Union Pacific Corporation is an American company based in Omaha, Nebraska. The company is part of the Dow Jones Composite Average and Dow Jones Transportation Average indices. It is the parent company of the Union Pacific Railroad and had a network of 51,610km (32,068 miles) in 2016.
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 June 30, 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 July 31, 2001, there were 248,345,605 shares of the Registrant's Common Stock outstanding.
2 UNION PACIFIC CORPORATION INDEX <Table> <Caption> Page Number ----------- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1: Consolidated Financial Statements: CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Three Months Ended June 30, 2001 and 2000........................ 1 CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Six Months Ended June 30, 2001 and 2000.......................... 2 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION At June 30, 2001 (Unaudited) and December 31, 2000....................... 3 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, 2001 and 2000.......................... 4 CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY (Unaudited) For the Six Months Ended June 30, 2001................................... 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)......................... 6-12 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 13-20 Item 3: Quantitative and Qualitative Disclosures About Market Risk..................... 20 PART II. OTHER INFORMATION Item 1: Legal Proceedings.............................................................. 20-21 Item 6: Exhibits and Reports on Form 8-K............................................... 21 Signatures.................................................................................. 22 </Table> (i)
3 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 June 30, <Table> <Caption> Millions, Except Per Share and Ratios 2001 2000 ------ ------ <S> <C> <C> OPERATING REVENUES Rail, trucking and other .............................. $2,998 $2,966 ------ ------ OPERATING EXPENSES Salaries, wages and employee benefits.................. 1,063 1,040 Equipment and other rents.............................. 331 310 Depreciation .......................................... 293 283 Fuel and utilities .................................... 338 311 Materials and supplies................................. 145 155 Casualty costs......................................... 87 84 Other costs............................................ 247 241 ------ ------ Total.................................................. 2,504 2,424 ------ ------ INCOME Operating Income....................................... 494 542 Other income - net .................................... 75 24 Interest expense ...................................... (178) (180) ------ ------ Income before Income Taxes............................. 391 386 Income taxes........................................... (148) (142) ------ ------ Net Income............................................. $ 243 $ 244 ------ ------ PER SHARE Basic - Net Income..................................... $ 0.98 $ 0.99 Diluted - Net Income................................... $ 0.95 $ 0.96 ------ ------ Weighted Average Number of Shares (Basic).............. 247.7 246.4 Weighted Average Number of Shares (Diluted)............ 271.9 269.4 ------ ------ Dividends Declared..................................... $ 0.20 $ 0.20 ------ ------ Ratio of Earnings to Fixed Charges .................... 3.1 2.7 ------ ------ </Table> The accompanying notes are an integral part of these consolidated financial statements. -1-
4 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Union Pacific Corporation and Subsidiary Companies For the Six Months Ended June 30, <Table> <Caption> Millions, Except Per Share and Ratios 2001 2000 ------ ------ <S> <C> <C> OPERATING REVENUES Rail, trucking and other .............................. $5,941 $5,872 ------ ------ OPERATING EXPENSES Salaries, wages and employee benefits.................. 2,148 2,105 Equipment and other rents.............................. 660 625 Depreciation .......................................... 585 565 Fuel and utilities .................................... 690 622 Materials and supplies................................. 284 311 Casualty costs......................................... 185 178 Other costs............................................ 456 472 ------ ------ Total.................................................. 5,008 4,878 ------ ------ INCOME Operating Income....................................... 933 994 Other income - net .................................... 105 44 Interest expense ...................................... (359) (362) ------ ------ Income before Income Taxes............................. 679 676 Income taxes........................................... (255) (247) ------ ------ Net Income............................................. $ 424 $ 429 ------ ------ PER SHARE Basic - Net Income..................................... $ 1.71 $ 1.74 Diluted - Net Income................................... $ 1.67 $ 1.70 ------ ------ Weighted Average Number of Shares (Basic).............. 247.3 246.4 Weighted Average Number of Shares (Diluted)............ 271.4 269.4 ------ ------ Dividends Declared..................................... $ 0.40 $ 0.40 ------ ------ Ratio of Earnings to Fixed Charges .................... 2.8 2.6 ------ ------ </Table> The accompanying notes are an integral part of these consolidated financial statements. -2-
