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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 1-6075
UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 13-2626465
(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) 271-5777
(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, there were 253,282,042 shares of the Registrant's
Common Stock outstanding.
UNION PACIFIC CORPORATION
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)................................................. 8-14
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 15-25
Item 3: Quantitative and Qualitative Disclosures About Market Risk............................................. 26
Item 4: Controls and Procedures................................................................................ 26
PART II. OTHER INFORMATION
Item 1: Legal Proceedings...................................................................................... 26-27
Item 6: Exhibits and Reports on Form 8-K....................................................................... 27
Signatures...................................................................................................... 28
Certifications.................................................................................................. 29-30
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Union Pacific Corporation and Subsidiary Companies
Millions, Except Per Share Amounts,
For the Three Months Ended September 30, 2002 2001
---------------------------------------- ---- ----
OPERATING REVENUES Rail, trucking and other..................................... $ 3,199 $ 3,026
-------- --------
OPERATING EXPENSES Salaries, wages and employee benefits........................ 1,125 1,059
Equipment and other rents.................................... 349 332
Depreciation................................................. 302 292
Fuel and utilities........................................... 295 318
Materials and supplies....................................... 133 133
Casualty costs............................................... 102 97
Purchased services and other costs........................... 249 221
-------- --------
Total........................................................ 2,555 2,452
-------- --------
INCOME Operating income............................................. 644 574
Other income................................................. 161 31
Interest expense............................................. (157) (175)
-------- --------
Income before income taxes................................... 648 430
Income taxes................................................. (211) (163)
-------- --------
Net income................................................... $ 437 $ 267
-------- --------
SHARE AND PER SHARE Basic - earnings per share................................... $ 1.73 $ 1.08
Diluted - earnings per share................................. $ 1.63 $ 1.04
-------- --------
Weighted average number of shares (Basic).................... 252.5 247.9
Weighted average number of shares (Diluted).................. 277.3 271.6
-------- --------
Dividends ................................................... $ 0.20 $ 0.20
-------- --------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Union Pacific Corporation and Subsidiary Companies
Millions, Except Per Share Amounts,
For the Nine Months Ended September 30, 2002 2001
--------------------------------------- ---- ----
OPERATING REVENUES Rail, trucking and other..................................... $ 9,320 $ 8,967
-------- --------
OPERATING EXPENSES Salaries, wages and employee benefits........................ 3,349 3,207
Equipment and other rents.................................... 1,029 992
Depreciation................................................. 901 877
Fuel and utilities........................................... 820 1,008
Materials and supplies....................................... 404 417
Casualty costs............................................... 306 282
Purchased services and other costs........................... 766 677
-------- --------
Total........................................................ 7,575 7,460
-------- --------
INCOME Operating income............................................. 1,745 1,507
Other income ................................................ 217 136
Interest expense............................................. (479) (534)
-------- --------
Income before income taxes................................... 1,483 1,109
Income taxes................................................. (520) (418)
-------- --------
Net income................................................... $ 963 $ 691
-------- --------
SHARE AND PER SHARE Basic - earnings per share................................... $ 3.83 $ 2.79
Diluted - earnings per share................................. $ 3.64 $ 2.71
-------- --------
Weighted average number of shares (Basic).................... 251.8 247.5
Weighted average number of shares (Diluted).................. 276.5 271.5
-------- --------
Dividends ................................................... $ 0.60 $ 0.60
-------- --------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies
(Unaudited)
Sept. 30, Dec. 31,
Millions of Dollars 2002 2001
------------------- ---- ----
ASSETS
Current Assets Cash and temporary investments .................. $ 451 $ 113
Accounts receivable, net ........................ 765 604
Inventories ..................................... 264 265
Current deferred income taxes ................... 398 400
Other current assets ............................ 213 160
-------- --------
Total ........................................... 2,091 1,542
-------- --------
Investments Investments in and advances to affiliated
companies .................................... 640 708
Other investments ............................... 55 78
-------- --------
Total ........................................... 695 786
-------- --------
Properties Cost ............................................ 37,479 36,436
Accumulated depreciation ........................ (8,106) (7,644)
-------- --------
Net ............................................. 29,373 28,792
-------- --------
Other Other assets .................................... 466 431
-------- --------
Total assets .................................... $ 32,625 $ 31,551
-------- --------
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current Liabilities Accounts payable ................................ $ 580 $ 567
Accrued wages and vacation ...................... 431 394
Accrued casualty costs .......................... 464 452
Income and other taxes .......................... 322 286
Dividends and interest .......................... 227 255
Debt due within one year ........................ 294 194
Other current liabilities ....................... 574 598
-------- --------
Total ........................................... 2,892 2,746
Other Liabilities Debt due after one year ......................... 7,580 7,886
and Common Deferred income taxes ........................... 8,277 7,882
Shareholders' Equity Accrued casualty costs .......................... 651 696
Retiree benefits obligation ..................... 849 812
Other long-term liabilities ..................... 377 454
Company-obligated mandatorily redeemable
convertible preferred securities ........... 1,500 1,500
Commitments and contingencies
Common shareholders' equity ..................... 10,499 9,575
