1
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 March 31, 2001
- 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 April 30, 2001, there were 247,884,955 shares of the Registrant's
Common Stock outstanding.
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UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements: Page Number
-----------
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended March 31, 2001 and 2000....................... 1
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At March 31, 2001 (Unaudited) and December 31, 2000...................... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, 2001 and 2000....................... 3
CONSOLIDATED STATEMENT OF CHANGES IN COMMON
SHAREHOLDERS' EQUITY (Unaudited)
For the Three Months Ended March 31, 2001................................ 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)......................... 5-11
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 12-17
Item 3: Quantitative and Qualitative Disclosures About Market Risk..................... 17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.............................................................. 17
Item 4: Submission of Matters to a Vote of Security Holders............................ 18
Item 6: Exhibits and Reports on Form 8-K............................................... 18
Signatures.................................................................................. 19
(i)
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Three Months Ended March 31
Millions, Except Per Share and Ratios 2001 2000
---------- ----------
OPERATING REVENUES Rail, trucking and other ....................... $ 2,943 $ 2,906
---------- ----------
OPERATING EXPENSES Salaries, wages and employee benefits .......... 1,085 1,065
Equipment and other rents ...................... 329 315
Depreciation ................................... 292 282
Fuel and utilities ............................. 352 311
Materials and supplies ......................... 139 156
Casualty costs ................................. 98 94
Other costs .................................... 209 231
---------- ----------
Total .......................................... 2,504 2,454
---------- ----------
INCOME Operating Income ............................... 439 452
Other income - net ............................. 30 20
Interest expense ............................... (181) (182)
---------- ----------
Income before Income Taxes ..................... 288 290
Income taxes ................................... (107) (105)
---------- ----------
Net Income ..................................... $ 181 $ 185
---------- ----------
PER SHARE Basic - Net Income ............................. $ 0.73 $ 0.75
Diluted - Net Income ........................... $ 0.72 $ 0.74
---------- ----------
Weighted Average Number of Shares (Basic) ...... 246.9 246.4
Weighted Average Number of Shares (Diluted) .... 271.0 269.3
---------- ----------
Dividends ...................................... $ 0.20 $ 0.20
---------- ----------
Ratio of Earnings to Fixed Charges ............. 2.4 2.6
---------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies
(unaudited)
March 31, Dec. 31,
Millions of Dollars 2001 2000
---------- ----------
ASSETS
Current Assets Cash and temporary investments ........................... $ 73 $ 105
Accounts receivable - net ................................ 631 597
Inventories .............................................. 340 360
Current deferred tax asset ............................... 111 89
Other current assets ..................................... 147 134
---------- ----------
Total .................................................... 1,302 1,285
---------- ----------
Investments Investments in and advances to affiliated companies ...... 657 644
Other investments ........................................ 100 96
---------- ----------
Total .................................................... 757 740
---------- ----------
Properties Cost ..................................................... 35,629 35,458
Accumulated depreciation ................................. (7,348) (7,262)
---------- ----------
Net ...................................................... 28,281 28,196
---------- ----------
Other Other assets ............................................. 412 278
---------- ----------
Total Assets ............................................. $ 30,752 $ 30,499
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities Accounts payable ......................................... $ 509 $ 658
Accrued wages and vacation ............................... 434 422
Accrued casualty costs ................................... 411 409
Income and other taxes ................................... 236 234
Dividends and interest ................................... 252 265
Debt due within one year ................................. 203 207
Other current liabilities ................................ 705 767
---------- ----------
Total .................................................... 2,750 2,962
---------- ----------
Other Liabilities and Debt due after one year .................................. 8,435 8,144
Shareholders' Equity Deferred income taxes .................................... 7,241 7,143
Accrued casualty costs ................................... 805 834
Retiree benefits obligation .............................. 748 745
Other long-term liabilities .............................. 462 509
Commitments and contingencies
Company-obligated Mandatorily Redeemable
Convertible Preferred Securities ....................... 1,500 1,500
Common shareholders' equity .............................. 8,811 8,662
---------- ----------
Total Liabilities and Shareholders' Equity ............... $ 30,752 $ 30,499
---------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Three Months Ended March 31
Millions of Dollars 2001 2000
---------- ----------
OPERATING ACTIVITIES Net Income ............................................... $ 181 $ 185
Non-cash charges to income:
Depreciation ......................................... 292 282
Deferred income taxes ................................ 77 91
Other - net .......................................... (84) (61)
