ILLINOIS UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN PRODUCTION NOTE University of Illinois at Urbana-Champaign Library Brittle Books Project, 2019.COPYRIGHT NOTIFICATION In Public Domain. Published prior to 1923. This digital copy was made from the printed version held by the University of Illinois at Urbana-Champaign. It was made in compliance with copyright law. Prepared for the Brittle Books Project, Main Library, University of Illinois at Urbana-Champaign by Northern Micrographics Brookhaven Bindery La Crosse, Wisconsin 2019 mgMtws, |js8§*:'^1 vi' -V'. V . -v r -•' •J- : ■/•; "-«?4ir'''iii* 4 ."' ^^•%4teasfcaa^u-i.vi!c'.c^.t-.-v — •5gun44.hu 7-s' ** j :T ■$■£■:$ I ^ •„• •>'*- -_ ]'.?* ["- n~ .=S V"' \ I3V-/I '>' /• -' m f;.SS /U ^ . i.v£v4^ , .- .•• JfS< "i?P fR;3f I 1|£ 'y&$ W^l Analysis of the Annual Reports UNION PACIFIC RAILWAY CO., WITH REFERENCE TO THE Prospective Value of its Properties C, W. HUNTINGTON. K-% -w * ^ ^ ..•"*' • !i0* I A iLV^~¥: * mishssff v ■' '* .x~~ ■ 7A*\W--^ . v}.% ; ■ ^4# ' " -' - • - *?$> l -wy >< • ,v -~ , >-- <, - ^iT>- vrc .•'* zxsm i*s&i ^ • -«??3E3&Analysis of the Annual Reports Prospective Value of its Properties. C. W. HUNTINGTON. * BOSTON: GEORGE H. ELLIS, 141 FRANKLIN STREET. I884. OF THE WITH REFERENCE TO THEANALYSIS OF THE ANNUAL REPORTS OF THE Union Pacific Railway Company, WITH REFERENCE TO THE PROSPECTIVE VALUE OF ITS PROPERTIES. " What do you think of the Union Pacific Railroad ? Is the stock of the Company selling for more or less than it is intrin- sically worth in comparison with the market price of the stocks of other railroad companies ? These are questions which have been very frequently asked, during the past few weeks more particularly, not merely by hold- ers of the shares and bonds of the Company, but by investors generally. When direct answers have been given, it is safe to say that in nine cases out of ten they were based rather upon feeling and prejudice and impressions than upon actual or intelligent knowledge in detail as to what have been the results of the operations of the Company in its past history. Every- body knows, of course, that the Company has for several years paid dividends amounting to seven per cent, annually upon its capital stock, but from what particular sources of business the earnings were chiefly derived in each year out of which the dividends have been paid very few persons outside the officers of the Company have taken the pains to investigate for themselves. Now that the market price of the shares has 'fallen from over $130 per share in June, 1881, to less than $40 per share May, 1884, it is important that all those inter- ested to learn should have at their command the data which I 1 165664 will enable them, whether stockholder or investor, to answer, each one for himself, the questions which so naturally suggest themselves under the present condition of affairs. Neither the present nor the prospective value of a railroad property can be approximately arrived at without, not a general, but a particular knowledge in detail of the results of its past history. When that has been acquired, then, and not until then, does each individual possess for himself one very impor- tant element, absolutely necessary, in fact, for forming an intel- ligent judgment as to the prospects of the property in the future. It is no part of the plan of the writer, even were he vain enough to consider himself competent to do so, to indulge in any prophecies as to what will, in his judgment, be the future history of the railroads embraced in the Union Pacific system, or to criticise the management of the affairs of the Company, but simply, first, to state the results of many computations made from the tabular statements appended to the annual reports of the Company for each year from 1880 to January, 1, 1884; second, to collate and compare the results of those computations with each other, so far as may be necessary or proper; and, third, to state in some instances certain conclu- sions, which, so far as they relate to the past, seem to be the only conclusions legitimately deducible from such comparisons and computations, but not attempting to foretell how far it is wise or prudent to take such results of computations and com- parisons as a guide for the future. That they properly serve as a guide to some extent is a fact which cannot be disputed, but to what extent each individual must determine for himself. The yearly statements of the earnings, expenditures, and indebt- edness of a railroad company furnish the materials with which to write its financial history; but the materials necessary for a history complete in all respects must be gathered from other sources. And this the writer has not undertaken to do. In other words, the sole object of this publication is to furnish certain data compiled from the various tables appended to the official reports for each year, from which each individual, who may feel an interest in the subject, can make such additional5 computations as he may deem necessary, in order to enable him to arrive at an approximate estimate, satisfactorily to himself at least, of the prospective value of this property. In justice to himself and those interested in the subject, the writer ought to state in the outset that he began this analysis of the above official reports of the Company over a month ago, merely for his own gratification and amusement, and without the slightest idea of the great labor involved. As ! he progressed in his self-imposed undertaking, he became so | much interested in his work and so greatly surprised in some J of the results arrived at that he pursued his investiga- tions to the end, as time and opportunity offered. All this has been done without the knowledge of any officer of the Company, until it became necessary to verify certain tabular statements. No officer of the Company, of either high or low degree, has ever examined or had an opportunity to examine any part of what is herein written. So far as they are con- cerned, they have had absolutely nothing whatever to do with it.GENERAL STATEMENT. The present Union Pacific Railway Company was created, ! Jan. 24, 1880, by the consolidation of the former Union Pacific Railroad Company, the Kansas Pacific Railway Company, and the Denver and Pacific Railroad and Telegraph Company. The capital stock of the Company at the time of the con- solidation in January, 1880, was fixed at $50,762,300; but, in the year 1881, it was increased to $60,868,500, and has ever since been the same amount. The number of miles of railways acquired by this consolidation was eighteen hundred and twenty and nine-tenths miles, and the mileage of the Com- pany proper has remained the same. But, at the time of the consolidation, the Company either controlled and operated or had large proprietary interests in roads of other companies connecting with its own lines, and which had an additional mileage of nineteen hundred and seventy-two and nine-tenths miles. Since that time, the investments of the Company in connecting roads have increased to such an extent that on Jan. 1, 1884, the aggregate length of connecting roads con- trolled and operated by it amounted to two thousand nine hundred and sixty miles. In addition to this, the Company at the same date owned large proprietary interests in, but did not operate, six hundred and thirty-five additional miles of railroad. No statements are given in the annual reports showing the earnings, operating expenses, bonded indebtedness, or the financial condition of any of these connecting roads; but the general results of the Company's investments in the bonds and stocks of such roads for each year are given in the annual Income Accounts of the Company under the head of " Income from Investments," and they form a part of Total SurplusEarnings of the Company for each year. They will be more particularly referred to hereafter. The aggregate gross earnings of the 1820/^ miles of railroad, deducting the Company's own business, from which, of course, no profit was derived, were as follows for each year: — 1880 1881 1882 1883 $21,112,562 $22,755,218 $21,327,206 $19,673,791 Company's business, . . 1,342,573 I>5°3>599 1*496,678 1,328,751 Total,.....^22,455,135 $24,258,817 $22,823,884 $21,002,542 The aggregate operating expenses, including under that head expenses of conducting transportation, motive power, mainten- ence of cars and of way, renewals of rails, general expenses and taxes, were as follows : — 1880 1881 1882 1883 $10,545,120 $12,480,343 $10,727,049 $10,354,540 Net earnings, $11,910,015 $11,778,474 $12,096,835 $10,648,001 The expenditures for construction and equipment, deducting equipment sold, which expenses are included in the above table, were as follows for each year : — 1880 1881 1882 1883 Construction,.......$447,445 $712,427 $324,446 $101,177 Equipment,....... 