<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 1-6146
UNION PACIFIC RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 94-6001323
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 271-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of July 31, 2000 the Registrant had outstanding 7,130 shares of
Common Stock, $10 par value, and 620 shares of Class A Stock, $10 par value.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE> 2
UNION PACIFIC RAILROAD COMPANY
AND CONSOLIDATED SUBSIDIARY AND AFFILIATE COMPANIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Item 1: Consolidated Financial Statements:
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
For the Three Months Ended June 30, 2000 and 1999............................. 1
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
For the Six Months Ended June 30, 2000 and 1999............................... 2
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
At June 30, 2000 (Unaudited) and December 31, 1999............................. 3
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2000 and 1999................................ 4
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(Unaudited) For the Six Months Ended June 30, 2000............................. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited).............................. 6-11
Item 2: Management's Narrative Analysis of the Results of Operations........................ 12-16
Item 3: Quantitative and Qualitative Disclosures about Market Risk.......................... 16-17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings................................................................... 17
Item 6: Exhibits and Reports on Form 8-K.................................................... 17
Signatures................................................................................... 18
</TABLE>
(i)
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate Companies
For the Three Months Ended June 30, 2000 and 1999
----------------------------------------------------------------------------------
Millions of Dollars, Except Ratios 2000 1999
---------------------------------- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES Rail................................................... $2,687 $2,491
------ ------
OPERATING EXPENSES Salaries, wages and employee benefits.................. 857 874
Equipment and other rents.............................. 297 304
Depreciation.......................................... 271 256
Fuel and utilities (Note 3)........................... 294 190
Materials and supplies................................. 142 133
Casualty costs......................................... 74 84
Other costs........................................... 213 213
------ ------
Total.................................................. 2,148 2,054
------ ------
INCOME Operating Income....................................... 539 437
Other income (Note 5).................................. 22 17
Interest expense....................................... (147) (155)
------ ------
Income before Income Taxes............................. 414 299
Income taxes........................................... (150) (93)
------ ------
Net Income............................................. $ 264 $ 206
------ ------
Ratio of Earnings to Fixed Charges (Note 6)............ 3.1 2.5
------ ------
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
-1-
<PAGE> 4
STATEMENT OF CONSOLIDATED INCOME (Unaudited)
Union Pacific Railroad Company
and Consolidated Subsidiary and Affiliate Companies
For the Six Months Ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Millions of Dollars, Except Ratios 2000 1999
---------------------------------- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES Rail................................................... $5,324 $4,970
------ ------
OPERATING EXPENSES Salaries, wages and employee benefits.................. 1,741 1,779
Equipment and other rents.............................. 598 615
Depreciation........................................... 540 514
Fuel and utilities (Note 3)............................ 587 368
Materials and supplies................................. 286 266
Casualty costs......................................... 158 184
Other costs............................................ 410 443
------ ------
Total.................................................. 4,320 4,169
------ ------
INCOME Operating Income....................................... 1,004 801
Other income (Note 5).................................. 42 40
Interest expense....................................... (298) (311)
------ ------
Income before Income Taxes............................. 748 530
Income taxes........................................... (270) (175)
------ ------
Net Income............................................. $ 478 $ 355
------ ------
Ratio of Earnings to Fixed Charges (Note 6)............ 3.1 2.3
------ ------
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
-2-
<PAGE> 5
<TABLE>
<S> <C>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate Companies
----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(Unaudited) Dec. 31,
June 30, 1999
Millions of Dollars 2000
------------------- ---------- ---------
<S> <C> <C>
ASSETS
Current Assets Cash and temporary investments....................... $ 46 $ 83
------- -------
Accounts receivable (Note 3)......................... 390 418
Inventories.......................................... 315 329
Current deferred tax asset........................... 48 48
Other current assets................................. 88 78
------- -------
Total................................................ 887 956
------- -------
Investments Investments in and advances to affiliated companies.. 596 657
Other investments.................................... 95 95
------- -------
Total................................................ 691 752
------- -------
Properties Cost................................................. 34,141 33,536
Accumulated depreciation............................. (6,766) (6,490)
