Union Pacific Corporation

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Union Pacific Corporation

Martin Tower
Eighth and Eaton Avenues
Bethlehem, Pennsylvania 18018
U.S.A.
(215) 861-3200
Fax: (215) 861-3111

Public Company
Incorporated: 1897 as Union Pacific Railroad Company
Employees: 48,300
Sales: $6.96 billion
Stock Exchange: New York

The Union Pacific railroad covers much of the western and mid western United States and comprises the nation’s second-largest rail system. Famed for its role in building a significant part of the country’s first transcontinental railroad in 1869, Union Pacific (UP) survived early years of scandal and financial uncertainty to emerge as perhaps the most respected U.S. railroad. Blessed with valuable land and mineral rights along its many miles of track, UP has built a substantial business in natural resources. At one time in the 1970s it appeared that its energy holdings might eventually overshadow UP’s rail business, and some day they may well do so; but in the early 1990s the heart and soul of Union Pacific Corporation remained its railroad.

Union Pacific came into existence in response to the widely held belief, fully formed by the 1850s, that the United States needed a rail link between its older, eastern states and the distant but rapidly growing states of the far West. Various proposals were made for northern, southern, and central routes, but the U.S. Congress could not agree on a plan. Following the southern states’ secession from the United States in 1861 the remaining congressmen from the North quickly agreed upon a route, and U.S. President Abraham Lincoln finally signed the Pacific Railroad Act of 1862, urged on by military considerations as much as by those of economics. The act called for the creation of a public corporation, called Union Pacific Railroad Company, to build a railroad from Nebraska to the California-Nevada border and there to meet the Central Pacific, building east from Sacramento, California, and later linked with San Francisco. Later, the meeting place of the two railroads was set at Promontory Summit, Utah Territory. As amended by a second piece of legislation, the act specified that the company would be supported by a loan from the federal government of U.S. bonds, to be paid back in 30 years, and by the issuance of its own bonds and capital stock. Further, the company would receive land grants in the amount of 6,400 acres on alternating sides of every mile of track laid, a checkerboard swath of land across the middle of the country that would eventually total around 12 million acres of valuable minerals, grazing land, and metropolitan real estate. The government retained the right to inspect each section of track laid before releasing the allotted number of bonds, and it would keep two directors on UP’s board, but the company was to be otherwise a venture of the private sector.

While the logic and value of a railroad across the western United States is obvious in the late 20th century, it was much less so in 1864. The men who became involved in the leadership of the UP—chiefly Thomas C. Durant and the Ames brothers, Oliver and Oakes—did so largely in order to make handsome profits off the railroad’s hurried construction. Durant was the vice president and dominant figure in the company’s early years, and it was he and a handful of others who formed a construction company called Credit Mobilier of America (CMA) to receive contracts from UP for the building of its vast railroad. Estimates vary as to precisely how inflated these contracts were, but later congressional investigations left no doubt that the backers of CMA intentionally siphoned off far more of the UP’s capital than was fair to its investors or good for its future financial health. The investigations of the early 1870s also revealed that the CMA principals bribed members of Congress with company stock.

Still, the railroad they built was a splendid success, and so vast a project might never have been undertaken without the promise of equally vast profits to be made. In five years the UP crews laid more than 1,000 miles of rail between Omaha, Nebraska, and Promontory Summit, Utah Territory, where on May 10, 1869, a golden spike completed the first transcontinental rail line. The railroad’s completion supplied a critical impetus to the development of the U.S. West, which to that time had been settled only on the Pacific Coast and in areas of unusual mineral wealth, such as Colorado. With the coming of the railroad, farmers, ranchers, and manufacturers were able to transport their goods to the great eastern metropolitan markets cheaply and quickly, and the West began to fill with pioneers. As the area’s most significant railroad for almost 15 years, UP enjoyed rapid growth and excellent earnings for its scandal-ridden promoters, who were dominated from 1873 to the mid-1880s by financier Jay Gould.