747>343 1,001,481 201,369 184,546 $1,194,788 $1,713,908 $525,815 $285,723* The increase in expenses for the year 1881 was caused in a great measure by the large amount expended for new rails and equipment, the amount for rails alone being, in the aggregate, $1,700,426, or $590,749 in excess of 1880, $1,144,283 in excess of 1882, and $1,451,311 in excess of 1883. The ratio of operating expenses to gross earnings in each year was as follows : — 1880 1881 1882 1883 5'j4fo 47 49t3A Per cent. *Note that in 1883 the equipment expenditures account was credited with equipment sold, $184,546, otherwise the expenditures for equipment would be that amount larger, or $470,269 instead of $285,723.8 Obviously, the ratio of operating expenses to gross earnings, is not a satisfactory method of determining whether the road and equipments are maintained to a satisfactory standard; for the ratio of operating expenses to earnings is not a fixed but a constantly shifting standard, varying generally as earnings in- crease or diminish, though not in the same ratio. A more accurate method of determining the yearly probable cost of operating and maintaining a railroad is to compare the aggregate expenses each year for a series of years, and strike the average. In the year 1881, the operating expenses were extraordinarily large, for reasons above shown, in comparison with any of the remaining years; but, if an average for the four years be struck, the yearly operating expenses amounted, on the average for each year, to about $11,000,000, or say, $6,000 per mile of road each year. It would not be surprising if the estimate of $11,000,000 were found to be too large, for the reason that the period taken is only four years, in one of which very heavy expenditures were incurred. In 1880, 1882, and 1883, the average was about $5,685 per mile each year. It appears from the above statement of the gross earnings, excluding Company's business, that the highest point was reached in the year 1881. The aggregate for that year ex- ceeded the aggregate for 1880 by $1,642,656, and the aggre- gate for 1882 by $1,428,012. It is to be borne in mind that the competition created by the opening of the Atchison, Topeka and Santa Fe. and of the Texas Pacific roads, as will be more fully shown hereafter, did not begin to bear its legitimate fruit until the year 1882, when the earnings of the Union Pacific Company, though showing an aggregate decrease of $1,428,012, as compared with 1881, still showed a .gain over the earnings for 1880 of $2 [4,644. In addition to the competition arising from the above roads, the competition growing out of the extension of the Chicago, Burlington and Quincy road to Denver, on June 1, 1882, was also partially felt by the Union Pacific road during the remainder of that year. On April 1, 1883, the Denver and Rio Grande road was extended to Ogden, thus forming a new line to the Pacific in! 9 connection with the Chicago, Burlington and Quincy road ; and 'for the rest of that year a brisk rivalry followed between those jcombined roads and the Union Pacific, which raged more fiercely in the month of December than at any other previous jtime. EFFECTS OF COMPETITION. i ■ As compared with the earnings of 1882, the aggregate gross earnings, excluding Company's business, for 1883 fell °ff ($1,653,416. But, in order that the above decrease in gross earnings may be taken at its true value and duly accounted for, it becomes necessary to examine in detail the various tables annexed to the annual reports. The gross earnings of the Company are subdivided into six different classes,— namely, Passenger, Freight, Mail, Express, Miscellaneous, and Company; and the gross earnings pertain- ing to each class are given. For obvious reasons, the earnings derived from the business of the Company itself have been and will be altogether omitted in the comparative statements. It will also be found that the earnings derived from the Mail, Express, and Miscellaneous business may be entirely excluded without materially affecting the general results, for the reason that, out of the above total decrease of $1,653,416 gross earn- ings, excluding Company's business, $1,509,154 came from pas- senger and freight business alone. The falling-off in Mis- cellaneous business amounted to less than $100,000; in Express business, to less than $44,000; and in Mail service to about $7,000. As compared with 1880 and 1881, the earnings derived from Mail and Express business in 1883 show a slight increase; while the Miscellaneous business in 1883, though not quite $16,000 less than in 1881, was more than $200,000 larger than in 1880. The following table shows the ratio which the passenger earnings and freight earnings respectively bore to the total earnings of the Company in each year, excluding Company's business : — 1880 1881 1882 1883 Passengers,..............25% 22% 24% 23% Freight,................72 74 72 72 Total,..............96% ~&% *IO It will be seen, therefore, that the above eliminations will not materially affect the general result of the present inquiry. It is proposed now to consider the Passenger and Freight! Earnings separately. PASSENGER EARNINGS. i The report for the year 1880 does not supply the tables nec- essary for a comparative statement in detail, but only in gross. The following table gives a comparative statement of both( the Through and Way Passenger Earnings for the years 1881, 1882, and 1883, Through passengers being those carried from one terminal point to another terminal point, as from Council Bluffs to Ogden, and from Kansas City to Denver, all other passengers being Way passengers: — 1881 1882 .1883 Through passengers,........$35203,789 $2,837,036 $2,366,886 Way,.............1,927,782 2,360,734 2,292,230 Total,...........$5>I3I>57i $5>I97>770 $4,659,116 It thus appears that the total decrease in Passenger Earnings for 1883 as compared with 1882 was $538,654, subdivided as follows: — On through passengers,..................$470,150 On way passengers,............ . ...... 68,504 But the earnings alone do not show what the passenger busi- ness of the Company really was during those years. It becomes necessary also to consider the number of passengers actually carried one mile. The Through and Way passengers carried one mile were as follows: — 1881 1882 1883 Through passengers carried one mile, . . 101,727,222 92,659,170 82,030,350 Way passengers carried one mile, ... . 51,842,783 64,868,166 66,933,489 Total, one mile, .......i53>57o>oo5 i57>527,336 148,963,839 The above two tables, when taken together, show not only the effects of competition, but also the increase in the local business of the Company.II Thus it appears that, while about 10,500,000 less Through passengers were carried one mile in 1883 than in 1882, and nearly 20,000,000 less than in 1881, the Way passengers carried one mile in 1883 were 2,065,323 greater than in 1882, and more than 15,000,000 greater than in 1881. As between 1882 and 1881, the increase in the Way passengers carried one mile was more than 13,000,000. The above increase in local travel is a ^act which cannot be ignored in looking at the prospective : earnings and business of the Company. Inasmuch as the earnings from the way passenger business of 1883 were less than in 1882, notwithstanding the increase in the way passengers carried, it necessarily follows that the passenger rate per mile was less in 1883 than 1882. The following table shows the rate per mile at which Through and Way passengers were carried in each of the above years, and also the average rate per mile for both classes of passengers : — ... 1881 1882 1883 Through rate per mile, . . . . , .....3.14 cts. 3.06 cts. 2.88 < Way, ........... .... 3.71 3-64 3-42 Average rate, ........ ...... 3-34 3-29 3.12 Although, as before stated, the total passengers carried one mile was less in 1883 than in the two previous years, the aggregate number of individual passengers carried, irrespective of distance, was actually greater in 1883 than in either of these years. And, as is to be expected, the gain came solely from local passengers, the number of through passengers having fallen off in each year, as appears from the following table: — 1881 1882 1883 Through, ............ I49>°95 146,173 132,994 Way,............. . 658,045 835,246 1,052,990 Total,......... 807,140 981,419 1,185,984 This comparative statement shows, even in a more striking manner than the mileage table given above, the constant growth which has yearly taken place in the local passenger business of the Company.12 FREIGHT EARNINGS. A more correct and intelligent view of the profits which the Company has derived from its freight traffic will be arrived at if the earnings from carrying coal be stated separately. The coal which the Company has carried came from its own mines ; and the avowed policy of the Company has been to carry the coal so mined at about the actual cost, and to take its profits from mining and selling the same for commercial and domestic uses instead of from carrying. These profits on the sales of coal are included under the class, "Miscellaneous Business." They will be stated hereafter separately. The rate per ton per mile at which the Company carried the coal which it sold in 1881, 1882, and 1883, was as follows : — 1881 1882 1883 Cts. . Cts. Cts. Rate per ton per mile,........ fifo The effect of separating the coal from other freight earn- ings is to give the true profits and rates at which the freight business of the Company from outside sources has been con- ducted. While the coal earnings and tonnage swell the aggre- gate freight business, they also, unless stated separately, de- crease the average rates at which the outside freight is carried. Thus, in 1883, more than 29,000,000 tons of coal were car- ried one mile than in 1882, but the actual gross earnings from that source were increased less than $5,000. The aggregate freight earnings and freight tonnage are sub- divided in the Company's tables into Local, Through, and Pacific Coast. Local freight is the freight which is carried from one point on the line to another, or from one terminus to an intermediate point, or vice versa. Through freight is freight carried from one terminus to another, as from Council Bluffs to Ogden or from Kansas City to Denver. Pacific Coast freight is all freight going to or coming from a fixed point in Nevada. The following statement shows the gross freight earnings, exclusive of Company's business and both excluding and includ- ing coal freights, for each of the years 1881, 1882, and 1883 : —13 i88i 1882 1883 From local freight,.......$6,906,819 $6,598,221 $7,840,372 Through,.......... 4,364,822 3,933,168 1,954,483 Pacific Coast, ........ 3,703,657 2,746,473 2,512,507 Total,...........$I4,97S,298 $13,277,862 $12,307,362 Add coal freights,....... 584,230 627,628 632,178 Qrand total,.........$i5,559,528 $I3,9°5,49° $12,939,540 j It thus appears that the decrease in freight earnings, exclud- ing coal and Company's business, for 1883, as compared with 1882, was as follows : — Decrease on Through freights,..............$1,978,68 5 Decrease on Pacific Coast,................ 233,965 $2,212,650 But this was offset in part by gain in local freight earnings, .... $1,242,150 Balance showing net decrease in aggregate freight earnings as between 1883 and 1882, .................. $970,500 If a comparison be made between the years 1882 and 1881, it will be found that the total decrease in freight earnings was $1,697,435, as follows : — In Local freight earnings,.....................