------- -------
Net.................................................. 27,375 27,046
------- -------
Other Other assets......................................... 134 126
------- -------
Total Assets......................................... $29,087 $28,880
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities Accounts payable..................................... $ 537 $ 496
Accrued wages and vacation........................... 393 377
Accrued casualty costs............................... 351 344
Income and other taxes............................... 243 252
Debt due within one year............................. 206 210
Interest............................................. 77 97
Other current liabilities............................ 597 669
------- -------
Total................................................ 2,404 2,445
------- -------
Other Liabilities and Intercompany borrowing from UPC...................... 5,243 5,357
Stockholders' Equity Third-party debt due after one year.................. 2,293 2,419
Deferred income taxes................................ 7,467 7,266
Accrued casualty costs............................... 850 911
Retiree benefit obligations.......................... 676 677
Other long-term liabilities.......................... 501 533
Redeemable preference shares......................... 24 25
Common stockholders' equity (Page 5)................. 9,629 9,247
------- -------
Total Liabilities and Stockholders' Equity........... $29,087 $28,880
------- -------
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
-3-
<PAGE> 6
<TABLE>
<S> <C>
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate Companies
For the Six Months Ended June 30, 2000 and 1999
----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Millions of Dollars 2000 1999
------------------- ---- ----
<S> <C> <C>
CASH PROVIDED BY Net Income............................................. $ 478 $ 355
OPERATIONS Non-cash charges to income:
Depreciation....................................... 540 514
Deferred income taxes.................................. 200 161
Other - net............................................ (194) (161)
Changes in current assets and liabilities.............. (9) 74
------ ------
Cash Provided by Operations............................ 1,015 943
------ ------
INVESTING ACTIVITIES Capital investments.................................... (812) (802)
Other - net............................................ 97 (21)
------ ------
Cash Used in Investing Activities...................... (715) (823)
------ ------
EQUITY AND FINANCING Debt repaid ........................................... (123) (104)
ACTIVITIES Dividends paid to parent............................... (100) (100)
Advances (to) from affiliated companies - net.......... (114) 118
------ ------
Cash Used in Equity and Financing Activities........... (337) (86)
------ ------
Net Change in Cash and Temporary Investments........... (37) 34
Cash at Beginning of Period............................ 83 35
------ ------
Cash at End of Period.................................. $ 46 $ 69
------ ------
CHANGES IN CURRENT Accounts receivable.................................... $ 28 $ 91
ASSETS AND LIABILITIES Inventories............................................ 14 3
Other current assets................................... (10) (4)
Accounts, wages and vacation payable................... 57 89
Debt due within one year............................... (4) 32
Other current liabilities.............................. (94) (137)
------ ------
Total.................................................. $ (9) $ 74
------ ------
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
-4-
<PAGE> 7
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (Unaudited)
Union Pacific Railroad and Consolidated Subsidiary and Affiliate Companies
For the Six Months Ended June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
[a] [b] Other
Common Class A Paid-in- Retained Comprehensive
Millions of Dollars Shares Shares Surplus Earnings Income Total
------------------- ------ ------ ------- -------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999........ - - $4,782 $4,471 $(6) $9,247
------ ------ ------- -------- -------------- -----
Net Income.......................... - - - 478 - 478
Other Comprehensive Income:
Foreign Currency Translation..... - - - - 4 4
-----
Comprehensive Income................ - - - - - 482
Dividends declared.................. - - - (100) - (100)
------ ------ ------- -------- -------------- -----
Balance at June 30, 2000............ - - $4,782 $4,849 $(2) $9,629
------ ------ ------- -------- -------------- -----
</TABLE>
[a] Common stock $10.00 par value; 9,200 shares authorized; 4,465 shares issued
at beginning and end of period.
[b] Class A Stock, $10.00 par value; 800 shares authorized; 388 shares issued at
beginning and end of period.
The accompanying notes to the financial statements are an integral part of these
statements.
-5-
<PAGE> 8
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY AND AFFILIATE
COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS - Union Pacific Railroad Company
(the Registrant), a Class I railroad incorporated in Delaware and a
wholly-owned subsidiary of Union Pacific Corporation (the Corporation or
UPC), together with a number of wholly-owned and majority-owned
subsidiaries, certain affiliates and various minority-owned companies
(collectively, the Company or Railroad), operates various railroad and
railroad-related businesses. The consolidated financial statements of the
Company are unaudited and reflect all adjustments (consisting only of
normal and recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods presented. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. The results of operations
for the three months and six months ended June 30, 2000 are not necessarily
indicative of the results for the year ending December 31, 2000.
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 of accounting and was fully consolidated into the
Company's results beginning October 1996.