-------- --------
Total liabilities and common shareholders' equity $ 32,625 $ 31,551
-------- --------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Union Pacific Corporation and Subsidiary Companies
Millions of Dollars,
For the Nine Months Ended September 30, 2002 2001
--------------------------------------- ---- ----
OPERATING ACTIVITIES Net income .................................... $ 963 $ 691
Non-cash charges to income:
Depreciation ............................... 901 877
Deferred income taxes ...................... 387 344
Other, net ................................. (243) (361)
Changes in current assets and liabilities, net (165) (189)
------- -------
Cash provided by operating activities ......... 1,843 1,362
------- -------
INVESTING ACTIVITIES Capital investments ........................... (1,468) (1,354)
Proceeds from asset sales ..................... 299 204
Other investing activities, net ............... (49) (124)
------- -------
Cash used in investing activities ............. (1,218) (1,274)
------- -------
FINANCING ACTIVITIES Dividends paid ................................ (151) (148)
Debt repaid ................................... (1,032) (792)
Cash received from exercise of stock options .. 121 48
Financings, net ............................... 775 819
------- -------
Cash used in financing activities ............. (287) (73)
------- -------
Net change in cash and temporary investments .. 338 15
Cash and temporary investments at beginning of
period ..................................... 113 105
------- -------
Cash and temporary investments at end of period $ 451 $ 120
------- -------
CHANGES IN CURRENT Accounts receivable, net ...................... $ (161) $ (93)
ASSETS AND LIABILITIES, NET Inventories ................................... 1 80
Other current assets .......................... (51) (60)
Accounts, wages and vacation payable .......... 50 (88)
Other current liabilities ..................... (4) (28)
------- -------
Total ......................................... $ (165) $ (189)
------- -------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest ............................... $ 515 $ 563
Income taxes, net ...................... 98 10
------- -------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY (UNAUDITED)
Union Pacific Corporation and Subsidiary Companies
Accumulated Other
Comprehensive Income (Loss)
----------------------------------
Minimum
Pension Foreign
Lia- Currency Deriv-
Millions of Dollars, bility Translation ative
For the Nine Months Ended [a]Common Paid-in- Retained [b]Treasury Adjust- Adjust- Adjust-
September 30, 2002 Shares Surplus Earnings Stock ments ments ments Total Total
- ------------------ ------ ------- -------- ----- ----- ----- ----- ----- -----
Balance at December 31, 2001 $689 $ 3,980 $ 6,466 $(1,549) $(7) $ 3 $ (7) $(11) $ 9,575
---- ------- ------- ------- --- ---- ---- ---- --------
Net income .................. -- -- 963 -- -- -- -- -- 963
Other comprehensive income,
net of tax [c] ............ -- -- -- -- -- (10) 26 16 16
--------
Comprehensive income ........ 979
Conversion, exercises of
stock options, forfeitures
and other ................. -- (70) -- 166 -- -- -- -- 96
Dividends declared ($0.60 per
share) .................... -- -- (151) -- -- -- -- -- (151)
---- ------- ------- ------- --- ---- ---- ---- --------
Balance at September 30, 2002 $689 $ 3,910 $ 7,278 $(1,383) $(7) $ (7) $ 19 $ 5 $ 10,499
---- ------- ------- ------- --- ---- ---- ---- --------
[a] Common stock $2.50 par value; 500,000,000 shares authorized; 275,499,087
shares issued at beginning of period; 275,568,237 shares issued at end of
period.
[b] 25,208,819 treasury shares at beginning of period, at cost; 22,501,306
treasury shares at end of period, at cost.
[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 CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS - The Consolidated Financial
Statements 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 Annual Report on Form
10-K for Union Pacific Corporation (the Corporation or UPC) for the year ended
December 31, 2001. The results of operations for the three months and nine
months ended September 30, 2002 are not necessarily indicative of the results
for the entire year ending December 31, 2002. Certain prior year amounts have
been reclassified to conform to the 2002 financial statement presentation.
2. SEGMENTATION - Union Pacific Corporation consists of two reportable segments,
rail and trucking, and UPC's other product lines (Other). The rail segment
includes the operations of the Corporation's indirect wholly owned subsidiary,
Union Pacific Railroad Company (UPRR) and UPRR's subsidiaries and rail
affiliates (collectively, the Railroad). The trucking segment includes Overnite
Transportation Company (OTC) and Motor Cargo Industries, Inc. (Motor Cargo) as
of November 30, 2001, both operating as separate and distinct subsidiaries of
Overnite Corporation (Overnite), an indirect wholly owned subsidiary of UPC. The
Corporation's other product lines are comprised of the corporate holding company
(which largely supports the Railroad), Fenix LLC and affiliated technology
companies and self-insurance activities, in addition to all appropriate
consolidating entries.
The following table details reportable financial information for UPC's
segments and other operations for the three months and nine months ended
September 30, 2002 and 2001:
Three Months Ended Nine Months Ended
---------------------- ----------------------
Millions of Dollars Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues [a]:
Rail .............. $ 2,838 $ 2,727 $ 8,295 $ 8,082
Trucking .......... 349 292 986 862
Other ............. 12 7 39 23
-------- -------- -------- --------
Consolidated ...... $ 3,199 $ 3,026 $ 9,320 $ 8,967
-------- -------- -------- --------
Operating income (loss):
Rail .............. $ 638 $ 575 $ 1,744 $ 1,515
Trucking .......... 25 18 54 43
Other ............. (19) (19) (53) (51)
-------- -------- -------- --------
Consolidated ...... $ 644 $ 574 $ 1,745 $ 1,507
-------- -------- -------- --------
Assets:
Rail .............. $ 31,263 $ 30,725 $ 31,263 $ 30,725
Trucking .......... 756 649 756 649
Other ............. 606 323 606 323
-------- -------- -------- --------
Consolidated ...... $ 32,625 $ 31,697 $ 32,625 $ 31,697
-------- -------- -------- --------
[a] The Corporation has no significant intercompany sales activities.
3. FINANCIAL INSTRUMENTS
STRATEGY AND RISK - The Corporation and its subsidiaries use derivative
financial instruments in limited instances for other than trading purposes to
manage risk related to changes in fuel prices and to achieve the Corporation's
interest rate objectives. The Corporation 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 Corporation uses interest rate swaps to
manage its exposure to interest rate changes. The purpose of these programs is
to protect the
8
Corporation's operating margins and overall profitability from adverse fuel
price changes or interest rate fluctuations.
The Corporation 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 Corporation 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 Corporation has not been required to provide
collateral, nor has UPC received collateral relating to its hedging activities.
DETERMINATION OF FAIR VALUE - The fair values of the Corporation'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.