$308,597 In Through freight earnings,................. 431,654 In Pacific Coast freight earnings,........ ...... 957,184 Total decrease in freight earnings as between 1882 and 1881, .... $1,697,435 Total decrease in same earnings as between 1883 and 1882, .... 970,500 Thus, the decrease in freight earnings between 1882 and 1881 exceeded the decrease between 1883 and 1882,......................$726,935 It farther appears that as between the years 1882 and 1881 . there was a decrease in all three of the above classes of freight earnings, excluding coal and Company's business, whereas as between the years 1883 and 1882 the decrease in earnings was confined to two classes, namely, " Through" and " Pacific Coast" freight, the Local freight earnings showing a gain for 1883 over 1882 of $1,242,150. But, as in the case of the passenger business, in order to ascertain what effect should justly be given to the above de- crease in the total freight earnings, a comparison should also be made in the number of tons carried one mile in each of the14 above years. This was as follows, excluding and including coal, and excluding Company's business : — 1881 1882 1883 No. of tons of local freight one mile, 250,223,075 249,639,157 326,037,771 Through,...........172,534,680 169,100,775 122,020,553 Pacific Coast,.........292,682,913 233,748,550 188,587,587 Total,............715,440,668 652,488,482 636,645,911 Add coal sold and carried one mile, . 67,890,416 80,302,572 109,343,104 Total No. tons carried one mile, . . 783,331,084 732,791,054 745*989,015 Taking the above tables of freight earnings and tonnage together, not only can the effect of competition by rival lines be seen, but also the growth of the local freight business of the Union Pacific Company, even more clearly than in the comparative statements relating to the passenger business. Thus, it appears that the aggregate number of tons of local freight, excluding coal and Company's business, carried one mile in 1883, was larger than that carried one mile in 1882 by 76,398,614 tons; whereas there was a decrease in 1882 of 583,918 tons as compared with 1881. If a comparison be made of the number of tons of local freight carried each month in the years 1883 an(3 1882, it will be found that the increase in the number of tons carried one mile averaged about 4,000,000 tons per month for January, February, September, October, November, and December; for March more than 10,000,000 tons ; for April more than 6,000,- 000 tons; for May more than 8,000,000 tons ; for June more than 9,500,000 tons; for July nearly 9,000,000 tons; and for August more than 8,000,000 tons, in 1883 over the corre- sponding months of 1882, and that in no one month of the year 1883 was the increased tonnage per mile less than 3,000,000 tons as compared with the corresponding month of 1882. As the tables are not given separately in the report for 1881, no similar comparison can be made between the local tonnage of that year and the year 1882. In order to ascertain still more clearly the effects of the competition which have resulted from the opening of rival lines of road, it is necessary to. examine the rates at which theIS freights of the Company have been carried during the above period. And this is shown by the following table of the rates per ton per mile : — 1881 1882 1883 Cts. Cts. Cts. Local,............ 2.64 2.40 .....2.53 2-33 1.60 Pacific Coast,......... 1.17 *•33 Coal,............ 84 7 8 58 ToTF Average, including coal,..... I.89 i-73 Average, excluding coal,..... 2.O3 1-93 freights of the Company have been carried during the above period. And this is shown by the following table of the rates per ton per mile : — The greatest decrease, it will be perceived, has been on the rates for through freight, which rates fell off T2^ of. a cent per ton per mile as between 1882 and 1881, and T7^ of a cent as between 1883 . and 1882. On the other hand, the rates on the Pacific Coast freights for the year 1883 were of a cent per ton per mile larger than in 1882, and ^ of a cent larger than in 1881. If a comparison be made between the rates of freight East-bound and West-bound, excluding coal, it will be found : — 1. That local West-bound freight paid 1.06 and 1.07 cents per ton per mile in 1881 and 1882 respectively, and cent in 1883, more than East-bound freight. 2 That Through West-bound freight in 1881 paid 1.03 cents, in 1882 ^0 cent, and in 1883 T3o% cent per ton per mile more than East-bound freight. And 3. That West-bound Pacific Coast freight in 1881 paid cent more than East-bound, in 1882 ^0 cent less than East- bound, and in 1883 T°o3o cent more than East-bound. Again, in 1882, the ratio of West-bound freight was about 63 per cent., and of East-bound about 37 per cent, of the whole through freight; while, in 1883, the ratio of West-bound freight was about 56 per cent., and of East-bound freight about 44 per cent, of the through freight. It would thus appear that competition has tended not only to equalize the rates between East and West bound freights, but also the tonnage going East or West. There is still another distinction which should not escape notice; and that is that, whereas the Local tonnage West-boundi6 exceeded that East-bound in 1882 by more than 18,000,000 tons carried one mile, the tables were reversed in 1883, anc1 more than 22,000,000 tons were carried East-bound than West- bound. This shows clearly that, as the country adjacent to the line of the road is settled and developed, the products of the country will seek Eastern markets; and it seems fair to presume that the business from this source will increase year by year. The following tables computed on the aggregate of freight earnings in each year show how the movements of the differ- ent classes of freight, excluding coal, have varied in each year for the years 1881, 1882, and 1883, the tables appended to the report for 1880 not admitting of similar computations : — 1881 1882 1883 Freight: Local,.......... ■......40% 49 % 63% Through, ....... .......29 29 !S Pacific Coast,....... .......3i 22 22 A similar table follows, in regard to passenger earnings; — 1881 1882 1883 Way passengers, 38% 46% 5°—% Through passengers, 62 54 504- A similar table follows, in regard to passenger earnings; — 1881 1882 1883 Way passengers,..............38% 46% 5°—% Through passengers,.............62 54 504- In connection with this subject, and as showing both the progress made in the development of the country adjacent to the line of roads embraced in the Union Pacific system and the increase in freight and passenger business naturally to be expected to arise therefrom, as indicated above for the years 1882 and 1883, the following statement of the number of acres of land sold in each year from the Union Pacific and Kansas Pacific Land Grants are very instructive : — 1880 1881 1882 1883 Union Pacific,...........176,202 96,060 292,159 867,871 Kansas Pacific,..........100,382 99,478 105,915 298,478 Total,...........276,584 195,538 398,074 1,166,349 It is well known that in the latter part of the year 1883 the competition with rival roads became more earnest than at any previous time. The tables show this clearly. The average17 rate at which the freights of the Company were carried, exclud- ing coal, for the first six months of 1883 was 2.05 cents per ton per mile, and for the last six months 1.84 cents. In December, the average rate on all freight was reduced to 1.48 cents, or of a cent per ton per mile less than the average rate for the entire year. Had the December freights been carried at the average rate for the entire year, the earnings of the Company , would have been $243,504 larger than they actually were. The decrease in December was, in all classes of freight, as follows: — On Local, from an average for the entire year 1883 of 2.40 cents per ton per mile to 1.87 cents; On Through freight, from a similar average rate of 1.60 cents to cent; On Pacific Coast freight, from a similar average of 1.33 cents to 1.15 cents. The greatest falling off was in through freight. The average rate for all freights in December, 1882, was 1.81 cents per ton per mile as against an average rate of 1.48 cents in 1883, as stated above. If, however, the Company had been compelled to carry all the passengers and all the freights which it actually carried during the entire year 1883 at precisely the same rates as obtained in the month of December, 1883, the aggregate loss in gross earn- ings would have been $3,884,397, or, if the road still continued to be operated for fifty per cent, of the gross earnings, the net loss would have been $1,942,198. Even then, assuming all the deductions to have been the same as they actually were, including Government dues, the Company would still have been able to pay out of surplus earnings and income dividends of five per cent, upon its capital stock and to carry a surplus to its General Income Account of $537,039. But the Govern- ment dues in that case would have been reduced; and the sur- plus applicable to dividends would have been still greater, more than sufficient to enable the Company to pay six per cent, dividends upon its capital stock.i8 PROFITS ON COAL SALES. It is estimated that the Company owns about 400,000 acres of Coal Lands. It has derived considerable revenues from the coal sold for commercial and domestic purposes, besides the savings which have resulted from having been able to furnish its own fuel. The earnings from carrying the coal sold have already been given. The following table shows the number of tons of coal mined, coal sold, cost per ton loaded, average net price per ton, and the profit on coal sales for each of the years 1881, 1882, and 1883 : — 1881 1882 1883 Coal: Tons mined, .................587,493 738,210 7 57,119 Tons sold,....................i93>032 215,829 265,113 Cost per ton loaded,............$1-386 $M95 $1405 Average net price per ton, .... $4-305 $4-096 $3-302 Profit on sales,........