Merger Consolidation Activities - In connection with the acquisition and
continuing integration of UPRR and Southern Pacific's rail operations, the
Company is in the process of eliminating 5,200 duplicate positions, which
are primarily employees involved in activities other than train, engine and
yard activities. In addition, the Company is relocating 4,700 positions,
merging or disposing of redundant facilities, and disposing of certain rail
lines. The Company is also canceling uneconomical and duplicative SP
contracts.
To date the Company has eliminated 3,600 positions and relocated 4,500
employees due to merger consolidation activities. The Company recognized a
$958 million pre-tax liability as part of the SP purchase price allocation
for costs associated with SP's portion of these activities. In addition,
the Railroad expects to incur between $10 million and $30 million over the
remaining merger implementation period in pre-tax, acquisition-related
costs for severing or relocating UPRR employees, disposing of certain UPRR
facilities, training and equipment upgrading. Earnings for the three months
ending June 30, 2000 and 1999 included $5 million and $8 million after-tax,
respectively, and for the six months ending June 30, 2000 and 1999,
included $11 million and $17 million after-tax, respectively, for
acquisition-related costs for UPRR consolidation activities.
-6-
<PAGE> 9
The components of the merger liability as of June 30, 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......................................................... 343 269 74
Contract cancellation fees and facility and line closure costs.......... 145 141 4
Relocation costs........................................................ 109 94 15
---- ---- ---
Total................................................................... $958 $865 $93
---- ---- ---
</TABLE>
Merger liability activity reflects cash payments for merger
consolidation activities and reclassification of contractual obligations
from merger liabilities to contractual liabilities. In addition, where
merger implementation has varied from the original merger plan, the Company
has adjusted the merger liability and the fair value allocation of SP's
purchase price to fixed assets to eliminate the variance. Where the merger
implementation has caused the Company to incur more costs than were
envisioned in the original merger plan, such costs are charged to expense
in the period incurred. For the three and six months ended June 30, 2000,
the Company charged $2 million and $6 million against the merger liability,
respectively. The Company expects that the remaining merger payments will
be made over the course of the next 18 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
-7-
<PAGE> 10
for counterparties and periodic settlements. The total credit risk
associated with the Company's counterparties was $26 million at June 30,
2000. The Company has not been required to provide collateral; however, the
Company has received collateral relating to its hedging activity where the
concentration of credit risk was substantial.
DETERMINATION OF FAIR VALUE - The fair market values of the Company's
derivative financial instrument positions at June 30, 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 June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
Millions June 30, December 31,
Except Percentages and Average Commodity Prices 2000 1999
----------------------------------------------- -------- ------------
<S> <C> <C>
Fuel Hedging:
Number of gallons hedged for 2000............................ 63 126
Percentage of forecasted 2000 fuel consumption hedged......... 9% 10%
Average price of 2000 hedges outstanding (per gallon) [a]..... $0.40 $0.40
----- -----
</TABLE>
[a] Excluding taxes, transportation costs, and regional pricing spreads.
The asset and liability positions of the Company's outstanding
derivative financial instruments at June 30, 2000 and December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
Millions of Dollars 2000 1999
------------------- -------- ------------
<S> <C> <C>
Fuel Hedging:
Gross fair market asset position.............................. $26 $22
Gross fair market (liability) position........................ - -
----- -----
Total net asset position........................................... $26 $22
----- -----
</TABLE>
The Company's use of derivative financial instruments for fuel hedging
decreased fuel costs by $10 million for the three months ended June 30,
2000 and had no effect on fuel costs for the three months ended June 30,
1999 and decreased fuel costs by $20 million for the six months ended June
30, 2000 and increased fuel costs by $19 million for the six months ended
June 30, 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 June 30, 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 5 excludes
2,665 shares of Common Stock and 232 shares of Class A Stock owned by
Southern Pacific Rail Corporation, an affiliate of the Registrant, whose
results are included in the consolidated financial statements.
-8-
<PAGE> 11
5. OTHER INCOME - Other income included the following for the three months and
six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
Millions of Dollars 2000 1999
------------------- ---- ----
<S> <C> <C>
Net gain on asset dispositions.................................. $12 $7
Rental income................................................... 15 13
Interest income................................................. 2 2
Other - net..................................................... (7) (5)
---- ----
Total........................................................... $22 $17
---- ----
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
Millions of Dollars 2000 1999
------------------- ---- ----
<S> <C> <C>
Net gain on asset dispositions.................................. $ 22 $18
Rental income................................................... 29 25
Interest income................................................. 3 4
Other - net..................................................... (12) (7)
---- ----
Total........................................................... $ 42 $40
---- ----
</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 six months
ended June 30, 2000.
