Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
------------------- -----------------------------------------
Missouri Pacific Railroad Company New York Stock Exchange, Inc.
4-1/4% First Mortgage Bonds due 2005
Missouri Pacific Railroad Company New York Stock Exchange, Inc.
4-3/4% General Income Mortgage Bonds due 2020 and 2030
Missouri Pacific Railroad Company New York Stock Exchange, Inc.
5% Income Debentures due 2045
Missouri-Kansas-Texas Railroad Company New York Stock Exchange, Inc.
5-1/2% Subordinated Income Debentures due 2033
Securities registered pursuant to Section 12(g) of the Act: None
1
2
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
None of the Registrant's voting stock is held by non-affiliates. The Registrant
is a wholly owned subsidiary of Union Pacific Corporation.
As of February 28, 2001, the Registrant had outstanding 7,130 shares of Common
Stock, $10 par value, and 620 shares of Class A Stock, $10 par value.
DOCUMENTS INCORPORATED BY REFERENCE: None
2
3
PART I
ITEM 1. BUSINESS
COMPANY
Union Pacific Railroad Company (the Registrant), a Class I railroad incorporated
in Delaware and a wholly owned subsidiary of Union Pacific Corporation (the
Corporation or UPC), together with a number of wholly owned and majority-owned
subsidiaries, certain affiliates and various minority-owned companies
(collectively, the Company or Railroad), operates various railroad and
railroad-related businesses.
The Railroad has approximately 34,000 route miles linking Pacific Coast and
Gulf Coast ports to the Midwest and eastern U.S. gateways and providing several
north/south corridors to key Mexican gateways. The Railroad serves the western
two-thirds of the country and maintains coordinated schedules with other
carriers for the handling of freight to and from the Atlantic Coast, the Pacific
Coast, the Southeast, the Southwest, Canada and Mexico. Export and import
traffic is moved through Gulf Coast and Pacific Coast ports and across the
Mexican and (primarily through interline connections) Canadian borders.
PRODUCT MIX - In 2000, the Railroad had operating revenues of approximately
$10.7 billion, almost all of which were derived from rail freight operations.
The percentages of revenue ton-miles (RTM) and rail commodity revenue for
commodities during 2000, 1999 and 1998 were as follows:
2000 1999 1998
-------------------------- -------------------------- --------------------------
Commodity Commodity Commodity
RTM Revenue RTM Revenue RTM Revenue
---------- ---------- ---------- ---------- ---------- ----------
Agricultural ............. 13.9% 13.6% 14.7% 14.4% 14.1% 14.4%
Automotive ............... 3.4 11.5 3.2 10.6 3.1 10.3
Chemicals ................ 11.0 16.0 11.3 16.2 11.4 16.9
Energy ................... 40.9 21.0 40.0 22.0 40.1 22.0
Industrial Products ..... 16.2 19.3 16.2 19.3 16.5 19.7
Intermodal ............... 14.6 18.6 14.6 17.5 14.8 16.7
---------- ---------- ---------- ---------- ---------- ----------
Total .................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ========== ==========
Total (billions) ......... 485.5 $ 10.3 473.1 $ 9.9 432.1 $ 9.1
========== ========== ========== ========== ========== ==========
COMPETITION - The Railroad is subject to price and service competition from
other railroads, motor carriers and barge operators. The Company's main rail
competitor is Burlington Northern Santa Fe Corporation. Its rail subsidiary, The
Burlington Northern and Santa Fe Railway Company (BNSF), operates parallel
routes in many of the Company's main traffic corridors. In addition, the
Company's operations are conducted in corridors served by other competing
railroads and by motor carriers. Motor carrier competition is particularly
strong for intermodal traffic. Because of the proximity of the Railroad's routes
to major inland and Gulf Coast waterways, barge competition can be particularly
pronounced, especially for grain and bulk commodities.
EMPLOYEES - Approximately 87% of the Railroad's nearly 50,000 employees are
represented by rail unions. Under the conditions imposed by the Surface
Transportation Board (STB) in connection with the Southern Pacific acquisition,
labor agreements between the Railroad and the unions had to be negotiated before
the UPRR and Southern Pacific rail systems could be fully integrated. The
Railroad has successfully reached agreements with the shopcraft, carmen,
clerical, and maintenance-of-way unions, and also implemented "hub-and-spoke"
agreements with the train operating crafts. Under the hub-and-spoke concept, all
operating employees in a central "hub" are placed under a common set of
collective bargaining agreements with the ability to work on the "spokes"
running into and out of the hub. Negotiations under the Railway Labor Act to
revise the national labor agreements for all crafts began in late 1999 and are
still in progress.
3
4
ACQUISITIONS
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 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 currently holds a
26% ownership share in the consortium. This investment is accounted for using
the equity method of accounting.
SOUTHERN PACIFIC - During 2000, the Company continued its integration of
Southern Pacific's rail operations. This process is expected to be completed in
2001 (see note 2 to the consolidated financial statements on pages F-8 and F-9).
The Corporation's investment in Southern Pacific has been pushed down to the
Railroad. The acquisition of Southern Pacific (SP) has been accounted for using
the purchase method of accounting and was fully consolidated into the Company's
results beginning October 1996.
OTHER INFORMATION
GOVERNMENTAL REGULATION - The Company's operations are currently subject to a
variety of federal, state and local regulations. The most significant areas of
regulation are described below. See also the discussion of certain regulatory
proceedings in "Item 3. Legal Proceedings," which is incorporated herein by
reference.
The Railroad is subject to the regulatory jurisdiction of the STB and other
federal and state agencies. The STB has jurisdiction over rates charged on
certain regulated rail traffic; freight car compensation; transfer, extension or
abandonment of rail lines; and acquisition of control of rail and motor carriers
by rail common carriers. In March 2000, the STB imposed a 15-month moratorium on
railroad merger applications between Class I railroads. The moratorium directs
large railroads to avoid merger activities for 15 months until the STB adopts
new rules governing merger proceedings. The rulemaking proceeding is scheduled
to be completed by June 11, 2001.
Other federal agencies have jurisdiction over safety, movement of hazardous
materials, movement and disposal of hazardous waste, and equipment standards.
Various state and local agencies have jurisdiction over disposal of hazardous
wastes and seek to regulate movement of hazardous materials.
ENVIRONMENTAL REGULATION - The Railroad is subject to various environmental
statutes and regulations, including the Resource Conservation and Recovery Act
(RCRA), the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 (CERCLA), and the Clean Air Act (CAA).
RCRA applies to hazardous waste generators and transporters, as well as to
persons engaged in treatment and disposal of hazardous waste, and specifies
standards for storage areas, treatment units and land disposal units. All
generators of hazardous waste are required to label shipments in accordance with
detailed regulations and to prepare a detailed manifest identifying the material
and stating its destination before waste can be released for offsite transport.
The transporter must deliver the hazardous waste in accordance with the manifest
and only to a treatment, storage or disposal facility qualified for RCRA interim
status or having a final RCRA permit.
The Environmental Protection Agency (EPA) regulations under RCRA have
established a comprehensive system for the management of hazardous waste. These
regulations identify a wide range of industrial by-products and residues as
hazardous waste, and specify requirements for "cradle-to-grave" management of
such waste from the time of generation through the time of disposal and beyond.
States that have adopted hazardous waste management programs with standards at
least as stringent as those promulgated by the EPA may be authorized by the EPA
to administer all or part of RCRA on behalf of the EPA.
CERCLA was designed to establish a strategy for cleaning up facilities at
which hazardous waste or other hazardous substances have created actual or
potential environmental hazards. The EPA has designated certain facilities as
requiring cleanup or further assessment. Among other things, CERCLA authorizes
the federal government either to clean up such facilities itself or to order
persons responsible for the situation to do so. The
4
5
act created a multi-billion dollar fund to be used by the federal government to
pay for such cleanup efforts. In the event the federal government pays for such
cleanup, it will seek reimbursement from private parties upon which CERCLA
imposes liability.
CERCLA imposes strict liability on the owners and operators of facilities
in which hazardous waste and other hazardous substances are deposited or from
which they are released or are likely to be released into the environment. It
also imposes strict liability on the generators of such waste and the
transporters of the waste who select the disposal or treatment sites. Liability
may include cleanup costs incurred by third persons and damage to publicly owned
natural resources. The Company is subject to potential liability under CERCLA as
an owner or operator of facilities at which hazardous substances have been
disposed of, or as a generator or a transporter of hazardous substances disposed
of at other locations. Some states have enacted, and other states are
considering enacting, legislation similar to CERCLA. Certain provisions of these
acts are more stringent than CERCLA. States that have passed such legislation
are currently active in designating more facilities as requiring cleanup and
further assessment.
The operations of the Company are subject to the requirements of the CAA.
The 1990 amendments to the CAA include a provision under Title V requiring that
certain facilities obtain operating permits. EPA regulations require all states
to develop federally approvable permit programs. Affected facilities must submit
air operating permit applications to the respective states within one year of
the EPA's approval of the state programs. Certain of the Company's facilities
may be required to obtain such permits. In addition, in December 1997 the EPA
issued final regulations which require that certain purchased and remanufactured
locomotives meet stringent emissions criteria. While the cost of meeting these
requirements may be significant, expenditures are not expected to affect
materially the Company's financial condition or results of operations.
The operations of the Company are also subject to other laws protecting the
environment, including permit requirements for wastewater discharges pursuant to
the National Pollutant Discharge Elimination System and storm-water runoff
regulations under the Federal Water Pollution Control Act.
Information concerning environmental claims and contingencies and estimated
attendant remediation costs is set forth in "Management's Narrative Analysis of
Results of Operations - Other Matters - Environmental Costs" at page F-26. Such
information is incorporated herein by reference.
CAUTIONARY INFORMATION
Certain statements in this report are, and statements in other material filed or
to be filed with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) are or will be, forward-looking within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934. These
forward-looking statements include, without limitation, statements regarding:
expectations as to operational improvements; expectations as to cost savings,
revenue growth and earnings; the time by which certain objectives will be
achieved; estimates of costs relating to environmental remediation and
restoration; proposed new products and services; 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.
5
6
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 2. PROPERTIES
OPERATING EQUIPMENT
At December 31, 2000, the Railroad owned or leased from others 7,007
locomotives, 108,669 freight cars and 6,616 units of work equipment.
Substantially all railway equipment secures various outstanding equipment
obligations.
RAIL PROPERTY
The Railroad operates approximately 34,000 miles of track, including
approximately 27,000 miles of main line. Approximately 12 percent of the main
line track consists of trackage rights over track owned by others. A substantial
portion of the right-of-way and track is subject to one or more mortgages.
ITEM 3. LEGAL PROCEEDINGS
SOUTHERN PACIFIC ACQUISITION
On August 12, 1996, the STB served a decision (the Decision) approving the
acquisition of control of Southern Pacific by UPC, subject to various
conditions. The acquisition was consummated on September 11, 1996. Various
appeals were filed with respect to the Decision, all such appeals were
ultimately consolidated in the U.S. Court of Appeals for the District of
Columbia Circuit and all of the appeals have since been withdrawn or denied.
Among the conditions to the STB's approval of the Southern Pacific
acquisition was the requirement that the STB retain oversight jurisdiction for
five years to examine whether the conditions imposed under the Decision remain
effective to address the competitive harms caused by the merger. On December 15,
2000, the STB served a decision in the fourth annual general oversight
proceeding to review the implementation of the merger and the effectiveness of
the conditions imposed under the Decision. The Board concluded that merger
implementation continued to be positive, the conditions ensured effective
competition and no new conditions were warranted. The STB established July 2,
2001 as the date for the fifth comprehensive summary to be filed by the
Railroad. The STB order also requires interested parties to file comments
concerning the fifth annual oversight proceeding on August 17, 2001, with
replies being due September 4, 2001.
SHAREHOLDER LITIGATION
As previously reported, UPC and certain of its directors and officers (who are
also directors of the Railroad) were named as defendants in two purported class
actions filed in 1997 that have been consolidated into one proceeding in the
United States District Court for the Northern District of Texas (the Class
Action). 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).