$246 965 $256,408 $243,225 .The directors, in their annual report for the year 1883, say, " The policy of furnishing coal approximately at cost has been maintained; and the amplest assurance is given in the develop- ment of industries along the lines of railway that it is more advantageous to the Company than would be a direct profit on the sale of coal." It appears from the above tables that, in carrying out this policy, the net price per ton for 1883 was reduced more than $1 per ton, as compared with 1881 ; and 79/0 cents, as com- pared with 1882. Had the coal sold in 1883 been sold for the same net price per ton as in 1882, the net income from this source alone, not including coal freight earnings, would have been larger than they actually were by $210,500, or more than 86^ per cent, larger. As it was, the profits on the coal sold in 1883 were $13,183 less than on the coal sold in 1882, although the number of tons sold was nearly 50,000 tons greater. And, again, the freight earnings on the same were only about $5,000 larger in 1883 than in 1882, notwithstanding the number of tons of coal carried one mile exceeded the num- ber carried the same distance in 1882 by upwards of 29,000,000 tons.19 In order to arrive at a closer approximate estimate as to the value and earning capacity of the Union Pacific road, it is nec- essary to ascertain what income the Company has derived from its investments on what are termed AUXILIARY RAILROADS. These include roads which are controlled and operated by the Company as a part of its system, and also roads in which the Company has large proprietary interests, though operated by independent companies in the interests of the Union Pacific. As before stated, the general results only can be ascertained from the reports of the Company. The aggregate mileage of all such lines was as follows, on December 31 of each year since the consolidation : — 1880 1881 1882 1883 1,972^ miles 2,449^ miles 2,872 miles 3,595 miles The following table shows the par value of the bonds and stocks which were owned at the same dates by the Union Pacific Company, and which represented its investments in the above roads : — Par value, Dec. 31, 1880 Dec. 31, 1881 Dec. 31, 1882 Dec. 31, 1883 Stocks, .... $17,608,011 $25,835,700 $29,462,042 $36,903,492 Bonds, .... 16,194,264 20,920,430 23,749,230 24,444,230 Total, . . . $33,802,275 $46,756,130 $53,211,272 $61,347,722 In addition to the above stocks and bonds, the Trustees under the consolidated mortgage of the Kansas Pacific Com- pany also held Dec. 31, 1883, stocks and bonds in auxiliary roads amounting at their par value to $1,875,300 stocks and " $3,158,000 bonds. It appears from the general balance sheet for each year that the cost of the above securities of auxiliary companies to the Union Pacific Company was as follows : — 1880 1881 1882 1883 Stocks, . . (not given separately) $12,255,757 $12,997,388 $13,536,962 Bonds, ... " " 16,278,521 18,491,442 19,500,645 Total, . . $19,507,615 $28,534,278 $31,488,830 $33,037,60720 The Company also, on Dec. 31, 1883, had invested $4,811,124 additional, for which the stocks and bonds had not then been issued. The Company derived the following income from the fore- going investments in each of the above years : — From stocks, From bonds, Total, . In 1880 In 1881 $370,122 $960,378 640,030 372>300 $1,010,152 $1,332,678 In 1882 In 1883 $1,036,507 $701,923 M74,592 1,364,759 $2,211,099 $2,066,682 And the aggregate sums in each year are equivalent to the following percentages upon the actual cost of the investments : 1880 1881 1882 1883 Per cent, on cost, ............5^ 4T6oV 7ih 6i2 The above sums are equivalent to the following percentages upon the par value of the stocks and bonds so held as invest- ments : — For 1880 For 1881 . or 1882 For 1883 Per cent, on stocks, ......... 2.to 3.71 3.51 1.90 Per cent, on bonds,.......... 3.95 1.77 4.52 5.17 Average on both,........... 2.99 2.85 4.15 3.36 The aggregate sums are also equivalent to the following percentages on the capital stock of the Union Pacific Com- pany, assuming such capital stock to have been the same in 1880 as in subsequent years and at the present time; namely, $60,868,500. 1880 1881 1882 1883 Per cent on Union Pacific stock, . . 1.66 nearly 2.18 3.63 3.38 Thus it appears that in the year 1883 the investments in the bonds and stocks of other roads were nearly one-half of the seven per cent, dividends paid to the stockholders of the Union Pacific Company, and in the year 1882 they amounted to more than one-half of such dividends. The Government has not claimed that the income accruing from these bonds and stocks of other roads form any part of the " net earnings " of the Union Pacific Railway Company within the meaning either of its charter or of the Thurman Act, so called, of 1878 ; and, consequently, they are not to be taken21 into the accounts in determining the amounts to be paid to the United States as a Sinking Fund under said Acts. THE FINANCIAL CONDITION OF THE COMPANY. The following statement shows the total amount of the bonds of all the Companies embraced in the consolidation outstanding on December 31 of each year, as appears in the annual reports: — Dec. 31, 1880 Dec. 31, 1881 Dec. 31, 1882 Dec. 31, 1883 Bonds outstanding, . $82,623,114 $82,118,134 $81,845,508 $84,506,332 The increase in 1883 was caused by the issue of $3,000,000 collateral trust five per cent, bonds, the difference between the interest on which said bonds and on the securities held in trust for their payment is expected, with the accumulations thereon, to pay the principal of said $3,000,000 bonds at ma- turity, and also the interest on the same as it accrues each year. The net floating debt of the Company as stated in the an- nual reports was as follows for each year : — Dec. 31, 1880 Dec. 31,1881 Dec. 31, 1882 Dec. 31, 1883 $1,519,835 $4,035,078 $842,743 $308,509 The process by which this result was reached in each year requires explanation. The gross amount is first stated, which includes bills and notes payable, accounts payable, coupons and drawn bonds and dividends, including dividends due Janu- ary 1 following, also audited bills, pay rolls, etc. From the gross sum thus ascertained, certain deductions are made ; and it will make this matter more plain to state first the deductions which are common to all the years; namely, "Cash on hand," and "Balances due from station agents and foreign railroads." In 1881, two additional items were deducted from the gross debt stated as above; namely, "Balances due from proprietary roads," and " Kansas Pacific Railway Company consolidated bonds, received in exchange for coupon certificates bought in," or "Company's stock and bonds owned by the Company." In the reports for 1882 and 1883, the same two items with22 varying amounts continue to be deducted, and also another item ; namely, " Fuel and material on hand." If the several amounts of the above items of deductions, except Company's stocks and bonds owned by the Company, be added to the Company's statement of the Floating Debt as given above, the result for each year will be as follows : — Dec. 31, 1880 Dec. 31,1881 Dec. 31,1882 Dec. 31, 1883 Company's statement, .... $1,519,835 $4,035,078 $842,743 $308,509 Balances due from auxiliary roads, None given 212,670 927,648 1,259,511: Fuel and material on hand, ... " " 2,768,437 2,557,564 Total,......$i,5i9>835 $4,247,748 $4,538,828 $4,125,584 The amounts of the stocks and bonds included in the item of deductions were as follows : — 1880 1881 1882 1883 None $1,475,000 $2,011,319 $2,557,564 The Government Directors in their annual report for 1883 give a " Statement of Company stock and bonds owned by the Company, the amount of which has been deducted from the Floating Debt, June 30, 1883," as follows: — Par Amount deducted Kansas Division, Consolidated Bonds, .... $1,872,000 $1,871,95° Subordinated income Bonds, . . . . . . 88,600 91,912 Not subordinated income Bonds,..... 27,700 26,849 Kansas Division, Coupon Certificates, .... *35 135 Denver Extension Bonds, ......... 37,030 38,701 Omaha Bridge Bonds,.......... 5,000 5,l6l Union Pacific Railway and constituent companies stocks,.............. 160,150 H4,I57 Total,............ $2,148,865 FUNDED DEBTS. FUNDED DEBTS. As before stated, the aggregate outstanding Funded Debts of the Company amounted, Dec. 31, 1883, to $84,506,332. These were originally created as follows : — By Union Pacific Railroad Company,............$52,272,000 By Kansas Pacific Railway Company,............29,234,332 By Union Pacific Railway Company,........................3,000,000 Total,...................$84,506,33223 It is proposed to consider these separately. The following is a statement in detail of the Funded Debts outstanding Dec. 31, 1883, incurred by the Union Pacific Railroad and Railway Companies: — Am't outstanding. When payable First Mortgage Bonds, .........$27,229,000 1896-1899 Land Grant Bonds, . ...................4,589,000 1887-1899 Sinking Fund Bonds,..........13,861,000 Sept. 1, 1893 Omaha Bridge Bonds,....................1,805,000 April 1, 1896 Collateral Trust Bonds, 6's,................4,788,000 1908 Collateral Trust Bonds, 5's,................3,000,000 1907 Total, ...........$55,272,000 The First Mortgage Bonds bear interest at the rate of six per cent, lawful money, principal payable in thirty years from the date of their issue,— namely, thirty years from 1866 to 1869; and they are secured by a first lien upon the main line of the Union Pacific Railroad with its equipments. Their issue was limited to an amount not exceeding per mile the amount provided to be issued by the United States to aid in the construction of said road, but the lien of the Govern- ment is subordinate to that of the First Mortgage Bonds. ? LAND GRANT BONDS. i These bonds bear interest at the rate of seven per cent., principal payable in twenty years from the date of their issue, I—namely, twenty years from 1867 to 1869,— unless sooner re- deemed by virtue of the sinking fund established by the mort- gage securing the same ; and they are secured by a first mort- gage upon all the lands granted to the Union Pacific Railroad Company by Acts of Congress, excepting all parts included in the railroad and telegraph line of said Company or used in connection with the operation of said road. The proceeds of the sales of the lands granted to the Union Pacific Railroad Company by the United States are set apart: first, for the payment of the Land Grant Bonds; and, when those have been redeemed, secondly, for the payment of the24 Sinking Fund Bonds, which are secured by a second lien upon the lands and upon the proceeds of the sales thereof of precisely the same nature and extent as the lien of the Land Grant Bonds is secured, only subordinate to it. f As stated in the last annual report of the Company, the amount of Land and Town Lot Contracts of sales from the Union Pacific Railroad Land Grant, outstanding Dec. 31, 1883, was.....