Changes in current assets and liabilities ............... (261) (142)
---------- ----------
Cash Provided by Operating Activities .................... 205 355
---------- ----------
INVESTING ACTIVITIES Capital investments ...................................... (361) (360)
Proceeds from sale of assets and other investing
activities ............................................... (133) 6
---------- ----------
Cash Used in Investing Activities ........................ (494) (354)
---------- ----------
FINANCING ACTIVITIES Dividends paid ........................................... (49) (52)
Debt repaid .............................................. (214) (168)
Net financings ........................................... 520 104
---------- ----------
Cash Provided by (Used in) Financing Activities .......... 257 (116)
---------- ----------
Net Change in Cash and Temporary Investments ............. (32) (115)
Cash and Temporary Investments at Beginning of Period .... 105 175
---------- ----------
Cash and Temporary Investments at End of Period .......... $ 73 $ 60
---------- ----------
CHANGES IN CURRENT Accounts receivable ...................................... $ (34) $ (37)
ASSETS AND LIABILITIES Inventories .............................................. 20 13
Other current assets ..................................... (35) (28)
Accounts, wages and vacation payable ..................... (137) (25)
Debt due within one year ................................. (4) 11
Other current liabilities ................................ (71) (76)
---------- ----------
Total .................................................... $ (261) $ (142)
---------- ----------
SUPPLEMENTAL CASH Cash paid (received) during the year for:
FLOW INFORMATION Interest ............................................. $ 197 $ 212
Income taxes - net ................................... -- (3)
---------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
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CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Three Months Ended March 31, 2001
Accumulated Other
Comprehensive Income (Loss)
-------------------------------------------
Minimum Foreign
[a] [b] Pension Currency
Common Paid-in- Retained Treasury Liability Translation Derivative
Millions of Dollars Shares Surplus Earnings Stock Adjustment Adjustments Adjustment Total Total
-------- -------- -------- -------- ---------- ----------- ---------- ------- -------
Balance at December 31, 2000 ...... $ 688 $ 4,024 $ 5,699 $ (1,749) $ (2) $ 2 $ -- $ -- $ 8,662
-------- -------- -------- -------- --------- --------- --------- ------- -------
Net Income ........................ -- -- 181 -- -- -- -- -- 181
Other Comprehensive Income
(Loss), net of tax:
Minimum Pension Liability .... -- -- -- -- -- -- -- -- --
Adjustment
Foreign Currency Translation . -- -- -- -- -- (4) -- (4) (4)
Adjustments
Derivative Adjustments ....... -- -- -- -- -- -- 1 1 1
-------
Comprehensive Income .............. -- -- -- -- -- -- -- -- 178
Conversion, exercises of stock
options, forfeitures
and other..................... 1 (18) -- 38 -- -- -- -- 21
Dividends declared ($0.20 per
share) ....................... -- -- (50) -- -- -- -- -- (50)
-------- -------- -------- -------- --------- --------- --------- ------- -------
Balance at March 31, 2001 ......... $ 689 $ 4,006 $ 5,830 $ (1,711) $ (2) $ (2) $ 1 $ (3) $ 8,811
-------- -------- -------- -------- --------- --------- --------- ------- -------
[a] Common stock $2.50 par value; 500,000,000 shares authorized; 275,233,975
shares issued at beginning of period; 275,494,350 shares issued at end of
period.
[b] 27,860,454 treasury shares at end of period, at cost.
The accompanying notes are an integral part of these
consolidated financial statements.
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UNION PACIFIC CORPORATION AND CONSOLIDATED 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, 2000 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 Union Pacific Corporation's (the Corporation or UPC)
Annual Report to Shareholders incorporated by reference in the
Corporation's Annual Report on Form 10-K for the year ended December 31,
2000. The results of operations for the three months ended March 31, 2001
are not necessarily indicative of the results for the entire year ending
December 31, 2001. Certain prior year amounts have been reclassified to
conform to the 2001 financial statement presentation.
2. SEGMENTATION - Union Pacific Corporation consists of one reportable
segment, rail, and UPC's other product lines (other operations). The rail
segment includes the operations of the Corporation's wholly owned
subsidiary, Union Pacific Railroad Company (UPRR) and UPRR's subsidiaries
and rail affiliates (collectively, the Railroad). Other operations include
the trucking product line (Overnite Transportation Company or Overnite), as
well as the "other" product lines that include the corporate holding
company (which largely supports the Railroad), Fenix LLC and affiliated
technology companies (Fenix), self-insurance activities, and all
appropriate consolidating entries.
The following tables detail reportable financial information for UPC's
rail segment and other operations for the three months ended March 31,
2001 and 2000, respectively:
Three Months Ended
-----------------------
March 31, March 31,
Millions of Dollars 2001 2000
---------- ----------
Operating revenues [a]:
Rail .............................. $ 2,655 $ 2,630
Trucking .......................... 280 269
Other ............................. 8 7
---------- ----------
Consolidated ...................... $ 2,943 $ 2,906
---------- ----------
Operating income (loss):
Rail .............................. $ 449 $ 465
Trucking .......................... 9 1
Other ............................. (19) (14)
---------- ----------
Consolidated ...................... $ 439 $ 452
---------- ----------
Assets:
Rail .............................. $ 29,664 $ 28,914
Trucking .......................... 659 671
Other ............................. 429 324
---------- ----------
Consolidated ...................... $ 30,752 $ 29,909
---------- ----------
[a] The Corporation has no significant intercompany sales activities.
