UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20152017
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)
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UTAH |
| 13-2626465 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
1400 DOUGLAS STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 544-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each Class |
| Name of each exchange on which registered |
Common Stock (Par Value $2.50 per share) |
| New York Stock Exchange, Inc. |
§ | Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. |
☑ Yes ☐ No
§ | Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. |
☐ Yes ☑ No
§ | 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 ☐ No
§ | Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). |
☑ Yes ☐ No
§ | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |
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§ | Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ |
§ | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). |
☐ Yes ☑ No
§ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
As of June 30, 2015, the aggregate market value of the registrant’s Common Stock held by non-affiliates (using the New York Stock Exchange closing price) was $82.7 billion.
§ | As of June 30, 2017, the aggregate market value of the registrant’s Common Stock held by non-affiliates (using the New York Stock Exchange closing price) was $87.3 billion. |
The number of shares outstanding of the registrant’s Common Stock as of January 29, 2016February 2, 2018 was 846,414,350.779,305,276.
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Documents Incorporated by Reference – Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 12, 2016,10, 2018, are incorporated by reference into Part III of this report. The registrant’s Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A.
TABLE OF CONTENTS
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Item 1. | 5 | |
Item 1A. | 10 | |
Item 1B. |
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Item 2. | 14 | |
Item 3. | 16 | |
Item 4. |
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| Executive Officers of the Registrant and Principal Executive Officers of Subsidiaries |
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Item 5. |
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Item 6. |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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| Management’s Annual Report on Internal Control Over Financial Reporting |
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Item 9B. |
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Item 10. |
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Item 11. |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions and Director Independence |
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Item 14. |
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Item 15. |
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| Certifications |
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February 5, 20169, 2018
This past year was a difficult one in many respects, but our team did outstanding work in the face of dramatic declines in volumes and shifts in our business mix. Although our earnings per share of $5.49 fell short of last year’s record of $5.75 per share, we were able to improve our operating ratio to a record low 63.1 percent, 0.4 points better than 2014. Our return on invested capital* of 14.3 percent also fell short of last year’s all-time high of 16.2 percent. Despite these shortfalls,
Looking back at 2017, I can report Union Pacific was able to increase the cash returned tomade progress building long-term value for our four key stakeholders – shareholders, in 2015. We increased our quarterly declared dividend per share by 10 percent, with total dividends declared per share for 2015 growing 15 percent compared to the full year 2014. We also repurchased $3.5 billion in Union Pacific shares, a 7 percent increase compared to 2014.
communities, customers, and employees. After two consecutive years of overall volume declines, Union Pacific experienced a 2 percent increase in volume. This increase in volume, coupled with positive pricing and continued productivity improvement, generated reported earnings of $13.36 per share. After adjusting for the impact of corporate tax reform that was passed prior to year-end, our adjusted earnings were a record $5.79 per share*. This result is a 14 percent improvement compared to last year’s $5.07 per share. Our adjusted operating ratio was a record 63.0 percent*, or 0.5 points better than last year’s 63.5 percent.
Carloadings were up in our Industrial Products and Coal business units 12 percent and 6 percent, decline in volume last year. Carloadings declined in five of our six commodity groups. Low natural gas prices and high coal inventory levels led torespectively, driven primarily by a significant reduction in our Coal volumes. Declines in shale drilling activity due to lower energy prices drove reductionsrobust increase in frac sand shipments. SteelAutomotive shipments also declined due towere down 3 percent resulting from lower drilling activitydomestic sales and reduced vehicle production, while Chemical and Agricultural Product shipments were both down 2 percent as well as from the strength of the U.S. dollar. Lower grain commodity prices, abundant worldwide inventories, and a strong U.S. Dollar negatively impacted grain shipments. International intermodal shipments declined as a result of the West Coast port work disruptions and higher than normal retail inventory levels. Crude oil shipments declined as a result of lowerwe experienced declines in our crude oil pricesvolumes and unfavorable spreads, while fertilizer shipments also declined year-over-year duegrain carloadings. Intermodal volumes were flat compared to 2016.
We faced several operational challenges during 2017, from significant flooding in the western portion of our network, to the uncertaintyunprecedented rain and flooding that accompanied Hurricane Harvey. Despite these challenges, the men and women of grain commodity prices. Increased auto productionUnion Pacific worked tirelessly and vehicle sales drove strong growth in Automotive, our only business group which experienced volume growth in 2015.
As volumes beganheroically to decrease from 2014 levels, we were effective in aligning our resources to meet demand, while safely and efficiently servingserve our customers. Our operating metrics showed a step function improvement throughout last year. Average system velocity, as reportedI am pleased with our results and look forward to the AAR, increased 6 percent and average terminal dwell decreased 3 percent when comparedcontinuing to 2014. By year end,build long-term enterprise value by building our velocityValue Tracks.
Starting with World Class Safety, 2017 was at an all-time best for that level of demand, and we continue to drive toward further network improvement.
2015 was a stronganother outstanding year for employee safety performance. Our reportable personal injury rate of 0.87 declined 11 percent0.79 was off slightly from last year, and was anyear’s all-time record low. As we move forward, we continue to utilize our safety strategy to yield record results on our way toward achieving ourlow of 0.75. Our ultimate goal of an incident free environment. We have an unrelenting focus on risk reduction through internal programs such as Courage to Care and Total Safety Culture. This is the cornerstonezero incidents, getting every one of our safety strategy so that every employee returnsemployees home safely at the end of each day. We will maintain a relentless focus on data-driven processes and root-cause evaluations, as well as on internal safety programs such as Total Safety Culture and Courage to Care.
We have built centers of excellence around game-changing technology and other Innovation initiatives. Our Engaged Team is inspiring passion and dedication while leveraging diverse talents to extract the best ideas that will drive positive results across our Company. The continued implementation and execution of our “Grow to 55 and Zero” initiative drives significant Resource Productivity, from successfully aligning our resources to meet the increase in demand, to being more efficient in virtually everything that we do across the entire organization.
Given the challenges I mentioned above, our service product in 2017 did not meet all our customers’ expectations, but we kept working to create an Excellent Customer Experience, anticipating customer needs, responding quickly, keeping commitments, and offering solutions. Our robust capital program helps ensure we haveprovide the necessary resources and network capacity required to efficientlybuild these relationships and prepare for future growth. It enables us to handle our current volumesbusiness safely and future growth,efficiently, while improving our network fluidity and generating returns for our shareholders.fluidity. We invested $4.3about $3.1 billion in 2015 strengthening the franchise. This included2017, including about $1.9 billion in replacement capital to harden our infrastructure, and to improve the safety and resiliency of our network.network, as well as nearly $340 million toward completing our Positive Train Control project.
A Maximized Franchise is much more than our unique physical footprint. It encompasses our employees’ skills, our assets, and a strategy that emphasizes the importance of our customers’ experiences. It also embraces a thoughtful approach to market penetration, the competitive landscape to determine future service offerings and to identify trade flow opportunities.
This successful execution of our value track strategy to the benefit of all our stakeholders translates into value for our shareholders. Total shareholder return increased 32 percent in 2017, compared with 22 percent for the S&P 500. Our net return on invested capital* of 13.7 percent increased a full percentage point over last year’s 12.7 percent. We increased our quarterly declared dividend per share by 10 percent, with dividends paid in 2017 totaling $2.0 billion. In addition, we spent $1.1repurchased 36 million Union Pacific shares. In total, combining both dividends and share repurchases, Union Pacific returned $6 billion on locomotives and other equipment, and nearly $700 million on new capacity and commercial facilities.to our shareholders in 2017.
Looking to 2018, we are optimistic the economy will favor many of the segments which drive our core business, leading us to another year of positive volume growth. We also spent almost $400 million toward completing the federally mandated Positive Train Control project. The deadline for completing PTC was extended to December 31, 2018, and we will continue to work diligently to safely complete this mandate.
Overall economic conditions, uncertainty in the energy markets, commodity prices, and the strength of the U.S. dollar will continue to have a major impactexecute on our business this year. We are well-positionedValue Tracks to benefit our employees, partner with the communities in which we serve, customers in existing markets as they rebound. The strength and diversity of the Union Pacific franchise also will provide tremendous opportunities for new business development as both domestic and global markets evolve.
When combined with our unrelenting focus on safety, productivity, and service, these opportunities will translate intocustomers an excellent experience, and generate strong returns for our customers and strong value for our shareholders in the years ahead.shareholders.
Chairman, President and Chief Executive Officer
*See Item 7 of this report for reconciliations to U.S. GAAP.
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DIRECTORS AND SENIOR MANAGEMENT
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BOARD OF DIRECTORS |
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Andrew H. Card, Jr. |
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| Thomas F. McLarty III |
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| President |
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| McLarty Associates |
Board Committees: Audit, |
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| Board Committees: Finance (Chair), |
Compensation and Benefits |
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| Corporate Governance and |
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| Nominating |
Erroll B. Davis, Jr. |
| Governance and Nominating, Finance |
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Former Chairman, |
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President & CEO |
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Alliant Energy Corporation |
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Board Committees: Compensation |
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and Benefits (Chair), Corporate |
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Governance and Nominating | Governance and Nominating | Compensation and Benefits | ||
David B. Dillon | Michael R. McCarthy | Steven R. Rogel | ||
Former Chairman | Chairman | Former Chairman | ||
The Kroger Company | McCarthy Group, LLC | Weyerhaeuser Company | ||
Board Committees: Audit (Chair), | Lead Independent Director |
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| and Benefits, Corporate Governance |
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| and Nominating |
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| Jose H. Villarreal |
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| Advisor |
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| Akin, Gump, Strauss, Hauer & |
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| Former Managing Partner |
| Feld, LLP |
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SENIOR MANAGEMENT*
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Lance M. Fritz |
| Robert M. Knight, Jr. |
| Todd M. Rynaski |
Chairman, President and |
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| Vice President and Controller |
Chief Executive Officer |
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| Cameron A. Scott |
Bryan L. Clark |
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| Lynden L. Tennison |
Executive Vice President, Chief Legal |
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| Senior Vice President and |
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| Chief Information Officer |
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| Elizabeth F. Whited |
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Continuous Improvement |
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Vice President and Treasurer |
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| Michael A. Rock |
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*Senior management are elected officers of both Union Pacific Corporation and Union Pacific Railroad Company, except Mr. Scott, Ms. Kelley and Ms. Whited are elected officers for Union Pacific Railroad Company. |
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GENERAL
Union Pacific Railroad Company is the principal operating company of Union Pacific Corporation. One of America's most recognized companies, Union Pacific Railroad Company links 23 states in the western two-thirds of the country by rail, providing a critical link in the global supply chain. The Railroad’s diversified business mix includes Agricultural Products, Automotive, Chemicals, Coal, Industrial Products and Intermodal. Union Pacific serves many of the fastest-growing U.S. population centers, operates from all major West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems and is the only railroad serving all six major Mexico gateways. Union Pacific provides value to its roughly 10,000 customers by delivering products in a safe, reliable, fuel-efficient and environmentally responsible manner.
Union Pacific Corporation was incorporated in Utah in 1969 and maintains its principal executive offices at 1400 Douglas Street, Omaha, NE 68179. The telephone number at that address is (402) 544-5000. The common stock of Union Pacific Corporation is listed on the New York Stock Exchange (NYSE) under the symbol “UNP”.
For purposes of this report, unless the context otherwise requires, all references herein to “UPC”, “Corporation”, “Company”, “we”, “us”, and “our” shall mean Union Pacific Corporation and its subsidiaries, including Union Pacific Railroad Company, which we separately refer to as “UPRR” or the “Railroad”.
Available Information – Our Internet website is www.up.com. We make available free of charge on our website (under the “Investors” caption link) our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; eXtensible Business Reporting Language (XBRL) documents; our current reports on Form 8-K; our proxy statements; Forms 3, 4, and 5, filed on behalf of our directors and certain executive officers; and amendments to such reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act). We provide these reports and statements as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We also make available on our website previously filed SEC reports and exhibits via a link to EDGAR on the SEC’s Internet site at www.sec.gov. Additionally, our corporate governance materials, including By-Laws, Board Committee charters, governance guidelines and policies, and codes of conduct and ethics for directors, officers, and employees are available on our website. From time to time, the corporate governance materials on our website may be updated as necessary to comply with rules issued by the SEC and the NYSE or as desirable to promote the effective and efficient governance of our Company. Any security holder wishing to receive, without charge, a copy of any of our SEC filings or corporate governance materials should send a written request to: Secretary, Union Pacific Corporation, 1400 Douglas Street, Omaha, NE 68179.
We have included the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) certifications regarding our public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31(a) and (b) to this report.
References to our website address in this report, including references in Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7, are provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.
OPERATIONS
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide revenue by commodity group, we analyze the net financial results of the Railroad as one segment due to the integrated nature of our rail network. Additional information regarding our business and operations, including revenue and financial information and data and other information regarding environmental matters, is presented in Risk Factors, Item 1A; Legal Proceedings, Item 3; Selected Financial Data, Item 6; Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7; and the Financial Statements and Supplementary Data, Item 8 (which include information regarding revenues, statements of income, and total assets).
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Operations –UPRR is a Class I railroad operating in the U.S. We have |
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manifest, and premium business. Bulk traffic primarily consists of coal, grain, soda ash, ethanol, rock and crude oil shipped in unit trains – trains transporting a single commodity from one sourceorigin to one destination. Manifest traffic includes individual carload or less than train-load business involving commodities such as lumber, steel, paper, food and chemicals. The transportation of finished vehicles, auto parts, intermodal containers and truck trailers are included as part of our premium business. In 2015,2017, we generated freight revenues totaling $20.4$19.8 billion from the following six commodity groups:
Agricultural Products – Transportation of grains, commodities produced from these grains, and food and beverage products generated 17%19% of the Railroad’s 20152017 freight revenue. We access most major grain markets, linking the Midwest and Western U.S. producing areas to export terminals in the Pacific Northwest and Gulf Coast ports, as well as Mexico. We also serve significant domestic markets, including grain processors, animal feeders and ethanol producers in the Midwest, West, South and Rocky Mountain states. Unit trains, which transport a single commodity between producers and export terminals or domestic markets, represent approximately 40%41% of our agricultural shipments.
Automotive – We are the largest automotive carrier west of the Mississippi River and operate or access over 4038 vehicle distribution centers. The Railroad’s extensive franchise serves five vehicle assembly plants and connects to West Coast ports, all six major Mexico gateways, and the GulfPort of MexicoHouston to accommodate both import and export shipments. In addition to transporting finished vehicles, UPRR provides expedited handling of automotive parts in both boxcars and intermodal containers destined for Mexico, the U.S. and Canada. The automotive group generated 11%10% of Union Pacific’s freight revenue in 2015.2017.
Chemicals – Transporting chemicals generated 17%18% of our freight revenue in 2015.2017. The Railroad’s unique franchise serves the chemical producing areas along the Gulf Coast, where roughly 60%55% of the Company’s chemical business originates, terminatestravels through, or travels.terminates. Our chemical franchise also accesses chemical producers in the Rocky Mountains and on the West Coast. The Company’s chemical shipments include six categories: industrial chemicals, plastics, fertilizer, petroleum and liquid petroleum gases, crude oil and soda ash. Currently, these products move primarily to and from the Gulf Coast region. Fertilizer movements originate in the Gulf Coast region, the western U.S. and Canada (through interline access) for delivery to major agricultural users in the Midwest, western U.S., as well as abroad. Soda ash originates in southwestern Wyoming and California, destined for chemical and glass producing markets in North America and abroad.
Coal – Shipments of coal, and petroleum coke, and biomass accounted for 16%13% of our freight revenue in 2015.2017. The Railroad’s network supports the transportation of coal, and petroleum coke, and biomass to independent and regulated power companies and industrial facilities throughout the U.S. Through interchange gateways and ports, UPRR’s reach extends to eastern U.S. utilities, Mexico, Europe and Asia. Water terminals allow the Railroad to move western U.S. coal east via the Mississippi and Ohio Rivers, as well as the Great Lakes. Export coal moves through West Coast ports to AsiaMexico and through the Mississippi River and Houston to Europe.other international destinations. Coal traffic originating in the Southern Powder River Basin (SPRB)(PRB) area of Wyoming is the largest segment of the Railroad’s coal business.
Industrial Products – Our extensive network facilitates the movement of numerous commodities between thousands of origin and destination points throughout North America. The Industrial Products group consists of several categories, including construction products, minerals, consumer goods, metals, lumber, paper, and other miscellaneous products. In 2015,2017, this group generated 19%21% of our total freight revenue. Commercial, residential and governmental infrastructure investments drive shipments of steel,
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aggregates (cement components), cement and wood products. Oil and gas drilling generates demand for raw steel, finished pipe, frac sand, stone and drilling fluid commodities. Industrial and light manufacturing plants
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receive steel, nonferrous materials, minerals and other raw materials. Paper and packaging commodities, as well as appliances, move to major metropolitan areas for consumers. Lumber shipments originate primarily in the Pacific Northwest and western Canada and move throughout the U.S. for use in new home construction and repair and remodeling.
Intermodal – Our Intermodal business includes two segments: international and domestic. International business consists of import and export container traffic that mainly passes through West Coast ports served by UPRR’s extensive terminal network. Domestic business includes container and trailer traffic picked up and delivered within North America for intermodal marketing companies (primarily shipper agents and logistics companies), as well as truckload carriers. Less-than-truckload and package carriers with time-sensitive business requirements are also an important part of domestic shipments. Together, our international and domestic Intermodal business generated 20%19% of our 20152017 freight revenue.
Seasonality – Some of the commodities we carry have peak shipping seasons, reflecting either or both the nature of the commodity and the demand cycle for the commodity (such as certain agricultural and food products that have specific growing and harvesting seasons). The peak shipping seasons for these commodities can vary considerably each year depending upon various factors, including the strength of domestic and international economies and currencies and the strength of harvests and market prices for agricultural products. In response to an annual request from the Surface Transportation Board (STB) to all of the Class I railroads operating in the U.S., we submit a publicly available letter during the third quarter detailing our plans for handling traffic during the third and fourth quarters each year and provide other information requested by the STB.
Working Capital – At December 31, 2015 and 2014,2017, we had a modest working capital surplus, which provides enhanced liquidity. In addition, we believe wesurplus. We maintain adequate resources, and when necessary, have adequate access to capital markets to meet any foreseeable cash requirements, and we havein addition to sufficient financial capacity to satisfy our current liabilities. At December 31, 2016, we had a working capital deficit, due primarily to a decrease in other current assets related to a tax receivable for the late extension of bonus depreciation at December 31, 2015, along with an increase at December 31, 2016, in accounts payable and upcoming debt maturities.
Competition – We are subject to competition from other railroads, motor carriers, ship and barge operators, and pipelines. Our main railroad competitor is Burlington Northern Santa Fe LLC. Its primary subsidiary, BNSF Railway Company (BNSF), operates parallel routes in many of our main traffic corridors. In addition, we operate in corridors served by other railroads and motor carriers. Motor carrier competition exists for five of our six commodity groups (excluding most coal shipments). Because of the proximity of our routes to major inland and Gulf Coast waterways, barges can be particularly competitive, especially for grain and bulk commodities in certain areas where we operate. In addition to price competition, we face competition with respect to transit times, quality and reliability of service from motor carriers and other railroads. Motor carriers in particular can have an advantage over railroads with respect to transit times and timeliness of service. However, railroads are much more fuel-efficient than trucks, which reduces the impact of transporting goods on the environment and public infrastructure, and we have been making efforts to convert certain truck traffic to rail. Additionally, we must build or acquire and maintain our rail system; trucks and barges are able to use public rights-of-way maintained by public entities. Any of the following could also affect the competitiveness of our transportation services for some or all of our commodities: (i) improvements or expenditures materially increasing the quality or reducing the costs of these alternative modes of transportation, (ii) legislation that eliminates or significantly reducesincreases the size or weight limitations applied to motor carriers, or (iii) legislation or regulatory changes that impose operating restrictions on railroads or that adversely affect the profitability of some or all railroad traffic. Finally, many movements face product or geographic competition where our customers can use different products (e.g. natural gas instead of coal, sorghum instead of corn) or commodities from different locations (e.g. grain from states or countries that we do not serve, crude oil from different regions). Sourcing different commodities or different locations allows shippers to substitute different carriers and such competition may reduce our volume or constrain prices. For more information regarding risks we face from competition, see the Risk Factors in Item 1A of this report.
Key Suppliers – We depend on two key domestic suppliers of high horsepower locomotives. Both suppliers provide parts for locomotives and one also provides maintenance under a service agreement. Due to the capital intensive nature of the locomotive manufacturing business and sophistication of this equipment, potential new suppliers face high barriers of entry into this industry. Therefore, if one of these domestic suppliers discontinues manufacturing locomotives, supplying parts or providing maintenance for any reason, including insolvency or bankruptcy, we could experience a significant cost increase and risk reduced availability of the locomotives that are necessary to our operations. Additionally, for a high percentage of our rail purchases, we utilize two steel producers (one domestic and one international) that meet our specifications. Rail is critical for
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maintenance, replacement, improvement, and expansion of our network and facilities. Rail manufacturing also has high barriers of entry, and, if one of those suppliers
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discontinues operations for any reason, including insolvency or bankruptcy, we could experience cost increases and difficulty obtaining rail.
Employees– Approximately 85% of our 47,45741,992 full-time-equivalent employees are represented by 14 major rail unions. On January 1, 2015, current labor agreements became subject to modification and we began the current round of negotiations with the unions. Existing agreements remain in effect until new agreements are reachedratified or the Railway Labor Act’s (RLA) procedures (which include mediation, potential arbitration, cooling-off periods, and the possibility of Presidential Emergency Boards and Congressional intervention) are exhausted. Through industry and local negotiations, UPRR reached tentative new agreements with 12 of our 14 major rail unions. Nine unions (representing nearly 70% of our agreement work force) have ratified those agreements by significant margins. The tentative agreement failed ratification with two unions in early February 2018 (representing about 10% of our agreement work force) returning any further discussions with them to the jurisdiction of the National Mediation Board. Another small union (less than 1%) is still out for ratification. UPRR and the industry currently continue in active mediation with the remaining coalition of two unions (representing about 20% of our agreement work force). Under the Railway Labor Act, the National Mediation Board controls timing and location of mediation conferences and when to terminate mediation, moving the parties to the next stages of the RLA process. Contract negotiations historically continue for an extended period of time and we rarely experience work stoppages while negotiations are pending.
Railroad Security – Our security efforts consist of a wide variety of measures including employee training, engagement with our customers, training of emergency responders, and partnerships with numerous federal, state, and local government agencies. While federal law requires us to protect the confidentiality of our security plans designed to safeguard against terrorism and other security incidents, the following provides a general overview of our security initiatives.
UPRR Security Measures – We maintain a comprehensive security plan designed to both deter and respond to any potential or actual threats as they arise. The plan includes four levels of alert status, each with its own set of countermeasures. We employ our own police force, consisting of more than 250 commissioned and highly-trained officers. Our employees also undergo recurrent security and preparedness training, as well as federally-mandated hazardous materials and security training. We regularly review the sufficiency of our employee training programs. We maintain the capability to move critical operations to back-up facilities in different locations.
We operate an emergency response management center 24 hours a day. The center receives reports of emergencies, dangerous or potentially dangerous conditions, and other safety and security issues from our employees, the public, law enforcement and other government officials. In cooperation with government officials, we monitor both threats and public events, and, as necessary, we may alter rail traffic flow at times of concern to minimize risk to communities and our operations. We comply with the hazardous materials routing rules and other requirements imposed by federal law. We also design our operating plan to expedite the movement of hazardous material shipments to minimize the time rail cars remain idle at yards and terminals located in or near major population centers. Additionally, in compliance with Transportation Security Agency regulations, we deployed information systems and instructed employees in tracking and documenting the handoff of Rail Security Sensitive Materials with customers and interchange partners.
We also have established a number of our own innovative safety and security-oriented initiatives ranging from various investments in technology to The Officer on the Train program, which provides local law enforcement officers with the opportunity to ride with train crews to enhance their understanding of railroad operations and risks. Our staff of information security professionals continually assesses cyber security risks and implements mitigation programs that evolve with the changing technology threat environment. To date, we have not experienced any material disruption of our operations due to a cyber threat or attack directed at us.
Cooperation with Federal, State, and Local Government Agencies – We work closely on physical and cyber security initiatives with government agencies, including the DOTU.S. Department of Transportation (DOT) and the Department of Homeland Security (DHS) as well as local police departments, fire departments, and other first responders. In conjunction with the Association of American Railroads (AAR), we sponsor Ask Rail, a mobile application which provides first responders with secure links to electronic information, including commodity and emergency response information required by emergency personnel to respond to accidents and other situations. We also participate in the National Joint Terrorism Task Force, a multi-agency effort established by the U.S. Department of Justice and the Federal Bureau of Investigation to combat and prevent terrorism.
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We work with the Coast Guard, U.S. Customs and Border Protection (CBP), and the Military Transport Management Command, which monitor shipments entering the UPRR rail network at U.S. border crossings and ports. We were the first railroad in the U.S. to be named a partner in CBP’s Customs-Trade Partnership Against Terrorism, a partnership designed to develop, enhance, and maintain effective security processes throughout the global supply chain.
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Cooperation with Customers and Trade Associations – Through TransCAER (Transportation Community Awareness and Emergency Response) we work with the AAR, the American Chemistry Council, the American Petroleum Institute, and other chemical trade groups to provide communities with preparedness tools, including the training of emergency responders. In cooperation with the Federal Railroad Administration (FRA) and other interested groups, we are also working to develop additional improvements to tank car design that will further limit the risk of releases of hazardous materials.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Governmental Regulation – Our operations are subject to a variety of federal, state, and local regulations, generally applicable to all businesses. (See also the discussion of certain regulatory proceedings in Legal Proceedings, Item 3.)
The operations of the Railroad are also subject to the regulatory jurisdiction of the STB.Surface Transportation Board (STB). The STB has jurisdiction over rates charged on certain regulated rail traffic; common carrier service of regulated traffic; freight car compensation; transfer, extension, or abandonment of rail lines; and acquisition of control of rail common carriers. In 2015, theThe STB continuedcontinues its efforts to explore whether to expandexpanding rail regulation.regulation and is reviewing proposed rulemaking in various areas, including reciprocal switching, commodity exemptions, and expanding and easing procedures for smaller rate complaints. The STB requested partiesalso continues to discuss the STB’sdevelop a methodology for determining railroad revenue adequacy and the possible use of a revenue adequacy constraint in regulating railroad rates. The STB conducted a hearing on expanding and easing procedures for grain rate complaints.
The Surface Transportation Board Reauthorization Act of 2015 became law on December 18, 2015. The legislation increased the number of STB board members from three to five, requires the STB to postposts quarterly reports on rate reasonableness cases and maintainmaintains a database on service complaints, and grantshas the STB authority to initiate investigations, among other things.
The operations of the Railroad also are subject to the regulations of the FRA and other federal and state agencies. On January 12,In 2010, the FRA issued initial rules governing installation of Positive Train Control (PTC) by the endthat now has a deadline of 2015.December 31, 2018. The final regulation was issued on August 8, 2014. Although still under further development,PTC implementation deadline may be extended to December 31, 2020, provided certain other criteria are satisfied. PTC is a collision avoidance technology intended to override engineer controlled locomotives and stop train-to-train and overspeed accidents, misaligned switch derailments, and unauthorized entry to work zones. Final implementation of PTC will require us to adapt and integrate our system with other railroads whose implementation plan may be different than ours. Through 2015,2017, we have invested approximately $2.0$2.6 billion in the ongoing development of PTC.
FollowingDOT, the issuance of the initial rules, the FRA acknowledged that projected costs will exceed projected benefits by a ratio of at least 22 to one,Occupational Safety and we estimate that our final costs will be higher than those assumed by the FRA. On October 29, 2015, Congress extended the December 31, 2015 PTC implementation deadline until December 31, 2018. The PTC implementation deadline may be extended to December 31, 2020, provided certain other criteria are satisfied. We are planning to submit our required PTC safety plan to the FRA in the first half of 2016.
On May 1, 2015,Health Administration, the Pipeline and Hazardous Materials Safety Administration, (PHMSA) issued final rules governing the transportation of flammable liquids. The final rule included provisions for improved tank car standards, braking system requirements, community notification, and operating restrictions for certain trains carrying flammable liquids. Subsequently, Congress enacted the Fixing America’s Surface Transportation Act, which requires the Government Accountability Office (GAO) to conduct an independent study on the rule’s proposed braking system requirements. Pending the outcome of the study, the braking system requirement may be eliminated or revised. We will participate in and monitor the progress of the GAO study.
DOT, the Occupational Safety and Health Administration, PHMSA and DHS, along with other federal agencies, have jurisdiction over certain aspects of safety, movement of hazardous materials and hazardous waste, emissions requirements, and equipment standards. Additionally, various state and local agencies have jurisdiction over disposal of hazardous waste and seek to regulate movement of hazardous materials in ways not preempted by federal law.
Environmental Regulation – We are subject to extensive federal and state environmental statutes and regulations pertaining to public health and the environment. The statutes and regulations are administered and monitored by the Environmental Protection Agency (EPA) and by various state environmental agencies. The primary laws affecting our operations are the Resource Conservation and Recovery Act, regulating the management and disposal of solid and hazardous wastes; the Comprehensive Environmental Response, Compensation, and Liability Act, regulating the cleanup of
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contaminated properties; the Clean Air Act, regulating air emissions; and the Clean Water Act, regulating waste water discharges.
Information concerning environmental claims and contingencies and estimated remediation costs is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Environmental, Item 7 and Note 18 to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.
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The information set forth in this Item 1A should be read in conjunction with the rest of the information included in this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7, and Financial Statements and Supplementary Data, Item 8.
We Must Manage Fluctuating Demand for Our Services and Network Capacity – If there are significant reductions in demand for rail services with respect to one or more commodities or changes in consumer preferences that affect the businesses of our customers, we may experience increased costs associated with resizing our operations, including higher unit operating costs and costs for the storage of locomotives, rail cars, and other equipment; work-force adjustments; and other related activities, which could have a material adverse effect on our results of operations, financial condition, and liquidity. If there is significant demand for our services that exceeds the designed capacity of our network, we may experience network difficulties, including congestion and reduced velocity, that could compromise the level of service we provide to our customers. This level of demand may also compound the impact of weather and weather-related events on our operations and velocity. Although we continue to improve our transportation plan, add capacity, improve operations at our yards and other facilities, and improve our ability to address surges in demand for any reason with adequate resources, we cannot be sure that these measures will fully or adequately address any service shortcomings resulting from demand exceeding our planned capacity. We may experience other operational or service difficulties related to network capacity, dramatic and unplanned fluctuations in our customers’ demand for rail service with respect to one or more commodities or operating regions, or other events that could negatively impact our operational efficiency, any of which could have a material adverse effect on our results of operations, financial condition, and liquidity. In the event that we experience significant reductions in demand for rail services with respect to one or more commodities or changes in consumer preferences that affect the businesses of our customers, we may experience increased costs associated with resizing our operations, including higher unit operating costs and costs for the storage of locomotives, rail cars, and other equipment; work-force adjustments; and other related activities, which could have a material adverse effect on our results of operations, financial condition, and liquidity.
We Transport Hazardous Materials – We transport certain hazardous materials and other materials, including crude oil, ethanol, and toxic inhalation hazard (TIH) materials, such as chlorine, that pose certain risks in the event of a release or combustion. Additionally, U.S. laws impose common carrier obligations on railroads that require us to transport certain hazardous materials regardless of risk or potential exposure to loss. A rail accident or other incident or accident on our network, at our facilities, or at the facilities of our customers involving the release or combustion of hazardous materials could involve significant costs and claims for personal injury, property damage, and environmental penalties and remediation in excess of our insurance coverage for these risks, which could have a material adverse effect on our results of operations, financial condition, and liquidity.
We Are Subject to Significant Governmental Regulation – We are subject to governmental regulation by a significant number of federal, state, and local authorities covering a variety of health, safety, labor, environmental, economic (as discussed below), and other matters. Many laws and regulations require us to obtain and maintain various licenses, permits, and other authorizations, and we cannot guarantee that we will continue to be able to do so. Our failure to comply with applicable laws and regulations could have a material adverse effect on us. Governments or regulators may change the legislative or regulatory frameworks within which we operate without providing us any recourse to address any adverse effects on our business, including, without limitation, regulatory determinations or rules regarding dispute resolution, increasing the amount of our traffic subject to common carrier regulation, business relationships with other railroads, calculation of our cost of capital or other inputs relevant to computing our revenue adequacy, the prices we charge, and costs and expenses. Significant legislative activity in Congress or regulatory activity by the STB could expand regulation of railroad operations and prices for rail services, which could reduce capital spending on our rail network, facilities and equipment and have a material adverse effect on our results of operations, financial condition, and liquidity. As part of the Rail Safety Improvement Act of 2008, rail carriers were to implement PTC by the end of 2015 (the Rail Safety Improvement Act). The Surface Transportation Extension Act of 2015 amended the Rail Safety Improvement Act to require implementation of PTC by the end of 2018, which deadline may be extended to December 31, 2020, provided certain other criteria are satisfied. Final implementation of PTC will require us to adapt and integrate our system with other railroads whose implementation plan may be different than ours. This implementation could have a material adverse effect on our ability to make other capital investments.results of operations and financial condition. Additionally, one or more consolidations of Class I railroads could also lead to increased regulation of the rail industry.
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We May Be Affected by General Economic Conditions – Prolonged severe adverse domestic and global economic conditions or disruptions of financial and credit markets may affect the producers and consumers of the commodities we carry and may have a material adverse effect on our access to liquidity and our results of operations and financial condition.
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We Face Competition from Other Railroads and Other Transportation Providers – We face competition from other railroads, motor carriers, ships, barges, and pipelines. In addition to price competition, we face competition with respect to transit times and quality and reliability of service. We must build or acquire and maintain our rail system, while trucks, barges and maritime operators are able to use public rights-of-way maintained by public entities. Any future improvements or expenditures materially increasing the quality or reducing the cost of alternative modes of transportation, or legislation that eliminates or significantly reduces the burden ofincreases the size or weight limitations currently applicable to motor carriers, could have a material adverse effect on our results of operations, financial condition, and liquidity. Additionally, any future consolidation of the rail industry could materially affect the competitive environment in which we operate.
We Rely on Technology and Technology Improvements in Our Business Operations – We rely on information technology in all aspects of our business. If we do not have sufficient capital to acquire new technology or if we are unable to develop or implement new technology such as PTC or the latest version of our transportation control systems, we may suffer a competitive disadvantage within the rail industry and with companies providing other modes of transportation service, which could have a material adverse effect on our results of operations, financial condition, and liquidity. Additionally, if a cyber attack or other event causes significant disruption or failure of one or more of our information technology systems, including computer hardware, software, and communications equipment, we could suffer a significant service interruption, safety failure, security breach, or other operational difficulties, which could have a material adverse impact on our results of operations, financial condition, and liquidity.
We May Be Subject to Various Claims and Lawsuits That Could Result in Significant Expenditures – As a railroad with operations in densely populated urban areas and other cities and a vast rail network, we are exposed to the potential for various claims and litigation related to labor and employment, personal injury, property damage, environmental liability, and other matters. Any material changes to litigation trends or a catastrophic rail accident or series of accidents involving any or all of property damage, personal injury, and environmental liability that exceed our insurance coverage for such risks could have a material adverse effect on our results of operations, financial condition, and liquidity.
We Are Subject to Significant Environmental Laws and Regulations – Due to the nature of the railroad business, our operations are subject to extensive federal, state, and local environmental laws and regulations concerning, among other things, emissions to the air; discharges to waters; handling, storage, transportation, disposal of waste and other materials; and hazardous material or petroleum releases. We generate and transport hazardous and non-hazardous waste in our operations, and we did so in our former operations. Environmental liability can extend to previously owned or operated properties, leased properties, and properties owned by third parties, as well as to properties we currently own. Environmental liabilities have arisen and may also arise from claims asserted by adjacent landowners or other third parties in toxic tort litigation. We have been and may be subject to allegations or findings that we have violated, or are strictly liable under, these laws or regulations. We currently have certain obligations at existing sites for investigation, remediation and monitoring, and we likely will have obligations at other sites in the future. Liabilities for these obligations affect our estimate based on our experience and, as necessary, the advice and assistance of our consultants. However, actual costs may vary from our estimates due to any or all of several factors, including changes to environmental laws or interpretations of such laws, technological changes affecting investigations and remediation, the participation and financial viability of other parties responsible for any such liability and the corrective action or change to corrective actions required to remediate any existing or future sites. We could incur significant costs as a result of any of the foregoing, and we may be required to incur significant expenses to investigate and remediate known, unknown, or future environmental contamination, which could have a material adverse effect on our results of operations, financial condition, and liquidity.
We May Be Affected by Climate Change and Market or Regulatory Responses to Climate Change – Climate change, including the impact of global warming, could have a material adverse effect on our results of operations, financial condition, and liquidity. Restrictions, caps, taxes, or other controls on emissions of greenhouse gasses, including diesel exhaust, could significantly increase our operating costs. Restrictions on emissions could also affect our customers that (a) use commodities that we carry to produce energy, (b) use significant amounts of energy in producing or delivering the commodities we
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carry, or (c) manufacture or produce goods that consume significant amounts of energy or burn fossil fuels, including chemical producers, farmers and food producers, and automakers and other manufacturers. Significant cost increases, government regulation, or changes of consumer preferences for goods or services relating to alternative sources of energy or emissions reductions could materially affect the markets for the commodities we carry, which in turn could have a material adverse effect on our results of operations, financial condition, and liquidity. Government incentives encouraging the use of alternative sources of
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energy could also affect certain of our customers and the markets for certain of the commodities we carry in an unpredictable manner that could alter our traffic patterns, including, for example, increasing royalties charged to producers of PRB coal by the U.S. Department of Interior and the impacts of ethanol incentives on farming and ethanol producers. Finally, we could face increased costs related to defending and resolving legal claims and other litigation related to climate change and the alleged impact of our operations on climate change. Any of these factors, individually or in operation with one or more of the other factors, or other unforeseen impacts of climate change could reduce the amount of traffic we handle and have a material adverse effect on our results of operations, financial condition, and liquidity.
Severe Weather Could Result in Significant Business Interruptions and Expenditures – As a railroad with a vast network, we are exposed to severe weather conditions and other natural phenomena, including earthquakes, hurricanes, fires, floods, mudslides or landslides, extreme temperatures, and significant precipitation. Line outages and other interruptions caused by these conditions can adversely affect our entire rail network and can adversely affect revenue, costs, and liabilities, which could have a material adverse effect on our results of operations, financial condition, and liquidity.