6
7
Prior to any rulings on the defendants' motions to dismiss the Class Action
and the Derivative Action, counsel for UPC, the Railroad and the individual
defendants in those Actions entered into a Memorandum of Understanding (the
MOU), dated June 28, 2000, with counsel for the plaintiffs in the Class Action
and Derivative Action, providing for the settlement of both Actions. The MOU
provided, among other things, that the Class Action would be settled for
$34,025,000 in cash (the Settlement Payment), the full amount of which has been
covered by UPC's insurance carriers. The MOU also provided that, in settlement
of the Derivative Action, UPC would adopt certain additional procedures which
are intended to 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 agreed to 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.
On October 12, 2000, counsel for the respective parties in the Class Action
and the Derivative Action entered into definitive Stipulations of Compromise and
Settlement (the Stipulations), providing for the settlement of the Actions on
the terms described above, subject to court approval. At separate hearings on
December 13, 2000, the court in the Class Action and the court in the Derivative
Action approved the proposed settlement of the respective Actions as fair,
adequate and reasonable and dismissed the respective Actions with prejudice in
favor of the defendants. In its order, the court in the Class Action also
granted in part plaintiffs' counsels' application for attorneys' fees and
expenses, to be paid from the Settlement Payment. In its order, the court in the
Derivative Action also granted plaintiff's counsels' application for attorneys
fees and expenses in the amount of $975,000, which amount has been paid by the
Company but has been fully covered by UPC's insurance carriers.
UPC, the Railroad and the individual defendants named in the Actions
entered into the MOU and Stipulations solely for the purpose of avoiding the
further expense, inconvenience, burden and uncertainty of the Actions, and their
decision to do so does not constitute, and under the terms of the Stipulations
may not be taken as, an admission or concession or evidence of any liability or
wrongdoing whatsoever on the part of any party to either Action, which liability
and wrongdoing have consistently been, and continue to be, denied.
SURFACE TRANSPORTATION BOARD MATTERS
As previously reported, in May 2000 the STB dismissed a complaint filed 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. On November 30, 2000, the STB rejected
WCTL's petition for reconsideration and affirmed its earlier decision issued in
May of 2000 that the Railroad properly accounted for the service difficulties
experienced in 1997.
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 the STB 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. The Railroad and FMC each also filed a petition for review of the STB
decision in the United States Circuit Court of Appeals for the D.C. Circuit.
Although both FMC and the Railroad originally challenged the STB decision, both
parties agreed that neither party would pursue future appeals or regulatory
action as part of a wider commercial understanding reached on December 8, 2000.
When the Railroad notified the STB that it was withdrawing its motion for
reconsideration, the STB dismissed the motion and discontinued the proceeding in
a decision served December 13, 2000. The parties agreed upon an amount to be
paid in final reparations and interest and the Railroad paid the final
installment on December 15, 2000.
7
8
OTHER MATTERS
Western Resources v. Union Pacific Railroad Company and The Burlington Northern
Santa Fe Railway Company. Western Resources (Western) filed its original
complaint on January 24, 2000 in the U.S. District Court for the District of
Kansas. Western alleged the railroads materially breached their service
obligations under the transportation contract to deliver coal in a timely manner
to Western's Jeffrey Energy Center. The original complaint sought recovery of
consequential damages and termination of the contract, excusing Western from
further performance. In an amended complaint filed September 1, 2000, Western
claimed the right to retroactive termination and added a claim for restitution.
In its December 1, 2000 supplemental disclosure of damages, Western continued to
assert both its damages and restitution claims.
The railroads are vigorously defending this lawsuit and discovery is
underway. The railroads have filed two motions seeking dismissal of the
termination and restitution claims. Western has responded, and the railroads
have replied. The trial is currently scheduled to begin in May 2002.
ENVIRONMENTAL MATTERS
In March 1998, the Railroad received notice that the Railroad and Clean Harbors,
a waste disposal firm, were the subjects of a criminal investigation by the EPA
and the Federal Bureau of Investigation. Tank cars containing hazardous waste
billed to Clean Harbors' transload facility in Sterling, Colorado were held in
the Railroad's Sterling, Colorado rail yard for periods longer than ten days
prior to placement in Clean Harbors' facility, allegedly in violation of
hazardous waste regulations. The Railroad is cooperating with the investigation
and has responded to grand jury subpoenas. A finding of violation could result
in significant criminal or civil penalties.
The Corporation and its affiliates have received notices from the EPA and
state environmental agencies alleging that they are or may be liable under
certain federal or state environmental laws for remediation costs at various
sites throughout the United States, including sites which are on the Superfund
National Priorities List or state superfund lists. Although specific claims have
been made by the EPA and state regulators with respect to some of these sites,
the ultimate impact of these proceedings and suits by third parties cannot be
predicted at this time because of the number of potentially responsible parties
involved, the degree of contamination by various wastes, the scarcity and
quality of volumetric data related to many of the sites, and/or the speculative
nature of remediation costs. Nevertheless, at many of the superfund sites, the
Corporation believes it will have little or no exposure because no liability
should be imposed under applicable law, one or more other financially able
parties generated all or most of the contamination, or a settlement of the
Corporation's exposure has been reached although regulatory proceedings at the
sites involved have not been formally terminated.
Information concerning environmental claims and contingencies and estimated
attendant remediation costs is set forth in "Management's Narrative Analysis of
the Results of Operations - Other Matters - Environmental Costs" at page F-26.
Such information is incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted in accordance with General Instruction I of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
As of the date of filing this Report, the Registrant had the following
amounts of capital stock issued and outstanding: 7,130 shares of Common
Stock, par value $10.00 per share (the Company Common Stock), 620
shares of Class A Stock, par value $10.00 per share (the Company Class
A Stock), 4,829 Redeemable Preference Shares (Series A), initial par
value $10,000 per share, and 436 Redeemable Preference Shares (Series
B), initial par value $10,000 per share (collectively, the Preference
Shares). All of the Company
8
9
Common Stock and the Company Class A Stock, which constitutes all of
the voting capital stock of the Registrant, is owned by the Corporation
or a wholly owned subsidiary of the Corporation, and all of the
Preference Shares, which are non-voting stock, are owned by the Federal
Railroad Administration. Accordingly, there is no market for the
Registrant's capital stock.
Dividends on the Company Common Stock, which are paid on a
quarterly basis, totaled $143 million, $200 million and $308 million in
2000, 1999 and 1998, respectively. Dividends paid on the Company Class
A Stock were $57 million, $0 and $12 million in 2000, 1999 and 1998,
respectively. Information concerning restrictions on the Registrant's
ability to pay dividends on the Company Common Stock and the Company
Class A Stock is set forth in note 9 on pages F-16 and F-17 to the
consolidated financial statements. All such information is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Omitted in accordance with General Instruction I of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Omitted in accordance with General Instruction I of Form 10-K. In lieu
thereof, a narrative analysis is presented beginning on page F-21.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk sensitive instruments is set forth
in "Management's Narrative Analysis of the Results of Operations -
Other Matters - Derivative Financial Instruments" on page F-27 and in
note 4 to the consolidated financial statements on pages F-9 and F-10.
All such information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary information
related thereto, listed on the Index to consolidated financial
statements, are provided on pages F-1 through F-29 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted in accordance with General Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted in accordance with General Instruction I of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted in accordance with General Instruction I of Form 10-K.
9
10
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted in accordance with General Instruction I of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Schedules
See Index to the consolidated financial statements.
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are
not applicable or not required or the information required to
be set forth therein is included in the consolidated financial
statements or notes thereto.
(3) Exhibits
2(a) Agreement and Plan of Merger, dated as of January 29,
1998, between UPRR and SPT is incorporated herein by
reference to Exhibit 2 to the Registrant's Current
Report on Form 8-K dated February 13, 1998.
3(a) Amended Certificate of Incorporation of the
Registrant, effective as of February 1, 1998, is
incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
3(b) By-Laws of the Registrant, as amended effective as of
November 19, 1998, are incorporated by reference to
Exhibit 3(b) to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
4 Pursuant to various indentures and other agreements,
the Registrant has issued long-term debt; however, no
such agreement has securities or obligations covered
thereby which exceed 10% of the Registrant's total
consolidated assets. The Registrant agrees to furnish
the Commission with a copy of any such indenture or
agreement upon request by the Commission.
10(a) Amended and Restated Anschutz Shareholders Agreement,
dated as of July 12, 1996, among UPC, UPRR, The
Anschutz Corporation, Anschutz Foundation and Mr.
Philip F. Anschutz, is incorporated herein by
reference to Annex D to the Joint Proxy
statement/Prospectus included in Post-Effective
Amendment No. 2 to UPC's Registration Statement on
Form S-4 (No. 33-64707).
10(b) Agreement, dated September 25, 1995, among UPC, UPRR,
MPRR, SP, SPT, DRGW, SSW and SPCSL, on the one hand,
and Burlington Northern Railroad Company ("BN") and
The Atchison, Topeka and Santa Fe Railway Company
("Santa Fe"), on the other hand, is incorporated by
reference to Exhibit 10.11 to UPC's Registration
Statement on Form S-4 (No. 33-64707).
10
11
10(c) Supplemental Agreement, dated November 18, 1995,
between UPC, UPRR, MPRR, SP, SPT, DRGW, SSW and
SPCSL, on the one hand, and BN and Santa Fe, on the
other hand, is incorporated herein by reference to
Exhibit 10.12 to UPC's Registration Statement on Form
S-4 (No. 33-64707).
12 Ratio of Earnings to Fixed Charges.
24 Powers of attorney.
(b) Reports on Form 8-K
On October 19, 2000, the Registrant filed a current report on
Form 8-K announcing UPC's financial results for the third
quarter of 2000.
On December 27, 2000, the Registrant filed a current report on
Form 8-K announcing spending reductions and the expectation of
lower fourth quarter earnings.
On January 18, 2001, the Registrant filed a current report on
Form 8-K announcing UPC's financial results for the fourth
quarter of 2000.
11
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 2lst day of March,
2001.
UNION PACIFIC RAILROAD COMPANY
By /s/ Richard K. Davidson
-------------------------------------
Richard K. Davidson,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below, on this 2lst day of March, 2001 by the following persons
on behalf of the Registrant and in the capacities indicated.