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3. ACQUISITIONS
SOUTHERN PACIFIC - UPC consummated the acquisition of Southern Pacific (SP)
in September 1996 for $4.1 billion. Sixty percent of the outstanding
Southern Pacific common shares were converted into UPC common stock, and
the remaining 40% of the outstanding shares were acquired for cash. UPC
initially funded the cash portion of the acquisition with credit facility
borrowings, all of which have been subsequently refinanced with other
borrowings. The acquisition of Southern Pacific has been accounted for
using the purchase method and was fully consolidated into UPC's results
beginning October 1996.
Merger Consolidation Activities - In connection with the acquisition and
continuing integration of UPRR and Southern Pacific's rail operations, UPC
will complete the elimination of 5,200 duplicate positions in 2001,
primarily employees involved in activities other than train, engine and
yard activities. UPC will also complete the relocation of 4,700 positions,
merging or disposing of redundant facilities, and disposing of certain rail
lines. In addition, the Corporation will cancel and settle the remaining
uneconomical and duplicative SP contracts, including payroll-related
contractual obligations in accordance with the original merger plan.
Merger Liabilities - In 1996, UPC recognized a $958 million pre-tax
liability in the SP purchase price allocation for costs associated with
SP's portion of these activities. Merger liability activity reflected cash
payments for merger consolidation activities and reclassification of
contractual obligations from merger liabilities to contractual liabilities.
In addition, where merger implementation has varied from the original
merger plan, the Corporation has adjusted the merger liability and the fair
value allocation of SP's purchase price to fixed assets to eliminate the
variance. Where the merger implementation has caused the Corporation to
incur more costs than were envisioned in the original merger plan, such
costs are charged to expense in the period incurred. For the three months
ended March 31, 2001, the Corporation charged $2 million against the merger
liability. The remaining merger payments will be made during 2001 as labor
negotiations are completed and implemented, and related merger
consolidation activities are finalized.
The components of the merger liability as of March 31, 2001 were as
follows:
Original Cumulative Mar. 31, 2001
Millions of Dollars Liability Activity Liability
------------ ------------ -------------
Labor protection related to legislated and contractual
obligations ........................................... $ 361 $ 361 $ --
Severance and related costs ................................ 343 273 70
Contract cancellation fees and facility and line closure
costs ................................................. 145 141 4
Relocation costs ........................................... 109 96 13
------------ ------------ ------------
Total ...................................................... $ 958 $ 871 $ 87
------------ ------------ ------------
4. FINANCIAL INSTRUMENTS
ADOPTION OF STANDARD - Effective January 1, 2001, the Corporation adopted
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133) and Financial
Accounting Standards Board Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (FAS 138). FAS 133
and FAS 138 requires that the changes in fair value of all derivative
financial instruments the Corporation uses for fuel or interest rate
hedging purposes be recorded in the Corporation's consolidated statements
of financial position. In addition, to the extent fuel hedges are
ineffective due to pricing differentials resulting from the geographic
dispersion of the Corporation's operations, income statement recognition of
the ineffective portion of the hedge position will be required. The
adoption of FAS 133 and FAS 138 resulted in the recognition of a $2 million
asset on January 1, 2001. Activity through March 31, 2001, is disclosed
within the following narrative and tables.
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STRATEGY AND RISK - The Corporation and its subsidiaries use derivative
financial instruments in limited instances and for other than trading
purposes to manage risk related to changes in fuel prices and interest
rates. The Corporation uses swaps, futures and/or forward contracts to
mitigate the downside risk of adverse price and rate movements and hedge
the exposure to variable cash flows. The use of these instruments also
limits future gains from favorable movements. The purpose of these programs
is to protect the Corporation's operating margins and overall profitability
from adverse fuel price changes or interest rate fluctuations.
MARKET AND CREDIT RISK - The Corporation addresses market risk related to
derivative financial instruments by selecting instruments whose value
fluctuations 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. The total credit risk associated with the Corporation's
counterparties was $2 million at both March 31, 2001 and December 31, 2000.
The Corporation has not been required to provide collateral; however, UPC
has received collateral relating to its hedging activity where the
concentration of credit risk was substantial.
DETERMINATION OF FAIR VALUE - The fair market values of the Corporation's
derivative financial instrument positions at March 31, 2001 and December
2000, detailed below, were determined based upon current fair market 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 and 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 in limited circumstances as
one of the tools to obtain the targeted mix. In addition, the Corporation
also obtains additional flexibility in managing interest costs and the
interest rate mix within its debt portfolio by issuing callable fixed-rate
debt securities.
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 periodically use swaps, futures and/or forward contracts to
mitigate the impact of adverse fuel price changes.