Strikes or Work Stoppages Could Adversely Affect Our Operations – The U.S. Class I railroads are party to collective bargaining agreements with various labor unions. The majority of our employees belong to labor unions and are subject to these agreements. Disputes with regard to the terms of these agreements or our potential inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages, slowdowns, or lockouts, which could cause a significant disruption of our operations and have a material adverse effect on our results of operations, financial condition, and liquidity. Additionally, future national labor agreements, or renegotiation of labor agreements or provisions of labor agreements, could compromise our service reliability or significantly increase our costs for health care, wages, and other benefits, which could have a material adverse impact on our results of operations, financial condition, and liquidity. Labor disputes, work stoppages, slowdowns or lockouts at loading/unloading facilities, ports or other transport access points could compromise our service reliability and have a material adverse impact on our results of operations, financial condition, and liquidity. Labor disputes, work stoppages, slowdowns or lockouts by employees of our customers or our suppliers could compromise our service reliability and have a material adverse impact on our results of operations, financial condition, and liquidity.
The Availability of Qualified Personnel Could Adversely Affect Our Operations – Changes in demographics, training requirements, and the availability of qualified personnel could negatively affect our ability to meet demand for rail service. Unpredictable increases in demand for rail services and a lack of network fluidity may exacerbate such risks, which could have a negative impact on our operational efficiency and otherwise have a material adverse effect on our results of operations, financial condition, and liquidity.
We May Be Affected By Fluctuating Fuel Prices – Fuel costs constitute a significant portion of our transportation expenses. Diesel fuel prices can be subject to dramatic fluctuations, and significant price increases could have a material adverse effect on our operating results. Although we currently are able to recover a significant amount of our fuel expenses from our customers through revenue from fuel surcharges, we cannot be certain that we will always be able to mitigate rising or elevated fuel costs through our fuel surcharges. Additionally, future market conditions or legislative or regulatory activities could adversely affect our ability to apply fuel surcharges or adequately recover increased fuel costs through fuel surcharges. As fuel prices fluctuate, our fuel surcharge programs trail such fluctuations in fuel price by approximately two months, and may be a significant source of quarter-over-quarter and year-over-year volatility, particularly in periods of rapidly changing prices. International, political, and economic factors, events and conditions affect the volatility of fuel prices and supplies. Weather can also affect fuel supplies and limit domestic refining capacity. A severe shortage of, or disruption to, domestic fuel supplies could have a material adverse effect on our results of operations, financial condition, and liquidity. Alternatively, lower fuel prices could have a positive impact on the economy by increasing consumer discretionary spending that potentially could increase demand for various consumer products we transport. However, lower fuel prices could have a negative impact on other commodities we
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transport, such as coal frac sand and crude oildomestic drilling-related shipments, which could have a material adverse affecteffect on our results of operations, financial condition, and liquidity.
We Utilize Capital Markets – Due to the significant capital expenditures required to operate and maintain a safe and efficient railroad, we rely on the capital markets to provide some of our capital requirements. We utilize long-term debt instruments, bank financing and commercial paper from time-to-time, and we pledge certain of our receivables. Significant instability or disruptions of the capital markets, including the credit markets, or deterioration of our financial condition due to internal or external factors could restrict or prohibit
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our access to, and significantly increase the cost of, commercial paper and other financing sources, including bank credit facilities and the issuance of long-term debt, including corporate bonds. A significant deterioration of our financial condition could result in a reduction of our credit rating to below investment grade, which could restrict, or at certain credit levels below investment grade may prohibit us, from utilizing our current receivables securitization facility. This may also limit our access to external sources of capital and significantly increase the costs of short and long-term debt financing.
A Significant Portion of Our Revenue Involves Transportation of Commodities to and from International Markets – Although revenues from our operations are attributable to transportation services provided in the U.S., a significant portion of our revenues involves the transportation of commodities to and from international markets, including Mexico and Southeast Asia, by various carriers and, at times, various modes of transportation. Significant and sustained interruptions of trade with Mexico or countries in Southeast Asia, including China, could adversely affect customers and other entities that, directly or indirectly, purchase or rely on rail transportation services in the U.S. as part of their operations, and any such interruptions could have a material adverse effect on our results of operations, financial condition and liquidity. Any one or more of the following could cause a significant and sustained interruption of trade with Mexico or countries in Southeast Asia: (a) a deterioration of security for international trade and businesses; (b) the adverse impact of new laws, rules and regulations or the interpretation of laws, rules and regulations by government entities, courts or regulatory bodies, including modifications to the North American Free Trade Agreement (NAFTA) and actions of taxing authorities that affect our customers doing business in foreign countries; (c) any significant adverse economic developments, such as extended periods of high inflation, material disruptions in the banking sector or in the capital markets of these foreign countries, and significant changes in the valuation of the currencies of these foreign countries that could materially affect the cost or value of imports or exports; (d) shifts in patterns of international trade that adversely affect import and export markets; and (e) a material reduction in foreign direct investment in these countries.
We Are Subject to Legislative, Regulatory, and Legal Developments Involving Taxes – Taxes are a significant part of our expenses. We are subject to U.S. federal, state, and foreign income, payroll, property, sales and use, fuel, and other types of taxes. Changes in tax rates, such as those included in the recently enacted U.S. Tax Cuts and Jobs Act, enactment of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could result in substantially higher taxesa material effect to our results of operations, financial condition, and therefore,liquidity. Higher tax rates could have a material adverse effect on our results of operations, financial condition, and liquidity.
We Are Dependent on Certain Key Suppliers of Locomotives and Rail – Due to the capital intensive nature and sophistication of locomotive equipment, parts and maintenance, potential new suppliers face high barriers to entry. Therefore, if one of the domestic suppliers of high horsepower locomotives discontinues manufacturing locomotives, supplying parts or providing maintenance for any reason, including bankruptcy or insolvency, we could experience significant cost increases and reduced availability of the locomotives that are necessary for our operations. Additionally, for a high percentage of our rail purchases, we utilize two steel producers (one domestic and one international) that meet our specifications. Rail is critical to our operations for rail replacement programs, maintenance, and for adding additional network capacity, new rail and storage yards, and expansions of existing facilities. This industry similarly has high barriers to entry, and if one of these suppliers discontinues operations for any reason, including bankruptcy or insolvency, we could experience both significant cost increases for rail purchases and difficulty obtaining sufficient rail for maintenance and other projects.
We May Be Affected by Acts of Terrorism, War, or Risk of War – Our rail lines, facilities, and equipment, including rail cars carrying hazardous materials, could be direct targets or indirect casualties of terrorist attacks. Terrorist attacks, or other similar events, any government response thereto, and war or risk of war may adversely affect our results of operations, financial condition, and liquidity. In addition, insurance premiums for some or all of our current coverages could increase dramatically, or certain coverages may not be available to us in the future.
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Item 1B. Unresolved Staff Comments
None.
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We employ a variety of assets in the management and operation of our rail business. Our rail network covers 23 states in the western two-thirds of the U.S.
TRACK
Our rail network includes 32,08432,122 route miles. We own 26,06426,042 miles and operate on the remainder pursuant to trackage rights or leases. The following table describes track miles at December 31, 20152017, and 2014.2016:
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| 2015 | 2014 | 2017 | 2016 |
Route | 32,084 | 31,974 | 32,122 | 32,070 |
Other main line | 7,012 | 6,943 | 7,107 | 7,070 |
Passing lines and turnouts | 3,235 | 3,197 | 3,255 | 3,245 |
Switching and classification yard lines | 9,108 | 9,058 | 9,199 | 9,115 |
Total miles | 51,439 | 51,172 | 51,683 | 51,500 |
HEADQUARTERS BUILDING
We own our headquarters building in Omaha, Nebraska. The facility has 1.2 million square feet of space forthat can accommodate approximately 4,000 employees.
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HARRIMAN DISPATCHING CENTER
The Harriman Dispatching Center (HDC), located in Omaha, Nebraska, is our primary dispatching facility. It is linked to regional dispatching and locomotive management facilities at various locations along our network. HDC employees coordinate moves of locomotives and trains, manage traffic and train crews on
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our network, and coordinate interchanges with other railroads. Approximately 900 employees currently work on-site in the facility. In the event of a disruption of operations at HDC due to a cyber attack, flooding or severe weather or other event, we maintain the capability to conduct critical operations at back-up facilities in different locations.
RAIL FACILITIES
In addition to our track structure, we operate numerous facilities, including terminals for intermodal and other freight; rail yards for building trains (classification yards), switching, storage-in-transit (the temporary storage of customer goods in rail cars prior to shipment) and other activities; offices to administer and manage our operations; dispatching centers to direct traffic on our rail network; crew quarters to house train crews along our network; and shops and other facilities for fueling, maintenance, and repair of locomotives and repair and maintenance of rail cars and other equipment. The following table includes the major yards and terminals on our system:
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Major Classification Yards | Major Intermodal Terminals |
North Platte, Nebraska |
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North Little Rock, Arkansas |
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Englewood (Houston), Texas |
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Fort Worth, Texas | Global I (Chicago), Illinois |
Livonia, Louisiana |
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Proviso (Chicago), Illinois | Mesquite, Texas |
Roseville, California | City of Industry, California |
West Colton, California | Global II (Chicago), Illinois |
Pine Bluff, Arkansas |
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Neff (Kansas City), Missouri | Lathrop, California |
RAIL EQUIPMENT
Our equipment includes owned and leased locomotives and rail cars; heavy maintenance equipment and machinery; other equipment and tools in our shops, offices, and facilities; and vehicles for maintenance, transportation of crews, and other activities. As of December 31, 2015,2017, we owned or leased the following units of equipment:
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Locomotives | Owned | Leased | Total | Age (yrs.) | Owned | Leased | Total | Age (yrs.) |
Multiple purpose | 5,917 | 2,135 | 8,052 | 18.7 | 6,392 | 1,852 | 8,244 | 20.0 |
Switching | 273 | 12 | 285 | 35.0 | 213 | 12 | 225 | 36.9 |
Other | 70 | 57 | 127 | 36.6 | 47 | 57 | 104 | 38.5 |
Total locomotives | 6,260 | 2,204 | 8,464 | N/A | 6,652 | 1,921 | 8,573 | N/A |
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Freight cars | Owned | Leased | Total | Age (yrs.) | Owned | Leased | Total | Age (yrs.) |
Covered hoppers | 12,693 | 15,189 | 27,882 | 20.2 | 13,804 | 12,629 | 26,433 | 20.4 |
Open hoppers | 7,272 | 3,464 | 10,736 | 29.0 | 6,897 | 2,427 | 9,324 | 30.9 |
Gondolas | 5,856 | 3,674 | 9,530 | 25.2 | 5,798 | 2,772 | 8,570 | 26.7 |
Boxcars | 3,147 | 4,432 | 7,579 | 32.9 | 2,957 | 6,780 | 9,737 | 36.1 |
Refrigerated cars | 2,681 | 4,006 | 6,687 | 25.1 | 2,600 | 3,486 | 6,086 | 25.4 |
Flat cars | 2,617 | 1,447 | 4,064 | 29.3 | 2,533 | 1,147 | 3,680 | 32.4 |
Other | 33 | 352 | 385 | 22.2 | 8 | 353 | 361 | 29.9 |
Total freight cars | 34,299 | 32,564 | 66,863 | N/A | 34,597 | 29,594 | 64,191 | N/A |
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Highway revenue equipment | Owned | Leased | Total | Age (yrs.) | Owned | Leased | Total | Age (yrs.) |
Containers | 33,633 | 25,998 | 59,631 | 8.0 | 38,655 | 15,327 | 53,982 | 8.8 |
Chassis | 22,086 | 26,837 | 48,923 | 9.6 | 23,711 | 21,771 | 45,482 | 10.9 |
Total highway revenue equipment | 55,719 | 52,835 | 108,554 | N/A | 62,366 | 37,098 | 99,464 | N/A |
CAPITAL EXPENDITURES
Our rail network requires significant annual capital investments for replacement, improvement, and expansion. These investments enhance safety, support the transportation needs of our customers, and improve our operational efficiency. Additionally, we add new locomotives and freight cars to our fleet to replace older, less efficient equipment, to support growth and customer demand, and to reduce our impact on the environment through the acquisition of more fuel-efficient and low-emission locomotives.
20152017 Capital Program – During 2015,2017, our capital program totaled $4.3approximately $3.1 billion. (See the cash capital expenditures table in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 7.)
20162018 Capital Plan – In 2016,2018, we expect our capital plan to be approximately $3.75 billion, which$3.3 billion. The plan includes expenditures to renew and improve our existing infrastructure as well as new capacity investments, including initial construction work on a new classification yard in our Southern Region. In addition, expenditures will include expendituresbe made for PTC, of approximately $375 millionlocomotives, intermodal containers and may include non-cash investments.chassis, and freight cars. We may revise our 20162018 capital plan if business conditions warrant or if new laws or regulations affect our ability to generate sufficient returns on these investments. (See discussion of our 20162018 capital plan in Management’s Discussion and Analysis of Financial Condition and Results of Operations – 20162018 Outlook, Item 7.)
OTHER
Equipment Encumbrances – Equipment with a carrying value of approximately $2.6$2.0 billion and $2.8$2.3 billion at December 31, 2015,2017, and 2014,2016, respectively served as collateral for capital leases and other types of equipment obligations in accordance with the secured financing arrangements utilized to acquire or refinance such railroad equipment.
As a result of the merger of Missouri Pacific Railroad Company (MPRR) with and into UPRR on January 1, 1997, and pursuant to the underlying indentures for the MPRR mortgage bonds, UPRR must maintain the same value of assets after the merger in order to comply with the security requirements of the mortgage bonds. As of the merger date, the value of the MPRR assets that secured the mortgage bonds was approximately $6.0 billion. In accordance with the terms of the indentures, this collateral value must be maintained during the entire term of the mortgage bonds irrespective of the outstanding balance of such bonds.
Environmental Matters – Certain of our properties are subject to federal, state, and local laws and regulations governing the protection of the environment. (See discussion of environmental issues in Business – Governmental and Environmental Regulation, Item 1, and Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Environmental, Item 7.7, and Note 18 of the Consolidated Financial Statements.)
From time to time, we are involved in legal proceedings, claims, and litigation that occur in connection with our business. We routinely assess our liabilities and contingencies in connection with these matters based upon the latest available information and, when necessary, we seek input from our third-party advisors when making these assessments. Consistent with SEC rules and requirements, we describe below material pending legal proceedings (other than ordinary routine litigation incidental to our business), material proceedings known to be contemplated by governmental authorities, other proceedings arising under federal, state, or local environmental laws and regulations (including governmental proceedings involving potential fines, penalties, or other monetary sanctions in excess of $100,000), and such other pending matters that we may determine to be appropriate.
16
ENVIRONMENTAL MATTERS
As previously reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, the Illinois Attorney General's Office notified UPRR on January 14, 2013, that it will seek a penalty against the Railroad for environmental conditions caused by its predecessor at a former locomotive fueling facility in South Pekin, Illinois. This former CNW facility discontinued fueling operations in the early 1980s. Subsequent environmental investigation revealed evidence of fuel releases to soil and groundwater. In January 2007, the State rejected UPRR's proposed compliance commitment agreement and responded with a notice of intent to pursue legal action. UPRR continued to perform remedial investigations under the supervision of the Illinois EPA. In June 2012, the Illinois EPA approved UPRR's proposed remedial action plan for the site, consisting of no further action and monitoring for a period of ten years. Subsequently, the State notified UPRR that it would seek to recover a civil penalty, and during early negotiations, it offered to settle its claim for $240,000. UPRR rejected this offer. The State sued UPRR on October 26, 2013, in the Circuit Court for the Tenth Judicial Circuit, Tazewell County, Illinois. Through continued settlement negotiations, the parties reached an agreement to settle this matter in exchange for a payment by UPRR of $100,000. A final agreement was signed by the parties and approved by the Circuit Court and UPRR completed payment of $100,000.
As previously reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, a punctured tank car resulted in an accidental release of sulfuric acid in a rail yard in Herington, Kansas in January, 2012. The acid was released on the ground and entered a creek that runs adjacent to the yard. Environmental remediation at the site is complete. Despite negotiations with the federal government, the Assistant U.S. Attorney (District of Kansas) filed a criminal charge against the Railroad on March 30, 2015, in the U.S. District Court for Kansas. The action alleges a misdemeanor charge for negligent violation of the Clean Water Act. The penalty range was $2,500 to $200,000. In addition, the federal government may debar the facility if UPRR were convicted. A debarment would prevent Herington Yard from participating in new government contract work. On January 12, 2016, the federal judge in the U.S. District Court for Kansas dismissed the charge against the Railroad. The EPA is considering whether to appeal the case or pursue civil penalties. We cannot predict the ultimate impact of this proceeding at this time, but the proposed penalty could exceed $100,000.
We receive notices from the EPA and state environmental agencies alleging that we are or may be liable under federal or state environmental laws for remediation costs at various sites throughout the U.S., including sites on the Superfund National Priorities List or state superfund lists. We cannot predict the ultimate impact of these proceedings and suits because of the number of potentially responsible parties involved, the degree of contamination by various wastes, the scarcity and quality of volumetric data related to many of the sites, and the speculative nature of remediation costs.
On May 2, 2015, a UPRR train en route from Chicago, IL. to St. Louis, MO. experienced an accidental release of diesel fuel in the vicinity of Sidney, IL. It is believed that the release was caused by a puncture to a fuel tank under one or more of the locomotives attached to the train. The impacted fuel tank(s) released the majority of their contents onto the ground, approximately 400 feet from an unnamed creek. Some of the fuel migrated into that creek, which discharges to the Salt Fork River. We immediately notified federal, state and local authorities and dispatched our own emergency response resources to the scene. On May 29, 2015, we entered into an agreed-upon interim order to perform a comprehensive site investigation and remedial measures at the release site. On March 13, 2017, the State of Illinois issued a demand for $125,000 in civil penalties as part of the ongoing enforcement action. We are currently evaluating the State's demand.
Information concerning environmental claims and contingencies and estimated remediation costs is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Environmental, Item 7. See also Note 18 of the Consolidated Financial Statements.
OTHER MATTERS
Antitrust Litigation -– As we reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, 20 rail shippers (many of whom are represented by the same law firms) filed virtually identical
antitrust lawsuits in various federal district courts against us and four other Class I railroads in the U.S. Currently, UPRR and three other Class I railroads are the named defendants in the lawsuit. The original plaintiff filed the first of these claims in the U.S. District Court in New Jersey on May 14, 2007. The number of complaints reached a total of 30. These suits allege that the named railroads engaged in price-fixing by establishing common fuel surcharges for certain rail traffic.
In addition to suits filed by direct purchasers of rail transportation services, a few of the suits involved plaintiffs alleging that they are or were indirect purchasers of rail transportation and sought to represent a purported class of indirect purchasers of rail transportation services that paid fuel surcharges. These complaints added allegations under state antitrust and consumer protection laws. On November 6, 2007, the Judicial Panel on Multidistrict Litigation ordered that all of the rail fuel surcharge cases be transferred to Judge Paul Friedman of the U.S. District Court in the District of Columbia for coordinated or consolidated pretrial proceedings. Following numerous hearings and rulings, Judge Friedman dismissed the complaints of the indirect purchasers, which the indirect purchasers appealed. On April 16, 2010, the U.S. Court of Appeals for the District of Columbia affirmed Judge Friedman’s ruling dismissing the indirect purchasers’ claims based on various state laws.
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On June 21, 2012, Judge Friedman issued a decision that certified a class of plaintiffs with eight named plaintiff representatives. The decision included in the class all shippers that paid a rate-based fuel surcharge to any one of the defendant railroads for rate-unregulated rail transportation from July 1, 2003, through December 31, 2008. This was a procedural ruling, which did not affirm any of the claims asserted by the plaintiffs and does not address the ability of the railroad defendants to disprove the allegations made by the plaintiffs. On July 5, 2012, the defendant railroads filed a petition with the U.S. Court of Appeals for the District of Columbia requesting that the court review the class certification ruling. On August 28, 2012, a panel of the Circuit Court of the District of Columbia referred the petition to a merits panel of the court to address the issues in the petition and to address whether the district court properly granted class certification. The Circuit Court heard oral arguments on May 3, 2013. On August 9, 2013, the Circuit Court vacated the class certification decision and remanded the case to the district court to reconsider the class certification decision in light of a recent Supreme Court case and incomplete consideration of errors in the expert report of the plaintiffs. After reviewing an intervening case, supplemental expert materials and related briefing from the parties, Judge Friedman scheduled and completed a new class certification hearing during the week of September 26, 2016. On October 31, 2013,10, 2017, the parties received a ruling from Judge Friedman approved a schedule agreed todenying class certification. Plaintiffs have sought appellate review of that ruling and on December 20, 2017, were granted the right of an interlocutory appeal by all partiesthe U.S. Court of Appeals for considerationthe District of the class certification issue on remand.Columbia Circuit.
On October 2, 2014, the plaintiffs informed Judge Friedman that their economic expert had a previously undisclosed conflict of interest. Judge Friedman ruled on November 26, 2014, that the plaintiffs had until April 1, 2015, to file a supplemental expert report to support their motion for class certification. The plaintiffs filed their supplemental expert report on April 1, 2015. Judge Friedman issued a scheduling order on June 19, 2015, scheduling a class certification hearing for November 2, 2015. Judge Friedman then vacated the hearing date in an Order on September 28, 2015 because of the potential impact resulting from the decision of the U.S. Supreme Court case, Tyson Foods v. Bouaphakeo,related to class action certification and damages, which was heard on November 10, 2015. The Order requires the parties to file a joint schedule and briefing statement within fourteen days after the U.S. Supreme Court decision in the Tyson Foods matter, which is expected to be issued during the first half of 2016.
As we reported in our Current Report on Form 8-K, filed on June 10, 2011, the Railroad received a complaint filed in the U.S. District Court for the District of Columbia on June 7, 2011, by Oxbow Carbon & Minerals LLC and related entities (Oxbow). The complaint named the Railroad and one other U.S. Class I Railroad as defendants and alleged that the named railroads engagedparties are currently conducting discovery in price-fixing and monopolistic practices in connection with fuel surcharge programs and pricing of shipments of certain commodities, including coal and petroleum coke. The complaint sought injunctive relief and payment of damages of over $30 million, and other unspecified damages, including treble damages. Some of the allegations in the complaint were addressed in the existing fuel surcharge litigation referenced above. The complaint also included additional unrelated allegations regarding alleged limitations on competition for shipments of Oxbow’s commodities. Judge Friedman, who presides over the fuel surcharge matter described above, also presides over this matter. On February 26, 2013, Judge Friedman grantedFor additional information on Oxbow, please refer to Item 3. Legal Proceedings, under Other Matters, Antitrust Litigation in our Annual Report on Form 10-K for the defendants’ motion to dismiss Oxbow’s complaint for failure to state properly a claim under the antitrust laws. However, the dismissal was without prejudice to refile the complaint. Judge Friedman approved a schedule that allowed Oxbow to file a revised complaint, which Oxbow filed on May 1, 2013. The amended complaint alleges that UPRR and one other Class I railroad violated Sections 1 and 2 of the Sherman Antitrust Act and that UPRR also breached a tolling agreement between Oxbow and UPRR. Oxbow claims that it paid more than $50 million in wrongfully imposed fuel surcharges. UPRR and the other railroad filed separate motions to dismiss the Oxbow revised complaint on July 1, 2013. Judge Friedman heard oral arguments on the motions to dismiss filed by UPRR and the other railroad on January 8, 2015. Judge Friedman denied the motions to dismiss on February 24, 2015. This was a procedural ruling, which did not affirm any of the claims asserted by Oxbow and does not affect the ability of the railroad defendants to disprove the allegations made by Oxbow. UPRR filed its answer to Oxbow’s complaint on March 24, 2015, and the parties have commenced discovery.year ended December 31, 2016.
We continue to deny the allegations that our fuel surcharge programs violate the antitrust laws or any other laws. We believe that these lawsuits are without merit, and we will vigorously defend our actions. Therefore, we currently believe that these matters will not have a material adverse effect on any of our results of operations, financial condition, and liquidity.
Item 4. Mine Safety Disclosures
Not applicable.
1817
Executive Officers of the Registrant and Principal Executive Officers of Subsidiaries
The Board of Directors typically elects and designates our executive officers on an annual basis at the board meeting held in conjunction with the Annual Meeting of Shareholders, and they hold office until their successors are elected. Executive officers also may be elected and designated throughout the year, as the Board of Directors considers appropriate. There are no family relationships among the officers, nor is there any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information current as of February 5, 2016,9, 2018, relating to the executive officers.
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| Experience During |
Name | Position | Age | Past Five Years | |
Lance M. Fritz | Chairman, President and Chief Executive Officer of UPC and the Railroad |
| [1] | |
Robert M. Knight, Jr. | Executive Vice President |
| Current Position | |
| Executive Vice President, |
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Todd M. Rynaski | Vice President and Controller of UPC and Chief Accounting Officer and Controller of the Railroad |
| [ | |
Cameron A. Scott | Executive Vice President |
| [4] | |
Elizabeth F. Whited | Executive Vice President and Chief Marketing Officer of the Railroad | 52 | [5] | |
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[1] | On July 30, 2015, Mr. Fritz was named Chairman of the Board of UPC and the Railroad effective October 1, 2015. Mr. Fritz was elected President and Chief Executive Officer of UPC and the Railroad effective February 5, 2015. Previously, Mr. Fritz was President and Chief Operating Officer of the Railroad effective February 6, 2014, Executive Vice President – Operations of the Railroad effective September 1, 2010, and Vice President – Operations of the Railroad effective January 1, 2010. |
[2] |
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[3] |
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| Mr. Rynaski was elected Vice President and Controller of UPC and Chief Accounting Officer and Controller of the Railroad effective September 1, 2015. He previously was Assistant Vice President – Accounting of the Railroad effective January 1, 2014, and Assistant Vice President – Financial Reporting and Analysis effective April 1, |
[ | Mr. Scott was elected to his current position effective February 6, 2014. He previously was Vice President Network Planning and Operations effective June 30, |
[5] | Ms. Whited was elected Executive Vice President |
1918
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol “UNP”. The following table presents the dividends declared and the high and low prices of our common stock for each of the indicated quarters. All amounts are retroactively adjusted to reflect the June 6, 2014 stock split.
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2015 - Dollars Per Share |
| Q1 |
| Q2 |
| Q3 |
| Q4 | ||||||||
2017 - Dollars Per Share |
| Q1 |
| Q2 |
| Q3 |
| Q4 | ||||||||
Dividends | $ | 0.55 | $ | 0.55 | $ | 0.55 | $ | 0.55 | $ | 0.605 | $ | 0.605 | $ | 0.605 | $ | 0.665 |
Common stock price: |
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High |
| 124.52 |
| 112.44 |
| 99.71 |
| 98.28 |
| 111.38 |
| 115.15 |
| 116.93 |
| 136.32 |
Low |
| 106.75 |
| 94.91 |
| 79.31 |
| 74.78 |
| 101.20 |
| 104.12 |
| 101.06 |
| 108.71 |
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2014 - Dollars Per Share |
| Q1 |
| Q2 |
| Q3 |
| Q4 | ||||||||
2016 - Dollars Per Share |
| Q1 |
| Q2 |
| Q3 |
| Q4 | ||||||||
Dividends | $ | 0.455 | $ | 0.455 | $ | 0.50 | $ | 0.50 | $ | 0.55 | $ | 0.55 | $ | 0.55 | $ | 0.605 |
Common stock price: |
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High |
| 95.24 |
| 102.96 |
| 110.26 |
| 123.61 |
| 85.30 |
| 90.14 |
| 98.00 |
| 106.62 |
Low |
| 82.49 |
| 90.36 |
| 96.76 |
| 96.17 |
| 67.06 |
| 77.29 |
| 86.01 |
| 87.06 |
At January 29, 2016,February 2, 2018, there were 846,414,350779,305,276 shares of common stock outstanding and 32,20930,653 common shareholders of record. On that date, the closing price of the common stock on the NYSE was $72.00.$129.36. We paid dividends to our common shareholders during each of the past 116118 years. We declared dividends totaling $1,906$1,982 million in 20152017 and $1,714$1,879 million in 2014.2016. On February 8, 2018, we increased the quarterly dividend to $0.73 per share, payable on March 30, 2018, to shareholders of record on February 28, 2018. We are subject to certain restrictions regarding retained earnings with respect to the payment of cash dividends to our shareholders. The amount of retained earnings available for dividends decreasedincreased to $13.6$16.4 billion at December 31, 2015,2017, from $15.4$12.4 billion at December 31, 2014.2016. (See discussion of this restriction in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 7.) We do not believe the restriction on retained earnings will affect our ability to pay dividends, and we currently expect to pay dividends in 2016.2018.
Comparison Over One- and Three-Year Periods – The following table presents the cumulative total shareholder returns, assuming reinvestment of dividends, over one- and three-year periods for the Corporation (UNP), a peer group index (comprised of CSX Corporation and Norfolk Southern Corporation), the Dow Jones Transportation Index (DJ Trans), and the Standard & Poor’s 500 Stock Index (S&P 500).
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Period | UNP |
| Peer Group |
| DJ Trans |
| S&P 500 |
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1 Year (2015) | (32.9) | % | (23.9) | % | (16.8) | % | 1.4 | % |
3 Year (2013 - 2015) | 32.2 |
| 43.9 |
| 47.2 |
| 52.5 |
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Period | UNP |
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| DJ Trans |
| S&P 500 |
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1 Year (2017) | 32.2 | % | 46.5 | % | 19.0 | % | 21.8 | % |
3 Year (2015 - 2017) | 20.7 |
| 52.4 |
| 21.2 |
| 38.3 |
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2019
Five-Year Performance Comparison – The following graph provides an indicator of cumulative total shareholder returns for the Corporation as compared to the peer group index (described above), the DJ Trans, and the S&P 500. The graph assumes that $100 was invested in the common stock of Union Pacific Corporation and each index on December 31, 20102012 and that all dividends were reinvested. The information below is historical in nature and is not necessarily indicative of future performance.
Purchases of Equity Securities – During 2015,2017, we repurchased 36,921,64137,122,405 shares of our common stock at an average price of $99.16.$110.50. The following table presents common stock repurchases during each month for the fourth quarter of 2015:2017:
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Period | Period | Total Number of Shares Purchased [a] | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced | Maximum Number of Shares Remaining Under the Plan or Program [b] | Period | Total Number of Shares Purchased [a] |
| Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced | Maximum Number of Shares Remaining Under the Plan or Program [b] | |
Oct. 1 through Oct. 31 | Oct. 1 through Oct. 31 | 3,247,731 | $ | 92.98 | 3,221,153 | 56,078,192 | Oct. 1 through Oct. 31 | 3,831,636 | $ | 113.61 | 3,800,000 | 89,078,662 |
Nov. 1 through Nov. 30 | Nov. 1 through Nov. 30 | 2,325,865 |
| 86.61 | 2,322,992 | 53,755,200 | Nov. 1 through Nov. 30 | 3,005,225 |
| 117.07 | 2,937,410 | 86,141,252 |
Dec. 1 through Dec. 31 | Dec. 1 through Dec. 31 | 1,105,389 |
| 77.63 | 1,102,754 | 52,652,446 | Dec. 1 through Dec. 31 | 2,718,319 |
| 130.76 | 2,494,100 | 83,647,152 |
Total | Total | 6,678,985 | $ | 88.22 | 6,646,899 | N/A | Total | 9,555,180 | $ | 119.58 | 9,231,510 | N/A |
[a] | Total number of shares purchased during the quarter includes approximately |
[b] | Effective January 1, |
2120
Item 6. Selected Financial Data
The following table presents as of, and for the years ended, December 31, our selected financial data for each of the last five years. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7, and with the Financial Statements and Supplementary Data, Item 8. The information below is historical in nature and is not necessarily indicative of future financial condition or results of operations.
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Millions, Except per Share Amounts, | Millions, Except per Share Amounts, |
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Carloads, Employee Statistics, and Ratios | Carloads, Employee Statistics, and Ratios | 2015 | 2014 | 2013 | 2012 | 2011 | Carloads, Employee Statistics, and Ratios | 2017[a] | 2016 | 2015 | 2014 | 2013 | ||||||||||
For the Year Ended December 31 | For the Year Ended December 31 |
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Operating revenues [a] | $ | 21,813 | $ | 23,988 | $ | 21,963 | $ | 20,926 | $ | 19,557 | ||||||||||||
Operating revenues [b] | Operating revenues [b] | $ | 21,240 | $ | 19,941 | $ | 21,813 | $ | 23,988 | $ | 21,963 | |||||||||||
Operating income | Operating income |
| 8,052 |
| 8,753 |
| 7,446 |
| 6,745 |
| 5,724 | Operating income |
| 8,061 |
| 7,272 |
| 8,052 |
| 8,753 |
| 7,446 |
Net income | Net income |
| 4,772 |
| 5,180 |
| 4,388 |
| 3,943 |
| 3,292 | Net income |
| 10,712 |
| 4,233 |
| 4,772 |
| 5,180 |
| 4,388 |
Earnings per share - basic [b] |
| 5.51 |
| 5.77 |
| 4.74 |
| 4.17 |
| 3.39 | ||||||||||||
Earnings per share - diluted [b] |
| 5.49 |
| 5.75 |
| 4.71 |
| 4.14 |
| 3.36 | ||||||||||||
Dividends declared per share [b] |
| 2.20 |
| 1.91 |
| 1.48 |
| 1.245 |
| 0.965 | ||||||||||||
Earnings per share - basic [c] | Earnings per share - basic [c] |
| 13.42 |
| 5.09 |
| 5.51 |
| 5.77 |
| 4.74 | |||||||||||
Earnings per share - diluted [c] | Earnings per share - diluted [c] |
| 13.36 |
| 5.07 |
| 5.49 |
| 5.75 |
| 4.71 | |||||||||||
Dividends declared per share [c] | Dividends declared per share [c] |
| 2.48 |
| 2.255 |
| 2.20 |
| 1.91 |
| 1.48 | |||||||||||
Cash provided by operating activities | Cash provided by operating activities |
| 7,344 |
| 7,385 |
| 6,823 |
| 6,161 |
| 5,873 | Cash provided by operating activities |
| 7,230 |
| 7,525 |
| 7,344 |
| 7,385 |
| 6,823 |
Cash used in investing activities | Cash used in investing activities |
| (4,476) |
| (4,249) |
| (3,405) |
| (3,633) |
| (3,119) | Cash used in investing activities |
| (3,086) |
| (3,393) |
| (4,476) |
| (4,249) |
| (3,405) |
Cash used in financing activities | Cash used in financing activities |
| (3,063) |
| (2,982) |
| (3,049) |
| (2,682) |
| (2,623) | Cash used in financing activities |
| (4,146) |
| (4,246) |
| (3,063) |
| (2,982) |
| (3,049) |
Cash used for common share repurchases | Cash used for common share repurchases |
| (3,465) |
| (3,225) |
| (2,218) |
| (1,474) |
| (1,418) | Cash used for common share repurchases |
| (4,013) |
| (3,105) |
| (3,465) |
| (3,225) |
| (2,218) |
At December 31 | At December 31 |
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Total assets [c] | $ | 54,600 | $ | 52,372 | $ | 49,410 | $ | 46,842 | $ | 44,742 | ||||||||||||
Long-term obligations [c] [d] |
| 30,692 |
| 27,419 |
| 24,395 |
| 23,847 |
| 22,848 | ||||||||||||
Debt due after one year [c] |
| 13,607 |
| 10,952 |
| 8,820 |
| 8,754 |
| 8,650 | ||||||||||||
Total assets | Total assets | $ | 57,806 | $ | 55,718 | $ | 54,600 | $ | 52,372 | $ | 49,410 | |||||||||||
Long-term obligations [d] | Long-term obligations [d] |
| 29,011 |
| 32,146 |
| 30,692 |
| 27,419 |
| 24,395 | |||||||||||
Debt due after one year | Debt due after one year |
| 16,144 |
| 14,249 |
| 13,607 |
| 10,952 |
| 8,820 | |||||||||||
Common shareholders' equity | Common shareholders' equity |
| 20,702 |
| 21,189 |
| 21,225 |
| 19,877 |
| 18,578 | Common shareholders' equity |
| 24,856 |
| 19,932 |
| 20,702 |
| 21,189 |
| 21,225 |
Additional Data | Additional Data |
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Freight revenues [a] | $ | 20,397 | $ | 22,560 | $ | 20,684 | $ | 19,686 | $ | 18,508 | ||||||||||||
Freight revenues [b] | Freight revenues [b] | $ | 19,837 | $ | 18,601 | $ | 20,397 | $ | 22,560 | $ | 20,684 | |||||||||||
Revenue carloads (units) (000) | Revenue carloads (units) (000) |
| 9,062 |
| 9,625 |
| 9,022 |
| 9,048 |
| 9,072 | Revenue carloads (units) (000) |
| 8,588 |
| 8,442 |
| 9,062 |
| 9,625 |
| 9,022 |
Operating ratio (%) [e] | Operating ratio (%) [e] |
| 63.1 |
| 63.5 |
| 66.1 |
| 67.8 |
| 70.7 | Operating ratio (%) [e] |
| 62.0 |
| 63.5 |
| 63.1 |
| 63.5 |
| 66.1 |
Average employees (000) | Average employees (000) |
| 47.5 |
| 47.2 |
| 46.4 |
| 45.9 |
| 44.9 | Average employees (000) |
| 42.0 |
| 42.9 |
| 47.5 |
| 47.2 |
| 46.4 |
Financial Ratios (%) | Financial Ratios (%) |
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| Financial Ratios (%) |
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Debt to capital [c] [f] |
| 40.7 |
| 35.0 |
| 31.0 |
| 31.0 |
| 32.3 | ||||||||||||
Debt to capital [f] | Debt to capital [f] |
| 40.5 |
| 43.0 |
| 40.7 |
| 35.0 |
| 31.0 | |||||||||||
Return on average common | Return on average common |
| 22.8 |
| 24.4 |
| 21.4 |
| 20.5 |
| 18.1 | Return on average common |
| 47.8 |
| 20.8 |
| 22.8 |
| 24.4 |
| 21.4 |
[a] | 2017 includes a $5.9 billion non-cash reduction to income tax expense and $212 million non-cash reduction to operating expenses related to the Tax Cuts and Jobs Act enacted on December 22, 2017. |
[b] | Includes fuel surcharge revenue of $966 million, $560 million, $1.3 billion, $2.8 billion, and $2.6 billion, |
[ | Earnings per share and dividends declared per share are retroactively adjusted to reflect the June 6, 2014 stock split. |
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[d] | Long-term obligations is determined as follows: total liabilities less current liabilities. |
[e] | Operating ratio is defined as operating expenses divided by operating revenues. |
[f] | Debt to capital is determined as follows: total debt divided by total debt plus common shareholders' equity. |
[g] | Return on average common shareholders' equity is determined as follows: Net income divided by average common shareholders' equity. |
2221
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and applicable notes to the Financial Statements and Supplementary Data, Item 8, and other information in this report, including Risk Factors set forth in Item 1A and Critical Accounting Policies and Cautionary Information at the end of this Item 7.