PRINCIPAL EXECUTIVE OFFICER: By /s/ Richard K. Davidson
-------------------------------------
Richard K. Davidson,
Chairman and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER: By /s/ James R. Young
-------------------------------------
James R. Young,
Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER: By /s/ Richard J. Putz
-------------------------------------
Richard J. Putz
Chief Accounting Officer and
Controller
12
13
SIGNATURES - (Continued)
DIRECTORS:
Philip F. Anschutz* Elbridge T. Gerry, Jr.*
Robert P. Bauman* Judith Richards Hope*
E. Virgil Conway* Richard J. Mahoney*
Thomas J. Donohue* Steven R. Rogel*
Archie W. Dunham* Richard D. Simmons*
Spencer F. Eccles* Ernesto Zedillo*
Ivor J. Evans*
* By /s/ Thomas E. Whitaker
----------------------------------------
Thomas E. Whitaker, Attorney-in-fact
13
14
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report................................................................. F-2
Financial Statements:
Consolidated Statements of Income
- For the Years Ended December 31, 2000, 1999 and 1998.............................. F-3
Consolidated Statements of Financial Position
- At December 31, 2000 and 1999..................................................... F-4
Consolidated Statements of Cash Flows
- For the Years Ended December 31, 2000, 1999 and 1998.............................. F-5
Consolidated Statements of Changes in Common Shareholders' Equity
- For the Years Ended December 31, 2000, 1999 and 1998.............................. F-6
Notes to Consolidated Financial Statements............................................. F-7 - F-20
Management's Narrative Analysis of the Results of Operations................................. F-21 - F-29
F-1
15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Union Pacific Railroad Company
Omaha, Nebraska
We have audited the accompanying consolidated statements of financial position
of Union Pacific Railroad Company (a wholly owned subsidiary of Union Pacific
Corporation) and Consolidated Subsidiary and Affiliate Companies (the Company)
as of December 31, 2000 and 1999, and the related consolidated statements of
income, changes in common shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Union Pacific Railroad Company and
Consolidated Subsidiary and Affiliate Companies at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
January 18, 2001
F-2
16
PART 1 - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For The Years Ended December 31,
Millions of Dollars, Except Ratios 2000 1999 1998
- ---------------------------------- ---------- ---------- ----------
OPERATING REVENUES Rail .................................... $ 10,731 $ 10,140 $ 9,329
---------- ---------- ----------
OPERATING EXPENSES Salaries, wages and employee benefits ... 3,597 3,578 3,607
Equipment and other rents ............... 1,179 1,199 1,292
Depreciation ............................ 1,089 1,034 1,003
Fuel and utilities ...................... 1,279 783 792
Materials and supplies .................. 544 538 513
Casualty costs .......................... 319 334 423
Other costs ............................. 821 852 1,266
---------- ---------- ----------
Total ................................... 8,828 8,318 8,896
---------- ---------- ----------
INCOME Operating Income ........................ 1,903 1,822 433
Other income ............................ 126 115 186
Interest expense ........................ (592) (618) (603)
---------- ---------- ----------
Income before Income Taxes .............. 1,437 1,319 16
Income taxes ............................ (511) (465) 11
---------- ---------- ----------
Net Income .............................. $ 926 $ 854 $ 27
---------- ---------- ----------
Ratio of Earnings to Fixed Charges ...... 2.9 2.6 1.0
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
17
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
At December 31,
Millions of Dollars 2000 1999
- ------------------- ---------- ----------
ASSETS
Current Assets Cash and temporary investments ........................ $ 88 $ 83
Accounts receivable - net ............................. 393 418
Inventories ........................................... 347 329
Current deferred tax asset ............................ 30 48
Other current assets .................................. 121 78
---------- ----------
Total ................................................. 979 956
---------- ----------
Investments Investments in and advances to affiliated companies ... 644 657
Other investments ..................................... 84 95
---------- ----------
Total ................................................. 728 752
---------- ----------
Properties Cost:
Road and other ..................................... 26,832 25,781
Equipment .......................................... 7,781 7,755
---------- ----------
Total ................................................. 34,613 33,536
---------- ----------
Accumulated depreciation .............................. (6,881) (6,490)
---------- ----------
Properties - Net ...................................... 27,732 27,046
---------- ----------
Other Other assets .......................................... 142 126
---------- ----------
Total Assets .......................................... $ 29,581 $ 28,880
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities Accounts payable ...................................... $ 558 $ 496
Accrued wages and vacation ............................ 388 377
Accrued casualty costs ................................ 345 344
Income and other taxes ................................ 220 252
Debt due within one year .............................. 207 210
Interest payable ...................................... 82 97
Other current liabilities ............................. 712 669
---------- ----------
Total ................................................. 2,512 2,445
---------- ----------
Other Liabilities and Intercompany borrowings from UPC ...................... 5,082 5,357
Shareholders' Equity Third-party debt due after one year ................... 2,397 2,419
Deferred income taxes ................................. 7,705 7,266
Accrued casualty costs ................................ 811 911
Retiree benefit obligations ........................... 632 677
Other long-term liabilities ........................... 440 533
Redeemable preference shares .......................... 23 25
Commitments and Contingencies
Common shareholders' equity ........................... 9,979 9,247
---------- ----------
Total Liabilities and Shareholders' Equity ............ $ 29,581 $ 28,880
---------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
For The Years Ended December 31,
Millions of Dollars 2000 1999 1998
- ------------------- ---------- ---------- ----------
OPERATING ACTIVITIES Net Income ........................................... $ 926 $ 854 $ 27
Non-cash charges to income:
Depreciation ..................................... 1,089 1,034 1,003
Deferred income taxes ............................ 456 592 7
Other - net ...................................... (537) (560) (218)
Changes in current assets and liabilities ............ 49 66 (266)
---------- ---------- ----------
Cash Provided by Operating Activities ................ 1,983 1,986 553
---------- ---------- ----------
INVESTING ACTIVITIES Capital investments .................................. (1,735) (1,777) (2,044)
Proceeds from sale of assets and other investing
activities ....................................... 254 211 212
---------- ---------- ----------
Cash Used in Investing Activities .................... (1,481) (1,566) (1,832)
---------- ---------- ----------
FINANCING ACTIVITIES Dividends paid to parent ............................. (200) (200) (320)
Debt repaid .......................................... (224) (239) (276)
Financings ........................................... 202 77 486
Advances - net ....................................... (275) (10) 1,374
---------- ---------- ----------
Cash Provided by (Used in) Financing Activities ...... (497) (372) 1,264
---------- ---------- ----------
Net Change in Cash and Temporary Investments ......... $ 5 $ 48 $ (15)
Cash and Temporary Investments at Beginning
of Year .......................................... 83 35 50
---------- ---------- ----------
Cash and Temporary Investments at End of Year ........ $ 88 $ 83 $ 35
---------- ---------- ----------
CHANGES IN CURRENT Accounts receivable .................................. $ 25 $ 76 $ 58
ASSETS AND LIABILITIES Inventories .......................................... (18) 8 (49)
Other current assets ................................. (25) 89 36
Accounts, wages and vacation payable ................. 73 -- (169)
Debt due within one year ............................. (3) 32 (51)
Other current liabilities ............................ (3) (139) (91)
---------- ---------- ----------
Total ................................................ $ 49 $ 66 $ (266)
---------- ---------- ----------
SUPPLEMENTAL CASH Cash paid (received) during the year for:
FLOW INFORMATION Interest ......................................... $ 617 $ 641 $ 561
Income taxes - net ............................... 95 (134) (49)
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
19
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
Accumulated Total
Other Common
Common Class A Paid-in- Retained Comprehensive Shareholders'
Millions of Dollars Stock [a] Stock [b] Surplus Earnings Income Equity
- ------------------- ---------- ---------- ---------- ---------- ------------- -------------
Balance at January 1, 1998 ............... $ -- $ -- $ 4,782 $ 4,110 $ -- $ 8,892
---------- ---------- ---------- ---------- ---------- ----------
Net Income ............................... -- -- -- 27 -- 27
Other Comprehensive Income:
Foreign translation adjustment ........ -- -- -- -- -- --
Minimum pension liability adjustment .. -- -- -- -- -- --
----------
Comprehensive Income ..................... -- -- -- -- -- 27
Dividends declared ....................... -- -- -- (320) -- (320)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 ............. -- -- 4,782 3,817 -- $ 8,599
---------- ---------- ---------- ---------- ---------- ----------
Net Income ............................... -- -- -- 854 -- 854
Other Comprehensive Income:
Foreign translation adjustment ........ -- -- -- -- (4) (4)
Minimum pension liability adjustment .. -- -- -- -- (2) (2)
----------
Comprehensive Income ..................... -- -- -- -- -- 848
Dividends declared ....................... -- -- -- (200) -- (200)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 ............. -- -- 4,782 4,471 (6) $ 9,247
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME ............................... -- -- -- 926 -- 926
OTHER COMPREHENSIVE INCOME:
FOREIGN TRANSLATION ADJUSTMENT ........ -- -- -- -- 6 6
MINIMUM PENSION LIABILITY ADJUSTMENT .. -- -- -- -- -- --
----------
COMPREHENSIVE INCOME ..................... -- -- -- -- -- 932
DIVIDENDS DECLARED ....................... -- -- -- (200) -- (200)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2000 ............. $ -- $ -- $ 4,782 $ 5,197 $ -- $ 9,979
---------- ---------- ---------- ---------- ---------- ----------
[a] Common stock, $10.00 par value: 9,200 shares authorized, 4,465 outstanding.
[b] Class A stock, $10.00 par value: 800 shares authorized, 388 outstanding.
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
20
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the
accounts of Union Pacific Railroad Company, a Delaware corporation (the
Registrant), and all subsidiaries and certain affiliates (collectively, the
Company or Railroad). The Registrant is a wholly owned subsidiary of Union
Pacific Corporation, a Utah corporation (the Corporation or UPC). Investments in
affiliated companies (20% to 50% owned and/or where the Company exercises
significant influence over an investee's operations) are accounted for using the
equity method of accounting. All material intercompany transactions are
eliminated.
Cash and Temporary Investments - Temporary investments are stated at cost which
approximates fair value and consist of investments with original maturities of
three months or less.
Inventories - Inventories consist of materials and supplies carried at the lower
of average cost or market.
Property and Depreciation - Properties are carried at cost. Provisions for
depreciation are computed principally on the straight-line method based on
estimated service lives of depreciable property.
The cost (net of salvage) of depreciable rail property retired or replaced
in the ordinary course of business is charged to accumulated depreciation. A
gain or loss is recognized in other income for all other property upon
disposition.
The cost of internally developed software is capitalized and amortized over
a five-year period. An obsolescence review of capitalized software is performed
on a periodic basis.
Impairment of Long-lived Assets - The Company reviews long-lived assets,
including identifiable intangibles, for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment indicators are present and the estimated future
undiscounted cash flows are less than the carrying value of the long-lived
assets, the carrying value is reduced to the estimated fair value as measured by
the discounted cash flows.
Financial Instruments - The carrying value of the Company's non-derivative
financial instruments approximates fair value, except for differences with
respect to long-term, fixed-rate debt and certain differences relating to cost
method investments and other financial instruments that are not significant. The
fair value of financial instruments is generally determined by reference to
market values as quoted by recognized dealers or developed based upon the
present value of expected future cash flows discounted at the applicable U.S.
Treasury rate and swap spread.
The Company periodically uses derivative financial instruments to manage
risk related to changes in fuel prices and interest rates. The Company does not
enter into financial instruments for trading or speculative purposes.
Revenue Recognition - Transportation revenues are recognized on a
percentage-of-completion basis, as freight moves from origin to destination.
Other Revenue is recognized as service is performed or contractual obligations
are met.
Use of Estimates - The consolidated financial statements of the Company include
estimates and assumptions regarding certain assets, liabilities, revenues and
expenses and the disclosure of certain contingent assets and liabilities. Actual
future results may differ from such estimates.
F-7
21
Change in Presentation - Certain prior year amounts have been reclassified to
conform to the 2000 consolidated financial statement presentation.
1. NATURE OF OPERATIONS - The Registrant, a Class I railroad incorporated in
Delaware and a wholly owned subsidiary of the Corporation, together with a
number of wholly owned and majority owned subsidiaries, including as of
October 1, 1996, Southern Pacific Rail Corporation (Southern Pacific or
SP), certain affiliates and various minority owned companies, operates
various railroad and railroad-related businesses. The Company expects to
complete the integration of the operations of SP in 2001. During 1997, the
Railroad and a consortium of partners were granted a 50-year concession to
operate the Pacific-North and Chihuahua Pacific lines in Mexico. The
Railroad made an additional investment in the consortium in 1999.
The Railroad has approximately 34,000 route miles linking Pacific Coast
and Gulf Coast ports to the Midwest and eastern United States gateways and
providing several north/south corridors to key Mexican gateways. The
Railroad serves the western two-thirds of the country and maintains
coordinated schedules with other carriers for the handling of freight to
and from the Atlantic Coast, the Pacific Coast, the Southeast, the
Southwest, Canada and Mexico. Export and import traffic is moved through
Gulf Coast and Pacific Coast ports and across the Mexican and (primarily
through interline connections) Canadian borders. The Railroad is subject to
price and service competition from other railroads, motor carriers and
barge operators.
Approximately 87% of the Railroad's nearly 50,000 employees are
represented by rail unions. Under the conditions imposed by the Surface
Transportation Board (STB) in connection with the Southern Pacific
acquisition, labor agreements between the Railroad and the unions had to be
negotiated before the UPRR and Southern Pacific rail systems could be fully
integrated. The Railroad has successfully reached agreements with the
shopcraft, carmen, clerical, and maintenance-of-way unions, and also
implemented "hub-and-spoke" agreements with the train operating crafts.
Under the hub-and-spoke concept, all operating employees in a central "hub"
are placed under a common set of collective bargaining agreements with the
ability to work on the "spokes" running into and out of the hub.
Negotiations under the Railway Labor Act to revise the national labor
agreements for all crafts began in late 1999 and are still in progress.
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 will complete the elimination of 5,200 duplicate positions in 2001,
primarily employees involved in activities other than train, engine and
yard activities. The Company will also complete the relocation of 4,700
positions, merging or disposing of redundant facilities, and disposing of
certain rail lines. In addition, the Company will cancel and settle the
remaining uneconomical and duplicative SP contracts, including
payroll-related contractual obligations in accordance with the original
merger plan.