$5>I77>9S° The amount of cash from land sales in hands of Trustee was . . . 2,002,104 Total amount applicable to payment of Land Grant Bonds, .... $7,180,084 The amount of Land Grant Bonds outstanding, as given above, is . . 4,589,000 Amount of contracts and cash in excess of par value of outstanding Land Grant Bonds,.................$2,591,084 The following table shows the number of acres sold from the Union Pacific Railroad Land Grant each year since 1880, with the amounts of sales and the average price per acre: — 1880 1881 1882 1883 Acres sold,.....176,202 96,060 292,159 867,871 Amounts,.....$850,089 $474*343 $*>250,364 $2,701,115 Average price per acre, $4.82^ $4-93l(J $4-28 $3.11 The terms of sale as stated by the Government Directors are either cash, with a discount of ten per cent., or on five or ten. years' time in instalments of one-fifth or one-tenth, with an- nual interest at the rate of six per cent, on deferred payments.. No deeds are given until all the payments have been made in full. The estimate of the lands remaining unsold Dec. 31, 1883,, is as follows : — Acres. In Nebraska, east of North Platte,............. 395>ooc> In Nebraska, west of North Platte,............ 1,628,00c In Wyoming, Utah, and Colorado,............. 6,300,000 Total estimated lands unsold,............... 8,323,000 In the last annual report of the Government Directors, they state the Company's estimate of the value of the lands then unsold as follows : — Agricultural, 600,000 acres at $3 per acre,..........$1,800,000 Grazing, 7,700,000 acres at $1 per acre,......... . 7,700,000 Coal, 400,000 acres at $20 per acre,............. 8,000,000 Total estimated value,...............$17,500,00025 And, in regard to this classification and estimate, they i emark as follows : —- " Lands designated as agricultural are those within the limit, chiefly in Nebraska, where agriculture is deemed practicable, rather than where it has not yet been fully demonstrated. " The value of grazing lands is considered with reference to some favora- ble action concerning government lands intervening, rather than the prices they might bring, if now offered for sale. " The coal lands are estimated at the price for which coal lands are sold by the government; but their present and prospective value to the Com- pany far exceeds the price named." I If the tables stated in the report of the Government Direc- tors relating to lands be compared with the tables of the Com- pany, it will be found that, since the data were furnished to the Directors—June 30, 1883—upon which their remarks and all their estimates in reference to the land grant were based, and Dec. 31, 1883, the Company sold 555,303 additional acres for the gross sum of $1,684,429, or at the average price of $3 per acre. Now, the average price of the entire 8,700,000 acres of unsold lands, as stated by the Government Directors, is $2.01 per acre ; but, if the 400,000 acres of coal lands, with their esti- mated value of $8,000,000, be altogether eliminated, the aver- age estimated price of the remaining 8,300,000 acres is only a little more than $1.14 per acre. In the one case, including coal lands, the 555,303 acres sold in the interval above stated brought about $1 per acre more than the average estimated value per acre of all the lands; and in the other case, exclud- ing coal lands, they brought nearly $1.86 per acre more than the average estimated value per acre. Again, it is officially stated that between January 1 and April 26 of the current year the Company sold 727,360 acres from the Union Pacific Land Grant, and that the aggregate of these sales amounted to $1,819,471, or at an average price of more than $2.50 per acre. This average price is nearly fifty cents per acre higher than the above average valuation of $2.01, including coal lands, and $1.36 per acre higher than the average valuation, excluding coal. But these statements do not show the entire excess of the2 6 prices at which these lands were sold over the valuation pi upon them, for the reason that the agricultural lands were val- ued at $3 per acre and the grazing lands at $i per acre. The tables adopted by the Government Directors estimate the total acreage of agricultural lands at 600,000. The aggregate num- ber of acres sold since that table was made up, as stated above, is 1,382,663 ; that is, the equivalent of all the agricultural lands and 782,663 acres of grazing lands. The aggregate sales of these 1,382,663 acres exceed the valuation by at least $921,23/, and probably a very much larger sum. It is important, however, in considering how far the unsold lands will go toward redeeming the Sinking Fund Bonds, tc estimate the probable cost of selling the same and the taxes to be paid on the lands. The total cost thus far of selling the 2,775,410 acres sold to Dec. 31, 1883, and of the taxes paid on the part of the grant for which patents have issued to the Company has been as follows, as appears from the last annual report of the Company: Discounts, commissions, etc.,............... $392,644 General expenses and taxes,............... 2,189,49c Total cost,....................$2,582,143 Hence it appears that the average cost per acre of listing and selling the lands, including taxes, has been ninety-three cents per acre. For the year 1883, the cost of selling per acre was only twenty-six cents. The higher average cost results, of course, from the large expenditures necessarily incurred at the outset in selecting, appraising, and listing the lands. The above average cost per acre of ninety-three cents may serve as a guide in estimating the expenses per acre of taking out pat- ents for and surveying the remainder of the land grant not yet patented. It is only just in estimating how far the proceeds of the unsold lands will go toward paying the Sinking Fund Bonds to take into the account the amount of sales of lands from January 1 to April 26 of the current year, amounting as here- tofore stated, to 727,360 acres, or in dollars $1,819,471. From this should be deducted the expenses of selling the same,27 including taxes, discounts, and commissions, all of which, as appears from the tables of the report for 1883, amounted in that year on the average to twenty-six cents per acre. As- suming the cost to have been the same per acre between Jan- uary 1 and April 26, 1884, the net sales would be as follows: — Proceeds of sales,...................$1,819,471 Deduct cost of selling 727,360 acres, at 26 cents per acre,..........189,114 Net balance,...................$1,630,357 Add to this the t jtal amount of land contracts and cash now in hand for the payment of land bonds, as stated heretofore,..........7,180,084 Total cash and contracts applicable to that purpose,.......$8,810,441 Assuming, however, that the actual cash available to-day for the redemption of the Land Bonds is only precisely the • same in amount as is stated to have been in hand Dec. 31, 1883,— namely, $2,002,104,— and that the Land Bonds out- standing is also the same,— namely, $4,589,000,— it is appar- ent that $2,586,896 additional cash will be required to pay the Land Bonds in full, as they mature between the • years 1887 and 1889. The dates of the maturity of each Land Bond and of each contract under which the lands have been sold are not acces- sible to enable one to determine accurately how they compare. But, assuming that the lands have been sold on five and ten years' contracts bearing six per cent, interest, and that the cash which the Trustee under the Land Grant Mortgage has heretofore received each year furnishes a guide for ascertain- ing what cash he will probably receive each year hereafter, until the contracts now outstanding are paid in full, there seems to be no apparent cause to doubt that, as the Land Bonds mature, the Trustee will have sufficient cash in hand with which to pay them. The amount of cash which the Trustee received each year may be ascertained by computations from the tables contained in the annual reports, and appears to have been as follows: — 1881 1882 1883 Cash received by Trustee,......$705,433 $1,070,223 $1,310,172 Of course, the less in number are the bonds redeemed in any28 one year, by so much greater will be the increase of cash in hand. It is also more than probable that the cash in hand will be very considerably augmented each year by reason of the great increase in the amount of land sales, as shown above, and the consequently larger amounts of land contracts to mature and of interest moneys to be paid. Assuming, therefore, that the cash now in hand and to be hereafter received by the Trustee will pay the Land Bonds in full, the balance of cash in hand and land contracts then applic- able to the payment of the Sinking Fund Bonds will be the amount of cash in hand and contracts outstanding Dec. 31, 1883, less the amounts paid for Land Bonds outstanding that date, plus the cash in hand and outstanding contracts at the date of the final redemption of the Land Bonds. As the latter , is an unknown quantity, it will serve the present purpose to make up the account as of Dec. 31, 1883, upon the assumption that the Trustee will prefer to pay the Land Bonds at par, as they mature, rather than be compelled to pay a large premium in advance of their maturity, as his present policy is reported to be. The account thus made up will stand thus : — Total amount in cash and land contracts applicable to payment of bonds, Dec. 31, 1883,.................