5 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Union Pacific Corporation and Subsidiary Companies <Table> <Caption> (Unaudited) June 30, Dec. 31, Millions of Dollars 2001 2000 -------- -------- <S> <C> <C> ASSETS Current Assets Cash and temporary investments........................ $ 130 $ 105 Accounts receivable - net ............................ 640 597 Inventories........................................... 309 360 Current deferred tax asset............................ 118 89 Other current assets.................................. 162 134 ------- ------- Total................................................. 1,359 1,285 ------- ------- Investments Investments in and advances to affiliated companies... 667 644 Other investments..................................... 100 96 ------- ------- Total................................................. 767 740 ------- ------- Properties Cost.................................................. 35,755 35,458 Accumulated depreciation.............................. (7,330) (7,262) ------- ------- Net................................................... 28,425 28,196 ------- ------- Other Other assets.......................................... 440 278 ------- ------- Total Assets.......................................... $30,991 $30,499 ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable...................................... $ 580 $ 658 Accrued wages and vacation............................ 433 422 Accrued casualty costs................................ 407 409 Income and other taxes................................ 251 234 Dividends and interest................................ 260 265 Debt due within one year ............................. 200 207 Other current liabilities ............................ 627 767 ------- ------- Total................................................. 2,758 2,962 ------- ------- Other Liabilities and Debt due after one year .............................. 8,299 8,144 Shareholders' Equity Deferred income taxes................................. 7,377 7,143 Accrued casualty costs................................ 772 834 Retiree benefits obligation........................... 751 745 Other long-term liabilities .......................... 501 509 Commitments and contingencies Company-obligated Mandatorily Redeemable Convertible Preferred Securities ................... 1,500 1,500 Common shareholders' equity .......................... 9,033 8,662 ------- ------- Total Liabilities and Shareholders' Equity............ $30,991 $30,499 ------- ------- </Table> The accompanying notes are an integral part of these consolidated financial statements. -3-
6 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Union Pacific Corporation and Subsidiary Companies For the Six Months Ended June 30 <Table> <Caption> Millions of Dollars 2001 2000 ------ ------ <S> <C> <C> OPERATING ACTIVITIES Net Income.............................................. $ 424 $ 429 Non-cash charges to income: Depreciation........................................ 585 565 Deferred income taxes............................... 203 200 Other - net......................................... (116) (134) Changes in current assets and liabilities............... (253) (26) ------ ------ Cash Provided by Operating Activities................... 843 1,034 ------ ------ INVESTING ACTIVITIES Capital investments..................................... (792) (817) Proceeds from sale of assets and other investing activities............................................ (111) (155) ------ ------ Cash Used in Investing Activities....................... (903) (972) ------ ------ FINANCING ACTIVITIES Dividends paid.......................................... (99) (101) Debt repaid ............................................ (439) (539) Financings.............................................. 623 475 ------ ------ Cash Provided by (Used in) Financing Activities......... 85 (165) ------ ------ Net Change in Cash and Temporary Investments............ 25 (103) Cash and Temporary Investments at Beginning of Period... 105 175 ------ ------ Cash and Temporary Investments at End of Period......... $ 130 $ 72 ------ ------ CHANGES IN CURRENT Accounts receivable..................................... $ (43) $ 12 ASSETS AND LIABILITIES Inventories............................................. 51 13 Other current assets.................................... (57) (8) Accounts, wages and vacation payable.................... (67) 56 Debt due within one year................................ (7) (8) Other current liabilities............................... (130) (91) ------ ------ Total................................................... $ (253) $ (26) ------ ------ SUPPLEMENTAL CASH Cash paid during the year for: FLOW INFORMATION Interest............................................ $ 371 $ 397 Income taxes - net.................................. 1 7 ------ ------ </Table> The accompanying notes are an integral part of these consolidated financial statements. -4-
7 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY (Unaudited) Union Pacific Corporation and Subsidiary Companies For the Six Months Ended June 30, 2001 <Table> <Caption> 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 Adjustments Total Total ------ -------- -------- -------- ---------- ----------- ----------- ----- ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2000 ....... $ 688 $ 4,024 $ 5,699 $ (1,749) $ (2) $ 2 $ -- $ -- $8,662 ------ -------- -------- -------- ---------- ----------- ----------- ----- ------ Net Income ......................... -- -- 424 -- -- -- -- -- 424 Other Comprehensive Income (Loss), net of tax: Minimum Pension Liability Adjustment .................... -- -- -- -- -- -- -- -- -- Foreign Currency Translation Adjustments ................... -- -- -- -- -- 4 -- 4 4 Derivative Adjustments ........ -- -- -- -- -- -- -- -- -- ------ Comprehensive Income ............... 428 Conversion, exercises of stock options, forfeitures and other ... 1 (37) -- 78 -- -- -- -- 42 Dividends declared ($0.40 per share) ........................... -- -- (99) -- -- -- -- -- (99) ------ -------- -------- -------- ---------- ----------- ----------- ----- ------ Balance at June 30, 2001 ........... $ 689 $ 3,987 $ 6,024 $ (1,671) $ (2) $ 6 -- $ 4 $9,033 ------ -------- -------- -------- ---------- ----------- ----------- ----- ------ </Table> [a] Common stock $2.50 par value; 500,000,000 shares authorized; 275,233,975 shares issued at beginning of period; 275,488,325 shares issued at end of period. [b] 27,183,695 treasury shares at end of period, at cost. - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. -5-
