Back to GetFilings.com
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ________________
Commission file number 1-6146
UNION PACIFIC RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 94-6001323
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 271-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ----
As of October 31, 2002, the Registrant had outstanding 7,130 shares of
Common Stock, $10 par value, and 620 shares of Class A Stock, $10 par value.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
UNION PACIFIC RAILROAD COMPANY
INDEX
PART I. FINANCIAL INFORMATION
PAGE NUMBER
-----------
Item 1: Consolidated Financial Statements:
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended September 30, 2002 and 2001....................................... 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Nine Months Ended September 30, 2002 and 2001....................................... 4
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At September 30, 2002 (Unaudited) and December 31, 2001...................................... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2002 and 2001........................................ 6
CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 2002................................................ 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)........................................... 8-12
Item 2: Management's Narrative Analysis of the Results of Operations..................................... 13-18
Item 3: Quantitative and Qualitative Disclosures About Market Risk....................................... 19
Item 4: Controls and Procedures........................................................................... 19
PART II. OTHER INFORMATION
Item 1: Legal Proceedings................................................................................ 19-20
Item 6: Exhibits and Reports on Form 8-K................................................................. 20
Signatures................................................................................................ 21
Certifications............................................................................................ 22-23
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
Millions of Dollars,
For the Three Months Ended September 30, 2002 2001
---------------------------------------- -------- --------
OPERATING REVENUES Rail......................................................... $ 2,838 $ 2,727
-------- --------
OPERATING EXPENSES Salaries, wages and employee benefits........................ 899 868
Equipment and other rents.................................... 315 306
Depreciation................................................. 286 279
Fuel and utilities........................................... 277 302
Materials and supplies....................................... 117 119
Casualty costs............................................... 88 85
Purchased services and other costs........................... 218 193
-------- --------
Total........................................................ 2,200 2,152
-------- --------
INCOME Operating income............................................. 638 575
Other income ................................................ 160 30
Interest expense............................................. (136) (148)
-------- --------
Income before income taxes................................... 662 457
Income taxes................................................. (248) (171)
-------- --------
Net income................................................... $ 414 $ 286
-------- --------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
Consolidated Statements of Income (Unaudited)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
Millions of Dollars,
For the Nine Months Ended September 30, 2002 2001
--------------------------------------- -------- --------
OPERATING REVENUES Rail......................................................... $ 8,295 $ 8,082
-------- --------
OPERATING EXPENSES Salaries, wages and employee benefits........................ 2,683 2,636
Equipment and other rents.................................... 936 919
Depreciation................................................. 851 837
Fuel and utilities........................................... 770 956
Materials and supplies....................................... 358 373
Casualty costs............................................... 269 246
Purchased services and other costs........................... 684 600
-------- --------
Total........................................................ 6,551 6,567
-------- --------
INCOME Operating income............................................. 1,744 1,515
Other income ................................................ 216 133
Interest expense............................................. (412) (441)
-------- --------
Income before income taxes................................... 1,548 1,207
Income taxes................................................. (575) (450)
-------- --------
Net income................................................... $ 973 $ 757
-------- --------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
(Unaudited)
Sept. 30, Dec. 31,
Millions of Dollars 2002 2001
------------------- ------------ ------------
ASSETS
Current Assets Cash and temporary investments......................... $ 62 $ 87
Accounts receivable, net............................... 578 440
Inventories............................................ 250 250
Current deferred income taxes.......................... 331 331
Other current assets................................... 202 145
------------ ------------
Total.................................................. 1,423 1,253
------------ ------------
Investments Investments in and advances to affiliated
companies........................................... 640 708
Other investments...................................... 53 77
------------ ------------
Total.................................................. 693 785
------------ ------------
Properties Cost................................................... 36,477 35,440
Accumulated depreciation............................... (7,619) (7,177)
------------ ------------
Net.................................................... 28,858 28,263
------------ ------------
Other Other assets........................................... 289 262
------------ ------------
Total assets........................................... $ 31,263 $ 30,563
------------ ------------
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current Liabilities Accounts payable....................................... $ 511 $ 498
Accrued wages and vacation............................. 381 351
Accrued casualty costs................................. 405 404
Income and other taxes................................. 311 284
Debt due within one year............................... 292 194
Interest............................................... 59 75
Other current liabilities.............................. 517 550
------------ ------------
Total.................................................. 2,476 2,356
Other Liabilities and Intercompany borrowing from UPC........................ 4,602 5,003
Common Third-party debt due after one year.................... 2,027 2,166
Shareholders' Equity Deferred income taxes.................................. 8,789 8,430
Accrued casualty costs................................. 634 673
Retiree benefits obligation............................ 671 659
Other long-term liabilities............................ 380 429
Redeemable Preference Shares .......................... 20 21
Commitments and contingencies..........................