Environmental Issues - For environmental sites where remediation costs can
be reasonably determined, and where such remediation is probable, the
Company has recorded a liability.
-9-
<PAGE> 12
Shareholder Lawsuits - UPC and certain of its directors and officers (who
are also directors of the Railroad) are defendants in two purported class
actions that have been consolidated into one proceeding (the "Class
Action"). The consolidated complaint alleges, among other things, that UPC
violated the federal securities laws by failing to disclose material facts
and making materially false and misleading statements concerning the
service, congestion and safety problems encountered following UPC's
acquisition of Southern Pacific in 1996. These lawsuits were filed in late
1997 in the United States District Court for the Northern District of Texas
and seek to recover unspecified amounts of damages. Management believes
that the plaintiffs' claims are without merit and has been defending them
vigorously. The defendants moved to dismiss this action, and the motion was
briefed and submitted to the Court for decision in 1998. In February 2000,
prior to a ruling on the motion, the parties jointly advised the Court that
they were engaged in discussions concerning the possible settlement of the
action and asked the Court to defer ruling on the motion to dismiss pending
the outcome of these discussions. The Court entered an order dated February
29, 2000 agreeing to such deferral, subject to the motion of either party
to reactivate the action and the pending motion to dismiss at any time.
In addition to the Class Action, a purported derivative action was
filed on behalf of UPC and the Railroad in September 1998 in the District
Court for Tarrant County, Texas, naming as defendants the then-current and
certain former directors of UPC and the Railroad and, as nominal
defendants, UPC and the Railroad (the "Derivative Action" and together with
the Class Action, the "Actions"). The derivative action alleges, among
other things, that the named directors breached their fiduciary duties to
UPC and the Railroad by approving and implementing the Southern Pacific
merger without informing themselves of its impact or ensuring that adequate
controls were put in place and by causing UPC and the Railroad to make
misrepresentations about the Railroad's service problems to the financial
markets and regulatory authorities. UPC's Board of Directors established a
special litigation committee consisting of three independent directors to
review the plaintiff's allegations and determine whether it was in UPC's
best interest to pursue them. In February 1999, the committee rendered its
report, in which it unanimously concluded that further prosecution of the
derivative action on behalf of UPC and the Railroad was not in the best
interest of either such company. Accordingly, UPC and the Railroad have
filed a motion with the Court to dismiss the derivative action. The
individual defendants also believe that these claims are without merit and
have defended them vigorously.
As of June 28, 2000, counsel for UPC, the Railroad and certain officers
and directors of UPC and the Railroad entered into a Memorandum of
Understanding, with counsel for the plaintiffs in the Class Action and
Derivative Action. The Memorandum of Understanding provides, among other
things, that the Class Action will be settled for $34,025,000 in cash (the
"Settlement Payment"), the full amount of which is expected to be covered
by UPC's insurance carriers. The fees and expenses of counsel for the
plaintiffs in the Class Action will be paid out of the Settlement Payment.
The Memorandum of Understanding also provides that, in settlement of the
Derivative Action, UPC will adopt certain additional procedures which will
reinforce its continuing effort to ensure both the effective implementation
of its merger with Southern Pacific and its ongoing commitment to rail
safety. In addition, in the event of any proposed merger or other
transaction involving consolidation of UPC and a rail system of greater
than 1,000 miles in length of road, UPC will commission a study, to be
completed in advance of any formal application to a U.S., Canadian or
Mexican federal regulatory board, to analyze prospective safety and
congestion-related issues. As part of the terms of the Derivative Action
settlement, counsel for the plaintiffs will receive such fees and expenses
as may be awarded by the Court, up to an aggregate amount of $975,000. Such
amount is also expected to be fully covered by UPC's insurance carriers.
-10-
<PAGE> 13
The settlement of each of the Actions is subject to, among other
conditions, the negotiation and execution of definitive Stipulations of
Settlement and such other documentation as may be required in connection
with such settlement and the approval of each settlement by the respective
courts in which each Action is pending. Notwithstanding the existence of
the Memorandum of Understanding, there can be no assurances that a
definitive settlement will be consummated with respect to either Action.