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable business segment. Although revenue is analyzed by commodity, we analyze the net financial results of the Railroad as one segment due to the integrated nature of the rail network.
EXECUTIVE SUMMARY
20152017 Results
· | Safety – During |
· |
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· | Tax Reform – The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduced the federal income tax rate from 35% to 21% effective January 1, 2018. As a result, we remeasured our deferred tax assets and liabilities which resulted in a $5.9 billion non-cash reduction in our income tax expense in 2017. In |
For comparability purposes, the following table reconciles our full year 2017 reported results under accounting principles generally accepted in the U.S. (GAAP) to our 2017 adjusted results (non-GAAP) for the tax related items described above. We believe the adjusted results provide relevant information to our investors as they more accurately reflect on-going financial performance. In addition, these measures should be considered in addition to, and not a substitute for operating income, income taxes, net income, diluted EPS, operating ratio, and effective tax rate.
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Millions, Except Per Share Amounts and |
| Operating |
| Income |
| Net |
| Diluted | Operating | Effective | ||
Percentages |
| Income |
| Taxes |
| Income |
| EPS | Ratio | Tax Rate | ||
2017 Reported results (GAAP) | $ | 8,061 | $ | (3,080) | $ | 10,712 | $ | 13.36 | 62.0 | % | (40.4) | % |
Factors Affecting Comparability: |
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Adjustments for Tax Cuts and Jobs Act |
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Equity-method affiliates |
| (212) |
| (73) |
| (139) |
| (0.17) | 1.0 | pts | - |
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Deferred taxes |
| - |
| 5,935 |
| (5,935) |
| (7.40) | - |
| 77.9 |
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2017 Adjusted results (non-GAAP) | $ | 7,849 | $ | 2,782 | $ | 4,638 | $ | 5.79 | 63.0 | % | 37.5 | % |
2016 Reported results (GAAP) | $ | 7,272 | $ | 2,533 | $ | 4,233 | $ | 5.07 | 63.5 | % | 37.4 | % |
· | 2017 Adjusted Results Non-GAAP –In 2017, we generated adjusted operating income of 22 |
Adjusted net income of |
· | Freight Revenues – Our freight revenues |
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· | Fuel Prices – Our average price |
· | Free Cash Flow – Cash generated by operating activities totaled |
Free cash flow is not considered a financial measure under accounting principles generally accepted in the U.S. (GAAP)GAAP by SEC Regulation G and Item 10 of SEC Regulation S-K and may not be defined and calculated by other companies in the same manner. We believe free cash flow is important to management and investors in evaluating our financial performance and measures our ability to generate cash without additional external financings. Free cash flow should be considered in addition
23
to, rather than as a substitute for, cash provided by operating activities. The following table reconciles cash provided by operating activities (GAAP measure) to free cash flow (non-GAAP measure):
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Millions | Millions | 2015 | 2014 | 2013 | Millions | 2017 | 2016 | 2015 | ||||||
Cash provided by operating activities | Cash provided by operating activities | $ | 7,344 | $ | 7,385 | $ | 6,823 | Cash provided by operating activities | $ | 7,230 | $ | 7,525 | $ | 7,344 |
Cash used in investing activities | Cash used in investing activities |
| (4,476) |
| (4,249) |
| (3,405) | Cash used in investing activities |
| (3,086) |
| (3,393) |
| (4,476) |
Dividends paid | Dividends paid |
| (2,344) |
| (1,632) |
| (1,333) | Dividends paid |
| (1,982) |
| (1,879) |
| (2,344) |
Free cash flow | Free cash flow | $ | 524 | $ | 1,504 | $ | 2,085 | Free cash flow | $ | 2,162 | $ | 2,253 | $ | 524 |
20162018 Outlook
· | Safety – Operating a safe railroad benefits all our constituents: our employees, customers, shareholders and the communities we serve. We will continue using a multi-faceted approach to safety, utilizing technology, risk assessment, |
· | Network Operations – In |
· | Fuel Prices – |
Continuing lowerLower fuel prices could have a positive impact on the economy by increasing consumer discretionary spending that potentially could increase demand for various consumer products that we transport. Alternatively, lower fuel prices willcould likely have a negative impact on other commodities such as coal frac sand and crude oildomestic drilling-related shipments.
23
· | Capital Plan – In |
· | Financial Expectations – Economic conditions in many of our market sectors continue to drive uncertainty with respect to our volume levels. We expect |
· | Tax Reform – The Tax Act was enacted on December 22, 2017. The Tax Act reduced the federal income tax rate from 35% to 21% effective January 1, 2018. Due to the tax rate change, we expect to generate additional cash from operations in 2018 of approximately $1 billion, assuming normal business conditions prevail. We will continue to evaluate the best use of that cash, which will include pursuing capital projects with adequate returns, and returning cash to shareholders through share repurchases and dividends. |
24
RESULTS OF OPERATIONS
Operating Revenues
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| % Change | % Change |
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Millions | 2015 | 2014 | 2013 | 2015 v 2014 | 2014 v 2013 | 2017 | 2016 | 2015 | 2017 v 2016 | 2016 v 2015 | ||||||||||
Freight revenues | $ | 20,397 | $ | 22,560 | $ | 20,684 | (10) | % | 9 | % | $ | 19,837 | $ | 18,601 | $ | 20,397 | 7 | % | (9) | % |
Other revenues |
| 1,416 |
| 1,428 |
| 1,279 | (1) | % | 12 | % |
| 1,403 |
| 1,340 |
| 1,416 | 5 | % | (5) | % |
Total | $ | 21,813 | $ | 23,988 | $ | 21,963 | (9) | % | 9 | % | $ | 21,240 | $ | 19,941 | $ | 21,813 | 7 | % | (9) | % |
We generate freight revenues by transporting freight or other materials from our six commodity groups. Freight revenues vary with volume (carloads) and average revenue per car (ARC). Changes in price, traffic mix and fuel surcharges drive ARC. We provide some of our customers with contractual incentives for meeting or exceeding specified cumulative volumes or shipping to and from specific locations, which we record as reductions to freight revenues based on the actual or projected future shipments. We recognize freight revenues as shipments move from origin to destination. We allocate freight revenues between reporting periods based on the relative transit time in each reporting period and recognize expenses as we incur them.
Other revenues include revenues earned by our subsidiaries, revenues from commuter rail operations that we manage, accessorial revenues, which we earn when customers retain equipment owned or controlled by us or when we perform additional services such as switching or storage, and miscellaneous contract revenue. We recognize other revenues as we perform services or meet contractual obligations.
Freight revenues from fiveincreased 7% year-over-year to $19.8 billion driven by volume growth of our six commodity groups2%, higher fuel surcharge revenue, and core pricing gains. Growth in frac sand, coal, and intermodal shipments more than offset declines in grain, crude oil, finished vehicles, and rock shipments.
Freight revenues decreased 9% in 20152016 compared to 20142015 due to a 6%7% decline in carloadings, and lower fuel surcharge revenue, partially offset by core pricing gains. Volume declines in coal, international intermodal, frac sand, metals, crude oil, finished vehicles, and grainmetals shipments more than offset volume growth in domestic intermodal, finished vehicles,grain, automotive parts, and industrial chemicals and plastics shipments.
Freight revenues from all six commodity groups increased during 2014 compared to 2013 driven by 7% volume growth and core pricing gains of 2.5%. Volume growth from grain, frac sand, rock, and intermodal (domestic and international) shipments offset declines in crude oil.
24
Our fuel surcharge programs generated freight revenues of $966 million, $560 million, and $1.3 billion $2.8 billion,in 2017, 2016, and $2.6 billion in 2015, 2014, and 2013, respectively. Fuel surcharge revenue in 2015 decreased $1.5 billion2017 increased $406 million as a result of a 38% decrease22% increase in fuel price and a 6% reduction2% growth in carloadings. Fuel surcharge revenue in 2014 increased 6% based2016 decreased $740 million as a result of a 20% decrease in fuel price, a 7% reduction in carloadings, and the lag impact on our 7% carloadings increase.fuel surcharge (it can generally take up to two months for changing fuel prices to affect fuel surcharge recoveries).
In 2015,2017, other revenue increased from 2016 due to higher revenues at our subsidiaries, primarily those that broker intermodal, transload, and refrigerated warehousing logistics services.
In 2016, other revenue decreased from 20142015 due to lower revenues at our subsidiaries, primarily those that broker intermodal and automotivetransload services, partially offset by higherand lower intermodal accessorial revenue driven by increased revenue for container usage and demurrage fees.
In 2014, other revenue increased from 2013 due to higher revenues at our subsidiaries, primarily those that broker intermodal and automotive services, accessorial revenue driven by increased volume and per diem revenue for container usage (previously included in automotive freight revenue).
25
The following tables summarize the year-over-year changes in freight revenues, revenue carloads, and ARC by commodity type:
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Freight Revenues |
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| % Change | % Change |
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| % Change | % Change | ||||
Millions | 2015 | 2014 | 2013 | 2015 v 2014 | 2014 v 2013 | 2017 | 2016 | 2015 | 2017 v 2016 | 2016 v 2015 | ||||||||||
Agricultural Products | $ | 3,581 | $ | 3,777 | $ | 3,276 | (5) | % | 15 | % | $ | 3,685 | $ | 3,625 | $ | 3,581 | 2 | % | 1 | % |
Automotive |
| 2,154 |
| 2,103 |
| 2,077 | 2 |
| 1 |
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| 1,998 |
| 2,000 |
| 2,154 | - |
| (7) |
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Chemicals |
| 3,543 |
| 3,664 |
| 3,501 | (3) |
| 5 |
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| 3,596 |
| 3,474 |
| 3,543 | 4 |
| (2) |
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Coal |
| 3,237 |
| 4,127 |
| 3,978 | (22) |
| 4 |
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| 2,645 |
| 2,440 |
| 3,237 | 8 |
| (25) |
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Industrial Products |
| 3,808 |
| 4,400 |
| 3,822 | (13) |
| 15 |
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| 4,078 |
| 3,348 |
| 3,808 | 22 |
| (12) |
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Intermodal |
| 4,074 |
| 4,489 |
| 4,030 | (9) |
| 11 |
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| 3,835 |
| 3,714 |
| 4,074 | 3 |
| (9) |
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Total | $ | 20,397 | $ | 22,560 | $ | 20,684 | (10) | % | 9 | % | $ | 19,837 | $ | 18,601 | $ | 20,397 | 7 | % | (9) | % |
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Revenue Carloads |
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| % Change | % Change |
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| % Change | % Change | ||||
Thousands | 2015 | 2014 | 2013 | 2015 v 2014 | 2014 v 2013 | 2017 | 2016 | 2015 | 2017 v 2016 | 2016 v 2015 | ||||||||||
Agricultural Products |
| 941 |
| 973 |
| 874 | (3) | % | 11 | % |
| 958 |
| 980 |
| 941 | (2) | % | 4 | % |
Automotive |
| 863 |
| 809 |
| 781 | 7 |
| 4 |
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| 838 |
| 863 |
| 863 | (3) |
| - |
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Chemicals |
| 1,098 |
| 1,116 |
| 1,103 | (2) |
| 1 |
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| 1,055 |
| 1,074 |
| 1,098 | (2) |
| (2) |
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Coal |
| 1,459 |
| 1,768 |
| 1,703 | (17) |
| 4 |
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| 1,232 |
| 1,166 |
| 1,459 | 6 |
| (20) |
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Industrial Products |
| 1,213 |
| 1,368 |
| 1,236 | (11) |
| 11 |
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| 1,227 |
| 1,097 |
| 1,213 | 12 |
| (10) |
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Intermodal [a] |
| 3,488 |
| 3,591 |
| 3,325 | (3) |
| 8 |
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| 3,278 |
| 3,262 |
| 3,488 | - |
| (6) |
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Total |
| 9,062 |
| 9,625 |
| 9,022 | (6) | % | 7 | % |
| 8,588 |
| 8,442 |
| 9,062 | 2 | % | (7) | % |
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Average Revenue per Car | 2015 | 2014 | 2013 | 2015 v 2014 | 2014 v 2013 | 2017 | 2016 | 2015 | 2017 v 2016 | 2016 v 2015 | ||||||||||
Agricultural Products | $ | 3,805 | $ | 3,881 | $ | 3,746 | (2) | % | 4 | % | $ | 3,847 | $ | 3,702 | $ | 3,805 | 4 | % | (3) | % |
Automotive |
| 2,498 |
| 2,602 |
| 2,659 | (4) |
| (2) |
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| 2,384 |
| 2,317 |
| 2,498 | 3 |
| (7) |
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Chemicals |
| 3,227 |
| 3,282 |
| 3,176 | (2) |
| 3 |
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| 3,410 |
| 3,234 |
| 3,227 | 5 |
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Coal |
| 2,218 |
| 2,334 |
| 2,336 | (5) |
| - |
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| 2,146 |
| 2,092 |
| 2,218 | 3 |
| (6) |
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Industrial Products |
| 3,139 |
| 3,217 |
| 3,093 | (2) |
| 4 |
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| 3,324 |
| 3,051 |
| 3,139 | 9 |
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Intermodal [a] |
| 1,168 |
| 1,250 |
| 1,212 | (7) |
| 3 |
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| 1,170 |
| 1,138 |
| 1,168 | 3 |
| (3) |
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Average | $ | 2,251 | $ | 2,344 | $ | 2,293 | (4) | % | 2 | % | $ | 2,310 | $ | 2,203 | $ | 2,251 | 5 | % | (2) | % |
[a] | Each intermodal container or trailer equals one carload. |
2625
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Agricultural Products – Freight revenue from agricultural
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drought also negatively impacted the first three quartersvolume growth and core pricing gains, partially offset by lower fuel surcharge revenue and mix of 2013, which created favorable comparisons for the first three quarters of 2014. Lower export wheattraffic. Grain shipments increased 11% in 2016 compared to 2015 due to a larger world crop partially offset gainsstrong export demand in grain.the second half of the year. Market conditions in South America and ample supply of U.S. grains led to competitive U.S. pricing relative to the global market.
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Automotive – Freight revenue from automotive shipments
Freight revenue from automotive shipments |
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quarters of 2014 with improved sales andgrowth in automotive parts from truck-to-rail conversions was offset by a 5% decrease in finished vehicles resulting from a partial contract loss during the year. Overall U.S. vehicle production which offset declines in the first quarter due to winter weather. Shifts in business mix and a change in how we are compensated for container usage, which is now included as a per diem charge in other revenue, negatively impacted ARCwas flat compared to 2013.2015.
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Chemicals – Freight revenue from chemical shipments
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ARC drivendeclines and lower fuel surcharge revenue, which were partially offset by positive business mix increased freight revenuecore pricing gains. Crude oil shipments declined significantly resulting from chemicals in 2014 compared to 2013. Shipments of industrial chemicals grew as a result of continued strong demand in the drilling market. Fertilizer shipments increased due to strong exports of potash. Reduced shipments oflow crude oil from the Bakken and Permian shale formations to the Gulf area partially offset these gains as market factors, primarilyprices, regional pricing differences and available pipeline capacity. Fertilizer shipments also declined due to weak world-wide demand for various types of crude oil, displaced somepotash in the first half of the former Gulf Coast shipments toyear and the Eaststrong U.S. dollar. These decreases were partially offset by growth in industrial chemical and West Coasts.
liquid petroleum gas shipments.
2726
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Coal – Freight revenue from coal shipments increased in 2017 compared to 2016 driven by volume growth, mix of traffic, and higher fuel surcharge revenue. Shipments out of the Powder River Basin (PRB) grew 5% in 2017 driven by strong growth in the first half of the year due to higher year-over-year natural gas prices and lower inventory levels at utilities. Shipments out of Colorado and Utah increased 7% compared to 2016 due to the same drivers, combined with stronger export demand. Lower volume, |
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coal. This lower demand was a resultto 2015. Shipments out of several utilities switching to other fuel sourcesthe Powder River Basin (PRB) declined 24% in 2016 due to lowerhigh inventory levels at utilities and competitive natural gas prices. In addition, coal exports declined due to a soft global market.
Freight revenue from coal shipments increased in 2014 compared to 2013, driven by higher volumes. Shifts in business mix negatively impacted ARC compared to 2013. SPRB shipments increased 3% from 2013. Strong demand continued throughout the year due to inventory replenishment but network performance and contract losses limited year-over-year volume growth. Shipments fromout of Colorado and Utah mines increased 6%declined 15% compared to 2013, driven by higher natural gas prices for most of the year and strong exports through the West Coast. However, in the fourth quarter volumes from Colorado and Utah mines declined as exports2015 due to the Gulf Coast decreased.same drivers, combined with lower international demand.
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Industrial Products – Freight revenue from industrial products shipments Freight revenue from industrial products shipments decreased in 2016 compared to 2015 |
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Volume growth,due to volume declines, lower fuel surcharge revenue, and mix of traffic partially offset by core pricing gainsgains. Declines in shale drilling activity, due to lower oil prices, negatively impacted non-metallic mineral (frac sand) shipments compared to 2015. Rock shipments also decreased as weather events and positive business mixflooding in 2014 increased freight revenuethe Southern Region during the second and third quarters limited construction activity, thus limiting demand for industrial productstransportation of materials. In addition, steel shipments versus 2013. Shipments of non-metallic minerals (primarily frac sand, up 31%) grewdeclined as a result of reductions in shale drilling activity for energy products, as well as evolving drilling practices, which can increaseand strong import levels associated with the amountstrength of frac sand used at certain wells. Additionally, rock and lumber shipments increased from 2013, driven by new housing and commercial construction.the U.S. dollar.
28
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Intermodal –
Freight revenue from intermodal shipments |
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volume growth, core pricing improvements and positive business mix. Domestic traffic increased 11%compared to last year due to continued conversions from truck transportation to railweaker global trade activity, softer domestic sales, high retail inventories, and new premium services. International traffic grew 5% versus 2013, driven primarily by new business and improving economic conditions. International gains in the last three quarters of the year offset the declines in the first quarter due to severe weather that negatively impacted consumer demand.a customer bankruptcy.
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Mexico Business – Each of our commodity groups includes revenue from shipments to and from Mexico. Freight revenue from Mexico business decreased 4% to $2.2was $2.3 billion in 20152017, up 2% compared to 2014 primarily due to lower2016. Core pricing gains and higher fuel surcharge revenue. Volume levels were flat compared to 2014 asrevenue more than offset the 1% volume decline. The decrease in volume was driven by lower shipments of Intermodal, Agricultural, and Industrial Products wereautomotive parts, partially offset by growth in Automotive, Coal,coal and Chemicalrefined petroleum products shipments.
RevenueFreight revenue from Mexico business increased 8% to $2.3was $2.2 billion in 2014 versus 2013.2016, flat with 2015. Lower fuel surcharge revenue and mix of traffic offset the 4% of volume growth and core pricing gains. Volume levels increased 8% from 2013, as increases ingrowth was driven by Agricultural Products, Chemicals, Intermodal, AutomotiveCoal, and Industrial Products offset lower export Coalautomotive parts shipments.
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Operating Expenses
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Millions | 2015 | 2014 | 2013 | 2015 v 2014 | 2014 v 2013 | 2017 | 2016 | 2015 | 2017 v 2016 | 2016 v 2015 | ||||||||||
Compensation and benefits | $ | 5,161 | $ | 5,076 | $ | 4,807 | 2 | % | 6 | % | $ | 4,984 | $ | 4,750 | $ | 5,161 | 5 | % | (8) | % |
Purchased services and materials |
| 2,421 |
| 2,558 |
| 2,315 | (5) |
| 10 |
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| 2,363 |
| 2,258 |
| 2,421 | 5 |
| (7) |
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Depreciation |
| 2,105 |
| 2,038 |
| 2,012 | 3 |
| 1 |
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Fuel |
| 2,013 |
| 3,539 |
| 3,534 | (43) |
| - |
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| 1,891 |
| 1,489 |
| 2,013 | 27 |
| (26) |
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Depreciation |
| 2,012 |
| 1,904 |
| 1,777 | 6 |
| 7 |
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Equipment and other rents |
| 1,230 |
| 1,234 |
| 1,235 | - |
| - |
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| 888 |
| 1,137 |
| 1,230 | (22) |
| (8) |
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Other |
| 924 |
| 924 |
| 849 | - |
| 9 |
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| 948 |
| 997 |
| 924 | (5) |
| 8 |
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Total | $ | 13,761 | $ | 15,235 | $ | 14,517 | (10) | % | 5 | % | $ | 13,179 | $ | 12,669 | $ | 13,761 | 4 | % | (8) | % |
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Operating expenses
Operating expenses |
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materials contributed to the higher costs. Lower fuel priceprices, volume-related savings, productivity gains and lower locomotive and freight car maintenance expense. These cost reductions were partially offset these increases. In addition, there were approximately $35 million of weather-related costs in the first quarter of 2014.by inflation, depreciation, and higher environmental and other costs.
Compensation and Benefits – Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. In 2015, lower volume-related costs and second half productivity gains were more than offset2017, expenses increased 5% compared to 2016, driven by general wage inflation and increased hiring and training expenses related to a larger workforce in the first half of the year.
Volume-related expenses, including training, and a slower network increased our train and engine work force, which, along with general wage and benefit inflation, resulted in increased wages in 2014$86 million of expenses associated with the workforce reduction plan, volume-related costs, and higher training expenses for trainmen, which were partially offset by resource productivity gains.
In 2016, expenses decreased 8% compared to 2013. Weather-related2015, driven by lower volume-related costs, in the first quarter of 2014 also increased costs.productivity gains, and lower training expense. General wage and benefit inflation partially offset these decreases.
Purchased Services and Materials – Expense for purchased services and materials includes the costs of services purchased from outside contractors and other service providers (including equipment maintenance and contract expenses incurred by our subsidiaries for external transportation services); materials used to maintain the Railroad’s lines, structures, and equipment; costs of operating facilities jointly used by UPRR and other railroads; transportation and lodging for train crew employees; trucking and contracting costs for intermodal containers; leased automobile maintenance expenses; and tools and supplies. Purchased services and materials decreased $137 millionincreased 5% in 2017 compared to 20142016 primarily due to volume-related costs (including higher subsidiary contract services) and Hurricane Harvey-related contract service costs, which were partially offset by lower joint facility expenses.
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Purchased services and materials in 2016 decreased 7% compared to 2015 primarily due to lower volume-related costs including anda decrease in external transportation expenses incurred by our logistics subsidiaries. Expenses also decreased due to lower locomotive and freight car repair costs.
Expenses for purchased services in 2014 increased 8% compared to 2013 primarily due to volume-related expenses incurred by our logistics subsidiaries for external transportation and increased crew transportation and lodging due to volumes and a slower network. In addition, higher consulting fees and higher contract expenses (including equipment maintenance) increased costs compared to 2013. Locomotive and freight car material expenses increased in 2014 compared to 2013 due to additional volumes, including the impact of activating stored equipment to address operational issues caused by demand and a slower network.maintenance expenses.
Fuel – Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Locomotive diesel fuel prices, which averaged $1.841.81 per gallon (including taxes and transportation costs) in 2015,2017, compared to $2.97$1.48 per gallon in 2014, decreased2016, increased expenses $1.2 billion.$334 million. In addition, fuel costs were higher as gross-ton miles increased5% compared to 2016. The fuel consumption rate (c-rate), computed as gallons of fuel consumed divided by gross ton-miles in thousands, improved 2% compared to 2016.
30
Locomotive diesel fuel prices, which averaged $1.48 per gallon (including taxes and transportation costs) in 2016, compared to $1.84 per gallon in 2015, reduced expenses $347 million. In addition, fuel costs were lower as gross-ton miles decreased 9%8%. The fuel consumption rate (c-rate), computed as gallons of fuel consumed divided by gross ton-miles in thousands, increasedimproved 1% compared to 2014. Decreases in heavier, more fuel-efficient shipments, decreased gross-ton miles and increased the c-rate.
Volume growth of 7%, as measured by gross ton-miles, drove the increase in fuel expense in 2014 compared to 2013. This was essentially offset by lower locomotive diesel fuel prices, which averaged $2.97 per gallon (including taxes and transportation costs) in 2014, compared to $3.15 in 2013, along with a slight improvement in c-rate, computed as gallons of fuel consumed divided by gross ton-miles.2015.
Depreciation – The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. A higher depreciable asset base, reflecting recent years’ higher capital spending, in recent years, increased depreciation expense in 20152017 compared to 2014.2016. This increase was partially offset by our recent depreciation studies that resulted in lower depreciation rates for some asset classes.
Depreciation was up 7% in 2014 compared to 2013. A higherlarger depreciable asset base, reflecting higher ongoing capital spending drove the increase.in recent years, increased depreciation expense in 2016 compared to 2015. This increase was partially offset by our recent depreciation studies that resulted in lower depreciation rates for some asset classes.
Equipment and Other Rents – Equipment and other rents expense primarily includes rental expense that the Railroad pays for freight cars owned by other railroads or private companies; freight car, intermodal, and locomotive leases; and office and other rent expenses. Equity income from certain equity method investments is also included. Equipment and other rents expense decreased $4$249 million compared to 2014 primarily from a decrease2016. $212 million of the reduction was due to income tax adjustments at certain equity-method affiliates. Lower locomotive and freight car lease expense also contributed to the year-over-year decrease. Conversely, increased car rent expense due to volume growth in manifest and intermodal shipments,certain markets partially offset by growth in finished vehicle shipments.these decreases.
Higher intermodal volumesEquipment and longer cycle times increased short-term freight car rentalother rents expense decreased $93 million in 20142016 compared to 2013. Lower equipment leases essentially offset the higher freight2015 as lower volume levels drove a reduction in car rental expense, as we exercised purchase options on some of our leased equipment.hire and locomotive lease expenses.
Other – Other expenses include state and local taxes, freight, equipment and property damage, utilities, insurance, personal injury, environmental, employee travel, telephone and cellular, computer software, bad debt, and other general expenses. Other expenses were flatdecreased 5% in 20152017 compared to 20142016 as a result of lower environmental and personal injury expenses, and higher bad debt expense in 2016 resulting from a customer bankruptcy. Conversely, increased costs associated with destroyed equipment owned by third parties, and higher property taxes wereand damaged freight costs partially offset by lower costs in other areas.these decreases.
Higher propertyOther expenses increased 8% in 2016 compared to 2015 as a result of higher environmental costs, state and local taxes, personal injurybad debt expense (customer bankruptcy), and utilities coststhe write-off of certain in-progress capital projects that were cancelled. These cost increases were partially offset by lower environmental expense and costs associated withexpenses for damaged freight, resulted in an increase in other costs in 2014 compared to 2013.property, and equipment not owned by the Company.
Non-Operating Items
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| % Change | % Change |
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| % Change | % Change | ||||
Millions | 2015 | 2014 | 2013 | 2015 v 2014 | 2014 v 2013 | 2017 | 2016 | 2015 | 2017 v 2016 | 2016 v 2015 | ||||||||||
Other income | $ | 226 | $ | 151 | $ | 128 | 50 | % | 18 | % | $ | 290 | $ | 192 | $ | 226 | 51 | % | (15) | % |
Interest expense |
| (622) |
| (561) |
| (526) | 11 |
| 7 |
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| (719) |
| (698) |
| (622) | 3 |
| 12 |
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Income taxes |
| (2,884) |
| (3,163) |
| (2,660) | (9) | % | 19 | % | ||||||||||
Income tax benefit/(expense) |
| 3,080 |
| (2,533) |
| (2,884) | F |
| (12) | % |
Other Income – Other income increased in 20152017 compared to 20142016 primarily as a result of a $65 million gain on a litigation settlement for back rent and a $57 million real estate sale gain, both recognized in the third quarter of 2017. Rental income also increased in 2017 compared to 2016.
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Other income decreased in 2016 compared to 2015 primarily due to large real estate transactions: a $113 million gain from a real estate sale in the second quarter of 2015, partially offset by a gain$67 million of gains from the sale of a permanent easement in 2014.
Other income increased in 2014 versus 2013 due to higher gains fromtwo real estate sales and a sale of a permanent easement. These gains were partially offset by higher environmental costs on non-operating property in 2014 and lower lease income due to the $17 million settlement of a land lease contract in 2013.2016.
Interest Expense – Interest expense increased in 20152017 compared to 20142016 due to an increased weighted-average debt level of $13.0$15.9 billion in 20152017 from $10.7$15.0 billion in 2014,2016, partially offset by the impact of a lower effective interest rate of 4.8%4.6% in 20152017 compared to 5.3%4.7% in 2014.2016.
Interest expense increased in 2014 versus 20132016 compared to 2015 due to an increased weighted-average debt level of $10.7$15.0 billion in 20142016 from $9.6$13.0 billion in 2013, which more than2015, partially offset by the impact of thea lower effective interest rate of 5.3%4.7% in 2014 versus 5.7%2016 compared to 4.8% in 2013.2015.
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Income Taxes – Income taxes were a benefit of $3.1 billion in 2017 compared to expense of $2.5 billion in 2016. The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Tax Act reduced the federal income tax rate from 35% to 21% effective January 1, 2018. As a result, we remeasured our deferred tax assets and liabilities which resulted in a $5.9 billion non-cash reduction in our income tax expense in 2017. Higher pre-tax income and an increase in the State of Illinois corporate tax rate effective July 1, 2017 modestly offset the impact of the deferred tax adjustment. Our effective tax rate for 2017 was (40.4%) compared to 37.4% in 2016.
Lower pre-tax income decreased income taxes in 20152016 compared to 2014.2015. Our effective tax rate for 20152016 was 37.7% compared to 37.9% in 2014.
Higher pre-tax income increased income taxes in 2014 compared to 2013. Our effective tax rate for 2014 was 37.9%37.4% compared to 37.7% in 2013.2015.
OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS
We report a number of key performance measures weekly to the Association of American Railroads. We provide this data on our website at www.up.com/investor/aar-stb_reports/index.htm.
Operating/Performance Statistics
Railroad performance measures are included in the table below:
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| % Change | % Change |
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| % Change | % Change | ||||||||
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| 2015 | 2014 | 2013 | 2015 v 2014 | 2014 v 2013 |
| 2017 | 2016 | 2015 | 2017 v 2016 | 2016 v 2015 | ||||
Average train speed (miles per hour) | Average train speed (miles per hour) | 25.4 | 24.0 | 26.0 | 6 | % | (8) | % | Average train speed (miles per hour) | 25.4 | 26.6 | 25.4 | (5) | % | 5 | % |
Average terminal dwell time (hours) | Average terminal dwell time (hours) | 29.3 | 30.3 | 27.1 | (3) | % | 12 | % | Average terminal dwell time (hours) | 30.3 | 28.1 | 29.3 | 8 | % | (4) | % |
Gross ton-miles (billions) | Gross ton-miles (billions) | 927.7 | 1,014.9 | 949.1 | (9) | % | 7 | % | Gross ton-miles (billions) | 898.7 | 856.9 | 927.7 | 5 | % | (8) | % |
Revenue ton-miles (billions) | Revenue ton-miles (billions) | 485.0 | 549.6 | 514.3 | (12) | % | 7 | % | Revenue ton-miles (billions) | 466.7 | 440.1 | 485.0 | 6 | % | (9) | % |
Operating ratio | Operating ratio | 63.1 | 63.5 | 66.1 | (0.4) | pts | (2.6) | pts | Operating ratio | 62.0 | 63.5 | 63.1 | (1.5) | pts | 0.4 | pts |
Employees (average) | Employees (average) | 47,457 | 47,201 | 46,445 | 1 | % | 2 | % | Employees (average) | 41,992 | 42,919 | 47,457 | (2) | % | (10) | % |
Average Train Speed – Average train speed is calculated by dividing train miles by hours operated on our main lines between terminals. Average train speed, as reported to the Association of American Railroads, improved 6%declined 5% in 20152017 compared to 2014.2016 as disruptions across our network, including the impact of Hurricane Harvey, negatively impacted network fluidity. Continued implementation and testing of Positive Train Control across a growing number of routes in our network combined with operational challenges also negatively impacted overall average train speed.
Average train speed improved 5% in 2016 compared to 2015. Velocity gains resulted from lower volumes, improved network fluidity and a strong resource position. More favorable weather conditions in the first quarter of 2015 also contributed to the improvement in our average train speed.
Average train speed decreased 8% in 2014 versus 2013. The decline was as result of a 7% volume increase, a major infrastructure project in Fort Worth, Texas and inclement weather, including flooding in the Midwest in the second quarter and severe weather conditions in the first quarter that impacted all major U.S. and Canadian railroads.
Average Terminal Dwell Time – Average terminal dwell time is the average time that a rail car spends at our terminals. Lower average terminal dwell time improves asset utilization and service. Average terminal dwell time improved 3%increased 8% in 20152017 compared to 2014,2016 resulting from network disruptions and operational challenges which negatively impacted network fluidity.
Average terminal dwell time improved 4% in 2016 compared to 2015, reflecting the impact of lower volume and improved network operations.
Average terminal dwell time increased 12% in 2014 compared to 2013, caused by higher volumes and inclement weather.
Gross and Revenue Ton-Miles – Gross ton-miles are calculated by multiplying the weight of loaded and empty freight cars by the number of miles hauled. Revenue ton-miles are calculated by multiplying the
30
weight of freight by the number of tariff miles. Gross ton-miles and revenue ton-miles decreased 9%increased 5% and 12%6%, respectively in 20152017 compared to 2014,2016, resulting from a 6%2% increase in carloads. Changes in commodity mix drove the variances in year-over-year increases between gross ton-miles, revenue ton-miles, and carloads.
Gross ton-miles and revenue ton-miles decreased 8% and 9%, respectively in 2016 compared to 2015, resulting from a 7% decrease in carloads. Changes in commodity mix drove the variances in year-over-year declines between gross ton-miles, revenue ton-miles and carloads.
Gross ton-miles, revenue ton-miles and carloadings all increased 7% in 2014 compared to 2013.
Operating Ratio – Operating ratio is our operating expenses reflected as a percentage of operating revenue. Our operating ratio improved 0.41.5 points to a new record low of 63.1%62.0% in 20152017 compared to 2014.2016. Income tax adjustments at our equity-method affiliates drove one point of the improvement. Core pricing gains, the impact of lower fuel prices, resource realignments, network efficienciesvolume leverage, and productivity gainssavings more than offset higher inflation, $86 million of costs associated with the impactworkforce reduction plan, higher fuel prices, and other expenses to drive 0.5 points of lower volume and inflation.operating ratio improvement.
Our operating ratio improved 2.6increased 0.4 points to 63.5% in 2014 versus 2013.2016 compared to 2015. Core pricing, business demandprice improvements, network efficiencies, and productivity gains were more than offset by the incremental operating costs associated withimpact of lower volume, a slower network, weatherinflation, and inflation.other costs.
32
Employees – Employee levels increased 1%decreased 2% in 20152017 compared to 2014,2016 driven by productivity gains, a smaller capital workforce, and fewer management and administrative personnel, which more employees in training and an increase in capital project work. More employees were in training as a resultthan offset the impact of the number of transportation employees hired during the last half of 2014 and early 2015 to handle expected2% volume increases, and who continued receiving training in 2015, most of which occurred in the first nine months of the year.growth.
Employee levels increased 2%decreased 10% in 2014 versus 2013. A decrease in our2016 compared to 2015, driven by lower volume levels, productivity gains, a smaller capital workforce, due to improved productivity and project mix partially offset the larger train and engine workforce required for higher volume levels and a slower network. We successfully managed the growth of our full-time equivalent train and engine force levels at a rate less than our volume growthfewer transportation employees in 2014.training.
Return on Average Common Shareholders’ Equity
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Millions, Except Percentages | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 | $ | 10,712 | $ | 4,233 | $ | 4,772 |
Average equity | $ | 20,946 | $ | 21,207 | $ | 20,551 | $ | 22,394 | $ | 20,317 | $ | 20,946 |
Return on average common shareholders' equity |
| 22.8% |
| 24.4% |
| 21.4% |
| 47.8% |
| 20.8% |
| 22.8% |
Return on Invested Capital as Adjusted (ROIC)
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Millions, Except Percentages | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 | $ | 10,712 | $ | 4,233 | $ | 4,772 |
Interest expense |
| 622 |
| 561 |
| 526 |
| 719 |
| 698 |
| 622 |
Interest on present value of operating leases |
| 135 |
| 158 |
| 175 |
| 105 |
| 121 |
| 135 |
Taxes on interest |
| (285) |
| (273) |
| (264) |
| (309) |
| (306) |
| (285) |
Net operating profit after taxes as adjusted (a) | $ | 5,244 | $ | 5,626 | $ | 4,825 | $ | 11,227 | $ | 4,746 | $ | 5,244 |
Average equity | $ | 20,946 | $ | 21,207 | $ | 20,551 | $ | 22,394 | $ | 20,317 | $ | 20,946 |
Average debt* |
| 12,807 |
| 10,469 |
| 9,237 | ||||||
Average debt |
| 15,976 |
| 14,604 |
| 12,807 | ||||||
Average present value of operating leases |
| 2,814 |
| 2,980 |
| 3,077 |
| 2,288 |
| 2,581 |
| 2,814 |
Average invested capital as adjusted (b) | $ | 36,567 | $ | 34,656 | $ | 32,865 | $ | 40,658 | $ | 37,502 | $ | 36,567 |
Return on invested capital as adjusted (a/b) |
| 14.3% |
| 16.2% |
| 14.7% |
| 27.6% |
| 12.7% |
| 14.3% |
*Adjusted for the retrospective adoption of Accounting Standard Update 2015-03 related to the presentation of deferred debt issuance costs.
ROIC is considered a non-GAAP financial measure by SEC Regulation G and Item 10 of SEC Regulation S-K, and may not be defined and calculated by other companies in the same manner. We believe this measure is important to management and investors in evaluating the efficiency and effectiveness of our long-term capital investments. In addition, we currently use ROIC as a performance criteria in determining certain elements of equity compensation for our executives. ROIC should be considered in addition to, rather than as a substitute for, other information provided in accordance with GAAP. The most comparable GAAP measure is Return on Average Common Shareholders’ Equity. The tables above provide reconciliations from return on average common shareholders’ equity to ROIC. Our 20152017 ROIC decreased 1.9 pointsof 27.6% increased compared to 2014, primarily2016, largely as a result the $5.9 billion reduction to our deferred tax liability, that was recognized as an income tax benefit in 2017 (See Note 8 of lowerthe Consolidated Financial Statements for
31
additional information). Higher earnings and afrom base operations also contributed to the increase, more than offsetting our higher invested capital base.
Net Return on Invested Capital as Adjusted (Net ROIC)
The table below reconciles ROIC as previously calculated to Net ROIC for items affecting comparability.
