<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
- OR -
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commission file number 1-6146
UNION PACIFIC RAILROAD COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 94-6001323
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 271-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of April 28, 2000 the Registrant had outstanding 7,130 shares of Common
Stock, $10 par value, and 620 shares of Class A Stock, $10 par value.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE>
UNION PACIFIC RAILROAD COMPANY
INDEX
PART I. FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Item 1: Consolidated Financial Statements:
STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended March 31, 2000 and 1999........ 1
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
At March 31, 2000 and December 31, 1999................... 2
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999........ 3
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2000................. 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. 5-9
Item 2: Management's Narrative Analysis of the Results of Operations 10-13
Item 3: Quantitative and Qualitative Disclosures About Market Risk.. 13
PART II. OTHER INFORMATION
---------------------------
Item 1: Legal Proceedings........................................... 14
Item 6: Exhibits and Reports on Form 8-K............................ 15
Signatures.......................................................... 16
</TABLE>
(i)
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
- --------------------------------------------------------------------------------
Statement of Consolidated Income (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Millions of Dollars, Except Ratios 2000 1999
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues Rail ......................................... $2,637 $2,479
----------------------------------------------------------------
Operating Expenses Salaries, wages and employee benefits ........ 884 905
Equipment and other rents .................... 301 311
Depreciation ................................. 269 258
Fuel and utilities (Note 3) ................. 293 178
Materials and supplies ....................... 144 133
Casualty costs ............................... 84 100
Other costs .................................. 197 230
----------------------------------------------------------------
Total ........................................ 2,172 2,115
----------------------------------------------------------------
Income Operating Income ............................. 465 364
Other income - net (Note 5) .................. 20 23
Interest expense ............................. (151) (156)
----------------------------------------------------------------
Income before Income Taxes ................... 334 231
Income taxes ................................. (120) (82)
----------------------------------------------------------------
Net Income ................................... $ 214 $ 149
----------------------------------------------------------------
Ratio of Earnings to Fixed Charges (Note 6) .. 2.7 2.1
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
-1-
<PAGE>
- ------------------------------------------------------------------------
Statement of Consolidated Financial Position (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, Dec. 31,
Millions of Dollars 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
------------------------------------------------------------------------------------
Current Assets Cash and temporary investments....................... $ 43 $ 83
Accounts receivable (Note 3)......................... 438 418
Inventories.......................................... 315 329
Current deferred tax asset........................... 48 48
Other current assets................................. 94 78
------------------------------------------------------------------------------------
Total................................................ 938 956
------------------------------------------------------------------------------------
Investments Investments in and advances to affiliated companies.. 584 657
Other investments.................................... 94 95
------------------------------------------------------------------------------------
Total................................................ 678 752
------------------------------------------------------------------------------------
Properties Cost................................................. 33,847 33,536
Accumulated depreciation............................. (6,681) (6,490)
------------------------------------------------------------------------------------
Net.................................................. 27,166 27,046
------------------------------------------------------------------------------------
Other Other assets......................................... 132 126
------------------------------------------------------------------------------------
Total Assets......................................... $28,914 $28,880
- -----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------------------------------------------------------
Current Liabilities Accounts payable..................................... $ 473 $ 496
Accrued wages and vacation........................... 373 377
Accrued casualty costs............................... 348 344
Income and other taxes............................... 252 252
Debt due within one year............................. 224 210
Interest............................................. 85 97
Other current liabilities (Note 2)................... 628 669
------------------------------------------------------------------------------------
Total................................................ 2,383 2,445
------------------------------------------------------------------------------------
Other Liabilities and Intercompany borrowing from UPC...................... 5,282 5,357
Stockholders' Equity Third-party debt due after one year.................. 2,364 2,419
Deferred income taxes................................ 7,352 7,266
Accrued casualty costs............................... 891 911
Retiree benefit obligations.......................... 678 677