Common shareholders' equity............................ 11,664 10,826
------------ ------------
Total liabilities and common shareholders' equity...... $ 31,263 $ 30,563
------------ ------------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
Millions of Dollars,
For the Nine Months Ended September 30, 2002 2001
--------------------------------------- ------------- -----------
OPERATING ACTIVITIES Net income................................................ $ 973 $ 757
Non-cash charges to income:
Depreciation........................................... 851 837
Deferred income taxes.................................. 350 339
Other, net............................................. (260) (372)
Changes in current assets and liabilities, net............ (173) (141)
------------- -----------
Cash provided by operating activities..................... 1,741 1,420
------------- -----------
INVESTING ACTIVITIES Capital investments....................................... (1,424) (1,331)
Proceeds from asset sales................................. 291 203
Other investing activities, net........................... (49) (124)
------------- -----------
Cash used in investing activities......................... (1,182) (1,252)
------------- -----------
FINANCING ACTIVITIES Dividends paid to parent.................................. (150) (150)
Debt repaid............................................... (159) (166)
Advances to affiliated companies.......................... (401) (25)
Financings, net........................................... 126 124
------------- -----------
Cash used in financing activities......................... (584) (217)
------------- -----------
Net change in cash and temporary investments (25) (49)
Cash and temporary investments at beginning of
period................................................. 87 88
------------- -----------
Cash and temporary investments at end of period ......... $ 62 $ 39
------------- -----------
CHANGES IN CURRENT Accounts receivable, net.................................. $ (138) $ (127)
ASSETS AND LIABILITIES, NET Inventories............................................... -- 88
Other current assets...................................... (57) (48)
Accounts, wages and vacation payable...................... 43 (71)
Other current liabilities................................. (21) 17
------------- -----------
Total..................................................... $ (173) $ (141)
------------- -----------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest........................................... $ 436 $ 463
Income taxes, net.................................. 200 17
------------- -----------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY (UNAUDITED)
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies
- --------------------------------------------------------------------------------
Accumulated Other
Comprehensive Income (Loss)
-----------------------------------------------
Minimum Foreign
Millions of Dollars, [a] [b] Paid- Pension Currency
For the Nine Months Ended Common Class A in- Retained Liability Translation Derivative
September 30, 2002 Shares Shares Surplus Earnings Adjustments Adjustments Adjustments Total Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001....... $ - $ - $4,782 $6,055 $(7) $ 3 $(7) $(11) $10,826
- -----------------------------------------------------------------------------------------------------------------------------------
Net income......................... - - - 973 - - - - 973
Other comprehensive income,
net of tax[c].................... - - - - - (10) 25 15 15
-------
Comprehensive income............... 988
Dividends.......................... - - - (150) - - - - (150)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002...... $ - $ - $4,782 $6,878 $(7) $(7) $18 $ 4 $11,664
- -----------------------------------------------------------------------------------------------------------------------------------
[a] Common Stock, $10.00 par value; 9,200 shares authorized; 4,465 outstanding.
[b] Class A Stock, $10.00 par value; 800 shares authorized; 388 outstanding.
[c] Foreign currency translation adjustments net of tax benefit of $5; and fuel
derivative adjustments net of tax expense of $15.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY AND
AFFILIATE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS - Union Pacific Railroad Company
(the Registrant), a Class I railroad incorporated in Delaware and an indirect
wholly owned subsidiary of Union Pacific Corporation (the Corporation or UPC),
together with a number of wholly owned and majority-owned subsidiaries, certain
affiliates and various minority-owned companies (collectively, UPRR, the Company
or the Railroad), operates various railroad and railroad-related businesses. The
Consolidated Financial Statements of the Company are unaudited and reflect all
adjustments (consisting only of normal and recurring adjustments) that are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods presented. The Statement
of Consolidated Financial Position at December 31, 2001 is derived from audited
financial statements. The Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. The results of operations for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results for the year
ending December 31, 2002. Certain prior year amounts have been reclassified to
conform to the 2002 financial statement presentation.
2. FINANCIAL INSTRUMENTS
STRATEGY AND RISK - The Company and its subsidiaries use derivative financial
instruments in limited instances for other than trading purposes to manage risk
related to changes in fuel prices. The Company uses swaps, futures and/or
forward contracts to mitigate the downside risk of adverse price movements and
hedge the exposure to variable cash flows. The use of these instruments also
limits future gains from favorable movements. The purpose of these programs is
to protect the Company's operating margins and overall profitability from
adverse fuel price changes.
The Company may also use swaptions to secure near-term swap prices.
Swaptions are swaps that are extendable past their base period at the option of
the counterparty. Swaptions do not qualify for hedge accounting treatment.
MARKET AND CREDIT RISK - The Company addresses market risk related to derivative
financial instruments by selecting instruments with value fluctuations that
highly correlate with the underlying item being hedged. Credit risk related to
derivative financial instruments, which is minimal, is managed by requiring high
credit standards for counterparties and periodic settlements. At September 30,
2002, the Company has not been required to provide collateral, nor has the
Company received collateral relating to its hedging activity.
DETERMINATION OF FAIR VALUE - The fair values of the Company's derivative
financial instrument positions at September 30, 2002 and December 31, 2001,
detailed below, were determined based upon current fair values as quoted by
recognized dealers or developed based upon the present value of expected future
cash flows discounted at the applicable U.S. Treasury rate, London Interbank
Offered Rates (LIBOR) or swap spread.
FUEL STRATEGY - Fuel costs are a significant portion of the Company's total
operating expenses. As a result of the significance of fuel costs and the
historical volatility of fuel prices, the Company uses swaps, futures and/or
forward contracts to mitigate the impact of adverse fuel price changes. In
addition, the Company at times may use swaptions to secure near-term swap
prices.
8
The following is a summary of the Company's derivative financial
instruments at September 30, 2002 and December 31, 2001:
- ------------------------------------------------------------------------------------------------
Millions, Sept. 30, Dec. 31,
Except Average Commodity Prices 2002 2001
- ------------------------------------------------------------------------------------------------
Fuel hedging/swaptions:
Number of gallons hedged for 2001 [a]................................ -- 407
Average price of 2001 hedges (per gallon) [b]........................ $ -- $0.66
Number of gallons hedged for the remainder of 2002 [c]............... 135 567
Average price of 2002 hedges outstanding (per gallon) [b]............ $0.58 $0.56
Number of gallons hedged for 2003 [d]................................ 63 63
Average price of 2003 hedges outstanding (per gallon) [b]............ $0.56 $0.56
- ------------------------------------------------------------------------------------------------
[a] Fuel hedges expired December 31, 2001. Fuel hedges included the swap
portion of a swaption with a base term expiring December 31, 2001, and they
excluded the option portion of the swaption to extend the swap through
December 31, 2002.
[b] Excluding taxes, transportation costs and regional pricing spreads.
[c] Fuel hedges expire December 31, 2002. Fuel hedges include the swap portions
of the swaptions with base terms expiring December 31, 2002, and they
exclude the option portions of the swaptions to extend the swaps through
December 31, 2003.
[d] Fuel hedges which are in effect during 2003. These hedges expire December
31, 2003.