Merger Liabilities - In 1996, the Company recognized a $958 million pre-tax
liability in the SP purchase price allocation for costs associated with
SP's portion of these activities. Merger liability activity reflected cash
payments for merger consolidation activities and reclassification of
contractual obligations from merger liabilities to contractual liabilities.
In addition, where merger implementation has varied from the original
merger plan, the Company has adjusted the merger liability and the fair
value allocation of SP's purchase price to fixed assets to eliminate the
variance. Where the merger implementation has caused the Company to incur
more costs than were envisioned in the original merger plan, such costs are
charged to expense in the period incurred. The Company charged $10 million,
$45 million and $474 million against the merger liability in 2000, 1999 and
1998, respectively. The remaining merger payments will be made during 2001
as labor negotiations are completed and implemented, and related merger
consolidation activities are finalized.
F-8
22
The components of the merger liability as of December 31, 2000 were as
follows:
Original Cumulative Dec. 31, 2000
Millions of Dollars Liability Activity Liability
------------------- --------- ---------- -------------
Labor protection related to legislated and contractual
obligations ................................................. $ 361 $ 361 $ --
Severance and related costs .................................... 343 271 72
Contract cancellation fees and facility and line closure
costs ....................................................... 145 141 4
Relocation costs ............................................... 109 96 13
--------- ---------- ----------
Total .......................................................... $ 958 $ 869 $ 89
--------- ---------- ----------
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 using the equity method of
accounting. The Company's portion of the consortium's assets and
liabilities are translated into U.S. dollars using current exchange rates
in effect at the balance sheet date. The Company's portion of the
consortium's net income is translated into U.S. dollars at weighted-average
exchange rates prevailing during the year. The resulting translation
adjustments are reflected within shareholders' equity as accumulated other
comprehensive income.
3. RELATED PARTY TRANSACTIONS - Amounts due to and from affiliates, including
advances to and borrowings from the Corporation, bear interest at an
annually determined rate which considers the Corporation's cost of debt.
Net intercompany interest expense charged to the Railroad on such amounts
was $405 million, $420 million and $399 million in 2000, 1999 and 1998,
respectively.
4. FINANCIAL INSTRUMENTS
STRATEGY AND RISK - The Company uses derivative financial instruments in
limited instances for purposes other than trading to manage risk related to
changes in fuel prices. The Company uses swaps, futures and/or forward
contracts to mitigate the downside risk of adverse price movements;
however, the use of these instruments also limits future gains from
favorable movements.
MARKET AND CREDIT RISK - The Company addresses market risk related to these
instruments by selecting instruments whose value fluctuations highly
correlate with the underlying item being hedged. Credit risk related to
derivative financial instruments, which is minimal, is managed by requiring
high credit standards for counterparties and periodic settlements. The
total credit risk associated with the Company's counterparties was $2
million and $22 million at December 31, 2000 and 1999, respectively. 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 values of the Company's derivative
financial instrument positions at December 31, 2000 and 1999, detailed
below, were determined based upon current fair values as quoted by
recognized dealers or developed based upon the present value of expected
future cash flows discounted at the applicable U.S. Treasury rate and swap
spread.
FUEL STRATEGY - Fuel costs are a significant portion of the Company's total
operating expenses. As a result of the significance of fuel costs and the
historical volatility of fuel prices, the Company periodically uses swaps,
futures and/or forward contracts to mitigate the impact of fuel price
volatility. The purpose of this program is to protect the Company's
operating margins and overall profitability from adverse fuel price
changes.
F-9
23
The following is a summary of the Company's financial instruments at
December 31, 2000 and 1999:
Millions, Except Percentages and Average Commodity Prices 2000 1999
--------------------------------------------------------- -------- --------
Fuel Hedging:
Number of gallons hedged for 2000 .......................... -- 126
Percentage of forecasted 2000 fuel consumption hedged ...... -- 10%
Average price of 2000 hedges outstanding (per gallon)[a] ... -- $ 0.40
Number of gallons hedged for 2001 .......................... 101 --
Percentage of forecasted 2001 fuel consumption hedged ...... 8% --
Average price of 2001 hedges outstanding (per gallon)[a] ... $ 0.68 --
-------- --------
[a] Excluded taxes and transportation costs, and regional pricing spreads.
The asset and liability positions of the Company's outstanding
financial instruments at December 31, 2000 and 1999 were as follows:
Millions of Dollars 2000 1999
------------------- -------- --------
Fuel Hedging:
Gross fair market asset position ........................... $ 2 $ 22
Gross fair market (liability) position ..................... -- --
-------- --------
Total asset position ............................................ $ 2 $ 22
-------- --------
The Company's use of derivative financial instruments for fuel hedging
decreased fuel costs by $52 million and $53 million in 2000 and 1999,
respectively, and increased 1998 fuel costs by $87 million.
FAIR VALUE OF DEBT INSTRUMENTS - The fair value of the Company's long- and
short-term debt has been estimated using quoted market prices or current
borrowing rates. At December 31, 2000, the fair value of total debt was
greater than the carrying value by approximately $29 million. Approximately
$435 million of fixed-rate debt securities contain call provisions that
allow the Company to retire the debt instruments prior to final maturity
subject, in certain cases, to the payment of premiums.
SALE OF RECEIVABLES - The Railroad has sold, on a revolving basis, an
undivided percentage ownership interest in a designated pool of accounts
receivable to third parties through a bankruptcy-remote subsidiary. The
receivables are sold at carrying value, which approximates fair value. The
third parties have designated the Railroad to service the sold receivables.
The amount of receivables sold fluctuates based upon the availability of
the designated pool of receivables and is directly affected by changing
business volumes and credit risks. At December 31, 2000 and 1999, accounts
receivable are presented net of $600 million and $576 million,
respectively, of receivables sold.
5. INCOME TAXES - The Company is included in the consolidated income tax
return of the Corporation. The consolidated income tax liability of the
Corporation is allocated among the parent and its subsidiaries on the basis
of their separate contributions to the consolidated income tax liability,
with full benefit of tax losses and credits made available through
consolidation by allocation to the individual companies generating such
losses and credits.
F-10
24
Components of income tax expense (benefit) were as follows:
(Millions of Dollars) 2000 1999 1998
--------------------- ---------- ---------- ----------
Current:
Federal ............................................. $ 50 $ (124) $ (15)
State ............................................... 5 (3) (3)
---------- ---------- ----------
Total current ......................................... 55 (127) (18)
---------- ---------- ----------
Deferred:
Federal ............................................. 431 566 286
State ............................................... 25 26 15
Benefit of net operating loss ....................... -- -- (294)
---------- ---------- ----------
Total deferred ........................................ 456 592 7
---------- ---------- ----------
Total ................................................. $ 511 $ 465 $ (11)
---------- ---------- ----------
Deferred tax liabilities (assets) comprise the following:
(Millions of Dollars) 2000 1999
--------------------- ---------- ----------
Net current deferred tax asset ........................ $ (30) $ (48)
---------- ----------
Excess tax over book depreciation ..................... 7,664 7,493
State taxes - net ..................................... 562 546
Long-term liabilities ................................. (253) (349)
Retirement benefits ................................... (244) (254)
Alternative minimum tax ............................... (5) (5)
Net operating loss .................................... (371) (486)
Other ................................................. 352 321
---------- ----------
Net long-term deferred tax liability .................. 7,705 7,266
---------- ----------
Net deferred tax liability ............................ $ 7,675 $ 7,218
---------- ----------
At December 31, 2000, the Company has a deferred tax asset reflecting
the benefits of $1,060 million in net operating loss carryforwards, which
expires as follows:
(Millions of Dollars)
---------------------
Expiring December 31:
2003 ................................................ $ 104
2004 ................................................ 134
2005 ................................................ 136
2006 ................................................ 226
2007-2018 ........................................... 460
----------
Total ............................................... $ 1,060
----------
The Internal Revenue Code limits a corporation's ability to utilize
net operating loss carryforwards. The Company does not expect these limits
to impact its ability to utilize its carryforwards. The Company has
analyzed its deferred tax assets and believes a valuation allowance is not
necessary.
F-11
25
A reconciliation between Federal statutory and effective tax rates is
as follows:
2000 1999 1998
---------- ---------- ----------
Statutory tax rate .................................... 35.0% 35.0% 35.0%
State taxes - net ..................................... 1.3 1.1 (75.0)
Dividend exclusion .................................... (1.0) (0.9) (75.0)
Tax settlements ....................................... -- (1.2) --
Non-deductible expenses ............................... 1.1 1.3 62.7
Property contributions ................................ (0.4) (0.3) (18.8)
Other ................................................. (0.4) 0.2 2.3
---------- ---------- ----------
Effective tax rate .................................... 35.6% 35.2% (68.8)%
---------- ---------- ----------
The Internal Revenue Service is currently examining the Company's tax
returns for 1986 through 1998. All years prior to 1986 are closed. The
Company believes it has adequately provided for federal and state income
taxes.
6. DEBT
Total debt is summarized below:
(Millions of Dollars) 2000 1999
--------------------- ---------- ----------
Intercompany borrowings from UPC, 7.5% ............................... $ 5,082 $ 5,357
Capitalized leases, due through 2023 ................................. 1,435 1,341
Equipment obligations, 6.1% to 10.3% due through 2019 ................ 842 921
Notes and debentures, 0% to 9.6% due through 2054 .................... 211 227
Mortgage bonds, 4.3% to 4.8% due through 2030 ........................ 154 175
Tax-exempt financings, 5.3% through 2015 ............................. 12 12
Unamortized discount ................................................. (50) (47)
---------- ----------
Total debt ...................................................... 7,686 7,986
---------- ----------
Less current portion ................................................. (207) (210)
---------- ----------
Total long-term debt ................................................. $ 7,479 $ 7,776
---------- ----------
DEBT MATURITIES - Aggregate debt maturities are as follows (excluding
intercompany):
Year Millions
---- ----------
2001 ................................................................................ $ 207
2002 ................................................................................ 199
2003 ................................................................................ 333
2004 ................................................................................ 257
2005 ................................................................................ 238
Thereafter .......................................................................... 1,370
----------
$ 2,604
----------
MORTGAGED PROPERTIES - At December 31, 2000 and 1999, approximately $9.6
billion and $9.4 billion, respectively, of Railroad properties secure
outstanding equipment obligations and mortgage bonds.
INCOME-BASED SECURITIES - The Company has certain debt instruments which
contain provisions that limit the payment of interest, require sinking fund
installments and impose certain restrictions in the event all interest
F-12
26
is not paid. Other debt instruments contain provisions that may impose
restrictions on the Company's ability to declare dividends on certain
classes of capital stock (note 9). A description of those debt instruments
follows.
MPRR Mortgage Bonds - The Company is the obligor under the Missouri Pacific
Railroad Company 4 1/4% First Mortgage Bonds due 2005 (the MPRR First
Mortgage Bonds) and the Missouri Pacific Railroad Company 4 3/4% General
(Income) Mortgage Bonds, Series A and Series B, due 2020 and 2030,
respectively (the MPRR General Mortgage Bonds). Payment of current interest
on the MPRR First Mortgage Bonds is mandatory, but current interest on the
MPRR General Mortgage Bonds must be paid only to the extent that there is
available income, as defined in the mortgages, remaining after allocation
to a capital fund for the purpose of reimbursing the Company for certain
capital expenditures and to the payment of certain sinking fund
installments required on the MPRR First Mortgage Bonds. If available income
is insufficient to pay interest in any calendar year, the unpaid interest
accumulates to an amount not in excess of 13 1/2% of the principal amount
of the MPRR General Mortgage Bonds and is paid in subsequent years only to
the extent that there is available income remaining after payment of
current interest.
MPRR Debentures - The Company is the obligor under the Missouri Pacific
Railroad Company 5% Income Debentures due 2045 (the MPRR Debentures).
Current interest on the MPRR Debentures must be paid only to the extent
that there is available income, as defined in the debenture, remaining
after allocation to a capital fund for the purpose of reimbursing the
Company for certain capital expenditures, to the payment of certain sinking
fund installments on the MPRR First Mortgage Bonds, to the payment of
current and accumulated interest on the MPRR General Mortgage Bonds and to
the payment of certain sinking fund installments on the MPRR General
Mortgage Bonds.