Other long-term liabilities (Notes 2 and 7).......... 534 533
Redeemable preference shares......................... 25 25
Common stockholders' equity (Page 4)................. 9,405 9,247
------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity........... $28,914 $28,880
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
-2-
<PAGE>
- ------------------------------------------------------------------------
Statement of Consolidated Cash Flows (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For the Three Months Ended March 31, 2000 and 1999
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Millions of Dollars 2000 1999
- ------------------------------------------------------------------------------------------------------
Cash Provided by Net Income........................................... $ 214 $ 149
Operations Non-cash charges to income:
Depreciation..................................... 269 258
Deferred income taxes............................ 87 63
Other - net...................................... (73) (30)
Changes in current assets and liabilities............ (84) (15)
-------------------------------------------------------------------------------
Cash Provided by Operations.......................... 413 425
-------------------------------------------------------------------------------
Investing Activities Capital investments.................................. (359) (363)
Other - net (Note 2)................................. 79 (91)
-------------------------------------------------------------------------------
Cash Used in Investing Activities.................... (280) (454)
-------------------------------------------------------------------------------
Equity and Financing Debt repaid.......................................... (40) (37)
Activities Dividends paid to parent............................. (57) (50)
Advances from affiliated companies - net............. (76) 147
-------------------------------------------------------------------------------
Cash Provided by (Used in) Equity and
Financing Activities............................. (173) 60
-------------------------------------------------------------------------------
Net Change in Cash and Temporary Investments......... (40) 31
Cash at Begining of Period........................... 83 35
-------------------------------------------------------------------------------
Cash at End of Period................................ $ 43 $ 66
- ------------------------------------------------------------------------------------------------------
Changes in Current Accounts receivable.................................. $ (20) $ 14
Assets and Liabilities Inventories.......................................... 14 (6)
Other current assets................................. (16) (2)
Accounts, wages and vacation payable................. (27) 55
Debt due within one year............................. 14 (2)
Other current liabilities............................ (49) (74)
-------------------------------------------------------------------------------
Total................................................ $ (84) $ (15)
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
-3-
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Common Stockholders' Equity (Unaudited)
Union Pacific Railroad and Consolidated Subsidiary and Affiliate Companies
For the Three Months Ended March 31, 2000
- --------------------------------------------------------------------------------
Millions of Dollars
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
[a] [b] Other
Common Class A Paid-in- Retained Comprehensive
Shares Shares Surplus Earnings Income Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999.... - - $4,782 $4,471 $(6) $9,247
- ---------------------------------------------------------------------------------------------------
Net Income...................... 214 214
Other Comprehensive Income:
Foreign Currency Translation... 1 1
-------
Comprehensive Income............ 215
-------
Dividends declared.............. (57) (57)
- ---------------------------------------------------------------------------------------------------
Balance at March 31, 2000....... - - $4,782 $4,628 $(5) $9,405
- ---------------------------------------------------------------------------------------------------
[a] Common stock $10.00 par value; 9,200 shares authorized; 4,465 shares issued
at beginning and end of period.
[b] Class A Stock, $10.00 par value; 800 shares authorized; 388 shares issued
at beginning and end of period.
- ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
-4-
<PAGE>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY AND
AFFILIATE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. Responsibilities For Financial Statements - Union Pacific Railroad Company
(the Registrant), a Class I railroad incorporated in Delaware and a wholly-
owned subsidiary of Union Pacific Corporation (the Corporation or UPC),
together with a number of wholly-owned and majority-owned subsidiaries,
certain affiliates and various minority-owned companies (collectively, the
Company or Railroad), operates various railroad and railroad-related
businesses. The Company's rail operations include for all periods the
operations of Union Pacific Railroad Company, a Utah corporation and
predecessor to the Registrant (UPRR), and the rail operating subsidiaries
of Southern Pacific Rail Corporation (Southern Pacific or SP). The
consolidated financial statements of the Company are unaudited and reflect
all adjustments (consisting only of normal and recurring adjustments) that
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods presented.
The consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results for the year ending December 31,
2000. Certain prior year amounts have been reclassified to conform to the
2000 financial statement presentation.
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, which
are primarily employees involved in activities other than train, engine and
yard activities. In addition, the Company is relocating 4,700 positions,
merging or disposing of redundant facilities, and disposing of certain rail
lines. The Company is also canceling uneconomical and duplicative SP
contracts.