INTEREST RATE STRATEGY - The Corporation manages its overall exposure to
fluctuations in interest rates by adjusting the proportion of fixed and floating
rate debt instruments within its debt portfolio over a given period. The mix of
fixed and floating rate debt is largely managed through the issuance of targeted
amounts of each as debt matures or as incremental borrowings are required.
Derivatives are used as one of the tools to obtain the targeted mix. In
addition, the Corporation also obtains flexibility in managing interest costs
and the interest rate mix within its debt portfolio by evaluating the issuance
of and managing outstanding callable fixed-rate debt securities.
Swaps allow the Corporation to convert debt from fixed rates to variable
rates and thereby hedge the risk of changes in the debt's fair value
attributable to the changes in the benchmark interest rate (LIBOR). The swaps
have been accounted for using the short-cut method as allowed by Financial
Accounting Standard (FAS) 133; therefore no ineffectiveness has been recorded
within the Corporation's Consolidated Financial Statements. In January 2002, the
Corporation entered into an interest rate swap on $250 million of debt with a
maturity date of December 2006. In May 2002, the Corporation entered into an
interest rate swap on $150 million of debt with a maturity date of February
2023.
FUEL STRATEGY - Fuel costs are a significant portion of the Corporation's total
operating expenses. As a result of the significance of fuel costs and the
historical volatility of fuel prices, the Corporation's transportation
subsidiaries use swaps, futures and/or forward contracts to mitigate the impact
of adverse fuel price changes. In addition, the Corporation at times may use
swaptions to secure near-term swap prices.
The following is a summary of the Corporation's derivative financial
instruments at September 30, 2002 and December 31, 2001:
9
Millions, Sept. 30, Dec. 31,
Except Percentages and Average Commodity Prices 2002 2001
-------- --------
Interest rate hedging:
Amount of debt hedged ................................................ $ 998 $ 598
Percentage of total debt portfolio ................................... 13% 7%
Rail 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
Trucking fuel hedging:
Number of gallons hedged for 2001 .................................... -- --
Average price of 2001 hedges outstanding (per gallon) ................ $ -- $ --
Number of gallons hedged for the remainder of 2002 ................... 3 9
Average price of 2002 hedges outstanding (per gallon) [b]............. $0.58 $0.58
Number of gallons hedged for 2003 .................................... 3 3
Average price of 2003 hedges outstanding (per gallon) [b]............. $0.58 $0.58
----- -----
[a] Rail fuel hedges expired December 31, 2001. Rail 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] Rail fuel hedges expire December 31, 2002. Rail 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] Rail fuel hedges which are in effect during 2003. These hedges expire
December 31, 2003.
The fair value asset and liability positions of the Corporation'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
---- ----
Interest rate hedging:
Gross fair value asset position ....................... $ 57 $ 13
Gross fair value (liability) position ................. -- --
Rail fuel hedging:
Gross fair value asset position ....................... 31 --
Gross fair value (liability) position ................. (2) (11)
Rail fuel swaptions:
Gross fair value asset position ....................... 3 --
Gross fair value (liability) position ................. (4) (24)
Trucking fuel hedging:
Gross fair value asset position ....................... 1 --
Gross fair value (liability) position ................. -- --
---- ----
Total fair value asset (liability) position, net............ $ 86 $(22)
---- ----
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 Corporation'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:
10
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
----------------- -----------------
Millions of Dollars 2002 2001 2002 2001
--- ---- --- ----
Decrease in interest expense from interest rate hedging....... $ 8 $ 1 $20 $ 1
Decrease in fuel expense from rail fuel hedging .............. 15 3 15 7
Decrease in fuel expense from rail fuel swaptions ............ 4 2 17 2
Decrease in fuel expense from trucking fuel hedging .......... 1 -- 1 --
--- ---- --- ----
Decrease in operating expenses ............................... 28 6 53 10
Increase (decrease) in other income, net from rail fuel
swaptions .............................................. 1 (10) 4 (10)
--- ---- --- ----
Increase (decrease) in pre-tax income ........................ $29 $ (4) $57 $-
--- ---- --- ----
Through September 30, 2002, the Corporation 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 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.
4. DEBT
CREDIT FACILITIES - On September 30, 2002, the Corporation had $1.875 billion in
revolving credit facilities available, of which $875 million expires in March
2003, with the remaining $1.0 billion expiring in 2005. The credit facility for
$875 million includes $825 million that was entered into during March 2002 and
$50 million entered into during June 2002. The $1.0 billion credit facility was
entered into during March 2000. The credit facilities are designated for general
corporate purposes and none of the credit facilities were used as of September
30, 2002. Commitment fees and interest rates payable under the facilities are
similar to fees and rates available to comparably rated investment-grade
borrowers.
CONVERTIBLE PREFERRED SECURITIES - Union Pacific Capital Trust (the Trust), a
statutory business trust sponsored and wholly owned by the Corporation, has
issued 6-1/4% Convertible Preferred Securities (the CPS) with an aggregate
liquidation amount of $1.5 billion. Each of the CPS has a stated liquidation
amount of $50 and is convertible, at the option of the holder, into shares of
UPC's common stock, par value $2.50 per share (the Common Stock), at the rate of
0.7257 shares of Common Stock for each of the CPS, equivalent to a conversion
price of $68.90 per share of Common Stock, subject to adjustment under certain
circumstances. The CPS accrue and pay cash distributions quarterly in arrears at
the annual rate of 6-1/4% of the stated liquidation amount. The Corporation owns
all of the common securities of the Trust. The proceeds from the sale of the CPS
and the common securities of the Trust were invested by the Trust in $1.5
billion aggregate principal amount of the Corporation's Convertible Junior
Subordinated Debentures due 2028, which debentures represent the sole assets of
the Trust. For financial reporting purposes, the Corporation has recorded
distributions payable on the CPS as an interest charge to earnings in the
Consolidated Statements of Income.