8 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, 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 and six months ended June 30, 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 two reportable segments, rail and trucking, 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). The trucking segment includes the Corporation's wholly owned subsidiary, Overnite Transportation Company (Overnite). 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), self-insurance activities, and all appropriate consolidating entries. The following table details reportable financial information for UPC's segments and other operations for the three months and six months ended June 30, 2001 and 2000: <Table> <Caption> Three Months Ended Six Months Ended -------------------- -------------------- June 30, June 30, June 30, June 30, Millions of Dollars 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Operating revenues[a]: Rail .................... $ 2,700 $ 2,674 $ 5,355 $ 5,304 Trucking ................ 290 283 570 552 Other ................... 8 9 16 16 -------- -------- -------- -------- Consolidated ............ $ 2,998 $ 2,966 $ 5,941 $ 5,872 -------- -------- -------- -------- Operating income (loss): Rail .................... $ 491 $ 539 $ 940 $ 1,004 Trucking ................ 16 17 25 17 Other ................... (13) (14) (32) (27) -------- -------- -------- -------- Consolidated ............ $ 494 $ 542 $ 933 $ 994 -------- -------- -------- -------- Assets: Rail .................... $ 29,827 $ 29,087 $ 29,827 $ 29,087 Trucking ................ 654 657 654 657 Other ................... 510 458 510 458 -------- -------- -------- -------- Consolidated ............ $ 30,991 $ 30,202 $ 30,991 $ 30,202 -------- -------- -------- -------- </Table> [a] The Corporation has no significant intercompany sales activities. -6-
9 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 and six months ended June 30, 2001, the Corporation charged $9 million and $11 million, respectively, against the merger liability. The remaining merger payments will be made during 2001 as labor negotiations are implemented, and related merger consolidation activities are finalized. The components of the merger liability as of June 30, 2001 were as follows: <Table> <Caption> Original Cumulative June 30, 2001 Millions of Dollars Liability Activity Liability --------- ---------- ------------- <S> <C> <C> <C> Labor protection related to legislated and contractual obligations ........................................... $ 361 $ 361 $ -- Severance and related costs ................................ 343 281 62 Contract cancellation fees and facility and line closure costs ................................................. 145 141 4 Relocation costs ........................................... 109 97 12 --------- ---------- ------------- Total ...................................................... $ 958 $ 880 $ 78 --------- ---------- ------------- </Table> 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 June 30, 2001, is disclosed within the following narrative and tables. -7-
10 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 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 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. There was no credit risk associated with the Corporation's counterparties at June 30, 2001. There was a $2 million credit risk associated with the Corporation's counterparties at 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 June 30, 2001 and December 31, 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 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. In May 2001, the Corporation entered into an interest rate swap on $200 million of debt with a maturity date of May 2004. The swap allowed the Corporation to convert the debt from a fixed rate to a variable rate and thereby hedge the risk of changes in the debt's fair value attributable to the changes in the benchmark interest rate (LIBOR). The swap has been accounted for using the short-cut method as allowed by FAS 133; and therefore, no ineffectiveness has been recorded within the Corporation's consolidated financial statements. 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. -8-
11 The following is a summary of the Corporation's derivative financial instruments at June 30, 2001 and December 31, 2000: <Table> <Caption> Millions June 30, December 31, Except Percentages and Average Commodity Prices 2001 2000 -------- ------------ <S> <C> <C> Interest Rate Hedging: Amount of debt hedged ........................................... $ 200 $ -- Percentage of total debt portfolio .............................. 2% -- Rail Fuel Hedging: Number of gallons hedged for the remainder of 2001 [a] .......... 50 101 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] ....... -- -- -------- ------------ </Table> [a] Rail fuel hedges 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 June 30, 2001 and December 31, 2000 were as follows: <Table> <Caption> June 30, December 31, Millions of Dollars 2001 2000 -------- ------------ <S> <C> <C> Interest Rate Hedging: Gross fair market asset position ............ $ -- $ -- Gross fair market (liability) position ...... -- -- Rail Fuel Hedging: Gross fair market asset position ............ -- 2 Gross fair market (liability) position ...... -- -- Trucking Fuel Hedging: Gross fair market asset position ............ -- -- Gross fair market (liability) position ...... -- -- -------- ------------ Total net asset position ......................... $ -- $ 2 -------- ------------ </Table> Rail fuel hedging positions will be reclassified from accumulated other comprehensive income to fuel expense over the next six 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 and six months ended June 30, 2001 and June 30, 2000: <Table> <Caption> Three Months Six Months Ended June 30, Ended June 30, ------------------- ------------------- Millions of Dollars 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Decrease in interest expense from interest rate hedging .... $ -- $ -- $ -- $ -- Decrease in fuel expense from rail fuel hedging ............ 2 10 4 20 Decrease in fuel expense from trucking fuel hedging ........ -- -- -- 1 -------- -------- -------- -------- Increase in pre-tax income ................................. $ 2 $ 10 $ 4 $ 21 -------- -------- -------- -------- </Table> At June 30, 2001, there was no ineffectiveness recorded within fuel expense for hedging. -9-