Gould’s direction of UP was notable for two things. First, the railroad expanded considerably during the decade of the 1870s. Its main route from Omaha, Nebraska, to Ogden, Utah, was soon joined by a host of feeder lines extending into the neighboring territory, some of them of substantial length; and from its Ogden terminus the company acquired control of two new branches, the Utah and Northern running to Montana, and the Utah Central progressing in the general direction of Los Angeles, which it reached in 1901. More immediately significant was the 1880 annexation by the UP of one of its rivals, the Kansas Pacific. The Kansas line ran from Kansas City, Kansas, to Cheyenne, Wyoming, via Denver, Colorado, and although its finances were in even worse condition than UP’s it added an important link to the company’s midwestern network. Finally, UP defended its transcontinental business by building a bridge to the Pacific Ocean through Idaho and Oregon, a system of new and existing lines that eventually fell under the aegis of UP’s Oregon Short Line Railway Company. UP’s original link to the ocean, the Central Pacific line to San Francisco, became a part of its most formidable rival, Southern Pacific, and was therefore lost to UP’s purposes until late in the 20th century.

The second legacy of Jay Gould’s years at UP was less beneficial. Beginning about 1875, Gould used the railroad’s considerable income to pay an extremely high dividend on its common stock, of which he happened to own about two-thirds. As a result of Credit Mobilier ’s excessive construction contracts, UP was already badly overcapitalized and faced stiff periodic interest payments on its own bonds as well as an eventual lump sum reimbursement to the federal government of about $76 million of principal and interest on the latter’s bond loan. Instead of taking prudent steps to provide for these liabilities, Gould bled UP of its cash flow, drove up the company’s stock price by means of the huge dividends, and then sold the bulk of his shares in 1878 for a bulging profit. UP staggered on until 1884 with Gould and others of like persuasion in charge of its failing finances, at which time the company tried to make a fresh start under its newly elected president, Charles Francis Adams Jr., a Bostonian of impeccable credentials and a scholar’s grasp of the railroad business.

Adams faced a doubly difficult situation. UP’s actual and reputed past sins made it nearly impossible to convince Congress and the public that the new president was in fact taking commendable steps toward reducing the company’s debt and improving its efficiency. As a result, Adams’s efforts were often thwarted, and UP continued to struggle under the burden laid upon it by its founders. At the same time, UP was by then no longer the sole provider of transcontinental rail service. Competition from three rival lines had cut severely into UP’s operating income by the mid-1880s, further complicating Adams’s task. The combination of looming government debt—due to mature in 1895—fresh competition in the market, and a skeptical legislative climate proved too much for the company when the financial panic of 1893 strained the U.S. economy to the utmost. In October of that year UP went into government receivership.

It was not until the end of 1895 that a satisfactory resolution of UP’s debt was accomplished, during which interval the railroad lost many of its most important branch lines to local receiverships. In 1895 a reorganization committee representing UP’s first-mortgage bondholders and backed by the New York investment banking house of Kuhn, Loeb and Company came up with a plan to foreclose on the railroad and sell its assets to a new company of the same name. The foreclosure sale was held in November 1897, and Kuhn, Loeb was able to raise the capital needed to pay off most of the government’s $71 million in remaining debt and launch the new corporation on a solid financial basis. Quickly asserting himself on the UP’s board of directors was an astute New York financier, Edward H. Harriman, who used his chairmanship of UP as the centerpiece of a remarkable railroad empire. Harriman was as brilliant a dealmaker as Jay Gould, but he also represented a new class of industrial magnate, one who was more interested in the construction of vast and durable business combines than in the clever manipulation of capital for immediate profit. Under Harriman’s leadership, UP became one of the best run as well as one of the largest of U.S. railroads.

Harriman first set about retrieving the various pieces of UP lost during the receivership and soon reassembled the company’s three basic networks: those running between Omaha and Ogden, Ogden and the Pacific Northwest, and Ogden and Los Angeles. Between 1898 and Harriman’s death in 1909, the UP increased its track miles from 2,000 to 6,000, and when the chairman became frustrated by UP’s failure to gain control of the old Central Pacific run between Ogden and San Francisco’s bay area, he wasted no time in buying up Central’s owner, Southern Pacific (SP). SP was UP’s chief rival and equal, the owner of three main routes between San Francisco and Portland, Oregon; San Francisco and Ogden; and San Francisco and the entire southwest to New Orleans. SP also owned a series of steamship lines extending from California to Japan and Panama, and from New Orleans to New York. UP’s purchase of 45% of SP’s stock in 1901 for $90 million virtually merged the two giants of western rail transport into a single, monopolistic entity dominating the markets from Kansas City to San Francisco and Denver to New Orleans, Louisiana.