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The following is a summary of the Corporation's derivative financial
instruments at March 31, 2001 and December 31, 2000:
Millions March 31, December 31,
Except Percentages and Average Commodity Prices 2001 2000
------------- -------------
Interest Rate Hedging:
Amount of debt hedged ........................................... -- --
Percentage of total debt portfolio .............................. -- --
Rail Fuel Hedging:
Number of gallons hedged for the remainder of 2001 [a] .......... 76 101
Percentage of forecasted 2001 fuel consumption hedged ........... 8% 8%
Average price of 2001 hedges outstanding (per gallon) [b] ....... $ 0.68 $ 0.68
Trucking Fuel Hedging:
Number of gallons hedged for the remainder of 2001 ............. -- --
Percentage of forecasted 2001 fuel consumption hedged ........... -- --
Average price of 2001 hedges outstanding (per gallon) [b] ....... -- --
------------- -------------
[a] Rail fuel hedging transactions expire December 31, 2001.
[b] Excluding taxes, transportation costs and regional pricing spreads.
The asset and liability positions of the Corporation's outstanding
derivative financial instruments at March 31, 2001 and December 31, 2000
were as follows:
March 31, December 31,
Millions of Dollars 2001 2000
------------- -------------
Interest Rate Hedging:
Gross fair market asset position ................................ $ -- $ --
Gross fair market (liability) position .......................... -- --
Rail Fuel Hedging:
Gross fair market asset position ................................ 2 2
Gross fair market (liability) position .......................... -- --
Trucking Fuel Hedging:
Gross fair market asset position ................................ -- --
Gross fair market (liability) position .......................... -- --
------------- -------------
Total net asset position ............................................. $ 2 $ 2
------------- -------------
These positions will be reclassified from accumulated other
comprehensive income to fuel expense over the next nine months as fuel is
consumed.
The Corporation's use of derivative financial instruments had the
following impact on pre-tax income for the three months ended March 31,
2001 and March 31, 2000:
Three Months Ended March 31,
----------------------------
Millions of Dollars 2001 2000
------------- -------------
Decrease in fuel expense from rail fuel hedging ...................... $ 2 $ 10
Decrease in fuel expense from trucking fuel hedging .................. -- 1
------------- -------------
Increase in pre-tax income ........................................... $ 2 $ 11
------------- -------------
At March 31, 2001, there was no ineffectiveness recorded within fuel
expense for hedging.
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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 (the
Subsidiary). The Subsidiary is collateralized by a $66 million note from
UPRR. 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 March 31, 2001 and December 31, 2000,
accounts receivable are presented net of $600 million receivables sold.
5. DEBT
CREDIT FACILITIES - On March 31, 2001, the Corporation had $2.0 billion in
revolving credit facilities, of which $1.0 billion expires in March 2002,
with the remaining $1.0 billion expiring in 2005. The facilities, which
were entered into during March 2001 and March 2000, respectively, are
designated for general corporate purposes.
CONVERTIBLE PREFERRED SECURITIES - Union Pacific Capital Trust (the Trust),
a statutory business trust sponsored and wholly owned by the Corporation,
has issued $1.5 billion aggregate liquidation amount of 6-1/4% Convertible
Preferred Securities (the CPS). 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 - Under currently effective shelf registration
statements, the Corporation may issue, from time to time, any combination
of debt securities, preferred stock, or warrants for debt securities or
preferred stock in one or more offerings. During January 2001, the
Corporation issued debt securities totaling $400 million under the shelf
registration. At March 31, 2001, the Corporation had $200 million remaining
for issuance under the shelf registration. The Corporation has no immediate
plans to issue equity securities.
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6. EARNINGS PER SHARE - The following table provides a reconciliation between
basic and diluted earnings per share for the three months ended March 31,
2001 and 2000:
Three Months Ended March 31,
Millions, Except Per Share Amounts 2001 2000
------------ -------------
Income Statement Data:
Net income available to common shareholders - Basic ........ $ 181 $ 185
Dilutive effect of interest associated with the CPS ........ 15 15
------------ ------------
Net income available to common shareholders - Diluted ...... $ 196 $ 200
------------ ------------
Weighted-Average Number of Shares Outstanding:
Basic ...................................................... 246.9 246.4
Dilutive effect of common stock equivalents ................ 24.1 22.9
------------ ------------
Diluted .................................................... 271.0 269.3
------------ ------------
Earnings Per Share:
Basic ...................................................... $ 0.73 $ 0.75
Diluted .................................................... $ 0.72 $ 0.74
------------ ------------
7. OTHER INCOME - Other income included the following for the three months
ended March 31, 2001 and 2000:
Three Months Ended March 31,
Millions of Dollars 2001 2000
------------ ------------
Net gain on non-operating asset dispositions .................... $ 17 $ 10
Rental income ................................................... 17 14
Interest income ................................................. 2 2
Other - net ..................................................... (6) (6)
------------ ------------
Total ........................................................... $ 30 $ 20
------------ ------------
8. RATIO OF EARNINGS TO FIXED CHARGES - 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
income taxes and fixed charges. Fixed charges represent interest,
amortization of debt discount and the estimated interest portion of rental
charges.
9. COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits
pending against the Corporation and certain of its subsidiaries. The
Corporation is also subject to federal, state and local environmental laws
and regulations, pursuant to which it is currently participating in the
investigation and remediation of numerous sites. For environmental sites
where remediation costs can be reasonably determined, and where such
remediation is probable, the Corporation has recorded a liability. At March
31, 2001, the Corporation had accrued $174 million for estimated future
environmental costs and believes it is reasonably possible that actual
environmental costs may differ from such estimate. In addition, 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.
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10. ACCOUNTING PRONOUNCEMENTS - In September 2000, the Financial Accounting
Standards Board issued Statement No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FAS
140), replacing Statement No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 140
revises criteria for accounting for securitizations, other financial asset
transfers and collateral, and introduces new disclosures. FAS 140 was
effective for fiscal 2000 with respect to the new disclosure requirements
and amendments of the collateral provisions originally presented in FAS
125. All other provisions are effective for transfers of financial assets
and extinguishments of liabilities occurring after March 31, 2001. The
provisions are to be applied prospectively with certain exceptions.
Management believes the financial impact that FAS 140 will have on the
Corporation's consolidated financial statements will be immaterial.
11. WORK FORCE REDUCTION PLAN - Prompted by signs of an economic slowdown,
the Corporation's Board of Directors approved a work force reduction plan
(the Plan) in the fourth quarter of 2000. The Plan calls for the
elimination of approximately 2,000 Railroad positions during 2001. The
positions will be eliminated through a combination of attrition, subsidized
early retirement and involuntary layoffs and will affect agreement and
non-agreement employees across the entire 23-state Railroad system. As of
March 31, 2001, 776 positions had been identified for elimination in
accordance with the Plan. Approximately 450 of those eliminations will be
made through subsidized early retirements and involuntary layoffs with the
remainder coming through attrition.
The Corporation accrued $115 million pre-tax or $72 million after-tax
in the fourth quarter of 2000 for costs related to the Plan. The expense
was charged to salaries, wages and employee benefits in the Corporation's
2000 consolidated statement of income. Plan liability activity in 2001 of
$17 million reflected severance benefits paid in cash or reclassified to
contractual liabilities for future payments to employees severed in the
current period.
Plan liability activity reflects severance for approximately half of
the 450 eliminations through March 31, 2001. The remaining termination
benefits related to early retirements are expected to be reflected in the
second quarter as the early retirement program is completed. The components
of the Plan liability and 2001 activity are as follows:
Original Cumulative March 31, 2001
Millions of Dollars Liability Activity Liability
--------- ---------- --------------
Severance and related costs......... $ 115 $ 17 $ 98
--------- ------- ------
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2000
Union Pacific Corporation (UPC or the Corporation) consists of one reportable
segment, rail transportation, and UPC's other product lines (Other Operations).
The rail segment includes the operations of the Corporation's wholly owned
subsidiary, Union Pacific Railroad Company (UPRR) and UPRR's subsidiaries and
rail affiliates (collectively, the Railroad). Other operations include the
trucking product line (Overnite Transportation Company or Overnite), as well as
the "other" product lines that include the corporate holding company (which
largely supports the Railroad), Fenix LLC and affiliated technology companies
(Fenix), and self-insurance activities, and all appropriate consolidating
entries (see note 2 to the consolidated financial statements).
CONSOLIDATED
NET INCOME - The Corporation reported net income of $181 million ($0.73 per
basic share and $0.72 per diluted share) in the first quarter of 2001 compared
to $185 million ($0.75 per basic share and $0.74 per diluted share) in 2000.
This decrease resulted primarily from higher fuel prices and wage and benefit
inflation, partially offset by higher operating revenue and productivity
improvements.
OPERATING REVENUES - Operating revenues increased $37 million (1%) to a
first-quarter record $2.9 billion. The growth was driven by higher Energy and
Agricultural commodity revenue and by revenue growth at Overnite.
OPERATING EXPENSES - Operating expenses increased $50 million (2%) to $2.5
billion in the first quarter 2001 compared to the first quarter 2000 resulting
primarily from higher fuel prices and higher salaries, wages and employee
benefits expense. Continued improvement in productivity partially offset higher
fuel prices at the Railroad. Salaries, wages, and employee benefits were higher
reflecting wage increases and higher benefit costs. Equipment and other rents
expense also increased as a result of increased locomotive lease expense and
longer car cycle times. Car cycle times were adversely affected by lower
automotive volume. Depreciation expense increased, reflecting 2000 and first
quarter 2001 capital spending. Fuel and utilities increased as significantly
higher fuel prices were slightly offset by favorable fuel hedging (see note 4 to
the consolidated financial statements). The decrease in materials and supplies
reflects fewer locomotive overhauls in the first quarter and lower running
repair costs. The decrease in other costs is associated with productivity gains
and focused cost control, partly offset by higher casualty costs.
OPERATING INCOME - Operating income decreased $13 million (3%) to $439 million
in 2001, as higher fuel and wage and benefit expenses more than offset higher
revenue growth and productivity gains at the Railroad.
NON-OPERATING ITEMS - Other income increased $10 million (50%) from 2000
primarily due to higher real estate gains. Interest expense declined $1 million,
as debt levels remained relatively flat. Income taxes for 2001 increased $2
million despite lower net income due to less state incentive credits.