To date the Company has eliminated 3,500 positions and relocated 4,400
employees due to merger implementation activities. The Company recognized a
$958 million pre-tax liability as part of the SP purchase price allocation
for costs associated with SP's portion of these activities. In addition,
the Railroad expects to incur between $20 million and $40 million over the
remaining merger implementation period in pre-tax, acquisition-related
costs for severing or relocating UPRR employees, disposing of certain UPRR
facilities, training and equipment upgrading. Earnings for the three months
ending March 31, 2000 and 1999 included $6 million and $9 million after-
tax, respectively, for acquisition-related costs for UPRR consolidation
activities.
-5-
<PAGE>
The components of the merger liability as of March 31, 2000 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..................................................... 343 268 75
Contract cancellation fees and facility and line closure costs...... 145 141 4
Relocation costs.................................................... 109 93 16
------------------------------------------------------------------------------------------------------
Total............................................................... $958 $863 $95
------------------------------------------------------------------------------------------------------
</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. For the three months ended
March 31, 2000, the Company charged $4 million against the merger
liability. The Company expects that the remaining merger payments will be
made over the course of the next 21 months as labor negotiations are
completed and implemented, and related merger consolidation activities are
finalized.
Mexican Railway Concession - During 1997, the Company and a consortium of
partners were granted a 50-year concession to operate the Pacific-North and
Chihuahua Pacific lines in Mexico and a 25% stake in the Mexico City
Terminal Company at a price of $525 million. The consortium assumed
operational control of both lines in 1998. In March 1999, the Company
purchased an additional 13% ownership interest for $87 million from one of
its partners. The Company now holds a 26% ownership share in the
consortium. The investment is accounted for under the equity method. The
Company's portion of the consortium's assets and liabilities is translated
into U.S. dollars using the exchange rate in effect at the balance sheet
date. The Company's portion of the consortium's net income is translated
into U.S. dollars at weighted-average exchange rates prevailing during the
year. The resulting translation adjustments are reflected within the
stockholders' equity component, accumulated other comprehensive income.
3. Financial Instruments
Strategy and Risk - The Company uses derivative financial instruments in
limited instances and for other than trading purposes to manage risk as it
relates to changes in fuel prices. The Company uses swaps, futures and/or
forward contracts to mitigate the downside risk of adverse price movements;
however, the use of these instruments also limits future gains from
favorable price movements. The purpose of this program is to protect the
Company's operating margins and overall profitability from adverse fuel
price changes.
Market and Credit Risk - The Company addresses market risk related to these
instruments by selecting instruments whose value fluctuations highly
correlate with the underlying item being hedged. Credit risk related to
derivative financial instruments, which is minimal, is managed by requiring
high credit standards for counterparties and periodic settlements. The
total credit risk associated with the Company's counterparties was $24
million at March 31, 2000. The Company has not been required to provide
-6-
<PAGE>
collateral; however, the Company has received collateral relating to its
hedging activity where the concentration of credit risk was substantial.
Determination of Fair Value - The fair market values of the Company's
derivative financial instrument positions at March 31, 2000 and
December 31, 1999 were determined based upon current fair market values as
quoted by recognized dealers or developed based upon the present value of
future cash flows discounted at the applicable U.S. treasury rate and swap
spread.
The following is a summary of the Company's derivative financial
instruments at March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Millions March 31, December 31,
Except Percentages and Average Commodity Prices 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fuel Hedging:
Number of gallons hedged for 2000................................. 95 126
Percentage of forecasted 2000 fuel consumption hedged............. 9% 10%
Average price of 2000 hedges outstanding (per gallon) [a]......... $0.40 $0.40
------------------------------------------------------------------------------------------------------
</TABLE>
[a] Excluded taxes, transportation costs, and regional pricing spreads.
The asset and liability positions of the Company's outstanding
derivative financial instruments at March 31, 2000 and December 31, 1999
are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
March 31, December 31,
Millions of Dollars 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fuel Hedging:
Gross fair market asset position.................................. $ 24 $ 22
Gross fair market (liability) position............................ - -
------------------------------------------------------------------------------------------------------
Total net asset position.............................................. $ 24 $ 22
------------------------------------------------------------------------------------------------------
</TABLE>
The Company's use of derivative financial instruments for fuel hedging
decreased fuel costs by $10 million for the three months ended March 31,
2000 and increased fuel costs by $19 million for the three months ended
March 31, 1999.