$7,180,084 Amount of Land Bonds outstanding same date, .........4,589,000 Balance applicable to payment of Sinking Fund Bonds,......$2,591,084 To this may be added net proceeds of land sales between January 1 and April 25, 1884, as heretofore stated,..........r>630,357 Total,.....................$4,221,441 SINKING FUND BONDS. The total amount of Sinking Fund Bonds outstanding Dec. 31, 1883, was $13,861,000, of which $12,115,000 were coupon bonds, and $1,746,000 registered. The total amount author- ized to be issued under the mortgage was $16,000,000. They bear interest at the rate of eight per cent, per annum, payable semi-annually; and their payment is secured by a mortgage upon the land, land grants, railroad and appurtenances and properties of the former Union Pacific Railroad Company. The principal of these bonds is payable Sept. 1, 1893.29 The mortgage securing the Sinking Fund Bonds provides in terms that, after the Land Grant Bonds shall have been fully paid, all the proceeds of the sales of the lands embraced in the land mortgage shall be applied to the payment and redemption of the Sinking Fund Bonds in the same manner as is provided in the Land Grant Mortgage for the payment and redemption of the Land Bonds ; also, that after the Land Bonds shall have been paid in full, the Trustee under the Sinking Fund Mortgage shall be entitled to the control, care, and custody of the residue of the lands not then sold, in the same manner as the Trustees under the Land Mortgage now are, and that the proceeds of the sales thereof shall be paid over to said Trustee to be applied in the redemption of the Sinking Fund Coupon Bonds in the same manner as the Land Bonds are now redeemed under the Land Grant Mortgage. As further security for the payment of the Sinking Fund Bonds, the mortgage securing the same requires that the Com- pany, in addition to paying-the interest as it accrues upon the outstanding and unpaid bonds, shall pay to the Trustee under said mortgage, as a sinking fund for the gradual and ultimate redemption of said bonds, a sum equal to one per cent, per annum on the amount of bonds actually outstanding on Sep- tember i of each year until the principal becomes due, such sinking fund to be applied each year by annual drawings to the purchase and redemption of the bonds so drawn, and the bonds so purchased are to be forthwith cancelled and delivered to the Company. The registered bonds are not entitled to share in the application of the sinking fund, but only the coupon bonds. The mortgage expressly provides that the sinking funds thus created shall not be used for any other purpose than as above, until all the Sinking Fund Bonds are paid; and also that, if the parties whose bonds are drawn fail to elect to have their bonds redeemed, the sinking funds shall be invested in any other of said Sinking Fund Bonds, at not over par and accrued interest, by advertising for sealed proposals. Owing to the high rate of interest which the Sinking Fund Bonds carry, and the limitation placed upon the price at which3° they may be bought for the purposes of the sinking fund, it is not probable that many of the holders thereof will elect either to present them for redemption or to sell them to the Trustee under the mortgage. If this be the result, the sinking fund will be increased each year by more than the sum of $100,000,* exclusive of interest on accumulations. The Land Grant Mortgage authorizes the Trustee under the same to use the proceeds of the sales of lands in the purchase of Land Bonds in the market so long as they can be bought at par or under; and, when they cannot be bought at that rate, he is required to advertise for proposals, and is authorized, but not required, to purchase such bonds at the lowest terms so offered. This provision would seem to be applicable to the Sinking Fund Bonds, so far as relates to the proceeds of the sales of lands received by the Trustee under the Sinking Fund Mortgage after the Land Bonds have been paid in full. It is impossible even to guess with any pretence to approxi- mation what will be the amount of funds in the hands of the Trustee arising from the sales of lands and applicable to the redemption of the Sinking Fund Bonds as they mature. It is safe to assume, however, that the amount of the con- tracts now outstanding and applicable to the payment of the Land Grant and Sinking Fund Bonds will be actually realized in cash either from the payments required to be made under said contracts or from sales yet to be made. Thus stated and assuming the Land Bonds to be paid at maturity, the account will stand as follows: — Amount of Sinking Fund Bonds outstanding Dec. 31, 1883, $13,861,000 Total amount in cash and contracts applicable to payment of Sinking Funds after payment of Land Grant Bonds, as stated Dec. 31, 1883,...........$2,591,084 Add net amount in cash and contracts from sales made between January 1 and April 25, 1884, as stated above, 1)630,357 Total,....................4,221,441 Balance Sinking Fund Bonds,....................$9,639,559 In estimating the probabilities of all the Sinking Fund Bonds being paid or redeemed at or before maturity, by virtue3i of the funds provided in the mortgage from the sinking fund proper and the sales of lands, it is to be borne in mind that ten years work marvellous changes in a country growing and filling up so rapidly as is that adjacent to the lines of the Union Pacific Railroad and its branches, as has been shown by the very great increase in the sales of lands during the past two years as well as in the tonnage of the local business of the roads. But whether it is or is not probable that, at the time when the principal of the Sinking Fund Bonds is payable, the Trustee under the mortgage will have in his hands cash or investments in both of the sinking funds above provided suf- ficient or more than sufficient for the payment of the bonds then outstanding is a question which each person interested must answer for himself. There can be no doubt, however, that either before or after maturity these bonds can at some -time be paid out of the proceeds of sales of lands even though new bonds be issued, secured by a new mortgage upon the lands for that purpose. OMAHA BRIDGE BONDS. The amount of the Omaha Bridge Bonds outstanding Dec. 31, 1883, was $1,805,000. The original authorized issue was $2,500,000, bearing interest at the rate of eight per cent, per annum and payable April 1, 1896. They are secured by a power of sale mortgage upon the Omaha Bridge, its approaches and appurtenances, and the depots at Council Bluffs and Omaha with the lines and tracks required to con- nect said bridge with the connecting lines of railroad, and also a first transportation lien upon the tolls to be levied and collected upon all property and persons using or trans- ported over said bridge. By the terms of the mortgage, the Trustees are required to set apart each year the fixed sum of $42,000, gold coin, and a sum equal to the interest upon the bonds previously redeemed or purchased under the provisions of the mortgage, as a sinking fund for the purchase and redemption of the bonds then outstanding. The bonds to be purchased and redeemed are to be drawn by lot in November of each year ; and, by the terms of the Supplemental Bridge32 Mortgage, the interest on the bonds drawn is to cease after the first day of the April following the drawing. Inasmuch as the bonds were all sold with the indorsement thereon "that notice has been given to and accepted by the Trustees that the holder of such bond elects to have the same redeemed by the sinking fund, when drawn," and " that such bond, if drawn for the sinking fund, ceases to draw interest from April i next following," the right of election which was given to the holder of the bonds under the original mortgage ceased to have any effect. All bonds drawn are entitled to a premium of ten per cent, in addition to the principal, payable when redeemed, and the last holder of any bond is also entitled to the same premium when the principal is due and payable. It will be noticed that by virtue of these provisions the amount of bonds to be bought and redeemed each year is larger than in the preceding year. It has been computed that- from the sinking fund above provided all the bonds issued under the Bridge Mortgage will be paid or redeemed at or before maturity. COLLATERAL TRUST BONDS. It is also estimated that, if the requirements of the Collat- eral Trust deeds are complied with, the $4,788,000 outstanding six per cent. Collateral Trust Bonds of the Union Pacific Rail- road Company, maturing in 1908, and the $3,000,000 outstand- ing five per cent. Collateral Trust Bonds of the Union Pacific Railway Company, maturing in 1907, will all be paid off before or at maturity under the provisions of the sinking funds estab- lished by the deeds of trust respectively securing said bonds. None of said bonds are a lien upon the road or lands of the Company, but their payment is secured by the bonds and stocks of certain auxiliary companies placed in trust for that purpose. FUNDED DEBTS OF THE KANSAS PACIFIC RAILWAY COMPANY. The following is the statement of the Funded Debt of the Kansas Pacific Railway Company, Dec. 31, 1883, as it appears in the annual report of the Union Pacific Railway Company33 for that year, with the date of the maturity of the outstanding bonds:— Amount outstanding. When payable. Eastern Division Bonds,........ $2,240,000 1895 Middle Division Bonds, ........ 4,063,000 I896 Denver Extension Bonds,....... 6,307,000 1899 Leavenworth Branch Bonds,...... 35>°00 I896 Income Bonds,........... 48,35° Income Bonds subordinated,...... 715,75° I9l6 Denver Extension Coupon Certificates, . . 2,397 Leavenworth Branch Coupon Certificates, 4,83° Cheyenne Branch Bonds,....... 43>°°° Consolidated Mortgage Bonds,..... 