##### Table of Contents



FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


(Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2003- OR -o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from  to


Commission file number 1-6146

UNION PACIFIC RAILROAD COMPANY

(Exact name of registrant as specified in its charter)


DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    94-6001323
(I.R.S. Employer
Identification No.)


1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)

68179
(Zip Code)

(402) 271-5000
(Registrants telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES x NO o

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES o NO x

As of October 31, 2003, the Registrant had outstanding 7,130 shares of
Common Stock, $10 par value, and 620 shares of Class A Stock, $10 par value.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.





---

TABLE OF CONTENTS



|                                               |                                                                      |                                                                              |  |  |  |  |  | 
|---------------------------------------------- | -------------------------------------------------------------------- | ---------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                 
|                                               | Item 1. Consolidated Financial Statements                           
|                                               |                                                                      | Consolidated Statements of Income                                           
|                                               |                                                                      | Consolidated Statements of Financial Position (Unaudited)                   
|                                               |                                                                      | Consolidated Statements of Cash Flows (Unaudited)                           
|                                               |                                                                      | Consolidated Statement of Changes in Common Shareholders Equity (Unaudited)
|                                               |                                                                      | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                  
|                                               | Item 2. Managements Narrative Analysis of the Results of Operations
|                                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk  
|                                               | Item 4. Controls and Procedures                                     
|PART II. OTHER INFORMATION                    
|                                               | Item 1. Legal Proceedings                                           
|                                               | Item 6. Exhibits and Reports on Form 8-K                            
|SIGNATURES                                    
|EX-12(a) Ratio of Earnings to Fixed Charges   
|EX-12(b) Ratio of Earnings to Fixed Charges   
|EX-31(a) Certification Pursuant to Section 302
|EX-31(b) Certification Pursuant to Section 302
|EX-32 Certifications Pursuant to Section 906  



---



##### Table of Contents



TABLE OF CONTENTS
UNION PACIFIC RAILROAD COMPANY

PART I. FINANCIAL INFORMATIONPage NumberItem 1: Consolidated Financial Statements:CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended September 30, 2003 and 2002
    
    
    3CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Nine Months Ended September 30, 2003 and 2002
    
    
    4CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
At September 30, 2003 and December 31, 2002
    
    
    5CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2003 and 2002
    
    
    6CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS EQUITY
(Unaudited) For the Nine Months Ended September 30, 2003
    
    
    7NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
    
    
    8Item 2: Managements Narrative Analysis of the Results of Operations
    
    
    14Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4: Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    21Item 6: Exhibits and Reports on Form 8-K
    
    
    21Signatures
    
    
    22


2



---



##### Table of Contents









PART I. FINANCIAL INFORMATION







Item 1. Consolidated Financial Statements







Consolidated Statements of Income (Unaudited)Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate Companies

Millions of Dollars,For the Three Months Ended September 30,
    
    2003
    
    2002Revenues
    
    $
    2,946
    
    
    $
    2,838Operating expenses:Salaries, wages and employee benefits
    
    
    958
    
    
    
    899Equipment and other rents
    
    
    308
    
    
    
    315Depreciation
    
    
    267
    
    
    
    286Fuel and utilities
    
    
    330
    
    
    
    277Materials and supplies
    
    
    103
    
    
    
    117Casualty costs
    
    
    107
    
    
    
    88Purchased services and other costs
    
    
    279
    
    
    
    218Total operating expenses
    
    
    2,352
    
    
    
    2,200Operating income
    
    
    594
    
    
    
    638Other income
    
    
    29
    
    
    
    160Interest expense
    
    
    (124
    )
    
    
    (136
    )Income before income taxes
    
    
    499
    
    
    
    662Income taxes
    
    
    (182
    )
    
    
    (248
    )Net income
    
    $
    317
    
    
    $
    414


The accompanying notes are an integral part of these Consolidated Financial Statements.

3



---



##### Table of Contents






Consolidated Statements of Income (Unaudited)Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate Companies

Millions of Dollars,For the Nine Months Ended September 30,
    
    2003
    
    2002Revenues
    
    $
    8,552
    
    
    $
    8,295Operating expenses:Salaries, wages and employee benefits
    
    
    2,831
    
    
    
    2,683Equipment and other rents
    
    
    914
    
    
    
    936Depreciation
    
    
    792
    
    
    
    851Fuel and utilities
    
    
    1,005
    
    
    
    770Materials and supplies
    
    
    304
    
    
    
    358Casualty costs
    
    
    311
    
    
    
    269Purchased services and other costs
    
    
    848
    
    
    
    684Total operating expenses
    
    
    7,005
    
    
    
    6,551Operating income
    
    
    1,547
    
    
    
    1,744Other income
    
    
    61
    
    
    
    216Interest expense
    
    
    (374
    )
    
    
    (412
    )Income before income taxes
    
    
    1,234
    
    
    
    1,548Income taxes
    
    
    (455
    )
    
    
    (575
    )Income before cumulative effect of accounting change
    
    
    779
    
    
    
    973Cumulative effect of accounting change, net of tax
    
    
    274
    
    
    
    Net income
    
    $
    1,053
    
    
    $
    973


The accompanying notes are an integral part of these Consolidated Financial Statements.

4



---



##### Table of Contents









Consolidated Statements of Financial Position (Unaudited)Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate Companies

Sept. 30,
    
    Dec. 31,Millions of Dollars
    
    2003
    
    2002AssetsCurrent AssetsCash and temporary investments
    
    $
    65
    
    
    $
    110Accounts receivable, net
    
    
    523
    
    
    
    529Inventories
    
    
    269
    
    
    
    277Current deferred income taxes
    
    
    281
    
    
    
    281Other current assets
    
    
    233
    
    
    
    189Total current assets
    
    
    1,371
    
    
    
    1,386Investments:Investments in and advances to affiliated companies
    
    
    681
    
    
    
    649Other investments
    
    
    40
    
    
    
    49Total investments
    
    
    721
    
    
    
    698Properties:Cost
    
    
    37,994
    
    
    
    36,821Accumulated depreciation
    
    
    (7,892
    )
    
    
    (7,841
    )Net properties
    
    
    30,102
    
    
    
    28,980Other assets
    
    
    296
    
    
    
    250Total assets
    
    $
    32,490
    
    
    $
    31,314Liabilities and Common Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    517
    
    
    $
    416Accrued wages and vacation
    
    
    384
    
    
    
    362Accrued casualty costs
    
    
    389
    
    
    
    403Income and other taxes
    
    
    339
    
    
    
    226Debt due within one year
    
    
    162
    
    
    
    275Interest
    
    
    56
    
    
    
    71Other current liabilities
    
    
    485
    
    
    
    537Total current liabilities
    
    
    2,332
    
    
    
    2,290Intercompany borrowing from UPC
    
    
    4,410
    
    
    
    4,464Third-party debt due after one year
    
    
    2,044
    
    
    
    1,984Deferred income taxes
    
    
    9,208
    
    
    
    8,823Accrued casualty costs
    
    
    619
    
    
    
    658Retiree benefits obligation
    
    
    807
    
    
    
    888Other long-term liabilities
    
    
    328
    
    
    
    333Redeemable Preference Shares
    
    
    17
    
    
    
    18Commitments and contingencies
Common shareholders equity
    
    
    12,725
    
    
    
    11,856Total liabilities and common shareholders equity
    
    $
    32,490
    
    
    $
    31,314


The accompanying notes are an integral part of these Consolidated Financial Statements.