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 March 31, 2000 and
December 31, 1999, accounts receivable are presented net of $576 million of
receivables sold.
4. Capital Stock - The number of shares shown in the Common Stock section of
the Statement of Changes in Common Stockholders' Equity on page 4 excludes
2,665 shares of Common Stock and 232 shares of Class A Stock owned by
Southern Pacific Rail Corporation, an affiliate of the Registrant, whose
results are included in the consolidated financial statements.
5. Other Income - Other income included the following for the three months
ended March 31, 2000 and 1999:
-7-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------
Millions of Dollars 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Net gain on asset dispositions...................................... $ 10 $ 11
Rental income....................................................... 14 12
Interest income..................................................... 1 2
Other - net......................................................... (5) (2)
--------------------------------------------------------------------------------------------------
Total............................................................... $ 20 $ 23
--------------------------------------------------------------------------------------------------
</TABLE>
6. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed charges
has been computed on a consolidated basis. Earnings represent net income
less equity in undistributed earnings of unconsolidated affiliates, plus
income taxes and fixed charges. Fixed charges represent interest,
amortization of debt discount and the estimated interest portion of rental
charges.
7. Commitments and Contingencies - There are various claims and lawsuits
pending against the Company. The Company is also subject to federal, state
and local environmental laws and regulations, pursuant to which it is
currently participating in the investigation and remediation of numerous
sites. In addition, the Company periodically enters into financial and
other commitments in connection with its business, and has retained certain
contingent liabilities upon the disposition of formerly owned operations.
It is not possible at this time for the Company to determine fully the
effect of all unasserted claims on its consolidated financial condition,
results of operations or liquidity; however, to the extent possible, where
unasserted claims can be estimated and where such claims are considered
probable, the Company has recorded a liability. The Company does not expect
that any known lawsuits, claims, environmental costs, commitments or
guarantees will have a material adverse effect on its consolidated
financial condition, results of operations or liquidity. Certain
potentially significant contingencies relating to the Company are detailed
below:
Customer Claims - Some customers have submitted claims for damages related
to shipments delayed by the Railroad as a result of congestion problems in
1997 and 1998, and certain customers have filed lawsuits seeking relief
related to such delays. Some customers also asserted that they have the
right to cancel contracts as a result of alleged material breaches of such
contracts by the Railroad. The Company accrued amounts for these claims in
1997 and 1998. No additional amounts were accrued in 1999 or the three
months ended March 31, 2000.
Environmental Issues - For environmental sites where remediation costs can
be reasonably determined, and where such remediation is probable, the
Company has recorded a liability.
Shareholder Lawsuits - 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
-8-
<PAGE>
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 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.
8. 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. 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 3). In addition, to the extent fuel hedges are
ineffective due to pricing differentials resulting from the geographic
dispersion of the Company's operations, income statement recognition of the
ineffective portion of the hedge position will be required. Management does
not anticipate that the final adoption of FAS 133 will have a material
impact on Company's consolidated financial statements.
-9-
<PAGE>
Item 2. Management's Narrative Analysis of the Results of Operations
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY AND
AFFILIATE COMPANIES
RESULTS OF OPERATIONS
Three Months ended March 31, 2000 Compared to Three Months ended March 31, 1999
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.
Net Income - First quarter 2000 net income of $214 million exceeded 1999 by $65
million (44%). Higher commodity and other revenue, combined with productivity
gains, offset higher fuel prices and volume-related costs.
Operating Revenues - Rail operating revenues increased $158 million (6%) to a
record $2.6 billion on the strength of a 5% commodity revenue gain. Other
revenue gains were the result of higher subsidiary revenues and reduced billing
claims from customers and other railroads.