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| 2017 |
| 2016 |
| 2015 |
Return on invested capital as adjusted |
| 27.6% |
| 12.7% |
| 14.3% |
Factors Affecting Comparability: |
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Adjustments for Tax Cuts and Jobs Act [a] |
| (13.9) |
| N/A |
| N/A |
Net Return on Invested Capital as Adjusted |
| 13.7% |
| 12.7% |
| 14.3% |
[a] | Adjustments remove the impact of $5.9 billion and $139 million from both 12/31/17 Net Income and 12/31/17 Shareholders’ Equity. |
Net ROIC is considered a non-GAAP financial measure by SEC Regulation G and Item 10 of SEC Regulation S-K, and may not be defined and calculated by other companies in the same manner. We believe this measure is important to management and investors in evaluating the efficiency and effectiveness of our long-term capital investments. We use Net ROIC to demonstrate year over year comparability for significant items. Net ROIC should be considered in addition to, rather than as a substitute for, other information provided in accordance with GAAP. The most comparable GAAP measure is Return on Average Common Shareholders’ Equity.
Debt to Capital
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Millions, Except Percentages | 2015 | 2014 | 2017 | 2016 | ||||
Debt* (a) | $ | 14,201 | $ | 11,413 | ||||
Debt (a) | $ | 16,944 | $ | 15,007 | ||||
Equity |
| 20,702 |
| 21,189 |
| 24,856 |
| 19,932 |
Capital (b) | $ | 34,903 | $ | 32,602 | $ | 41,800 | $ | 34,939 |
Debt to capital (a/b) |
| 40.7% |
| 35.0% |
| 40.5% |
| 43.0% |
*Adjusted for the retrospective adoption of Accounting Standard Update 2015-03 related to the presentation of deferred debt issuance costs.
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Adjusted Debt to Capital
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Millions, Except Percentages | 2015 | 2014 | 2017 | 2016 | ||||
Debt | $ | 14,201 | $ | 11,413 | $ | 16,944 | $ | 15,007 |
Net present value of operating leases |
| 2,726 |
| 2,902 |
| 2,140 |
| 2,435 |
Unfunded pension and OPEB, after tax |
| 463 |
| 523 | ||||
Adjusted debt* (a) | $ | 17,390 | $ | 14,838 | ||||
Unfunded pension and OPEB, net of taxes of $238 and $261 |
| 396 |
| 436 | ||||
Adjusted debt (a) | $ | 19,480 | $ | 17,878 | ||||
Equity |
| 20,702 |
| 21,189 |
| 24,856 |
| 19,932 |
Adjusted capital (b) | $ | 38,092 | $ | 36,027 | $ | 44,336 | $ | 37,810 |
Adjusted debt to capital (a/b) |
| 45.7% |
| 41.2% |
| 43.9% |
| 47.3% |
*Adjusted for the retrospective adoption of Accounting Standard Update 2015-03 related to the presentation of deferred debt issuance costs.
Adjusted debt to capital is a non-GAAP financial measure under SEC Regulation G and Item 10 of SEC Regulation S-K, and may not be defined and calculated by other companies in the same manner. We believe this measure is important to management and investors in evaluating the total amount of leverage in our capital structure, including off-balance sheet lease obligations, which we generally incur in connection with financing the acquisition of locomotives and freight cars and certain facilities. Operating leases were discounted using 4.8%4.6% and 5.3%4.7% at December 31, 20152017, and 2014,2016, respectively. The discount rate reflects our effective interest rate. We monitor the ratio of adjusted debt to capital as we manage our capital structure to balance cost-effective and efficient access to the capital markets with our overall cost of capital. Adjusted debt to capital should be considered in addition to, rather than as a substitute for, debt to capital. The tables above provide reconciliations from debt to capital to adjusted debt to capital. Our December 31, 20152017 debt to capital ratios increaseddecreased as a result of a $2.8$4.9 billion increase in debtequity from December 31, 2014.2016. The increase in equity is largely due to a $5.9 billion reduction to our deferred tax liability that was recognized as an income tax benefit in 2017.
32
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2015,2017, our principal sources of liquidity included cash, cash equivalents, our receivables securitization facility, and our revolving credit facility, as well as the availability of commercial paper and other sources of financing through the capital markets. We had $1.7 billion of committed credit available under our credit facility, with no borrowings outstanding as of December 31, 2015.2017. We did not make any borrowings under this facility during 2015.2017. The value of the outstanding undivided interest held by investors under the $650 million capacity receivables securitization facility was $400$500 million as of December 31, 2015, and is included in our Consolidated Statements of Financial Position as debt due after one year.2017. Our access to this receivables securitization facility may be reduced or restricted if our bond ratings fall to certain levels below investment grade. If our bond rating were to deteriorate, it could have an adverse impact on our liquidity. Access to commercial paper as well as other capital market financings is dependent on market conditions. Deterioration of our operating results or financial condition due to internal or external factors could negatively impact our ability to access capital markets as a source of liquidity. Access to liquidity through the capital markets is also dependent on our financial stability. We expect that we will continue to have access to liquidity through any or all of the following sources or activities: (i) increasing the size or utilization of our receivables securitization, (ii) issuing commercial paper, (iii) entering into bank loans, outside of our revolving credit facility, or (iv) issuing bonds or other debt securities to public or private investors based on our assessment of the current condition of the credit markets. The Company’s $1.7 billion revolving credit facility is intended to support the issuance of commercial paper by UPC and also serves as an emergency source of liquidity. The Company currently does not intend to make any borrowings under this facility.
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At December 31, 2015 and 2014,2017, we had a modest working capital surplus. This reflectsAt December 31, 2016, we had a strong cash position that provides enhanced liquidityworking capital deficit. The decrease at 2016 year-end was primarily due to a decrease in other current assets related to a tax receivable for the late extension of bonus depreciation at December 31, 2015, along with an uncertain economic environment. In addition, we believe weincrease at December 31, 2016, in accounts payable and upcoming debt maturities. We maintain adequate resources, and when necessary, have adequate access to capital markets to meet any foreseeable cash requirements, and we havein addition to sufficient financial capacity to satisfy our current liabilities.
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Cash provided by operating activities | $ | 7,344 | $ | 7,385 | $ | 6,823 | $ | 7,230 | $ | 7,525 | $ | 7,344 |
Cash used in investing activities |
| (4,476) |
| (4,249) |
| (3,405) |
| (3,086) |
| (3,393) |
| (4,476) |
Cash used in financing activities |
| (3,063) |
| (2,982) |
| (3,049) |
| (4,146) |
| (4,246) |
| (3,063) |
Net change in cash and cash equivalents | $ | (195) | $ | 154 | $ | 369 | $ | (2) | $ | (114) | $ | (195) |
Operating Activities
Cash provided by operating activities decreased in 20152017 compared to 20142016 due to lower netthe timing of tax payments in 2016 related to bonus depreciation on capital spending. The decrease was mostly offset by higher income in 2017 compared to 2016.
Cash provided by operating activities increased in 2016 compared to 2015. The timing of tax payments primarily related to bonus depreciation and changes in working capital partiallymore than offset by the timing of tax payments.lower net income.
Federal tax law provided forThe Tax Act was enacted on December 22, 2017. The Tax Act extended 100% bonus depreciation for qualified investments made during 2011effective September 27, 2017 through 2022, and 50%phases out bonus depreciation for qualified investments made during 2012-2013. As a result, the Company deferred a substantial portion of its 2011-2013 income tax expense, contributing to the positive operating cash flow in those years. Congress extended 50% bonus depreciation for 2014, but this extension occurred in December, and the related benefit was realized in 2015, rather than 2014. Similarly, in December of 2015, Congress extended bonus depreciation through 2019, which delayed the benefit of 2015 bonus depreciation into 2016. Bonus depreciation will be at a rate of 50% for 2015, 2016 and 2017, 40% for 2018 and 30% for 2019.deprecation by 2027.
Higher net income in 2014 increased cash provided by operating activities compared to 2013, despite higher income tax payments. 2014 income tax payments were higher than 2013 primarily due to higher income, but also because we paid taxes previously deferred by bonus depreciation.
Investing Activities
HigherLower capital investments in locomotives and freight cars, including $327 million in early lease buyouts, which we exercised due to favorable economic terms and market conditions, drove the increase inshort-term investment purchases decreased cash used in investing activities in 20152017 compared to 2014.2016.
HigherLower capital investments, including the early buyout of the long-term operating lease of our headquarters building for approximately $261 million, drove the increase inpartially offset by short-term investment purchases, decreased cash used in investing activities in 20142016 compared to 2013. Significant investments also were made for new locomotives, freight cars and containers, and capacity and commercial facility projects. Capital investments in 2014 also included $99 million for the early buyout of locomotives and freight cars under long-term operating leases, which we exercised due to favorable economic terms and market conditions.2015.
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The following tables detail cash capital investments and track statistics for the years ended December 31, 2015, 2014,2017, 2016, and 2013:2015:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Rail and other track material | $ | 734 | $ | 749 | $ | 743 | $ | 619 | $ | 628 | $ | 734 |
Ties |
| 455 |
| 415 |
| 438 |
| 480 |
| 494 |
| 455 |
Ballast |
| 233 |
| 204 |
| 226 |
| 231 |
| 235 |
| 233 |
Other [a] |
| 438 |
| 378 |
| 326 |
| 503 |
| 480 |
| 438 |
Total road infrastructure replacements |
| 1,860 |
| 1,746 |
| 1,733 |
| 1,833 |
| 1,837 |
| 1,860 |
Line expansion and other capacity projects |
| 457 |
| 515 |
| 455 |
| 124 |
| 153 |
| 457 |
Commercial facilities |
| 227 |
| 217 |
| 146 |
| 189 |
| 152 |
| 227 |
Total capacity and commercial facilities |
| 684 |
| 732 |
| 601 |
| 313 |
| 305 |
| 684 |
Locomotives and freight cars [b] |
| 1,436 |
| 1,067 |
| 580 |
| 607 |
| 854 |
| 1,436 |
Positive train control |
| 381 |
| 384 |
| 419 |
| 336 |
| 371 |
| 381 |
Technology and other [c] |
| 289 |
| 417 |
| 163 | ||||||
Technology and other |
| 149 |
| 138 |
| 289 | ||||||
Total cash capital investments | $ | 4,650 | $ | 4,346 | $ | 3,496 | $ | 3,238 | $ | 3,505 | $ | 4,650 |
[a] | Other includes bridges and tunnels, signals, other road assets, and road work equipment. |
[b] | Locomotives and freight cars include early lease buyouts of $173 million in 2017, $90 million in 2016, and $327 million in |
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| 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Track miles of rail replaced |
| 767 |
| 912 |
| 834 |
| 731 |
| 791 |
| 767 |
Track miles of rail capacity expansion |
| 103 |
| 119 |
| 97 |
| 11 |
| 52 |
| 103 |
New ties installed (thousands) |
| 4,178 |
| 4,076 |
| 3,870 |
| 4,026 |
| 4,482 |
| 4,178 |
Miles of track surfaced |
| 10,076 |
| 10,791 |
| 11,017 |
| 11,071 |
| 11,764 |
| 10,076 |
Capital Plan – In 2016,2018, we expect our capital plan to be approximately $3.75$3.3 billion, which may be revised if business conditions or the regulatory environment affect our ability to generate sufficient returns on these investments. While asset replacements will fluctuate as part of our renewal strategy, we expect to use 55% to 60%around 70% of our capital investments to renew and improve existing capital assets. We will continue to investbalance investment in our network infrastructure and terminals where appropriate, balancing terminal capacity with mainline capacity.as appropriate, including initial construction work on a new classification yard in our Southern Region. Significant investments in technology improvements are planned, including approximately $375 million for PTC. We also will also continue commercial investments in rail facilities and equipment, including 230approximately 60 new locomotives, intermodal containers and 450chassis, and freight cars.
We expect to fund our 20162018 cash capital plan by using some or all of the following: cash generated from operations, proceeds from the sale or lease of various operating and non-operating properties, proceeds from the issuance of long-term debt, and cash on hand. Our annual capital plan is a critical component of our long-term strategic plan. We expect our plan will enhance the long-term value of the Company for our shareholders by providing sufficient resources to (i) replace and improve our existing track infrastructure to provide safe and fluid operations, (ii) increase network efficiency by adding or improving facilities and track, and (iii) make investments that meet customer demand and take advantage of opportunities for long-term growth.
Financing Activities
Cash used in financing activities increaseddecreased in 20152017 compared to 2014.2016. An increase of $712$908 million in common shares purchased and an increase of $103 million in dividends paid and $240 million for the repurchase of shares under our common stock repurchase programwas more than offset by an increase of $740$752 million in debt issued, a decrease of $173 million in debt repaid, and a decrease of $154$191 million in debt repaid.exchange costs.
Cash used in financing activities increased in 2016 compared to 2015. An increase of $457 million in debt repaid and a decrease of $1,345 million in debt issued more than offset a decrease of $465 million in dividends paid. The higher dividend payments primarily weredecrease in dividends paid was a result of adjusting the dividend payable dates in 2015 to align with the timing of the quarterly dividend declaration and payment dates within the same quarter. Aligning the quarterly dividend declaration and payment resulted in two payments in the first quarter of 2015: the fourth quarter 2014 dividend of $438 million, which was paid on January 2, 2015, as well as the first quarter 2015 dividend of $484 million, which was paid on March 30, 2015. The second quarter 2015
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dividend of $479 million was paid on June 30, 2015, the third quarter 2015 dividend of $476 million was paid on September 30, 2015, and the fourth quarter 2015 dividend of $467 million was paid on December 31, 2015. Higher dividends per share also contributed to the increase in dividends paid.
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Cash used in financing activities remained flat in 2014 versus 2013. IncreasesSee Note 15 of the Consolidated Financial Statements for the repurchasea description of shares under our common stock repurchase program and higher dividend payments in 2014 of $1.6 billion compared to $1.3 billion in 2013 were offset by higher debt issuances in 2014.
Credit Facilities – At December 31, 2015, we had $1.7 billion of credit available under our revolving credit facility (the facility), which is designated for general corporate purposes and supports the issuance of commercial paper. We did not draw on the facility during 2015. Commitment fees and interest rates payable under the facility are similar to fees and rates available to comparably rated, investment-grade borrowers. The facility allows for borrowings at floating rates based on London Interbank Offered Rates, plus a spread, depending upon credit ratings for our senior unsecured debt. The facility matures in May 2019 under a five-year term and requires UPC to maintain a debt-to-net-worth coverage ratio. At December 31, 2015, and December 31, 2014 (and at all times during the periods presented), we were in compliance with this covenant.
The definition of debt used for purposes of calculating the debt-to-net-worth coverage ratio includes, among other things, certain credit arrangements, capital leases, guarantees and unfunded and vested pension benefits under Title IV of ERISA. At December 31, 2015, the debt-to-net-worth coverage ratio allowed us to carry up to $41.4 billion of debt (as defined in the facility), and we had $14.3 billion of debt (as defined in the facility) outstanding at that date. Under our current capital plans, we expect to continue to satisfy the debt-to-net-worth coverage ratio; however, many factors beyond our reasonable control could affect our ability to comply with this provision in the future. The facility does not include any other financial restrictions, credit rating triggers (other than rating-dependent pricing), or any other provision that could require us to post collateral. The facility also includes a $125 million cross-default provision and a change-of-control provision.
During 2015, we did not issue or repay any commercial paper, and at December 31, 2015, and 2014, we had no commercial paper outstanding. Our revolving credit facility supports our outstanding commercial paper balances,financing arrangements and unless we change the terms of our commercial paper program, our aggregate issuance of commercial paper will not exceed the amount of borrowings available under the facility.
(See further discussion in this Item 7 under Receivables Securitization Facility for information regarding the Company’s receivables securitization facility.)significant new borrowings.
Ratio of Earnings to Fixed Charges
For each of the years ended December 31, 2015, 2014,2017, 2016, and 2013,2015, our ratio of earnings to fixed charges was 11.6, 13.5,10.3, 9.6, and 11.8,11.6, respectively. The ratio of earnings to fixed charges was computed on a consolidated basis. Earnings represent income from continuing operations, less equity earnings net of distributions, plus fixed charges and income taxes. Fixed charges represent interest charges, amortization of debt discount, and the estimated amount representing the interest portion of rental charges. (See Exhibit 12 to this report for the calculation of the ratio of earnings to fixed charges.)
Common Shareholders’ Equity
Dividend Restrictions – Our revolving credit facility includes a debt-to-net worth covenant (discussed in the Credit Facilities section above) that, under certain circumstances, restricts the payment of cash dividends to our shareholders. The amount of retained earnings available for dividends was $13.6$16.4 billion and $15.4$12.4 billion at December 31, 2015,2017, and 2014,2016, respectively.
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Share Repurchase Program
Effective January 1, 2014,2017, our Board of Directors authorized the repurchase of up to 120 million shares of our common stock by December 31, 2017,2020, replacing our previous repurchase program. As of December 31, 2015,2017, we repurchased a total of $16.0$23.2 billion of our common stock since the commencement of our repurchase programs in 2007. The table below represents shares repurchased in 2017 under this repurchase program and shares repurchased in 2016 under our previous purchase program.
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| Number of Shares Purchased | Average Price Paid |
| Number of Shares Purchased | Average Price Paid | ||||||||
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| 2015 | 2014 |
| 2015 |
| 2014 |
| 2017 | 2016 |
| 2017 |
| 2016 |
First quarter | First quarter | 6,881,455 | 7,640,000 | $ | 117.28 | $ | 89.43 | First quarter | 7,531,300 | 9,315,807 | $ | 106.55 | $ | 76.49 |
Second quarter | Second quarter | 7,975,100 | 8,320,000 |
| 104.62 |
| 96.84 | Second quarter | 7,788,283 | 7,026,100 |
| 109.10 |
| 85.66 |
Third quarter | Third quarter | 13,800,700 | 8,347,000 |
| 89.65 |
| 102.54 | Third quarter | 11,801,755 | 9,088,613 |
| 106.69 |
| 93.63 |
Fourth quarter | Fourth quarter | 6,646,899 | 7,736,400 |
| 88.19 |
| 113.77 | Fourth quarter | 9,231,510 | 9,624,667 |
| 119.37 |
| 97.60 |
Total | Total | 35,304,154 | 32,043,400 | $ | 98.14 | $ | 100.65 | Total | 36,352,848 | 35,055,187 | $ | 110.40 | $ | 88.57 |
Remaining number of shares that may be repurchased under current authority | 52,652,446 |
Management's assessments of market conditions and other pertinent facts guide the timing and volume of all repurchases. We expect to fund any share repurchases under this program through cash generated from operations, the sale or lease of various operating and non-operating properties, debt issuances, and cash on hand. Repurchased shares are recorded in treasury stock at cost, which includes any applicable commissions and fees.
From January 1, 2016,2018, through February 4, 2016,8, 2018, we repurchased 3.72.6 million shares at an aggregate cost of approximately $268$349 million.
Shelf Registration Statement and Significant New Borrowings – We filed a new shelf registration statement with the SEC that became effective on February 9, 2015. The Board of Directors authorized the issuance of up to $4.0 billion of debt securities, replacing the $4.0 billion authorized under our shelf registration filed in February 2013, which was fully utilized after our January 2015 debt offering noted below. Under our current shelf registration, we 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. We have no immediate plans to issue equity securities; however, we will continue to explore opportunities to replace existing debt or access capital through issuances of debt securities under our shelf registration, and, therefore, we may issue additional debt securities at any time.
During 2015, we issued the following unsecured, fixed-rate debt securities under our shelf registrations:
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We used the net proceeds from the offerings for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase program. These debt securities include change-of-control provisions. At December 31, 2015, we had remaining authority to issue up to $2.2 billion of debt securities under our current shelf registration.
Equipment Trust – On May 12, 2015, UPRR consummated a pass-through (P/T) financing, whereby a P/T trust was created, which issued $399 million of P/T trust certificates with a stated interest rate of 2.695%. The P/T trust certificates will mature on May 12, 2027. The proceeds from the issuance of the P/T trust certificates were used to purchase equipment trust certificates to be issued by UPRR to finance the acquisition of 182 locomotives. The equipment trust certificates are secured by a lien on the
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locomotives. The $399 million is classified as debt due after one year in our Consolidated Statements of Financial Position.
Debt Exchange – On August 21, 2013, we exchanged $1,170 million of various outstanding notes and debentures due between 2016 and 2040 (the Existing Notes) for $439 million of 3.646% notes (the New 2024 Notes) due February 15, 2024 and $700 million of 4.821% notes (the New 2044 Notes) due February 1, 2044, plus cash consideration of approximately $280 million in addition to $8 million for accrued and unpaid interest on the Existing Notes. In accordance with ASC 470-50-40, Debt-Modifications and Extinguishments-Derecognition, this transaction was accounted for as a debt exchange, as the exchanged debt instruments are not considered to be substantially different. The cash consideration was recorded as an adjustment to the carrying value of debt, and the balance of the unamortized discount and issue costs from the Existing Notes is being amortized as an adjustment of interest expense over the terms of the New 2024 Notes and the New 2044 Notes. No gain or loss was recognized as a result of the exchange. Costs related to the debt exchange that were payable to parties other than the debt holders totaled approximately $9 million and were included in interest expense during the year ended December 31, 2013.
The following table lists the outstanding notes and debentures that were exchanged:
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Receivables Securitization Facility – The Railroad maintains a $650 million, 3-year receivables securitization facility maturing in July 2017 under which it sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a consolidated, wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without recourse, an undivided interest in accounts receivable to investors. The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI.
The amount outstanding under the facility was $400 million at both December 31, 2015, and December 31, 2014, respectively. The facility was supported by $0.9 billion and $1.2 billion of accounts receivable as collateral at December 31, 2015, and December 31, 2014, respectively, which, as a retained interest, is included in accounts receivable, net in our Consolidated Statements of Financial Position.
The outstanding amount the Railroad is allowed to maintain under the facility, with a maximum of $650 million, may fluctuate based on the availability of eligible receivables and is directly affected by business volumes and credit risks, including receivables payment quality measures such as default and dilution ratios. If default or dilution ratios increase one percent, the allowable outstanding amount under the facility would not materially change.
The costs of the receivables securitization facility include interest, which will vary based on prevailing benchmark and commercial paper rates, program fees paid to participating banks, commercial paper issuance costs, and fees of participating banks for unused commitment availability. The costs of the receivables securitization facility are included in interest expense and were $5 million, $4 million, and $5 million for 2015, 2014, and 2013, respectively.
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Contractual Obligations and Commercial Commitments
As described in the notes to the Consolidated Financial Statements and as referenced in the tables below, we have contractual obligations and commercial commitments that may affect our financial condition. Based on our assessment of the underlying provisions and circumstances of our contractual obligations and commercial commitments, including material sources of off-balance sheet and structured finance arrangements, other than the risks that we and other similarly situated companies face with respect to the condition of the capital markets (as described in Item 1A of Part II of this report), there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity. In addition, our commercial obligations, financings, and commitments are customary transactions that are similar to those of other comparable corporations, particularly within the transportation industry.
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The following tables identify material obligations and commitments as of December 31, 2015:2017:
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| Payments Due by December 31, |
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Contractual Obligations | Contractual Obligations |
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Millions | Millions | Total | 2016 | 2017 | 2018 | 2019 | 2020 | Other | Millions | Total | 2018 | 2019 | 2020 | 2021 | 2022 | Other | ||||||||||||||||||
Debt [a] | Debt [a] | $ | 22,885 | $ | 1,006 | $ | 1,434 | $ | 938 | $ | 981 | $ | 1,339 | $ | 17,187 | $ | - | Debt [a] | $ | 28,965 | $ | 1,325 | $ | 1,614 | $ | 1,473 | $ | 1,098 | $ | 1,337 | $ | 22,118 | $ | - |
Operating leases [b] | Operating leases [b] |
| 3,430 |
| 491 |
| 446 |
| 371 |
| 339 |
| 282 |
| 1,501 |
| - | Operating leases [b] |
| 2,649 |
| 398 |
| 359 |
| 297 |
| 259 |
| 221 |
| 1,115 |
| - |
Capital lease obligations [c] | Capital lease obligations [c] |
| 1,587 |
| 217 |
| 220 |
| 198 |
| 184 |
| 193 |
| 575 |
| - | Capital lease obligations [c] |
| 1,079 |
| 173 |
| 156 |
| 164 |
| 168 |
| 147 |
| 271 |
| - |
Purchase obligations [d] | Purchase obligations [d] |
| 3,983 |
| 2,309 |
| 673 |
| 306 |
| 255 |
| 211 |
| 197 |
| 32 | Purchase obligations [d] |
| 2,789 |
| 1,573 |
| 459 |
| 319 |
| 247 |
| 48 |
| 111 |
| 32 |
Other post retirement benefits [e] | Other post retirement benefits [e] |
| 453 |
| 45 |
| 45 |
| 46 |
| 46 |
| 46 |
| 225 |
| - | Other post retirement benefits [e] |
| 479 |
| 50 |
| 49 |
| 49 |
| 48 |
| 48 |
| 235 |
| - |
Income tax contingencies [f] | Income tax contingencies [f] |
| 94 |
| - |
| - |
| - |
| - |
| - |
| - |
| 94 | Income tax contingencies [f] |
| 179 |
| 56 |
| - |
| - |
| - |
| - |
| - |
| 123 |
Total contractual obligations | Total contractual obligations | $ | 32,432 | $ | 4,068 | $ | 2,818 | $ | 1,859 | $ | 1,805 | $ | 2,071 | $ | 19,685 | $ | 126 | Total contractual obligations | $ | 36,140 | $ | 3,575 | $ | 2,637 | $ | 2,302 | $ | 1,820 | $ | 1,801 | $ | 23,850 | $ | 155 |
[a] | Excludes capital lease obligations of |
[b] | Includes leases for locomotives, freight cars, other equipment, and real estate. |
[c] | Represents total obligations, including interest component of |
[d] | Purchase obligations include locomotive maintenance contracts; purchase commitments for fuel purchases, locomotives, ties, ballast, and rail; and agreements to purchase other goods and services. For amounts where we cannot reasonably estimate the year of settlement, they are reflected in the Other column. |
[e] | Includes estimated other post retirement, medical, and life insurance payments, payments made under the unfunded pension plan for the next ten years. |
[f] | Future cash flows for income tax contingencies reflect the recorded liabilities and assets for unrecognized tax benefits, including interest and penalties, as of December 31, |
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Other Commercial Commitments | Other Commercial Commitments |
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Millions | Millions | Total | 2016 | 2017 | 2018 | 2019 | 2020 | Millions | Total | 2018 | 2019 | 2020 | 2021 | 2022 | ||||||||||||||||
Credit facilities [a] | Credit facilities [a] | $ | 1,700 | $ | - | $ | - | $ | - | $ | 1,700 | $ | - | $ | - | Credit facilities [a] | $ | 1,700 | $ | - | $ | 1,700 | $ | - | $ | - | $ | - | $ | - |
Receivables securitization facility [b] | Receivables securitization facility [b] |
| 650 |
| - |
| 650 |
| - |
| - |
| - |
| - | Receivables securitization facility [b] |
| 650 |
| - |
| 650 |
| - |
| - |
| - |
| - |
Guarantees [c] | Guarantees [c] |
| 53 |
| 9 |
| 10 |
| 11 |
| 8 |
| 5 |
| 10 | Guarantees [c] |
| 33 |
| 11 |
| 7 |
| 5 |
| 5 |
| 5 |
| - |
Standby letters of credit [d] | Standby letters of credit [d] |
| 35 |
| 33 |
| 2 |
| - |
| - |
| - |
| - | Standby letters of credit [d] |
| 19 |
| 19 |
| - |
| - |
| - |
| - |
| - |
Total commercial commitments | Total commercial commitments | $ | 2,438 | $ | 42 | $ | 662 | $ | 11 | $ | 1,708 | $ | 5 | $ | 10 | Total commercial commitments | $ | 2,402 | $ | 30 | $ | 2,357 | $ | 5 | $ | 5 | $ | 5 | $ | - |
[a] | None of the credit facility was used as of December 31, |
[b] | $ |
[c] | Includes guaranteed obligations related to our affiliated operations. |
[d] | None of the letters of credit were drawn upon as of December 31, |
Off-Balance Sheet Arrangements
Guarantees – At December 31, 2015,2017, and 2014,2016, we were contingently liable for $53$33 million and $82$43 million in guarantees. We have recorded liabilities of $0 and $0.3 million for theThe fair value of these obligations as of both December 31, 2015,2017, and 2014, respectively.2016, was $0. We entered into these contingent guarantees in the normal course of business, and they include guaranteed obligations related to our affiliated operations. The final guarantee expires in 2022. We are not aware of any existing event of
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default that would require us to satisfy these guarantees. We do not expect that these guarantees will have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.
OTHER MATTERS
Labor Agreements – Approximately 85% of our 47,45741,992 full-time-equivalent employees are represented by 14 major rail unions. On January 1, 2015, current labor agreements became subject to modification and we began the current round of negotiations with the unions. Existing agreements remain in effect until new agreements are reachedratified or the Railway Labor Act’s (RLA) procedures (which include mediation, potential arbitration, cooling-off periods, and the possibility of Presidential Emergency Boards and Congressional intervention) are exhausted. Through industry and local negotiations, UPRR reached tentative new agreements with 12 of our 14 major rail unions. Nine unions (representing nearly 70% of our agreement work force) have ratified those agreements by significant margins. The tentative agreement failed ratification with two unions in early February 2018 (representing about 10% of our agreement work force)
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returning any further discussions with them to the jurisdiction of the National Mediation Board. Another small union (less than 1%) is still out for ratification. UPRR and the industry currently continue in active mediation with the remaining coalition of two unions (representing about 20% of our agreement work force). Under the Railway Labor Act, the National Mediation Board controls timing and location of mediation conferences and when to terminate mediation, moving the parties to the next stages of the RLA process. Contract negotiations historically continue for an extended period of time and we rarely experience work stoppages while negotiations are pending.
Inflation – Long periods of inflation significantly increase asset replacement costs for capital-intensive companies. As a result, assuming that we replace all operating assets at current price levels, depreciation charges (on an inflation-adjusted basis) would be substantially greater than historically reported amounts.
Derivative Financial Instruments – We may use derivative financial instruments in limited instances to assist in managing our overall exposure to fluctuations in interest rates and fuel prices. We are not a party to leveraged derivatives and, by policy, do not use derivative financial instruments for speculative purposes. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. We formally document the nature and relationships between the hedging instruments and hedged items at inception, as well as our risk-management objectives, strategies for undertaking the various hedge transactions, and method of assessing hedge effectiveness. Changes in the fair market value of derivative financial instruments that do not qualify for hedge accounting are charged to earnings. We may use swaps, collars, futures, and/or forward contracts to mitigate the risk of adverse movements in interest rates and fuel prices; however, the use of these derivative financial instruments may limit future benefits from favorable price movements.
Market and Credit Risk – We address market risk related to derivative financial instruments by selecting instruments with value fluctuations that highly correlate with the underlying hedged item. We manage credit risk related to derivative financial instruments, which is minimal, by requiring high credit standards for counterparties and periodic settlements. At December 31, 2015 and 2014, we were not required to provide collateral, nor had we received collateral, relating to our hedging activities.
Determination of Fair Value – We determine the fair values of our derivative financial instrument positions based upon current fair values as quoted by recognized dealers or the present value of expected future cash flows.
Sensitivity Analyses – The sensitivity analyses that follow illustrate the economic effect that hypothetical changes in interest rates could have on our results of operations and financial condition. These hypothetical changes do not consider other factors that could impact actual results.
At December 31, 2015,2017, we had variable-rate debt representing approximately 4.2%4.4% of our total debt. If variable interest rates average one percentage point higher in 20162018 than our December 31, 20152017 variable rate, which was approximately 1.1%2.2%, our interest expense would increase by approximately $6$7.5 million. This amount was determined by considering the impact of the hypothetical interest rate on the balances of our variable-rate debt at December 31, 2015.2017.
Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a hypothetical one percentage point decrease in interest rates as of December 31, 2015,2017, and amounts to an increase of approximately $1.6$2.2 billion to the fair value of our debt at December 31, 2015.2017. We estimated the fair values of our fixed-rate debt by considering the impact of the hypothetical interest rates on quoted market prices and current borrowing rates.
Interest Rate Fair Value Hedges – We manage our overall exposure to fluctuations in interest rates by adjusting the proportion of fixed and floating rate debt instruments within our debt portfolio over a given period. We generally manage the mix of fixed and floating rate debt through the issuance of targeted amounts of each as debt matures or as we require incremental borrowings. We employ derivatives, primarily swaps, as one of the tools to obtain the targeted mix. In addition, we also obtain flexibility in
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managing interest costs and the interest rate mix within our debt portfolio by evaluating the issuance of and managing outstanding callable fixed-rate debt securities.
Swaps allow us to convert debt from fixed rates to variable rates and thereby hedge the risk of changes in the debt’s fair value attributable to the changes in interest rates. We account for swaps as fair value hedges using the short-cut method as allowed by the Derivatives and Hedging Topic of the Financial Accounting Standards Board (FASB) ASC 815; therefore, we do not record any ineffectiveness within our Consolidated Financial Statements. As of December 31, 2015 and 2014, we had no interest rate fair value hedges outstanding.
Interest Rate Cash Flow Hedges – We report changes in the fair value of cash flow hedges in accumulated other comprehensive loss until the hedged item affects earnings. As of December 31, 2015, and 2014, we had no interest rate cash flow hedges outstanding.
Accounting Pronouncements – In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition guidance in Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenueSee Note 3 to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. This standard is effective for annual reporting periods beginning after December 15, 2017, and can be adopted either retrospectively or as a cumulative effect adjustment as of the date of adoption. ASU 2014-09 is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30). ASU 2015-03 changes the presentation of debt issuance costs in the financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will be reported as interest expense. This standard is effective for annual reporting periods beginning after December 15, 2015. We elected to early adopt ASU 2015-03 on December 31, 2015. As a result, the Company reclassified debt issuance costs from other assets to a direct deduction from debt due after one year on the Consolidated Statements of Financial Position. ASU 2015-03 did not have a material impact on our consolidated financial position, and had no impact on our results of operations or cash flows. All prior period financial information presented herein has been adjusted to reflect the retrospective application of this ASU.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17), Balance Sheet Classification of Deferred Taxes (Subtopic 740-10). ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the requirement for companies to present deferred tax liabilities and assets as current and non-current on the Consolidated Statements of Financial Position. Instead, companies will be required to classify all deferred tax assets and liabilities as non-current. This guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We elected to early adopt ASU 2015-17 on December 31, 2015. ASU 2015-17 did not have a material impact on our consolidated financial position, and had no impact on our results of operations or cash flows. All prior period financial information presented herein has been adjusted to reflect the retrospective application of this ASU.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01), Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). ASU 2016-01 provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. ASU 2016-01 is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.Statements.
Asserted and Unasserted Claims – Various claims and lawsuits are pending against us and certain of our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our consolidated results of operations, financial condition, or liquidity. To the extent possible, we have recorded a liability where asserted and unasserted claims are considered probable and where such claims can be reasonably estimated. We do not expect that any known lawsuits, claims, environmental costs, commitments, contingent liabilities, or guarantees will have a material adverse effect on our consolidated results of operations, financial condition, or liquidity after taking into account liabilities and insurance recoveries previously recorded for these matters.
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Indemnities – Our maximum potential exposure under indemnification arrangements, including certain tax indemnifications, can range from a specified dollar amount to an unlimited amount, depending on the nature of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions.
Climate Change – Although climate change could have an adverse impact on our operations and financial performance in the future (see Risk Factors under Item 1A of this report), we are currently unable to predict the manner or severity of such impact. However, we continue to take steps and explore opportunities to reduce the impact of our operations on the environment, including investments in new technologies, using training programs to reduce fuel consumption, and changing our operations to increase fuel efficiency.
Our Consolidated Financial Statements have been prepared in accordance with GAAP. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, expenses, assets, and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The following critical accounting policies are a subset of our significant accounting policies described in Note 2 to the Financial Statements and Supplementary Data, Item 8. These critical accounting
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policies affect significant areas of our financial statements and involve judgment and estimates. If these estimates differ significantly from actual results, the impact on our Consolidated Financial Statements may be material.
Personal Injury – The cost of personal injuries to employees and others related to our activities is charged to expense based on estimates of the ultimate cost and number of incidents each year. We use an actuarial analysis to measure the expense and liability, including unasserted claims. The Federal Employers’ Liability Act (FELA) governs compensation for work-related accidents. Under FELA, damages are assessed based on a finding of fault through litigation or out-of-court settlements. We offer a comprehensive variety of services and rehabilitation programs for employees who are injured at work.
Our personal injury liability is not discounted to present value due to the uncertainty surrounding the timing of future payments. Approximately 94%95% of the recorded liability is related to asserted claims and approximately 6%5% is related to unasserted claims at December 31, 2015.2017. Because of the uncertainty surrounding the ultimate outcome of personal injury claims, it is reasonably possible that future costs to settle these claims may range from approximately $318$285 million to $345$310 million. We record an accrual at the low end of the range as no amount of loss within the range is more probable than any other. Estimates can vary over time due to evolving trends in litigation.
Our personal injury liability activity was as follows:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Beginning balance | $ | 335 | $ | 294 | $ | 334 | $ | 290 | $ | 318 | $ | 335 |
Current year accruals |
| 89 |
| 96 |
| 87 |
| 77 |
| 75 |
| 89 |
Changes in estimates for prior years |
| (3) |
| 9 |
| (38) |
| (7) |
| (29) |
| (3) |
Payments |
| (103) |
| (64) |
| (89) |
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Ending balance at December 31 | $ | 318 | $ | 335 | $ | 294 | $ | 285 | $ | 290 | $ | 318 |
Current portion, ending balance at December 31 | $ | 63 | $ | 111 | $ | 82 | $ | 66 | $ | 62 | $ | 63 |
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Our personal injury claims activity was as follows:
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| 2015 | 2014 | 2013 | 2017 | 2016 | 2015 |
Open claims, beginning balance | 2,618 | 2,605 | 2,792 | 2,157 | 2,404 | 2,618 |
New claims | 2,573 | 2,773 | 2,705 | 3,024 | 2,453 | 2,573 |
Settled or dismissed claims | (2,787) | (2,760) | (2,892) | (3,091) | (2,700) | (2,787) |
Open claims, ending balance at December 31 | 2,404 | 2,618 | 2,605 | 2,090 | 2,157 | 2,404 |
In conjunction with the liability update performed in 2015,2017, we also reassessed our estimated insurance recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2015,2017, and 2014.2016. Any changes to recorded insurance recoveries are included in the above table in the Changes in estimates for prior years category.