MKT Subordinated Income Debentures - The Company is the obligor under
Missouri-Kansas-Texas Railroad Company (MKT) 5 1/2% Subordinated Income
Debentures due 2033 (the MKT Debentures). Current interest on the MKT
Debentures must be paid only to the extent that there is available income,
as defined in the indenture, remaining after allocation to a capital fund
for the purpose of reimbursing the Company for certain capital
expenditures. Unpaid interest accumulates to an amount not in excess of
16 1/2% of the principal amount of the MKT Debentures and is paid only to
the extent that there is available income remaining after payment of
current interest. Amounts in the capital fund for the MKT Debentures which
are unused or unappropriated for the reimbursement of capital expenditures
may not exceed $4.0 million at any time.
MKT Income Certificates - The Company has also assumed certain certificates
constituting a charge on income (the Certificates) issued by MKT. The
Certificates do not bear interest, and payments to a sinking fund for the
Certificates are made only from available income, as defined in such
Certificates. Available income must be applied to the capital fund, current
and accumulated interest on the MKT Debentures and a sinking fund for the
MKT Debentures before any payment is made to the sinking fund for the
Certificates.
Interest Payments - The Company had no available income in 1998 and
therefore, paid no interest on the MPRR General Mortgage Bonds, no interest
on the MPRR Debentures, and no interest on the MKT Debentures. The Company
generated available income in 1999. As a result, 1999 and 1998 interest
payments of $7.0 million were made on the MPRR General Mortgage Bonds, 1999
and 1998 interest payments of $2.8 million on the MKT Debentures, and the
1999 interest payments of $5.0 million on the MPRR Debentures. Sufficient
available income was also generated in 2000, as a result, interest payments
of $1.7 million will be made on the MPRR General Mortgage Bonds, $1.3
million on the MKT Debentures, and $4.8 million on the MPRR Debentures.
Sinking Fund Contributions - In addition, because the Company generated
available income in 2000, $1.5 million will be applied to the sinking fund
for the MPRR First Mortgage Bonds and the MPRR General Mortgage Bonds,
$34.3 million to the capital funds related to the MKT Debentures and
Certificates and $20.4 million to the sinking funds for the MKT Debentures
and the Certificates. Amounts payable to the MPRR First Mortgage Bonds,
MPRR General Mortgage Bonds, the MKT Debentures or the Certificates sinking
funds may be covered by the cost of securities previously repurchased by
the Company or its predecessors.
F-13
27
7. LEASES - The Company leases certain locomotives, freight cars, trailers and
other property. Future minimum lease payments for capital and operating
leases with initial or remaining non-cancelable lease terms in excess of
one year as of December 31, 2000 are as follows:
Operating Capital
(Millions of Dollars) Leases Leases
--------------------- ---------- ----------
2001 ........................................ $ 429 $ 231
2002 ........................................ 356 205
2003 ........................................ 276 199
2004 ........................................ 252 201
2005 ........................................ 248 174
Later years ................................. 1,796 1,386
---------- ----------
Total minimum payments .................... $ 3,357 2,396
---------- ----------
Amount representing interest .............. (961)
----------
Present value of minimum lease payments ... $ 1,435
----------
Rent expense for operating leases with terms exceeding one month was
$550 million in 2000, $609 million in 1999 and $573 million in 1998.
Contingent rentals and sub-rentals are not significant.
8. RETIREMENT PLANS
Benefit Summary - The Company provides defined benefit retirement income to
eligible non-union employees through qualified and non-qualified
(supplemental) pension plans. In addition, the Company provides a defined
contribution plan (thrift plan) to eligible non-union employees. All
non-union and certain of the Company's union employees participate in
defined contribution medical and life insurance programs for retirees. All
Railroad employees are covered by the Railroad Retirement System (the
System).
FUNDING AND BENEFIT PAYMENTS - Qualified and non-qualified pension benefits
are based on years of service and the highest compensation during the
latest years of employment. The qualified plans are funded based on the
Projected Unit Credit actuarial funding method and are funded at not less
than the minimum funding standards set forth in the Employee Retirement
Income Security Act of 1974, as amended. The Company has settled a portion
of the non-qualified unfunded supplemental plan's accumulated benefit
obligation by purchasing annuities. Company contributions into the thrift
plan are based on 50% of the participant's contribution, limited to 3% of
the participant's base salary. Company thrift plan contributions were $11
million, $11 million and $10 million for the years ended December 31, 2000,
1999 and 1998, respectively. The Company also provides medical and life
insurance benefits on a cost sharing basis for qualifying employees. These
costs are funded as incurred. In addition, contributions made to the System
are expensed as incurred and amounted to approximately $430 million in
2000, $426 million in 1999 and $411 million in 1998.
The following illustrates the change in the Company's projected
benefit obligation for 2000 and 1999:
Other
Pension Benefits Postretirement Benefits
-------------------------- --------------------------
(Millions of Dollars) 2000 1999 2000 1999
--------------------- ---------- ---------- ---------- ----------
Net benefit obligation at beginning of year .. $ 1,382 $ 1,516 $ 357 $ 378
Service cost ................................. 20 26 5 4
Interest cost ................................ 110 98 28 25
Plan amendments .............................. (3) 33 -- --
Actuarial (gain) loss ........................ 124 (201) 27 (19)
Gross benefits paid .......................... (99) (90) (36) (31)
---------- ---------- ---------- ----------
Net benefit obligation at end of year ........ $ 1,534 $ 1,382 $ 381 $ 357
---------- ---------- ---------- ----------
F-14
28
Changes in the Company's benefit plan assets are summarized as follows
for 2000 and 1999:
Other
Pension Benefits Postretirement Benefits
-------------------------- --------------------------
(Millions of Dollars) 2000 1999 2000 1999
--------------------- ---------- ---------- ---------- ----------
Fair value of plan assets at beginning of year ........ $ 1,751 $ 1,557 $ -- $ --
Actual return on plan assets .......................... (15) 254 -- --
Employer contributions ................................ 7 30 36 31
Gross benefits paid ................................... (99) (90) (36) (31)
---------- ---------- ---------- ----------
Fair value of plan assets at end of year .............. $ 1,644 $ 1,751 $ -- $ --
---------- ---------- ---------- ----------
The components of funded status of the benefit plans for 2000 and 1999
are as follows:
Other
Pension Benefits Postretirement Benefits
-------------------------- --------------------------
(Millions of Dollars) 2000 1999 2000 1999
--------------------- ---------- ---------- ---------- ----------
Funded status at end of year .......................... $ 110 $ 369 $ (381) $ (357)
Unrecognized net actuarial gain ....................... (437) (747) (24) (53)
Unrecognized prior service cost (credit) .............. 96 111 (15) (18)
Unrecognized net transition obligation ................ (6) (8) -- --
---------- ---------- ---------- ----------
Net liability recognized at end of year ............... $ (237) $ (275) $ (420) $ (428)
---------- ---------- ---------- ----------
In 2000 and 1999, $25 million and $26 million, respectively, of total
pension and other postretirement liability were reclassified as a current
liability. Amounts recognized for the benefit plan liabilities in the
statement of consolidated financial position for 2000 and 1999 consist of:
Other
Pension Benefits Postretirement Benefits
-------------------------- --------------------------
(Millions of Dollars) 2000 1999 2000 1999
--------------------- ---------- ---------- ---------- ----------
Prepaid benefit cost .................................. $ 4 $ 2 $ -- $ --
Accrued benefit cost .................................. (241) (277) (420) (428)
Additional minimum liability .......................... (30) (31) -- --
Intangible asset ...................................... 27 28 -- --
Accumulated other comprehensive income ................ 3 3 -- --
---------- ---------- ---------- ----------
Net liability recognized at end of year ............... $ (237) $ (275) $ (420) $ (428)
---------- ---------- ---------- ----------
F-15
29
The components of the Company's net periodic pension costs for the
years ended December 31, 2000, 1999 and 1998 were as follows:
Other
Pension Benefits Postretirement Benefits
------------------------------------ ------------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Service cost ............................. $ 20 $ 26 $ 20 $ 5 $ 4 $ 4
Interest cost ............................ 109 98 100 28 25 25
Expected return on assets ................ (145) (116) (107) -- -- --
Amortization of:
Transition obligation .................. (2) (2) 3 -- -- --
Prior service cost (credit) ............ 13 11 8 (3) (3) (3)
Actuarial gain (loss) .................... (26) (9) 3 (2) (1) (1)
-------- -------- -------- -------- -------- --------
Total net periodic benefit cost .......... $ (31) $ 8 $ 27 $ 28 $ 25 $ 25
-------- -------- -------- -------- -------- --------
As of year-end 2000 and 1999, approximately 32% and 25%, respectively,
of the funded plans' assets were held in fixed income and short-term
securities, with the remainder in equity securities.
The weighted-average actuarial assumptions for the years ended
December 31, 2000, 1999 and 1998 were as follows:
Other
Pension Benefits Postretirement Benefits
------------------------------------ ------------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Discount rate ............................ 7.5% 8.0% 6.75% 7.5% 8.0% 6.75%
Expected return on plan assets ........... 10.0 10.0 9.0 N/A N/A N/A
Rate of compensation increase ............ 4.5 5.0 4.75 4.5 5.0 4.75
Health care cost trend:
Current ............................. N/A N/A N/A 7.7 7.7 9.0
Level in 2006 ....................... N/A N/A N/A 5.5 5.5 4.5
Assumed health care cost trend rates have a significant effect on the
amount reported for health care plans. A one-percentage point change in the
assumed health care cost trend rates would have the following effects:
One percentage One percentage
(Millions of Dollars) point increase point decrease
--------------------- -------------- --------------
Effect on total service and interest cost components .. $ 4 $ (3)
Effect on postretirement benefit obligation ........... 37 (32)
---------- ----------
9. CAPITAL STOCK AND DIVIDEND RESTRICTIONS - The Board of Directors of the
Registrant has restricted the availability of retained earnings for payment
of dividends by $131 million. This represents (a) the amount by which the
estimated fair value of the Registrant's investment in its
non-transportation subsidiaries, as determined by the Board of Directors of
the Registrant, exceeded the net book value of such investment, which was
transferred to the Corporation by means of a dividend in June 1971 ($110
million) and (b) the amount by which the fair market value exceeded the
book value of certain investment securities which were transferred to the
Corporation by means of a dividend in November 1972 ($21 million).
The Company's capital structure consists of Class A Stock and Common
Stock. The Class A Stock is entitled to a cash dividend whenever a dividend
is declared on the Common Stock, in an amount which equals 8 percent of the
sum of the dividends on both the Class A Stock and the Common Stock.
However, dividends may be declared and paid on the Class A Stock only when
there is unappropriated available income in respect
F-16
30
of prior calendar years which is sufficient to make a sinking fund payment
equal to 25 percent of such dividend for the benefit of the MKT Debentures
or the Certificates (note 6). To the extent that dividends are paid on the
Common Stock but not the Class A Stock because the amount of unappropriated
available income is insufficient to make such a sinking fund payment, a
special cash dividend on the Class A Stock shall be paid when sufficient
unappropriated available income exists to make the sinking fund payment.
Such insufficiency does not affect the Company's right to declare dividends
on the Common Stock.
The number of shares shown in the Statement of Changes in
Shareholders' Equity on page F-6 excludes 2,665 shares of Common Stock and
232 shares of Class A Stock owned by Southern Pacific Rail Corporation,
whose results are included in the consolidated financial statements.
The Company is subject to certain restrictions related to the payment
of dividends. The amount of retained earnings available for dividends under
the most restrictive test was $4.0 billion and $3.6 billion at December 31,
2000 and 1999, respectively.
10. COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits
pending against the Company and certain of its subsidiaries. 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. For environmental sites
where remediation costs can be reasonably determined, and where such
remediation is probable, the Company has recorded a liability. At December
31, 2000, the Company had accrued $176 million for estimated future
environmental costs and believes it is reasonably possible that actual
environmental costs may differ from such estimate. In addition, the Company
and its subsidiaries periodically enter into financial and other
commitments in connection with their businesses. 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, contingent liabilities or
guarantees will have a material adverse effect on its consolidated
financial condition, results of operations or liquidity.
