Union Pacific 2001 Annual Report Download - page 67

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41
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 of accounting and was fully consolidated into UPC results beginning October 1996.
Merger Consolidation Activities – In connection with the acquisition and integration of UPRR and Southern Pacific’s rail
operations, UPC completed the elimination of 5,200 duplicate positions in 2001 in accordance with the original merger
plan. UPC also completed the relocation of 4,700 positions, merging or disposing of redundant facilities and disposing
of certain rail lines. In addition, the Corporation canceled and settled 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. The fair value
allocation of SP's purchase price to fixed assets was reduced by $50 million as costs for certain merger activities were less
than anticipated in the original plan. Where merger related costs were greater than what was anticipated in the plan, those
costs were charged to expense in the period incurred. Where the merger implementation caused the Corporation to incur
more costs than were envisioned in the original merger plan, such costs were charged to expense in the period incurred.
Merger liability activity was $89 million, $10 million and $45 million in 2001, 2000 and 1999, respectively.
The components of the merger liability as of December 31, 2001 were as follows:
December 31,
Original Cumulative 2001
Millions of Dollars Liability Activity Liability
Labor protection related to legislated and contractual
obligations.......................................................................................
$361 $361 $-
Severance costs..................................................................................... 343 343 -
Contract cancellation fees and facility and line closure costs............ 145 145 -
Relocation costs ................................................................................... 109 109 -
Total ..................................................................................................... $958 $958 $-
3. Divestitures
Adjustment to 1994 Loss on Disposal of Discontinued Operations – Net income for 1999 included a one-time $43
million gain ($27 million after-tax) from the adjustment of a liability established in connection with the discontinued
operations of a former subsidiary.
4. Financial Instruments
Adoption of Standard - Effective January 1, 2001, the Corporation adopted Financial Accounting Standards Board
Statement (FASB) No. 133, "Accounting for Derivative Instruments and Hedging Activities (FAS 133) and FASB No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities" (FAS 138). FAS 133 and FAS 138 require
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 may be required. Also, derivative
instruments that do not qualify for hedge accounting treatment per FAS 133 and FAS 138 may require income statement
recognition. The adoption of FAS 133 and FAS 138 resulted in the recognition of a $2 million asset on January 1, 2001.
Strategy and Risk – The Corporation and its subsidiaries use derivative financial instruments, which are subject to market
risk, in limited instances for other than trading purposes to manage risk related to changes in fuel prices and to achieve
the Corporation's interest rate objectives. The Corporation uses swaps, futures and/or forward contracts to mitigate
adverse price and rate movements and exposure to variable cash flows. The use of these instruments also limits future