Asbestos – We are a defendant in a number of lawsuits in which current and former employees and other parties allege exposure to asbestos. We assess our potential liability using a statistical analysis of resolution costs for asbestos-related claims. This liability is updated annually and excludes future defense and processing costs. The liability for resolving both asserted and unasserted claims was based on the following assumptions:
· | The ratio of future claims by alleged disease would be consistent with historical averages adjusted for inflation. |
· | The number of claims filed against us will decline each year. |
· | The average settlement values for asserted and unasserted claims will be equivalent to historical averages. |
· | The percentage of claims dismissed in the future will be equivalent to historical averages. |
Our liability for asbestos-related claims is not discounted to present value due to the uncertainty surrounding the timing of future payments. Approximately 22%16% of the recorded liability related to asserted claims and approximately 78%84% related to unasserted claims at December 31, 2015.2017. Because of the uncertainty
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surrounding the ultimate outcome of asbestos-related claims, it is reasonably possible that future costs to settle these claims may range from approximately $120$99 million to $129$105 million. We record an accrual at the low end of the range as no amount of loss within the range is more probable than any other.
Our asbestos-related liability activity was as follows:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Beginning balance | $ | 126 | $ | 131 | $ | 139 | $ | 111 | $ | 120 | $ | 126 |
Accruals/(Credits) |
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Payments |
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Ending balance at December 31 | $ | 120 | $ | 126 | $ | 131 | $ | 99 | $ | 111 | $ | 120 |
Current portion, ending balance at December 31 | $ | 6 | $ | 8 | $ | 9 | $ | 9 | $ | 8 | $ | 6 |
Our asbestos-related claims activity was as follows:
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| 2015 | 2014 | 2013 | 2017 | 2016 | 2015 |
Open claims, beginning balance | 1,065 | 1,140 | 1,258 | 943 | 1,089 | 1,065 |
New claims | 193 | 183 | 192 | 60 | 164 | 193 |
Settled or dismissed claims | (169) | (258) | (310) | (214) | (310) | (169) |
Open claims, ending balance at December 31 | 1,089 | 1,065 | 1,140 | 789 | 943 | 1,089 |
In conjunction with the liability update performed in 2015,2017, we also reassessed our estimated insurance recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2015,2017, and 2014.2016. The amounts recorded for asbestos-related liabilities and related insurance recoveries were based on currently known facts. However, future events, such as the number of new claims filed each year, average settlement costs, and insurance coverage issues, could cause the actual costs and insurance recoveries to be higher or lower than the projected amounts. Estimates also may vary in the future if strategies, activities, and outcomes of asbestos litigation materially change; federal and state laws
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governing asbestos litigation increase or decrease the probability or amount of compensation of claimants; and there are material changes with respect to payments made to claimants by other defendants.
Environmental Costs – We are subject to federal, state, and local environmental laws and regulations. We have identified 290315 sites at which we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 3133 sites that are the subject of actions taken by the U.S. government, 1921 of which are currently on the Superfund National Priorities List. Certain federal legislation imposes joint and several liability for the remediation of identified sites; consequently, our ultimate environmental liability may include costs relating to activities of other parties, in addition to costs relating to our own activities at each site.
When we identify an environmental issue with respect to property owned, leased, or otherwise used in our business, we perform, with assistance of our consultants, environmental assessments on the property. We expense the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is probable and such costs can be reasonably estimated. Our environmental liability is not discounted to present value due to the uncertainty surrounding the timing of future payments.
Our environmental liability activity was as follows:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Beginning balance | $ | 182 | $ | 171 | $ | 170 | $ | 212 | $ | 190 | $ | 182 |
Accruals |
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| 56 |
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| 84 |
| 61 |
Payments |
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Ending balance at December 31 | $ | 190 | $ | 182 | $ | 171 | $ | 196 | $ | 212 | $ | 190 |
Current portion, ending balance at December 31 | $ | 52 | $ | 60 | $ | 53 | $ | 57 | $ | 55 | $ | 52 |
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Our environmental site activity was as follows:
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| 2015 | 2014 | 2013 | 2017 | 2016 | 2015 |
Open sites, beginning balance | 270 | 268 | 284 | 292 | 290 | 270 |
New sites | 66 | 55 | 41 | 77 | 85 | 66 |
Closed sites | (46) | (53) | (57) | (54) | (83) | (46) |
Open sites, ending balance at December 31 | 290 | 270 | 268 | 315 | 292 | 290 |
The environmental liability includes future costs for remediation and restoration of sites, as well as ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates are based on information available for each site, financial viability of other potentially responsible parties, and existing technology, laws, and regulations. The ultimate liability for remediation is difficult to determine because of the number of potentially responsible parties, site-specific cost sharing arrangements with other potentially responsible parties, the degree of contamination by various wastes, the scarcity and quality of volumetric data related to many of the sites, and the speculative nature of remediation costs. Estimates of liability may vary over time due to changes in federal, state, and local laws governing environmental remediation. Current obligations are not expected to have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.
Property and Depreciation – Our railroad operations are highly capital intensive, and our large base of homogeneous, network-type assets turns over on a continuous basis. Each year we develop a capital program for the replacement of assets and for the acquisition or construction of assets that enable us to enhance our operations or provide new service offerings to customers. Assets purchased or constructed throughout the year are capitalized if they meet applicable minimum units of property criteria. Properties and equipment are carried at cost and are depreciated on a straight-line basis over their estimated service lives, which are measured in years, except for rail in high-density traffic corridors (i.e., all rail lines except for those subject to abandonment, yard and switching tracks, and electronic yards) for which lives are measured in millions of gross tons per mile of track. We use the group method of depreciation in which all items with similar characteristics, use, and expected lives are grouped together in asset classes, and are depreciated using composite depreciation rates. The group method of depreciation treats each asset class as a pool of resources, not as singular items. We currently have more than 60 depreciable
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asset classes, and we may increase or decrease the number of asset classes due to changes in technology, asset strategies, or other factors.
We determine the estimated service lives of depreciable railroad property by means of depreciation studies. We perform depreciation studies at least every three years for equipment and every six years for track assets (i.e., rail and other track material, ties, and ballast) and other road property. Our depreciation studies take into account the following factors:
· | Statistical analysis of historical patterns of use and retirements of each of our asset classes; |
· | Evaluation of any expected changes in current operations and the outlook for continued use of the assets; |
· | Evaluation of technological advances and changes to maintenance practices; and |
· | Expected salvage to be received upon retirement. |
For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on rail weight, rail condition (e.g., new or secondhand), and rail type (e.g., straight or curve). Our depreciation studies for rail in high-density traffic corridors consider each of these factors in determining the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the estimated service lives of the rail measured in millions of gross tons per mile. Rail in high-density traffic corridors accounts for approximately 70 percent of the historical cost of rail and other track material. Based on the number of gross ton-miles carried over our rail in high density traffic corridors during 2015,2017, the estimated service lives of the majority of this rail ranged from approximately 19 years to approximately 3941 years. For all other depreciable assets, we compute depreciation based on the estimated service lives of our assets as determined from the analysis of our depreciation studies. Changes in the estimated service lives of our assets and their related depreciation rates are implemented prospectively.
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Estimated service lives of depreciable railroad property may vary over time due to changes in physical use, technology, asset strategies, and other factors that will have an impact on the retirement profiles of our assets. We are not aware of any specific factors that are reasonably likely to significantly change the estimated service lives of our assets. Actual use and retirement of our assets may vary from our current estimates, which would impact the amount of depreciation expense recognized in future periods.
Changes in estimated useful lives of our assets due to the results of our depreciation studies could significantly impact future periods’ depreciation expense and have a material impact on our Consolidated Financial Statements. If the estimated useful lives of all depreciable assets were increased by one year, annual depreciation expense would decrease by approximately $66$65 million. If the estimated useful lives of all depreciable assets were decreased by one year, annual depreciation expense would increase by approximately $70 million. Our recent depreciation studies have resulted in lower depreciation rates for some asset classes. These lower rates will partially offset the impact of a projected higher depreciable asset base, resulting in an increase in total depreciation expense by approximately 1% to 2%5% in 20162018 versus 2015.2017.
Under group depreciation, the historical cost (net of salvage) of depreciable property that is retired or replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is recognized. The historical cost of certain track assets is estimated usingby multiplying the current replacement cost of track assets by a historical index factor derived from (i) inflation indices published by the Bureau of Labor Statistics and (ii) the estimated useful lives of the assets as determined by our depreciation studies. The indices were selected because they closely correlate with the major costs of the properties comprising the applicable track asset classes. Because of the number of estimates inherent in the depreciation and retirement processes and because it is impossible to precisely estimate each of these variables until a group of property is completely retired, we continually monitor the estimated service lives of our assets and the accumulated depreciation associated with each asset class to ensure our depreciation rates are appropriate. In addition, we determine if the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by our depreciation studies. Any deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the applicable classes of assets.
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For retirements of depreciable railroad properties that do not occur in the normal course of business, a gain or loss may be recognized if the retirement meets each of the following three conditions: (i) it is unusual, (ii) it is material in amount, and (iii) it varies significantly from the retirement profile identified through our depreciation studies. During the last three fiscal years, no gains or losses were recognized due to the retirement of depreciable railroad properties. A gain or loss is recognized in other income when we sell land or dispose of assets that are not part of our railroad operations.
Income Taxes – We account for income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. These expected future tax consequences are measured based on current tax law; the effects of future tax legislation are not anticipated. Future tax legislation, such as a change in the corporate tax rate, could have a material impact on our financial condition, results of operations, or liquidity. For example, a permanent 1% increase in future income tax rates would increase our deferred tax liability by approximately $390$430 million. Similarly, a permanent 1% decrease in future income tax rates would decrease our deferred tax liability by approximately $430 million.
When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based on management’s judgments using available evidence for purposes of estimating whether future taxable income will be sufficient to realize a deferred tax asset. In 20152018 and 2014,2017, there were no valuation allowances.
We recognize tax benefits that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.
Pension and Other Postretirement Benefits – We use an actuarial analysis to measure the liabilities and expenses associated with providing pension and medical and life insurance benefits (OPEB) to eligible employees. In order to use actuarial methods to value the liabilities and expenses, we must make several assumptions. The critical assumptions used to measure pension obligations and expenses are the discount rate
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rates and expected rate of return on pension assets. For OPEB, the critical assumptions are the discount raterates and health care cost trend rate.
We evaluate our critical assumptions at least annually, and selected assumptions are based on the following factors:
· | Beginning in 2016, we measure the service cost and interest cost components of our net periodic benefit cost by using individual spot rates matched with separate cash flows for each future year. Discount |
· | Expected return on plan assets is based on our asset allocation mix and our historical return, taking into consideration current and expected market conditions. |
· | Health care cost trend rate is based on our historical rates of inflation and expected market conditions. |
The following tables present the key assumptions used to measure net periodic pension and OPEB cost/(benefit) for 20152018 and the estimated impact on 20152018 net periodic pension and OPEB cost/(benefit) relative to a change in those assumptions:
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Assumptions | Pension | OPEB | Pension | OPEB |
Discount rate | 3.94% | 3.74% | ||
Discount rate for benefit obligations | 3.62% | 3.53% | ||
Discount rate for interest on benefit obligations | 3.27% | 3.12% | ||
Discount rate for service cost | 3.77% | 3.72% | ||
Discount rate for interest on service cost | 3.72% | 3.65% | ||
Expected return on plan assets | 7.50% | N/A | 7.00% | N/A |
Compensation increase | 4.00% | N/A | 4.13% | N/A |
Health care cost trend rate: |
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Pre-65 current | N/A | 6.34% | N/A | 6.31% |
Pre-65 level in 2028 | N/A | 4.50% | ||
Pre-65 level in 2038 | N/A | 4.50% |
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Sensitivities | Increase in Expense | |||
Millions | Pension | OPEB | ||
0.25% decrease in discount rate | $ | 14 | $ | 1 |
0.25% increase in compensation scale | $ | 9 |
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0.25% decrease in expected return on plan assets | $ | 8 |
| N/A |
1% increase in health care cost trend rate |
| N/A | $ | 3 |
Sensitivities | Increase in Expense | |||
Millions | Pension | OPEB | ||
0.25% decrease in discount rates | $ | 12 | $ | - |
0.25% increase in compensation scale | $ | 8 | N/A | |
0.25% decrease in expected return on plan assets | $ | 9 | N/A | |
1% increase in health care cost trend rate | N/A | $ | 3 |
The following table presents the net periodic pension and OPEB cost for the years ended December 31:
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Millions | 2016 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | 2015 | ||||||||
Net periodic pension cost | $ | 42 | $ | 120 | $ | 69 | $ | 110 | $ | 69 | $ | 115 | $ | 43 | $ | 120 |
Net periodic OPEB cost |
| 13 |
| 19 |
| 15 |
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| 22 |
| 22 |
| 13 |
| 19 |
In 2016, we will measure the service cost and interest cost components of our net periodic benefit cost by using individual spot rates matched with separate cash flows for each future year instead of a single weighted-average discount rate approach. Our net periodic pension cost is expected to decrease to approximately $42 million in 2016 from $120 million in 2015. Our net periodic OPEB expense is expected to decrease to approximately $13 million in 2016 from $19 million in 2015.
Certain statements in this report, and statements in other reports or information filed or to be filed with the SEC (as well as information included in oral statements or other written statements made or to be made by us), are, or will be, forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements and information include, without limitation, (A) statements in the Chairman’s letter preceding Part I; statements regarding planned capital expenditures under the caption “2016“2018 Capital Plan” in Item 2 of Part I; statements regarding dividends in Item 5 of Part II; and statements and information set forth under the captions “2016“2018 Outlook”; “Liquidity and Capital Resources”; and “Pension and Other Postretirement Benefits” in this Item 7 of Part II, and (B) any other statements or information in this report (including information incorporated herein by reference) regarding: expectations as to financial performance, revenue growth and cost savings; the time by which goals, targets, or objectives will be achieved; projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, future economic performance, and general economic conditions; expectations as to operational or service performance or improvements; expectations as to the effectiveness of steps taken or to be taken to improve operations and/or service, including capital
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expenditures for infrastructure improvements and equipment acquisitions, any strategic business acquisitions, and modifications to our transportation plans;plans, including implementation of PTC; expectations as to existing or proposed new products and services; expectations as to the impact of any new regulatory activities or legislation on our operations or financial results; estimates of costs relating to environmental remediation and restoration; estimates and expectations regarding tax matters; expectations that claims, litigation, environmental costs, commitments, contingent liabilities, labor negotiations or agreements, or other matters will not have a material adverse effect on our consolidated results of operations, financial condition, or liquidity and any other similar expressions concerning matters that are not historical facts. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects” and similar words, phrases or expressions.
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 that, or by which, such performance or results will be achieved. Forward-looking statements and information are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements and information. Forward-looking statements and information reflect the good faith consideration by management of currently available information, and may be based on underlying assumptions believed to be reasonable under the circumstances. However, such information and assumptions (and, therefore, such forward-looking statements and information) are or may be subject to variables or unknown or unforeseeable events or circumstances over which management has little or no influence or control. The Risk Factors in Item 1A of this report could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in any forward-looking statements or information. To the extent circumstances require or we deem it otherwise necessary, we will update or
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amend these risk factors in a Form 10-Q, Form 8-K or subsequent Form 10-K. All forward-looking statements are qualified by, and should be read in conjunction with, these Risk Factors.
Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information concerning market risk sensitive instruments is set forth under Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Matters, Item 7.
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Item 8. Financial Statements and Supplementary Data
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Index to Consolidated Financial Statements | Page |
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For the Years Ended December 31, | |
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5044
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Union Pacific Corporation
Omaha, Nebraska
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Union Pacific Corporation and Subsidiary Companies (the "Corporation") as of December 31, 20152017 and 2014, and2016, the related consolidated statements of income, comprehensive income, changes in common shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included2017, and the financial statementrelated notes and the schedule listed in the Table of Contents at Part IV, Item 15. These financial statements and financial statement schedule are15 (collectively referred to as the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)“financial statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidatedthe financial statements present fairly, in all material respects, the financial position of Union Pacificthe Corporation and Subsidiary Companies as of December 31, 20152017 and 2014,2016, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2015,2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Corporation's internal control over financial reporting as of December 31, 2015,2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 5, 20169, 2018, expressed an unqualified opinion on the Corporation's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the Corporation's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 5, 20169, 2018
We have served as the Corporation’s auditor since 1967.
5145
CONSOLIDATED STATEMENTS OF INCOME
Union Pacific Corporation and Subsidiary Companies
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Millions, Except Per Share Amounts, | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Operating revenues: |
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Freight revenues | $ | 20,397 | $ | 22,560 | $ | 20,684 | $ | 19,837 | $ | 18,601 | $ | 20,397 |
Other revenues |
| 1,416 |
| 1,428 |
| 1,279 |
| 1,403 |
| 1,340 |
| 1,416 |
Total operating revenues |
| 21,813 |
| 23,988 |
| 21,963 |
| 21,240 |
| 19,941 |
| 21,813 |
Operating expenses: |
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Compensation and benefits |
| 5,161 |
| 5,076 |
| 4,807 |
| 4,984 |
| 4,750 |
| 5,161 |
Purchased services and materials |
| 2,421 |
| 2,558 |
| 2,315 |
| 2,363 |
| 2,258 |
| 2,421 |
Depreciation |
| 2,105 |
| 2,038 |
| 2,012 | ||||||
Fuel |
| 2,013 |
| 3,539 |
| 3,534 |
| 1,891 |
| 1,489 |
| 2,013 |
Depreciation |
| 2,012 |
| 1,904 |
| 1,777 | ||||||
Equipment and other rents |
| 1,230 |
| 1,234 |
| 1,235 |
| 888 |
| 1,137 |
| 1,230 |
Other |
| 924 |
| 924 |
| 849 |
| 948 |
| 997 |
| 924 |
Total operating expenses |
| 13,761 |
| 15,235 |
| 14,517 |
| 13,179 |
| 12,669 |
| 13,761 |
Operating income |
| 8,052 |
| 8,753 |
| 7,446 |
| 8,061 |
| 7,272 |
| 8,052 |
Other income (Note 7) |
| 226 |
| 151 |
| 128 |
| 290 |
| 192 |
| 226 |
Interest expense |
| (622) |
| (561) |
| (526) |
| (719) |
| (698) |
| (622) |
Income before income taxes |
| 7,656 |
| 8,343 |
| 7,048 |
| 7,632 |
| 6,766 |
| 7,656 |
Income taxes (Note 8) |
| (2,884) |
| (3,163) |
| (2,660) | ||||||
Income tax benefit/(expense) (Note 8) |
| 3,080 |
| (2,533) |
| (2,884) | ||||||
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 | $ | 10,712 | $ | 4,233 | $ | 4,772 |
Share and Per Share (Note 9): |
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Earnings per share - basic | $ | 5.51 | $ | 5.77 | $ | 4.74 | $ | 13.42 | $ | 5.09 | $ | 5.51 |
Earnings per share - diluted | $ | 5.49 | $ | 5.75 | $ | 4.71 | $ | 13.36 | $ | 5.07 | $ | 5.49 |
Weighted average number of shares - basic |
| 866.2 |
| 897.1 |
| 926.5 |
| 798.4 |
| 832.4 |
| 866.2 |
Weighted average number of shares - diluted |
| 869.4 |
| 901.1 |
| 931.5 |
| 801.7 |
| 835.4 |
| 869.4 |
Dividends declared per share | $ | 2.20 | $ | 1.91 | $ | 1.48 | $ | 2.48 | $ | 2.255 | $ | 2.20 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Union Pacific Corporation and Subsidiary Companies
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Millions, | Millions, | 2015 | 2014 | 2013 | Millions, | 2017 | 2016 | 2015 | ||||||
Net income | Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 | Net income | $ | 10,712 | $ | 4,233 | $ | 4,772 |
Other comprehensive income/(loss): | Other comprehensive income/(loss): |
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| Other comprehensive income/(loss): |
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Defined benefit plans | Defined benefit plans |
| 58 |
| (448) |
| 436 | Defined benefit plans |
| 103 |
| (29) |
| 58 |
Foreign currency translation | Foreign currency translation |
| (43) |
| (12) |
| (1) | Foreign currency translation |
| 28 |
| (48) |
| (43) |
Derivatives |
| - |
| - |
| 1 | ||||||||
Total other comprehensive income/(loss) [a] | Total other comprehensive income/(loss) [a] |
| 15 |
| (460) |
| 436 | Total other comprehensive income/(loss) [a] |
| 131 |
| (77) |
| 15 |
Comprehensive income | Comprehensive income | $ | 4,787 | $ | 4,720 | $ | 4,824 | Comprehensive income | $ | 10,843 | $ | 4,156 | $ | 4,787 |
[a] | Net of deferred taxes of |
The accompanying notes are an integral part of these Consolidated Financial Statements.
5246
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies
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Millions, Except Share and Per Share Amounts | 2015 | 2014 | 2017 | 2016 | ||||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | 1,391 | $ | 1,586 | $ | 1,275 | $ | 1,277 |
Short-term investments (Note 14) |
| 90 |
| 60 | ||||
Accounts receivable, net (Note 11) |
| 1,356 |
| 1,611 |
| 1,493 |
| 1,258 |
Materials and supplies |
| 736 |
| 712 |
| 749 |
| 717 |
Other current assets |
| 647 |
| 492 |
| 399 |
| 284 |
Total current assets |
| 4,130 |
| 4,401 |
| 4,006 |
| 3,596 |
Investments |
| 1,410 |
| 1,390 |
| 1,809 |
| 1,457 |
Net properties (Note 12) |
| 48,866 |
| 46,272 |
| 51,605 |
| 50,389 |
Other assets |
| 194 |
| 309 |
| 386 |
| 276 |
Total assets | $ | 54,600 | $ | 52,372 | $ | 57,806 | $ | 55,718 |
Liabilities and Common Shareholders' Equity |
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Current liabilities: |
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Accounts payable and other current liabilities (Note 13) | $ | 2,612 | $ | 3,303 | $ | 3,139 | $ | 2,882 |
Debt due within one year (Note 15) |
| 594 |
| 461 |
| 800 |
| 758 |
Total current liabilities |
| 3,206 |
| 3,764 |
| 3,939 |
| 3,640 |
Debt due after one year (Note 15) |
| 13,607 |
| 10,952 |
| 16,144 |
| 14,249 |
Deferred income taxes (Note 8) |
| 15,241 |
| 14,403 |
| 10,936 |
| 15,996 |
Other long-term liabilities |
| 1,844 |
| 2,064 |
| 1,931 |
| 1,901 |
Commitments and contingencies (Notes 17 and 18) |
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Total liabilities |
| 33,898 |
| 31,183 |
| 32,950 |
| 35,786 |
Common shareholders' equity: |
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Common shares, $2.50 par value, 1,400,000,000 authorized; |
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1,110,426,354 and 1,110,100,423 issued; 849,211,436 and 883,366,476 |
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1,111,371,304 and 1,110,986,415 issued; 780,917,756 and 815,824,413 |
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outstanding, respectively |
| 2,776 |
| 2,775 |
| 2,778 |
| 2,777 |
Paid-in-surplus |
| 4,417 |
| 4,321 |
| 4,476 |
| 4,421 |
Retained earnings |
| 30,233 |
| 27,367 |
| 41,317 |
| 32,587 |
Treasury stock |
| (15,529) |
| (12,064) |
| (22,574) |
| (18,581) |
Accumulated other comprehensive loss (Note 10) |
| (1,195) |
| (1,210) |
| (1,141) |
| (1,272) |
Total common shareholders' equity |
| 20,702 |
| 21,189 |
| 24,856 |
| 19,932 |
Total liabilities and common shareholders' equity | $ | 54,600 | $ | 52,372 | $ | 57,806 | $ | 55,718 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
5347
CONSOLIDATED STATEMENTS OF CASH FLOWS
Union Pacific Corporation and Subsidiary Companies
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Millions, for the Years Ended December 31, | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Operating Activities |
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Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 | $ | 10,712 | $ | 4,233 | $ | 4,772 |
Adjustments to reconcile net income to cash provided | Adjustments to reconcile net income to cash provided |
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| Adjustments to reconcile net income to cash provided |
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Depreciation |
| 2,012 |
| 1,904 |
| 1,777 |
| 2,105 |
| 2,038 |
| 2,012 |
Deferred and other income taxes |
| 765 |
| 895 |
| 723 |
| (5,067) |
| 831 |
| 765 |
Net gain on non-operating asset dispositions |
| (144) |
| (69) |
| (32) |
| (111) |
| (94) |
| (144) |
Other operating activities, net |
| 116 |
| (216) |
| (194) |
| (282) |
| (228) |
| 116 |
Changes in current assets and liabilities: |
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Accounts receivable, net |
| 255 |
| (197) |
| (83) |
| (235) |
| 98 |
| 255 |
Materials and supplies |
| (24) |
| (59) |
| 7 |
| (32) |
| 19 |
| (24) |
Other current assets |
| (47) |
| (35) |
| 1 |
| 9 |
| 22 |
| (47) |
Accounts payable and other current liabilities |
| (276) |
| 295 |
| 40 |
| 182 |
| 232 |
| (276) |
Income and other taxes |
| (85) |
| (313) |
| 196 |
| (51) |
| 374 |
| (85) |
Cash provided by operating activities |
| 7,344 |
| 7,385 |
| 6,823 |
| 7,230 |
| 7,525 |
| 7,344 |
Investing Activities |
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Capital investments |
| (4,650) |
| (4,346) |
| (3,496) |
| (3,238) |
| (3,505) |
| (4,650) |
Proceeds from asset sales |
| 251 |
| 138 |
| 98 |
| 168 |
| 129 |
| 251 |
Purchases of short-term investments (Note 14) |
| (120) |
| (580) |
| - | ||||||
Maturities of short-term investments (Note 14) |
| 90 |
| 520 |
| - | ||||||
Other investing activities, net |
| (77) |
| (41) |
| (7) |
| 14 |
| 43 |
| (77) |
Cash used in investing activities |
| (4,476) |
| (4,249) |
| (3,405) |
| (3,086) |
| (3,393) |
| (4,476) |
Financing Activities |
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Common share repurchases (Note 19) |
| (3,465) |
| (3,225) |
| (2,218) |
| (4,013) |
| (3,105) |
| (3,465) |
Debt issued |
| 3,328 |
| 2,588 |
| 1,443 |
| 2,735 |
| 1,983 |
| 3,328 |
Dividends paid |
| (2,344) |
| (1,632) |
| (1,333) |
| (1,982) |
| (1,879) |
| (2,344) |
Debt repaid |
| (556) |
| (710) |
| (640) |
| (840) |
| (1,013) |
| (556) |
Debt exchange |
| - |
| - |
| (289) |
| - |
| (191) |
| - |
Other financing activities, net |
| (26) |
| (3) |
| (12) |
| (46) |
| (41) |
| (26) |
Cash used in financing activities |
| (3,063) |
| (2,982) |
| (3,049) |
| (4,146) |
| (4,246) |
| (3,063) |
Net change in cash and cash equivalents |
| (195) |
| 154 |
| 369 |
| (2) |
| (114) |
| (195) |
Cash and cash equivalents at beginning of year |
| 1,586 |
| 1,432 |
| 1,063 |
| 1,277 |
| 1,391 |
| 1,586 |
Cash and cash equivalents at end of year | $ | 1,391 | $ | 1,586 | $ | 1,432 | $ | 1,275 | $ | 1,277 | $ | 1,391 |
Supplemental Cash Flow Information |
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Non-cash investing and financing activities: |
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Capital investments accrued but not yet paid | $ | 100 | $ | 174 | $ | 133 | $ | 366 | $ | 223 | $ | 100 |
Capital lease financings |
| 13 |
| - |
| 39 |
| 19 |
| - |
| 13 |
Cash dividends declared but not yet paid (Note 13) |
| - |
| 438 |
| 356 | ||||||
Cash paid during the year for: |
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Income taxes, net of refunds | $ | (2,156) | $ | (2,492) | $ | (1,656) | $ | (2,112) | $ | (1,347) | $ | (2,156) |
Interest, net of amounts capitalized |
| (592) |
| (554) |
| (528) |
| (666) |
| (652) |
| (592) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
5448
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Union Pacific Corporation and Subsidiary Companies
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Millions | Common | Treasury |
| Common | Paid-in- | Retained | Treasury | AOCI | Total | Common | Treasury |
| Common | Paid-in- | Retained | Treasury | AOCI | Total | ||||||||||||
Balance at January 1, 2013 | 1,109.3 | (170.3) |
|
| $ 2,773 |
| $ 4,113 |
| $ 20,884 |
| $ (6,707) |
| $ (1,186) |
| $ 19,877 | |||||||||||||||
Balance at January 1, 2015 | 1,110.1 | (226.7) |
|
| $ 2,775 |
| $ 4,321 |
| $ 27,367 |
| $ (12,064) |
| $ (1,210) |
| $ 21,189 | |||||||||||||||
Net income |
|
|
|
| - |
| - |
| 4,388 |
| - |
| - |
| 4,388 |
|
|
|
| - |
| - |
| 4,772 |
| - |
| - |
| 4,772 |
Other comp. income |
|
|
|
| - |
| - |
| - |
| - |
| 436 |
| 436 | |||||||||||||||
Conversion, stock option | 0.4 | 1.6 |
|
| 1 |
| 97 |
| - |
| 15 |
| - |
| 113 | |||||||||||||||
Share repurchases (Note 19) | - | (29.0) |
|
| - |
| - |
| - |
| (2,218) |
| - |
| (2,218) | |||||||||||||||
Cash dividends declared | - | - |
|
| - |
| - |
| (1,371) |
| - |
| - |
| (1,371) | |||||||||||||||
Balance at December 31, 2013 | 1,109.7 | (197.7) |
|
| $ 2,774 |
| $ 4,210 |
| $ 23,901 |
| $ (8,910) |
| $ (750) |
| $ 21,225 | |||||||||||||||
Net income |
|
|
|
| - |
| - |
| 5,180 |
| - |
| - |
| 5,180 | |||||||||||||||
Other comp. loss |
|
|
|
| - |
| - |
| - |
| - |
| (460) |
| (460) | |||||||||||||||
Conversion, stock option | 0.4 | 3.0 |
|
| 1 |
| 111 |
| - |
| 71 |
| - |
| 183 | |||||||||||||||
Share repurchases (Note 19) | - | (32.0) |
|
| - |
| - |
| - |
| (3,225) |
| - |
| (3,225) | |||||||||||||||
Cash dividends declared | - | - |
|
| - |
| - |
| (1,714) |
| - |
| - |
| (1,714) | |||||||||||||||
Balance at December 31, 2014 | 1,110.1 | (226.7) |
|
| $ 2,775 |
| $ 4,321 |
| $ 27,367 |
| $ (12,064) |
| $ (1,210) |
| $ 21,189 | |||||||||||||||
Net income |
|
|
|
| - |
| - |
| 4,772 |
| - |
| - |
| 4,772 | |||||||||||||||
Other comp. income |
|
|
|
| - |
| - |
| - |
| - |
| 15 |
| 15 | |||||||||||||||
Other comprehensive income |
|
|
|
| - |
| - |
| - |
| - |
| 15 |
| 15 | |||||||||||||||
Conversion, stock option | 0.3 | 0.8 |
|
| 1 |
| 96 |
| - |
| - |
| - |
| 97 | 0.3 | 0.8 |
|
| 1 |
| 96 |
| - |
| - |
| - |
| 97 |
Share repurchases (Note 19) | - | (35.3) |
|
| - |
| - |
| - |
| (3,465) |
| - |
| (3,465) | - | (35.3) |
|
| - |
| - |
| - |
| (3,465) |
| - |
| (3,465) |
Cash dividends declared | - | - |
|
| - |
| - |
| (1,906) |
| - |
| - |
| (1,906) | - | - |
|
| - |
| - |
| (1,906) |
| - |
| - |
| (1,906) |
Balance at December 31, 2015 | 1,110.4 | (261.2) |
|
| $ 2,776 |
| $ 4,417 |
| $ 30,233 |
| $ (15,529) |
| $ (1,195) |
| $ 20,702 | 1,110.4 | (261.2) |
|
| $ 2,776 |
| $ 4,417 |
| $ 30,233 |
| $ (15,529) |
| $ (1,195) |
| $ 20,702 |
Net income |
|
|
|
| - |
| - |
| 4,233 |
| - |
| - |
| 4,233 | |||||||||||||||
Other comprehensive loss |
|
|
|
| - |
| - |
| - |
| - |
| (77) |
| (77) | |||||||||||||||
Conversion, stock option | 0.6 | 1.1 |
|
| 1 |
| 4 |
| - |
| 53 |
| - |
| 58 | |||||||||||||||
Share repurchases (Note 19) | - | (35.1) |
|
| - |
| - |
| - |
| (3,105) |
| - |
| (3,105) | |||||||||||||||
Cash dividends declared | - | - |
|
| - |
| - |
| (1,879) |
| - |
| - |
| (1,879) | |||||||||||||||
Balance at December 31, 2016 | 1,111.0 | (295.2) |
|
| $ 2,777 |
| $ 4,421 |
| $ 32,587 |
| $ (18,581) |
| $ (1,272) |
| $ 19,932 | |||||||||||||||
Net income |
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| - |
| - |
| 10,712 |
| - |
| - |
| 10,712 | |||||||||||||||
Other comprehensive income |
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| - |
| - |
| - |
| - |
| 131 |
| 131 | |||||||||||||||
Conversion, stock option | 0.4 | 1.1 |
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| 1 |
| 55 |
| - |
| 20 |
| - |
| 76 | |||||||||||||||
Share repurchases (Note 19) | - | (36.4) |
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| - |
| - |
| - |
| (4,013) |
| - |
| (4,013) | |||||||||||||||
Cash dividends declared | - | - |
|
| - |
| - |
| (1,982) |
| - |
| - |
| (1,982) | |||||||||||||||
Balance at December 31, 2017 | 1,111.4 | (330.5) |
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| $ 2,778 |
| $ 4,476 |
| $ 41,317 |
| $ (22,574) |
| $ (1,141) |
| $ 24,856 |
[a] | AOCI = Accumulated Other Comprehensive Income/(Loss) (Note 10) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Union Pacific Corporation and Subsidiary Companies
For purposes of this report, unless the context otherwise requires, all references herein to the “Corporation”, “Company”, “UPC”, “we”, “us”, and “our” mean Union Pacific Corporation and its subsidiaries, including Union Pacific Railroad Company, which will be separately referred to herein as “UPRR” or the “Railroad”.
1. Nature of Operations
Operations and Segmentation – We are a Class I railroad operating in the U.S. Our network includes 32,08432,122 route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and Eastern U.S. gateways and providing several corridors to key Mexican gateways. We own 26,06426,042 miles and operate on the remainder pursuant to trackage rights or leases. We serve the western two-thirds of the country and maintain coordinated schedules with other rail carriers for the handling of freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada, and Mexico. Export and import traffic is moved through Gulf Coast and Pacific Coast ports and across the Mexican and Canadian borders.
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide and analyze revenue by commodity group, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network. The following table provides freight revenue by commodity group:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Agricultural Products | $ | 3,581 | $ | 3,777 | $ | 3,276 | $ | 3,685 | $ | 3,625 | $ | 3,581 |
Automotive |
| 2,154 |
| 2,103 |
| 2,077 |
| 1,998 |
| 2,000 |
| 2,154 |
Chemicals |
| 3,543 |
| 3,664 |
| 3,501 |
| 3,596 |
| 3,474 |
| 3,543 |
Coal |
| 3,237 |
| 4,127 |
| 3,978 |
| 2,645 |
| 2,440 |
| 3,237 |
Industrial Products |
| 3,808 |
| 4,400 |
| 3,822 |
| 4,078 |
| 3,348 |
| 3,808 |
Intermodal |
| 4,074 |
| 4,489 |
| 4,030 |
| 3,835 |
| 3,714 |
| 4,074 |
Total freight revenues | $ | 20,397 | $ | 22,560 | $ | 20,684 | $ | 19,837 | $ | 18,601 | $ | 20,397 |
Other revenues |
| 1,416 |
| 1,428 |
| 1,279 |
| 1,403 |
| 1,340 |
| 1,416 |
Total operating revenues | $ | 21,813 | $ | 23,988 | $ | 21,963 | $ | 21,240 | $ | 19,941 | $ | 21,813 |
Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of origination or destination for some products transported by uswe transport are outside the U.S. Each of our commodity groups includes revenue from shipments to and from Mexico. Included in the above table are freight revenues from our Mexico business which amounted to $2.3 billion in 2017, $2.2 billion in 2015, $2.32016, and $2.2 billion in 2014, and $2.1 billion in 2013.2015.
Basis of Presentation – The Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the U.S. (GAAP) as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). Certain prior period amounts in the statement of cash flows and income tax footnote have been aggregated or disaggregated further to conform to the current period financial presentation.
2. Significant Accounting Policies
Principles of Consolidation –– The Consolidated Financial Statements include the accounts of Union Pacific Corporation and all of its subsidiaries. Investments in affiliated companies (20% to 50% owned) are accounted for using the equity method of accounting. All intercompany transactions are eliminated. We currently have no less than majority-owned investments that require consolidation under variable interest entity requirements.
Cash and Cash Equivalents – Cash equivalents consist of investments with original maturities of three months or less.
Accounts Receivable – Accounts receivable includes receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, credit worthiness of customers, and current
56
economic conditions. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Consolidated Statements of Financial Position.
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Investments – Investments represent our investments in affiliated companies (20% to 50% owned) that are accounted for under the equity method of accounting and investments in companies (less than 20% owned) accounted for under the cost method of accounting. The results of operations for our equity method investments that are integral to our operations are recorded in operating expenses.
Materials and Supplies – Materials and supplies are carried at the lower of average cost or market.
Property and Depreciation – Properties and equipment are carried at cost and are depreciated on a straight-line basis over their estimated service lives, which are measured in years, except for rail in high-density traffic corridors (i.e., all rail lines except for those subject to abandonment, yard and switching tracks, and electronic yards), for which lives are measured in millions of gross tons per mile of track. We use the group method of depreciation in which all items with similar characteristics, use, and expected lives are grouped together in asset classes, and are depreciated using composite depreciation rates. The group method of depreciation treats each asset class as a pool of resources, not as singular items. We determine the estimated service lives of depreciable railroad assets by means of depreciation studies. Under the group method of depreciation, no gain or loss is recognized when depreciable property is retired or replaced in the ordinary course of business.
Impairment of Long-lived Assets – We review long-lived assets, including identifiable intangibles, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the long-lived assets, the carrying value is reduced to the estimated fair value as measured by the discounted cash flows.
Revenue Recognition – We recognize freight revenues as freight moves from origin to destination. The allocation of revenue between reporting periods is based on the relative transit time in each reporting period with expenses recognized as incurred. Other revenues, which include revenues earned by our subsidiaries, revenues from our commuter rail operations, and accessorial revenue, are recognized as service is performed or contractual obligations are met. Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a reduction to operating revenues based on actual or projected future customer shipments.
Translation of Foreign Currency – Our portion of the assets and liabilities related to foreign investments are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and expenses are translated at the average rates of exchange prevailing during the year. Unrealized gains or losses are reflected within common shareholders’ equity as accumulated other comprehensive income or loss.
