UNP

Union Pacific Corp. 10-Q Summary: Period Ended September 30, 1999

Business Context and Reporting Period

This Quarterly Report on Form 10-Q covers the three and nine months ended September 30, 1999, for Union Pacific Corporation (UPC). UPC operates primarily through its Rail segment (Union Pacific Railroad Company) and Other Operations, which include the Overnite trucking line, technology, and insurance products. The reporting period reflects continued integration of the Southern Pacific acquisition and significant operational improvements in the Rail segment.

Key Financial Metrics

Note: Total Debt includes $206 million current and $8,502 million long-term debt as of Sep 30, 1999. Operating Ratio is calculated as Operating Expenses divided by Operating Revenues for the Rail segment.

Material Changes vs. Prior Period

• Profitability Surge: Net income for the nine months ended September 30, 1999, was $568 million, a dramatic turnaround from a net loss of $444 million in the same period in 1998. The 1998 loss included a $262 million after-tax provision for the expected sale of Overnite, which was later reversed and reclassified to continuing operations in Q4 1998.
• Revenue Growth: Consolidated operating revenues increased 7% year-over-year for the nine-month period ($8,406 million vs. $7,869 million), driven by a 7% increase in revenue carloads across all commodity lines.
• Expense Reduction: Operating expenses decreased 9% for the nine-month period ($7,088 million vs. $7,765 million). Key drivers included lower casualty costs, reduced equipment rents due to improved cycle times, and lower fuel costs (despite volume increases) due to hedging and efficiency.
• One-Time Items: Q3 1999 net income included a $27 million after-tax gain from the adjustment of a liability related to discontinued operations of a former subsidiary.

Outlook, Risks, and Management Commentary

• Operational Outlook: Management attributes the strong performance to improved service levels and operational efficiency in the Rail segment. The operating ratio improved significantly to 82.6% for the nine-month period compared to 97.7% in 1998.
• Labor Risks: A significant risk involves the Overnite trucking subsidiary. As of November 9, 1999, a job action by the Teamsters union affected approximately 6.7% of the workforce. Management expects this to negatively impact Overnite's results in the fourth quarter of 1999.
• Legal Contingencies: UPC is facing a jury verdict in a crossbuck accident case involving Amtrak, resulting in approximately $160.3 million in damages ($40.3 million compensatory, $120 million punitive). UPC intends to appeal and believes Amtrak's insurance will hold them harmless. Additionally, shareholder class actions regarding the Southern Pacific merger remain pending.
• Year 2000 (Y2K): Management reports that 100% of Rail systems and 98% of trucking systems are Y2K compliant. Contingency plans are in place, and a command center will be staffed through early 2000.
• Accounting Changes: The adoption of FAS 133 (Accounting for Derivative Instruments) is deferred until fiscal years beginning after June 15, 2000. Management does not anticipate a material impact on consolidated financial statements upon adoption.

Investor Verification Checklist

• Overnite Labor Impact: Verify the extent of Q4 1999 financial impact from the Teamsters job action at Overnite.
• Legal Settlements: Monitor the status of the $160.3 million jury verdict appeal and the shareholder class action regarding the Southern Pacific merger.
• Debt Structure: Review the $1.5 billion Convertible Preferred Securities (CPS) and their treatment as debt or equity in capital ratio calculations.
• Y2K Contingency: Confirm the execution of Y2K contingency plans as the year 2000 approaches, particularly regarding embedded systems in locomotives and signaling.
• Merger Integration Costs: Track the remaining $110 million in pre-tax acquisition-related costs for UPRR consolidation activities.