12 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 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 June 30, 2001 and December 31, 2000, accounts receivable are presented net of approximately $600 million receivables sold. 5. DEBT CREDIT FACILITIES - On June 30, 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 AND SIGNIFICANT NEW BORROWINGS - During May 2001, under an existing shelf registration statement, the Corporation issued the remaining $200 million of debt securities available as fixed rate debt with a maturity date of May 25, 2004. Simultaneously, the Corporation entered into a swap converting the debt from a fixed rate to a variable rate (see note 4 to the consolidated financial statements). The proceeds from the issuance of this debt were used for repayment of debt and other general corporate purposes. In June 2001, the Corporation filed a $1.0 billion shelf registration statement, which became effective June 14, 2001. Under the 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. The total offering price of these securities, in the aggregate, will not exceed $1.0 billion. At June 30, 2001, the Corporation had $1.0 billion remaining for issuance under this shelf registration. The Corporation has no immediate plans to issue equity securities. -10-
13 6. EARNINGS PER SHARE - The following table provides a reconciliation between basic and diluted earnings per share for the three months and six months ended June 30, 2001 and 2000: <Table> <Caption> Three Months Six Months Ended June 30, Ended June 30, ------------------- ------------------- Millions, Except Per Share Amounts 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Income Statement Data: Net income available to common shareholders - Basic ........ $ 243 $ 244 $ 424 $ 429 Dilutive effect of interest associated with the CPS ........ 15 15 30 30 -------- -------- -------- -------- Net income available to common shareholders - Diluted ...... $ 258 $ 259 $ 454 $ 459 -------- -------- -------- -------- Weighted-Average Number of Shares Outstanding: Basic ...................................................... 247.7 246.4 247.3 246.4 Dilutive effect of common stock equivalents ................ 24.2 23.0 24.1 23.0 -------- -------- -------- -------- Diluted .................................................... 271.9 269.4 271.4 269.4 -------- -------- -------- -------- Earnings Per Share: Basic ...................................................... $ 0.98 $ 0.99 $ 1.71 $ 1.74 Diluted .................................................... $ 0.95 $ 0.96 $ 1.67 $ 1.70 -------- -------- -------- -------- </Table> 7. OTHER INCOME - Other income included the following for the three months and six months ended June 30, 2001 and 2000: <Table> <Caption> Three Months Six Months Ended June 30, Ended June 30, -------------------- -------------------- Millions of Dollars 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net gain on non-operating asset dispositions ..... $ 64 $ 12 $ 81 $ 22 Rental income .................................... 19 15 36 29 Interest income .................................. 3 3 5 5 Other - net ...................................... (11) (6) (17) (12) -------- -------- -------- -------- Total ............................................ $ 75 $ 24 $ 105 $ 44 -------- -------- -------- -------- </Table> 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 June 30, 2001, the Corporation had accrued $177 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. -11-
14 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. The obligation of FAS 140 did not have a significant impact on the Corporation's consolidated financial statements. In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" (FAS 141). FAS 141 revises the method of accounting for business combinations and eliminates the pooling method of accounting. FAS 141 is effective for all business combinations that are initiated or completed after June 30, 2001. Management believes the financial impact that FAS 141 will have on the Corporation's consolidated financial statements will not be significant. Also in July 2001, the Financial Accounting Standards Board issued Statement No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 142 revises the method of accounting for goodwill and other intangible assets. FAS 142 does not allow the amortization of goodwill, but requires goodwill to be tested for impairment at least annually at a reporting unit level. FAS 142 is effective for the Corporation's fiscal year beginning January 1, 2002. Management believes the financial impact that FAS 142 will have on the Corporation's consolidated financial statements will not be significant. In addition, in July 2001, the Financial Accounting Standards Board voted to issue Statement No. 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. 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 June 30, 2001, 1,336 positions had been identified for elimination in accordance with the Plan. Of those eliminations, 895 will be made through subsidized early retirements and involuntary layoffs with the remaining 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 includes $30 million paid in cash or reclassified to contractual liabilities for severance benefits to 390 employees. The remaining $60 million of plan liability activity reflects subsidized early retirement benefits covering 480 employees. Plan liability activity for 2001 is as follows: <Table> <Caption> Original Cumulative June 30, 2001 Millions of Dollars Liability Activity Liability --------- ---------- ------------- <S> <C> <C> <C> Severance and related costs...... $ 115 $ 90 $ 25 --------- ---------- ------------- </Table> It is expected that the Plan will be completed during the remainder of 2001. -12-
15 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 SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2000 Union Pacific Corporation (UPC or the Corporation) consists of two reportable segments, rail and trucking, 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). The trucking segment includes the Corporation's wholly owned subsidiary, Overnite Transportation Company (Overnite). 