The fair value asset and liability positions of the Company's outstanding
derivative financial instruments at September 30, 2002 and December 31, 2001
were as follows:
- ----------------------------------------------------------------------------------
Sept. 30, Dec. 31,
Millions of Dollars 2002 2001
- ----------------------------------------------------------------------------------
Fuel hedging:
Gross fair value asset position..................... $31 $ --
Gross fair value (liability) position............... (2) (11)
Fuel swaptions:
Gross fair value asset position..................... 3 --
Gross fair value (liability) position............... (4) (24)
- ----------------------------------------------------------------------------------
Total fair value asset (liability) position, net......... $28 $(35)
- ----------------------------------------------------------------------------------
Fuel hedging positions will be reclassified from accumulated other
comprehensive income to fuel expense over the life of the hedge as fuel is
consumed. Rail fuel swaption positions will be reflected in the Consolidated
Statements of Income as fuel expense over the life of the swap and as other
income as the fair value of the outstanding option fluctuates.
The Company's use of derivative financial instruments had the following
impact on pre-tax income for the three months and nine months ended September
30, 2002 and 2001:
- -------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
Millions of Dollars 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
Decrease in fuel expense from fuel hedging........................ $15 $ 3 $15 $ 7
Decrease in fuel expense from fuel swaptions...................... 4 2 17 2
- -------------------------------------------------------------------------------------------------------
Decrease in operating expenses.................................... 19 5 32 9
Increase (decrease) in other income, net from fuel swaptions...... 1 (10) 4 (10)
- -------------------------------------------------------------------------------------------------------
Increase (decrease) in pre-tax income............................. $20 $(5) $36 $(1)
- -------------------------------------------------------------------------------------------------------
Through September 30, 2002, the Company had recorded less than $1 million
for fuel hedging ineffectiveness.
SALE OF RECEIVABLES - The Railroad has sold, on a revolving basis, an undivided
percentage ownership interest in a designated pool of accounts receivable to
third parties through a bankruptcy-remote subsidiary. Receivables are sold at
carrying value, which approximates fair value. The amount of receivables sold
fluctuates based upon the availability of the designated pool of receivables and
is directly affected by changing business volumes and credit risks. At September
30, 2002 and December 31, 2001, accounts
9
receivable are presented net of $600 million of receivables sold. In May 2002,
the sale of receivables program was renewed for one year without any significant
term changes.
3. CAPITAL STOCK - The number of shares shown in the Common Stock section of the
Consolidated Statement of Changes in Common Shareholders' Equity excludes 2,665
shares of Common Stock and 232 shares of Class A Stock owned by Southern
Pacific, an affiliate of the Registrant, whose results are included in the
Company's Consolidated Financial Statements.
4. DEBT - During June 2002, the Company entered into a capital lease covering
new locomotives. The related capital lease obligation totaled approximately $126
million and is included in the Consolidated Statements of Financial Position as
debt.
5. OTHER INCOME - Other income included the following for the three months and
nine months ended September 30, 2002 and 2001:
- --------------------------------------------------------------------------------------
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
Millions of Dollars 2002 2001 2002 2001
- --------------------------------------------------------------------------------------
Net gain on non-operating asset dispositions..... $155 $31 $196 $112
Rental income.................................... 12 11 38 47
Interest income.................................. 1 1 5 4
Other, net....................................... (8) (13) (23) (30)
- --------------------------------------------------------------------------------------
Total............................................ $160 $30 $216 $133
- --------------------------------------------------------------------------------------
Included in the third quarter gain on non-operating asset dispositions is a
pre-tax gain of $141 million related to the sale of land, track, operating
rights and facilities to the Utah Transit Authority (UTA) for $185 million,
which included approximately 175 miles of track that stretches from Brigham
City, Utah, through Salt Lake City, Utah, south to Payson, Utah. The transaction
contributed $88 million to the Company's earnings on an after-tax basis. An
additional $16 million of pre-tax gain has been deferred pending successful
completion of arrangements for the relocation of various existing facilities.
6. COMMITMENTS AND CONTINGENCIES
CLAIMS AND LITIGATION - There are various claims and lawsuits pending against
the Company and certain of its subsidiaries, in addition to unasserted claims.
It is not possible at this time for the Company to determine fully the effect of
all such claims on its consolidated financial condition, results of operations
or liquidity; however, to the extent possible, where unasserted claims can be
estimated and where such claims are considered probable, the Company has
recorded a liability. The Company does not expect that any known lawsuits or
claims, including unasserted claims, will have a material adverse effect on its
consolidated financial condition, results of operations or liquidity.
Western Resources (Western) filed a complaint on January 24, 2000 in the
U.S. District Court for the District of Kansas alleging that UPRR and The
Burlington Northern Santa Fe Railway Company (BNSF) materially breached their
service obligations under the transportation contract to deliver coal in a
timely manner to Western's Jeffrey Energy Center. The original complaint sought
recovery of consequential damages and termination of the contract, excusing
Western from further performance. In an amended complaint filed September 1,
2000, Western claimed the right to retroactive termination and added a claim for
restitution. On October 23, 2001, Western moved for leave to file a second
amendment to its complaint to add counts for innocent misrepresentation and
negligent misrepresentation and to request rescission of the contract. The
motion for leave to amend was denied by the magistrate on March 11, 2002, whose
decision was affirmed by the judge on May 30, 2002. The matter went to trial
before a jury on August 20, 2002. On September 12, 2002, the jury returned a
verdict finding that the contract had not been breached by the railroads, and
the judgment dismissing the case was entered by the court on September 16, 2002.
Western filed a motion for new trial on September 30, 2002, which the railroads
believe will be unsuccessful. UPRR and BNSF filed a response opposing the motion
for a new trial on October 15, 2002, and will vigorously defend this and all
other post-trial efforts by Western to overturn the jury verdict.
PERSONAL INJURY AND OCCUPATIONAL ILLNESS - The cost of injuries to employees and
others related to Railroad activities is charged to expense based on actuarial
estimates of the ultimate cost and number of incidents
10
each year. In the first nine months of 2002, the Railroad's reported number of
work-related injuries that resulted in lost job time increased 3% compared to
the number of injuries reported during the first nine months of 2001. Accidents
at grade crossings, however, decreased 17% during the first nine months of 2002
compared to the similar period in 2001. The three month and nine month expenses
for the Railroad's personal injury-related events were $58 million and $174
million in 2002, compared to $46 million and $150 million in 2001, respectively.