SHELF REGISTRATION STATEMENT AND SIGNIFICANT NEW BORROWINGS - During January
2002, under an existing shelf registration statement, the Corporation issued
$300 million of 6-1/8% fixed rate debt with a maturity of January 15, 2012. The
proceeds from the issuance were used for repayment of debt and other general
corporate purposes. In April 2002, the Corporation called its $150 million,
8-5/8% debentures due May 15, 2022 for redemption in May 2002. The Corporation
issued $350 million of 6-1/2% fixed rate debt with a maturity of April 15, 2012,
in order to fund the redemption. The Corporation used the remaining proceeds to
repay other debt and for other general corporate purposes. On May 17, 2002, the
Corporation issued the remaining $50 million of debt under the existing shelf
registration statement. The debt carries a fixed rate of 5-3/4% with a maturity
of October 15, 2007. The proceeds from the issuance were used for repayment of
debt and other general corporate purposes.
11
The Corporation filed a new $1.0 billion shelf registration statement,
which became effective in July 2002. Under the new shelf registration statement,
the Corporation may issue, from time to time, any combination of debt
securities, preferred stock, common stock or warrants for debt securities or
preferred stock in one or more offerings. At September 30, 2002, the Corporation
had $1.0 billion remaining for issuance under the shelf registration. The
Corporation has no immediate plans to issue equity securities.
During June 2002, UPRR 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. EARNINGS PER SHARE - The following table provides a reconciliation between
basic and diluted earnings per share for the three months and nine months ended
September 30, 2002 and 2001:
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
Millions, Except Per Share Amounts 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Income statement data:
Net income available to common shareholders - basic $ 437 $ 267 $ 963 $ 691
Dilutive effect of interest associated with the CPS 14 14 44 44
- --------------------------------------------------------------------------------------------------------------
Net income available to common shareholders -
diluted ............................................ $ 451 $ 281 $ 1,007 $ 735
- --------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding:
Basic ............................................. 252.5 247.9 251.8 247.5
Dilutive effect of common stock equivalents ....... 24.8 23.7 24.7 24.0
- --------------------------------------------------------------------------------------------------------------
Diluted ........................................... 277.3 271.6 276.5 271.5
- --------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic ............................................. $ 1.73 $ 1.08 $ 3.83 $ 2.79
Diluted ........................................... $ 1.63 $ 1.04 $ 3.64 $ 2.71
- --------------------------------------------------------------------------------------------------------------
Common stock options totaling 2.4 million and 2.2 million for the three and
nine months ended September 30, 2002, respectively, and 14.7 million and 12.2
million for the three and nine months ended 2001, respectively, were excluded
from the computation of diluted EPS because the exercise prices of these options
exceeded the average market price of the Corporation's common stock for the
respective periods, and the effect of their inclusion would be anti-dilutive.
6. 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 $ 156 $ 31 $ 197 $ 112
Rental income .............................. 12 11 38 47
Interest income ............................ 3 2 9 7
Other, net ................................. (10) (13) (27) (30)
- ----------------------------------------------------------------------------------------
Total ...................................... $ 161 $ 31 $ 217 $ 136
- ----------------------------------------------------------------------------------------
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 Corporation'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.
12
7. COMMITMENTS AND CONTINGENCIES
CLAIMS AND LITIGATION - There are various claims and lawsuits pending against
the Corporation and certain of its subsidiaries, in addition to unasserted
claims. It is not possible at this time for the Corporation 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
Corporation has recorded a liability. The Corporation 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 or in accidents involving the trucking
segment is charged to expense based on actuarial estimates of the ultimate cost
and number of incidents 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 Corporation's personal injury-related
events were $66 million and $197 million in 2002, compared to $53 million and
$169 million in 2001, respectively. As of September 30, 2002, the Corporation
had a liability of $718 million accrued for personal injury costs, of which $303
million was recorded as a current liability. The Railroad has additional amounts
accrued for claims related to certain occupational illnesses. Compensation for
Railroad work-related accidents is governed by the Federal Employers' Liability
Act (FELA). Under FELA, damages are assessed based on a finding of fault through
litigation or out-of-court settlements. The Railroad offers a comprehensive
variety of services and rehabilitation programs for employees who are injured at
work.
ENVIRONMENTAL - The Corporation 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 Corporation 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 Corporation'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 Corporation's business,
the Corporation and its external consultants perform environmental assessments
on such property. The Corporation expenses the cost of the assessments as
incurred. The Corporation accrues the cost of remediation where its obligation
is probable and such costs can be reasonably estimated.
As of September 30, 2002, the Corporation had a liability of $176 million
accrued for future environmental costs, of which $71 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
13
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 Corporation 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 Corporation 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 Corporation.
OTHER MATTERS - The Corporation and its subsidiaries periodically enter into
financial and other commitments in connection with their businesses. It is not
possible at this time for the Corporation 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 Corporation has
recorded a liability. The Corporation 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 Corporation had unconditional purchase
obligations of $392 million for the purchase of locomotives as part of the
Corporation's multi-year capital asset acquisition plan. In addition, the
Corporation was contingently liable for $347 million in guarantees and $64
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 Corporation is not aware of any
existing event of default, which would require it to satisfy these guarantees.
8. 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 Corporation 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 Corporation's fiscal year beginning
January 1, 2003. Management is in the process of evaluating the impact this
standard will have on the Corporation'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 Corporation'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 Corporation's
Consolidated Financial Statements.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Union Pacific Corporation (UPC or the Corporation) consists of two reportable
segments, rail and trucking, and UPC's other product lines (Other). The rail
segment includes the operations of the Corporation's indirect wholly owned
subsidiary, Union Pacific Railroad Company (UPRR) and UPRR's subsidiaries and
rail affiliates (collectively, the Railroad). The trucking segment includes
Overnite Transportation Company (OTC) and Motor Cargo Industries, Inc. (Motor
Cargo) as of November 30, 2001, both operating as separate and distinct
subsidiaries of Overnite Corporation (Overnite), an indirect wholly owned
subsidiary of UPC. The Corporation's other product lines are comprised of the
corporate holding company (which largely supports the Railroad), Fenix LLC and
affiliated technology companies (Fenix) and self-insurance activities, in
addition to all appropriate consolidating entries (see note 2 to the
Consolidated Financial Statements).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses Union Pacific Corporation'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 judgement and the extensive use of
estimates.