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, and all appropriate consolidating entries (see note 2 to the consolidated financial statements). CONSOLIDATED NET INCOME - Net income for the three and six month periods ended June 30, 2001 was $243 million ($0.95 per diluted share) and $424 million ($1.67 per diluted share), respectively, compared to $244 million ($0.96 per diluted share) and $429 million ($1.70 per diluted share) for the comparable periods in 2000. This decrease resulted primarily from wage and benefit inflation and higher fuel prices, partially offset by higher operating revenue, productivity improvements, and real estate sales. OPERATING REVENUES - Operating revenues increased $32 million (1%) and $69 million (1%) for the three and six month periods ended June 30, 2001, respectively, over the comparable periods in 2000. The growth reflects higher Energy and Agricultural commodity revenue at the Railroad as well as increased revenue at Overnite. OPERATING EXPENSES - For the three and six month periods ended June 30, 2001, operating expenses increased $80 million (3%) and $130 million (3%), respectively, over the comparable periods in 2000 primarily due to higher fuel prices, rent expense, and salaries, wages and employee benefits expense. Continued improvement in productivity through work force level reductions and cost control initiatives partially offset these increases. Operating expense comparisons by category for the quarters ending June 30, 2001 and June 30, 2000 are discussed below. The factors primarily responsible for the increase or decrease in each category are substantially the same for both the three and six month periods, except as noted. Salaries, wages, and employee benefits were higher reflecting wage increases and higher benefits expense partially offset by a 2% reduction in employment levels and improved productivity. 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 business levels and poor weather at the Railroad. Depreciation expense increased as a result of the Railroad's capital program in 2000 and the first half of 2001. Fuel and utilities costs rose due to significantly higher fuel prices and increased gross ton miles at the Railroad. The decrease in materials and supplies reflects fewer locomotive overhauls and lower freight car repair costs at the Railroad. Casualty costs increased due to slightly higher settlement costs at the Railroad. Other costs increased 2% and decreased 3% for the three and six month periods, respectively. Cost control and productivity gains at the Railroad for the first six months were partially offset by higher state and local taxes and joint facilities expense at the Railroad during the second quarter of 2001. OPERATING INCOME - Operating income decreased $48 million (9%) and $61 million (6%) for the three and six month periods ended June 30, 2001, respectively, over the comparable periods in 2000, as higher fuel and wage and benefit expenses more than offset revenue growth and productivity gains at the Railroad and Overnite. -13-
16 NON-OPERATING ITEMS - Non-operating expense decreased $53 million and $64 million for the three and six months ended June 30, 2001, respectively. The gains were primarily the result of higher income from real estate sales at the Railroad with two transactions accounting for approximately $46 million of the gain. Income taxes for the three and six month periods of 2001 increased $6 million (4%) and $8 million (3%), respectively, over the comparable periods of 2000 reflecting higher pre-tax income and a higher effective state tax rate, in both periods of 2001. RAIL SEGMENT NET INCOME - Rail operations reported net income of $262 million and $471 million for the three and six month periods ended June 30, 2001, respectively, compared to net income of $264 million for the second quarter of 2000 and $478 million for the six month period in 2000. Higher fuel prices, labor costs, and rent expense were partially offset by higher commodity revenue, productivity gains, and higher real estate sales income. OPERATING REVENUES - Rail operating revenues increased $26 million (1%) to a second-quarter record $2.7 billion and $51 million (1%) to a record $5.4 billion for the three and six month periods ended June 30, 2001, respectively, over the comparable periods in 2000. Revenue carloads were flat for the three and six month periods over the comparable periods in 2000 as strong Energy demand offset weakness in the economically sensitive commodities of Automotive, Chemicals, Industrial Products and Intermodal. Second quarter 2001 operating revenue was also adversely affected by flooding in the upper Midwest and in the Houston area. The following tables summarize rail commodity revenue, revenue carloads and average revenue per car for the periods indicated: <Table> <Caption> Three Months Ended June 30, Six Months Ended June 30, --------------------------- % Commodity Revenue ------------------------- % 2001 2000 Change In Millions 2001 2000 Change ------ ------ ------ ------------------- ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> $ 345 $ 334 3 Agricultural $ 715 $ 684 4 301 307 (2) Automotive 577 597 (3) 388 424 (9) Chemicals 778 836 (7) 577 490 18 Energy 1,170 1,019 15 522 525 (1) Industrial Products 994 1,017 (2) 462 471 (2) Intermodal 912 912 -- ------ ------ ------ ------------------- ------ ------ ------ $2,595 $2,551 2 Total $5,146 $5,065 2 ------ ------ ------ ------------------- ------ ------ ------ </Table> <Table> <Caption> Three Months Ended June 30, Six Months Ended June 30, --------------------------- % Revenue Carloads ------------------------- % 2001 2000 Change In Millions 2001 2000 Change ------ ------ ------ ------------------- ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> 211 213 (1) Agricultural 430 434 (1) 199 214 (7) Automotive 384 413 (7) 222 244 (9) Chemicals 441 476 (7) 516 439 18 Energy 1,053 919 15 374 376 -- Industrial Products 710 731 (3) 689 727 (5) Intermodal 1,372 1,414 (3) ------ ------ ------ ------------------- ------ ------ ------ 2,211 2,213 -- Total 4,390 4,387 -- ------ ------ ------ ------------------- ------ ------ ------ </Table> -14-
17 <Table> <Caption> Three Months Ended June 30, Six Months Ended June 30, --------------------------- % Average Revenue ------------------------- % 2001 2000 Change In Millions 2001 2000 Change ------ ------ ------ ------------------- ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> $1,632 $1,568 4 Agricultural $1,660 $1,575 5 1,514 1,437 5 Automotive 1,501 1,446 4 1,749 1,741 -- Chemicals 1,764 1,759 -- 1,117 1,115 -- Energy 1,111 1,109 -- 1,396 1,398 -- Industrial Products 1,400 1,392 1 671 647 4 Intermodal 665 645 3 ------ ------ ------ ------------------- ------ ------ ------ $1,173 $1,153 2 Total $1,172 $1,155 1 ------ ------ ------ ------------------- ------ ------ ------ </Table> Agricultural - Agricultural revenue increased for both the three and six month periods of 2001 over the comparable periods in 2000 despite a 1% decline in carloads. Wheat carloads were strong in the first quarter due to Mexico and Gulf exports, however, declined in the second quarter as a result of soft domestic and overseas export demand. Meals and oils shipments showed market share gains from barge