UNP

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

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Union Pacific Corporation (UPC) for the three and six months ended June 30, 1999. UPC operates primarily through its Rail segment (Union Pacific Railroad Company) and Other Operations, which include trucking (Overnite Transportation Company), technology, and insurance. The reporting period reflects continued service recovery following congestion issues in 1997-1998 and ongoing integration of the Southern Pacific acquisition.

Key Financial Metrics

Note: Total Debt includes $215 million current and $8,590 million long-term debt as of June 30, 1999. Cash flow figures are provided for the six-month period only.

Material Changes vs. Prior Period

• Profitability Turnaround: Net income for the quarter was $194 million, a significant improvement from a net loss of $416 million in the same period in 1998. The 1998 loss included a $262 million after-tax charge related to the attempted sale of Overnite Transportation Company, which was reversed in late 1998.
• Revenue Growth: Operating revenues increased 6% year-over-year for the quarter ($150 million increase) and 6% for the six-month period ($304 million increase), driven by higher volumes and rates across all rail commodity lines.
• Expense Reduction: Operating expenses decreased 16% for the quarter ($430 million) and 11% for the six-month period ($605 million). This was largely due to the absence of a $250 million customer claims expense recorded in Q2 1998 and benefits from the Southern Pacific merger integration.
• Service Recovery: Rail cycle times improved to 12.6 days in Q2 1999 from 16.4 days in Q2 1998, contributing to lower equipment rental costs and higher productivity.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the improved results to successful service recovery efforts and the realization of merger benefits. The company expects continued integration of Southern Pacific operations to yield further cost savings. Capital spending for the first six months of 1999 was approximately $824 million.

Outlook and Hedging: The company has hedged 64% of its forecasted 1999 fuel consumption at an average price of $0.41 per gallon. For the remaining six months of 1999, 64% of fuel consumption is expected to be hedged at an average of 55 cents per gallon.

Risks and Contingencies:

• Legal Proceedings: UPC faces shareholder class actions regarding the Southern Pacific merger and service issues, as well as customer claims related to shipment delays from 1997-1998. Management believes these claims are without merit or adequately reserved.
• Year 2000 (Y2K): As of June 30, 1999, 100% of rail systems and 98% of trucking systems were deemed Y2K compliant. Total project costs are estimated at $61 million, with over 80% already expensed.
• Accounting Changes: The adoption of FAS 133 (Accounting for Derivative Instruments) is deferred until fiscal years beginning after June 15, 2000, but is expected to increase volatility in reported asset and liability positions.

Investor Verification Checklist

• Service Metrics: Verify the sustainability of the improved rail cycle time (12.6 days) and its impact on future operating ratios.
• Customer Claims: Confirm that the $250 million expense recorded in 1998 for customer claims has been fully resolved and no new significant provisions are required.
• Debt Structure: Review the $1.5 billion Convertible Preferred Securities (CPS) and the $2.8 billion credit facility expiring in 2001 to assess refinancing risks.
• Y2K Compliance: Monitor the completion of the remaining 2% of trucking system modifications and the effectiveness of contingency plans.
• Merger Integration: Track the progress of eliminating 5,200 duplicate positions and the associated cost savings against the $958 million merger liability.