11. OTHER INCOME - Other income included the following:
(Millions of Dollars) 2000 1999 1998
--------------------- -------- -------- --------
Net gain on asset dispositions ........................ $ 88 $ 71 $ 124
Rental income ......................................... 75 63 55
Interest income ....................................... 7 10 20
Other - net ........................................... (44) (29) (13)
-------- -------- --------
Total ............................................ $ 126 $ 115 $ 186
-------- -------- --------
12. 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 value of all
financial instruments the Company uses for fuel or interest rate hedging
purposes will, upon adoption of FAS 133 and FAS 138, be recorded in the
Company's consolidated statements of financial position (note 4). In
addition, to the extent fuel hedges are ineffective due to pricing
differentials resulting from the geographic dispersion of the Company's
operations, income statement recognition of the ineffective portion of the
hedge position will be required. On
F-17
31
January 1, 2001, the Company adopted the provisions of FAS 133 and FAS 138.
This adoption resulted in the recognition of a $2 million asset on January
1, 2001.
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (FAS 140), replacing Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (FAS 125). FAS 140 revises criteria for accounting for
securitizations, other financial asset transfers and collateral, and
introduces new disclosures. FAS 140 is effective for fiscal 2000 with
respect to the new disclosure requirements and amendments of the collateral
provisions originally presented in FAS 125. All other provisions are
effective for transfers of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The provisions are to be
applied prospectively with certain exceptions. Management is currently
assessing the financial impact that FAS 140 will have on the Company's
consolidated financial statements.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - Selected unaudited quarterly
financial information for the Company for 2000 and 1999 are as follows:
(Millions of Dollars) Mar. 31 Jun. 30 Sep. 30 Dec. 31 Total
--------------------- ---------- ---------- ---------- ---------- ----------
Operating Revenues: 2000 $ 2,630 $ 2,674 $ 2,757 $ 2,670 $ 10,731
1999 2,473 2,484 2,594 2,589 10,140
---- ---------- ---------- ---------- ---------- ----------
Operating Income: 2000 465 539 563 336 1,903
1999 364 437 515 506 1,822
---- ---------- ---------- ---------- ---------- ----------
Net Income: 2000 214 264 274 174 926
1999 149 206 234 265 854
---- ---------- ---------- ---------- ---------- ----------
14. STOCK OPTIONS AND OTHER STOCK PLANS
OPTIONS - The Railroad participates in the Corporation's stock incentive
programs. The Corporation applies Accounting Principles Board Opinion 25
and related interpretations in accounting for its stock plans. Pursuant to
the Corporation's stock option and retention stock plans for officers and
key employees, 5,541,561; 4,807,783; and 4,493,578 common shares were
available for grant at December 31, 2000, 1999 and 1998, respectively.
Options are granted at market value on the grant date and are exercisable
for a period of 10 years from the grant date. Options generally become
exercisable no earlier than one year after grant.
RETENTION STOCK - The plans provide for awarding retention shares of common
stock or stock units (the right to receive shares of common stock) to
eligible employees. These awards are subject to forfeiture if employment
terminates during the prescribed retention period or, in some cases, if
certain prescribed stock price or other financial criteria are not met.
During the year ended December 31, 2000, 171,309 retention shares and stock
units were issued at a weighted-average fair value of $41.22. During 1999,
18,700 retention shares and stock units were issued at a weighted-average
fair value of $53.03. During 1998, 253,736 retention shares were issued at
a weighted-average fair value of $50.87. A portion of the retention awards
issued in 1999 and 1998 are subject to stock price or performance targets.
The cost of retention shares is amortized to expense over the vesting
period. In 2000, 1999 and 1998, UPC expensed approximately $4 million, $2
million and $12 million, respectively, to amortize Railroad retention stock
awards.
LONG-TERM PLANS - During the year ended December 31, 2000, the 1996
Long-Term Performance Plan (LTPP) expired. The performance criteria set
forth in the LTPP were not satisfied and all retention stock and units
awarded under the LTPP were cancelled. In November 2000, the Corporation
approved the 2001 Long-Term Plan (LTP). The LTP includes certain
performance criteria and a retention requirement.
EXECUTIVE STOCK PURCHASE INCENTIVE PLAN - The Corporation adopted the
Executive Stock Purchase Incentive Plan (ESPIP) effective October 1, 1999,
in order to encourage and facilitate ownership of common stock by officers
and other key executives of the Corporation and its subsidiaries and allow
the ESPIP participants to share in the same risks and rewards as the
Corporation's other shareholders. Under the ESPIP, the Railroad
F-18
32
participants purchased a total of 542,000 shares of the Corporation's
common stock with the proceeds of 6.02% interest-bearing, full recourse
loans from the Corporation. Loans totaled $25 million. Deferred cash
payments will be awarded to the participants to repay interest and the loan
principal if certain performance and retention criteria are met within a
40-month period ending January 31, 2003. During the years ended December
31, 2000 and 1999, UPC expensed approximately $4.9 million and $1.3
million, respectively, attributable to the Railroad participants.
DETERMINATION OF FAIR VALUE OF OPTIONS - The fair value of each stock
option granted is estimated for the determination of pro forma expense
using a Black-Scholes option-pricing model. The following table details the
number of options granted, weighted-average option price of the options
granted, weighted-average assumptions utilized in determining the pro forma
expense and the weighted-average fair value of options for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998[a]
------------ ------------ ------------
Number of options granted .................. 175,850 40,750 14,920,920
Weighted-average option price .............. $ 41.53 $ 54.35 $ 53.27
Weighted-average assumptions:
Dividend yield ........................ 1.6% 1.8% 1.8%
Risk-free interest rate ............... 5.1% 6.4% 4.5%
Volatility ............................ 31.4% 28.3% 24.2%
Expected option period (years) ........ 4 4 4
Weighted-average fair value of options ..... $ 11.71 $ 14.84 $ 11.73
------------ ------------ ------------
The expense impact of the option grant is determined as of the date of
the grant and is reflected in pro forma results over the options' vesting
period. Pro forma net income (loss) for 2000, 1999 and 1998 including
compensation expense for options that vested in each year was $897 million,
$805 million and $(6) million, respectively.
Changes in common stock options outstanding were as follows:
Shares Weighted-Average
Under Option Option Price Per Share
------------ ----------------------
Balance January 1, 1998 .................... 5,607,064 $ 44.41
------------ ------------
Granted[a] ................................. 14,920,920 $ 53.27
Exercised .................................. (208,984) 24.52
Expired/Surrendered ........................ (44,686) 56.17
------------ ------------
Balance December 31, 1998 .................. 20,274,314 $ 51.19
------------ ------------
Granted .................................... 40,750 $ 54.35
Exercised .................................. (276,656) 28.34
Expired/Surrendered ........................ (196,300) 53.04
------------ ------------
Balance December 31, 1999 .................. 19,842,108 $ 51.51
------------ ------------
Granted .................................... 175,850 $ 41.53
Exercised .................................. (105,914) 28.97
Expired/Surrendered ........................ (84,197) 47.71
------------ ------------
Balance December 31, 2000 .................. 19,827,847 $ 51.50
------------ ------------
[a] During 1998, the Corporation implemented a broad-based option program
that granted each Railroad employee 200 options at $55.00 per share. This
program resulted in 11,124,000 new options in 1998.
F-19
33
Stock options outstanding at December 31, 2000 were as follows:
Number of Weighted-Average Weighted-Average
Options Years to Expiration Option Price
------------ ------------------- ----------------
Range of Option Prices:
$20.60 to $39.78 .......... 1,777,780 4 $ 32.43
$41.03 to $48.19 .......... 4,084,757 7 46.58
$52.88 to $60.71 .......... 13,965,310 7 55.37
------------ ------------ ------------
Balance December 31, 2000 .... 19,827,847 7 $ 51.50
------------ ------------ ------------
Stock options exercisable at December 31, 2000 were as follows:
Number of Weighted-Average
Options Option Price
------------ ----------------
Range of Option Prices:
$20.60 to $39.78 ........................ 1,692,447 $ 32.06
$42.87 to $48.19 ........................ 3,914,657 46.80
$52.88 to $60.71 ........................ 2,825,310 56.85
------------ ------------
Balance December 31, 2000 .................. 8,432,414 $ 47.21
------------ ------------
15. WORK FORCE REDUCTION PLAN - Prompted by signs of an economic slowdown, the
Corporation's Board of Directors approved a work force reduction plan (the
Plan) in the fourth quarter of 2000. The Plan calls for the elimination of
approximately 2,000 Railroad positions during 2001. The positions will be
eliminated through a combination of attrition, subsidized early retirement
and involuntary layoffs and will affect both agreement and non-agreement
employees across the entire 23-state Railroad system. Most of the
eliminations will occur during the first six months of 2001, with the
remainder completed throughout the year.
The Company accrued $115 million pre-tax or $72 million after-tax in
the fourth quarter of 2000 for costs related to the Plan. The expense was
charged to salaries, wages and employee benefits in the Company's
consolidated statements of income. No cash payments or charges against the
Plan reserve were made in 2000.
F-20
34
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
2000 COMPARED TO 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 terminal and bridge
companies (collectively, the Company or Railroad), operates various railroad and
railroad-related businesses.
NET INCOME - The Railroad reported record net income of $926 million (including
the $72 million after-tax work force reduction plan charge) in 2000 compared to
net income of $854 million in 1999. The increase in income resulted primarily
from higher commodity and other revenue, improved operations, productivity gains
and lower interest expense, partially offset by significantly higher fuel prices
and volume-related costs. Excluding the work force reduction plan charge, net
income was $998 million in 2000.
OPERATING REVENUES - Operating revenues increased $591 million (6%) over 1999 to
a record $10.7 billion. Revenue carloads increased 4% over 1999 with gains in
five of the six commodity groups. Other revenue gains were the result of higher
subsidiary revenues and increased accessorial services.
The following tables summarize the year-over-year changes in rail commodity
revenue, revenue carloads and average revenue per car by commodity type:
Commodity Revenue
In Millions of Dollars 2000 1999 % Change
- ---------------------- ---------- ---------- ----------
Agricultural .................... $ 1,400 $ 1,419 (1)
Automotive ...................... 1,182 1,048 13
Chemicals ....................... 1,640 1,595 3
Energy .......................... 2,154 2,168 (1)
Industrial Products ............. 1,985 1,896 5
Intermodal ...................... 1,909 1,725 11
---------- ---------- ----------
Total ........................... $ 10,270 $ 9,851 4
---------- ---------- ----------
Revenue Carloads
In Thousands 2000 1999 % Change
- ---------------- ---------- ---------- ----------
Agricultural .................... 873 911 (4)
Automotive ...................... 815 707 15
Chemicals ....................... 936 930 1
Energy .......................... 1,930 1,872 3
Industrial Products ............. 1,431 1,398 2
Intermodal ...................... 2,916 2,738 7
---------- ---------- ----------
Total ........................... 8,901 8,556 4
---------- ---------- ----------
Average Revenue Per Car 2000 1999 % Change
- ----------------------- ---------- ---------- ----------
Agricultural .................... $ 1,604 $ 1,558 3
Automotive ...................... 1,450 1,481 (2)
Chemicals ....................... 1,752 1,715 2
Energy .......................... 1,116 1,158 (4)
Industrial Products ............. 1,387 1,357 2
Intermodal ...................... 655 630 4
---------- ---------- ----------
Total ........................... $ 1,154 $ 1,151 --
---------- ---------- ----------
F-21
35
Agricultural - Revenue declined 1%, as a 4% decrease in carloads more than
offset a 3% increase in average revenue per car. Carloads decreased primarily
due to reduced export demand for wheat and corn and a lack of producer selling
in anticipation of higher prices. Revenue increased for fresh fruits and
vegetables primarily as a result of new express train service from the Pacific
Northwest and northern California to eastern markets. Beverage revenue increased
due to new wine shipments out of California and higher domestic beer carloads.
Average revenue per car increased primarily due to an increase in longer haul
traffic, particularly domestic corn shuttle shipments to California.
Automotive - Revenue increased 13% as a result of a 15% increase in carloads.
Both revenue and carload totals were all-time records, resulting from strong
demand for finished vehicles and parts, market share gains and improved rail
service. Business volume with Mexico was particularly strong due to increased
vehicle production levels and more reliable and expanded rail service. New
product offerings facilitated the conversion of automotive parts shipments from
truck to the Railroad. Increased container shipments of automotive parts, rather
than boxcar shipments, caused average revenue per car to decrease slightly.
