Union Pacific 2002 Annual Report Download - page 58

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In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure” (FAS 148). FAS 148 provides alternative methods of transition for voluntary changes to the fair value based
method of accounting for stock-based employee compensation, and amends the disclosure requirements including a
requirement for interim disclosures. The Corporation currently discloses the effects of stock-based employee compensation
and does not intend to voluntarily change to the alternative accounting principle.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46
requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss
from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also
requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established. As described in note 10 to the Consolidated Financial
Statements, Item 8, the Railroad has a synthetic operating lease arrangement to finance a new headquarters building, which
falls within the guidance of FIN 46. In accordance with FIN 46, the Railroad will either consolidate, restructure or refinance
the synthetic lease prior to July 1, 2003. The Corporation does not expect FIN 46 to have any impact on the treatment of the
Sale of Receivables program as described in note 2 to the Consolidated Financial Statements, Item 8.
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 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 10 to the Consolidated Financial Statements, Item 8.
Pensions – During the second quarter of 2002, the Corporation decreased its assumed rate of return on pension plan assets
from 10% to 9%. This assumption change resulted in an increase to 2002 pension expense of $22 million. In addition, due
to declines on plan assets, a minimum pension liability adjustment was recorded during the fourth quarter of 2002. This
adjustment resulted in a reduction of common shareholders’ equity. The reduction in equity totaled $225 million, after tax
(approximately 2% of total equity).
OTC voluntarily contributed $125 million to its pension plan during 2002. The Railroad voluntarily contributed $100 million
to its pension plan during the fourth quarter of 2002. The Corporation currently does not have any minimum funding
requirements, as set forth in employee benefit and tax laws; however, UPC plans to voluntarily contribute approximately $75 million
during 2003. Required contributions subsequent to 2003 are dependent on asset returns, current discount rates and a number of
other factors; however, the Corporation expects to continue discretionary funding to help manage any potential required funding
in the future. Future contributions are expected to be funded primarily by cash generated from operating activities.
Dividend Receivable – The Railroad owns a 26% interest in Grupo Ferroviario Mexicano, S.A. de C.V. (GFM). GFM operates
a major railway system in Mexico. During the third quarter of 2002, the Railroad recorded a dividend from GFM of
approximately $118 million. As of December 31, 2002, the dividend is reflected as a receivable in the Corporation’s
Consolidated Statements of Financial Position. The dividend is accounted for as a reduction to investments in and advances
to affiliated companies in the Consolidated Statements of Financial Position as of December 31, 2002 and creates no effect on
the Corporation’s Consolidated Statements of Income. During the fourth quarter 2002, the Railroad received approximately
$20 million of the dividend receivable, and anticipates it will receive the remainder of the dividend during 2003.
West Coast Port Disruption – During September of 2002, the labor dispute between the International Longshoreman and
Warehouse Union (ILWU) and the Pacific Maritime Association escalated and resulted in work slow-downs and a lockout
of the ILWU dockworkers for four days at the end of the third quarter and continued for nine days into the fourth quarter
of 2002. The estimated impact on fourth quarter earnings is approximately 10 cents per share, resulting mainly from
international intermodal shipments diverted to trucks and suspended shipments due to vessel scheduling disruptions.
Railroad Retirement Reform – On December 21, 2001, The Railroad Retirement and Survivors’ Improvement Act of 2001
(the Act) was signed into law. The Act was a result of historic cooperation between rail management and labor, and provides
improved railroad retirement benefits for employees and reduced payroll taxes for employers. The estimated savings to the
Railroad during 2002 from passage of the Act was $36 million, pre-tax, in reduced employer payroll taxes. Incremental
savings are expected in 2003 as the employer tax rate is further reduced by 1.4 percentage points from 15.6% to 14.2%.