Fair Value Measurements – We use a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. These levels include:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
We have applied fair value measurements to our short term investments, pension plan assets and short- and long-term debt.
Stock-Based Compensation – We have several stock-based compensation plans under which employees and non-employee directors receive stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. We have elected to issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when retention shares are granted.
We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period). The fair value of retention awards is the closing stock price on the date of grant, while the fair value of stock options is determined by using the Black-Scholes option pricing model.
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Earnings Per Share – Basic earnings per share are calculated on the weighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options and stock-based awards where the conversion of such instruments would be dilutive.
Income Taxes – We account for income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. These expected future tax consequences are measured based on current tax law; the effects of future tax legislation are not anticipated. Future tax legislation, such as a change in the corporate tax rate, could have a material impact on our financial condition, results of operations, or liquidity.
When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based on management’s judgments using available evidence for purposes of estimating whether future taxable income will be sufficient to realize a deferred tax asset.
We recognize tax benefits that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.
Pension and Postretirement Benefits – We incur certain employment-related expenses associated with pensions and postretirement health benefits. In order to measure the expense associated with these benefits, we must make various assumptions including discount rates used to value certain liabilities, expected return on plan assets used to fund these expenses, compensation increases, employee turnover rates, anticipated mortality rates, and expected future health care costs. The assumptions used by us are based on our historical experience as well as current facts and circumstances. We use an actuarial analysis to measure the expense and liability associated with these benefits.
Personal Injury – The cost of injuries to employees and others on our property is charged to expense based on estimates of the ultimate cost and number of incidents each year. We use an actuarial analysis to measure the expense and liability. Our personal injury liability is not discounted to present value. Legal fees and incidental costs are expensed as incurred.
Asbestos – We estimate a liability for asserted and unasserted asbestos-related claims based on an assessment of the number and value of those claims. We use a statistical analysis to assist us in properly measuring our potential liability. Our liability for asbestos-related claims is not discounted to present value due to the uncertainty surrounding the timing of future payments. Legal fees and incidental costs are expensed as incurred.
Environmental – When environmental issues have been identified with respect to property currently or formerly owned, leased, or otherwise used in the conduct of our business, we perform, with the assistance of our consultants, environmental assessments on such property. We expense the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is probable and such costs can be reasonably estimated. We do not discount our environmental liabilities when the timing of the anticipated cash payments is not fixed or readily determinable. Legal fees and incidental costs are expensed as incurred.
Use of Estimates – The preparation of our Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported assets and liabilities, and the disclosure of certain contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual future results may differ from such estimates.
3. Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition guidance in Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the
5852
consideration to which the entity expects to be entitled in the exchange for those goods or services. This may require the use of more judgment and estimates in order to correctly recognize the revenue expected as an outcome of each specific performance obligation. Additionally, this guidance will require the disclosure of the nature, amount, and timing of revenue arising from contracts so as to aid in the understanding of the users of financial statements.
This standard is effective for annual reporting periods beginning after December 15, 2017,2017. The Company has analyzed our freight and can be adopted either retrospectively orother revenues and we expect to continue to recognize freight revenues as a cumulative effect adjustmentfreight moves from origin to destination and to recognize other revenues as identified performance obligations are satisfied. We have also analyzed freight and other revenues in the context of the date of adoption.new guidance on principal versus agent considerations and evaluated the required new disclosures. Effective January 1, 2018, the Company adopted ASU 2014-09 isusing the modified retrospective transition method. The ASU did not expected to have a materialan impact on our consolidated financial position, results of operations, or cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30). ASU 2015-03 changes the presentation of debt issuance costs in the financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will be reported as interest expense. This standard is effective for annual reporting periods beginning after December 15, 2015. We elected to early adopt ASU 2015-03 on December 31, 2015. As a result, the Company reclassified debt issuance costs from other assets to debt on the Consolidated Statements of Financial Position. ASU 2015-03 did not have a material impact on our consolidated financial position, and had no impact on our results of operations or cash flows. All prior period financial information presented herein has been adjusted to reflect the retrospective application of this ASU.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17), Balance Sheet Classification of Deferred Taxes (Subtopic 740-10). ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the requirement for companies to present deferred tax liabilities and assets as current and non-current on the Consolidated Statements of Financial Position. Instead, companies will be required to classify all deferred tax assets and liabilities as non-current. This guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We elected to early adopt ASU 2015-17 on December 31, 2015. ASU 2015-17 did not have a material impact on our consolidated financial position, and had no impact on our results of operations or cash flows. All prior period financial information presented herein has been adjusted to reflect the retrospective application of this ASU.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01), Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). ASU 2016-01 provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. ASU 2016-01 is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.
4. Stock SplitIn March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). ASU 2017-07 requires the service cost component be reported separately from the other components of net benefit costs in the income statement, provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the income statement, and allows only the service cost component of net benefit cost to be eligible for capitalization. This standard is effective for annual and interim reporting periods beginning after December 15, 2017, and we intend to adopt the standard beginning in 2018 using retrospective adoption. The Company currently records service costs and net benefit costs within compensation and benefits expense. Upon adoption, the service cost will be recorded within compensation and benefits expense, and the other components of net benefit costs, including $69 million related to the 2017 workforce reduction plan as described in Note 4, will be recorded in other income. The retrospective impact of future adoption is shown in the table below:
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Millions |
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| 2016 |
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Increase/(decrease) in operating income | $ | 45 | $ | (29) | $ | 30 |
Increase/(decrease) in other income |
| (45) |
| 29 |
| (30) |
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Subtopic 842). ASU 2016-02 will require companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. Management is currently evaluating the impact of this standard on our consolidated financial position, results of operations, and cash flows, and expects that the adoption will result in an increase in the Company’s assets and liabilities of over $2 billion.
On June 6, 2014, we completedDecember 22, 2017 the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the “Tax Act”). SAB 118 provides a two-for-one stock split, effectedmeasurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under Accounting Standards Codification (ASC) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but for which they are able to determine a reasonable estimate, it must record a provisional amount in the formfinancial statements. Provisional treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. Provisional treatment is also necessary if the company is waiting for final financial information from domestic and foreign equity investments. If a 100% stock dividend.company cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
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4. Workforce Reduction Plan
On August 16, 2017, the Company approved and commenced a management and administrative personnel reorganization plan (the “Plan”) furthering its on-going efforts to increase efficiency and more effectively align Company resources. The stock split entitled all shareholdersPlan implemented productivity initiatives identified during a recently completed Company-wide organizational review that included the reduction of record atapproximately 460 management positions and 250 agreement positions. The Plan resulted in a pretax charge recognized in the closethird quarter of business on May 27, 2014,2017 within compensation and benefits expense in our Consolidated Statements of Income. This charge consisted of management employee termination benefits, including pension expenses, severance costs, and acceleration of equity compensation expense as shown in the table below. The actions associated with the Plan are substantially complete, and we do not expect to receive oneincur additional share of our common stock, par value $2.50 per share,charges for each share of common stock held on that date. All references to common shares and per share amounts have been retroactively adjusted to reflect the stock split for all periods presented.Plan in subsequent years.
Millions | Compensation and | |
for the Year Ended December 31, 2017 | Benefits Expense | |
Pension | $ | 69 |
Severance | 12 | |
Equity Compensation | 5 | |
Total | $ | 86 |
5. Stock Options and Other Stock Plans
There are 7,140 restricted shares outstanding under the 1992 Restricted Stock Plan for Non-Employee Directors of Union Pacific Corporation. We no longer grant awards of restricted shares under this plan.
In April 2000, the shareholders approved the Union Pacific Corporation 2000 Directors Plan (Directors Plan) whereby 2,200,000 shares of our common stock were reserved for issuance to our non-employee directors. Under the Directors Plan, each non-employee director, upon his or her initial election to the Board of Directors, receives a grant of 4,000 retention shares or retention stock units. Prior to December 31, 2007, each non-employee director received annually an option to purchase at fair value a number of shares of our common stock, not to exceed 20,000 shares during any calendar year, determined by dividing 60,000 by 1/3 of the fair market value of one share of our common stock on the date of such Board of Directors meeting, with the resulting quotient rounded up or down to the nearest 50 shares. In September 2007, the Board of Directors eliminated the annual payment of options for 2008 and all future years. As of December 31, 2015, 36,0002017, 44,000 restricted shares and 45,400no options were outstanding under the Directors Plan.
The Union Pacific Corporation 2004 Stock Incentive Plan (2004 Plan) was approved by shareholders in April 2004. The 2004 Plan reserved 84,000,000 shares of our common stock for issuance, plus any
59
shares subject to awards made under previous plans that were outstanding on April 16, 2004, and became available for regrant pursuant to the terms of the 2004 Plan. Under the 2004 Plan, non-qualified options, stock appreciation rights, retention shares, stock units, and incentive bonus awards may be granted to eligible employees of the Corporation and its subsidiaries. Non-employee directors are not eligible for awards under the 2004 Plan. As of December 31, 2015, 3,652,9542017, 1,557,350 options and 2,092,721962 retention shares and stock units were outstanding under the 2004 Plan. We no longer grant any stock options or other stock or unit awards under this plan.
The Union Pacific Corporation 2013 Stock Incentive Plan (2013 Plan) was approved by shareholders in May 2013. The 2013 Plan reserved 78,000,000 shares of our common stock for issuance, plus any shares subject to awards made under previous plans as of February 28, 2013, that are subsequently cancelled, expired, forfeited or otherwise not issued under previous plans. Under the 2013 Plan, non-qualified options, incentive stock options, retention shares, stock units, and incentive bonus awards may be granted to eligible employees of the Corporation and its subsidiaries. Non-employee directors are not eligible for awards under the 2013 Plan. As of December 31, 2015, 1,873,0142017, 4,072,514 options and 2,061,7373,450,600 retention shares and stock units were outstanding under the 2013 Plan.
Pursuant to the above plans 76,548,520; 77,786,772;72,151,415; 73,745,250; and 79,574,89676,548,520; shares of our common stock were authorized and available for grant at December 31, 2015, 2014,2017, 2016, and 2013,2015, respectively.
Stock-Based Compensation – We have several stock-based compensation plans under which employees and non-employee directors receive stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. We have elected to issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when retention shares are granted.
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Information regarding stock-based compensation appears in the table below:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Stock-based compensation, before tax: |
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Stock options | $ | 17 | $ | 21 | $ | 19 | $ | 19 | $ | 16 | $ | 17 |
Retention awards |
| 81 |
| 91 |
| 79 |
| 84 |
| 66 |
| 81 |
Total stock-based compensation, before tax | $ | 98 | $ | 112 | $ | 98 | $ | 103 | $ | 82 | $ | 98 |
Excess tax benefits from equity compensation plans | $ | 62 | $ | 118 | $ | 76 | $ | 44 | $ | 28 | $ | 62 |
Stock Options – We estimate the fair value of our stock option awards using the Black-Scholes option pricing model. The table below shows the annual weighted-average assumptions used for valuation purposes:
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Weighted-Average Assumptions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Risk-free interest rate |
| 1.3% |
| 1.6% |
| 0.8% |
| 2.0% |
| 1.3% |
| 1.3% |
Dividend yield |
| 1.8% |
| 2.1% |
| 2.1% |
| 2.3% |
| 2.9% |
| 1.8% |
Expected life (years) |
| 5.1 |
| 5.2 |
| 5.0 |
| 5.3 |
| 5.1 |
| 5.1 |
Volatility |
| 23.4% |
| 30.0% |
| 36.2% |
| 21.7% |
| 23.2% |
| 23.4% |
Weighted-average grant-date fair value of options granted | $ | 22.30 | $ | 20.18 | $ | 17.49 | $ | 18.19 | $ | 11.36 | $ | 22.30 |
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the expected dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of grant; the expected life is based on historical and expected exercise behavior; and expected volatility is based on the historical volatility of our stock price over the expected life of the option.
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A summary of stock option activity during 20152017 is presented below:
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| Options (thous.) | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (millions) | |||
Outstanding at January 1, 2015 | 5,387 | $ | 53.56 | 5.8 | yrs. | $ | 353 |
Granted | 934 |
| 122.85 | N/A |
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Exercised | (716) |
| 40.10 | N/A |
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Forfeited or expired | (34) |
| 89.24 | N/A |
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Outstanding at December 31, 2015 | 5,571 | $ | 66.69 | 5.4 | yrs. | $ | 114 |
Vested or expected to vest | 5,532 | $ | 66.32 | 5.4 | yrs. | $ | 114 |
Options exercisable at December 31, 2015 | 3,672 | $ | 49.00 | 4.1 | yrs. | $ | 110 |
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Outstanding at January 1, 2017 | 6,162 | $ | 73.13 | 5.9 | yrs. | $ | 205 |
Granted | 1,086 |
| 107.30 | N/A |
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Exercised | (1,448) |
| 56.69 | N/A |
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Forfeited or expired | (170) |
| 92.18 | N/A |
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Outstanding at December 31, 2017 | 5,630 | $ | 83.37 | 5.8 | yrs. | $ | 286 |
Vested or expected to vest | 5,607 | $ | 83.25 | 5.8 | yrs. | $ | 285 |
Options exercisable at December 31, 2017 | 3,466 | $ | 75.96 | 4.2 | yrs. | $ | 201 |
Stock options are granted at the closing price on the date of grant, have ten-year contractual terms, and vest no later than three years from the date of grant. None of the stock options outstanding at December 31, 2015,2017, are subject to performance or market-based vesting conditions.
At December 31, 2015,2017, there was $18$19 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.0 year.1.1 years. Additional information regarding stock option exercises appears in the table below:following table:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Intrinsic value of stock options exercised | $ | 50 | $ | 194 | $ | 112 | $ | 88 | $ | 52 | $ | 50 |
Cash received from option exercises |
| 27 |
| 54 |
| 51 |
| 59 |
| 39 |
| 27 |
Treasury shares repurchased for employee payroll taxes |
| (12) |
| (24) |
| (21) |
| (18) |
| (15) |
| (12) |
Tax benefit realized from option exercises |
| 19 |
| 74 |
| 43 |
| 34 |
| 20 |
| 19 |
Aggregate grant-date fair value of stock options vested |
| 19 |
| 17 |
| 16 |
| 20 |
| 19 |
| 19 |
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Retention Awards – The fair value of retention awards is based on the closing price of the stock on the grant date. Dividends and dividend equivalents are paid to participants during the vesting periods.
Changes in our retention awards during 20152017 were as follows:
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| Shares (thous.) | Weighted-Average | Shares (thous.) | Weighted-Average | ||
Nonvested at January 1, 2015 | 3,403 | $ | 64.39 | |||
Nonvested at January 1, 2017 | 2,789 | $ | 84.68 | |||
Granted | 521 |
| 122.79 | 575 |
| 107.51 |
Vested | (934) |
| 47.66 | (894) |
| 70.91 |
Forfeited | (90) |
| 72.87 | (157) |
| 94.01 |
Nonvested at December 31, 2015 | 2,900 | $ | 80.01 | |||
Nonvested at December 31, 2017 | 2,313 | $ | 95.04 |
Retention awards are granted at no cost to the employee or non-employee director and vest over periods lasting up to four years. At December 31, 2015,2017, there was $88$87 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.51.6 years.
Performance Retention Awards – In February 2015,2017, our Board of Directors approved performance stock unit grants. Other than different performance targets, theThe basic terms of these performance stock units are identical to those granted in February 2013 and February 2014, including using2016, except for different annual return on invested capital (ROIC) performance targets. The 2016 and 2017 plans also include the addition of relative operating income growth (OIG) as a modifier compared to the performance measure.companies included in the S&P 500 Industrials Index. We define ROIC as net operating profit adjusted for interest expense (including interest on the present value of operating leases) and taxes on interest divided by average invested capital adjusted for the present value of operating leases. The modifier can be up to +/- 25% of the award earned based on the ROIC achieved.
Stock units awarded to selected employees under these grants are subject to continued employment for 37 months and the attainment of certain levels of ROIC.ROIC, and for the 2016 and 2017 plans, modified for the relative OIG. We expense the fair value of the units that are
61
probable of being earned based on our forecasted ROIC over the 3-year performance period.period, and with respect to the third year of the 2016 and 2017 plans, the relative OIG modifier. We measure the fair value of these performance stock units based upon the closing price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends. Dividend equivalents are paid to participants only after the units are earned.
The assumptions used to calculate the present value of estimated future dividends related to the February 20152017 grant were as follows:
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Dividend per share per quarter | $ | |
Risk-free interest rate at date of grant |
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Changes in our performance retention awards during 20152017 were as follows:
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| Shares (thous.) | Weighted-Average | Shares (thous.) | Weighted-Average | ||
Nonvested at January 1, 2015 | 1,583 | $ | 65.33 | |||
Nonvested at January 1, 2017 | 1,145 | $ | 86.23 | |||
Granted | 339 |
| 117.42 | 461 |
| 101.38 |
Vested | (580) |
| 54.38 | (255) |
| 83.06 |
Unearned | (110) |
| 83.06 | |||
Forfeited | (87) |
| 86.66 | (103) |
| 91.36 |
Nonvested at December 31, 2015 | 1,255 | $ | 82.98 | |||
Nonvested at December 31, 2017 | 1,138 | $ | 92.92 |
At December 31, 2015,2017, there was $19$39 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 0.71.5 years. This expense is subject to achievement of the ROIC levelsperformance measures established for the performance stock unit grants.
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6. Retirement Plans
Pension and Other Postretirement Benefits
Pension Plans – We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements. Non-union employees hired on or after January 1, 2018, are no longer eligible for pension benefits, but will be eligible for an enhanced 401(k) plan as described below in other retirement programs.
Other Postretirement Benefits (OPEB) – We provide medical and life insurance benefits for eligible retirees.retirees hired before January 1, 2004. These benefits are funded as medical claims and life insurance premiums are paid.
Funded Status
We are required by GAAP to separately recognize the overfunded or underfunded status of our pension and OPEB plans as an asset or liability. The funded status represents the difference between the projected benefit obligation (PBO) and the fair value of the plan assets. Our non-qualified (supplemental) pension plan is unfunded by design. The PBO of the pension plans is the present value of benefits earned to date by plan participants, including the effect of assumed future compensation increases. The PBO of the OPEB plan is equal to the accumulated benefit obligation, as the present value of the OPEB liabilities is not affected by compensation increases. Plan assets are measured at fair value. We use a December 31 measurement date for plan assets and obligations for all our retirement plans.
62
Changes in our PBO and plan assets were as follows for the years ended December 31:
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Funded Status | Pension | OPEB | Pension | OPEB | ||||||||||||
Millions | 2015 | 2014 | 2015 | 2014 | 2017 | 2016 | 2017 | 2016 | ||||||||
Projected Benefit Obligation |
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Projected benefit obligation at beginning of year | $ | 4,142 | $ | 3,372 | $ | 354 | $ | 330 | $ | 4,110 | $ | 3,958 | $ | 334 | $ | 329 |
Service cost |
| 106 |
| 70 |
| 3 |
| 2 |
| 90 |
| 84 |
| 2 |
| 1 |
Interest cost |
| 163 |
| 158 |
| 13 |
| 14 |
| 142 |
| 143 |
| 10 |
| 11 |
Actuarial loss/(gain) |
| (267) |
| 735 |
| (18) |
| 33 | ||||||||
Plan curtailment cost |
| 20 |
| - |
| (1) |
| - | ||||||||
Special termination cost |
| 49 |
| - |
| - |
| - | ||||||||
Actuarial loss |
| 382 |
| 124 |
| 7 |
| 16 | ||||||||
Gross benefits paid |
| (186) |
| (193) |
| (23) |
| (25) |
| (264) |
| (199) |
| (22) |
| (23) |
Projected benefit obligation at end of year | $ | 3,958 | $ | 4,142 | $ | 329 | $ | 354 | $ | 4,529 | $ | 4,110 | $ | 330 | $ | 334 |
Plan Assets |
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Fair value of plan assets at beginning of year | $ | 3,654 | $ | 3,429 | $ | - | $ | - | $ | 3,748 | $ | 3,544 | $ | - | $ | - |
Actual return on plan assets |
| (43) |
| 185 |
| - |
| - |
| 716 |
| 279 |
| - |
| - |
Voluntary funded pension plan contributions |
| 100 |
| 200 |
| - |
| - |
| - |
| 100 |
| - |
| - |
Non-qualified plan benefit contributions |
| 19 |
| 33 |
| 23 |
| 25 |
| 24 |
| 24 |
| 22 |
| 23 |
Gross benefits paid |
| (186) |
| (193) |
| (23) |
| (25) |
| (264) |
| (199) |
| (22) |
| (23) |
Fair value of plan assets at end of year | $ | 3,544 | $ | 3,654 | $ | - | $ | - | $ | 4,224 | $ | 3,748 | $ | - | $ | - |
Funded status at end of year | $ | (414) | $ | (488) | $ | (329) | $ | (354) | $ | (305) | $ | (362) | $ | (330) | $ | (334) |
Amounts recognized in the statement of financial position as of December 31, 20152017, and 20142016 consist of:
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| Pension | OPEB | Pension | OPEB | ||||||||||||
Millions | 2015 | 2014 | 2015 | 2014 | 2017 | 2016 | 2017 | 2016 | ||||||||
Noncurrent assets | $ | 1 | $ | 1 | $ | - | $ | - | $ | 196 | $ | 67 | $ | - | $ | - |
Current liabilities |
| (22) |
| (19) |
| (23) |
| (23) |
| (27) |
| (24) |
| (23) |
| (24) |
Noncurrent liabilities |
| (393) |
| (470) |
| (306) |
| (331) |
| (474) |
| (405) |
| (307) |
| (310) |
Net amounts recognized at end of year | $ | (414) | $ | (488) | $ | (329) | $ | (354) | $ | (305) | $ | (362) | $ | (330) | $ | (334) |
57
Pre-tax amounts recognized in accumulated other comprehensive income/(loss) as of December 31, 20152017, and 20142016 consist of:
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| 2015 | 2014 | 2017 | 2016 | ||||||||||||||||||||
Millions | Pension | OPEB | Total | Pension | OPEB | Total | Pension | OPEB | Total | Pension | OPEB | Total | ||||||||||||
Prior service (cost)/credit | $ | - | $ | 7 | $ | 7 | $ | - | $ | 17 | $ | 17 | ||||||||||||
Prior service cost | $ | - | $ | (1) | $ | (1) | $ | - | $ | (2) | $ | (2) | ||||||||||||
Net actuarial loss |
| (1,652) |
| (117) |
| (1,769) |
| (1,727) |
| (148) |
| (1,875) |
| (1,533) |
| (120) |
| (1,653) |
| (1,681) |
| (123) |
| (1,804) |
Total | $ | (1,652) | $ | (110) | $ | (1,762) | $ | (1,727) | $ | (131) | $ | (1,858) | $ | (1,533) | $ | (121) | $ | (1,654) | $ | (1,681) | $ | (125) | $ | (1,806) |
Pre-tax changes recognized in other comprehensive income/(loss) during 2015, 20142017, 2016, and 20132015 were as follows:
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| Pension | OPEB | Pension | OPEB | ||||||||||||||||||||
Millions | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||
Net actuarial (loss)/gain | $ | (31) | $ | (780) | $ | 561 | $ | 18 | $ | (33) | $ | 34 | $ | 67 | $ | (112) | $ | (31) | $ | (6) | $ | (16) | $ | 18 |
Amortization of: |
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Prior service cost/(credit) |
| - |
| - |
| - |
| (10) |
| (11) |
| (16) |
| - |
| - |
| - |
| 1 |
| (9) |
| (10) |
Actuarial loss |
| 106 |
| 71 |
| 106 |
| 13 |
| 10 |
| 15 |
| 81 |
| 83 |
| 106 |
| 9 |
| 10 |
| 13 |
Total | $ | 75 | $ | (709) | $ | 667 | $ | 21 | $ | (34) | $ | 33 | $ | 148 | $ | (29) | $ | 75 | $ | 4 | $ | (15) | $ | 21 |
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Amounts included in accumulated other comprehensive income/(loss) expected to be amortized into net periodic cost during 2016:2018:
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Millions | Pension | OPEB | Total | Pension | OPEB | Total | ||||||
Prior service credit | $ | - | $ | 9 | $ | 9 | $ | - | $ | (1) | $ | (1) |
Net actuarial loss |
| (80) |
| (10) |
| (90) |
| (90) |
| (9) |
| (99) |
Total | $ | (80) | $ | (1) | $ | (81) | $ | (90) | $ | (10) | $ | (100) |
Underfunded Accumulated Benefit Obligation – The accumulated benefit obligation (ABO) is the present value of benefits earned to date, assuming no future compensation growth. The underfunded accumulated benefit obligation represents the difference between the ABO and the fair value of plan assets. At December 31, 20152017, and 2014,2016, the non-qualified (supplemental) plan ABO was $388$481 million and $379 $412million, respectively. The following table discloses only the PBO, ABO, and fair value of plan assets for pension plans where the accumulated benefit obligation is in excess of the fair value of the plan assets as of December 31:
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Underfunded Accumulated Benefit Obligation |
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Millions | 2015 | 2014 | 2017 | 2016 | ||||
Projected benefit obligation | $ | 398 | $ | 388 | $ | 501 | $ | 428 |
Accumulated benefit obligation | $ | 388 | $ | 379 | $ | 481 | $ | 412 |
Fair value of plan assets |
| - |
| - |
| - |
| - |
Underfunded accumulated benefit obligation | $ | (388) | $ | (379) | $ | (481) | $ | (412) |
The ABO for all defined benefit pension plans was $3.7$4.2 billion and $3.9 billion at December 31, 20152017, and 2014,2016, respectively.
58
Assumptions – The weighted-average actuarial assumptions used to determine benefit obligations at December 31:
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| Pension | OPEB | Pension | OPEB | ||||
Percentages | 2015 | 2014 | 2015 | 2014 | 2017 | 2016 | 2017 | 2016 |
Discount rate | 4.37% | 3.94% | 4.16% | 3.74% | 3.62% | 4.20% | 3.53% | 4.00% |
Compensation increase | 4.10% | 4.00% | N/A | N/A | 4.20% | 4.20% | N/A | N/A |
Health care cost trend rate (employees under 65) | N/A | N/A | 6.52% | 6.34% | N/A | N/A | 6.09% | 6.31% |
Ultimate health care cost trend rate | N/A | N/A | 4.50% | 4.50% | N/A | N/A | 4.50% | 4.50% |
Year ultimate trend rate reached | N/A | N/A | 2038 | 2028 | N/A | N/A | 2038 | 2038 |
Expense
Both pension and OPEB expense are determined based upon the annual service cost of benefits (the actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the expected return on plan assets. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a five-year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and expected returns based on long-term rate of return assumptions. Differences in actual experience in relation to assumptions are not recognized in net income immediately, but are deferred in accumulated other comprehensive income and, if necessary, amortized as pension or OPEB expense.
The workforce reduction plan initiated in the third quarter of 2017 included a curtailment loss of $20 million and a special termination benefit of $49 million as a result of a remeasurement as of September 30, 2017, due to the eliminated future service for approximately 460 management employees. These amounts were recognized in 2017 within compensation and benefits expense in our Consolidated Statements of Income. In connection with this remeasurement, the Company also updated the pension effective discount rate assumption from 4.20% to 3.81%.
64
The components of our net periodic pension and OPEB cost/(benefit)cost were as follows for the years ended December 31:
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| Pension | OPEB | Pension | OPEB | ||||||||||||||||||||
Millions | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||
Net Periodic Benefit Cost: |
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Service cost | $ | 106 | $ | 70 | $ | 72 | $ | 3 | $ | 2 | $ | 3 | $ | 90 | $ | 84 | $ | 106 | $ | 2 | $ | 1 | $ | 3 |
Interest cost |
| 163 |
| 158 |
| 134 |
| 13 |
| 14 |
| 12 |
| 142 |
| 143 |
| 163 |
| 10 |
| 11 |
| 13 |
Expected return on plan assets |
| (255) |
| (230) |
| (202) |
| - |
| - |
| - |
| (267) |
| (267) |
| (255) |
| - |
| - |
| - |
Plan curtailment cost |
| 20 |
| - |
| - |
| - |
| - |
| - | ||||||||||||
Special termination cost |
| 49 |
| - |
| - |
| - |
| - |
| - | ||||||||||||
Amortization of: |
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Prior service cost/(credit) |
| - |
| - |
| - |
| (10) |
| (11) |
| (16) |
| - |
| - |
| - |
| 1 |
| (9) |
| (10) |
Actuarial loss |
| 106 |
| 71 |
| 106 |
| 13 |
| 10 |
| 15 |
| 81 |
| 83 |
| 106 |
| 9 |
| 10 |
| 13 |
Net periodic benefit cost/(benefit) | $ | 120 | $ | 69 | $ | 110 | $ | 19 | $ | 15 | $ | 14 | ||||||||||||
Net periodic benefit cost | $ | 115 | $ | 43 | $ | 120 | $ | 22 | $ | 13 | $ | 19 | ||||||||||||
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Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows:
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| Pension | OPEB | Pension | OPEB | ||||||||
Percentages | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
Discount rate | 3.94% | 4.72% | 3.78% | 3.74% | 4.47% | 3.48% | ||||||
Discount rate for benefit obligations | 4.09% | 4.37% | 3.94% | 3.89% | 4.13% | 3.74% | ||||||
Discount rate for interest on benefit obligations | 3.47% | 3.65% | 3.94% | 3.25% | 3.34% | 3.74% | ||||||
Discount rate for service cost | 4.41% | 4.69% | 3.94% | 4.25% | 4.59% | 3.74% | ||||||
Discount rate for interest on service cost | 4.27% | 4.55% | 3.94% | 4.11% | 4.44% | 3.74% | ||||||
Expected return on plan assets | 7.50% | 7.50% | N/A | N/A | 7.00% | 7.50% | 7.50% | N/A | N/A | |||
Compensation increase | 4.00% | 4.00% | 3.43% | N/A | N/A | 4.13% | 4.20% | 4.00% | N/A | N/A | ||
Health care cost trend rate (employees under 65) | N/A | N/A | 6.34% | 6.49% | 6.64% | N/A | N/A | 6.31% | 6.52% | 6.34% | ||
Ultimate health care cost trend rate | N/A | N/A | 4.50% | 4.50% | N/A | N/A | 4.50% | 4.50% | 4.50% | |||
Year ultimate trend reached | N/A | N/A | 2028 | 2028 | N/A | N/A | 2038 | 2038 | 2028 |
Beginning in 2016, we measure the service cost and interest cost components of our net periodic benefit cost by using individual spot discount rates matched with separate cash flows for each future year. The discount rate wasrates were based on a yield curve of high quality corporate bonds with cash flows matching our plans’ expected benefit payments.bonds. The expected return on plan assets is based on our asset allocation mix and our historical return, taking into account current and expected market conditions. The actual returnreturn/(loss) on pension plan assets, net of fees, was approximately 19% in 2017, 8% in 2016, and (1)% in 2015, 6% in 2014, and 17% in 2013.2015.
Assumed health care cost trend rates have an effect on the expense and liabilities reported for health care plans. The assumed health care cost trend rate is based on historical rates and expected market conditions. The 20162018 assumed health care cost trend rate for employees under 65 is 6.34%6.09%. It is assumed the rate will decrease gradually to an ultimate rate of 4.5% in 20282038 and will remain at that level. A one-percentage point change in the assumed health care cost trend rates would have the following effects on OPEB:
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Millions | One % pt. | One % pt. | One % pt. | One % pt. | ||||
Effect on total service and interest cost components | $ | 1 | $ | (1) | $ | 1 | $ | (1) |
Effect on accumulated benefit obligation |
| 17 |
| (14) |
| 19 |
| (16) |
Cash Contributions
The following table details our cash contributions for the qualified pension plans and the benefit payments for the non-qualified (supplemental) pension and OPEB plans:
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| Pension |
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Millions | Qualified | Non-qualified | OPEB | ||||
2014 | $ | 200 | $ | 33 | $ | 25 | |
2015 |
| 100 |
| 19 |
| 23 |
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Millions | Qualified | Non-qualified | OPEB | ||||
2017 | $ | - | $ | 24 | $ | 22 | |
2016 |
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| 100 |
| 24 |
| 23 |
Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes. All contributions made to the qualified pension plans in 2015 were voluntary and were made with cash generated from operations.
65
The non-qualified pension and OPEB plans are not funded and are not subject to any minimum regulatory funding requirements. Benefit payments for each year represent supplemental pension payments and claims paid for medical and life insurance. We anticipate our 20162018 supplemental pension and OPEB payments will be made from cash generated from operations.
60
Benefit Payments
The following table details expected benefit payments for the years 20162018 through 2025:2027:
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Millions | Pension | OPEB | Pension | OPEB | ||||
2016 | $ | 191 | $ | 23 | ||||
2017 |
| 194 |
| 23 | ||||
2018 |
| 198 |
| 23 | $ | 212 | $ | 23 |
2019 |
| 202 |
| 23 |
| 212 |
| 22 |
2020 |
| 205 |
| 22 |
| 211 |
| 22 |
Years 2021 - 2025 |
| 1,077 |
| 102 | ||||
2021 |
| 212 |
| 21 | ||||
2022 |
| 213 |
| 20 | ||||
Years 2023 - 2027 |
| 1,101 |
| 90 |
Asset Allocation Strategy
Our pension plan asset allocation at December 31, 20152017, and 2014,2016, and target allocation for 2016,2018, are as follows:
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| Percentage of Plan Assets |
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| Percentage of Plan Assets | ||
| Target |
| December 31, | Target |
| December 31, | ||
| Allocation 2016 |
| 2015 | 2014 | Allocation 2018 |
| 2017 | 2016 |
Equity securities | 60% to 70% |
| 67% | 68% | 60% to 70% |
| 69% | 68% |
Debt securities | 20% to 30% |
| 23 | 23 | 20% to 30% |
| 22 | 21 |
Real estate | 2% to 8% |
| 6 | 4 | 2% to 8% |
| 5 | 6 |
Commodities | 4% to 6% |
| 4 | 5 | 4% to 6% |
| 4 | 5 |
Total | Total |
| 100% | 100% | Total |
| 100% | 100% |
The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to achieve our target average long-term rate of return of 7.5%7.0%. While we believe we can achieve a long-term average rate of return of 7.5%7.0%, we cannot be certain that the portfolio will perform to our expectations. Assets are strategically allocated among equity, debt, and other investments in order to achieve a diversification level that reduces fluctuations in investment returns. Asset allocation target ranges for equity, debt, and other portfolios are evaluated at least every three years with the assistance of an independent consulting firm. Actual asset allocations are monitored monthly, and rebalancing actions are executed at least quarterly, ifas needed.
The pension plan investments are held in a Master Trust. The majority of pension plan assets are invested in equity securities because equity portfolios have historically provided higher returns than debt and other asset classes over extended time horizons and are expected to do so in the future. Correspondingly, equity investments also entail greater risks than other investments. Equity risks are balanced by investing a significant portion of the plans’ assets in high quality debt securities. The average credit rating of the debt portfolio exceeded A as ofat both December 31, 20152017 and A+ as of December 31, 2014.2016. The debt portfolio is also broadly diversified and invested primarily in U.S. Treasury, mortgage, and corporate securities. The weighted-average maturity of the debt portfolio was 1213 years and 14 years at both December 31, 20152017, and 2014.2016, respectively.
The investment of pension plan assets in securities issued by UPC is explicitly prohibited by the plan for both the equity and debt portfolios, other than through index fund holdings.
Fair Value Measurements
The pension plan assets are valued at fair value. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
66
Temporary Cash Investments – These investments consist of U.S. dollars and foreign currencies held in master trust accounts at The Northern Trust Company (the Trustee). Foreign currencies held are reported in terms of U.S. dollars based on currency exchange rates readily available in active markets. These temporary cash investments are classified as Level 1 investments.
61
Registered Investment Companies – Registered Investment Companies are real estate investmentsentities primarily engaged in the business of investing in securities and bond investmentsare registered with the Securities and Exchange Commission. The real estate investments are traded actively on public exchanges. The share prices for these investments are published at the close of each business day. The Plan’s holdings of real estate investmentsRegistered Investment Companies include both public and private fund vehicles. The public vehicles are mutual funds (real estate) and exchange-traded funds (stocks), which are classified as Level 1 investments. The bond investmentsprivate vehicles (bonds) do not have published pricing and are not traded publicly, but the underlying assets held in these funds are traded on active markets and the prices for these assets are readily observable. The Plan’s holdings in bond investments are classified as Level 2 investments.valued using Net Asset Value (NAV).
Federal Government Securities – Federal Government Securities consist of bills, notes, bonds, and other fixed income securities issued directly by the U.S. Treasury or by government-sponsored enterprises. These assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Federal Government Securities are classified as Level 2 investments.
Bonds and Debentures – Bonds and debentures consist of fixed incomedebt securities issued by U.S. and non-U.S. corporations as well as state and local governments. These assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Corporate, state, and municipal bonds and debentures are classified as Level 2 investments.
Corporate Stock – This investment category consists of common and preferred stock issued by U.S. and non-U.S. corporations. Most common shares are traded actively on exchanges and price quotes for these shares are readily available. Common stock is classified as a Level 1 investment. Preferred shares included in this category are valued using a bid evaluation process with bid data provided by independent pricing sources. Preferred stock is classified as a Level 2 investment.
Venture Capital and Buyout Partnerships – This investment category is comprised of interests in limited partnerships that invest primarily in privately-held companies. Due to the private nature of the partnership investments, pricing inputs are not readily observable. Asset valuations are developed by the general partners that manage the partnerships. These valuations are based on the application of public market multiples to private company cash flows, market transactions that provide valuation information for comparable companies, and other methods. The fair value recorded by the Plan is calculated using each partnership’s net asset value (NAV), which is derived from the valuation method described here. The Plan’s holdings of limited partnership interests are classified as Level 3 investments.NAV.
Real Estate Partnerships – Most of the Plan’s real estate investments are partnership interests. The Real Estate Partnership category also includes real estate investments heldprimarily interests in similar structures such as private real estate investment trusts, andpartnerships, limited liability companies.companies, and similar structures. Valuations for the holdings in this category are not based on readily observable inputs and are primarily derived from property appraisals. The fair value recorded by the Plan is calculated using the NAV for each investment, which is derived from the valuation methods described here. The Plan’s interests in private real estate partnerships, investment trusts, and limited liability companies are classified as Level 3 investments.investment.
Collective Trust and Other FundFundss – Collective trust and other funds are comprised of shares or units in commingled funds and limited liability companies that are not publicly traded. The underlying assets in these fundsentities (U.S. stock funds, non-U.S. stock funds, commodity funds, hedge funds, and short term investment funds) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. The Plan’s holdings of common trust funds are classified as Level 2 investments.fair value recorded by the Plan is calculated using NAV for each investment.