5



---



##### Table of Contents









Consolidated Statements of Cash Flows (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate Companies

Millions of Dollars,For the Nine Months Ended September 30,
    
    2003
    
    2002Operating ActivitiesNet income
    
    $
    1,053
    
    
    $
    973Adjustments to reconcile net income to net cash provided by operating activities:Cumulative effect of accounting change
    
    
    (274
    )
    
    
    Depreciation
    
    
    792
    
    
    
    851Deferred income taxes
    
    
    224
    
    
    
    350Cash paid to fund pension plan
    
    
    (50
    )
    
    
    Other, net
    
    
    (346
    )
    
    
    (260
    )Changes in current assets and liabilities, net
    
    
    125
    
    
    
    (173
    )Cash provided by operating activities
    
    
    1,524
    
    
    
    1,741Investing ActivitiesCapital investments
    
    
    (1,299
    )
    
    
    (1,298
    )Proceeds from asset sales
    
    
    85
    
    
    
    291Other investing activities, net
    
    
    112
    
    
    
    (49
    )Cash used in investing activities
    
    
    (1,102
    )
    
    
    (1,056
    )Financing ActivitiesDividends paid to parent
    
    
    (174
    )
    
    
    (150
    )Debt repaid
    
    
    (240
    )
    
    
    (159
    )Advances to affiliated companies
    
    
    (55
    )
    
    
    (401
    )Financings, net
    
    
    2
    
    
    
    Cash used in financing activities
    
    
    (467
    )
    
    
    (710
    )Net change in cash and temporary investments
    
    
    (45
    )
    
    
    (25
    )Cash and temporary investments at beginning of period
    
    
    110
    
    
    
    87Cash and temporary investments at end of period
    
    $
    65
    
    
    $
    62Changes in Current Assets and Liabilities, NetAccounts receivable, net
    
    $
    6
    
    
    $
    (138
    )Inventories
    
    
    8
    
    
    
    Other current assets
    
    
    (44
    )
    
    
    (57
    )Accounts, wages and vacation payable
    
    
    123
    
    
    
    43Other current liabilities
    
    
    32
    
    
    
    (21
    )Total
    
    $
    125
    
    
    $
    (173
    )Supplemental cash flow information:Non-cash locomotive lease financings
    
    $
    188
    
    
    $
    126Cash paid during the period for:Interest
    
    
    390
    
    
    
    436Income taxes, net
    
    
    126
    
    
    
    200


The accompanying notes are an integral part of these Consolidated Financial Statements.

6



---



##### Table of Contents









Consolidated Statement of Changes in Common Shareholders Equity (Unaudited)Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate Companies

Accumulated OtherComprehensive Income (Loss)Minimum
    
    ForeignMillions of Dollars,
    
    [a]
    
    [b]
    
    Paid-
    
    
    
    
    
    Pension
    
    CurrencyFor the Nine Months Ended
    
    Common
    
    Class A
    
    in-
    
    Retained
    
    Liability
    
    Translation
    
    DerivativeSeptember 30, 2003
    
    Shares
    
    Shares
    
    Surplus
    
    Earnings
    
    Adjustments
    
    Adjustments
    
    Adjustments
    
    Total
    
    TotalBalance at January 1, 2003
    
    $
    
    
    
    $
    
    
    
    $
    4,782
    
    
    $
    7,224
    
    
    $
    (148
    )
    
    $
    (9
    )
    
    $
    7
    
    
    $
    (150
    )
    
    $
    11,856Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,053
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,053Other comprehensive loss, net of tax[c]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (3
    )
    
    
    (10
    )
    
    
    (10
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,043Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174
    )Balance at September 30, 2003
    
    $
    
    
    
    $
    
    
    
    $
    4,782
    
    
    $
    8,103
    
    
    $
    (148
    )
    
    $
    (16
    )
    
    $
    4
    
    
    $
    (160
    )
    
    $
    12,725


[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.


[c] Other comprehensive loss, net of tax of $6 million.






The accompanying notes are an integral part of these Consolidated Financial Statements.

7



---



##### Table of Contents









UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY AND AFFILIATE COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Responsibilities for Financial Statements- Union Pacific Railroad Company
(the Registrant), a Class I railroad incorporated in Delaware and an indirect
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, UPRR, the
Company or the Railroad), operates various railroad and railroad-related
businesses. The Consolidated Financial Statements of the Company are unaudited
and reflect all adjustments (consisting only of normal and recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
periods presented. The Consolidated Statement of Financial Position at December
31, 2002 is derived from audited financial statements. The Consolidated
Financial Statements should be read in conjunction with the Consolidated
Financial Statements and notes thereto contained in the Companys Annual Report
on Form 10-K for the year ended December 31, 2002. The results of operations
for the three months and nine months ended September 30, 2003 are not
necessarily indicative of the results for the entire year ending December 31,
2003. Certain prior year amounts have been reclassified to conform to the 2003
financial statement presentation.

2. Stock-Based Compensation The Company participates in the Corporations
stock incentive plans. At September 30, 2003, the Corporation had several
stock-based employee compensation plans. The Railroad accounts for those plans
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees",and related Interpretations. No
stock option expense is reflected in net income as all options granted under
those plans had an exercise price equal to the market value of the Union
Pacific Corporation common stock on the date of grant. Stock-based employee
compensation expense related to restricted stock and other incentive plans is
reflected in net income. The following table illustrates the effect on net
income if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation",to stock-based
employee compensation.

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Millions of Dollars
    
    2003
    
    2002
    
    2003
    
    2002Net income, as reported
    
    $
    317
    
    
    $
    414
    
    
    $
    1,053
    
    
    $
    973Stock-based employee compensation expense included in reported
net income, net of tax
    
    
    1
    
    
    
    2
    
    
    
    8
    
    
    
    6Total stock-based employee compensation expense determined
under fair value based method for all awards, net of tax
    
    
    (4
    )
    
    
    (5
    )
    
    
    (18
    )
    
    
    (16
    )Pro forma net income
    
    $
    314
    
    
    $
    411
    
    
    $
    1,043
    
    
    $
    963


The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model. The following were the
weighted-average assumptions for options granted during both the three months
and nine months ended September 30, 2003: risk-free interest rate of 2.9%;
dividend yield of 1.5%; expected lives of 5 years; and volatility of 28.4%.
Assumptions for both the three months and nine months ended September 30, 2002
were: risk-free interest rate of 4.4%; dividend yield of 1.3%; expected lives
of 5 years; and volatility of 28.8%.