As of September 30, 2002, the Company had a liability of $670 million accrued
for personal injury costs, of which $272 million was recorded as a current
liability. The Railroad has additional amounts accrued for claims related to
certain occupational illnessess. Compensation for Railroad work-related
accidents is governed by the Federal Employers' Liability Act (FELA). Under
FELA, damages are assessed based on a finding of fault through litigation or
out-of-court settlements. The Railroad offers a comprehensive variety of
services and rehabilitation programs for employees who are injured at work.
ENVIRONMENTAL - The Company generates and transports hazardous and nonhazardous
waste in its current operations and has done so in its former operations, and it
is subject to federal, state and local environmental laws and regulations. The
Company has identified approximately 433 active sites at which it is or may be
liable for remediation costs associated with alleged contamination or for
violations of environmental requirements. This includes 52 sites that are the
subject of actions taken by the U.S. government, 28 of which are currently on
the Superfund National Priorities List. Certain federal legislation imposes
joint and several liability for the remediation of identified sites;
consequently, the Company's ultimate environmental liability may include costs
relating to other parties, in addition to costs relating to its own activities
at each site.
When environmental issues have been identified with respect to the property
owned, leased or otherwise used in the conduct of the Company's business, the
Company and its external consultants perform environmental assessments on such
property. The Company expenses the cost of the assessments as incurred. The
Company accrues the cost of remediation where its obligation is probable and
such costs can be reasonably estimated.
As of September 30, 2002, the Company had a liability of $175 million
accrued for future environmental costs, of which $70 million was recorded in
current liabilities as accrued casualty costs. The liability includes future
costs for remediation and restoration of sites, as well as for ongoing
monitoring costs, but excludes any anticipated recoveries from third parties.
Cost estimates are based on information available for each site, financial
viability of other potentially responsible parties, and existing technology,
laws and regulations. The Company believes that it has adequately accrued for
its ultimate share of costs at sites subject to joint and several liability.
However, the ultimate liability for remediation is difficult to determine
because of the number of potentially responsible parties involved, site-specific
cost sharing arrangements with other potentially responsible parties, the degree
of contamination by various wastes, the scarcity and quality of volumetric data
related to many of the sites and/or the speculative nature of remediation costs.
The Company expects to pay out the majority of the September 30, 2002
environmental liability over the next five years, funded by cash generated from
operations. The impact of current obligations is not expected to have a material
adverse effect on the results of operations, financial condition or liquidity of
the Company.
OTHER MATTERS - The Company periodically enters into financial and other
commitments in connection with its businesses. It is not possible at this time
for the Company to determine fully the effect of all unasserted claims on its
consolidated financial condition, results of operations or liquidity; however,
to the extent possible, where unasserted claims can be estimated and where such
claims are considered probable, the Company has recorded a liability. The
Company does not expect that any known lawsuits, claims, environmental costs,
commitments, contingent liabilities or guarantees will have a material adverse
effect on its consolidated financial condition, results of operations or
liquidity.
At September 30, 2002, the Company had unconditional purchase obligations
of $392 million for the purchase of locomotives as part of the Company's
multi-year capital asset acquisition plan. In addition, the Company was
contingently liable for $284 million in guarantees and $27 million in letters of
credit at September 30, 2002. These contingent guarantees were entered into in
the normal course of business and include guaranteed obligations of affiliated
operations. The Company is not aware of any existing event of default, which
would require it to satisfy these guarantees.
11
7. ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting
Standards Board (FASB) issued FAS 143, "Accounting for Asset Retirement
Obligations" (FAS 143). FAS 143 requires the Company to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred and is effective for the Company's fiscal year beginning January 1,
2003. Management is in the process of evaluating the impact this standard will
have on the Company's Consolidated Financial Statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (FAS 145). FAS 145 concludes that debt extinguishments used as part
of a company's risk management strategy should not be classified as an
extraordinary item. FAS 145 also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. Management believes that FAS 145 will not have a
significant impact on the Company's Consolidated Financial Statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). FAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred and is effective for exit or
disposal activities that are initiated after December 31, 2002. Management is in
the process of evaluating the impact this standard may have on the Company's
Consolidated Financial Statements.
12
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY
AND AFFILIATE COMPANIES
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Union Pacific Railroad Company (the Registrant), a Class I railroad incorporated
in Delaware and an indirect wholly owned subsidiary of Union Pacific Corporation
(the Corporation or UPC), together with a number of wholly owned and
majority-owned subsidiaries, certain affiliates and various minority-owned
companies (collectively, the Company or Railroad), operates various railroad and
railroad-related businesses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Narrative Analysis of the Results of Operations addresses Union
Pacific Railroad Company's Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions. Management bases its estimates on historical
experience and on various other factors that are believed to be reasonable under
the circumstances. Actual results may vary under different assumptions or
conditions.
Management believes the following accounting policies are among the most
critical in the preparation of the Consolidated Financial Statements, in that
they depend upon the application of judgements and the extensive use of
estimates.
Revenue recognition - The Company recognizes transportation revenues on a
percentage-of-completion basis as freight moves from origin to destination.
Other revenue is recognized as service is performed or contractual obligations
are met.
Environmental costs - When environmental issues have been identified with
respect to the property owned, leased or otherwise used in the conduct of the
Company's business, the Company and its consultants perform environmental
assessments on such property. The Company expenses the cost for the assessments
as incurred. The Company accrues the cost of remediation where its obligation is
probable and such costs can be reasonably estimated.
Personal injury - The cost of injuries to employees and others related to
Railroad activities is charged to expense based on actuarial estimates of the
ultimate cost and number of incidents each year.