traffic and strong European demand. Beverages and fruits and vegetables grew from strong domestic demand and new railroad services introduced last year. Year-to-date, carloads decreased as a result of reduced export demand for corn. Average revenue per car increased primarily due to longer hauls and less low average revenue per car corn shipments. Automotive - Automotive revenue declined for both the three and six month periods of 2001 over the comparable periods in 2000 as carload volumes fell 7%. These declines were the result of soft consumer demand for vehicles, leading to supplier plant shutdowns to adjust inventories, which also reduced auto materials shipments. Partially offsetting the weak demand was an increase in market share. Average revenue per car increased due to price increases, greater use of boxcars, rather than containers, to support materials shipments and the positive mix impact of fewer materials shipments. Chemicals - Chemicals revenue and carloads decreased for both the three and six month periods of 2001 over the comparable periods in 2000 as a slowing economy and lower industrial production reduced demand for plastics and liquid and dry chemicals. High natural gas-based raw materials costs reduced production and demand for plastics and fertilizer. Phosphate rock shipments also declined in the second quarter due to a customer production shutdown. Average revenue per car was flat as the positive impact of fewer low average revenue per car phosphate rock shipments was offset by decreased long-haul plastics shipments. Energy - The Railroad recorded consecutive quarterly records for revenue, carloads, and average coal trains per day out of the Southern Powder River Basin. The growth for both the three and six month periods was the result of high utility demand and market share gains. Cool winter weather and high prices for natural gas and Eastern-sourced coal reduced utility stockpiles compared to a year ago. Delays due to severe weather in the first quarter and flooding in the second quarter partially offset these increases. Industrial Products - Industrial Products revenue decreased for both the three and six month periods of 2001 over the comparable periods in 2000 as the slowing economy reduced demand for metallic minerals, newsprint and ferrous scrap. In the second quarter, demand for lumber, stone and cement increased over second quarter 2000 levels due to improving construction demand. All three of these commodities were down in the first quarter compared to 2000. Average revenue per car for the six month period increased slightly as price increases offset growth in low average revenue per car stone and cement carloads. Intermodal - Intermodal revenue was flat for the six month period of 2001 over the comparable period in 2000, as a 2% increase in the first quarter was offset by a 2% decrease in the second quarter. Total carloads year-to-date declined due to the slow economy that reduced both domestic and import demand. Offsetting the loss of carloads was a higher average revenue per car resulting from price increases. -15-
18 OPERATING EXPENSES - Operating expenses increased $74 million (3%) and $115 million (3%) for the three and six month periods ended June 30, 2001, respectively. Operating expense comparisons by category for the quarter and six-month period ending June 30, 2001 and 2000 are discussed below. The factors primarily responsible for the increase or decrease in each category are substantially the same for both the three and six month periods, except as noted. Salaries, Wages and Employee Benefits - Labor costs increased $17 million (2%) and $27 million (2%) for the three and six month periods, respectively, over the comparable periods in 2000. The higher expenses were driven primarily by wage and benefit inflation and costs associated with flooding in the Midwest and Houston area. Partially offsetting these cost increases was a reduction in employees and higher train crew productivity. Equipment and Other Rents - Expenses increased $20 million (7%) and $38 million (7%) for the three and six month periods, respectively, due primarily to increased cycle times and higher locomotive leases. Lower automotive carloads were a driver of the increased cycle time as excess cars were temporarily stored at assembly plants and unloading facilities. Second quarter flooding and resulting lower train speeds also contributed to the cycle time deterioration. Locomotive leases increased due to the acquisition of new, more reliable and fuel efficient units to replace older models in the fleet. Depreciation - Depreciation increased $8 million (3%) and $18 million (3%) for the three and six month periods, respectively, over comparable periods in 2000, as a result of the Railroad's capital program in 2000 and the first half of 2001. Capital spending was $780 million in the six months ended June 30, 2001, compared to $812 million in the six months ended June 30, 2000. Fuel and utilities - Expenses were up $27 million (9%) and $67 million (11%) for the three and six month periods, respectively. Higher fuel prices added $25 million of expense in the second quarter and $61 million of expense in the first six months of 2001 over comparable periods in 2000. Additional costs due to higher gross ton miles were offset by a lower diesel fuel consumption rate. In 2001, the Railroad's fuel consumption was 32% hedged at an average of 69 cents per gallon in the first quarter and 8% hedged at 68 cents per gallon in the second quarter (excluding taxes, transportation charges, and regional pricing spreads), which decreased fuel costs by $2 million each quarter. In 2000, the Railroad hedged approximately 10% of its fuel consumption for the three and six month periods, which decreased fuel costs by $10 million and $20 million, respectively. As of June 30, 2001, expected fuel consumption for the remaining six months of 2001 is 8% hedged at 68 cents per gallon excluding taxes, transportation costs and regional pricing spreads (see note 4 to the consolidated financial statements). Materials and Supplies - Expenses decreased $11 million (8%) and $32 million (11%) for the three and six month periods, respectively, reflecting decreases in locomotive overhauls as well as freight car repairs and purchasing costs. The decrease in locomotive overhauls is due to the acquisition of newer, more reliable units and the retirement of older models in the fleet. Casualty Costs - Expenses increased $1 million (1%) and $3 million (2%) for the three and six month periods, respectively, primarily due to slightly higher settlement costs. Other Costs - Expenses increased $12 million (6%) for the second quarter of 2001 and decreased $6 million (1%) for the first six months compared to the same periods in 2000. Cost control and productivity gains for the first six months were partially offset by flooding-related costs, higher state and local taxes and joint facilities expenses in the second quarter. -16-