3. Intercompany Relationship with UPC At September 30, 2003 and December 31,
2002, the Railroad had $961 million and $904 million working capital deficit
balances, respectively, relating to UPCs management of its cash position. As
part of UPCs cash management activities, the Railroad advances excess cash
(cash available after satisfying all of the Railroads obligations and paying
dividends to UPC) to UPC. Dividends declared and paid to UPC by the Railroad
typically approximate the dividends that UPC declares to its shareholders;
however, there is no formal requirement to do so. The dividend declaration
between the Railroad and UPC is determined solely by the Railroads Board of
Directors. To the extent the Railroad requires additional cash for use in its
operations, UPC makes such funds available for borrowing by the Railroad.
Transactions between UPC and UPRR are treated as net intercompany borrowings in
the Consolidated Statements of Financial Position.

8



---



##### Table of Contents



The majority of the Railroads intercompany borrowings from UPC relate to
the acquisitions of the Chicago and North Western Transportation Company and
Southern Pacific Rail Corporation which were funded by UPC on behalf of the
Railroad. These acquisition costs were assumed by the Railroad in the form of
intercompany borrowings from UPC. The intercompany borrowings accrue interest
at an annual rate of 7.5%, which may be adjusted from time to time, and are
payable on demand. There are no restrictions on the amount the Railroad is
able to borrow from UPC. Intercompany borrowings are unsecured and rank
equally with all of the Railroads other unsecured indebtedness.

UPC provides the Company with various services, including strategic
planning, legal, treasury, accounting, auditing, insurance, human resources and
corporate affairs. In 2003, pursuant to a services agreement, UPC will continue
to provide services to the Company, and the Company will pay UPC its share of
the costs as determined by an independent review. Billings for these services were
$13 million and $40 million for the three months and nine months ended September 30, 2003.

4. Financial Instruments

Strategy and Risk- The Company and its subsidiaries use derivative financial
instruments in limited instances for other than trading purposes to manage risk
related to changes in fuel prices. The Company uses swaps, collars, futures
and/or forward contracts to mitigate the downside risk of adverse price
movements and hedge the exposure to variable cash flows. The use of these
instruments also limits future benefits from favorable movements. The purpose
of these programs is to protect the Companys operating margins and overall
profitability from adverse fuel price changes.

Market and Credit Risk- The Company addresses market risk related to
derivative financial instruments by selecting instruments with value
fluctuations that 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. At September 30, 2003, the Company has not been required to
provide collateral, nor has the Company received collateral relating to its
hedging activity.

Determination of Fair Value- The fair values of the Companys derivative
financial instrument positions at September 30, 2003 and December 31, 2002,
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 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 uses swaps, collars, futures
and/or forward contracts to mitigate the impact of adverse fuel price changes.

9



---



##### Table of Contents



The following is a summary of the Companys derivative financial
instruments at September 30, 2003 and December 31, 2002:

Millions,
    
    Sept. 30,
    
    Dec. 31,Except Average Commodity Prices
    
    2003
    
    2002Fuel hedgingSwaps and swaptions:Number of gallons hedged for 2002 [a]
    
    
    
    
    
    
    552Average price of 2002 hedges (per gallon) [b]
    
    $
    
    
    
    $
    0.56Number of gallons hedged for the remainder of 2003 [c]
    
    
    79
    
    
    
    88Average price of 2003 hedges outstanding (per gallon) [b]
    
    $
    0.66
    
    
    $
    0.58Collars:Number of gallons hedged for the remainder of 2003
    
    
    22
    
    
    
    Average cap price for 2003 collars outstanding
    
    $
    0.77
    
    
    $
    Average floor price for 2003 collars outstanding
    
    $
    0.67
    
    
    $
    Average ceiling price for 2003 collars outstanding
    
    $
    0.88
    
    
    $
    Number of gallons hedged for 2004
    
    
    28
    
    
    
    Average cap price for 2004 collars outstanding
    
    $
    0.78
    
    
    $
    Average floor price for 2004 collars outstanding
    
    $
    0.67
    
    
    $
    Average ceiling price for 2004 collars outstanding
    
    $
    0.88
    
    
    $
    




| |  | [a] Fuel hedges expired December 31, 2002. Fuel hedges included the swap portion of a swaption with a base term expiring December 31, 2002.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | [b] Excluding taxes, transportation costs and regional pricing spreads.                                                                    
| |  | [c] Fuel hedges which are in effect during 2003. These hedges expire December 31, 2003.                                                    

The fair value asset positions of the Companys outstanding derivative
financial instruments at September 30, 2003 and December 31, 2002 were as
follows:

Sept. 30,
    
    Dec. 31,Millions of Dollars
    
    2003
    
    2002Fuel hedging:Gross fair value asset position
    
    $
    9
    
    
    $
    12Gross fair value (liability) position
    
    
    
    
    
    
    Total fair value asset position
    
    $
    9
    
    
    $
    12


Fuel hedging positions will be reclassified from accumulated other
comprehensive income to fuel expense over the life of the hedge as fuel is
consumed.

The Companys use of derivative financial instruments had the following
impact on pre-tax income for the three months and nine months ended
September 30, 2003 and 2002:

Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,Millions of Dollars
    
    2003
    
    2002
    
    2003
    
    2002Decrease in fuel expense from hedging
    
    $
    4
    
    
    $
    15
    
    
    $
    15
    
    
    $
    15Decrease in fuel expense from swaptions
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    17Decrease in operating expenses
    
    
    4
    
    
    
    19
    
    
    
    15
    
    
    
    32Increase in other income from swaptions
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    4Increase in pre-tax income
    
    $
    4
    
    
    $
    20
    
    
    $
    15
    
    
    $
    36


Through September 30, 2003, the Company had recorded less than $1 million
for fuel hedging ineffectiveness.

Sale of Receivables- The Railroad has sold, on a 364-day revolving basis, an
undivided percentage ownership interest in a designated pool of accounts
receivable to third parties through a bankruptcy-remote subsidiary.
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. Payments

10



---



##### Table of Contents



collected from sold receivables can be
reinvested in new receivables on behalf of the buyers. Should the
Corporations credit rating fall below investment grade, the amount of
receivables sold would be reduced, and in certain cases, the buyers have the
right to discontinue this reinvestment, thus requiring the Railroad to fund the
receivables. At September 30, 2003 and December 31, 2002, accounts receivable
are presented net of $590 million and $600 million of receivables sold,
respectively. On August 7, 2003, the sale of receivables program was renewed
for one year without any significant term changes.