The following tables summarize the year-over-year change in rail commodity
revenue, carloads and average revenue per car by commodity type:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Commodity Revenue Three Months Ended March 31,
----------------------------
In Millions of Dollars 2000 1999 Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Agricultural............................. $ 350 $ 347 1 %
Automotive............................... 290 253 15 %
Chemicals................................ 412 401 3 %
Energy................................... 529 564 (6)%
Industrial Products...................... 492 449 10 %
Intermodal............................... 441 388 14 %
- -------------------------------------------------------------------------------
Total.................................... $2,514 $2,402 5 %
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Revenue Carloads Three Months Ended March 31,
----------------------------
In Thousands 2000 1999 Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Agricultural............................. 221 223 (1)%
Automotive............................... 199 170 17 %
Chemicals................................ 232 225 3 %
Energy................................... 480 477 1 %
Industrial Products...................... 355 327 8 %
Intermodal............................... 687 626 10 %
- -------------------------------------------------------------------------------
Total.................................... 2,174 2,048 6 %
- -------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------
Average Revenue Per Car 2000 1999 Change
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Agricultural....................... $1,582 $1,552 2 %
Automotive......................... 1,456 1,491 (2)%
Chemicals.......................... 1,777 1,781 --
Energy............................. 1,103 1,183 (7)%
Industrial Products................ 1,387 1,373 1 %
Intermodal......................... 642 620 4 %
- -------------------------------------------------------------------------
Total.............................. $1,156 $1,173 (1)%
- -------------------------------------------------------------------------
</TABLE>
Agricultural - Revenue increased despite a slight carload decline. Carloads
decreased primarily due to reduced demand across most markets - principally
wheat and sweeteners. Partially offsetting these declines was strong export
demand for corn, especially to the Pacific Northwest. Average revenue per car
was up $30 due primarily to longer hauls.
Automotive - The Railroad recorded its best quarter ever for revenue and
carloads. The year-over-year gain resulted from increased share in a market
characterized by record vehicle sales. Average revenue per car decreased 2%
principally due to greater use of containers, rather than boxcars, to support
materials shipments.
Chemicals - Carloads increased due to improved service and increased demand for
plastics, liquid and dry chemicals, sulfur, and petroleum gas, partially offset
by a decline in fertilizer moves resulting from depressed demand for U.S. farm
commodities and the temporary shutdown of a Canadian export facility. Average
revenue per car was flat, reflecting lower volumes of high average revenue per
car soda ash and low average revenue per car fertilizer.
Energy - The Railroad recorded its best quarter ever for carloads and average
trains per day out of the Powder River Basin despite warm winter weather
constraining demand. Revenue was down due to lower average revenue per car
which was affected by contract pricing provisions with a few major customers
which are expected to impact year-over-year revenue comparisons through the
third quarter of 2000.
Industrial Products - Revenue increases resulted in the best first quarter ever
due to stronger overall demand and improved service. Carloads of steel and
ferrous scrap increased as import trade quotas on steel took hold. Increases in
lumber, stone, and cement moves resulted from strong construction activity and
mild weather.
Intermodal - Revenue increased as a result of increased carloads and higher
average revenue per car, a best first quarter ever for revenue and carloads.
Carloads improved due to strong growth in imports from Asia and service
improvements. Average revenue per car increased as a result of positive mix
shifts and demand-driven price increases.
Operating Expenses - Operating expenses were up $57 million (3%), reflecting
higher fuel prices and volume costs, partly offset by improved productivity.
Salaries, Wages, and Employee Benefits - Labor costs decreased $21 million (2%)
despite a 6% increase in gross ton-miles and a nearly 6% increase in wage and
benefit costs. Offsetting these cost increases were merger-related workforce
reductions, higher train crew productivity, and lower training expenses.
-11-
<PAGE>
Equipment and Other Rents - Expenses decreased $10 million (3%), due primarily
to improvements in cycle times, lower prices, and increased rent receipts from
other railroads. Higher volume costs partially offset the decreases.
Depreciation - Expenses increased $11 million (4%), reflecting the 1999 and
first quarter 2000 capital programs. Capital spending totaled $359 million in
the first quarter 2000 compared to $363 million in 1999.