E.H. Harriman was a man of unlimited ambition. Shortly after sealing the Southern Pacific merger, he entered into a complicated series of maneuvers that resulted in the purchase by UP of a strong minority position in Northern Pacific, owner of vital Chicago connections operated by the Chicago, Burlington and Quincy Railroad. In turn, Northern Pacific and Great Northern Railroad became a part of a holding company known as Northern Securities Corporation, which was ordered dissolved by the U.S. Supreme Court in 1904. When the pieces of this gigantic, short-lived combination were sorted out, UP emerged as the owner of 20% of both Northern Pacific and Great Northern and a substantial amount of cash profit as well. With the proceeds of this wrangling, Harriman bought sizable shares of many of the other important railroads in the western United States, in particular the Illinois Central and the Atchison, Topeka and Santa Fe, the latter providing the UP-SP’s sole competition in the Southwest. The empire of E.H. Harriman and UP-SP thus comprised large numbers of railroads, railroad stocks, steamship lines, increasingly valuable real estate holdings, and uncounted tons of coal, iron, and other minerals.

Harriman was a prudent administrator of his roads, reinvesting the bulk of their net income in extensive renovation and new rolling stock. In 1906, however, he began paying an unusually large dividend of 10%, raising widespread accusations that Harriman was another profiteer out to gouge the public for his own benefit. The Interstate Commerce Commission (ICC) initiated an investigation into Harriman and UP that resulted in a 1913 decision by the U.S. Supreme Court that the company was inhibiting competition and must divest itself of its Southern Pacific holdings. Harriman did not live to see the UP thus reduced roughly to the size and shape it had been in 1900, the company’s lines once again restricted to the three main routes between Omaha and Ogden, Ogden and the northwest port cities, and Ogden and Los Angeles. Lost was the prized route between Ogden and San Francisco, but in the meantime UP had beefed up its branch system and added new lines between Portland and Seattle.

Although Harriman died in 1909, his family retained a powerful influence at the UP, Harriman’s sons W. Averell Harriman and E. Roland Harriman sitting on the company’s board for many years and both serving as chairmen. Furthermore, so successful was the elder Harriman that the company he left behind became a model for the railroad industry of financial strength and unexcelled performance. From 1916’s gross revenue of slightly more than $100 million, UP more than doubled sales to $211 million by 1923, where they remained for much of that prosperous decade. Earnings were steadily excellent in the 1930s and 1940s, an increasing portion of them in the 1930s generated by UP’s oil and gas holdings and industrial real estate. A long-term problem for the railroad industry had by then made itself felt, however; truck and automobile traffic was eroding the railroads’ share of both freight and passenger miles. This trend, which would intensify during much of the 20th century, was especially painful when the Great Depression of the 1930s curtailed the heavy industrial transport upon which the railroads had come to depend. UP revenues did not approach their former heights until World War II recharged the industrial economy after 1940, and in the early 1930s they barely topped $125 million annually.

Averell Harriman was chairman of UP for most of the 1930s, and did an excellent job of keeping expenses down during the lean years while also investing needed capital in technological developments such as the diesel locomotive. With the outbreak of World War II the Harrimans had little to worry about in the financial realm. The need to shuttle huge amounts of personnel and heavy equipment around the United States gave UP all the business it could handle, company employment nearly doubling to 60,000 and revenue pushing to more than $500 million by war’s end. Between 1914 and 1944 alone, UP purchased 2,270 new locomotives, including a number of Big Boys, the world’s largest steam locomotive designed for the most taxing Rocky Mountain routes. The end of the war in 1945 caused only a temporary drop in sales for UP, and by the early 1950s revenue was again exceeding $500 million annually and the company remained in generally excellent financial health.