5. Capital Stock The number of shares shown in the Common Stock section of
the Consolidated
Statement of Changes in Common Shareholders Equity excludes 2,665 shares of
Common Stock and 232 shares of Class A Stock owned by Southern Pacific, an
affiliate of the Registrant, whose results are included in the Companys
Consolidated Financial Statements.

6. Other Income- Other income included the following for the three months and
nine months ended September 30, 2003 and 2002:

Three Months
    
    Nine MonthsEnded Sept. 30,
    
    Ended Sept. 30,Millions of Dollars
    
    2003
    
    2002
    
    2003
    
    2002Net gain on non-operating asset dispositions
    
    $
    22
    
    
    $
    155
    
    
    $
    46
    
    
    $
    196Rental income
    
    
    13
    
    
    
    12
    
    
    
    38
    
    
    
    38Interest income
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    5Other, net
    
    
    (7
    )
    
    
    (8
    )
    
    
    (26
    )
    
    
    (23
    )Total
    
    $
    29
    
    
    $
    160
    
    
    $
    61
    
    
    $
    216


7. Commitments and Contingencies

Unasserted Claims- There are various claims and lawsuits pending against the
Company and certain of its subsidiaries, in addition to unasserted claims. It
is not possible at this time for the Company to determine fully the effect of
all such claims on its consolidated financial condition, results of operations
or liquidity; however, to the extent possible, where unasserted claims can be
reasonably estimated and where such claims are considered probable, the Company
has recorded a liability. The Company does not expect that any known lawsuits
or claims, including unasserted claims, will have a material adverse effect on
its consolidated financial condition, results of operations or liquidity.

Personal Injury and Occupational Illness- The cost of injuries to employees
and others related to Railroad activities is charged to expense based on
actuarial estimates of the ultimate cost and number of incidents each year.
The three month and nine month expenses for the Companys personal
injury-related events were $66 million and $187 million in 2003 and $58 million
and $174 million in 2002, respectively. As of September 30, 2003, the Company
had a liability of $630 million accrued for personal injury costs, of which
$272 million was recorded as a current liability. The Railroad has additional
amounts accrued for claims related to certain occupational illnesses.
Compensation for Railroad 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- The Company generates and transports hazardous and nonhazardous
waste in its current operations and has done so in its former operations, and
it is subject to federal, state and local environmental laws and regulations.
The Company has identified approximately 417 sites at which it is or may be
liable for remediation costs associated with alleged contamination or for
violations of environmental requirements. This includes 57 sites that are the
subject of actions taken by the U.S. government, 32 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.

When an environmental issue has been identified with respect to the
property owned, leased or otherwise used in the conduct of the Companys
business, the Company and its external consultants perform environmental
assessments on such property. The Company expenses the cost of the assessments
as incurred. The Company accrues the cost of remediation where its obligation
is probable and such costs can be reasonably estimated.

11



---



##### Table of Contents



As of September 30, 2003, the Company had a liability of $195 million
accrued for future environmental costs, of which $59 million was recorded in
current liabilities as accrued casualty costs. 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 Company expects to pay out the majority of
the September 30, 2003 environmental liability over the next five years, funded
by cash generated from operations. The impact of current obligations is not
expected to have a material adverse effect on the results of operations,
financial condition or liquidity of the Company.

Other Matters- The Company periodically enters into financial and other
commitments in connection with its 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 reasonably 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.

At September 30, 2003, the Company had unconditional purchase obligations
of $180 million for the acquisition of locomotives as part of the Companys
multi-year capital asset acquisition plan. In addition, the Company was
contingently liable for $343 million in guarantees and $28 million in letters
of credit at September 30, 2003. These contingent guarantees were entered into
in the normal course of business and include guaranteed obligations of
affiliated operations. The Company is not aware of any existing event of
default, which would require it to satisfy these guarantees.

As described in note 10 to the Consolidated Financial Statements, Item 8,
in the Annual Report on Form 10-K, the Railroad has a synthetic operating lease
arrangement to finance a new headquarters building. The Railroad has
guaranteed a residual value equal to 85% of the total construction related
costs upon completion of the building. During construction, the Railroad
guarantees 89.9% of the construction costs incurred. At September 30, 2003,
the Railroads guarantee related to the building was $92 million. The
guarantee will be approximately $220 million upon completion of the building.
At September 30, 2003, the Railroad had a liability recorded of approximately
$7 million related to the fair value of this guarantee.

During May 2003, UPRR entered into a capital lease covering new
locomotives. The related capital lease obligation totaled approximately $188
million and is included in the Consolidated Statements of Financial Position as
debt.

8. Accounting Pronouncements- In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of the entitys residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. As described in note 10 to the
Consolidated Financial Statements, Item 8, in the Annual Report on Form 10-K,
the Railroad has a synthetic operating lease arrangement to finance a new
headquarters building, which falls within the guidance of FIN 46. In June
2003, the Railroad restructured the synthetic lease resulting in no effect to
the Consolidated Financial Statements due to the adoption of FIN 46.

In October 2003, the FASB issued FASB Staff Position Number FIN 46-6 (FSP
46-6) which provides public entities an opportunity to delay implementation of
FIN 46, for agreements entered into prior to February 1, 2003, until periods
ending after December 15, 2003. FSP 46-6 does not impact the Company, as the
Company has already adopted FIN 46.

9. Cumulative Effect of Accounting Change Surface Transportation Board (STB)
accounting rules require that railroads accrue the cost of removing track
structure over the expected useful life of these assets. Railroads
historically used this prescribed accounting for reports filed with both the
STB and SEC. In August 2001, the FASB issued Statement No. 143, Accounting
for Asset Retirement Obligations (FAS 143). This statement was effective

12



---



##### Table of Contents



for the Company beginning January 1, 2003, and prohibits the accrual of removal
costs unless there is a legal obligation to remove the track structure at the
end of its life. The Company concluded that it did not have a legal obligation
to remove the track structure, and therefore, under generally accepted
accounting principles, the Company could not accrue the cost of removal in
advance. Reports filed with the SEC will reflect the expense of removing these
assets in the period in which they are removed. For STB reporting requirements
only, the Company will continue to follow the historical method of accruing in
advance, as prescribed by the STB. FAS 143 also requires the Company to record
a liability for legally obligated asset retirement costs associated with
tangible long-lived assets. In the first quarter of 2003, the Company recorded
income from a cumulative effect of accounting change, related to the adoption
of FAS 143, of $274 million, net of tax of $167 million. The accounting change
had no effect on the Companys liquidity. Had the change been retroactively
applied, the change would have had an immaterial impact on net income.