15,7 7 5'°° 5 1919 Total outstanding Funded Debt, . . . . $29>234>332 for that year, with the date of the maturity of the outstanding bonds:— Amount outstanding. When payable. The Kansas Pacific Railway Company was reorganized in 1879. pursuance of the plan of reorganization, the Com- pany executed a new mortgage,, called the Consolidated Mort- gage, which, after reciting the execution of former mortgages by the Company and the issue of bonds under the same, con- veyed all the lands granted by the United States not then sold amounting to about 5,000,000 acres, also all contracts of sales, together with all the lines of railroads and branches and all other properties and assets of said Company, to the Trustees named in said mortgage, in order to secure the payment of $30,000,000 of its bonds, payable May 1, 1919, with six per cent, interest, principal and interest payable in gold coin. By the express provisions of this mortgage, all the moneys received from the sales of lands are required to be paid over to the Trustees; and they are required to apply these moneys and all other moneys received by them before the maturity of the Con- solidated Bonds; first, to the payment of any interest accru- ing upon said bonds ; second, in buying in any of the bonds theretofore issued by the Company into which the Consolidated Bonds are intended to be converted, at the lowest price for which such old bonds can be had, not exceeding certain rates fixed for their conversion; or, third, if they cannot be procured at those rates, then at the lowest prices for which they can be had, not exceeding principal and accrued interest. The Consolidated Mortgage further provides that the Trustees shall in no case whatever deliver to the Company or permit to34 pass into its possession or under its control any of the Consoli- dated Bonds; and the Trustees are expressly forbidden to cer- tify said bonds, except as they may be required to be issued under the provisions and restrictions of the mortgage and for the purposes therein mentioned. It is not necessary for the present purpose to state these restrictions and provisions in detail. It appears from the above statement of the outstanding Funded Debt of the Kansas Pacific Company that the old outstanding bonds and certificates still remaining to be bought or exchanged under the above plan amount in the aggregate to.........$13A59>327 And that the Consolidated Bonds issued and outstanding Dec. 31, 1883, amount to,.................. I5»775>°05 Total,....................#29,234,332 Leaving an apparent surplus of $765,668 Consolidated Bonds in the hands of the Trustees, to be applied only as authorized by the mortgage. It is to be noted that the bonds received by the Trustees in exchange for the Consolidated First Mortgage Bonds are not to be cancelled until the exchange and conversion of all of the bonds of each class is completed, when all the old bonds of that class are to be cancelled; but until then the old bonds bought or exchanged by the Trustees are to be re- tained and kept alive as part of the property covered by the mortgage, and the coupons or interest thereon collected by said Trustees. By the operation of these provisions, all the old Land Bonds of the Company, and many others in addition, have been cancelled, so that the amount outstanding Dec. 31, 1883, is, as stated above, $13,459,327. In view of the prices which the Consolidated Bonds have heretofore brought in the markets, and the fact that the proceeds of the sales of lands are also to be applied in taking up the old bonds as well as in paying the interest on the Consolidated Bonds, it is clear that, as the old bonds mature, as they all do, before the Consolidated Bonds themselves are payable, they can easily be paid off with the proceeds of sales of the Consolidated Bonds and of lands, if indeed they are not all exchanged for Consolidated Bonds before that time.35 The railway of the Denver Pacific Railway and Telegraph Company, extending from Denver to Cheyenne, was by Act of Congress made a part and extension of the road of the Kansas Pacific Company. The railroad itself is not included in the Consolidated Mortgage, but the land grant is. Nearly all the stock of this Company was owned by the Kansas Pacific Company, prior to the consolidation in January, 1880; and the shares of stock so held were in terms conveyed under the Consolidated Mortgage. The bonds formerly issued upon both the road and land grant of this branch had all been redeemed on Dec. 31, 1883, with the exception of $43,000 Cheyenne Branch Bonds, as appears from the annual report. KANSAS PACIFIC LAND GRANT. The statements relating to the Land Grant of the Kansas Pacific Company also include those relating to the lands granted to the Denver Pacific Company. The following table shows the number of acres sold from the Kansas Pacific and Denver Pacific Land Grants each year since 1880, with the amounts of sales and the average price per acre : — 1880 1881 1882 1883 Acres sold,........ 100,382 99,478 105,915 298,478 Amounts,.........$404,688 $425,978 $521,932 $1,380,019 Average price per acre, .... $4-3°^ $4-2%^ $4-93 $4-4i£ The estimate of the lands remaining unsold Dec. 31, 1883, is as follows : — Acres. In Kansas, east of 380 Mile Post,............. 1,530,000 In Kansas, west of 380 Mile Post,............. 3,588,000 Total,....................... 5,118,000 At the time when the tables were furnished to the Govern- ment Directors, namely, in June, 1883, the unsold lands they state are estimated to be 5,236,726 acres, classed as follows : — Agricultural,................ 625,000 Grazing, ................. 4,611,726 Total,....................................5,236,72636 But what valuation is put upon the lands by the Company does not appear. The Consolidated Mortgage Bonds do not mature until May i, 1919, more than thirty-six years from the date of the last annual report; and, as the Consolidated Mortgage does not in terms provide that the proceeds of the land sales shall be set apart and invested for the purchase and redemption of the principal of the Consolidated Bonds, but only to the payment of any interest accruing thereon, it would seem that, after the old bonds have all been bought up or exchanged by the Trustees, the Company is entitled to the balance of the pro- ceeds of sales of lands after the payment of interest on the Consolidated Bonds. The road and land grant of the Denver Pacific and Telegraph Company are at the present time subject only to the $43,000 bonds of the Cheyenne Branch referred to above. This should not be lost sight of when taken into con. nection with the indebtedness of the present Union Pacific Railway Company. The aggregate net sales from the Land Grants of the Kansas Pacific and Denver Pacific Railways to Dec. 31, 1883, are officially stated to have been 1,886,206 acres ; and the average cost to the Company of selling the same has been not quite 89 cents per acre, including general expenses, sales of town lots, discounts, and taxes, as against 62 cents per acre in 1883. The average net price per acre, including town lots, to the same date is a little over $2.92 per acre. REVIEW OF THE FUNDED DEBTS. From this review of the provisions governing the funded debts of the former Union and Kansas Pacific Railroad Compa- nies, one is the better able to arrive at the actual financial condition of the present Union Pacific Railway Company as distinguished from what may be called its apparent financial condition, so far as relates to the funded debts. As heretofore stated, the gross funded debts of the Company on Dec. 31, 1883, were $84,506,332, created as follows : —37 By Union Pacific Railroad Company, . By Union Pacific Railway Company, . By Kansas Pacific Railway Company, . $52,272,000 3,000,000 29^34,332 Total, #84,506,332 The Funded Debt of the Kansas Pacific Railway Company may be assumed to amount ultimately to the aggregate princi- pal of the bonds authorized to be issued under the Consolidated Mortgage; namely, $30,000,000. But as they are not a lien upon the roads, lands, and properties of the Union Pacific divi- sion or branches of the present Union Pacific Company, this part of the Funded Debt of the present Company does not seem to require further consideration. The funded debts of the Union Pacific Railroad and Rail- way Companies amounted, Dec. 31, 1883, as stated above, to $55,272,000. It appears that the First Mortgage Bonds constitute the only part of the funded debt, for the payment or redemption of which, at or before maturity, provisions have not been made by way of sinking funds, or otherwise, in the various mort- gages securing the same. If the Company maintains its ability to pay its fixed charges and its annual dues to the Government, and to comply with the covenants and agreements contained in the several mortgage deeds and deeds of trust, it seems far more than probable that, before the First Mortgage Bonds become payable, which is not until between 1896 and 1899, the Land Grant Bonds, the Sink- ing Fund and the Omaha Bridge Bonds, will all have been redeemed, or paid at or before they respectively fall due; namely, the Land Bonds between 1887 and 1889, the Sinking Fund Bonds Sept. 1, 1893, and the Omaha Bridge Bonds April 1, 1896. Inasmuch as the Collateral Trust Bonds are not a lien upon the roads and lands of the Companies, but are secured only by the bonds and stocks of certain connecting roads owned and operated by the Union Pacific Company, the Company probably will, unless additional liens be created, at the date of the maturity of the First Mortgage Bonds, own the road of the Union Division, including the Omaha Bridge, subject on]y to38 the lien of the First Mortgage Bonds and the Government lien, whatever the nature of that lien may then be. INDEBTEDNESS TO THE UNITED STATES. This indebtedness consists of bonds issued and loaned by the United States to aid in the construction of the roads of the Union Pacific and Kansas Pacific Railroad Companies, and the interest which has accrued thereon, less the amounts repaid by the Company. These bonds are payable in thirty years from the date of their issue; namely, thirty years from 1866 to 1869. So long as the controversies exist which are now pending between the Government and the Company as to what items of expenditures should be taken into the account in determining what constitutes "net earnings" within the meaning of the Charter and the Thurman Act, so called, and also as to what compensation the Company is entitled for carrying the mails and for other Government service, it is impossible to state accurately in what amount the Company was indebted to the Government Dec. 31, 1883. It is said to claim that it has overpaid the Government by about $2,000,000, the amounts it is required to pay into the Government Sinking Funds established by the Acts of Congress. No part of the interest nor of the princi- pal of the bonds is due, as has been expressly decided by the United States Supreme Court, until the bonds themselves are payable. The total issue of bonds by the Government was as follows: To the Union Pacific R.R. Co.,..............