UNP

Union Pacific Corp. 10-Q Summary: Period Ended September 30, 2001

Business Context and Reporting Period

This Quarterly Report (Form 10-Q) covers the three and nine months ended September 30, 2001, for Union Pacific Corporation (UPC). UPC operates primarily through two reportable segments: Rail (Union Pacific Railroad Company) and Trucking (Overnite Transportation Company), alongside corporate and other operations. The company is headquartered in Omaha, Nebraska, and operates across a 23-state system.

Key Financial Metrics

Note: Operating Ratio for the nine months ended Sept 30, 2001, was 81.2% (worsened from 80.6% in 2000). Debt-to-total capital employed was 43.9% as of Sept 30, 2001.

Material Changes vs. Prior Period

• Revenue: Consolidated operating revenues were flat for the nine months ($41 million increase) but declined 1% in the third quarter. Rail revenue was flat year-to-date, driven by strong Energy demand offsetting declines in Automotive, Chemicals, and Intermodal segments. Trucking revenue increased 3% year-to-date due to improved yield despite lower volume.
• Expenses: Operating expenses increased 1% year-to-date ($98 million) primarily due to higher fuel prices in the first half of the year, increased rent, and wage/benefit inflation. However, third-quarter expenses decreased 1% due to lower fuel prices and materials costs.
• Profitability: Operating income decreased 4% year-to-date ($57 million) due to higher costs outpacing revenue growth. Net income increased slightly year-to-date ($6 million) largely due to higher non-operating income from real estate sales and lower interest expense.
• Cash Flow: Cash provided by operating activities decreased $135 million year-to-date, attributed to the timing of large cash payments, including workforce reduction costs.

Guidance, Outlook, and Risks

Management Commentary: Management noted that the economic slowdown impacted economically sensitive commodities (Automotive, Chemicals, Intermodal). However, the Energy segment achieved record revenue and carloads. The company is executing a workforce reduction plan approved in late 2000 to eliminate approximately 2,000 positions in 2001.

Acquisitions: On October 15, 2001, UPC announced an agreement to acquire Motor Cargo Industries, Inc., a western regional less-than-truckload carrier, for approximately $80 million.

Risks and Contingencies:

• Legal Proceedings: Pending shareholder derivative litigation regarding Overnite's anti-union campaign; NLRB bargaining order appeals; and a lawsuit by Western Resources alleging breach of coal delivery contracts.
• Environmental: Accrued liability of $177 million for estimated future environmental costs. A specific complaint by the State of Illinois regarding a styrene release seeks penalties exceeding $100,000.
• Market Risks: Exposure to fuel price volatility (mitigated by hedging 48% of remaining 2001 rail fuel consumption) and interest rate fluctuations (managed via swaps).
• Forward-Looking Statements: Risks include adverse economic conditions, labor stoppages, regulatory changes, and potential repercussions from terrorist activities.

Investor Verification Checklist

• Workforce Reduction Costs: Verify the remaining liability and cash outflows associated with the 2,000-position elimination plan.
• Fuel Hedging Effectiveness: Confirm the impact of fuel price volatility on future margins given the 48% hedge coverage for the remainder of 2001.
• Motor Cargo Acquisition: Monitor the closing of the $80 million Motor Cargo acquisition and integration costs.
• Legal Exposure: Track the outcome of the Western Resources lawsuit and NLRB bargaining order appeals, which could result in significant costs or operational changes.
• Debt Maturities: Note that $1.0 billion of revolving credit facilities expires in March 2002.