13



---



##### Table of Contents









Item 2. Managements Narrative Analysis of the Results of Operations

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
RESULTS OF OPERATIONS

Three Months and Nine Months Ended September 30, 2003 Compared to
Three Months and Nine Months Ended September 30, 2002

Union Pacific Railroad Company (the Registrant), a Class I railroad
incorporated in Delaware and an indirect 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, UPRR, the Company or Railroad),
operates various railroad and railroad-related businesses.

A copy of this Quarterly Report on Form 10-Q, as well as certain other
filings made by the Company, including the Companys 2002 Annual Report on Form
10-K, current reports on Form 8-K and any amendments to such reports are
available free of charge on the Internet at Union Pacific Corporations website
at www.up.com/investors. Additionally, the Corporations corporate governance
materials, including Board Committee charters, governance guidelines and
policies and codes of conduct and ethics for directors, officers and employees
may also be found on the Internet at the Corporations website at
www.up.com/investors.

Critical Accounting Policies and Estimates

The Companys discussion and analysis of its financial condition and results of
operations are based upon its Consolidated Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires estimation and judgment that affect the reported amounts of revenues,
expenses, assets and liabilities. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. If these estimates differ materially
from actual results, the impact on the Consolidated Financial Statements may be
material. The Companys critical accounting policies are available in the
Companys 2002 Annual Report on Form 10-K, Item 7.

Net Income The Company reported net income of $317 million in the third
quarter of 2003 compared to net income of $414 million in 2002, a decrease of
$97 million (23%). Year-to-date net income was $1.1 billion. Year-to-date
income before the cumulative effect of accounting change decreased $194 million
(20%) to $779 million, compared to 2002 net income of $973 million. The
decrease in both periods resulted primarily from higher fuel prices, inflation,
volume-related expenses and lower gains from real estate sales. The third
quarter decrease in net income was partially offset by 4% operating revenue
growth, lower depreciation expense, lower interest expense and cost control
efforts. The decrease year-to-date was partially offset by 3% operating
revenue growth, lower depreciation expense, lower interest expense and cost
control efforts.

Operating Revenues Operating revenue is comprised of rail commodity revenue
and other revenues. Other revenues primarily include subsidiary revenue from
various companies that are wholly owned or majority owned by the Railroad,
revenue from the Chicago commuter rail operations and accessorial revenue
earned due to customer detainment of Railroad owned or controlled equipment.
Operating revenues increased $108 million (4%) to $2.9 billion in the third
quarter and $257 million (3%) to $8.6 billion in the nine-month period compared
to 2002. Commodity revenue increased $101 million (4%) in the third quarter to
$2.8 billion, led by growth in the Agricultural Products, Energy and Industrial
Products commodity groups. Third quarter revenue carloads were essentially
flat compared to a year ago. Average revenue per car for the period increased
3% to $1,195 driven by positive mix, fuel surcharges, pricing gains and
index-based contract escalators. Year-to-date rail commodity revenue grew 3%
to $8.2 billion compared to 2002. Revenue carloads were flat and average
revenue per car showed a 3% increase to $1,192 when compared to a year ago.
Other revenues increased $7 million (6%) to $119 million in the third quarter
compared to a year ago and increased $31 million (10%) year-to-date when
compared to 2002 as a result of higher subsidiary revenue and accessorial
revenue.

14



---



##### Table of Contents



The following tables summarize the year-over-year changes in rail
commodity revenue, revenue carloads and average revenue per car by commodity
type:

Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    %
    
    Commodity Revenue
    
    September 30,
    
    %2003
    
    2002
    
    Change
    
    Millions of Dollars
    
    2003
    
    2002
    
    Change$
    411
    
    
    $
    373
    
    
    
    10
    %
    
    Agricultural
    
    $
    1,158
    
    
    $
    1,096
    
    
    
    6
    %276
    
    
    
    285
    
    
    
    (3
    )
    
    Automotive
    
    
    898
    
    
    
    893
    
    
    
    1400
    
    
    
    399
    
    
    
    
    
    
    Chemicals
    
    
    1,187
    
    
    
    1,186
    
    
    
    628
    
    
    
    591
    
    
    
    6
    
    
    Energy
    
    
    1,791
    
    
    
    1,743
    
    
    
    3572
    
    
    
    535
    
    
    
    7
    
    
    Industrial Products
    
    
    1,643
    
    
    
    1,542
    
    
    
    6540
    
    
    
    543
    
    
    
    
    
    
    Intermodal
    
    
    1,521
    
    
    
    1,512
    
    
    
    1$
    2,827
    
    
    $
    2,726
    
    
    
    4
    %
    
    Total
    
    $
    8,198
    
    
    $
    7,972
    
    
    
    3
    %


Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    %
    
    Revenue Carloads
    
    September 30,
    
    %2003
    
    2002
    
    Change
    
    Thousands
    
    2003
    
    2002
    
    Change225
    
    
    
    215
    
    
    
    5
    %
    
    Agricultural
    
    
    645
    
    
    
    642
    
    
    
    189
    
    
    
    193
    
    
    
    (2
    )
    
    Automotive
    
    
    610
    
    
    
    605
    
    
    
    1225
    
    
    
    231
    
    
    
    (3
    )
    
    Chemicals
    
    
    670
    
    
    
    681
    
    
    
    (2
    )563
    
    
    
    540
    
    
    
    4
    
    
    Energy
    
    
    1,621
    
    
    
    1,605
    
    
    
    1390
    
    
    
    379
    
    
    
    3
    
    
    Industrial Products
    
    
    1,112
    
    
    
    1,077
    
    
    
    3775
    
    
    
    801
    
    
    
    (3
    )
    
    Intermodal
    
    
    2,220
    
    
    
    2,253
    
    
    
    (1
    )2,367
    
    
    
    2,359
    
    
    
    
    
    
    Total
    
    
    6,878
    
    
    
    6,863
    
    
    
    


Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    %
    
    Average Revenue
    
    September 30,
    
    %2003
    
    2002
    
    Change
    
    Per Car
    
    2003
    
    2002
    
    Change$
    1,828
    
    
    $
    1,740
    
    
    
    5
    %
    
    Agricultural
    
    $
    1,796
    
    
    $
    1,708
    
    
    
    5
    %1,455
    
    
    
    1,479
    
    
    
    (2
    )
    
    Automotive
    
    
    1,471
    
    
    
    1,476
    
    
    
    1,780
    
    
    
    1,729
    
    
    
    3
    
    
    Chemicals
    
    
    1,773
    
    
    
    1,742
    
    
    
    21,116
    
    
    
    1,095
    
    
    
    2
    
    
    Energy
    
    
    1,105
    
    
    
    1,086
    
    
    
    21,467
    
    
    
    1,410
    
    
    
    4
    
    
    Industrial Products
    
    
    1,476
    
    
    
    1,432
    
    
    
    3697
    
    
    
    667
    
    
    
    3
    
    
    Intermodal
    
    
    685
    
    
    
    671
    
    
    
    2$
    1,195
    
    
    $
    1,156
    
    
    
    3
    %
    
    Total
    
    $
    1,192
    
    
    $
    1,162
    
    
    
    3
    %


Agricultural- Revenue increased 10% in the third quarter and 6% for the
year-to-date period of 2003 over the comparable periods in 2002. Third quarter
volume increased 5% while year-to-date volume was flat over last year. Average
revenue per car increased 5% in both periods. Demand for domestic wheat and
Gulf export wheat led the improvement over 2002. Ethanol shipments also
increased due to heightened demand for the fuel additive. Average revenue per
car increased due to price increases, the positive mix impact of longer average
length of haul shipments and fuel surcharges.