RAIL SEGMENT
NET INCOME - First quarter 2001 net income of $209 million decreased $5 million
(2%) compared to the first quarter of 2000. Higher fuel prices, wage inflation,
and rent expense were partially offset by higher commodity revenue, productivity
gains and higher other income.
OPERATING REVENUES - Rail operating revenues increased $25 million (1%) to a
first-quarter record $2.7 billion on 1% commodity revenue gain.
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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 March 31,
Commodity Revenue ----------------------------------
In Millions of Dollars 2001 2000 Change
---------- ---------- ----------
Agricultural ........................... $ 370 $ 350 6%
Automotive ............................. 276 290 (5)%
Chemicals .............................. 390 412 (5)%
Energy ................................. 593 529 12%
Industrial Products .................... 472 492 (4)%
Intermodal ............................. 450 441 2%
---------- ---------- ----------
Total .................................. $ 2,551 $ 2,514 1%
---------- ---------- ----------
Three Months Ended March 31,
Revenue Carloads ----------------------------------
In Thousands 2001 2000 Change
---------- ---------- ----------
Agricultural ........................... 219 221 (1)%
Automotive ............................. 185 199 (7)%
Chemicals .............................. 219 232 (5)%
Energy ................................. 537 480 12%
Industrial Products .................... 336 355 (5)%
Intermodal ............................. 683 687 (1)%
---------- ---------- ----------
Total .................................. 2,179 2,174 --%
---------- ---------- ----------
Three Months Ended March 31,
----------------------------------
Average Revenue Per Car 2001 2000 Change
---------- ---------- ----------
Agricultural ........................... $ 1,687 $ 1,582 7%
Automotive ............................. 1,486 1,456 2%
Chemicals .............................. 1,779 1,777 --
Energy ................................. 1,106 1,103 --
Industrial Products .................... 1,405 1,387 1%
Intermodal ............................. 659 642 3%
---------- ---------- ----------
Total .................................. $ 1,171 $ 1,156 1%
---------- ---------- ----------
Agricultural - Revenue increased despite a slight carload decline. Carloads
decreased primarily due to weak export demand for corn. Partially offsetting
these declines were strong domestic wheat shipments as well as export demand to
Mexico and Gulf ports. Average revenue per car was up $105 primarily due to a
mix of longer-haul business and selective price increases.
Automotive - Carloads decreased due to weak consumer demand for finished
vehicles and high supplier inventories. Materials carloads were also down due to
lower production levels. Average revenue per car increased 2% due to greater use
of boxcars, rather than containers, to support materials shipments and a lower
mix of lower average revenue per car materials shipments.
Chemicals - Carloads decreased due to a slowing economy that reduced demand for
plastics and liquid and dry chemicals. High natural gas prices reduced
production and demand for plastics and fertilizer. Fertilizer carloads were
further reduced due to poor weather in March 2001.
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Energy - The Railroad recorded its best quarter ever for revenue, carloads, and
average trains per day out of the Southern Powder River Basin. The growth was
the result of high utility demand and market share gains. Cool winter weather
and higher natural gas prices reduced utility stockpiles compared to a year ago.
Delays due to severe weather partially offset these increases.
Industrial Products - Carloads were lower due to an economic slowdown that
decreased demand for lumber, construction materials and consumer goods. A weak
domestic steel industry also contributed to the decline. Stone carloads were
lower as adverse weather in the Southwest resulted in reduced demand for highway
construction materials. Average revenue per car increased slightly as a result
of declines in lower average revenue per car stone shipments and selected price
increases.
Intermodal - Revenue set a first-quarter record due primarily to an increase in
average revenue per car. Carloads decreased slightly as the softening economy
reduced demand for domestic intermodal shipments. The domestic decline was
partially offset by growth in import carloads from Asia. Average revenue per car
increased as a result of demand-driven price increases.
OPERATING EXPENSES - Operating expenses increased $41 million (2%), reflecting
higher fuel prices, inflation, and higher rent expense partially offset by
improved productivity and cost control initiatives.
Salaries, Wages, and Employee Benefits - Labor costs increased $10 million (1%)
reflecting wage and benefit increases. Partially offsetting these cost increases
were fewer employees and higher train crew productivity.
Equipment and Other Rents - Expenses increased $18 million (6%) due primarily to
increased cycle times. Lower automotive carloads were a driver of the increased
cycle time as excess cars were temporarily stored at assembly plants and
unloading facilities. Locomotive leases also increased rent expense as more
units were leased in the first quarter of 2001 compared to 2000.
Depreciation - Expenses increased $10 million (4%), reflecting the 2000 and
first quarter 2001 capital programs. Capital spending totaled $355 million in
the first quarter 2001 compared to $359 million in 2000.