This category also includes investments in limited liability companies that invest in publicly-traded securities. The limited liability company investments are funds that invest in both long and short positions in convertible securities, stocks, commodities, and fixed income securities. The underlying securities held by the funds are traded actively on public exchanges and price quotes for these investments are readily available. Interests in the limited liability companies are classified as Level 2 investments.
6762
As of December 31, 2015,2017, the pension plan assets measured at fair value on a recurring basis were as follows:
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| Quoted Prices |
| Significant |
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|
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| Quoted Prices |
| Significant |
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|
|
| ||||
| in Active |
| Other |
| Significant |
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| in Active |
| Other |
| Significant |
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| ||||||||
| Markets for |
| Observable |
| Unobservable |
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| Markets for |
| Observable |
| Unobservable |
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| ||||||||
| Identical Inputs |
| Inputs |
| Inputs |
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|
| Identical Inputs |
| Inputs |
| Inputs |
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| ||||||
Millions | (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||||||
Plan assets: |
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Plan assets at fair value: |
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| |||||||||||
Temporary cash investments | $ | 13 |
| $ | - |
| $ | - |
| $ | 13 | $ | 27 |
| $ |
|
| $ | - |
| $ | 27 |
Registered investment companies |
| 179 |
|
| 270 |
|
| - |
|
| 449 | |||||||||||
Registered investment companies [a] |
| 4 |
|
|
|
|
| - |
|
| 4 | |||||||||||
Federal government securities |
| - |
|
| 125 |
|
| - |
|
| 125 |
|
|
|
| 182 |
|
| - |
|
| 182 |
Bonds & debentures |
| - |
|
| 383 |
|
| - |
|
| 383 | |||||||||||
Bonds and debentures |
|
|
|
| 389 |
|
| - |
|
| 389 | |||||||||||
Corporate stock |
| 1,034 |
|
| 7 |
|
| - |
|
| 1,041 |
| 1,171 |
|
| 8 |
|
| - |
|
| 1,179 |
Total plan assets at fair value | $ | 1,202 |
| $ | 579 |
| $ | - |
| $ | 1,781 | |||||||||||
Plan assets at NAV: |
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|
|
|
|
|
|
| |||||||||||
Registered investment companies [b] |
|
|
|
|
|
|
|
|
|
| 329 | |||||||||||
Venture capital and buyout partnerships |
| - |
|
| - |
|
| 256 |
|
| 256 |
|
|
|
|
|
|
|
|
|
| 358 |
Real estate partnerships |
| - |
|
| - |
|
| 199 |
|
| 199 |
|
|
|
|
|
|
|
|
|
| 226 |
Collective trust and other funds |
| - |
|
| 1,075 |
|
| - |
|
| 1,075 |
|
|
|
|
|
|
|
|
|
| 1,552 |
Total plan assets at fair value | $ | 1,226 |
| $ | 1,860 |
| $ | 455 |
|
| 3,541 | |||||||||||
Other assets [a] |
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|
|
|
|
| 3 | |||||||||||
Total plan assets at NAV |
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|
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| $ | 2,465 | ||||||||||||||
Other assets [c] |
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|
|
|
|
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| (22) | |||||||||||
Total plan assets |
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|
|
|
|
|
|
|
| $ | 3,544 |
|
|
|
|
|
|
|
|
| $ | 4,224 |
[a] | Registered investment companies measured at fair value include stock investments. |
[b] | Registered investment companies measured at NAV include bond investments. |
[c] | Other assets include accrued receivables, net payables, and pending broker settlements. |
As of December 31, 2014,2016, the pension plan assets measured at fair value on a recurring basis were as follows:
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| Quoted Prices |
| Significant |
|
|
|
|
| Quoted Prices |
| Significant |
|
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|
| |||||
| in Active |
| Other |
| Significant |
|
| in Active |
| Other |
| Significant |
|
| ||||||||
| Markets for |
| Observable |
| Unobservable |
|
| Markets for |
| Observable |
| Unobservable |
|
| ||||||||
| Identical Inputs |
| Inputs |
| Inputs |
|
|
| Identical Inputs |
| Inputs |
| Inputs |
|
|
| ||||||
Millions | (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||||||
Plan assets: |
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| |||||||||||
Plan assets at fair value: |
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|
|
|
|
|
| |||||||||||
Temporary cash investments | $ | 22 |
| $ | - |
| $ | - |
| $ | 22 | $ | 27 |
| $ | - |
| $ | - |
| $ | 27 |
Registered investment companies |
| 12 |
|
| 282 |
|
| - |
|
| 294 | |||||||||||
Registered investment companies [a] |
| 17 |
|
| - |
|
| - |
|
| 17 | |||||||||||
Federal government securities |
| - |
|
| 163 |
|
| - |
|
| 163 |
| - |
|
| 142 |
|
| - |
|
| 142 |
Bonds & debentures |
| - |
|
| 381 |
|
| - |
|
| 381 | |||||||||||
Bonds and debentures |
| - |
|
| 357 |
|
| - |
|
| 357 | |||||||||||
Corporate stock |
| 1,076 |
|
| 15 |
|
| - |
|
| 1,091 |
| 1,059 |
|
| 8 |
|
| - |
|
| 1,067 |
Total plan assets at fair value | $ | 1,103 |
| $ | 507 |
| $ | - |
| $ | 1,610 | |||||||||||
Plan assets at NAV: |
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|
|
|
|
|
|
|
|
|
| |||||||||||
Registered investment companies [b] |
|
|
|
|
|
|
|
|
|
| 280 | |||||||||||
Venture capital and buyout partnerships |
| - |
|
| - |
|
| 234 |
|
| 234 |
|
|
|
|
|
|
|
|
|
| 283 |
Real estate partnerships |
| - |
|
| - |
|
| 139 |
|
| 139 |
|
|
|
|
|
|
|
|
|
| 212 |
Collective trust and other funds |
| - |
|
| 1,340 |
|
| - |
|
| 1,340 |
|
|
|
|
|
|
|
|
|
| 1,346 |
Total plan assets at fair value | $ | 1,110 |
| $ | 2,181 |
| $ | 373 |
|
| 3,664 | |||||||||||
Other assets [a] |
|
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|
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|
|
|
|
|
| (10) | |||||||||||
Total plan assets at NAV |
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|
|
|
| $ | 2,121 | ||||||||||||||
Other assets [c] |
|
|
|
|
|
|
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|
|
| 17 | |||||||||||
Total plan assets |
|
|
|
|
|
|
|
|
| $ | 3,654 |
|
|
|
|
|
|
|
|
| $ | 3,748 |
[a] | Registered investment companies measured at fair value include stock and real estate investments. |
[b] | Registered investment companies measured at NAV include bond investments. |
[c] | Other assets include accrued receivables and pending broker settlements. |
63
For the years ended December 31, 20152017 and 2014,2016, there were no significant transfers in or out of Levels 1, 2, or 3.
68
The following table presents a reconciliationMaster Trust’s investments in limited partnerships and similar structures (used to invest in private equity and real estate) are valued at fair value based on their proportionate share of the beginning and ending balances of thepartnerships’ fair value measurements using significant unobservable inputs (Level 3 investments) during 2015:
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|
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| Venture Capital |
|
|
|
| |||
| and Buyout |
| Real Estate |
|
| |||
Millions | Partnerships |
| Partnerships |
| Total | |||
Beginning balance - January 1, 2015 | $ | 234 |
| $ | 139 |
| $ | 373 |
Realized gain |
| 18 |
|
| 5 |
|
| 23 |
Unrealized gain |
| 13 |
|
| 8 |
|
| 21 |
Purchases |
| 54 |
|
| 74 |
|
| 128 |
Sales |
| (63) |
|
| (27) |
|
| (90) |
Ending balance - December 31, 2015 | $ | 256 |
| $ | 199 |
| $ | 455 |
as recorded in the limited partnerships’ audited financial statements. The following table presents a reconciliation oflimited partnerships allocate gains, losses and expenses to the beginningpartners based on the ownership percentage as described in the partnership agreements. At December 31, 2017 and ending balances of2016, the fair value measurements using significant unobservable inputs (Level 3 investments) during 2014:Master Trust had future commitments for additional contributions to private equity partnerships totaling $359 million and $392 million, respectively, and to real estate partnerships and funds totaling $67 million and $32 million, respectively.
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|
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| Venture Capital |
|
|
|
| |||
| and Buyout |
| Real Estate |
|
| |||
Millions | Partnerships |
| Partnerships |
| Total | |||
Beginning balance - January 1, 2014 | $ | 213 |
| $ | 139 |
| $ | 352 |
Realized gain |
| 17 |
|
| 8 |
|
| 25 |
Unrealized gain |
| 5 |
|
| 6 |
|
| 11 |
Purchases |
| 54 |
|
| 19 |
|
| 73 |
Sales |
| (55) |
|
| (33) |
|
| (88) |
Ending balance - December 31, 2014 | $ | 234 |
| $ | 139 |
| $ | 373 |
Other Retirement Programs
401(k)/Thrift Plan – WeFor non-union employees hired prior to January 1, 2018, and eligible union employees for whom we make matching contributions, we provide a defined contribution plan (401(k)/thrift plan) to eligible non-union and union employees for whom we make matching contributions.. We match 50 cents for each dollar contributed by employees up to the first six percent6% of compensation contributed. Our plan contributions were $19 million in 2017, $19 million in 2016, and $20 million in 2015, $19 million2015. For non-union employees hired on or after January 1, 2018, we will match dollar-for-dollar, up to the first 6% of compensation contributed, in 2014, and $18 million in 2013.addition to contributing an annual amount of 3% of the employee’s annual base salary.
Railroad Retirement System – All Railroad employees are covered by the Railroad Retirement System (the System). Contributions made to the System are expensed as incurred and amounted to approximately $672 million in 2017, $671 million in 2016, and $749 million in 2015, $711 million in 2014, and $670 million in 2013.2015.
Collective Bargaining Agreements – Under collective bargaining agreements, we participate in multi-employer benefit plans that provide certain postretirement health care and life insurance benefits for eligible union employees. Premiums paid under these plans are expensed as incurred and amounted to $60 million in 2017, $50 million in 2016, and $46 million in 2015, $52 million in 2014, and $57 million in 2013.2015.
7. Other Income
Other income included the following for the years ended December 31:
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| �� |
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Millions | Millions | 2015 | 2014 | 2013 | Millions | 2017 | 2016 | 2015 | ||||||
Net gain on non-operating asset dispositions [a] | $ | 144 | $ | 69 | $ | 32 | ||||||||
Rental income [b] |
| 96 |
| 96 |
| 106 | ||||||||
Rental income [a] | Rental income [a] | $ | 178 | $ | 96 | $ | 96 | |||||||
Net gain on non-operating asset dispositions [b] [c] | Net gain on non-operating asset dispositions [b] [c] |
| 111 |
| 94 |
| 144 | |||||||
Interest income | Interest income |
| 5 |
| 4 |
| 4 | Interest income |
| 16 |
| 11 |
| 5 |
Non-operating environmental costs and other [c] |
| (19) |
| (18) |
| (14) | ||||||||
Non-operating environmental costs and other | Non-operating environmental costs and other |
| (15) |
| (9) |
| (19) | |||||||
Total | Total | $ | 226 | $ | 151 | $ | 128 | Total | $ | 290 | $ | 192 | $ | 226 |
[a] |
|
[b] |
|
[c] |
|
6964
8. Income Taxes
Components of income tax expense were as follows for the years ended December 31:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Current tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal | $ | 1,901 | $ | 2,019 | $ | 1,727 | $ | 1,750 | $ | 1,518 | $ | 1,901 |
State |
| 210 |
| 239 |
| 199 |
| 235 |
| 176 |
| 210 |
Foreign |
| 8 |
| 10 |
| 11 |
| 2 |
| 8 |
| 8 |
Total current tax expense |
| 2,119 |
| 2,268 |
| 1,937 |
| 1,987 |
| 1,702 |
| 2,119 |
Deferred and other tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| 644 |
| 753 |
| 605 |
| (5,260) |
| 692 |
| 644 |
State |
| 121 |
| 142 |
| 118 |
| 183 |
| 139 |
| 121 |
Total deferred and other tax expense |
| 765 |
| 895 |
| 723 | ||||||
Foreign |
| 10 |
| - |
| - | ||||||
Total deferred and other tax expense [a] |
| (5,067) |
| 831 |
| 765 | ||||||
Total income tax expense | $ | 2,884 | $ | 3,163 | $ | 2,660 | $ | (3,080) | $ | 2,533 | $ | 2,884 |
[a] | 2017 includes a $(5,935) million adjustment to income tax expense resulting from the Tax Cuts and Jobs Act. Of this amount, $(5,965) million is a federal income tax benefit and $30 million is a state income tax expense. |
For the years ended December 31, reconciliations between statutory and effective tax rates are as follows:
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Tax Rate Percentages | 2015 |
| 2014 |
| 2013 |
| 2017 |
| 2016 |
| 2015 |
|
Federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % |
State statutory rates, net of federal benefits | 3.1 |
| 3.1 |
| 3.1 |
| 3.1 |
| 3.1 |
| 3.1 |
|
Adjustment for Tax Cuts and Jobs Act | (77.8) |
| - |
| - |
| ||||||
Other deferred tax adjustments | 0.4 |
| - |
| - |
| ||||||
Tax credits | (0.5) |
| (0.4) |
| (0.2) |
| 0.1 |
| (0.5) |
| (0.5) |
|
Deferred tax adjustments | - |
| - |
| (0.1) |
| ||||||
Other | 0.1 |
| 0.2 |
| (0.1) |
| (1.2) |
| (0.2) |
| 0.1 |
|
Effective tax rate | 37.7 | % | 37.9 | % | 37.7 | % | (40.4) | % | 37.4 | % | 37.7 | % |
Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that are reported in different periods for financial reporting and income tax purposes. The majority of our deferred tax assets relate to deductions that already have been claimed for financial reporting purposes but not for tax purposes. The majority of our deferred tax liabilities relate to differences between the tax bases and financial reporting amounts of our land and depreciable property, due to accelerated tax depreciation (including bonus depreciation), revaluation of assets in purchase accounting transactions, and differences in capitalization methods.
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act made significant changes to federal tax law, including a reduction in the federal income tax rate from 35% to 21% effective January 1, 2018, 100% bonus depreciation for certain capital expenditures, stricter limits on deductions for interest and certain executive compensation, and a one-time transition tax on previously deferred earnings of certain foreign subsidiaries. As a result of our initial analysis of the Tax Act and existing implementation guidance, we remeasured our deferred tax assets and liabilities and computed our transition tax liability net of offsetting foreign tax credits. This resulted in a $5.9 billion reduction in our income tax expense in 2017. We also recorded a $212 million reduction to our operating expense related to income tax adjustments at equity-method affiliates.
The SEC provided guidance in SAB 118 on accounting for the tax effects of the Tax Act (See Note 3). In accordance with that guidance, some of the income tax effects recorded in 2017 are provisional, including those related to our analysis of 100% bonus depreciation for certain capital expenditures, stricter limits on deductions for certain executive compensation, the one-time transition tax, and the reduction to our operating expense related to income tax adjustments at equity-method affiliates. The accounting for these income tax effects may be adjusted during 2018 as a result of continuing analysis of the Tax Act; additional implementation guidance from the IRS, state tax authorities, the SEC, the FASB, or the Joint Committee on Taxation; and new information from domestic or foreign equity affiliates.
7065
On July 6, 2017, the State of Illinois increased its corporate income tax rate effective July 1, 2017. In the third quarter of 2017, we increased our deferred tax expense by $33 million to reflect the increased tax rate.
Deferred income tax (liabilities)/assets were comprised of the following at December 31:
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Millions | 2015 | 2014 | 2017[a] | 2016 | ||||
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Property | $ | (16,079) | $ | (15,173) | $ | (11,262) | $ | (16,687) |
Other |
| (352) |
| (411) |
| (197) |
| (346) |
Total deferred income tax liabilities |
| (16,431) |
| (15,584) |
| (11,459) |
| (17,033) |
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Accrued wages |
| 76 |
| 74 |
| 46 |
| 75 |
Accrued casualty costs |
| 237 |
| 228 |
| 147 |
| 231 |
Stock compensation |
| 72 |
| 69 |
| 46 |
| 69 |
Debt and leases |
| 149 |
| 86 | ||||
Retiree benefits |
| 204 |
| 392 |
| 141 |
| 222 |
Credits |
| 156 |
| 164 |
| 1 |
| 145 |
Other |
| 296 |
| 168 |
| 142 |
| 295 |
Total deferred income tax assets [a] | $ | 1,190 | $ | 1,181 | ||||
Total deferred income tax assets | $ | 523 | $ | 1,037 | ||||
Net deferred income tax liability | $ | (15,241) | $ | (14,403) | $ | (10,936) | $ | (15,996) |
[a] |
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When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized based on management’s judgments using available evidence for purposes of estimating whether future taxable income will be sufficient to realize a deferred tax asset. In 20152017 and 2014,2016, there were no valuation allowances.
Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.
A reconciliation of changes in unrecognized tax benefits liabilities/(assets) from the beginning to the end of the reporting period is as follows:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Unrecognized tax benefits at January 1 | $ | 151 | $ | 59 | $ | 115 | $ | 125 | $ | 94 | $ | 151 |
Increases for positions taken in current year |
| 38 |
| 92 |
| 24 |
| 38 |
| 31 |
| 38 |
Increases for positions taken in prior years |
| 13 |
| 22 |
| 15 |
| 51 |
| 10 |
| 13 |
Decreases for positions taken in prior years |
| (87) |
| (14) |
| (35) |
| (56) |
| (20) |
| (87) |
Payments to and settlements with taxing authorities |
| (13) |
| (8) |
| (58) | ||||||
Refunds from/(payments to) and settlements with taxing authorities |
| 64 |
| 4 |
| (13) | ||||||
Increases/(decreases) for interest and penalties |
| (5) |
| 1 |
| - |
| - |
| 6 |
| (5) |
Lapse of statutes of limitations |
| (3) |
| (1) |
| (2) |
| (43) |
| - |
| (3) |
Unrecognized tax benefits at December 31 | $ | 94 | $ | 151 | $ | 59 | $ | 179 | $ | 125 | $ | 94 |
We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest and penalties were $2 million and $6$8 million at both December 31, 20152017, and 2014, respectively.2016. Total interest and penalties recognized as part of income tax expense (benefit) were $(3) million for 2015, $92017, $5 million for 2014,2016, and $7$(3) million for 2013.2015.
Internal Revenue Service (IRS) examinations have been completed and settledThe statute of limitations has run for all years prior to 2011,2014 and the statute of limitations bars any additional tax assessments. UPC is not currently under auditexamination by the Internal Revenue Service.Service (IRS) for any of its open years. In 2017, UPC amended its 2013 income tax returns, primarily to claim deductions resulting from the resolution of prior year IRS examinations. We have not received any communication from the IRS related to these amended returns.
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In 2016, UPC amended its 2011 and 2012 income tax returns to claim deductions resulting from the resolution of IRS examinations for years prior to 2011. The IRS and Joint Committee on Taxation reviewed these amended returns. In the third quarter of 2017, we received a refund of $62 million, consisting of $60 million of tax and $2 million of interest.
In the third quarter of 2015, UPC and the IRS signed a closing agreement resolving all tax matters for tax
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years 2009-2010. The settlement had an immaterial effect on our income tax expense. In connection with the settlement, UPC paid $10 million in the fourth quarter of 2015.
In the fourth quarter of 2014, UPC and the IRS signed a closing agreement resolving all tax matters for tax years 2005-2008. The settlement had an immaterial effect on our income tax expense. In connection with the settlement, UPC paid $11 million in 2014.
Several state tax authorities are examining our state income tax returns for years 20062010 through 2012.2015.
We do not expect our unrecognized tax benefits to change significantly in the next 12 months. At December 31, 2015, we had a net unrecognized tax benefit liability of $94 million.
The portion of our unrecognized tax benefits that relates to permanent changes in tax and interest would reduce our effective tax rate, if recognized. The remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is uncertain. Recognition of the tax benefits with uncertain timing would reduce our effective tax rate only through a reduction of accrued interest and penalties. The unrecognized tax benefits that would reduce our effective tax rate are as follows:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Unrecognized tax benefits that would reduce the effective tax rate | $ | 31 | $ | 33 | $ | 34 | $ | 83 | $ | 31 | $ | 31 |
Unrecognized tax benefits that would not reduce the effective tax rate |
| 63 |
| 118 |
| 25 |
| 96 |
| 94 |
| 63 |
Total unrecognized tax benefits | $ | 94 | $ | 151 | $ | 59 | $ | 179 | $ | 125 | $ | 94 |
9. Earnings Per Share
The following table provides a reconciliation between basic and diluted earnings per share for the years ended December 31:
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Millions, Except Per Share Amounts | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 | $ | 10,712 | $ | 4,233 | $ | 4,772 |
Weighted-average number of shares outstanding: |
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Basic |
| 866.2 |
| 897.1 |
| 926.5 |
| 798.4 |
| 832.4 |
| 866.2 |
Dilutive effect of stock options |
| 1.5 |
| 2.1 |
| 2.4 |
| 1.8 |
| 1.5 |
| 1.5 |
Dilutive effect of retention shares and units |
| 1.7 |
| 1.9 |
| 2.6 |
| 1.5 |
| 1.5 |
| 1.7 |
Diluted |
| 869.4 |
| 901.1 |
| 931.5 |
| 801.7 |
| 835.4 |
| 869.4 |
Earnings per share – basic | $ | 5.51 | $ | 5.77 | $ | 4.74 | $ | 13.42 | $ | 5.09 | $ | 5.51 |
Earnings per share – diluted | $ | 5.49 | $ | 5.75 | $ | 4.71 | $ | 13.36 | $ | 5.07 | $ | 5.49 |
Common stock options totaling 1.6 million, 2.0 million, and 1.1 million 0.4 million,for 2017, 2016, and 0.5 million for 2015, 2014, and 2013, respectively, were excluded from the computation of diluted earnings per share because the exercise prices of these options exceeded the average market price of our common stock for the respective periods, and the effect of their inclusion would be anti-dilutive.
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10. Accumulated Other Comprehensive Income/(Loss)
Reclassifications out of accumulated other comprehensive income/(loss) were as follows (net of tax):
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Millions | Defined | Foreign currency translation | Total | ||||
Balance at January 1, 2015 | $ | (1,161) | $ | (49) | $ | (1,210) | |
Other comprehensive income/(loss) before reclassifications |
| (4) |
| (43) |
| (47) | |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] |
| 62 |
| - |
| 62 | |
Net year-to-date other comprehensive income/(loss), |
| 58 |
| (43) |
| 15 | |
Balance at December 31, 2015 | $ | (1,103) | $ | (92) | $ | (1,195) | |
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Balance at January 1, 2014 | $ | (713) | $ | (37) | $ | (750) | |
Other comprehensive income/(loss) before reclassifications |
| 10 |
| (12) |
| (2) | |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] |
| (458) |
| - |
| (458) | |
Net year-to-date other comprehensive income/(loss), |
| (448) |
| (12) |
| (460) | |
Balance at December 31, 2014 | $ | (1,161) | $ | (49) | $ | (1,210) |
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Millions | Defined | Foreign currency translation | Total | ||||
Balance at January 1, 2017 | $ | (1,132) | $ | (140) | $ | (1,272) | |
Other comprehensive income/(loss) before reclassifications |
| 2 |
| 28 |
| 30 | |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] |
| 101 |
| - |
| 101 | |
Net year-to-date other comprehensive income/(loss), |
| 103 |
| 28 |
| 131 | |
Balance at December 31, 2017 | $ | (1,029) | $ | (112) | $ | (1,141) | |
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Balance at January 1, 2016 | $ | (1,103) | $ | (92) | $ | (1,195) | |
Other comprehensive income/(loss) before reclassifications |
| (3) |
| (48) |
| (51) | |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] |
| (26) |
| - |
| (26) | |
Net year-to-date other comprehensive income/(loss), |
| (29) |
| (48) |
| (77) | |
Balance at December 31, 2016 | $ | (1,132) | $ | (140) | $ | (1,272) |
[a] | The accumulated other comprehensive income/(loss) reclassification components are 1) prior service cost/(benefit) and 2) net actuarial loss which are both included in the computation of net periodic pension cost. See Note 6 Retirement Plans for additional details. |
11. Accounts Receivable
Accounts receivable includes freight and other receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, credit worthiness of customers, and current economic conditions. At both December 31, 2015,2017, and 2014,2016, our accounts receivable were reduced by $3 million and $5 million.million, respectively. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Consolidated Statements of Financial Position. At both December 31, 2015,2017, and 2014,2016, receivables classified as other assets were reduced by allowances of $11 million and $16 million, respectively.$17 million.
Receivables Securitization Facility – The Railroad maintains a $650 million, 3-year receivables securitization facility (the Receivables Facility), maturing in July 2017 under which it2019. Under the Receivables Facility, the Railroad sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a consolidated, wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without recourse, an undivided interest in accounts receivable to investors. The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI.
The amount outstanding under the facilityReceivables Facility was $400$500 million and $0 at both December 31, 2015,2017, and December 31, 2014.2016. The facilityReceivables Facility was supported by $0.9$1.1 billion and $1.2$1.0 billion of accounts receivable as collateral at December 31, 2015,2017, and December 31, 2014,2016, respectively, which, as a retained interest, is included in accounts receivable, net in our Consolidated Statements of Financial Position.
The outstanding amount the Railroad is allowed to maintain under the facility,Receivables Facility, with a maximum of $650 million, may fluctuate based on the availability of eligible receivables and is directly affected by business volumes and credit risks, including receivables payment quality measures such as default and dilution ratios. If default or dilution ratios increase one percent, the allowable outstanding amount under the facilityReceivables Facility would not materially change.
The costs of the receivables securitization facilityReceivables Facility include interest, which will vary based on prevailing benchmark and commercial paper rates, program fees paid to participating banks, commercial paper issuance costs, and fees of participating banks for unused commitment availability. The costs of the Receivables Facility are
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receivables securitization facility are included in interest expense and were $5$6 million, $4$7 million, and $5 million for 2015, 2014,2017, 2016, and 2013,2015, respectively.
12. Properties
The following tables list the major categories of property and equipment, as well as the weighted-average estimated useful life for each category (in years):
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Millions, Except Estimated Useful Life | Millions, Except Estimated Useful Life |
| Accumulated | Net Book | Estimated | Millions, Except Estimated Useful Life |
| Accumulated | Net Book | Estimated | ||||||
As of December 31, 2015 | Cost | Depreciation | Value | Useful Life | ||||||||||||
As of December 31, 2017 | As of December 31, 2017 | Cost | Depreciation | Value | Useful Life | |||||||||||
Land | Land | $ | 5,195 | $ | N/A | $ | 5,195 | N/A | Land | $ | 5,258 | $ | N/A | $ | 5,258 | N/A |
Road: | Road: |
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Rail and other track material | Rail and other track material |
| 15,236 |
| 5,495 |
| 9,741 | 37 | Rail and other track material |
| 16,327 |
| 5,929 |
| 10,398 | 43 |
Ties | Ties |
| 9,439 |
| 2,595 |
| 6,844 | 33 | Ties |
| 10,132 |
| 2,881 |
| 7,251 | 33 |
Ballast | Ballast |
| 5,024 |
| 1,350 |
| 3,674 | 34 | Ballast |
| 5,406 |
| 1,509 |
| 3,897 | 34 |
Other roadway [a] | Other roadway [a] |
| 17,374 |
| 3,021 |
| 14,353 | 47 | Other roadway [a] |
| 18,972 |
| 3,482 |
| 15,490 | 47 |
Total road | Total road |
| 47,073 |
| 12,461 |
| 34,612 | N/A | Total road |
| 50,837 |
| 13,801 |
| 37,036 | N/A |
Equipment: | Equipment: |
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Locomotives | Locomotives |
| 9,027 |
| 3,726 |
| 5,301 | 19 | Locomotives |
| 9,686 |
| 3,697 |
| 5,989 | 19 |
Freight cars | Freight cars |
| 2,203 |
| 962 |
| 1,241 | 24 | Freight cars |
| 2,255 |
| 983 |
| 1,272 | 24 |
Work equipment and other | Work equipment and other |
| 897 |
| 191 |
| 706 | 19 | Work equipment and other |
| 936 |
| 267 |
| 669 | 19 |
Total equipment | Total equipment |
| 12,127 |
| 4,879 |
| 7,248 | N/A | Total equipment |
| 12,877 |
| 4,947 |
| 7,930 | N/A |
Technology and other | Technology and other |
| 919 |
| 358 |
| 561 | 11 | Technology and other |
| 1,105 |
| 460 |
| 645 | 11 |
Construction in progress | Construction in progress |
| 1,250 |
| - |
| 1,250 | N/A | Construction in progress |
| 736 |
| - |
| 736 | N/A |
Total | Total | $ | 66,564 | $ | 17,698 | $ | 48,866 | N/A | Total | $ | 70,813 | $ | 19,208 | $ | 51,605 | N/A |
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Millions, Except Estimated Useful Life | Millions, Except Estimated Useful Life |
| Accumulated | Net Book | Estimated | Millions, Except Estimated Useful Life |
| Accumulated | Net Book | Estimated | ||||||
As of December 31, 2014 | Cost | Depreciation | Value | Useful Life | ||||||||||||
As of December 31, 2016 | As of December 31, 2016 | Cost | Depreciation | Value | Useful Life | |||||||||||
Land | Land | $ | 5,194 | $ | N/A | $ | 5,194 | N/A | Land | $ | 5,220 | $ | N/A | $ | 5,220 | N/A |
Road: | Road: |
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Rail and other track material | Rail and other track material |
| 14,588 |
| 5,241 |
| 9,347 | 33 | Rail and other track material |
| 15,845 |
| 5,722 |
| 10,123 | 40 |
Ties | Ties |
| 9,102 |
| 2,450 |
| 6,652 | 33 | Ties |
| 9,812 |
| 2,736 |
| 7,076 | 33 |
Ballast | Ballast |
| 4,826 |
| 1,264 |
| 3,562 | 34 | Ballast |
| 5,242 |
| 1,430 |
| 3,812 | 34 |
Other roadway [a] | Other roadway [a] |
| 16,476 |
| 2,852 |
| 13,624 | 47 | Other roadway [a] |
| 18,138 |
| 3,226 |
| 14,912 | 47 |
Total road | Total road |
| 44,992 |
| 11,807 |
| 33,185 | N/A | Total road |
| 49,037 |
| 13,114 |
| 35,923 | N/A |
Equipment: | Equipment: |
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| Equipment: |
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Locomotives | Locomotives |
| 8,276 |
| 3,694 |
| 4,582 | 20 | Locomotives |
| 9,692 |
| 3,939 |
| 5,753 | 20 |
Freight cars | Freight cars |
| 2,116 |
| 968 |
| 1,148 | 25 | Freight cars |
| 2,243 |
| 972 |
| 1,271 | 24 |
Work equipment and other | Work equipment and other |
| 684 |
| 153 |
| 531 | 18 | Work equipment and other |
| 905 |
| 232 |
| 673 | 19 |
Total equipment | Total equipment |
| 11,076 |
| 4,815 |
| 6,261 | N/A | Total equipment |
| 12,840 |
| 5,143 |
| 7,697 | N/A |
Technology and other | Technology and other |
| 872 |
| 320 |
| 552 | 10 | Technology and other |
| 974 |
| 412 |
| 562 | 11 |
Construction in progress | Construction in progress |
| 1,080 |
| - |
| 1,080 | N/A | Construction in progress |
| 987 |
| - |
| 987 | N/A |
Total | Total | $ | 63,214 | $ | 16,942 | $ | 46,272 | N/A | Total | $ | 69,058 | $ | 18,669 | $ | 50,389 | N/A |
[a] | Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets. |
Property and Depreciation – Our railroad operations are highly capital intensive, and our large base of homogeneous, network-type assets turns over on a continuous basis. Each year we develop a capital program for the replacement of assets and for the acquisition or construction of assets that enable us to enhance our operations or provide new service offerings to customers. Assets purchased or constructed throughout the year are capitalized if they meet applicable minimum units of property criteria. Properties and equipment are carried at cost and are depreciated on a straight-line basis over their estimated service lives, which are measured in years, except for rail in high-density traffic corridors (i.e., all rail lines except for those subject to abandonment, yard and switching tracks, and electronic yards) for which lives are measured in millions of gross tons per mile of track. We use the group method of depreciation in which all
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which all items with similar characteristics, use, and expected lives are grouped together in asset classes, and are depreciated using composite depreciation rates. The group method of depreciation treats each asset class as a pool of resources, not as singular items. We currently have more than 60 depreciable asset classes, and we may increase or decrease the number of asset classes due to changes in technology, asset strategies, or other factors.
We determine the estimated service lives of depreciable railroad assets by means of depreciation studies. We perform depreciation studies at least every three years for equipment and every six years for track assets (i.e., rail and other track material, ties, and ballast) and other road property. Our depreciation studies take into account the following factors:
· | Statistical analysis of historical patterns of use and retirements of each of our asset classes; |
· | Evaluation of any expected changes in current operations and the outlook for continued use of the assets; |
· | Evaluation of technological advances and changes to maintenance practices; and |
· | Expected salvage to be received upon retirement. |
For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on rail weight, rail condition (e.g., new or secondhand), and rail type (e.g., straight or curve). Our depreciation studies for rail in high-density traffic corridors consider each of these factors in determining the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the estimated service lives of the rail measured in millions of gross tons per mile. For all other depreciable assets, we compute depreciation based on the estimated service lives of our assets as determined from the analysis of our depreciation studies. Changes in the estimated service lives of our assets and their related depreciation rates are implemented prospectively.
Under group depreciation, the historical cost (net of salvage) of depreciable property that is retired or replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is recognized. The historical cost of certain track assets is estimated usingby multiplying the current replacement cost of track assets by a historical index factor derived from (i) inflation indices published by the Bureau of Labor Statistics and (ii) the estimated useful lives of the assets as determined by our depreciation studies. The indices were selected because they closely correlate with the major costs of the properties comprising the applicable track asset classes. Because of the number of estimates inherent in the depreciation and retirement processes and because it is impossible to precisely estimate each of these variables until a group of property is completely retired, we continually monitor the estimated service lives of our assets and the accumulated depreciation associated with each asset class to ensure our depreciation rates are appropriate. In addition, we determine if the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by our depreciation studies. Any deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the applicable classes of assets.
For retirements of depreciable railroad properties that do not occur in the normal course of business, a gain or loss may be recognized if the retirement meets each of the following three conditions: (i) is unusual, (ii) is material in amount, and (iii) varies significantly from the retirement profile identified through our depreciation studies. A gain or loss is recognized in other income when we sell land or dispose of assets that are not part of our railroad operations.
When we purchase an asset, we capitalize all costs necessary to make the asset ready for its intended use. However, many of our assets are self-constructed. A large portion of our capital expenditures is for replacement of existing track assets and other road properties, which is typically performed by our employees, and for track line expansion and other capacity projects. Costs that are directly attributable to capital projects (including overhead costs) are capitalized. Direct costs that are capitalized as part of self-constructed assets include material, labor, and work equipment. Indirect costs are capitalized if they clearly relate to the construction of the asset.
General and administrative expenditures are expensed as incurred. Normal repairs and maintenance are also expensed as incurred, while costs incurred that extend the useful life of an asset, improve the safety of our operations or improve operating efficiency are capitalized. These costs are allocated using
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costs are allocated using appropriate statistical bases. Total expense for repairs and maintenance incurred was $2.5 billion for 2015, $2.4 billion for 2014, and2017, $2.3 billion for 2013.2016, and $2.5 billion for 2015.
Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease.
13. Accounts Payable and Other Current Liabilities
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| Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | ||||
Millions | 2015 | 2014 | 2017 | 2016 | ||||
Accounts payable | $ | 743 | $ | 877 | $ | 1,013 | $ | 955 |
Income and other taxes payable |
| 434 |
| 412 |
| 547 |
| 472 |
Accrued wages and vacation |
| 391 |
| 409 |
| 384 |
| 387 |
Interest payable |
| 208 |
| 178 |
| 220 |
| 212 |
Accrued casualty costs |
| 181 |
| 249 |
| 194 |
| 185 |
Equipment rents payable |
| 105 |
| 100 |
| 110 |
| 101 |
Dividends payable [a] |
| - |
| 438 | ||||
Other |
| 550 |
| 640 |
| 671 |
| 570 |
Total accounts payable and other current liabilities | $ | 2,612 | $ | 3,303 | $ | 3,139 | $ | 2,882 |
[a]Beginning in 2015, the timing of the dividend declaration and payable dates was aligned to occur within the same quarter. The 2015 dividends paid amount includes the fourth quarter 2014 dividend of $438 million, which was paid on January 2, 2015, the first quarter 2015 dividend of $484 million, which was paid on March 30, 2015, the second quarter 2015 dividend of $479 million, which was paid on June 30, 2015, the third quarter 2015 dividend of $476 million, which was paid on September 30, 2015, as well as the fourth quarter 2015 dividend of $467 million, which was paid on December 30, 2015.
14. Financial Instruments
Strategy and Risk – We may use derivative financial instruments in limited instances for other than trading purposes to assist in managing our overall exposure to fluctuations in interest rates and fuel prices. We are not a party to leveraged derivatives and, by policy, do not use derivative financial instruments for speculative purposes. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. We formally document the nature and relationships between the hedging instruments and hedged items at inception, as well as our risk-management objectives, strategies for undertaking the various hedge transactions, and method of assessing hedge effectiveness. Changes in the fair market value of derivative financial instruments that do not qualify for hedge accounting are charged to earnings. We may use swaps, collars, futures, and/or forward contracts to mitigate the risk of adverse movements in interest rates and fuel prices; however, the use of these derivative financial instruments may limit future benefits from favorable interest rate and fuel price movements.
Market and Credit RiskShort-Term Investments – We address market risk related to derivative financial instruments by selecting instruments with value fluctuations that highly correlate with the underlying hedged item. We manage credit risk related to derivative financial instruments,The Company’s short-term investments consist of time deposits and government agency securities. These investments are considered level 2 investments and are valued at amortized cost, which is minimal, by requiring high credit standards for counterparties and periodic settlements. At December 31, 2015, and 2014, we were not required to provide collateral, nor had we received collateral, relating to our hedging activities.
Interest Rate Fair Value Hedges – We manage our overall exposure to fluctuations in interest rates by adjusting the proportion of fixed and floating rate debt instruments within our debt portfolio over a given period. We generally manage the mix of fixed and floating rate debt through the issuance of targeted amounts of each as debt matures or as we require incremental borrowings. We employ derivatives, primarily swaps, as one of the tools to obtain the targeted mix. In addition, we also obtain flexibility in managing interest costs and the interest rate mix within our debt portfolio by evaluating the issuance of and managing outstanding callable fixed-rate debt securities.