Automotive- Revenue declined 3% for the third quarter but increased 1% for the
year-to-date period of 2003 over the comparable periods in 2002. The third
quarter revenues from domestic manufacturers decreased compared to the same
period last year, as the softening economy weakened demand for finished
vehicles and forced production cuts. The year-to-date revenue growth was the
result of increased volume due to market share gains for materials shipments.
Average revenue per car decreased 2% in the third quarter but was flat for the
year-to-date period as price increases and fuel surcharges were offset by the
mix impact of disproportionate growth in materials shipments, which move at a
lower average revenue per car than finished vehicles.

Chemicals- Revenue was flat for both the third quarter and year-to-date period
of 2003 over the comparable periods of 2002, as declining carloads in both
periods were partially offset by an increase in average revenue per car.
Reduced plastics volume led the decline in carloads in both periods, as the
soft economy combined with higher input costs caused producers to lower
inventories and reduce shipments. Increased market demand for domestic and
export soda ash partially offset the decline. Average revenue per car increased
3% for the third quarter and 2% year-to-date,

15



---



##### Table of Contents



due to a mix shift toward longer average length of haul, price increases, fewer cars in storage in transit and
fuel surcharges.

Energy- Revenue increased 6% for the third quarter and 3% for the year-to-date
period of 2003 over the comparable periods of 2002. First quarter volume was
hampered by the absence of export traffic from the Colorado and Utah mining
regions, which Japan is now sourcing from other Far Eastern producers. Severe
weather in February and March also negatively impacted coal volumes. Strong
utility demand due to lower inventories in the second and third quarter
resulted in a 1% increase in year-to-date carloads. Average revenue per car
increased 2% in both periods, due to index-based contract escalators and longer
average length of haul.

Industrial Products- Revenue increased 7% for the third quarter and 6% for the
year-to-date period of 2003 over the comparable periods of 2002, due to
increases in carloads and average revenue per carload. The volume increase
was led by lumber, as housing starts and low interest rates continued to drive
business. Government shipments of military equipment and ammunition in support
of the war effort also contributed to the increase. Steel and scrap shipments
increased as the weakening dollar created higher domestic and export demand for
U.S. produced steel, augmented by market share gains. Average revenue per car
increased 4% in the third quarter and 3% year-to-date, primarily due to
positive mix, fuel surcharges and price increases.

Intermodal- Revenue was flat for the third quarter and increased 1% for the
year-to-date period of 2003 over the comparable periods of 2002, as a decline
in carloads in the third quarter was more than offset by an increase in average
revenue per car. Domestic carloads were up in both periods while international
carloads decreased in the third quarter and year-to-date due to penetration
losses, partially offset by strong first quarter market growth. Average
revenue per car for the three and nine month periods increased due to fuel
surcharges and price increases.

Mexico Business- Included in the rail commodity revenue reported above is
Mexican related revenue, which increased 1% to $218 million for the third
quarter and was flat at $650 million for the year-to-date period of 2003 over
the comparable periods of 2002. Business growth was led by strong grain export
movements and penetration gains from motor carriers in auto part shipments.
Reduced steel and scrap along with finished vehicle imports partially offset
the increase.

Operating Expenses Operating expenses increased $152 million (7%) to $2.4
billion in the third quarter of 2003 and $454 million (7%) year-to-date when
compared to 2002. The increase in operating expenses is due primarily to
higher fuel prices, in addition to wage and benefit inflation and
volume-related costs as gross ton miles for the quarter and year-to-date
periods increased 3% and 2% respectively. A reduction in employment levels,
lower depreciation expense (see Depreciationdiscussion) and cost control
efforts partially offset the increase. Cost control efforts are defined as
focused actions to reduce discretionary spending and failure costs. Expenses in
the third quarter were also negatively impacted by increased crew and asset
utilization costs.

Salaries, Wages and Employee Benefits- Salaries, wages and employee benefits
increased $59 million (7%) in the third quarter of 2003 compared to 2002.
Year-to-date, wage and benefit expenses rose $148 million (6%). Increases were
driven by the adoption of FAS 143 (see note 10 to the Consolidated Financial
Statements), inflation, protection costs, increased crew utilization costs due
to a shortage of available crews and increased pension expenses. A 3% and 2%
reduction in employee force levels for the third quarter and year-to-date
periods, respectively, as well as improvements in productivity partially offset
the effects of inflation and protection costs for both periods. Protection cost
represents the differential payment when the wage earned for active employment
is lower than an employees protected rate of pay. An individuals protected
rate is imposed by the Surface Transportation Board for employees adversely
affected by a merger or is established by collective bargaining agreements in
other cases. The adoption of FAS 143 accounted for $30 million and $87 million
of the increases for the third quarter and year-to-date, respectively.

Equipment and Other Rents- Equipment and other rents primarily includes rental
expense UPRR pays for freight cars owned by other railroads or private
companies; freight car, intermodal and locomotive leases; other specialty
equipped vehicle leases; and office and other rentals. Expenses decreased $7
million (2%) in the third quarter and $22 million (2%) year-to-date compared to
2002. The third quarter decrease was due primarily to reduced rental prices
for private freight cars, partially offset by increased car cycle times driven
by higher inventory levels due to slower network train speed. Equipment and
other rents decreased year-to-date due to lower rental prices for private cars
and a reduction in lease expenses due to lower car cycle times and lower
general car expenses in the first quarter of 2003, partially offset by higher
locomotive lease expense. The higher locomotive lease expense is due to UPRRs
increased leasing of new, more reliable and fuel efficient locomotives. These
new locomotives replaced older, non-leased models in the fleet, which helped
reduce expenses for depreciation, labor, materials and fuel during the period.