19 OPERATING INCOME - Operating income decreased $48 million (9%) to $491 million and $64 million (6%) to $940 million for the three and six months ended June 30, 2001, respectively. The operating ratio for the second quarter of 2001 was 81.8%, 2.0 percentage points worse than 2000's 79.8% operating ratio. The operating ratio for the six months ended June 30, 2001 was 82.4%, 1.3 percentage points worse than 2000's 81.1%. NON-OPERATING ITEMS - Non-operating expense decreased $53 million and $66 million for the three and six months ended June 30, 2001, respectively. The gains were primarily the result of higher income from real estate sales and lower interest expense. Income taxes increased $7 million for the second quarter and $9 million for the first six months of 2001 reflecting higher pre-tax income and a higher effective state tax rate in 2001. TRUCKING SEGMENT OPERATING REVENUES - For the three and six month periods ended June 30, 2001, trucking revenues increased $7 million (2%) to $290 million and $18 million (3%) to $570 million, respectively, over the comparable periods in 2000 despite a decline in volume. The growth resulted primarily from improved service levels, yield initiatives and a fuel surcharge. OPERATING EXPENSES - For the three and six month periods ended June 30, 2001, operating expenses increased $8 million (3%) to $274 million and $10 million (2%) to $545 million, respectively, over the comparable periods in 2000. Salaries, wages and employee benefits costs increased $10 million (6%) to $175 million and $16 million (5%) to $346 million for the three and six month periods of 2001, respectively, reflecting wage and benefit increases and a 3% increase in employee levels. Fuel and utilities costs were flat at $17 million for the quarter and $35 million for the six-month period as higher fuel prices were offset by improved fuel economy and a reduction in pounds hauled. In the first six months of 2001, Overnite had no fuel hedges. In the first six months 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 June 30, 2001, no fuel consumption for the remaining six months of 2001 was hedged. Depreciation expense was flat at $12 million and $24 million for the three and six months ended June 30, 2001, respectively. Materials and supplies expenses were flat in the second quarter and up $1 million to $25 million for the six month period ended June 30, 2001 reflecting higher fleet maintenance services. Equipment and other rents was flat at $24 million for the second quarter and decreased $1 million to $46 million for the six-month period over 2000 due to higher contract expenses in 2000. Other expenses decreased $2 million (6%) and $6 million (8%) for the three and six month periods ended June 30, 2001 primarily due to lower security, legal, and travel expenses compared to 2000. OPERATING INCOME - Operating income decreased $1 million (6%) to $16 million and increased $8 million (47%) to $25 million for the three and six months ended June 30, 2001, respectively. The operating ratio for the second quarter of 2001 was 94.6%, 0.5 percentage points worse than 2000's 94.1% operating ratio. The operating ratio for the six months ended June 30, 2001 was 95.8%, 1.1 percentage points better than 2000's 96.9%. OTHER OPERATIONS OTHER PRODUCT LINES The other product lines include the corporate holding company (which largely supports the Railroad), Fenix LLC, and self-insurance activities, and all appropriate consolidating entries (see note 2 to the consolidated financial statements). For the three and six month periods ended June 30, 2001, operating losses decreased $1 million and increased $5 million, respectively, reflecting increased operating expenses over the same periods of 2000. -17-
20 CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS FINANCIAL CONDITION - During the first six months of 2001, cash provided by operations was $843 million, compared to $1,034 million in 2000. The decrease is primarily attributable to the timing of large cash payments including payments for the work force reduction. Cash used in investing activities was $903 million during the first six months of 2001, compared to $972 million in 2000. The decrease in 2001 is a result of lower capital spending and higher asset sales in 2001, partially offset by the receipt of a cash dividend from an affiliate in 2000. Cash provided by financing activities was $85 million in the first six months of 2001, compared to a use in financing activities of $165 million in 2000. This increase in financing is the result of higher debt and other financings ($623 million in 2001 compared to $475 million in 2000) coupled with lower net debt repayments ($439 million in 2001 versus $539 million in 2000). Including the Convertible Preferred Stock as an equity instrument, the ratio of debt to total capital employed was 44.7% at June 30, 2001 and 45.1% at December 31, 2000. FINANCING ACTIVITIES CREDIT FACILITIES - On June 30, 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. SHELF REGISTRATION STATEMENT AND SIGNIFICANT NEW BORROWINGS - During May 2001, under the previously effective shelf registration statement, the Corporation issued the remaining $200 million of debt securities available as fixed rate debt with a maturity date of May 25, 2004. Simultaneously, the Corporation entered into a swap converting the debt from a fixed rate to a variable rate (see note 4 to the consolidated financial statements). The proceeds from the issuance of this debt were used for repayment of debt and other general corporate purposes. In June 2001, the Corporation filed a $1.0 billion shelf registration statement, which became effective June 14, 2001. Under the 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. The total offering price of these securities, in the aggregate, will not exceed $1.0 billion. At June 30, 2001, the Corporation had $1.0 billion 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. -18-