Revenue recognition - The Corporation 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
Corporation's business, the Corporation and its consultants perform
environmental assessments on such property. The Corporation expenses the cost
for the assessments as incurred. The Corporation 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 or in accidents involving the trucking segment is charged to
expense based on actuarial estimates of the ultimate cost and number of
incidents each year.
CONSOLIDATED
NET INCOME - The Corporation reported net income of $437 million ($1.73 per
basic share and $1.63 per diluted share) in the third quarter of 2002, compared
to $267 million ($1.08 per basic share and $1.04 per diluted share) in the third
quarter of 2001. Year-to-date net income totaled $963 million ($3.83 per basic
share and $3.64 per diluted share) compared to $691 million ($2.79 per basic
share and $2.71 per diluted share) for the same period in 2001. The increase in
net income for both periods resulted from the sale of land, track, operating
rights and facilities to the Utah Transit Authority (UTA) ($141 million
pre-tax), a tax settlement with the Internal Revenue Service recognized at OTC
($34 million after-tax), double digit operating income growth and lower interest
costs. Operating income improved as revenue growth, lower fuel prices and
productivity gains offset the effects of wage and benefit inflation and higher
volume-related costs. Productivity is measured as total output during the
quarter. Total output is measured by both gross ton miles per inflation-adjusted
expense dollar and gross ton miles per employee.
OPERATING REVENUES - Operating revenues increased $173 million (6%) in the third
quarter to $3.2 billion. Year-to-date revenues increased $353 million (4%) to
$9.3 billion. Revenue growth in both periods was led
15
by gains in Automotive and Intermodal carloads. This increase also reflects 20%
revenue growth in the trucking segment in the third quarter and 14% revenue
growth year-to-date due to the acquisition of Motor Cargo in November 2001.
Excluding Motor Cargo in the current year, operating revenues were up $135
million (4%) for the third quarter and were up $248 million (3%) year-to-date.
OPERATING EXPENSES - Operating expenses increased $103 million (4%) to $2.6
billion in the third quarter of 2002 and increased $115 million (2%) to $7.6
billion for the year-to-date period. Excluding Motor Cargo in the current year,
operating expenses increased $68 million (3%) in the third quarter and increased
$18 million (flat) year-to-date, compared to 2001. The increase in expenses in
the third quarter is due to wage and benefit inflation and higher volume costs
related to a 4% increase in third quarter carloads at the Railroad, partially
offset by lower fuel prices, a 2% reduction in employment levels and cost
control efforts. Cost control is defined as focused actions to reduce
discretionary spending and failure costs. For the year-to-date period, wage and
benefit inflation and increased volume-related costs were partially offset by
lower fuel prices, a 3% reduction in employment levels and cost control efforts.
Salaries, wages and employee benefits increased $66 million (6%) in the
third quarter and increased $142 million (4%) year-to-date, compared to 2001.
Excluding Motor Cargo in the current year, expenses increased $46 million (4%)
in the third quarter and $87 million (3%) year-to-date, compared to 2001, as
wage and benefit inflation and volume costs exceeded savings from lower
employment levels and improved productivity. Equipment and other rents expense
increased $17 million (5%) in the third quarter and $37 million (4%)
year-to-date, compared to 2001, as a result of a 4% increase in third quarter
carloads, lease of additional locomotives and higher contract transportation
costs at OTC. The higher locomotive lease expenses at the Railroad were partly
offset by lower freight car costs. Depreciation expense increased $10 million
(3%) in the third quarter and $24 million (3%) year-to-date, compared to 2001 as
a result of the Railroad's capital spending in recent years, which increased the
total value of the Corporation's depreciable assets.
Fuel and utilities costs were down $23 million (7%) in the third quarter
and $188 million (19%) year-to-date, compared to 2001, due to lower fuel prices,
which were partially offset by increased volume-related expense due to higher
gross ton miles at the Railroad. Materials and supplies expense was flat in the
third quarter and decreased $13 million (3%) year-to-date, compared to 2001 due
to reduced locomotive repair supplies and cost control actions. Casualty costs
increased $5 million (5%) in the third quarter and $24 million (9%)
year-to-date, compared to 2001 primarily due to higher costs for personal
injury, partially offset by lower freight damage in the third quarter of 2002.
Purchased services and other costs increased $28 million (13%) in the third
quarter and $89 million (13%) year-to-date, compared to 2001 due to higher
contract services for locomotive maintenance, intermodal volume costs and other
general expenses.
OPERATING INCOME - Operating income increased $70 million (12%) to $644 million
in the third quarter compared to $574 million in 2001. Year-to-date operating
income increased $238 million (16%) over 2001 to $1.7 billion. The increase in
operating income in both periods is attributable to higher operating revenue,
lower fuel prices, cost control, and productivity which more than offset
inflation and volume costs.
NON-OPERATING ITEMS - Interest expense decreased $18 million (10%) in the third
quarter and $55 million (10%) year-to-date compared to 2001 due to lower
interest rates and a lower average debt level in 2002. In the three months ended
September 30, 2002, the Corporation's average debt level, including the
Convertible Preferred Securities, decreased to $9.5 billion from $10.0 billion
for the same period in 2001. In the nine months ended September 30, 2002, the
Corporation's average debt level, including the Convertible Preferred
Securities, decreased to $9.6 billion from $10.1 billion for the same period in
2001. The Corporation's effective interest rate was 6.6% during the third
quarter of 2002 compared to 7.0% in 2001. For the year-to-date period, the
effective interest rate was 6.7% in 2002 compared to 7.1% in 2001. Other income
increased $130 million in the third quarter and $81 million (60%) for the
year-to-date period in 2002 compared to 2001 due primarily to the asset sale
transaction with the UTA. Income tax expense increased $48 million (29%) in the
third quarter and $102 million (24%) in the year-to-date period over 2001, due
to higher pre-tax income in 2002 which was partially offset by a tax settlement
with the Internal Revenue Service recognized at OTC.