The next few years were not as kind, however. UP faltered in the late 1950s, its income, dividend, and stock price all falling between 1956 and 1961. Part of the problem lay in the rapid depletion of the company’s best oil well, outside Los Angeles, and part in the continuing loss of railroad freight sales to the trucking industry. In response, UP restructured its holdings into three divisions—transportation, land development, and natural resources—and in the mid-1960s began a concentrated program of mineral, oil, and gas exploration. The reorganization into divisions helped UP pursue what had grown into three very distinct businesses, each one with the potential to add significant dollars to the company’s bottom line. Only a small percentage of the railroad’s 7.8 million acres of remaining land had been fully explored and utilized, but even so by 1967 the firm operated five oil and gas fields and was the owner of the world’s largest known deposit of trona soda ash ore; vast reserves of coal; and sizable holdings of iron, titanium, and uranium. In a further step toward the exploitation of these resources, in 1969 UP acquired Champlin Petroleum Company and Pontiac Refineries from Celanese Corporation for $240 million, thus completing the formation of a fully integrated oil and gas business. Champlin would eventually operate three refineries, in Texas, Oklahoma, and California, and to ensure that its plants were kept busy UP also signed a joint-venture agreement allowing a subsidiary of Standard Oil Company of Indiana to drill for oil on its acreage, with UP getting royalties and retaining a quarter interest in whatever oil was found.

Overseeing this diversification at UP was chief executive officer Frank Barnett, the first CEO without intimate ties to the Harriman family to run the company in the 20th century. Barnett, who became CEO in 1967, had as his goal to develop equally strong transportation and nontransport divisions at UP, which in 1969 became a holding company called Union Pacific Corporation. With oil prices soaring after the oil crisis of 1973-1974, UP’s revenue quadrupled during the 1970s to $4 billion, more than half of which was provided in the late 1970s by the nontransportation businesses. The company’s coal reserves also became more valuable during the energy-conscious 1970s, when UP upped its production tenfold. Less successful was the company’s 13-year effort, begun in 1962, to win ICC approval of a merger with Chicago, Rock Island & Pacific Railroad and thereby secure a valuable link between UP’s Omaha terminus and both Chicago and St. Louis, Missouri. The merger was opposed by rivals of UP who feared the impact of its entry into Chicago, the nation’s busiest rail center. In 1982 UP solved the problem in another way. In a move reminiscent of E.H. Harriman’s reign, the company took advantage of U.S. President Ronald Reagan’s deregulation of the railroads to accomplish an important merger with the Missouri Pacific and Western Pacific railroads. Missouri Pacific operated some 11,500 miles of track in Texas, Oklahoma, and Missouri, and also provided the crucial bridge between Chicago and Omaha long sought by UP, along with three key gateways to Mexico; while the addition of Western Pacific united the two builders of the original transcontinental road of 1869, Western Pacific operating a route between Ogden, Utah, and the bay area of San Francisco.

The merger was a major undertaking, and it signaled a new era of consolidation in the U.S. railroad industry. While the move would benefit all three partners in the long run, it also presented UP with a massive organizational problem. With suddenly bloated employee and management ranks and a doubling of track mileage, UP slipped to dead last in operating profitability among U.S. railroads in 1984, although profits were up nearly 30%. The company’s problems were not helped by the steadily falling price of oil, which was especially hard on domestic producers trying to squeeze the last drop out of older oil wells; but its basic need was for a drastic pruning of its labor force. This has been accomplished by Drew Lewis, UP chairman since 1987, and his railroad president, Michael Walsh, who together cut nearly 12,000 employees from UP’s ranks. The cuts had resulted in far greater productivity from line workers as well as a more responsive management, whose ranks were thinned from nine administrative levels to only three. Walsh resigned in 1991 to become CEO of Tenneco. He was succeeded by Richard K. Davidson.

In 1986 UP gave up trying to beat the truckers and instead joined them, buying Overnite Transportation Company, a national trucking company, and stepping up its capacity for inter-modal services. The company in the early 1990s seemed to be balanced between a streamlined, comprehensive rail and truck carrier and a natural resources division capable of considerable expansion or contraction depending on the market price of commodities.