Fuel and Utilities - Expenses were up $115 million (65%), driven by higher fuel
prices and, to a lesser degree, volume growth. In the first quarter 2000, the
Railroad hedged 10% of its fuel consumption at an average of 40 cents per gallon
(excluding taxes, transportation charges and regional pricing spreads), lowering
fuel costs by $10 million. For the first quarter 1999, fuel consumption was 70%
hedged at 41 cents per gallon, which resulted in a $19 million increase in fuel
expense. As of March 31, 2000, fuel consumption for the remainder of 2000 is 9%
hedged at 40 cents per gallon (see Note 3 to the Consolidated Financial
Statements).
Materials and Supplies - Costs increased $11 million (8%), reflecting volume-
related increases in locomotive overhauls and running repairs.
Casualty Costs - Costs declined $16 million (16%), primarily due to the effect
of lower than expected settlement costs.
Other Costs - Costs decreased $33 million (14%), reflecting cost control
initiatives, lower joint facility expenses and productivity gains.
Operating Income - Operating income increased $101 million to $465 million for
the first quarter of 2000. The operating ratio in 2000 was 82.4%, 2.9 percentage
points better than 1999's 85.3%.
Non-Operating Items - Non-operating income improved $2 million (1%) in 2000 as
lower interest expense offset reductions in real estate sales. Income taxes
increased $38 million in 2000 reflecting higher income levels partially offset
by favorable state tax incentive credits.
OTHER MATTERS
Commitments and Contingencies - There are various claims and lawsuits pending
against the Company and certain of its subsidiaries. In addition, the Company
and its subsidiaries are subject to various Federal, state and local
environmental laws and are currently participating in the investigation and
remediation of various sites. A discussion of certain claims, lawsuits,
guarantees and contingencies is set forth in Note 7 to the Consolidated
Financial Statements, which is incorporated herein by reference.
Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board 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. 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 3). In addition, to the extent fuel hedges are
ineffective due to pricing differentials resulting from the geographic
dispersion of the Company's operations, income statement
-12-
<PAGE>
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.
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 and its subsidiaries' business,
financial and operational results, and future economic performance, statements
of management's goals and objectives and other similar expressions concerning
matters that are not historical facts.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved. Forward-
looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements.
Important factors that could cause such differences include, but are not
limited to, whether the Company and its subsidiaries are fully successful in
implementing their financial and operational initiatives; industry competition,
conditions, performance and consolidation; legislative and/or regulatory
developments, including possible enactment of initiatives to re-regulate the
rail business; natural events such as severe weather, floods and earthquakes;
the effects of adverse general economic conditions, both within the United
States and globally; changes in fuel prices; changes in labor costs; labor
stoppages; the impact of latent year 2000 systems problems; and the outcome of
claims and litigation.
Forward-looking statements speak only as of the date the statement was made.
The Company assumes no obligation to update forward-looking information to
reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information. If the Company does update one or more
forward-looking statements, no inference should be drawn that the Company will
make additional updates with respect thereto or with respect to other forward-
looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk from the information provided
in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Disclosure concerning market risk-sensitive instruments is set forth in Note 3
to the Consolidated Financial Statements included in Item 1 of Part I of this
Report and is incorporated herein by reference.
-13-
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
Surface Transportation Board Matters
Western Coal Traffic League v. Union Pacific Railroad Company. In March 1999,
the Western Coal Traffic League ("WCTL"), an association of coal receivers,
filed a complaint at the Surface Transportation Board ("STB") alleging that the
Railroad's 1997 annual report filed with the STB improperly accounted for
certain costs associated with the acquisition of SP and the Railroad's service
difficulties. Claiming that this resulted in an overstatement of the Railroad's
regulatory variable costs, WCTL asked the STB to direct the Railroad to restate
certain schedules in the report. The STB dismissed WCTL's complaint on May 12,
2000. The STB found that the Railroad's accounting had conformed to both
applicable generally accepted accounting principles and the Uniform System of
Accounts that rail carriers are required to follow.