OTHER KEY MEASURES - Operating margin (operating income as a percentage of
operating revenues) increased to 20.1% in the third quarter of 2002 from 19.0%
in the same period of 2001. Year-to-date, operating margin increased to 18.7%
from 16.8% in the same period of 2001.
16
RAIL SEGMENT
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.
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.
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 -
- -----------------------------------------------------------------------------------------------------------
17
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.
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.
18
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 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
19
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.
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.
TRUCKING SEGMENT
OPERATING REVENUES - For the third quarter and year-to-date periods ended
September 30, 2002, trucking revenues increased $57 million (20%) to $349
million and $124 million (14%) to $986 million, respectively, over the
comparable periods in 2001. The acquisition of Motor Cargo accounted for $38
million of revenue in the third quarter and $105 million of revenue in the first
nine months of 2002. Excluding Motor Cargo in the current year, revenues rose
$19 million in both periods due to an increase in volume of 8% in the third
quarter and 4% year-to-date partially offset by lower fuel surcharge revenue in
both periods as a result of lower fuel prices in 2002. Third quarter revenues
were also positively impacted by additional business realized as a result of the
Consolidated Freightways bankruptcy which occurred in September.
OPERATING EXPENSES - In the third quarter operating expenses increased $50
million (18%) to $324 million and increased $113 million (14%) to $932 million,
year-to-date, over the same periods in 2001. The acquisition of Motor Cargo
accounted for $35 million in the third quarter and $98 million year-to-date of
incremental expenses. Excluding Motor Cargo in the current year, expenses
increased $15 million (6%) in the third quarter and increased $15 million (2%)
for the year-to-date period due to wage and benefit inflation, increased
linehaul contract transportation costs and an increase in volume-related costs.
Salaries, Wages and Employee Benefits - Salaries, wages and employee benefits
increased $33 million (19%) for the third quarter and increased $85 million
(16%) year-to-date. Excluding Motor Cargo in the current year, third quarter
expenses increased $13 million (8%) and year-to-date expenses increased $30
million (6%) due to wage and benefit inflation and an increase in volume costs.
Expenses were partially offset by a decrease in employee force levels (down 3%
in the third quarter and down 2% year-to-date) and productivity improvements.
Productivity is measured as total costs related to local, dock, and linehaul
operations relative to the total volume shipped.
Equipment and Other Rents - Equipment and other rents increased $8 million (32%)
in the third quarter of 2002 and $19 million (27%) year-to-date, compared to a
year ago. Excluding Motor Cargo in the current year, expenses increased $4
million (16%) and $7 million (10%) for the third quarter and year-to-date
20
periods, respectively, due to increased use of linehaul contract transportation
partially offset by decreased local purchased transportation costs in the first
quarter.
Depreciation - Depreciation expense increased $2 million (17%) in the third
quarter and $8 million (22%) year-to-date, compared to 2001. Excluding Motor
Cargo in the current year, expenses were flat in the third quarter and increased
$1 million (3%) in the nine-month period due to purchases of new equipment.
Fuel and Utilities - Fuel and utilities increased $1 million (6%) in the third
quarter and decreased $3 million (6%) year-to-date, compared to a year ago.
Excluding Motor Cargo in the third quarter of 2002, expenses decreased $1
million (6%), as a result of lower fuel prices during the quarter (76 cents per
gallon average in 2002 compared to 83 cents per gallon average in 2001,
including transportation costs and excluding taxes), combined with a 1% decrease
in gallons consumed. Excluding Motor Cargo in the first nine-month period of
2002, expenses decreased $9 million (17%) due to lower fuel prices in the first
nine months of the year (70 cents per gallon average in 2002 compared to 87
cents per gallon average in 2001, including transportation costs and excluding
taxes), combined with a 4% decrease in gallons consumed. Overnite did not hedge
any fuel volume for the first quarter of 2002. Fuel consumption was hedged at
approximately 19% for the second and third quarters of 2002, respectively, at an
average of 58 cents per gallon (excluding taxes and transportation costs and
regional pricing spreads). For the remainder of 2002 through March 2003, hedged
volume represents 19% of expected total fuel consumption at an average price of
58 cents per gallon (excluding taxes and transportation costs and regional
pricing spreads).
Materials and Supplies - Materials and supplies expense increased $2 million
(17%) in the third quarter and increased $2 million (5%) year-to-date, compared
to 2001. Excluding Motor Cargo in the current year, expenses were flat in the
third quarter and decreased $2 million (5%) for the nine-month period in 2002,
due to lower maintenance and operating supplies expense as a result of lower
volumes, fleet maintenance productivity and cost control measures in the first
quarter 2002.
Casualty Costs - Casualty costs increased $2 million (17%) in the third quarter
and increased $2 million (6%) year-to-date, compared to a year ago. Excluding
Motor Cargo in the current year, expenses increased $1 million (8%) in the third
quarter due to higher insurance and cargo loss and damage expenses. Year-to-date
expenses decreased $1 million (3%) due to a reduction in bad debt expense,
offset by higher insurance expenses.
Purchased Services and Other Costs - Other costs increased $2 million (9%) in
the third quarter and were flat for the year-to-date period, compared to 2001.
Excluding Motor Cargo in the current year, expenses decreased $2 million (9%) in
the third quarter and decreased $11 million (16%) in the first nine months due
to the insourcing of contract programmers, reduced legal expense, lower expenses
related to decreased security (security expenses are related to Teamsters
matters) in the first quarter and cost control measures.