16



---



##### Table of Contents



Depreciation- The majority of depreciation expense relates to track structure,
including rail, ties and other track material. Depreciation expense decreased
$19 million (7%) in the third quarter and $59 million (7%) year-to-date over
2002. The adoption of FAS 143 (see note 9 to the Consolidated Financial
Statements) decreased depreciation expense in the third quarter by $24 million
and $73 million year-to-date. Additionally, implementation of the recent
depreciation study required and approved by the Surface Transportation Board
resulted in lower depreciation expense of $12 million and $37 million for the
third quarter and first nine months of 2003, respectively, due to a reduction
in depreciation rates for certain track assets (effective January 1, 2003),
offset by increased rates for locomotives and other assets (effective July 1,
2003). Capital spending in recent years has increased the total value of the
Companys depreciable assets. Capital spending totaled $1.3 billion in both
nine month periods ended September 30, 2003 and 2002.

Fuel and Utilities- Fuel and utilities is comprised of locomotive fuel,
utilities other than telephone, gasoline and other fuels. Expenses increased
$53 million (19%) in the third quarter and $235 million (31%) year-to-date 2003
compared to a year ago. The increase was driven by higher fuel prices
minimally offset by a lower fuel consumption rate, as measured by gallons
consumed per thousand gross ton miles. Fuel prices averaged 90 cents per
gallon in the third quarter of 2003 compared to 75 cents per gallon in the
third quarter of 2002 (price includes taxes and transportation costs).
Year-to-date, fuel prices averaged 93 cents per gallon compared to 70 cents per
gallon in 2002. Higher fuel prices in 2003 resulted in a $48 million increase
in fuel expense in the third quarter and $227 million increase year-to-date
compared to 2002. The lower consumption rate decreased fuel expense by $4
million in the third quarter and $15 million year-to-date. A 3% increase in
gross ton miles for the third quarter and a 2% increase year-to-date resulted
in additional fuel expense of $6 million and $13 million, respectively. The
Railroad hedged approximately 7% of its fuel consumption for the third quarter
and year-to-date, which decreased fuel costs by $4 million in the third quarter
and $15 million year-to-date. Gasoline, utilities and propane expenses
increased $3 million in the third quarter and $10 million year-to-date
primarily due to higher fuel prices.

Materials and Supplies- Materials used for the maintenance of the Railroads
lines, structures and equipment is the principal component of materials and
supplies expense. Office, small tools and other supplies along with the costs
of freight services purchased to ship company materials are also included.
Expenses decreased $14 million (12%) in the third quarter and $54 million (15%)
year-to-date, primarily due to the adoption of FAS 143 (see note 10 to the
Consolidated Financial Statements), fewer locomotive and freight car repairs,
reduced material freight charges, cost control measures
and a shift to more contracting of locomotive repairs, which resulted in a
corresponding increase to Purchased Services and Other Costs. The decreases
were partially offset by increased costs for locomotive materials.

Casualty Costs- The largest component of casualty costs is personal injury
expense. Freight and property damage, insurance, environmental matters and
occupational illness expense are also included in casualty costs. Costs
increased $19 million (22%) in the third quarter compared to 2002 and $42
million (16%) year-to-date due primarily to higher personal injury expense and
insurance costs.

Purchased Services and Other Costs- Purchased services and other costs include
the costs of services purchased from outside contractors, state and local
taxes, net costs of operating facilities jointly used by UPRR and other
railroads, transportation and lodging for train crew employees, trucking and
contracting costs for intermodal containers, leased automobile maintenance
expenses, telephone and cellular expense, employee travel expense and computer
and other general expenses. Expenses increased $61 million (28%) in the third
quarter and $164 million (24%) year-to-date when compared to last year. In the
third quarter of 2003, higher expenses were driven by increased state and local
taxes, increased spending for contract services and higher expenses for jointly
operated facilities. Expenses increased year-to-date primarily due to
increased contract services, higher state and local taxes, increased intermodal
volume costs, joint facility expenses, and crew transportation costs.

Operating Income Third quarter operating income decreased $44 million (7%) to
$594 million while operating income year-to-date declined $197 million (11%) to
$1.5 billion as higher fuel prices, wage and benefit inflation, volume and
resource utilization costs offset higher revenues, lower depreciation expense
and cost control efforts.

Non-Operating Items Interest expense decreased $12 million (9%) in the third
quarter and $38 million (9%) year-to-date due to lower interest rates and a
lower average debt level in 2003. Other income decreased $131 million (82%) in
the third quarter and $155 million (72%) year-to-date compared to 2002 due to
lower gains from real estate sales (2002 land and track sale to the Utah
Transit Authority with a pre-tax value of $141 million). Income tax expense
decreased $66 million (27%) in the third quarter and $120 million (21%)
year-to-date compared to 2002 due to lower pre-tax income and higher state tax
incentives in 2003.

17



---



##### Table of Contents



OTHER MATTERS

Intercompany Relationship with UPC At September 30, 2003 and December 31,
2002, the Railroad had $961 million and $904 million working capital deficit
balances, respectively, relating to UPCs management of its cash position. As
part of UPCs cash management activities, the Railroad advances excess cash
(cash available after satisfying all of the Railroads obligations and paying
dividends to UPC) to UPC. Dividends declared and paid to UPC by the Railroad
typically approximate the dividends that UPC declares to its shareholders;
however, there is no formal requirement to do so. The dividend declaration
between the Railroad and UPC is determined solely by the Railroads Board of
Directors. To the extent the Railroad requires additional cash for use in its
operations, UPC makes such funds available for
borrowing by the Railroad. Transactions between UPC and UPRR are treated as
net intercompany borrowings in the Consolidated Statements of Financial
Position.

The majority of the Railroads intercompany borrowings from UPC relate to
the acquisitions of the Chicago and North Western Transportation Company and
Southern Pacific Rail Corporation which were funded by UPC on behalf of the
Railroad. These acquisition costs were assumed by the Railroad in the form of
intercompany borrowings from UPC. The intercompany borrowings accrue interest
at a rate of 7.5%, which may be adjusted from time to time, and are payable on
demand. There are no restrictions on the amount the Railroad is able to borrow
from UPC. Intercompany borrowings are unsecured and rank equally with all of
the Railroads other unsecured indebtedness.

UPC provides the Company with various services, including strategic
planning, legal, treasury, accounting, auditing, insurance, human resources and
corporate affairs. In 2003, pursuant to a services agreement, UPC will continue
to provide services to the Company, and the Company will pay UPC its share of
the costs as determined by an independent review. Billings for these services
were $13 million and $40 million for the three months and nine months ended
September 30, 2003.

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 7 to the
Consolidated Financial Statements, which discussion is incorporated herein by
reference.