Fuel and Utilities - Expenses increased $40 million (14%), driven by higher fuel
prices and utilities expense. In the first quarter 2001, 32% of the Railroad's
fuel consumption was hedged at an average of 69 cents per gallon (excluding
taxes, transportation charges, and regional pricing spreads), lowering fuel
costs by $2 million. For the first quarter 2000, fuel consumption was 10% hedged
at 40 cents per gallon, which resulted in a $10 million decrease in fuel
expense. As of March 31, 2001, projected fuel consumption for the remainder of
2001 is 8% hedged at 68 cents per gallon (see note 4 to the Consolidated
Financial Statements).
Materials and Supplies - Costs decreased $21 million (15%), reflecting decreases
in locomotive overhauls and running repairs as well as freight car repairs.
Casualty Costs - Costs increased $2 million (2%) due to slightly higher
settlement costs.
Other Costs - Costs decreased $18 million (9%), reflecting productivity gains
and cost control initiatives.
OPERATING INCOME - Operating income decreased $16 million (3%) to $449 million
for the first quarter of 2001. The operating ratio in 2001 was 83.1%, 0.8
percentage points higher than 2000's 82.3%.
NON-OPERATING ITEMS - Non-operating expense decreased $13 million (10%) in 2001
due to lower interest expense, higher real estate sales and other miscellaneous
items. Income taxes increased $2 million in 2001 over the same period in 2000
reflecting lower state incentive credits partially offset by the tax impact of
lower income before income taxes.
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OTHER OPERATIONS
TRUCKING PRODUCT LINE
OPERATING REVENUES - Revenue increased $11 million (4%) to $280 million in the
first quarter 2001 despite flat volume. The growth resulted from best-ever
service performance levels, yield initiatives, a mix of higher-margin traffic,
and a fuel surcharge.
OPERATING EXPENSES - Operating expenses increased $3 million (1%) to $271
million in the first quarter 2001. Salaries and benefits costs increased $6
million (4%) to $171 million reflecting wage and benefit increases. Fuel and
utilities costs were flat at $18 million as higher fuel prices were offset by
improved fuel economy. In the first quarter 2001, Overnite had no fuel hedges.
In the first quarter of 2000, fuel consumption was 9% hedged at an average of 39
cents per gallon (excluding taxes, transportation charges, and regional pricing
spreads). As of March 31, 2001, no fuel consumption for 2001 is hedged.
Depreciation expense was flat at $12 million in the first quarter 2001.
Materials and supplies expenses increased $2 million (18%) to $13 million
reflecting higher fleet maintenance services. Equipment and other rents
decreased $1 million (4%) over 2000 due to higher contract labor expenses in
2000. Other expenses decreased $4 million (10%), primarily due to higher
security, legal, and travel expenses in 2000.
OPERATING INCOME - Trucking operations generated operating income of $9 million
in the first quarter 2001, an $8 million improvement from 2000. The operating
ratio for trucking operations improved to 96.9% in 2001 from 99.8% in 2000.
OTHER PRODUCT LINES
The other product lines include the corporate holding company (which largely
supports the Railroad), Fenix LLC, self-insurance activities, and all
appropriate consolidating entries (see note 2 to the Consolidated Financial
Statements). First quarter operating losses increased $5 million reflecting a
slight decrease in revenues and an increase in operating expenses.
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
FINANCIAL CONDITION
During the first three months of 2001, cash provided by operations was $205
million, compared to $355 million in 2000. The decline in cash provided from
operations was driven by timing of cash payments, changes in working capital and
lower net income.
Cash used in investing activities was $494 million during the first quarter
2001, compared to $354 million in 2000. The year over year change is due to
receipt of a cash dividend from an affiliate in 2000 and acquisition of
equipment in 2001 that is awaiting financing.
Cash generated by financing activities was $257 million in the first three
months of 2001, compared to a use of $116 million in 2000. The difference is the
result of net borrowings of $306 million in 2001 compared to net repayments of
$64 million in 2000.
Including the Convertible Preferred Stock as an equity instrument, the
ratio of debt to total capital employed was 45.6% at March 31, 2001 and 45.1% at
December 31, 2000.
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FINANCING ACTIVITIES
CREDIT FACILITIES - As of March 31, 2001, the Corporation had $2 billion in
revolving credit facilities, of which $1 billion expires in 2002, with the
remaining $1 billion expiring in 2005. The facilities, which were entered into
during March 2001 and March 2000, respectively, are designated for general
corporate purposes.
SHELF REGISTRATION STATEMENT - Under currently effective shelf registration
statements, the Corporation may issue, from time to time, any combination of
debt securities, preferred stock, or warrants for debt securities or preferred
stock in one or more offerings. During January 2001, the Corporation issued debt
securities amounting to $400 million under the shelf registration. At March 31,
2001, the Corporation had $200 million remaining for issuance under the shelf
registration. The Corporation has no immediate plans to issue equity securities.
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 are 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 9 to the consolidated
financial statements, which is incorporated herein by reference.