OPERATING INCOME - Operating income increased $7 million to $25 million (39%) in
the third quarter and increased $11 million to $54 million (26%) for the
year-to-date period ended September 30, 2002. Excluding Motor Cargo in the
current year, operating income increased $4 million (22%) in the third quarter
and increased $4 million (9%) year-to-date. The operating margin for the third
quarter was 7.3%, compared to 6.3% in 2001. The year-to-date operating margin
was 5.5% compared to 4.9% a year ago. Motor Cargo improved the operating margin
by 0.2 percentage points for both the third quarter and first nine month period
of 2002.
OTHER PRODUCT LINES
OTHER - Operating losses were $19 million (flat) in the third quarter of 2002
and 2001 and were up $2 million (4%) to $53 million in the first nine months of
2002, compared to the same periods in 2001. Operating revenues increased $5
million in the third quarter to $12 million and increased $16 million
year-to-date to $39 million. However, operating expenses increased $5 million in
the third quarter to $31 million and increased $18 million year-to-date to $92
million. Interest expense decreased $6 million in the third quarter to $21
million and decreased $27 million to $66 million in the first nine months of the
year due to lower interest rates and a lower average debt level compared to
2001.
21
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
Cash provided by operations was $1.8 billion in the first nine months of 2002
compared to $1.4 billion in 2001. The increase is the result of higher net
income and improved working capital.
Cash used in investing activities was $1.2 billion in the first nine months
of 2002 compared to $1.3 billion in 2001. The decreased use of cash is due to
higher real estate proceeds and the receipt of $34 million related to a warranty
refund from a vendor in 2002, partly offset by higher capital spending. The
following table details capital expenditures for the nine months ended September
30, 2002 and 2001:
Capital Expenditures
Millions 2002 2001
- ------------------------------------------------------------------------------
Track .................................................. 979 904
Locomotives ............................................ 160 160
Freight cars ........................................... 7 21
Facilities and Other ................................... 322 269
- ------------------------------------------------------------------------------
Total .................................................. 1,468 1,354
- ------------------------------------------------------------------------------
Cash used in financing activities was $287 million in the first nine months
of 2002 compared to $73 million in the first nine months of 2001. The increase
in cash used is due to higher debt repayments ($1,032 million in 2002 compared
to $792 million in 2001) and lower net financings ($775 million in 2002 compared
to $819 million in 2001), partly offset by an increase in the proceeds from the
exercise of stock options ($121 million in 2002 compared to $48 million in
2001).
Including the Convertible Preferred Stock as an equity instrument, the
ratio of debt to total capital employed was 39.6% at September 30, 2002 compared
to 42.2% at December 31, 2001.
For the three and nine months ended September 30, 2002, the Corporation's
ratio of earnings to fixed charges was 4.8 and 3.8, respectively, compared to
3.2 and 2.9 for the three and nine month periods ended September 30, 2001. The
ratio of earnings to fixed charges has been computed on a consolidated basis.
Earnings represent net income less equity in undistributed earnings of
unconsolidated affiliates, plus fixed charges and income taxes. Fixed charges
represent interest charges, amortization of debt discount, and the estimated
amount representing the interest portion of rental charges.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As described in the notes to the Consolidated Financial Statements and as
referenced in the tables below, the Corporation has contractual obligations and
commercial commitments that may affect the financial condition of the
Corporation. However, based on management's assessment of the underlying
provisions and circumstances of the material contractual obligations and
commercial commitments of the Corporation, including material sources of
off-balance sheet and structured finance arrangements, there is no known trend,
demand, commitment, event or uncertainty that is reasonably likely to occur
which would have a material effect on the Corporation's financial condition,
results of operations or liquidity. In addition, the commercial obligations,
financings and commitments made by the Corporation are customary transactions,
which are similar to those of other comparable industrial corporations,
particularly within the transportation industry.
22
The following tables identify material obligations and commitments as of
September 30, 2002:
Payments Due by Period
--------------------------------------------------
Contractual Obligations Less Than After
Millions of Dollars Total 1 Year 2-3 Years 4-5 Years 5 Years
- ------------------------------------------------------------------------------------------------------------
Debt [a] ............................. $ 6,386 $ 181 $ 1,279 $ 662 $ 4,264
Operating leases ..................... 3,280 420 726 608 1,526
Capital lease obligations [b] ........ 2,487 198 411 381 1,497
Unconditional purchase obligations [c] 392 261 131 -- --
- ------------------------------------------------------------------------------------------------------------
Total contractual obligations ........ $12,545 $ 1,060 $ 2,547 $ 1,651 $ 7,287
- ------------------------------------------------------------------------------------------------------------
[a] Excludes capital lease obligations of $1,488 million.
[b] Represents total obligations, including interest component.
[c] Unconditional purchase obligations represent multi-year contractual
commitments to purchase assets at fixed prices and fixed volumes. These
commitments are made in order to take advantage of pricing opportunities
and to insure availability of assets to meet quality and operational
requirements. Excluded are contracts made in the normal course of business
for performance of routine services, as well as commitments where contract
provisions allow for cancellation.
Amount of Commitment Expiration
Per Period
---------------------------------------------
Total Less
Other Commercial Commitments Amounts Than After
Millions of Dollars Committed 1 Year 2-3 Years 4-5 Years 5 Years
- -----------------------------------------------------------------------------------------------------------
Credit facilities .............. $1,875 $ 875 $1,000 $ -- $ --
Convertible preferred securities 1,500 -- -- -- 1,500
Sale of receivables ............ 600 600 -- -- --
Guarantees [a] ................. 347 16 23 14 294
Standby letters of credit ...... 64 64 -- -- --
- -----------------------------------------------------------------------------------------------------------
Total commercial commitments ... $4,386 $1,555 $1,023 $ 14 $1,794
- -----------------------------------------------------------------------------------------------------------
[a] Includes guaranteed obligations of affiliated operations.