NET INCOME - Rail operations reported net income in the third quarter of 2002 of
$414 million, compared to net income of $286 million in 2001, an increase of
$128 million (45%). Year-to-date, net income increased $216 million (29%) to
$973 million, compared to 2001 net income of $757 million. The increase in
earnings in both periods resulted primarily from the sale transaction with the
UTA and stronger operating results. Higher operating revenue and lower fuel
prices combined with productivity gains and cost control efforts offset
inflation and higher volume-related costs to also contribute to the increase in
net income. Cost control is defined as focused actions to reduce discretionary
spending and failure costs.
OPERATING REVENUES - Operating revenue is comprised of Commodity Revenue and
other revenues. Other revenues primarily include subsidiary revenue from various
companies that are wholly owned or majority owned by the Railroad, revenue from
the Chicago commuter rail operations and accessorial revenue earned due to
customer detainment of railroad owned or controlled equipment. Third quarter
rail operating revenues increased $111 million (4%) to $2.8 billion compared to
2001. Year-to-date, rail revenues increased $213 million (3%) compared to 2001.
Third quarter revenue carloads increased 4% and year-to-date carloads increased
3% compared to a year ago, with the highest growth in both periods in the
automotive and intermodal commodity groups. Other revenues increased 13% to $113
million in the third quarter and increased 5% to $323 million for the
year-to-date period compared to a year ago due to higher subsidiary revenue.
13
The following tables summarize the year-over-year changes in rail
commodity revenue, revenue carloads and average revenue per car by commodity
type:
Three Months Ended Nine Months Ended
Sept. 30, % Commodity Revenue Sept. 30, %
2002 2001 Change Millions of Dollars 2002 2001 Change
---- ---- ------ ------------------- ---- ---- ------
$ 373 $ 358 4 Agricultural $1,096 $1,073 2
285 253 13 Automotive 893 830 8
399 392 2 Chemicals 1,186 1,168 2
591 611 (3) Energy 1,743 1,781 (2)
535 514 4 Industrial Products 1,542 1,509 2
542 499 9 Intermodal 1,512 1,412 7
------ ------ --- ------ ------ ---
$2,725 $2,627 4 Total $7,972 $7,773 3
------ ------ --- ------ ------ ---
Three Months Ended Nine Months Ended
Sept. 30, % Revenue Carloads Sept. 30, %
2002 2001 Change Thousands 2002 2001 Change
---- ---- ------ --------- ---- ---- ------
216 214 1 Agricultural 647 645 --
193 177 9 Automotive 605 561 8
231 225 3 Chemicals 681 666 2
540 549 (2) Energy 1,605 1,602 --
378 368 3 Industrial Products 1,072 1,078 --
801 741 8 Intermodal 2,253 2,112 7
------ ------ --- ------ ------ ----
2,359 2,274 4 Total 6,863 6,664 3
------ ------ --- ------ ------ ----
Three Months Ended Nine Months Ended
Sept. 30, % Average Revenue Sept. 30, %
2002 2001 Change Per Car 2002 2001 Change
$1,728 $1,668 4 Agricultural $1,695 $1,663 2
1,479 1,429 3 Automotive 1,476 1,478 --
1,729 1,744 (1) Chemicals 1,742 1,757 (1)
1,095 1,113 (2) Energy 1,086 1,112 (2)
1,415 1,399 1 Industrial Products 1,438 1,400 3
677 674 -- Intermodal 671 668 --
------ ------ --- ------ ------ ----
$1,156 $1,155 -- Total $1,162 $1,166 --
------ ------ --- ------ ------ ----
Agricultural - Revenue increased 4% in the third quarter and 2% for the
year-to-date period of 2002 over the comparable periods in 2001. Meals and oils
increased due to increased demand for soybean meal shipments into Mexico and
soybean oil exports. Demand for cottonseed shipments used for feed also
increased. Ethanol shipments increased due to heightened demand for the fuel
additive. Weak domestic demand for wheat partially offset these increases.
Average revenue per car increased primarily due to the positive mix impact of
longer average length of haul shipments.
Automotive - Revenue increased 13% for the third quarter and 8% for the
year-to-date period of 2002 over the comparable periods in 2001, driven by an
increase in carloads. The volume growth was due primarily to market share gains
for finished vehicle shipments. Average revenue per car was flat for the
year-to-date period over 2001, but increased 3% in the third quarter due to the
mix impact of longer average length of haul vehicle shipments.
Chemicals - Revenue increased 2% for both the third quarter and year-to-date
periods of 2002 over the comparable periods in 2001, due to increases in
carloads. While a softening economy and decreased industrial production resulted
in a revenue decline in the first quarter, increased levels of industrial
production boosted second and third quarter carloads a combined 4% higher than
2001. Higher general demand increased shipments of soda ash, liquid & dry
chemicals and liquified petroleum (LP) gas. Average revenue per car declined 1%
due to rate pressures and shifts among the mix of plastics, phosphate rock,
fertilizer and soda ash traffic.
14
Energy - Revenue decreased 3% for the third quarter and 2% for the year-to-date
period of 2002 over the comparable periods in 2001 as a 2% carload decline in
the third quarter and flat carloads year-to-date were accompanied by a 2%
decline in average revenue per car in both periods. The decline in carloads was
largely impacted by higher demand in 2001 and higher stockpile levels in 2002.
Average revenue per car declined primarily due to the impact of contract price
negotiations on expiring long-term contracts with certain major customers.
Industrial Products - Revenue increased 4% for the third quarter and 2% for the
year-to-date periods of 2002 over the comparable periods in 2001 due to higher
average revenue per car in both periods and a 3% increase in carloads for the
third quarter. Year-to-date carloads were flat. Volume declines in the first
half of 2002 were mainly the result of the soft economy which had a negative
effect on many economically sensitive commodities, including steel and paper
products. Shipments of metallic minerals were also negatively affected by the
weak steel market. In the third quarter, however, some commodity lines,
including steel and certain paper products, including newsprint, experienced
revenue growth due to stronger economic demand. Also offsetting the declines
were volume increases in construction-related commodities, led by stone, as
strong building and road construction activity continued. Lumber volumes also
increased due to strong housing construction and other general demand for lumber
products. Average revenue per car increased as a result of price increases and a
greater mix of longer average length of haul business, mainly lumber.