UPC, the Railroad and the individual defendants named in the Actions
entered into the Memorandum of Understanding solely for the purpose of
avoiding the further expense, inconvenience, burden and uncertainty of the
Actions, and their decision to do so is not an admission or concession or
evidence of any liability or wrongdoing on the part of any party to either
Action, which liability and wrongdoing have consistently been, and continue
to be, denied.
8. ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement No.133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), that would have been
effective January 1, 2000. In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivatives Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133" postponing the effective date
for implementing FAS 133 to fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (FAS 138). FAS 138
addresses certain issues related to the implementation of FAS 133, but does
not change the basic model of FAS 133 or further delay the implementation
of FAS 133. Management has determined that FAS 133 and FAS 138 will
increase the volatility of the Company's asset, liability and equity
(comprehensive income) positions as the change in the fair market value of
all financial instruments the Company uses for fuel hedging purposes will,
upon adoption of FAS 133 and FAS 138, be recorded in the Company's
Statement of Financial Position (Note 3). In addition, to the extent fuel
hedges are ineffective due to pricing differentials resulting from the
geographic dispersion of the Company's operations, income statement
recognition of the ineffective portion of the hedge position will be
required. Management does not anticipate that the final adoption of FAS 133
and FAS 138 will have a material impact on the Company's consolidated
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition". SAB 101 provides
additional guidance on revenue recognition criteria and related disclosure
requirements. This SAB is effective beginning in the fourth quarter of
2000. When the SAB becomes effective, it will require implementation as of
the beginning of the current fiscal year. If the impact is material, the
SAB requires retroactive application to all periods presented. Management
is currently assessing the impact that SAB 101 will have on the Company's
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25". The Interpretation clarifies the
application of APB Opinion 25 for certain issues involving employee stock
compensation. The Interpretation is generally effective July 1, 2000.
Management does not anticipate that FIN 44 will have a material impact on
the Company's consolidated financial statements.
-11-
<PAGE> 14
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED
SUBSIDIARY AND AFFILIATE COMPANIES
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 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 - Rail operations reported net income of $264 million and $478
million for the three and six months ended June 30, 2000, respectively, compared
to net income of $206 million for the second quarter of 1999 and $355 million
for the six month period in 1999. The increases resulted primarily from higher
commodity and other revenue, combined with productivity gains, partially offset
by higher fuel prices and volume-related costs.
OPERATING REVENUES - Rail operating revenues increased $196 million (8%) to a
record $2.7 billion and $354 million (7%) to a record $5.3 billion for the three
and six month periods ended June 30, 2000, respectively, over the comparable
periods in 1999. Revenue carloads increased 5% for the three and six month
periods over the comparable periods in 1999. Other revenue gains were the result
of higher subsidiary revenues and reduced billing claims from customers and
other railroads.
The following tables summarize rail commodity revenue, revenue carloads and
average revenue per car for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30, % Commodity Revenue Six Months Ended June 30, %
--------------------------- ------------------------
2000 1999 Change In Millions 2000 1999 Change
---- ---- ------ ----------- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 334 $ 328 2 Agricultural $ 684 $ 675 1
307 275 12 Automotive 597 528 13
424 395 7 Chemicals 836 796 5
490 533 (8) Energy 1,019 1,097 (7)
525 475 11 Industrial Products 1,017 924 10
471 426 11 Intermodal 912 814 12
------ ------ ----- ------ ------ -----
$2,551 $2,432 5 Total $5,065 $4,834 5
------ ------ ----- ------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
Revenue Carloads
In Thousands
----------------
<S> <C> <C> <C> <C> <C> <C> <C>
213 214 - Agricultural 434 437 (1)
214 184 16 Automotive 413 354 17
244 233 5 Chemicals 476 458 4
439 448 (2) Energy 919 925 (1)
376 353 7 Industrial Products 731 680 7
727 681 7 Intermodal 1,414 1,307 8
------ ------ ----- ------ ------ -----
2,213 2,113 5 Total 4,387 4,161 5
------ ------ ----- ------ ------ -----
</TABLE>
-12-
<PAGE> 15
<TABLE>
<CAPTION>
Average Revenue
Per Car
----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,568 $1,536 2 Agricultural $1,575 $1,544 2
1,437 1,492 (4) Automotive 1,446 1,492 (3)
1,741 1,701 2 Chemicals 1,759 1,741 1
1,115 1,188 (6) Energy 1,109 1,185 (6)
1,398 1,345 4 Industrial Products 1,392 1,359 2
647 624 4 Intermodal 645 622 4
------ ------ ----- ------ ------ -----
$1,153 $1,151 - Total $1,155 $1,162 (1)
------ ------ ----- ------ ------ -----
</TABLE>
Agricultural - Agricultural revenue increased for both the three and six months
periods of 2000 over the comparable periods in 1999 despite a slight decline in
carloads. Carloads decreased primarily due to reduced market demand for wheat
and a lack of producer selling in anticipation of higher future prices. Carload
growth for corn, beverages, and fresh fruits and vegetables partially offset
these declines. Average revenue per car increased primarily due to longer hauls
and declines in lower average revenue per car wheat movements.