FINANCING ACTIVITIES
CREDIT FACILITIES - On September 30, 2002, the Corporation had $1.875 billion in
revolving credit facilities available, of which $875 million expires in March
2003, with the remaining $1.0 billion expiring in 2005. The credit facility for
$875 million includes $825 million that was entered into during March 2002 and
$50 million entered into during June 2002. The $1.0 billion credit facility was
entered into during March 2000. The credit facilities are designated for general
corporate purposes and none of the credit facilities were used as of September
30, 2002. Commitment fees and interest rates payable under the facilities are
similar to fees and rates available to comparably rated investment-grade
borrowers.
SHELF REGISTRATION STATEMENT AND SIGNIFICANT NEW BORROWINGS - During January
2002, under an existing shelf registration statement, the Corporation issued
$300 million of 6-1/8% fixed rate debt with a maturity of January 15, 2012. The
proceeds from the issuance were used for repayment of debt and other general
corporate purposes. In April 2002, the Corporation called its $150 million,
8-5/8% debentures due May 15, 2022 for redemption in May 2002. The Corporation
issued $350 million of 6-1/2% fixed rate debt with a maturity of April 15, 2012,
in order to fund the redemption. The Corporation used the remaining proceeds to
repay other debt and for other general corporate purposes. On May 17, 2002, the
Corporation issued the remaining $50 million of debt under the existing shelf
registration statement. The debt carries a fixed rate of 5-3/4% with a maturity
of October 15, 2007. The proceeds from the issuance were used for repayment of
debt and other general corporate purposes.
The Corporation filed a new $1.0 billion shelf registration statement,
which became effective in July 2002. Under the new shelf registration statement,
the Corporation may issue, from time to time, any combination of debt
securities, preferred stock, common stock or warrants for debt securities or
preferred stock in one or more offerings. At September 30, 2002, the Corporation
had $1.0 billion remaining for issuance under the shelf registration. The
Corporation has no immediate plans to issue equity securities.
23
During June 2002, UPRR 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.
OTHER MATTERS
COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. The Corporation is also
subject to various federal, state and local environmental laws and regulations,
pursuant to which it is currently participating in the investigation and
remediation of various sites. A discussion of certain claims, lawsuits,
contingent liabilities and guarantees is set forth in note 7 to the Consolidated
Financial Statements, which discussion is incorporated herein by reference.
PENSIONS - During the second quarter of 2002, the Corporation 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 $22 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 Corporation expects the reduction in equity to be
approximately $200 million, after tax (less than 2% of total equity).
Overnite voluntarily contributed $35 million to its pension plan during
2002. The Railroad voluntarily contributed $50 million to its pension plan in
November of 2002.
DIVIDEND RECEIVABLE - The Corporation 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 Corporation recorded a dividend from GFM
of approximately $118 million. As of September 30, 2002, the dividend is
reflected as a receivable in the Corporation'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
Corporation's Consolidated Statements of Income. Subsequent to September 30,
2002, the Corporation 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 Corporation 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.
END OF TEAMSTERS STRIKE AT OTC - As previously reported on the Corporation's
Annual Report on Form 10-K for the period ended December 31, 2001, the
International Brotherhood of Teamsters Union (Teamsters) called a strike on
October 24, 1999. The strike has continued since 1999, with the number of
affected employees representing less than 3% of OTC's work force. On October 24,
2002, the Teamsters unconditionally ended their three year walkout. The
termination of the walkout will not significantly impact OTC's financial results
in future periods.
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 Corporation 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 Corporation's fiscal year beginning January 1, 2003.
Management is in the process of evaluating the impact this standard will have on
the Corporation'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 Corporation'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
24
that are initiated after December 31, 2002. Management is in the process of
evaluating the impact this standard may have on the Corporation's Consolidated
Financial Statements.
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 Corporation) 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 Corporation'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 Corporation'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 Corporation 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 Corporation 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 Corporation does
update one or more forward-looking statements, no inference should be drawn that
the Corporation will make additional updates with respect thereto or with
respect to other forward-looking statements.
25
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
Corporation'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 3
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 Corporation carried out an
evaluation, under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
(CEO) and Executive Vice President - Finance (EVP - Finance), of the
effectiveness of the design and operation of the Corporation's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the CEO and the EVP - Finance concluded that the Corporation's
disclosure controls and procedures are effective in alerting them, in a timely
manner, to material information relating to the Corporation (including its
consolidated subsidiaries) required to be included in the Corporation's periodic
SEC filings.
Additionally, the CEO and EVP - Finance determined that there were no
significant changes in the Corporation's internal controls or in other factors
that could significantly affect the Corporation'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.
26
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibits are listed in the exhibit index on page 31.
(b) REPORTS ON FORM 8-K
On July 18, 2002, UPC filed a Current Report on Form 8-K announcing
UPC's financial results for the second quarter of 2002.
On August 8, 2002, UPC filed a Current Report on Form 8-K regarding
the filing of statements made by its principal executive officer and
principal financial officer pursuant to an order issued by the SEC
to approximately 1,000 U.S. companies, on June 27, 2002.
On October 24, 2002, UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the third quarter of 2002.
27
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 CORPORATION
(Registrant)
By /s/ James R. Young
-----------------------------
James R. Young,
Executive Vice President - Finance
(Principal Financial Officer)
By /s/ Richard J. Putz
-----------------------------
Richard J. Putz,
Vice President and Controller
(Principal Accounting Officer)
28
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
Corporation;
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, President and
Chief Executive Officer
Union Pacific Corporation
29
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
Corporation;
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
Executive Vice President - Finance
Union Pacific Corporation
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UNION PACIFIC CORPORATION
EXHIBIT INDEX
Exhibit No. Description of 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
Description of Exhibits Incorporated by Reference
3(a) Revised Articles of Incorporation of UPC, as amended through
April 25, 1996, are incorporated herein by reference to
Exhibit 3 to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
3(b) By-Laws of UPC, as amended effective as of November 19,
1998, are incorporated herein by reference to Exhibit 3.1 to
the Corporation's Current Report on Form 8-K filed November
25, 1998.
31