Chemicals - A 1% increase in carloads combined with a 2% increase in average
revenue per car led to a 3% increase in revenue. Revenue growth was driven
primarily by an increase in average revenue per car for soda ash, fertilizer,
and liquid and dry segments due to selected price increases. Year-over-year
carload improvements came mainly in the first half of the year, as a strong
economy and customer plant expansions led to increased market demand for
plastics, liquid and dry chemicals, and domestic soda ash. However, a softening
economy late in the year resulted in a 2% decline in fourth-quarter revenue
compared to 1999, with weakness in most segments of the chemical market.
Energy - Energy revenue was down 1% compared to 1999, despite a 3% increase in
carloads for the year. Average revenue per car dropped 4% as a result of
contract pricing provisions with certain major customers. In the first six
months of 2000, carloads declined compared to 1999 due to lower coal demand at
utilities resulting from high inventories caused by mild winter weather and Year
2000 (Y2K) stockpiles. In the second half of 2000, carloads increased over 1999
levels due to hot summer weather and the combination of cold winter weather late
in the year and a significant increase in the price of alternative fuels. Delays
due to severe winter weather partially offset volume gains in the second half of
the year.
Industrial Products - Revenue increased 5% on a 2% increase in carloads and a 2%
increase in average revenue per car. A strong economy in the first half of 2000
led to a general increase in demand for most business lines. The largest revenue
gains were in steel, lumber, cement and other building materials due to an
expanding construction market, especially in the south and southwest. New rail
services and generally improved service performance also contributed to the
increase in carloads. Starting in the third quarter, a softening in the economy
began to adversely affect business demand. Fourth-quarter revenue and carloads
decreased in nearly all business lines but especially minerals, steel, and
hazardous waste. The increase in average revenue per car was due to gains in
higher average revenue per car, steel and lumber carloads and selected price
increases during the year.
Intermodal - Revenue increased 11% due to a 7% increase in carloads and a 4%
increase in average revenue per car. Carload growth resulted from a strong U.S.
economy in the first half of 2000 and increased demand for imports from Asia.
Improved service performance led to an increase in carloads and revenue for
expedited premium service. New and expanded rail service offerings also
contributed to the gains. The increase in average revenue per car was primarily
the result of price increases and a longer average length of haul in some
markets.
OPERATING EXPENSES - Operating expense increased $510 million (6%) to $8.8
billion in 2000 including the work force reduction plan. The higher expenses are
primarily the result of significantly higher fuel prices, inflation, volume
costs associated with a 4% increase in carloads and higher depreciation expense,
partially offset by productivity gains and other cost control measures.
Operating expenses increased $395 million (5%) to $8.7 billion in 2000,
excluding the $115 million pre-tax charge for the work force reduction plan.
F-22
36
Salaries, Wages and Employee Benefits - Including the work force reduction plan
charge, salaries, wages and employee benefits increased $19 million (1%) to $3.6
billion. Costs decreased $96 million (3%), excluding the $115 million pre-tax
work force reduction plan charge. The primary driver was productivity
improvements that resulted in lower train crew expenses despite a 4% increase in
carload volume. In addition, the average employee count decreased 4% from 1999
to 2000. Partially offsetting these gains were volume-related costs and wage and
employee benefit inflation.
Equipment and Other Rents - Expenses decreased $20 million (2%) compared to
1999. The improvement was attributable to lower prices for equipment and
improvements in car cycle times, partially offset by higher volume-related
costs.
Depreciation - Depreciation expense increased $55 million (5%) over 1999,
resulting from capital spending in recent years. Capital spending totaled $1.7
billion in 2000 compared to $1.8 billion in 1999 and $2.0 billion in 1998.
Fuel and Utilities - Expenses increased $496 million (63%). The increase was
driven by significantly higher fuel prices (which added $444 million of
additional costs) and higher volume. Fuel prices were 90 cents per gallon in
2000 compared to 56 cents per gallon in 1999, including taxes, transportation
costs, and regional pricing spreads. The Railroad hedged approximately 10% of
its fuel consumption for the year, which decreased fuel costs by $52 million. As
of December 31, 2000, expected fuel consumption for 2001 is 8% hedged at 68
cents per gallon excluding taxes, transportation costs, and regional pricing
spreads (see note 4 to the consolidated financial statements).
Materials and Supplies - Expenses increased $6 million (1%), reflecting
volume-related increases in car and locomotive repairs, partially offset by
productivity improvements and cost control measures.
Casualty Costs - Costs decreased $15 million (4%) compared to 1999, primarily as
a result of lower settlement costs.
Other Costs - Expenses decreased $31 million (4%) compared to 1999. Cost
control, productivity gains, and lower contract services expenses more than
offset volume-related cost increases and higher state and local taxes.
OPERATING INCOME - Operating income increased $81 million (4%) to $1.9 billion
including the work force reduction charge. Operating income increased $196
million (11%) to a record $2.0 billion excluding the work force reduction
charge. The operating ratio for 2000 was 81.2%, excluding the work force
reduction charge, 0.8 percentage points better than 1999's 82.0% operating
ratio.
NON-OPERATING ITEMS - Other income increased $11 million (10%), primarily the
result of higher real estate sales. Interest expense decreased $26 million (4%),
primarily as a result of lower average debt levels compared to 1999. Excluding
the effect of the work force reduction charge, income taxes increased $89
million (19%) for the year, reflecting higher income levels and 1999 settlements
related to prior tax years.
1999 COMPARED TO 1998
NET INCOME - During 1999, the Railroad continued the earnings improvement that
began in the third quarter of 1998. The Railroad continued to benefit from the
service recovery process implemented in 1997 and 1998. Rail operations reported
net income of $854 million compared to net income of $27 million in 1998. The
increase resulted from improved operations and service levels, increased
revenues in all commodity lines and lower operating costs.
OPERATING REVENUES - Rail operating revenues increased $811 million (9%) to
$10.1 billion. Revenue carloads increased 7% over 1998 with gains in each
commodity group. The increase in revenue carloads resulted from improved
service, market share recovery and a strong economy.
F-23
37
The following tables summarize the year-over-year changes in rail commodity
revenue, revenue carloads and average revenue per car by commodity type:
Commodity Revenue
In Millions of Dollars 1999 1998 % Change
- ---------------------- ---------- ---------- ----------
Agricultural ............................... $ 1,419 $ 1,303 9
Automotive ................................. 1,048 937 12
Chemicals .................................. 1,595 1,535 4
Energy ..................................... 2,168 1,996 9
Industrial Products ........................ 1,896 1,785 6
Intermodal ................................. 1,725 1,516 14
---------- ---------- ----------
Total ...................................... $ 9,851 $ 9,072 9
---------- ---------- ----------
Revenue Carloads
In Thousands 1999 1998 % Change
- ---------------- ---------- ---------- ----------
Agricultural ............................... 911 840 8
Automotive ................................. 707 641 10
Chemicals .................................. 930 899 3
Energy ..................................... 1,872 1,767 6
Industrial Products ........................ 1,398 1,320 6
Intermodal ................................. 2,738 2,531 8
---------- ---------- ----------
Total ...................................... 8,556 7,998 7
---------- ---------- ----------
Average Revenue Per Car 1999 1998 % Change
- ----------------------- ---------- ---------- ----------
Agricultural ............................... $ 1,558 $ 1,552 --
Automotive ................................. 1,481 1,461 1
Chemicals .................................. 1,715 1,708 --
Energy ..................................... 1,158 1,130 2
Industrial Products ........................ 1,357 1,352 --
Intermodal ................................. 630 599 5
---------- ---------- ----------
Total ...................................... $ 1,151 $ 1,134 2
---------- ---------- ----------
Agricultural - Revenue increased 9%, reflecting an 8% improvement in carloads.
Carloads increased primarily due to stronger exports and improved service
levels, which resulted in increased shipments of wheat, corn, meals and oils,
fresh products and beverages. Carloads also increased due to pre-harvest
shipments of stored crops to clear storage. Average revenue per car was flat, as
longer hauls in meals and oils and a price increase on wheat shipments were
offset by a shift in corn movements to shorter-haul Gulf Coast moves versus
longer-haul Pacific Northwest moves.
Automotive - Revenue increased 12%, as a result of a 10% increase in carloads
and a 1% rise in average revenue per car. The year-over-year increase was driven
by improved market coverage and price increases in a year of record vehicle
production. Improvements in service and the negative impact in 1998 of a strike
against a major auto manufacturer also contributed to the increase in revenue.
These gains were partially offset by the negative impact on rail traffic, due to
the implementation of the joint acquisition of Conrail by two other major
railroads. Average revenue per car increased 1% due to a change in mix and
pricing actions.
Chemicals - A 3% increase in chemical carloads drove a 4% increase in revenue.
Shipments increased due to improved service levels and increased demand for
plastics, liquid and dry chemicals and phosphorous. These gains were partially
offset by lower sulfur moves resulting from decreased production in response to
weak demand and a decline in fertilizer moves resulting from depressed demand
for U.S. farm commodities. Average revenue per car
F-24
38
was level, reflecting traffic improvements in longer-haul plastics, offset by
shorter-haul petroleum and export sulfur moves.
Energy - Revenue was up 9%, as a result of a 6% improvement in carloads and a 2%
rise in average revenue per car. The volume increase was due to increases in the
number of Powder River Basin trains per day, tons per car and average train
length. Colorado and Utah volumes also increased, due to improved service.
Average revenue per car increased resulting from longer-haul Powder River Basin
traffic and an increase in tons per car.
Industrial Products - Revenue increased 6%, due to stronger demand and improved
service. Carloads were up 6% because of increases in lumber, stone and cement
moves, caused by strong construction demand; shipments of recyclables grew
through new business. Gains were partially offset by decreased steel and ferrous
scrap carloads, due to higher imports of lower-priced foreign steel and lost
volumes from a major steel producer who filed for bankruptcy. Gains were also
partially offset by the negative impact on rail traffic, due to the
implementation of the joint acquisition of Conrail by two other major railroads.
Intermodal - Revenue increased 14%, driven by an 8% increase in carloads and a
5% increase in average revenue per car. Carloads improved due to strong demand
from growth in imports from Asia, service improvements and a new premium service
offering. Average revenue per car increased, due to longer-haul shipments and
demand-driven price increases.
OPERATING EXPENSES - Operating expenses decreased $578 million (7%) to $8.3
billion in 1999. The lower expenses reflected improved operating efficiency and
service levels and benefits resulting from the continuing integration of
Southern Pacific operations.
Salaries, Wages and Employee Benefits - Labor costs decreased $29 million (1%),
due to productivity gains that resulted in reduced crew costs and lower recrew
rates, partially offset by increases resulting from volume and inflation and
one-time costs recorded in 1999 related to the Southern Pacific merger (see note
2 to the consolidated financial statements).
Equipment and Other Rents - Expenses decreased $93 million (7%), due primarily
to improvements in cycle time as well as lower prices, partially offset by
higher volume.
Depreciation - Expenses increased $31 million (3%), reflecting increased capital
spending in recent years, partially offset by lower depreciation rates for
equipment and track assets. Capital spending totaled $1.8 billion in 1999
compared to $2.0 billion in 1998.
Fuel and Utilities - Expenses were down $9 million (1%). The decrease was driven
by lower fuel prices and improved consumption rates, partially offset by higher
volume. The Railroad hedged 68% of its fuel consumption for 1999 at an average
of 41 cents per gallon (excluding taxes, transportation charges and regional
pricing spreads), which decreased fuel costs by $53 million. At December 31,
1999, expected fuel consumption for 2000 was 10% hedged at an average of 40
cents per gallon (excluding taxes, transportation charges and regional pricing
spreads). At December 31, 1998, 64% of 1999 expected fuel consumption was hedged
(see note 4 to the consolidated financial statements).
Materials and Supplies - Costs increased $25 million (5%), reflecting higher
volumes and increased fleet maintenance.
Casualty Costs - Costs declined $89 million (21%), primarily due to the effect
of lower than expected settlement costs. The decline also reflected an insurance
refund received in 1999 and decreased costs for repairs on cars from other
railroads.
Other Costs - Costs decreased $414 million (33%), reflecting lower state and
local taxes (primarily sales and property taxes), and the impact in 1998 of
customer claims expense.