Automotive - The Railroad recorded back-to-back record quarters for automotive
revenue and carloads in the first six months of 2000. The year-over-year gain
resulted from increased share in a market characterized by record vehicle sales.
Average revenue per car decreased principally due to an increase in lower
average revenue per car materials moves and greater use of containers, rather
than boxcars, to haul materials shipments.
Chemical - Chemical revenue and carloads increased for both the three and six
month periods of 2000 over the comparable periods in 1999 due to improved
service levels, customer plant expansions and strength in the economy,
especially the plastics and liquid and dry chemical markets. Average revenue per
car increased reflecting growth in high average revenue per car plastics moves
and selected price increases ranging from 2% to 5%.
Energy - Energy carloads decreased for both the three and six month periods in
2000 over the comparable periods in 1999. Market growth was more than offset by
mine production problems, high coal inventory levels at utilities as a result of
Y2K concerns and mild winter weather. Revenue was down due to the lower volume
and lower average revenue per car as a result of contract pricing provisions
with certain major customers, which are expected to impact year-over-year
commodity revenue comparisons through the third quarter of 2000.
Industrial Products - Industrial Products revenue increased for both the three
and six month periods of 2000 over the comparable periods in 1999 due to
stronger commodity demand and improved service. Carloads of steel and ferrous
scrap increased with the mild recovery of the domestic steel market. Increases
in carloads of lumber, cement, roofing materials and other construction products
resulted from strong construction activity and mild weather. Average revenue per
car increased due to gains in high average revenue per car steel and lumber and
selected price increases.
Intermodal - Intermodal revenue increased for both the three and six month
periods of 2000 over the comparable periods in 1999 as a result of increased
carloads and higher average revenue per car, setting quarterly records for both
measures. Carloads improved due to strong growth in imports from Asia and
service improvements. Average revenue per car increased as a result of gains in
the premium segment of the business and demand-driven price increases.
-13-
<PAGE> 16
OPERATING EXPENSES - Operating expenses increased $94 million (5%) and $151
million (4%) for the three and six month periods ended June 30, 2000,
respectively. Operating expense comparisons by category for the quarter and
six-month period ending June 30, 2000 and 1999 are discussed below. The factors
primarily responsible for the increase or decrease in each category are
substantially the same for both the three and six month periods, except as
noted.
Salaries, Wages and Employee Benefits - Costs decreased $17 million (2%) and $38
million (2%) for the three and six month periods, respectively, over the
comparable periods in 1999. The lower expenses were driven primarily by
merger-related workforce reductions, higher train crew productivity, and lower
training expenses.
Equipment and Other Rents - Expenses decreased $7 million (2%) and $17 million
(3%) for the three and six month periods, respectively, due primarily to
improvements in cycle time, lower prices, and increased rent receipts from other
railroads. Higher volume costs partially offset these decreases.
Depreciation - Depreciation increased $15 million (6%) and $26 million (5%) for
the three and six month periods, respectively, over comparable periods in 1999,
as a result of the Railroad's capital program in 1999 and the first half of
2000. Capital spending was $812 million in the six months ended June 30, 2000
compared to $802 million in the six months ended June 30, 1999.