Intermodal - Revenue increased 9% for the third quarter and 7% for the
year-to-date periods of 2002 over the comparable periods in 2001, which was
driven by increased international shipments due to high import demand and
increased market share. Partially offsetting these increases were declines in
domestic shipments, as a result of soft economic demand and the voluntary action
of reducing low-margin domestic truckload trailer business in favor of
higher-margin containers. In addition, the labor dispute between the
International Longshoreman and Warehouse Union (ILWU) and the Pacific Maritime
Association, which began four days before the end of the third quarter had a
significant impact on intermodal volumes during that period. Average revenue per
car was flat for both periods compared to 2001 due to a higher mix of
international shipments which have a lower average revenue per car compared to
domestic shipments. The effect of this mix more than offset price increases.
Mexico Business - In 2001, UPRR generated $860 million of revenues from rail
traffic with businesses located in Mexico. Included in the rail commodity
revenue reported above, Mexican related revenue increased 2% to $217 million for
the third quarter but decreased 1% to $646 million for the year-to-date period
of 2002 over the comparable periods in 2001. In both periods, shipments
increased for chemicals and industrial products business segments. Increased
chemicals business consisted of plastics, fertilizer, and LP gas exports, in
addition to higher imports/exports of liquid and dry chemicals. An increase in
industrial products resulted from exports of pulp and paper products in addition
to higher imports/exports of steel and scrap. Reduced automobile production
offset these gains resulting in fewer shipments of parts and finished vehicles.
OPERATING EXPENSES - Third quarter operating expenses increased $48 million (2%)
to $2.2 billion, compared to 2001. Year-to-date operating expenses decreased $16
million. In the third quarter, inflation, volume-related costs, increased
contract services, lease and depreciation expense were partially offset by lower
fuel prices and savings from lower employee force levels and productivity
improvements. Expenses in the nine month period of 2002 were significantly
reduced by lower fuel prices and productivity savings which more than offset
increases in inflation, volume-related costs, contract services, casualty and
depreciation expense.
Salaries, Wages and Employee Benefits - Salaries, wages and employee benefits
increased $31 million (4%) in the third quarter of 2002, compared to 2001.
Year-to-date, wage and benefit expenses rose $47 million (2%). Increases were
driven by inflation and volume-related costs as the result of a 4% growth in
gross ton miles in both the third quarter and year-to-date. A reduction in
employee force levels in the third quarter of 2% and year-to-date of 3%, in
conjunction with worker productivity improvements, partially offset wage and
employee benefits inflation and volume-related costs.
Equipment and Other Rents - Equipment and other rents primarily includes rental
expense UPRR pays for freight cars owned by other railroads or private
companies; freight car, intermodal and locomotive leases; other specialty
equipped vehicle leases; and office and other rentals. Expenses increased $9
million (3%) in the third quarter and $17 million (2%) year-to-date, compared to
2001. The increases were due primarily to higher expenses for locomotive leases
and higher volume-related costs in both periods. Partially offsetting the
increases were both a decrease in car cycle times (the average number of
accumulated days that loaded and empty cars from other railroads spend on UPRR's
system) and lower rental prices for freight cars. The higher locomotive lease
expense is due to UPRR's increased leasing of new, more reliable and fuel
efficient locomotives. These new locomotives replaced older, non-leased models
in the fleet, which helped reduce
15
expenses for depreciation, labor, materials and fuel during the year. The
decrease in car cycle times is partially attributable to increased volume demand
and better car utilization. The increase in volume costs is attributable to an
increase in carloads in certain commodity types such as automotive, intermodal,
chemicals and industrial products that utilize a high percentage of rented
freight cars.
Depreciation - The majority of depreciation relates to road property.
Depreciation expense increased $7 million (3%) in the third quarter and $14
million (2%) year-to-date over 2001 as a result of increased capital spending in
recent years. Capital spending totaled $1.4 billion in the first nine months of
2002 compared to $1.3 billion in the first nine months of 2001. Full year
capital spending totaled $1.7 billion in 2001 and 2000 and $1.8 billion in 1999.
Fuel and Utilities - Fuel and utilities is comprised of locomotive fuel,
utilities other than telephone and gasoline and other fuels. Expenses decreased
$25 million (8%) in the third quarter and $186 million (19%) in the year-to-date
period of 2002 compared to a year ago. The decrease was driven by lower fuel
prices and a lower fuel consumption rate, as measured by gallons consumed per
thousand gross ton miles. Fuel prices averaged 75 cents per gallon in the third
quarter of 2002 compared to 86 cents per gallon in the third quarter of 2001
(price includes taxes and transportation costs). Year-to-date, fuel prices
averaged 70 cents per gallon compared to 90 cents per gallon in the same
year-to-date period in 2001. Lower fuel prices in 2002 resulted in a $33 million
reduction in fuel expense in the third quarter and a $198 million reduction in
the first nine months, compared to 2001. The lower consumption rate decreased
fuel expense by $1 million in the third quarter and $12 million year-to-date. A
4% increase in gross ton miles increased fuel expense by $11 million in the
third quarter and a 4% increase in gross ton miles year-to-date increased fuel
expense by $36 million compared to a year ago. The Railroad hedged or had fuel
swaptions in place which equaled approximately 41% of its fuel consumption for
the third quarter and 42% of its fuel consumption year-to-date, which decreased
fuel costs by $19 million in the third quarter and $32 million in the first nine
months of 2002. As of September 30, 2002, expected fuel consumption for the
remainder of 2002 is 41% hedged at 58 cents per gallon (excluding estimated
taxes and transportation costs and regional pricing spreads). Expected fuel
consumption in 2003 is 5% hedged at 56 cents per gallon (excluding estimated
taxes, transportation costs and regional pricing spreads). Utilities, gasoline,
and propane expenses decreased $2 million in the third quarter and decreased $12
million year-to-date primarily due to lower rates and fuel prices.
