UNP

Union Pacific Corporation 10-K Summary

Business Context and Reporting Period

This Annual Report on Form 10-K covers the fiscal year ended December 31, 2002. Union Pacific Corporation (UPC) operates primarily in rail transportation through its subsidiary Union Pacific Railroad Company (UPRR) and in trucking through Overnite Transportation Company (OTC) and Motor Cargo Industries, Inc. The railroad serves the western two-thirds of the United States with over 33,000 route miles. The trucking segment focuses on less-than-truckload (LTL) shipments. The company completed the integration of Southern Pacific rail operations in 2001 and fully consolidated Motor Cargo results following its acquisition in late 2001.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 4% to a record $12.5 billion, driven by 3% growth in the rail segment and 17% growth in trucking (including the Motor Cargo acquisition). Excluding Motor Cargo, trucking revenue grew 5%.
• Profitability: Net income rose 39% to $1.34 billion. This was fueled by double-digit operating income growth, lower interest costs, and two significant asset sales (to Utah Transit Authority and Santa Clara Valley Transportation Authority) generating $214 million in pre-tax gains.
• Cost Management: Operating expenses increased only 3% despite volume growth. Lower fuel prices (73 cents/gallon in 2002 vs. 88 cents in 2001) reduced fuel expenses by $198 million. A 3% reduction in railroad employment levels also contributed to cost savings.
• Debt Reduction: Total debt decreased by $376 million to $7.7 billion, and the debt-to-capital employed ratio improved to 38.8% from 42.2%.

Guidance, Outlook, and Risks

2003 Outlook: Management projects continued revenue growth across all commodity groups, with the largest percentage increases expected in intermodal, agricultural, and industrial sectors. Capital expenditures for 2003 are estimated between $1.8 billion and $2.0 billion. The company plans to reduce approximately 1,000 administrative positions in 2003, with an estimated pre-tax severance cost of $45 million.

Risks and Contingencies:

• Environmental Liability: The company has identified 433 sites with potential remediation liability, including 27 on the Superfund National Priorities List. Accrued liability for future environmental costs was $189 million as of year-end 2002.
• Legal Proceedings: Ongoing litigation includes a class action regarding a 2000 train derailment in Louisiana and criminal charges in California regarding hazardous material releases. The company also faces shareholder derivative suits regarding labor relations.
• Labor Relations: Approximately 87% of railroad employees are unionized. While several five-year agreements were reached in 2002, negotiations with remaining unions are ongoing. In the trucking segment, the Teamsters union campaign has largely stalled, with union representation dropping to approximately 10% of OTC employees.
• Fuel Volatility: Fuel costs remain a significant expense. The company uses hedging strategies to mitigate price risk, with 7% of 2003 rail fuel consumption hedged as of year-end.

Investor Verification Checklist

• Verify the impact of the $214 million pre-tax gain from asset dispositions on the reported net income to assess core operating performance.
• Review the status of the $189 million accrued environmental liability and the potential for additional costs at the 433 identified sites.
• Monitor the outcome of pending labor negotiations with remaining railroad unions and the potential for strikes or work stoppages.
• Assess the financial impact of the planned 2003 workforce reduction and the associated $45 million severance cost.
• Confirm the company's ability to maintain its investment-grade credit rating, which is critical for its $1.875 billion credit facility and sale of receivables program.