Fuel and utilities - Expenses were up $104 million (55%) and $219 million (60%)
for the three and six month periods, respectively. Higher fuel prices added $89
million of expense in the second quarter and $189 million of expense in the
first six months of 2000 over comparable periods in 1999. Volume costs and a
higher consumption rate added $7 million for the second quarter and $17 million
for the first six months of 2000 compared to 1999. The Railroad hedged
approximately 10% of its fuel consumption for the three and six month periods,
which decreased fuel costs by $10 million and $20 million, respectively. As of
June 30, 2000, expected fuel consumption for the remaining six months of 2000 is
9% hedged at 40 cents per gallon excluding taxes, transportation costs and
regional pricing spreads (see Note 3 to the Consolidated Financial Statements).
Materials and Supplies - Expenses increased $9 million (7%) and $20 million (8%)
for the three and six month periods, respectively, due to volume-related
increases in locomotive overhauls and repairs.
Casualty Costs - Expenses declined $10 million (12%) and $26 million (14%) for
the three and six month periods, respectively, primarily due to the effect of
lower than expected settlement and insurance costs.
Other Costs - Expenses were flat for the second quarter of 2000 and down $33
million (7%) for the first six months compared to comparable periods in 1999.
Cost control and productivity gains offset volume-related cost increases and
higher state and local taxes.
OPERATING INCOME - Operating income increased $102 million to $539 million and
$203 million to $1.0 billion for the three and six months ended June 30, 2000,
respectively. The operating ratio for the second quarter of 2000 was 79.9%, 2.6
percentage points better than 1999's 82.5% operating ratio. The operating ratio
for the first six months of 2000 was 81.1%, 2.8 percentage points better than
1999's 83.9%.
NON-OPERATING ITEMS - Non-operating expense decreased $13 million (9%) and $15
million (6%) for the three and six months ended June 30, 2000, respectively. The
gains were primarily the result of lower interest expense, higher income from
real estate sales and rents, partially offset by higher losses from other
miscellaneous items. Income taxes increased $57 million for the second quarter
and $95 for the first six months
-14-
<PAGE> 17
of 2000 reflecting higher income levels and a one-time, $19 million after-tax
gain in the second quarter of 1999 related to prior year tax settlements. The
increase was partially offset by favorable state tax incentive credits in the
first six months of 2000.
OTHER MATTERS
COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits pending
against the Company and certain of its subsidiaries. In addition, the Company
and its subsidiaries are subject to various Federal, state and local
environmental laws and are currently participating in the investigation and
remediation of various sites.
A discussion of certain claims, lawsuits, guarantees and contingencies is set
forth in Note 7 to the Consolidated Financial Statements, which is incorporated
herein by reference.
ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement No.133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133), that would have been effective January 1, 2000.
In June 1999, the FASB issued Statement No. 137, "Accounting for Derivatives
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133" postponing the effective date for implementing FAS 133 to
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" (FAS 138). FAS 138 addresses certain issues related to the
implementation of FAS 133, but does not change the basic model of FAS 133 or
further delay the implementation of FAS 133. Management has determined that FAS
133 and FAS 138 will increase the volatility of the Company's asset, liability
and equity (comprehensive income) positions as the change in the fair market
value of all financial instruments the Company uses for fuel hedging purposes
will, upon adoption of FAS 133 and FAS 138, be recorded in the Company's
Statement of Financial Position (Note 3). In addition, to the extent fuel hedges
are ineffective due to pricing differentials resulting from the geographic
dispersion of the Company's operations, income statement recognition of the
ineffective portion of the hedge position will be required. Management does not
anticipate that the final adoption of FAS 133 and FAS 138 will have a material
impact on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition". SAB 101 provides
additional guidance on revenue recognition criteria and related disclosure
requirements. This SAB is effective beginning in the fourth quarter of 2000.
When the SAB becomes effective, it will require implementation as of the
beginning of the current fiscal year. If the impact is material, the SAB
requires retroactive application to all periods presented. Management is
currently assessing the impact that SAB 101 will have on the Company's
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25". The Interpretation clarifies the application of APB Opinion 25
for certain issues involving employee stock compensation. The Interpretation is
generally effective July 1, 2000. Management does not anticipate that FIN 44
will have a material impact on the Company's consolidated financial statements.