F-25
39
OPERATING INCOME - Operating income increased $1.4 billion to $1.8 billion in
1999. Both 1999 and 1998 operating income included the impact of one-time costs
related to the Southern Pacific merger for severance, relocation and training of
employees. The operating ratio in 1999 was 82.0%, 13.4 percentage points better
than 1998's 95.4% operating ratio.
NON-OPERATING ITEMS - Other income decreased $71 million (38%) in 1999, due to
the impact in 1998 of a telecommunications contract buyout, sale of a company
aircraft, sale of the Southern Pacific headquarters building and an insurance
recovery for 1997 flood damage received in 1998. Interest expense increased $15
million (2%) in 1999, as a result of higher average debt levels year-over-year
caused by increased borrowings during 1998. Income taxes increased $476 million
in 1999, reflecting higher income before income taxes, partially offset by
settlements related to prior tax years.
OTHER MATTERS
PERSONAL INJURY - In 2000, the Railroad's work-related injuries that resulted in
lost job time declined 20% compared to 1999. In addition, accidents at grade
crossings decreased 10% compared to 1999. Annual expenses for the Railroad's
personal injury-related events were $207 million in 2000, reflecting lower
settlement costs, $228 million in 1999 and $311 million in 1998. Compensation
for work-related accidents is governed by the Federal Employers' Liability Act
(FELA). Under FELA, damages are assessed based on a finding of fault through
litigation or out-of-court settlements. The Railroad offers a comprehensive
variety of services and rehabilitation programs for employees who are injured at
work.
ENVIRONMENTAL COSTS - The Company generates and transports hazardous and
nonhazardous waste in its current and former operations, and is subject to
federal, state and local environmental laws and regulations. The Company has
identified approximately 400 active sites at which it is or may be liable for
remediation costs associated with alleged contamination or for violations of
environmental requirements. This includes 46 sites that are the subject of
actions taken by the U.S. government, 26 of which are currently on the Superfund
National Priorities List. Certain federal legislation imposes joint and several
liability for the remediation of identified sites; consequently, the Company's
ultimate environmental liability may include costs relating to other parties, in
addition to costs relating to its own activities at each site.
As of December 31, 2000, the Company has a liability of $176 million
accrued for future environmental costs where its obligation is probable and
where such costs can be reasonably estimated. However, the actual costs may
differ from these estimates. The liability includes future costs for remediation
and restoration of sites, as well as for ongoing monitoring costs, but excludes
any anticipated recoveries from third parties. Cost estimates are based on
information available for each site, financial viability of other potentially
responsible parties, and existing technology, laws and regulations. The Company
believes that it has adequately accrued for its ultimate share of costs at sites
subject to joint and several liability. However, the ultimate liability for
remediation is difficult to determine because of the number of potentially
responsible parties involved, site-specific cost sharing arrangements with other
potentially responsible parties, the degree of contamination by various wastes,
the scarcity and quality of volumetric data related to many of the sites, and/or
the speculative nature of remediation costs. The majority of the December 31,
2000 environmental liability is expected to be paid out over the next five
years, funded by cash generated from operations.
Remediation of identified sites previously used in operations, used by
tenants or contaminated by former owners required spending of $62 million in
2000, $56 million in 1999 and $58 million in 1998. The Company is also engaged
in reducing emissions, spills and migration of hazardous materials, and spent $8
million, $5 million and $9 million in 2000, 1999 and 1998, respectively, for
control and prevention. In 2001, the Company anticipates spending $65 million
for remediation and $8 million for control and prevention. The impact of current
obligations is not expected to have a material adverse effect on the results of
operations or financial condition of the Company.
LABOR MATTERS - Approximately 87% of the Railroad's nearly 50,000 employees are
represented by rail unions. Under the conditions imposed by the Surface
Transportation Board (STB) in connection with the Southern Pacific acquisition,
labor agreements between the Railroad and the unions had to be negotiated before
the UPRR and Southern Pacific rail systems could be fully integrated. The
Railroad has successfully reached agreements with the
F-26
40
shopcraft, carmen, clerical, and maintenance-of-way unions, and also implemented
"hub-and-spoke" agreements with the train operating crafts. Under the
hub-and-spoke concept, all operating employees in a central "hub" are placed
under a common set of collective bargaining agreements with the ability to work
on the "spokes" running into and out of the hub. Negotiations under the Railway
Labor Act to revise the national labor agreements for all crafts began in late
1999 and are still in progress.
INFLATION - The cumulative effect of long periods of inflation has significantly
increased asset replacement costs for capital-intensive companies such as the
Railroad. As a result, depreciation charges on an inflation-adjusted basis,
assuming that all operating assets are replaced at current price levels, would
be substantially greater than historically reported amounts.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company and its subsidiaries use
derivative financial instruments, which are subject to market risk, in limited
instances for purposes other than trading to manage risk related to changes in
fuel prices and interest rates. The Company uses swaps, futures and/or forward
contracts to mitigate the downside financial risk of adverse price and rate
movements and hedge the exposure to variable cash flows. The sensitivity
analyses that follow illustrate the economic effect that hypothetical changes in
interest rates or fuel prices could have on the Company's financial instruments.
These hypothetical changes do not consider other factors that could impact
actual results.
Interest Rates - The Company manages its overall exposure to fluctuations in
interest rates by adjusting the proportion of fixed- and floating-rate debt
instruments within its debt portfolio over a given period. The mix of fixed- and
floating-rate debt is largely managed through the issuance of targeted amounts
of each as debt matures or incremental borrowings are required. Derivatives may
be used in limited circumstances as one of the tools to obtain the targeted mix
and hedge the exposure to variable fair value changes. In addition, the Company
obtains flexibility in managing interest costs and the interest rate mix within
its debt portfolio by issuing callable fixed-rate debt securities.
At December 31, 2000, the Company has variable-rate debt representing less
than 1% of its total debt. If interest rates average 10% higher in 2001 than the
December 31, 2000 rate, the Company's interest expense would increase by less
than $1 million after tax. This amount is determined by considering the impact
of the hypothetical interest rates on the balances of the Company's
variable-rate debt at December 31, 2000. At December 31, 2000, the Company has
not entered into any interest rate swaps.
Market risk for fixed-rate debt is estimated as the potential increase in
fair value resulting from a hypothetical 10% decrease in interest rates as of
December 31, 2000, and amounts to approximately $122 million at December 31,
2000. The fair values of the Company's fixed-rate debt were estimated by
considering the impact of the hypothetical interest rates on quoted market
prices and current borrowing rates.
Fuel - Fuel costs are a significant portion of the Company's total operating
expenses. As a result of the significance of fuel costs and the historical
volatility of fuel prices, the Company periodically uses swaps, futures and/or
forward contracts to mitigate the impact of adverse fuel price changes. However,
the use of these instruments also limits future gains from favorable movements.
As of December 31, 2000, the Company had hedged approximately 8% of its
forecasted 2001 fuel consumption. If fuel prices decrease 10% from the December
31, 2000 level, the corresponding decrease in the value of the Company's fuel
hedging contracts would be approximately $5 million after tax.
COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits pending
against the Company and certain of its subsidiaries. The Company is also subject
to various federal, state and local environmental laws and regulations, pursuant
to which it is currently participating in the investigation and remediation of
various sites. A discussion of certain claims, lawsuits, contingent liabilities
and guarantees is set forth in note 10 to the consolidated financial statements.
F-27
41
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 value of
all financial instruments the Company uses for fuel or interest rate hedging
purposes will, upon adoption of FAS 133 and FAS 138, be recorded in the
Company's consolidated statements of financial position (see note 4 to the
consolidated financial statements). In addition, to the extent fuel hedges are
ineffective due to pricing differentials resulting from the geographic
dispersion of the Company's operations, income statement recognition of the
ineffective portion of the hedge position will be required. On January 1, 2001,
the Company adopted the provisions of FAS 133 and FAS 138. This adoption
resulted in the recognition of a $2 million asset on January 1, 2001.
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(FAS 140), replacing Statement No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 140
revises criteria for accounting for securitizations, other financial asset
transfers and collateral, and introduces new disclosures. FAS 140 is effective
for fiscal 2000 with respect to the new disclosure requirements and amendments
of the collateral provisions originally presented in FAS 125. All other
provisions are effective for transfers of financial assets and extinguishments
of liabilities occurring after March 31, 2001. The provisions are to be applied
prospectively with certain exceptions. Management is currently assessing the
financial impact that FAS 140 will have on the Company's consolidated financial
statements.
A LOOK FORWARD
2001 BUSINESS OUTLOOK - The Railroad anticipates that revenue will continue to
grow in 2001 despite signals of a weakening economy that were evident at the
close of 2000. The Railroad's diverse commodity base helps insulate overall
financial performance from weakness in individual commodity groups due to
economic or other factors. Fuel prices are expected to remain above historical
levels during 2001, but should fall below the record levels of 2000. To help
reduce the effect of volatile fuel prices on earnings, the Railroad will
continue to look for opportunities to use hedge contracts. Emphasis will
continue to be placed on cost control. In addition, by developing innovative new
rail services and improving service performance and reliability, the Railroad
expects to continue to grow market share and raise overall customer
satisfaction.
2001 CAPITAL INVESTMENTS - The Company's 2001 capital expenditures and debt
service requirements are expected to be funded through cash generated from
operations, additional debt financings and the sale or lease of various
operating and non-operating properties. The Company expects that these sources
will continue to provide sufficient funds to meet cash requirements in the
foreseeable future. Railroad-related capital expenditures will be used to
maintain track and structures, continue capacity expansions on its main lines,
upgrade and augment equipment to better meet customer needs, build
infrastructure and develop and implement new technologies.
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; proposed new products and services; expectations that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material
F-28
42
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.
F-29
43
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31,
----------------------------------------
2000 1999 1998
---------- ---------- ----------
(in millions)
Accrued Casualty Costs:
Balance, beginning of period ..................................... $ 1,255 $ 1,292 $ 1,293
Charged to expense ............................................... 319 334 423
Deductions ....................................................... 418 371 424
---------- ---------- ----------
Balance, End of Period ....................................... $ 1,156 $ 1,255 $ 1,292
---------- ---------- ----------
Accrued casualty costs are presented in the consolidated statements
of financial position as follows:
Current ...................................................... $ 345 $ 344 $ 364
Long-term .................................................... 811 911 928
---------- ---------- ----------
Balance, End of Period .................................. $ 1,156 $ 1,255 $ 1,292
---------- ---------- ----------
44
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
FILED WITH THIS STATEMENT
12 Ratio of Earnings to Fixed Charges.
24 Powers of attorney.
INCORPORATED BY REFERENCE
2(a) Agreement and Plan of Merger, dated as of January 29,
1998, between UPRR and SPT is incorporated herein by
reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated February 13, 1998.
3(a) Amended Certificate of Incorporation of the Company,
effective as of February 1, 1998, is incorporated
herein by reference to Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1998.
3(b) By-Laws of the Company, as amended effective as of
November 19, 1998, are incorporated herein by
reference to Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1998.
4 Pursuant to various indentures and other agreements,
the Company has issued long-term debt; however, no
such agreement has securities or obligations covered
thereby which exceed 10% of the Company's total
consolidated assets. The Company agrees to furnish
the Commission with a copy of any such indenture or
agreement upon request by the Commission.
10(a) Amended and Restated Anschutz Shareholders Agreement,
dated as of July 12, 1996, among UPC, UPRR, The
Anschutz Company, Anschutz Foundation and Mr. Philip
F. Anschutz, is incorporated herein by reference to
Annex D to the Joint Proxy Statement/Prospectus
included in Post-Effective Amendment No. 2 to UPC's
Registration Statement on Form S-4 (No. 33-64707).
10(b) Agreement, dated September 25, 1995, among UPC, UPRR,
MPRR, SP, SPT, DRGW, SSW and SPCSL, on the one hand,
and Burlington Northern Railroad Company (BN) and The
Atchison, Topeka and Santa Fe Railway Company (Santa
Fe), on the other hand, is incorporated by reference
to Exhibit 10.11 to UPC's Registration Statement on
Form S-4 (No. 33-64707).
10(c) Supplemental Agreement, dated November 18, 1995,
between UPC, UPRR, MPRR, SP, SPT, DRGW, SSW and
SPCSL, on the one hand, and BN and Santa Fe, on the
other hand, is incorporated herein by reference to
Exhibit 10.12 to UPC's Registration Statement on Form
S-4 (No. 33-64707).