Materials and Supplies - Material used for the maintenance of the Railroad's
lines, structures and equipment is the principal component of materials and
supplies expense. Office, small tools and other supplies and the costs of
freight services purchased to ship company materials are also included. Expenses
decreased $2 million (2%) in the third quarter and decreased $15 million (4%)
year-to-date, primarily reflecting a reduction in the number of locomotives
overhauled. Materials expense for locomotive overhauls decreased due to the
acquisition of new, more-reliable locomotives during the past several years, the
sale of older units, which required higher maintenance, and outsourcing some
locomotive maintenance. Partially offsetting the reductions in locomotive
overhauls was an increase in costs for freight car repairs.
Casualty Costs - The largest component of casualty costs is personal injury
expense. Freight and property damage, insurance, environmental matters and
occupational illness expense are also included in casualty costs. Costs
increased $3 million (4%) in the third quarter compared to 2001 due to higher
personal injury expenses partially offset by lower freight damage. Year-to-date
costs increased $23 million (9%) due primarily to higher personal injury costs.
Purchased Services and Other Costs - Purchased services and other costs include
the costs of services purchased from outside contractors, state and local taxes,
net costs of operating facilities jointly used by UPRR and other railroads,
transportation and lodging for train crew employees, trucking and contracting
costs for intermodal containers, leased automobile maintenance expenses,
telephone and cellular expense, employee travel expense and computer and other
general expenses. Expenses increased $25 million (13%) in the third quarter and
increased $84 million (14%) year-to-date, compared to last year. The increase in
both periods is primarily due to increased spending for contract services,
higher expenses for jointly operated facilities and higher general expenses.
OPERATING INCOME - Operating income increased $63 million (11%) in the third
quarter to $638 million. Operating income for the first nine months of 2002 grew
$229 million (15%) to $1.7 billion. The operating margin for the third quarter
was 22.5%, compared to 21.1% in 2001. The year-to-date operating margin was
21.0% compared to 18.8% a year ago.
16
NON-OPERATING ITEMS - Interest expense decreased $12 million (8%) in the third
quarter and $29 million (7%) year-to-date, primarily as a result of lower
average debt levels and lower weighted-average interest rates in 2002. Third
quarter other income increased $130 million and increased $83 million for the
year-to-date period in 2002 compared to 2001 due primarily to the sale
transaction with the UTA ($141 million pre-tax). Income taxes increased $77
million (45%) in the third quarter and $125 million (28%) year-to-date, compared
to 2001, which was primarily the result of higher pre-tax income in both periods
in 2002.
OTHER MATTERS
COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits pending
against the Company and certain of its subsidiaries. The Company is also subject
to various federal, state and local environmental laws and regulations, pursuant
to which it is currently participating in the investigation and remediation of
various sites. A discussion of certain claims, lawsuits, contingent liabilities
and guarantees is set forth in note 6 to the Consolidated Financial Statements,
which discussion is incorporated herein by reference.
PENSIONS - During the second quarter of 2002, the Company decreased its assumed
rate of return on pension plan assets from 10% to 9%. This assumption change
resulted in an increase to 2002 pension expense of $16 million. In addition, due
to declines on plan assets, a minimum pension liability adjustment will be
recorded during the fourth quarter of 2002. This adjustment will result in a
reduction of common shareholders' equity. Based upon actual asset returns
through October 31, 2002, the Company expects the reduction in equity to be
approximately $120 million, after tax. The Railroad voluntarily contributed
$50 million to its pension plan in November of 2002.
DIVIDEND RECEIVABLE - The Company owns a 26% interest in Grupo Ferroviario
Mexicano, S.A. de C.V. (GFM). GFM operates a major railway system in Mexico.
During the third quarter of 2002, the Company recorded a dividend from GFM of
approximately $118 million. As of September 30, 2002, the dividend is reflected
as a receivable in the Company's Consolidated Statements of Financial Position.
The dividend is accounted for as a reduction to investments in and advances to
affiliated companies in the Consolidated Statements of Financial Position as of
September 30, 2002 and creates no effect on the Company's Consolidated
Statements of Income. Subsequent to September 30, 2002, the Company received
approximately $20 million of the dividend receivable.
WEST COAST PORT DISRUPTION - During September of 2002, the labor dispute between
the International Longshoreman and Warehouse Union (ILWU) and the Pacific
Maritime Association escalated and resulted in work slow-downs and a lockout of
the ILWU dockworkers for four days at the end of the third quarter that
continued for nine days into the fourth quarter. The Company expects the
negative impact on earnings to range between 5 cents and 10 cents per diluted
share in the fourth quarter of 2002; however, the actual results may differ
depending on how quickly the congestion at the ports can be resolved.
ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting Standards
Board (FASB) issued FAS 143, "Accounting for Asset Retirement Obligations" (FAS
143). FAS 143 requires the Company to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred and is
effective for the Company's fiscal year beginning January 1, 2003. Management is
in the process of evaluating the impact this standard will have on the Company
's Consolidated Financial Statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (FAS 145). FAS 145 concludes that debt extinguishments used as part
of a company's risk management strategy should not be classified as an
extraordinary item. FAS 145 also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. Management believes that FAS 145 will not have a
significant impact on the Company 's Consolidated Financial Statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). FAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred and is effective for exit or
disposal activities that are initiated after December 31, 2002. Management is in
the process of evaluating the impact this standard may have on the Company's
Consolidated Financial Statements.
17
CAUTIONARY INFORMATION
Certain statements in this report are, and statements in other material filed or
to be filed with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) are, or will be, forward-looking statements as defined by the
Securities Act of 1933 and the Securities Exchange Act of 1934. These
forward-looking statements include, without limitation, statements regarding:
expectations as to operational improvements; expectations as to cost savings,
revenue growth and earnings; the time by which certain objectives will be
achieved; estimates of costs relating to environmental remediation and
restoration; proposed new products and services; expectations that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material adverse
effect on our consolidated financial position, results of operations or
liquidity; and statements concerning projections, predictions, expectations,
estimates or forecasts as to the Company's and its subsidiaries' business,
financial and operational results, and future economic performance, statements
of management's goals and objectives and other similar expressions concerning
matters that are not historical facts.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements.