FMC v. Union Pacific Railroad Company. In October 1997, FMC filed a complaint
with the STB challenging 16 different tariff rates, claiming the rates exceeded
a reasonable maximum. On May 12, 2000, the STB served a decision finding 15 of
the rates excessive. For rates applicable to certain movements of sodium
compounds, phosphorus and phosphate rock, the STB found there was no effective
modal competition and, with one exception, that the rates exceeded the
jurisdictional threshold. The jurisdictional threshold is a statutory
restriction against the STB prescribing a rate that results in a
revenue-to-variable cost percentage that is less than 180%. Applying its
stand-alone cost standard, the STB determined the rates were excessive and
prescribed rates from the third quarter of 1997 through 2017 that are the higher
of the stand-alone cost or the jurisdictional threshold. The STB ordered the
Railroad to pay as reparations for past shipments the difference between the
prescribed rates and the tariff rates. For the remaining movement of coke, the
STB found that truck competition limits the rate UP can charge and dismissed the
complaint as to that rate.
The decision will not have a significant impact on the Railroad's current
earnings because the Railroad had accrued for potential reparations. The impact
on future revenue is uncertain, as most of the traffic at issue in the decision
is now moving under contracts and traffic moving under contract is not affected
by the decision. The Railroad is continuing to analyze the decision, including
whether to appeal.
Environmental Matters
The U.S. Environmental Protection Agency (EPA) brought a civil action against
certain subsidiaries of Southern Pacific, which have been merged into the
Company, in the U.S. District Court for the District of Colorado alleging
violation of the Clean Water Act and the Oil Pollution Act. The complaint
identified seven incidents involving the alleged release of hazardous substances
into the waters of the United States and sought civil penalties of $25,000 per
day and unspecified injunctive relief to prevent future violations. Six of the
seven incidents are related to derailments dating back to 1992. Six of the
incidents involve alleged releases from ruptured locomotive fuel tanks, and one
incident in 1996 involves an alleged release of sulfuric acid near the Tennessee
Pass.
-14-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
12 - Computation of ratio of earnings to fixed charges.
27 - Financial data schedule.
(b) Reports on Form 8-K
-------------------
On January 20, 2000, the Registrant filed a Current Report on Form 8-K
announcing UPC's financial results for the fourth quarter of 1999.
On April 20, 2000, the Registrant filed a Current Report on Form 8-K
announcing UPC's financial results for the first quarter of 2000.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 2000
UNION PACIFIC RAILROAD COMPANY
(Registrant)
By /s/ Richard J. Putz
---------------------------------------------
Richard J. Putz
Chief Accounting Officer and Controller
(Chief Accounting Officer and Duly Authorized
Officer)
-16-
<PAGE>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
EXHIBIT INDEX
Exhibit No. Description of Exhibits Filed with this Statement
----------- -------------------------------------------------
12 Computation of ratio of earnings to fixed charges
27 Financial data schedule
<PAGE>
EXHIBIT 12
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------
Millions, Except Ratios 2000 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Earnings:
Net Income.......................................................... $214 $149
Undistributed equity earnings....................................... (12) (10)
- ---------------------------------------------------------------------------------------------------
Total............................................................... 202 139
- ---------------------------------------------------------------------------------------------------
Income Taxes.......................................................... 120 82
- ---------------------------------------------------------------------------------------------------
Fixed Charges:
Interest expense including amortization of debt discount............ 151 156
Portion of rentals representing an interest factor.................. 43 44
- ---------------------------------------------------------------------------------------------------
Total............................................................... 194 200
- ---------------------------------------------------------------------------------------------------
Earnings available for fixed charges.................................. 516 421
- ---------------------------------------------------------------------------------------------------
Total fixed charges -- as above....................................... 194 200
- ---------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges (Note 6)........................... 2.7 2.1
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the financial statements of Union Pacific Railroad and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 438
<ALLOWANCES> 0
<INVENTORY> 315
<CURRENT-ASSETS> 938
<PP&E> 33847
<DEPRECIATION> 6681
<TOTAL-ASSETS> 28914
<CURRENT-LIABILITIES> 2383
<BONDS> 2364
0
25
<COMMON> 0
<OTHER-SE> 9405
<TOTAL-LIABILITY-AND-EQUITY> 28914
<SALES> 0
<TOTAL-REVENUES> 2637
<CGS> 0
<TOTAL-COSTS> 2172
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151
<INCOME-PRETAX> 334
<INCOME-TAX> 120
<INCOME-CONTINUING> 214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 214
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