CERTAIN OTHER MATTERS - On May 27, 2000 a Union Pacific train carrying hazardous
materials derailed near Eunice, Louisiana causing a fire and explosion that
resulted in the evacuation of approximately 3,800 residents of the surrounding
area and numerous claims for personal injuries, property damage and business
interruption. Investigation into the cause and impact of the derailment is
proceeding. To date, 25 lawsuits, most containing class action allegations have
been filed and are currently pending in the United States District Court for the
District of Western Louisiana. While it is not possible to predict the ultimate
outcome of these proceedings,
-15-
<PAGE> 18
the Railroad believes it has substantial defenses and, although losses may
exceed self-insured retention amounts, the Railroad believes its insurance
coverage is adequate to cover material damage claims. In addition to the claims
asserted by private parties, the release of hazardous materials into the
environment caused by the derailment could result in the imposition of fines and
penalties by state and/or federal agencies. On July 14, 2000 the Railroad
received a Notice of Potential Penalty of an unspecified amount from the State
of Louisiana. Whether any fines or penalties will be imposed and, if imposed,
the amount of any such fines or penalties is uncertain.
CAUTIONARY INFORMATION
Certain statements in this report are, and statements in other material filed or
to be filed with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) are or will be, forward-looking within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934. These
forward-looking statements include, without limitation, statements regarding:
expectations as to operational improvements; expectations as to cost savings,
revenue growth and earnings; the time by which certain objectives will be
achieved; estimates of costs relating to environmental remediation and
restoration; expectations as to product applications; expectations that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity; and statements concerning projections, predictions, expectations,
estimates or forecasts as to the Company's and its subsidiaries' business,
financial and operational results, and future economic performance, statements
of management's goals and objectives and other similar expressions concerning
matters that are not historical facts.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements.
Important factors that could cause such differences include, but are not
limited to, whether the Company and its subsidiaries are fully successful in
implementing their financial and operational initiatives; industry competition,
conditions, performance and consolidation; legislative and/or regulatory
developments, including possible enactment of initiatives to re-regulate the
rail business; natural events such as severe weather, floods and earthquakes;
the effects of adverse general economic conditions, both within the United
States and globally; changes in fuel prices; changes in labor costs; labor
stoppages; and the outcome of claims and litigation.
Forward-looking statements speak only as of the date the statement was
made. The Company assumes no obligation to update forward-looking information to
reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information. If the Company does update one or more
forward-looking statements, no inference should be drawn that the Company will
make additional updates with respect thereto or with respect to other
forward-looking statements.
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
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<PAGE> 19
Consolidated Financial Statements included in Item 1 of Part I of this Report
and is incorporated herein by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SURFACE TRANSPORTATION BOARD MATTERS
As previously reported, in May 2000 the Surface Transportation Board ("STB")
dismissed a complaint filed with the STB by the Western Coal Traffic League
("WCTL") alleging that the Railroad improperly accounted for certain costs
associated with the acquisition of SP and service difficulties in its 1997
annual report filed with the STB. On June 1, 2000 the WCTL petitioned the STB
for a rehearing. The Railroad filed its reply on June 21, 2000, arguing that the
STB's decision was correct.
Also as previously reported, in May 2000 the STB served a decision in a
complaint filed by FMC challenging the Railroad's tariff rates on 16 different
movements. The decision found rates on 15 of the movements were excessive. On
June 1, 2000, the Railroad petitioned for reconsideration, alleging that
multiple errors caused the decision to understate costs and therefore prescribe
rates where not jurisdictionally permitted or prescribe lower rates than
warranted. FMC has replied to the Petition. The Railroad and FMC have each filed
a petition for review of the decision in the United States Circuit Court of
Appeals for the D.C. Circuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
12(a) - Computation of ratio of earnings to fixed charges for
the Three Months Ended June 30, 2000.
12(b) - Computation of ratio of earnings to fixed charges for
the Six Months Ended June 30, 2000.
27 - Financial data schedule.
(b) REPORTS ON FORM 8-K
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.
On July 7, 2000, the Registrant filed a Current Report on Form 8-K
announcing developments in certain litigation.
On July 27, 2000, the Registrant filed a Current Report on Form
8-K announcing UPC's financial results for the second quarter of
2000.
-17-
<PAGE> 20
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: August 14, 2000
UNION PACIFIC RAILROAD COMPANY
(Registrant)
By /s/ Richard J. Putz
------------------------------
Richard J. Putz
Chief Accounting Officer and
Controller
(Chief Accounting Officer and
Duly Authorized Officer)
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<PAGE> 21
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
12(a) Computation of ratio of earnings to fixed charges for the
Three Months Ended June 30, 2000.
12(b) Computation of ratio of earnings to fixed charges for the
Six Months Ended June 30, 2000.
27 Financial data schedule.
</TABLE>