21 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. The adoption of FAS 140 did not have a significant impact on the Corporation's consolidated financial statements. In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" (FAS 141). FAS 141 revises the method of accounting for business combinations and eliminates the pooling method of accounting for business combinations. FAS 141 is effective for all business combinations that are initiated or completed after June 30, 2001. Management believes the financial impact that FAS 141 will have on the Corporation's consolidated financial statements will not be significant. Also in July 2001, the Financial Accounting Standards Board issued Statement No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 142 revises the method of accounting for goodwill and other intangible assets. FAS 142 does not allow the amortization of goodwill, but requires goodwill to be tested for impairment at least annually at a reporting unit level. FAS 142 is effective for the Corporation's fiscal year beginning January 1, 2002. Management believes the financial impact that FAS 142 will have on the Corporation's consolidated financial statements will not be significant. In addition, in July 2001, the Financial Accounting Standards Board voted to issue Statement No. 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. 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. -19-
22 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 Corporation'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 SHAREHOLDER LITIGATION A purported derivative action was filed by nine individuals, seven of whom are members of the International Brotherhood of Teamsters (Teamsters), on behalf of the Corporation on June 21, 2001 in the Chancery Court of Shelby County, Tennessee, naming as defendants current and certain former directors of the Corporation and various present and former officers and employees of Overnite Transportation Company, as well as Overnite, and, as a nominal defendant, the Corporation. The derivative action alleges, among other things, that the named defendants breached their fiduciary duties to the Corporation, wasted its assets and mismanaged the company by opposing the efforts of the Teamsters to organize the employees of Overnite. Plaintiffs claim that the "anti-union" campaign allegedly waged by the defendants cost millions of dollars and caused a substantial decline in the value of Overnite. On July 31, 2001, defendants filed a motion to dismiss the action on various grounds. The Corporation, Overnite and the individual defendants believe that the claims raised by the plaintiffs are without merit and intend to defend them vigorously. LABOR MATTERS As previously reported, the General Counsel of the National Labor Relations Board (NLRB) is seeking a bargaining order remedy in 11 cases involving Overnite where a Teamsters local union lost a representation election. In these eleven cases an administrative law judge ruled that the bargaining order remedy is warranted. Overnite appealed those rulings to the NLRB. The NLRB upheld the decision of the administrative law judge in four cases, and Overnite appealed the NLRB's ruling to the United States Court of Appeals for the Fourth Circuit. On February 16, 2001 a two-one majority of a Fourth Circuit panel enforced the NLRB bargaining -20-
23 orders. On July 5, 2001 a majority of judges of the entire Fourth Circuit bench granted Overnite's petition for a rehearing by the entire court. With respect to the other seven bargaining order cases, Overnite's appeal is pending before the NLRB. In a twelfth case, the administrative law judge found that a bargaining order remedy was not warranted. Overnite believes it has substantial defenses in the bargaining order cases and intends to continue to defend them aggressively. ENVIRONMENTAL MATTERS The State of Illinois filed a complaint against the Railroad with the Illinois Pollution Board on May 14, 2001 seeking penalties for an alleged violation of state air pollution laws arising out of a release of styrene from a tank car near Cora, Illinois, which occurred on August 29, 1997. The car contained styrene monomer, a hazardous substance, stabilized by an inhibitor by the origin shipper. The car was delayed in transit for a number of different reasons including rerouting and reconsignment by the shipper. The Railroad was not notified that such delays could jeopardize the shipment. Eventually the effect of the inhibitor wore off and the styrene went into a reactive state resulting in pressure and venting near Cora, Illinois. A small populated area was evacuated for a few hours. The situation was controlled and remediated promptly. Styrene has since been put on the Railroad's list of time sensitive shipments for special monitoring. The Railroad is vigorously defending the case. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10(a) UPC Stock Unit Grant and Deferred Compensation Plan for the Board of Directors, as amended May 31, 2001. 10(b) Executive Incentive Plan of UPC and Subsidiaries, as amended May 31, 2001. 12(a) Computation of ratio of earnings to fixed charges for the Three Months Ended June 30, 2001. 12(b) Computation of ratio of earnings to fixed charges for the Six Months Ended June 30, 2001. (b) REPORTS ON FORM 8-K On April 26, 2001, UPC filed a Current Report on Form 8-K announcing UPC's financial results for the first quarter of 2001. On July 19, 2001, UPC filed a Current Report on Form 8-K announcing UPC's financial results for the second quarter of 2001. -21-
24 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: August 14, 2001 UNION PACIFIC CORPORATION (Registrant) By /s/ Richard J. Putz -------------------------------------- Richard J. Putz Vice President and Controller (Chief Accounting Officer and Duly Authorized Officer) -22-
25 UNION PACIFIC CORPORATION EXHIBIT INDEX <Table> <Caption> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 10(a) UPC Stock Unit Grant and Deferred Compensation Plan for the Board of Directors, as amended May 31, 2001. 10(b) Executive Incentive Plan of UPC and Subsidiaries, as amended May 31, 2001. 12(a) Computation of ratio of earnings to fixed charges for the Three Months Ended June 30, 2001. 12(b) Computation of ratio of earnings to fixed charges for the Six Months Ended June 30, 2001. </Table>