ACCOUNTING PRONOUNCEMENTS - In September 2000, the Financial Accounting
Standards Board issued Statement No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 140),
replacing Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 140 revises
criteria for accounting for securitizations, other financial asset transfers and
collateral, and introduces new disclosures. FAS 140 was effective for fiscal
2000 with respect to the new disclosure requirements and amendments of the
collateral provisions originally presented in FAS 125. All other provisions are
effective for transfers of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The provisions are to be applied prospectively
with certain exceptions. Management believes the financial impact that FAS 140
will have on the Corporation's consolidated financial statements will be
immaterial.
CAUTIONARY INFORMATION
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 within the meaning of 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 its 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.
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19
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 cause such differences 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/or regulatory
developments, including possible enactment of initiatives to re-regulate the
rail business; natural events such as severe weather, 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; labor
stoppages; and the outcome of claims and litigation.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided
in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Disclosure concerning market risk-sensitive instruments is set forth in note 4
to the Consolidated Financial Statements included in Item 1 of Part I of this
Report and is incorporated herein by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
As previously reported, in March 1998, the Railroad received notice that the
Railroad and Clean Harbors, a waste disposal firm, were the subjects of a
criminal investigation by the Environmental Protection Agency (EPA) and the
Federal Bureau of Investigation. Tank cars containing hazardous waste billed to
Clean Harbors' transload facility in Sterling, Colorado were held in the
Railroad's Sterling, Colorado rail yard for periods longer than ten days prior
to placement in Clean Harbors' facility, allegedly in violation of hazardous
waste regulations. The Railroad cooperated with the investigation and responded
to grand jury subpoenas. A finding of violation could have resulted in
significant criminal or civil penalties. The EPA has notified the Railroad
verbally that the investigation has been concluded and that no charges will be
brought against the Railroad. The EPA also instructed the Railroad to retrieve
the documents it produced in response to the subpoenas. The documents have been
retrieved. Although no written confirmation has been received, the Railroad
anticipates no further legal action.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders of the Corporation was held
on April 20, 2001.
(b) At the Annual Meeting, the Corporation's shareholders voted
for the election of Philip F. Anschutz (219,582,280 shares in
favor; 5,843,354 shares withheld), E. Virgil Conway
(220,386,205 shares in favor; 5,039,429 shares withheld),
Richard K. Davidson (223,153,115 shares in favor; 2,272,519
shares withheld), Thomas J. Donohue (223,446,120 shares in
favor; 1,979,514 shares withheld), A. W. Dunham (223,443,276
shares in favor; 1,982,358 shares withheld), Spencer F. Eccles
(223,420,789 shares in favor; 2,004,845 shares withheld), Ivor
J. Evans (223,393,341 shares in favor; 2,032,293 shares
withheld), Elbridge T. Gerry, Jr. (223,413,008 shares in
favor; 2,012,626 shares withheld), Judith Richards Hope
(220,525,867 shares in favor; 4,899,767 shares withheld),
Richard J. Mahoney (223,379,593 shares in favor; 2,046,041
shares withheld), Steven R. Rogel (223,452,308 shares in
favor; 1,973,326 shares withheld), R. D. Simmons (223,352,472
shares in favor; 2,073,162 shares withheld), E. Zedillo
(223,177,536 shares in favor; 2,248,098 shares withheld), as
directors of the Corporation. In addition, the Corporation's
shareholders voted to ratify the appointment of Deloitte &
Touche LLP as independent auditors of the Corporation
(222,680,008 shares in favor; 1,681,207 shares against,
1,064,419 shares withheld); voted to approve the Union Pacific
2001 Stock Incentive Plan (194,659,916 shares in favor;
28,692,101 shares against, 2,073,616 shares withheld); voted
to approve a shareholder proposal regarding confidential
voting (119,476,386 shares in favor; 73,695,346 shares
against, 3,447,211 shares withheld and 28,806,691 shares not
voted by brokers); and voted not to approve a shareholder
proposal regarding Chairman of the Board (41,810,010 shares in
favor; 153,156,020 shares against, 3,572,213 shares withheld
and 26,887,391 shares not voted by brokers).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10(a) UPC 2001 Stock Incentive Plan incorporated by
reference to Exhibit 99 to the Company's Current
Report on Form 8-K dated March 8, 2001.
10(b) UP Shares Stock Option Plan of UPC incorporated by
reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (File No.
333-57958) dated March 30, 2001.
12 Computation of ratio of earnings to fixed charges.
(b) REPORTS ON FORM 8-K
On January 18, 2001, UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the fourth quarter of 2000.
On March 8, 2001, UPC filed a Current Report on Form 8-K filing
the Union Pacific Corporation 2001 Stock Incentive Plan considered
for approval at the UPC 2001 Annual Meeting of Shareholders.
On April 26, 2001, UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the first quarter of 2001.
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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: May 15, 2001
UNION PACIFIC CORPORATION
(Registrant)
By /s/ Richard J. Putz
------------------------------------------------------
Richard J. Putz
Vice President and Controller
(Chief Accounting Officer and Duly Authorized Officer)
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UNION PACIFIC CORPORATION
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
12 Computation of ratio of earnings to fixed charges.