$27,236,512 To the Kansas Pacific Railway Co., ............ 6,303,000 The interest accrued thereon to Dec. 31, 1883, is........32,093,369 Total principal and accrued interest,............$65,632,881 Deduct the total amounts repaid by the Companies to Dec. 31, 1883, . 18,225,328 Balance of indebtedness, Dec. 31, 1883, ...........$47>407>553 The balance on December 31 of each year, as stated in the annual reports of the Company, was as follows : — Dec. 31, 1880 Dec. 31, 1881 Dec. 31, 1882 Dec. 31, 1883 $45,673,487 $46,129,900 $46,676,001 $47,407,55339 The aggregate amounts repaid by the Company as they stood December 31 of each year were as follows: — Dec. 31, 1880 Dec. 31, 1881 Dec. 31, 1882 Dec. 31, 1883 $13,922,281 $115,478,240 $16,944,509 $18,225,328 The annual interest on the above $33,539,512 bonds is $2,012,371. The following table shows by how much the payments by the Company to the Government in each year have been less than the annual interest 011 the bonds, and also what the increase in the balance of indebtedness to the Gov- ernment was in each year:— 1880 and 1881 1881 and 1882 1882 and 1883 $456,413 $546,101 $73r>SS2 The annual payments to the Government by the Company have been as follows : — 1880 and 1881 1881 and 1882 1882 and 1883 $I>555»959 $1,466,269 $1,280,819 What will be the aggregate amount due from the Company to the Government at the maturity of the bonds, if no pro- vision for a settlement of the entire debt be, in the mean time, made other than by its immediate payment, is a matter which it is impossible to determine with any attempt at approx- imation, for the reason that it is impossible to state what sums may annually be paid by the Company into the sinking funds created under the Acts of Congress. The Government Direc- tors, in their last annual report, referring to this subject, say: "It has been suggested that an actuarial computation of the net amount of these debts [debts to the Government], principal and interest, at a certain day, say July i, 1884, be made, and that this sum be divided into one hundred and twenty equal parts, the Company to issue one hundred and twenty interest-bearing bonds, payable on each six months, until the whole debt is ex- tinguished. This would give the Company a fixed and definite sum to pay semi-annually, and would extend the time of pay- ment over sixty years, at a constantly decreasing annual draft. The effect would be to remove the misunderstandings now existing as to what constitutes the twenty-five per cent, of net4° earnings required to be paid under the Thurman Act, and would at the same time strengthen the security of the Govern- ment and enhance the credit of the Company. This or some- thing similar in the way of legislation seems to us very desir- able, if not absolutely demanded, by the necessities of the case. Should such a proposition be made by [to] the Company on behalf of the Government, we have no reason to doubt that it would be cordially accepted by the Company." A bill has been introduced into Congress, at its present session, to carry out the recommendations above made. It is too plain to admit of argument that some such or similar pro- vision for a settlement of the Government debt would in every respect be most beneficial both to the Government, to the Company, and to those who have invested in its bonds and its shares.SUMMARY. Without undertaking to set forth all the deductions which may be drawn from the foregoing analysis of the tables annexed to the annual reports of the Union Pacific Railway Company, it is sufficient for the present to state the following facts, the truth of which has been clearly established from the tables: — 1. Since the present consolidated Company was organized in January, 1880, it has made and paid out of the earnings of the various railways embraced in its system seven per cent, dividends upon its capital stock for each of the years 1883, 1882, and 1881, and six per cent, for the year 1880, and has also carried in each year to the credit of its General Income Account a surplus of earnings varying from more than $1,260,- 000 for the year 1883 to upwards of $2,000,000 each year for the years 1880, 1881, and 1882, after deducting all its ex- penses and charges, including interest and discounts, sinking fund requirements, and dues to the Government. 2. The total amount to the credit of the General Income Account of the Company, exclusive of Sinking Fund and Land Trust Income Accounts, has increased from $2,423,822 on Dec. 31, 1880, to $8,255,121, Dec. 31, 1883. 3. The investments which the Company has made in the stocks and bonds of auxiliary railways operated in its interests have increased, at their actual cost to the Company, from $19,507,615, Dec. 31, 1880, to $37,848,731, Dec. 31, 1883 ; and the par value of the stocks and bonds represented by the above investments and owned by the Company has increased from $17,608,011 stocks and $16,194,234 bonds, Dec. 31, 1880, to $36*903,492 stocks and $24,444,230 bonds, Dec. 31, 1883, exclu- sive of stocks and bonds not then delivered to the Company, but for which $4,811,124 had been paid. 4. The total net income which the Company has received in each year from the above investments has increased from42 $1,010,152 for the year 1880 to $2,066,682 for the year 1883, or the equivalent for the year 1883 of 6T2775>966 1,673,224 1,547,968 March,........... 2,324,347 2,391,758 1,9 72,712 Total,.......... $6,208,464 $5,981,836 $5,059,588 EXPENSES. 1882 1883 1884 January,........... $1,362,680 $1,019,122 $1)305,365 February,.......... 1,247,738 1,007,454 1,201,018 March............ 1,309,269 1,095,688 1,204,553 Total,.......... $3,919 ,687 $3,122,264 $3,710,936 Net Earnings,......... $2,288,777 $2,859,572 $1,348,652 It thus appears: — 1. That the expenses in 1884 were less than in 1882 by $208,751. 2. That the expenses in 1884 were more than in 1883 by $5 88,672. 3. That the expenses in 1883 were less than in 1882 by $797,423. It will be observed that in each year the expenses are about the same for each of the three months in that year, and that49 the increase in gross earnings in any one month did not bring with it a corresponding increase in expenses. It is to be noticed, however, that the net earnings in 1884 increased from $233,543 in January to $346,950 in February and $768,159 in March, a result hardly to be expected, if com- petition be the controlling cause of the decrease; for the earn- ings in March were more than those of both January and February added together. These monthly estimates are for the entire system of roads owned and operated by the Union Pacific Company, and not simply for the main lines. Now, the same process of reasoning by which the gross earnings and expenses for the three winter months of 1884 are taken as a criterion for what may be expected for the entire year applies with precisely the same force and effect to the three winter months of 1882 and 1883 respectively. It must, therefore, inevitably follow that, if the gross earnings for the entire year 1884 will not exceed the aggregate earnings for the first three months of 1884 multiplied by four, so also in the case of the years 1882 and 1883 the aggregate gross earn- ings for each year ought not to exceed the gross earnings for the first three months of those years respectively multiplied by four. The differences between the theoretical results of this test and the practical results, as officially stated, from the actual operation of the roads, are as follows : — Total difference in favor of actual results over theory, $4*720,753 $4,788,796 And so also in regard to expenses, as appears from the following table: — Theoretical gross earnings, Actual gross earnings, . . 1882 1883 $24,833,856 $23,927,344 29,554,609 28,716,140 Theoretical expenses, Actual,..... Difference, . . . , $15,678,748 $12,122,264 15,264,283 15,899,402 $414,465— $3,777,138+So It is evident that in 1883 the first three months of the year did not bear their proportionate amount of expenses, and that the deficiency was made up in subsequent months. False premises beget false conclusions; and we have clearly demonstrated that it is not safe to take the earnings and expenses for three months in any one year, particularly months the most unfavorable in all respects, as the true test for esti- mating either the probable gross earnings or the probable expenses for the entire year. The monthly statements throw no light upon the causes of the declines in net earnings, and when the fact is called to mind that very many miles of the roads embraced in the Union Pacific system run through mountainous districts, and that the winter has been unusually severe, it is fully as logical, and certainly more reasonable, in view of the past history of this Company, to ascribe the decrease in net earnings for the above three months to un- favorable meteorological conditions rather than to competition with rival roads. C. W. HUNTINGTON. Boston, May 17, 1S84.This book is a preservation facsimile produced for the University of Illinois, Urbana-Champaign. It is made in compliance with copyright law and produced on acid-free archival 60# book weight paper which meets the requirements of ANSI/NISO Z39.48-1992 (permanence of paper). Preservation facsimile printing and binding by Northern Micrographics Brookhaven Bindery La Crosse, Wisconsin 2019