARDS HOPE
------------------------
Judith Richards Hope
<PAGE>
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ RICHARD J. MAHONEY
----------------------
Richard J. Mahoney
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ JAMES A. SHATTUCK
---------------------
James A. Shattuck
I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
corporation (the Railroad), do hereby appoint each of James R. Young, Carl W.
von Bernuth and Thomas E. Whitaker my true and lawful attorney-in-fact and
agent, to sign on my behalf the Railroad's Annual Report on Form 10-K for the
year ended December 31, 1999, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.
/s/ RICHARD D. SIMMONS
----------------------
Richard D. Simmons
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 83
<SECURITIES> 0
<RECEIVABLES> 418
<ALLOWANCES> 0
<INVENTORY> 329
<CURRENT-ASSETS> 956
<PP&E> 33,536
<DEPRECIATION> 6,490
<TOTAL-ASSETS> 28,880
<CURRENT-LIABILITIES> 2,445
<BONDS> 7,776
0
0
<COMMON> 25
<OTHER-SE> 9,247
<TOTAL-LIABILITY-AND-EQUITY> 28,880
<SALES> 0
<TOTAL-REVENUES> 10,176
<CGS> 0
<TOTAL-COSTS> 8,354
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 618
<INCOME-PRETAX> 1,319
<INCOME-TAX> 465
<INCOME-CONTINUING> 854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 854
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