Important factors that could affect the Company's and its subsidiaries'
future results and could cause those results or other outcomes to differ
materially from those expressed or implied in the forward-looking statements
include, but are not limited to:
- whether the Company and its subsidiaries are fully successful in
implementing their financial and operational initiatives;
- industry competition, conditions, performance and consolidation;
- legislative and regulatory developments, including possible
enactment of initiatives to re-regulate the rail business;
- natural events such as severe weather, fire, floods and earthquakes;
- the effects of adverse general economic conditions, both within the
United States and globally;
- changes in fuel prices;
- changes in labor costs;
- any adverse economic or operational repercussions from terrorist
activities and any governmental response thereto;
- labor stoppages; and
- the outcome of claims and litigation, including those related to
environmental contamination, personal injuries, and occupational
illnesses arising from hearing loss, repetitive motion and exposure
to asbestos and diesel fumes.
Forward-looking statements speak only as of the date the statement was made.
The Company assumes no obligation to update forward-looking information to
reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information. If the Company does update one or more
forward-looking statements, no inference should be drawn that the Company will
make additional updates with respect thereto or with respect to other
forward-looking statements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided
in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Disclosure concerning market risk-sensitive instruments is set forth in note 2
to the Consolidated Financial Statements included in Item 1 of Part I of this
Report and is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the CEO and the CFO concluded that the
Company's disclosure controls and procedures are effective in alerting them, in
a timely manner, to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
Additionally, the CEO and CFO determined that there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the Company's internal controls subsequent to the date of
their most recent evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
The United States Environmental Protection Agency, Region 9, has filed two
administrative complaints against UPRR, during the third quarter, the first of
which alleges that the Railroad violated the Clean Water Act in 1997 by
discharging dredged or fill materials into the Carpenteria Salt Marsh in Santa
Barbara County, California, and seeks civil penalties from the Railroad in an
amount up to $137,500. The second complaint alleges that the Railroad violated
the Clean Water Act in 1999 by discharging dredged or fill materials into Laguna
Creek, in Santa Barbara County, California without a Section 404 permit and
likewise seeks civil penalties up to $137,500. UPRR disputes the allegations set
forth in these complaints and intends to defend the matters in any subsequent
administrative proceedings.
The South Coast Air Quality Management District has filed an action against
Union Pacific Railroad in the Los Angeles County Superior Court, in which it
seeks civil penalties in an amount up to $225,000 from the Railroad. The
complaint alleges that Union Pacific Railroad has violated certain provisions of
the California Health and Safety Code and District rules, as a result of air
emissions from idling diesel locomotives in Los Angeles, California. The
complaint further alleges that the Railroad has violated the California Health
and Safety Code and District rules as a result of fugitive dust emissions from
railroad property located in Colton, California. Union Pacific Railroad disputes
the allegations of the complaint and maintains that the claims relating to
idling locomotives are preempted by federal law. The Railroad intends to defend
against the claims made by the District in this action.
OTHER MATTERS
Western Resources (Western) filed a complaint on January 24, 2000 in the U.S.
District Court for the District of Kansas alleging that UPRR and The Burlington
Northern Santa Fe Railway Company (BNSF) materially breached their service
obligations under the transportation contract to deliver coal in a timely manner
to Western's Jeffrey Energy Center. The original complaint sought recovery of
consequential damages and termination of the contract, excusing Western from
further performance. In an amended complaint filed September 1, 2000, Western
claimed the right to retroactive termination and added a claim for restitution.
On October 23, 2001, Western moved for leave to file a second amendment to its
complaint to add counts for innocent misrepresentation and negligent
misrepresentation and to request rescission of the contract. The motion for
leave to amend was denied by the magistrate on March 11, 2002, whose decision
was affirmed by the judge on May 30, 2002. The matter went to trial before a
jury on August 20, 2002. On September 12, 2002, the jury returned a verdict
finding that the contract had not been breached by the railroads, and the
judgment dismissing the case was entered by the court on September 16, 2002.
Western
19
filed a motion for new trial on September 30, 2002, which the railroads believe
will be unsuccessful. UPRR and BNSF filed a response opposing the motion for a
new trial on October 15, 2002, and will vigorously defend this and all other
post-trial efforts by Western to overturn the jury verdict.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibits are listed in the exhibit index on page 23.
(B) REPORTS ON FORM 8-K
On July 18, 2002, the Registrant filed a Current Report on Form 8-K
announcing UPC's financial results for the second quarter of 2002.
On October 24, 2002, the Registrant filed a Current Report on Form 8-K
announcing UPC's financial results for the third quarter of 2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 2002
UNION PACIFIC RAILROAD COMPANY
(Registrant)
By /s/ James R. Young
----------------------------------
James R. Young,
Chief Financial Officer
(Principal Financial Officer)
By /s/ Richard J. Putz
------------------------------------
Richard J. Putz
Chief Accounting Officer and Controller
(Chief Accounting Officer and Duly
Authorized Officer)
21
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
I, Richard K. Davidson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union Pacific Railroad
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Richard K. Davidson
------------------------------
Richard K. Davidson
Chairman and
Chief Executive Officer
Union Pacific Railroad Company
22
CERTIFICATION
OF PRINCIPAL FINANCIAL OFFICER
I, James R. Young, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union Pacific Railroad
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ James R. Young
------------------------------
James R. Young
Chief Financial Officer
Union Pacific Railroad Company
23
UNION PACIFIC RAILROAD COMPANY
EXHIBIT INDEX
Exhibit No. Description
Exhibits Filed with this Statement
12(a) Ratio of Earnings to Fixed Charges for the Three Months
Ended September 30,
2002 and 2001.
12(b) Ratio of Earnings to Fixed Charges for the Nine Months
Ended September 30,
2002 and 2001.
99(a) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Richard K. Davidson
99(b) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - James R. Young
Exhibits Incorporated by Reference
3(a) Amended Certificate of Incorporation of the Registrant, effective
as of February 1, 1998, is incorporated herein by reference to
Exhibit 3(a) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
3(b) By-laws of the Registrant, as amended effective as of November 19,
1998, are incorporated herein by reference to Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.
24