Ratio of Earnings to Fixed Charges For the three months and nine months ended
September 30, 2003, the Companys ratio of earnings to fixed charges was 4.0
and 3.6, respectively, compared to 5.4 and 4.4 for the three months and nine
months ended September 30, 2002. The ratio of earnings to fixed charges has
been computed on a consolidated basis. Earnings represent income before
cumulative effect of accounting change, less equity in undistributed earnings
of unconsolidated affiliates, plus fixed charges and income taxes. Fixed
charges represent interest charges, amortization of debt discount and the
estimated amount representing the interest portion of rental charges.

Pensions- During the first quarter of 2003, the Company decreased its assumed
rate of return on pension plan assets from 9% to 8%. This assumption change
will result in an increase to 2003 pension expense of $14 million. During the
first nine months of 2003, the Railroad voluntarily contributed $50 million to
its pension plan.

Network Performance The Railroads operating efficiency has been adversely
impacted due to record-level volumes, an expanded summer maintenance program
and a shortage of trainmen, engineers and yardmasters. Programs are being put
in place which the Railroad believes should remediate the situation by early
next year including, among other things, hiring and training additional
employees and acquiring additional locomotives.

Accounting Pronouncements In January 2003, the FASB issued Interpretation No.
46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a majority of the entitys
residual returns or both. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
As described in note 10 to the Consolidated Financial Statements, Item 8, in
the Annual Report on Form 10-K, the Railroad has a synthetic operating lease
arrangement to finance a new headquarters building, which falls within the
guidance of FIN 46. In June 2003, the Railroad restructured the synthetic
lease resulting in no effect to the Consolidated Financial Statements due to
the adoption of FIN 46.

18



---



##### Table of Contents



In October 2003, the FASB issued FASB Staff Position Number FIN 46-6 (FSP
46-6) which provides public entities an opportunity to delay implementation of
FIN 46, for agreements entered into prior to February 1, 2003, until periods
ending after December 15, 2003. FSP 46-6 does not impact the Company, as the
Company has already adopted FIN 46.

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 statements as defined
by 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 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 that, 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 affect the Companys future results and could
cause those results or other outcomes to differ materially from those expressed
or implied in the forward-looking statements include, but are not limited to:



| |  |  | whether the Company is fully successful in implementing their
financial and operational initiatives;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | industry competition, conditions, performance and
consolidation;
| | - |  | ----------------------------------------------------------------



| |  |  | legislative and regulatory developments, including possible
enactment of new tax rates and possible enactment of initiatives to
re-regulate the rail industry;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | natural events such as severe weather, fire, floods and earthquakes;
| | - |  | --------------------------------------------------------------------



| |  |  | the effects of adverse general economic conditions, both within the United States and globally;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | any adverse economic or operational repercussions from
terrorist activities and any governmental response thereto;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | war or risk of war;
| | - |  | -------------------



| |  |  | changes in fuel prices;
| | - |  | -----------------------



| |  |  | changes in labor costs;
| | - |  | -----------------------



| |  |  | labor stoppages; and
| | - |  | --------------------



| |  |  | the outcome of claims and litigation, including those related
to environmental contamination, personal injuries, and occupational
illnesses arising from hearing loss, repetitive motion and exposure
to asbestos and diesel fumes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

19



---



##### Table of Contents



statements, no inference should be drawn that the Company will
make additional updates with respect thereto or with respect to other
forward-looking statements.







Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information
provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk
of the Companys Annual Report on Form 10-K for the year ended December 31,
2002.







Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of
the Companys disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the CEO and the CFO concluded that, as of
the end of the period covered by this report, the Companys disclosure controls
and procedures are effective in alerting them, in a timely manner, to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Companys periodic SEC filings.

Additionally, as of the end of the period covered by this report, the CEO
and CFO determined that there have been no changes to the Companys internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

20



---



##### Table of Contents









PART II. OTHER INFORMATION







Item 1. Legal Proceedings

ENVIRONMENTAL MATTERS

The Company 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 Company 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 Company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 remediation costs is set forth in Managements Discussion and
Analysis of Financial Condition and Results of Operations  Other Matters -
Environmental Costs, Item 2, and in note 7 to the Consolidated Financial
Statements, Item 1.

OTHER MATTERS

As previously reported, Western Resources, Inc. (Western) filed a
complaint on January 24, 2000, in the U.S. District Court for the District of
Kansas alleging that UPRR and The Burlington Northern and Santa Fe Railway
Company (BNSF) 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. The matter went to
trial before a jury on August 20, 2002. On September 12, 2002, the jury
returned a verdict finding that the contract had not been breached by the
railroads, and the judgment dismissing the case was entered by the court on
September 16, 2002. Western filed a motion for new trial on September 30, 2002,
which was denied by the court on March 6, 2003. Western filed notice of its
intent to appeal the verdict to the 10th Circuit Court of Appeals on April 4,
2003. The parties reached a settlement on October 22, 2003. Western is in the
process of dismissing its appeal in return for the payment to Western of
$50,000 by the railroads and waiving their respective rights to recover costs
from Western.







Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibits are listed in the exhibit index on page 23.

(b) Reports on Form 8-K

On October 23, 2003, the Registrant furnished a Current Report on Form
8-K announcing UPCs financial results for the third quarter of 2003.*

On July 24, 2003, the Registrant furnished a Current Report on Form 8-K
announcing UPCs financial results for the second quarter of 2003.*

* These reports were furnished under Item 12 of Form 8-K and are referenced
herein for informational purposes only. Therefore, they are not, and none of
their contents should be deemed, incorporated by reference into any
registration statements filed by UPRR with the SEC under the Securities Act of
1933, as amended.

21



---



##### Table of Contents









SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: November 13, 2003

UNION PACIFIC RAILROAD COMPANY
(Registrant)By /s/ James R. YoungJames R. Young,
Chief Financial Officer
(Principal Financial Officer)By /s/ Richard J. PutzRichard J. Putz,
Chief Accounting Officer and Controller
(Chief Accounting Officer and
Duly Authorized Officer)


22



---



##### Table of Contents



UNION PACIFIC RAILROAD COMPANY
EXHIBIT INDEX

Exhibit No.
    
    DescriptionExhibits Filed with this Statement12(a)
    
    Ratio of Earnings to Fixed Charges for the Three Months
Ended September 30, 2003 and 2002.12(b)
    
    Ratio of Earnings to Fixed Charges for the Nine Months
Ended September 30, 2003 and 2002.31(a)
    
    Certification Pursuant to Rule 13a-14(a) of the Exchange
Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002  Richard K. Davidson.31(b)
    
    Certification Pursuant to Rule 13a-14(a) of the Exchange
Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002  James R. Young.32
    
    Certifications Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002  Richard K. Davidson and James R. Young.


Exhibits Incorporated by Reference3(a)
    
    Amended Certificate of Incorporation of the Registrant,
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 Registrant, 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.


23