Swaps allow us to convert debt from fixed rates to variable rates and thereby hedge the risk of changes in the debt’sapproximates fair value attributable to the changes in interest rates. We account for swaps($90 million of time deposits as fair value hedges using the short-cut method; therefore, we do not record any ineffectiveness within our
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Consolidated Financial Statements. As of December 31, 2015,2017). All short-term investments have a maturity of less than one year and 2014, we hadare classified as held-to-maturity. There were no interest rate fair value hedges outstanding.
Interest Rate Cash Flow Hedges – We report changes intransfers out of Level 2 during the fair value of cash flow hedges in accumulated other comprehensive loss until the hedged item affects earnings. As of December 31, 2015, and 2014, we had no interest rate cash flow hedges outstanding.
Earnings Impact – Our use of derivative financial instruments had no impact on pre-tax income for the yearsyear ended December 31, 2015, 2014, and 2013.2017.
Fair Value of Financial Instruments – The fair value of our short- and long-term debt was estimated using a market value price model, which utilizes applicable U.S. Treasury rates along with current market quotes on comparable debt securities. All of the inputs used to determine the fair market value of the Corporation’s long-term debt are Level 2 inputs and obtained from an independent source. At December 31, 2015,2017, the fair value of total debt was $15.2$18.2 billion, approximately $1.0$1.3 billion more than the carrying value. At December 31, 2014,2016, the fair value of total debt was $13.0$15.9 billion, approximately $1.5$0.9 billion more than the carrying value. The fair value of the Corporation’s debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules. At both December 31, 2015,2017, and 2014,2016, approximately $155 million and $163 million, respectively, of debt securities contained call provisions that allow us to retire the debt instruments prior to final maturity withat par, without the payment of fixed call premiums, or in certain cases, at par.premiums. The fair value of our cash equivalents approximates their carrying value due to the short-term maturities of these instruments.
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15. Debt
Total debt as of December 31, 2015,2017, and 2014,2016, is summarized below:
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Millions | 2015 | 2014 | |||
Notes and debentures, 1.8% to 7.9% due through 2065 | $ | 11,964 | $ | 9,266 | |
Capitalized leases, 3.1% to 8.4% due through 2028 |
| 1,268 |
| 1,520 | |
Equipment obligations, 2.8% to 6.7% due through 2031 |
| 963 |
| 597 | |
Receivables Securitization (Note 11) |
| 400 |
| 400 | |
Term loans - floating rate, due in 2016 |
| 200 |
| 200 | |
Mortgage bonds, 4.8% due through 2030 |
| 57 |
| 57 | |
Medium-term notes, 9.3% to 10.0% due through 2020 |
| 23 |
| 23 | |
Tax-exempt financings - floating rate, due in 2015 |
| - |
| 8 | |
Unamortized discount and deferred issuance costs [a] |
| (674) |
| (658) | |
Total debt |
| 14,201 |
| 11,413 | |
Less: current portion |
| (594) |
| (461) | |
Total long-term debt | $ | 13,607 | $ | 10,952 |
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Millions | 2017 | 2016 | |||
Notes and debentures, 1.8% to 7.9% due through 2067 | $ | 15,096 | $ | 13,547 | |
Capitalized leases, 3.1% to 8.4% due through 2028 |
| 892 |
| 1,105 | |
Equipment obligations, 2.6% to 6.7% due through 2031 |
| 1,018 |
| 1,069 | |
Term loans - floating rate, due in 2018 |
| 250 |
| 100 | |
Mortgage bonds, 4.8% due through 2030 |
| 57 |
| 57 | |
Medium-term notes, 9.3% to 10.0% due through 2020 |
| 18 |
| 23 | |
Receivables Securitization (Note 11) |
| 500 |
| - | |
Unamortized discount and deferred issuance costs |
| (887) |
| (894) | |
Total debt |
| 16,944 |
| 15,007 | |
Less: current portion |
| (800) |
| (758) | |
Total long-term debt | $ | 16,144 | $ | 14,249 |
Debt Maturities – The following table presents aggregate debt maturities as of December 31, 2015,2017, excluding market value adjustments:
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Millions |
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2016 | $ | 594 | ||
2017 |
| 1,052 | ||
2018 |
| 566 | $ | 806 |
2019 |
| 637 |
| 1,125 |
2020 |
| 1,034 |
| 1,021 |
2021 |
| 677 | ||
2022 |
| 917 | ||
Thereafter |
| 10,318 |
| 13,285 |
Total principal |
| 17,831 | ||
Unamortized discount and deferred issuance costs |
| (887) | ||
Total debt | $ | 14,201 | $ | 16,944 |
Equipment Encumbrances – Equipment with a carrying value of approximately $2.6$2.0 billion and $2.8$2.3 billion at December 31, 2015,2017, and 2014,2016, respectively, served as collateral for capital leases and other
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types of equipment obligations in accordance with the secured financing arrangements utilized to acquire or refinance such railroad equipment.
As a result of the merger of Missouri Pacific Railroad Company (MPRR) with and into UPRR on January 1, 1997, and pursuant to the underlying indentures for the MPRR mortgage bonds, UPRR must maintain the same value of assets after the merger in order to comply with the security requirements of the mortgage bonds. As of the merger date, the value of the MPRR assets that secured the mortgage bonds was approximately $6.0 billion. In accordance with the terms of the indentures, this collateral value must be maintained during the entire term of the mortgage bonds irrespective of the outstanding balance of such bonds.
Credit Facilities – At December 31, 2015,2017, we had $1.7 billion of credit available under theour revolving credit facility, which is designated for general corporate purposes and supports the issuance of commercial paper. We did not draw on the facility during 2015.2017. Commitment fees and interest rates payable under the facility are similar to fees and rates available to comparably rated, investment-grade borrowers. The facility allows for borrowings at floating rates based on London Interbank Offered Rates, plus a spread, depending upon credit ratings for our senior unsecured debt. The facility matures in May 2019 under a five-year term and requires UPC to maintain a debt-to-net-worth coverage ratio.
The definition of debt used for purposes of calculating the debt-to-net-worth coverage ratio includes, among other things, certain credit arrangements, capital leases, guarantees and unfunded and vested pension benefits under Title IV of ERISA. At December 31, 2015,2017, the debt-to-net-worth coverage ratio allowed us to carry up to $41.4$49.7 billion of debt (as defined in the facility), and we had $14.3$17.0 billion of debt (as defined in the facility) outstanding at that date. Under our current capitalfinancial plans, we expect to continue to satisfy the
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debt-to-net-worth coverage ratio; however, many factors beyond our reasonable control could affect our ability to comply with this provision in the future. The facility does not include any other financial restrictions, credit rating triggers (other than rating-dependent pricing), or any other provision that could require us to post collateral. The facility also includes a $125 million cross-default provision and a change-of-control provision.
During 2015,2017, we did not issue or repay any commercial paper, and at December 31, 2015,2017, and 2014,2016, we had no commercial paper outstanding. Our revolving credit facility supports our outstanding commercial paper balances, and, unless we change the terms of our commercial paper program, our aggregate issuance of commercial paper will not exceed the amount of borrowings available under the facility.
Dividend Restrictions – Our revolving credit facility includes a debt-to-net worth covenant (discussed in the Credit Facilities section above) that, under certain circumstances, restricts the payment of cash dividends to our shareholders. The amount of retained earnings available for dividends was $13.6$16.4 billion and $15.4$12.4 billion at December 31, 2015,2017, and 2014,2016, respectively.
Shelf Registration Statement and Significant New Borrowings – We filed a new shelf registration statement withIn 2016, the SEC that became effective on February 9, 2015. The Board of Directors authorizedreauthorized the issuance of up to $4.0 billion of debt securities, replacing the $4.0 billion authorized under our shelf registration filed in February 2013, which was fully utilized after our January 2015 debt offering noted below.securities. Under our current shelf registration, we 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.
During 2015,2017, we issued the following unsecured, fixed-rate debt securities under our current shelf registrations:registration:
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| $ |
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| $500 million of |
September 19, 2017 | $500 million of 3.600% Notes due September 15, 2037 |
| $ |
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We used the net proceeds from the offerings for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase program. These debt securities include change-of-control provisions. At December 31, 2015,2017, we had remaining authority to issue up to $2.2$1.55 billion of debt securities under our shelf registration.
Equipment Trust – On May 12, 2015, UPRR consummated a pass-through (P/T) financing, whereby a P/T trust was created, which issued $399 million of P/T trust certificates with a stated interest rate of 2.695%. The P/T trust certificates will mature on May 12, 2027. The proceeds from the issuance of the P/T trust certificates were used to purchase equipment trust certificates to be issued by UPRR to finance the acquisition of 182 locomotives. The equipment trust certificates are secured by a lien on the locomotives. The $399 million is classified as debt due after one year in our Consolidated Statements of Financial Position.
Debt Exchange – On August 21, 2013, we exchanged $1,170 million of various outstanding notes and debentures due between 2016 and 2040 (the Existing Notes) for $439 million of 3.646% notes (the New 2024 Notes) due February 15, 2024 and $700 million of 4.821% notes (the New 2044 Notes) due February 1, 2044, plus cash consideration of approximately $280 million in addition to $8 million for accrued and unpaid interest on the Existing Notes. In accordance with ASC 470-50-40, Debt-Modifications and Extinguishments-Derecognition, this transaction was accounted for as a debt exchange, as the exchanged debt instruments are not considered to be substantially different. The cash consideration was recorded as an adjustment to the carrying value of debt, and the balance of the unamortized discount and issue costs from the Existing Notes is being amortized as an adjustment of interest expense over the terms of the New 2024 Notes and the New 2044 Notes. No gain or loss was recognized as a result of the exchange. Costs related to the debt exchange that were payable to parties other than the debt holders totaled approximately $9 million and were included in interest expense during the year ended December 31, 2013.
The following table lists the outstanding notes and debentures that were exchanged:
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Receivables Securitization Facility – As of both December 31, 20152017, and 2014,2016, we recorded $400$500 million and $0, respectively, of borrowings under our receivables securitization facility,Receivables Facility, as secured debt. (See further discussion of our receivables securitization facility in Note 11).
16. Variable Interest Entities
We have entered into various lease transactions in which the structure of the leases contain variable interest entities (VIEs). These VIEs were created solely for the purpose of doing lease transactions (principally involving railroad equipment and facilities) and have no other activities, assets or liabilities outside of the lease transactions. Within these lease arrangements, we have the right to purchase some or all of the assets at fixed prices. Depending on market conditions, fixed-price purchase options available in the leases could potentially provide benefits to us; however, these benefits are not expected to be significant.
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We maintain and operate the assets based on contractual obligations within the lease arrangements, which set specific guidelines consistent within the railroad industry. As such, we have no control over activities that could materially impact the fair value of the leased assets. We do not hold the power to direct the activities of the VIEs and, therefore, do not control the ongoing activities that have a significant impact on the economic performance of the VIEs. Additionally, we do not have the obligation to absorb losses of the VIEs or the right to receive benefits of the VIEs that could potentially be significant to the VIEs.
We are not considered to be the primary beneficiary and do not consolidate these VIEs because our actions and decisions do not have the most significant effect on the VIE’s performance and our fixed-price purchase options are not considered to be potentially significant to the VIEs. The future minimum lease payments associated with the VIE leases totaled $2.6$1.9 billion as of December 31, 2015.2017.
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17. Leases
We lease certain locomotives, freight cars, and other property. The Consolidated Statements of Financial Position as of December 31, 20152017, and 20142016 included $2,273$1,635 million, net of $1,189$953 million of accumulated depreciation, and $2,454$1,997 million, net of $1,210$1,121 million of accumulated depreciation, respectively, for properties held under capital leases. A charge to income resulting from the depreciation for assets held under capital leases is included within depreciation expense in our Consolidated Statements of Income. Future minimum lease payments for operating and capital leases with initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2015,2017, were as follows:
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Millions | Operating | Capital | Operating | Capital | ||||
2016 | $ | 491 | $ | 217 | ||||
2017 |
| 446 |
| 220 | ||||
2018 |
| 371 |
| 198 | $ | 398 | $ | 173 |
2019 |
| 339 |
| 184 |
| 359 |
| 156 |
2020 |
| 282 |
| 193 |
| 297 |
| 164 |
2021 |
| 259 |
| 168 | ||||
2022 |
| 221 |
| 147 | ||||
Later years |
| 1,501 |
| 575 |
| 1,115 |
| 271 |
Total minimum lease payments | $ | 3,430 | $ | 1,587 | $ | 2,649 | $ | 1,079 |
Amount representing interest |
| N/A |
| (319) |
| N/A |
| (187) |
Present value of minimum lease payments |
| N/A | $ | 1,268 |
| N/A | $ | 892 |
Approximately 95%97% of capital lease payments relate to locomotives. Rent expense for operating leases with terms exceeding one month was $480 million in 2017, $535 million in 2016, and $590 million in 2015, $593 million in 2014, and $618 million in 2013.2015. When cash rental payments are not made on a straight-line basis, we recognize variable rental expense on a straight-line basis over the lease term. Contingent rentals and sub-rentals are not significant.
18. Commitments and Contingencies
Asserted and Unasserted Claims – Various claims and lawsuits are pending against us and certain of our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our consolidated results of operations, financial condition, or liquidity. To the extent possible, we have recorded a liability where asserted and unasserted claims are considered probable and where such claims can be reasonably estimated. We do not expect that any known lawsuits, claims, environmental costs, commitments, contingent liabilities, or guarantees will have a material adverse effect on our consolidated results of operations, financial condition, or liquidity after taking into account liabilities and insurance recoveries previously recorded for these matters.
Personal Injury – The cost of personal injuries to employees and others related to our activities is charged to expense based on estimates of the ultimate cost and number of incidents each year. We use an actuarial analysis to measure the expense and liability, including unasserted claims. The Federal Employers’ Liability Act (FELA) governs compensation for work-related accidents. Under FELA, damages are assessed based on a finding of fault through litigation or out-of-court settlements. We offer a comprehensive variety of services and rehabilitation programs for employees who are injured at work.
Our personal injury liability is not discounted to present value due to the uncertainty surrounding the timing of future payments. Approximately 94%95% of the recorded liability is related to asserted claims and
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approximately 6%5% is related to unasserted claims at December 31, 2015.2017. Because of the uncertainty surrounding the ultimate outcome of personal injury claims, it is reasonably possible that future costs to settle these claims may range from approximately $318$285 million to $345$310 million. We record an accrual at the low end of the range as no amount of loss within the range is more probable than any other. Estimates can vary over time due to evolving trends in litigation.
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Our personal injury liability activity was as follows:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Beginning balance | $ | 335 | $ | 294 | $ | 334 | $ | 290 | $ | 318 | $ | 335 |
Current year accruals |
| 89 |
| 96 |
| 87 |
| 77 |
| 75 |
| 89 |
Changes in estimates for prior years |
| (3) |
| 9 |
| (38) |
| (7) |
| (29) |
| (3) |
Payments |
| (103) |
| (64) |
| (89) |
| (75) |
| (74) |
| (103) |
Ending balance at December 31 | $ | 318 | $ | 335 | $ | 294 | $ | 285 | $ | 290 | $ | 318 |
Current portion, ending balance at December 31 | $ | 63 | $ | 111 | $ | 82 | $ | 66 | $ | 62 | $ | 63 |
In conjunction with the liability update performed in 2015,2017, we also reassessed our estimated insurance recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2015,2017, and 2014.2016. Any changes to recorded insurance recoveries are included in the above table in the Changes in estimates for prior years category.
Asbestos – We are a defendant in a number of lawsuits in which current and former employees and other parties allege exposure to asbestos. We assess our potential liability using a statistical analysis of resolution costs for asbestos-related claims. This liability is updated annually and excludes future defense and processing costs. The liability for resolving both asserted and unasserted claims was based on the following assumptions:
· | The ratio of future claims by alleged disease would be consistent with historical averages adjusted for inflation. |
· | The number of claims filed against us will decline each year. |
· | The average settlement values for asserted and unasserted claims will be equivalent to historical averages. |
· | The percentage of claims dismissed in the future will be equivalent to historical averages. |
Our liability for asbestos-related claims is not discounted to present value due to the uncertainty surrounding the timing of future payments. Approximately 22%16% of the recorded liability related to asserted claims and approximately 78%84% related to unasserted claims at December 31, 2015.2017. Because of the uncertainty surrounding the ultimate outcome of asbestos-related claims, it is reasonably possible that future costs to settle these claims may range from approximately $120$99 million to $129$105 million. We record an accrual at the low end of the range as no amount of loss within the range is more probable than any other.
Our asbestos-related liability activity was as follows:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Beginning balance | $ | 126 | $ | 131 | $ | 139 | $ | 111 | $ | 120 | $ | 126 |
Accruals/(Credits) |
| - |
| 1 |
| 2 |
| (1) |
| 12 |
| - |
Payments |
| (6) |
| (6) |
| (10) |
| (11) |
| (21) |
| (6) |
Ending balance at December 31 | $ | 120 | $ | 126 | $ | 131 | $ | 99 | $ | 111 | $ | 120 |
Current portion, ending balance at December 31 | $ | 6 | $ | 8 | $ | 9 | $ | 9 | $ | 8 | $ | 6 |
In conjunction with the liability update performed in 2015,2017, we also reassessed our estimated insurance recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2015,2017, and 2014.2016. The amounts recorded for asbestos-related liabilities and related insurance recoveries were based on currently known facts. However, future events, such as the number of new claims filed each year, average settlement costs, and insurance coverage issues, could cause the actual costs and insurance recoveries to be higher or lower than the projected amounts. Estimates also may vary in the future if strategies, activities, and outcomes of asbestos litigation materially change; federal and state laws governing asbestos litigation increase or decrease the probability or amount of compensation of
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claimants; and there are material changes with respect to payments made to claimants by other defendants.
Environmental Costs – We are subject to federal, state, and local environmental laws and regulations. We have identified 290315 sites at which we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 3133 sites that are the subject of actions taken by the U.S. government, 1921 of which are currently on the Superfund National Priorities List.
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Certain federal legislation imposes joint and several liability for the remediation of identified sites; consequently, our ultimate environmental liability may include costs relating to activities of other parties, in addition to costs relating to our own activities at each site.
When we identify an environmental issue with respect to property owned, leased, or otherwise used in our business, we perform, with assistance of our consultants, environmental assessments on the property. We expense the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is probable and such costs can be reasonably estimated. Our environmental liability is not discounted to present value due to the uncertainty surrounding the timing of future payments.
Our environmental liability activity was as follows:
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Millions | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Beginning balance | $ | 182 | $ | 171 | $ | 170 | $ | 212 | $ | 190 | $ | 182 |
Accruals |
| 61 |
| 56 |
| 58 |
| 45 |
| 84 |
| 61 |
Payments |
| (53) |
| (45) |
| (57) |
| (61) |
| (62) |
| (53) |
Ending balance at December 31 | $ | 190 | $ | 182 | $ | 171 | $ | 196 | $ | 212 | $ | 190 |
Current portion, ending balance at December 31 | $ | 52 | $ | 60 | $ | 53 | $ | 57 | $ | 55 | $ | 52 |
The environmental liability includes future costs for remediation and restoration of sites, as well as ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates are based on information available for each site, financial viability of other potentially responsible parties, and existing technology, laws, and regulations. The ultimate liability for remediation is difficult to determine because of the number of potentially responsible parties, site-specific cost sharing arrangements with other potentially responsible parties, the degree of contamination by various wastes, the scarcity and quality of volumetric data related to many of the sites, and the speculative nature of remediation costs. Estimates of liability may vary over time due to changes in federal, state, and local laws governing environmental remediation. Current obligations are not expected to have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.
Insurance – The Company has a consolidated, wholly-owned captive insurance subsidiary (the captive), that provides insurance coverage for certain risks including FELA claims and property coverage which are subject to reinsurance. The captive entered into annual reinsurance treaty agreements that insure workers compensation, general liability, auto liability and FELA risk. The captive cedes a portion of its FELA exposure through the treaty and assumes a proportionate share of the entire risk. The captive receives direct premiums, which are netted against the Company’s premium costs in other expenses in the Consolidated Statements of Income. The treaty agreements provide for certain protections against the risk of treaty participants’ non-performance, and we do not believe our exposure to treaty participants’ non-performance is material at this time. In the event the Company leaves the reinsurance program, the Company is not relieved of its primary obligation to the policyholders for activity prior to the termination of the treaty agreements. We record both liabilities and reinsurance receivables using an actuarial analysis based on historical experience in our Consolidated Statements of Financial Position.
Guarantees – At December 31, 2015,2017, and 2014,2016, we were contingently liable for $53$33 million and $82$43 million in guarantees, respectively. We have recorded liabilities of $0 and $0.3 million for theThe fair value of these obligations as of both December 31, 2015,2017, and 2014, respectively.2016 was $0. We entered into these contingent guarantees in the normal course of business, and they include guaranteed obligations related to our affiliated operations. The final guarantee expires in 2022. We are not aware of any existing event of default that would require us to satisfy these guarantees. We do not expect that these guarantees will have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.
Indemnities – We are contingently obligated under a variety of indemnification arrangements, although in some cases the extent of our potential liability is limited, depending on the nature of the transactions and
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the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions.
Gain Contingency – UPRR and Santa Fe Pacific Pipelines (SFPP, a subsidiary of Kinder Morgan Energy Partners, L.P.) currently are engaged in a proceeding to resolve the fair market rent payable to UPRR commencing on January 1, 2004, for pipeline easements on UPRR rights-of-way (Union Pacific Railroad Company vs. Santa Fe Pacific Pipelines, Inc., SFPP, L.P., Kinder Morgan Operating L.P. “D” Kinder Morgan G.P., Inc., et al., Superior Court of the State of California for the County of Los Angeles, filed July 28, 2004). In February 2007, a trial began to resolve this issue, and in May 2012, the trial judge rendered an opinion establishing the fair market rent and entering judgment for back rent, including prejudgment interest. SFPP appealed the judgment. On November 5, 2014, the Second District Circuit Court of Appeal in California issued an opinion holding that UPRR was not entitled to collect rent from SFPP for easements on the portions of the property acquired solely through federal government land grants issued during the 1800s. The Appellate Court also reversed the award of prejudgment interest and remanded the case to the trial court. A favorable final judgment may materially affect UPRR's results of operations in the period of any monetary recoveries. Due to the uncertainty regarding the amount and timing of any recovery or any subsequent proceedings, we consider this a gain contingency and have not recognized any amounts in the Consolidated Financial Statements as of December 31, 2015.76
19. Share Repurchase Program
Effective January 1, 2014,2017, our Board of Directors authorized the repurchase of up to 120 million shares of our common stock by December 31, 2017,2020, replacing our previous repurchase program. As of December 31, 2015,2017, we repurchased a total of $16.0$23.2 billion of our common stock since the commencement of our repurchase programs in 2007. The table below represents shares repurchased in 2017 under this repurchase program and shares repurchased in 2016 under our previous repurchase program.
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| Number of Shares Purchased | Average Price Paid |
| Number of Shares Purchased | Average Price Paid | ||||||||
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| 2015 | 2014 |
| 2015 |
| 2014 |
| 2017 | 2016 |
| 2017 |
| 2016 |
First quarter | First quarter | 6,881,455 | 7,640,000 | $ | 117.28 | $ | 89.43 | First quarter | 7,531,300 | 9,315,807 | $ | 106.55 | $ | 76.49 |
Second quarter | Second quarter | 7,975,100 | 8,320,000 |
| 104.62 |
| 96.84 | Second quarter | 7,788,283 | 7,026,100 |
| 109.10 |
| 85.66 |
Third quarter | Third quarter | 13,800,700 | 8,347,000 |
| 89.65 |
| 102.54 | Third quarter | 11,801,755 | 9,088,613 |
| 106.69 |
| 93.63 |
Fourth quarter | Fourth quarter | 6,646,899 | 7,736,400 |
| 88.19 |
| 113.77 | Fourth quarter | 9,231,510 | 9,624,667 |
| 119.37 |
| 97.60 |
Total | Total | 35,304,154 | 32,043,400 | $ | 98.14 | $ | 100.65 | Total | 36,352,848 | 35,055,187 | $ | 110.40 | $ | 88.57 |
Remaining number of shares that may be repurchased under current authority | 52,652,446 |
Management's assessments of market conditions and other pertinent factors guide the timing and volume of all repurchases. Repurchased shares are recorded in treasury stock at cost, which includes any applicable commissions and fees.
From January 1, 2016,2018, through February 4, 2016,8, 2018, we repurchased 3.72.6 million shares at an aggregate cost of approximately $268$349 million.
20. Related Parties
UPRR and other North American railroad companies jointly own TTX Company (TTX). UPRR has a 36.79% economic and voting interest in TTX while the other North American railroads own the remaining interest. In accordance with ASC 323 Investments - Equity Method and Joint Venture, UPRR applies the equity method of accounting to our investment in TTX.
TTX is a railcar pooling company that owns railcars and intermodal wells to serve North America’s railroads. TTX assists railroads in meeting the needs of their customers by providing railcars in an efficient, pooled environment. All railroads have the ability to utilize TTX railcars through car hire by renting railcars at stated rates.
UPRR had $830 million$1.2 billion and $795$877 million recognized as investments related to TTX in our consolidated statementsConsolidated Statements of financial positionFinancial Position as of December 31, 20152017, and 2014,2016, respectively. TTX car hire expenses
83
of $388 million in 2017, $368 million in 2016, and $376 million in 2015 $350 million in 2014, and $326 million in 2013 are included in equipment and other rents in our consolidated statementsConsolidated Statements of income.Income. In addition, UPRR had accounts payable to TTX of $69 million and $61 million and $53 million as ofat December 31, 20152017, and 2014,2016, respectively.
77
21. Selected Quarterly Data (Unaudited)
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Millions, Except Per Share Amounts |
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2015 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | ||||||||||||
2017 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | ||||||||||||
Operating revenues | $ | 5,614 | $ | 5,429 | $ | 5,562 | $ | 5,208 | $ | 5,132 | $ | 5,250 | $ | 5,408 | $ | 5,450 |
Operating income |
| 1,977 |
| 1,949 |
| 2,208 |
| 1,918 |
| 1,793 |
| 2,005 |
| 2,012 |
| 2,251 |
Net income |
| 1,151 |
| 1,204 |
| 1,300 |
| 1,117 |
| 1,072 |
| 1,168 |
| 1,194 |
| 7,278 |
Net income per share: |
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Basic |
| 1.31 |
| 1.38 |
| 1.51 |
| 1.31 |
| 1.32 |
| 1.45 |
| 1.50 |
| 9.29 |
Diluted |
| 1.30 |
| 1.38 |
| 1.50 |
| 1.31 |
| 1.32 |
| 1.45 |
| 1.50 |
| 9.25 |
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Millions, Except Per Share Amounts |
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2014 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | ||||||||||||
2016 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | ||||||||||||
Operating revenues | $ | 5,638 | $ | 6,015 | $ | 6,182 | $ | 6,153 | $ | 4,829 | $ | 4,770 | $ | 5,174 | $ | 5,168 |
Operating income |
| 1,854 |
| 2,196 |
| 2,330 |
| 2,373 |
| 1,687 |
| 1,660 |
| 1,960 |
| 1,965 |
Net income |
| 1,088 |
| 1,291 |
| 1,370 |
| 1,431 |
| 979 |
| 979 |
| 1,131 |
| 1,144 |
Net income per share: |
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Basic |
| 1.20 |
| 1.43 |
| 1.53 |
| 1.62 |
| 1.16 |
| 1.17 |
| 1.36 |
| 1.40 |
Diluted |
| 1.19 |
| 1.43 |
| 1.53 |
| 1.61 |
| 1.16 |
| 1.17 |
| 1.36 |
| 1.39 |
Per share net income for the four quarters combined may not equal the per share net income for the year due to rounding.
8478
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer (CEO) and Executive Vice President – Finance and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based upon that evaluation, the CEO and the CFO concluded that, as of the end of the period covered by this report, the Corporation’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Additionally, the CEO and CFO determined that there were no changes to the Corporation’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
8579
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Union Pacific Corporation and Subsidiary Companies (the Corporation) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). The Corporation’s internal control system was designed to provide reasonable assurance to the Corporation’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2015.2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on our assessment, management believes that, as of December 31, 2015,2017, the Corporation’s internal control over financial reporting is effective based on those criteria.
The Corporation’s independent registered public accounting firm has issued an attestation report on the effectiveness of the Corporation’s internal control over financial reporting. This report appears on the next page.
February 4, 20168, 2018
8680
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Union Pacific Corporation
Omaha, Nebraska
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Union Pacific Corporation and Subsidiary Companies (the Corporation)"Corporation") as of December 31, 2015,2017, based on criteria established in Internal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO). In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Corporation as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in common shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the schedule listed in the Table of Contents at Part IV, Item 15 (collectively referred to as the “financial statements”) and our report dated February 9, 2018 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Annual Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2015 of the Corporation and our report dated February 5, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 5, 2016
9, 2018
8781
None.
Item 10. Directors, Executive Officers, and Corporate Governance
(a) | Directors of Registrant. |
Information as to the names, ages, positions and offices with UPC, terms of office, periods of service, business experience during the past five years and certain other directorships held by each director or person nominated to become a director of UPC is set forth in the Election of Directors segment of the Proxy Statement and is incorporated herein by reference.
Information concerning our Audit Committee and the independence of its members, along with information about the audit committee financial expert(s) serving on the Audit Committee, is set forth in the Audit Committee segment of the Proxy Statement and is incorporated herein by reference.
(b) | Executive Officers of Registrant. |
Information concerning the executive officers of UPC and its subsidiaries is presented in Part I of this report under Executive Officers of the Registrant and Principal Executive Officers of Subsidiaries.
(c) | Section 16(a) Compliance. |
Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the Section 16(a) Beneficial Ownership Reporting Compliance segment of the Proxy Statement and is incorporated herein by reference.
(d) | Code of Ethics for Chief Executive Officer and Senior Financial Officers of Registrant. |
The Board of Directors of UPC has adopted the UPC Code of Ethics for the Chief Executive Officer and Senior Financial Officers (the Code). A copy of the Code may be found on the Internet at our website www.up.com/investor/governance. We intend to disclose any amendments to the Code or any waiver from a provision of the Code on our website.
Item 11. Executive Compensation
Information concerning compensation received by our directors and our named executive officers is presented in the Compensation Discussion and Analysis, Summary Compensation Table, Grants of Plan-Based Awards in Fiscal Year 2015,2017, Outstanding Equity Awards at 20152017 Fiscal Year-End, Option Exercises and Stock Vested in Fiscal Year 2015,2017, Pension Benefits at 20152017 Fiscal Year-End, Nonqualified Deferred Compensation at 20152017 Fiscal Year-End, Potential Payments Upon Termination or Change in Control and Director Compensation in Fiscal Year 20152017 segments of the Proxy Statement and is incorporated herein by reference. Additional information regarding compensation of directors, including Board committee members, is set forth in the By-Laws of UPC and the Stock Unit Grant and Deferred Compensation Plan for the Board of Directors, both of which are included as exhibits to this report. Information regarding the Compensation and Benefits Committee is set forth in the Compensation Committee Interlocks and Insider Participation and Compensation Committee Report segments of the Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information as to the number of shares of our equity securities beneficially owned by each of our directors and nominees for director, our named executive officers, our directors and executive officers as a group, and certain beneficial owners is set forth in the Security Ownership of Certain Beneficial Owners and Management segment of the Proxy Statement and is incorporated herein by reference.
8882
The following table summarizes the equity compensation plans under which UPC common stock may be issued as of December 31, 2015:2017:
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| (a) | (b) | (c) |
| (a) | (b) | (c) | ||||||
Plan Category | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||
Equity compensation plans approved | Equity compensation plans approved | 7,720,201 | [1] | $ | 66.67 | [2] | 76,548,520 | Equity compensation plans approved | 7,345,104 | [1] | $ | 83.35 | [2] | 72,151,415 |
Total | Total | 7,720,201 |
| $ | 66.67 |
| 76,548,520 | Total | 7,345,104 |
| $ | 83.35 |
| 72,151,415 |
[1] | Includes |
[2] | Does not include the retention units or retention shares described above in footnote 1. |
Item 13. Certain Relationships and Related Transactions and Director Independence
Information on related transactions is set forth in the Certain Relationships and Related Transactions and Compensation Committee Interlocks and Insider Participation segments of the Proxy Statement and is incorporated herein by reference. We do not have any relationship with any outside third party that would enable such a party to negotiate terms of a material transaction that may not be available to, or available from, other parties on an arm’s-length basis.
Information regarding the independence of our directors is set forth in the Director Independence segment of the Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information concerning the fees billed by our independent registered public accounting firm and the nature of services comprising the fees for each of the two most recent fiscal years in each of the following categories: (i) audit fees, (ii) audit-related fees, (iii) tax fees, and (iv) all other fees, is set forth in the Independent Registered Public Accounting Firm’s Fees and Services segment of the Proxy Statement and is incorporated herein by reference.
Information concerning our Audit Committee’s policies and procedures pertaining to pre-approval of audit and non-audit services rendered by our independent registered public accounting firm is set forth in the Audit Committee segment of the Proxy Statement and is incorporated herein by reference.
8983
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements, Financial Statement Schedules, and Exhibits:
(1) Financial Statements
The financial statements filed as part of this filing are listed on the index to the Financial Statements and Supplementary Data, Item 8, on page 5044.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not applicable or not required or the information required to be set forth therein is included in the Financial Statements and Supplementary Data, Item 8, or notes thereto.
(3) Exhibits
Exhibits are listed in the exhibit index beginning on page 9387. The exhibits include management contracts, compensatory plans and arrangements required to be filed as exhibits to the Form 10-K by Item 601 (10) (iii) of Regulation S-K.
9084
Pursuant to the requirements of Section 13 or 15(d) 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, on this 5th9th day of February, 2016.2018.
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| UNION PACIFIC CORPORATION |
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| By | /s/ Lance M. Fritz |
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| Lance M. Fritz, |
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| Chairman, President and |
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| Chief Executive Officer |
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| Union Pacific Corporation |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, on this 5th9th day of February, 2016,2018, by the following persons on behalf of the registrant and in the capacities indicated.
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| PRINCIPAL EXECUTIVE OFFICER |
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| AND DIRECTOR: |
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| By | /s/ Lance M. Fritz |
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| Lance M. Fritz, |
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| Chairman, President and |
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| Chief Executive Officer |
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| Union Pacific Corporation |
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| PRINCIPAL FINANCIAL OFFICER: |
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| By | /s/ Robert M. Knight, Jr. |
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| Robert M. Knight, Jr., |
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| Executive Vice President |
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| PRINCIPAL ACCOUNTING OFFICER: |
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| By | /s/ Todd M. Rynaski |
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| Todd M. Rynaski, |
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| Vice President and Controller |
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DIRECTORS:
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Andrew H. Card, Jr.* | Michael R. McCarthy* |
Erroll B. Davis, Jr.* | Michael W. McConnell* |
David B. Dillon* | Thomas F. McLarty III* |
Jane H. Lute* | Bhavesh V. Patel* Steven R. Rogel* |
| Jose H. Villarreal* |
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* By | James J. Theisen, Jr. |
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| James J. Theisen, Jr., Attorney-in-fact |
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9185
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Union Pacific Corporation and Subsidiary Companies
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Millions, for the Years Ended December 31, | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||
Allowance for doubtful accounts: |
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Balance, beginning of period | $ | 21 | $ | 23 | $ | 37 | $ | 22 | $ | 16 | $ | 21 |
Charges/(reduction) to expense |
| 1 |
| 5 |
| (4) |
| 1 |
| 23 |
| 1 |
Net recoveries/(write-offs) |
| (6) |
| (7) |
| (10) |
| (3) |
| (17) |
| (6) |
Balance, end of period | $ | 16 | $ | 21 | $ | 23 | $ | 20 | $ | 22 | $ | 16 |
Allowance for doubtful accounts are presented in the |
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Current | $ | 5 | $ | 5 | $ | 1 | $ | 3 | $ | 5 | $ | 5 |
Long-term |
| 11 |
| 16 |
| 22 |
| 17 |
| 17 |
| 11 |
Balance, end of period | $ | 16 | $ | 21 | $ | 23 | $ | 20 | $ | 22 | $ | 16 |
Accrued casualty costs: |
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Balance, beginning of period | $ | 757 | $ | 702 | $ | 734 | $ | 716 | $ | 736 | $ | 757 |
Charges to expense |
| 227 |
| 256 |
| 188 |
| 167 |
| 202 |
| 227 |
Cash payments and other reductions |
| (248) |
| (201) |
| (220) |
| (199) |
| (222) |
| (248) |
Balance, end of period | $ | 736 | $ | 757 | $ | 702 | $ | 684 | $ | 716 | $ | 736 |
Accrued casualty costs are presented in the |
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Current | $ | 181 | $ | 249 | $ | 207 | $ | 194 | $ | 185 | $ | 181 |
Long-term |
| 555 |
| 508 |
| 495 |
| 490 |
| 531 |
| 555 |
Balance, end of period | $ | 736 | $ | 757 | $ | 702 | $ | 684 | $ | 716 | $ | 736 |
9286
UNION PACIFIC CORPORATION
|
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Exhibit No. | Description | |
Filed with this Statement | ||
10(a) | Form of Performance Stock Unit Agreement dated February | |
10(b) | Form of Stock Unit Agreement for Executives dated February | |
10(c) | Form of Non-Qualified Stock Option Agreement for Executives dated February | |
10(d) | ||
10(e) | ||
12 | ||
21 | List of the Corporation’s significant subsidiaries and their respective states of incorporation. | |
23 | ||
24 | ||
31(a) | ||
31(b) | ||
32 | ||
101 | eXtensible Business Reporting Language (XBRL) documents submitted electronically: 101.INS (XBRL Instance Document), 101.SCH (XBRL Taxonomy Extension Schema Document), 101.CAL (XBRL Calculation Linkbase Document), 101.LAB (XBRL Taxonomy Label Linkbase Document), 101.DEF (XBRL Taxonomy Definition Linkbase Document) and 101.PRE (XBRL Taxonomy Presentation Linkbase Document). The following financial and related information from Union Pacific Corporation’s Annual Report on Form 10-K for the year ended December 31, | |
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87
Incorporated by Reference | ||
3(a) | ||
3(b) |
93
4(a) | ||
4(b) | ||
4(c) | ||
4(d) | ||
4(e) | ||
4(f) | ||
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Certain instruments evidencing long-term indebtedness of UPC are not filed as exhibits because the total amount of securities authorized under any single such instrument does not exceed 10% of the Corporation’s total consolidated assets. UPC agrees to furnish the Commission with a copy of any such instrument upon request by the Commission. | |
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10(g) | ||
10(h) |
88
10(i) |
94
10(j) | ||
10(k) | ||
10(l) |
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9589
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10(z) | ||
10(aa) | ||
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99 |
9690