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
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SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20142015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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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)
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:
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 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). 5
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 source 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 Agricultural Products – Transportation of grains, commodities produced from these grains, and food and beverage products generated 17% of the Railroad’s Automotive– We are the largest automotive carrier west of the Mississippi River and operate or access over 40 vehicle distribution centers. The Railroad’s extensive franchise serves five vehicle assembly plants and connects to West Coast ports, Mexico gateways and the Gulf of Mexico 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 Chemicals – Transporting chemicals generated Coal – Shipments of coal and petroleum coke accounted for 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 6 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 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% of 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) Working Capital – At December 31, 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 reduces 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. 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 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 7 maintenance, replacement, improvement, and expansion of our network and facilities. Rail manufacturing also has high barriers of entry, and, if one of those suppliers discontinues operations for any reason, including insolvency or bankruptcy, we could experience cost increases and difficulty obtaining rail. Employees– Approximately 85% of our 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 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, 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 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. 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
8 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. 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 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 The operations of the Railroad also are subject to the regulations of the FRA and other federal and state agencies. On January 12, 2010, the FRA issued initial rules governing installation of Positive Train Control (PTC) by the end of 2015. The final regulation was issued on August 8, 2014. Although still under further development, 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. Through 2015, we have invested approximately $2.0 billion in the ongoing development of PTC. Following 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, and we estimate that our final costs will be higher than those assumed by the FRA. On 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. 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 9 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. 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 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, 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
10 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. 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 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, 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 11 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 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, 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 12 transport, such as coal, frac sand and crude oil shipments, which could have a material adverse affect 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 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 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, enactment of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could result in substantially higher taxes and, therefore, 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, potential new suppliers face high barriers to entry. Therefore, if one of the domestic suppliers of high horsepower locomotives discontinues manufacturing locomotives 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. 13 It None. 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
HEADQUARTERS BUILDING We own our headquarters building in Omaha, Nebraska. The facility has 1.2 million square feet of space for approximately 4,000 employees. 14 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 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:
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,
Highway revenue equipment Average Age (yrs.) Containers Chassis Total highway revenue equipment
15
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.
OTHER Equipment Encumbrances – Equipment with a carrying value of approximately 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.) 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 As previously reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, a We 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. OTHER MATTERS Antitrust Litigation 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.
17 On June 21, 2012, Judge Friedman issued 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. On October 31, 2013, Judge Friedman approved a schedule agreed to by all parties for consideration of the class certification issue on remand. 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 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 engaged 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 granted 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. We 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. It Not applicable. 18 Exec 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
19 Ite 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.
At January 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).
20 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,
Purchases of Equity Securities– During
21 It 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.
22 It 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
2015 Results
· Safety – During 2015, we continued our focus on safety to reduce risk and eliminate incidents for our employees, our customers and the public. We achieved our best ever reportable personal injury incidents per 200,000 employee-hours of 0.87. In addition, we finished 2015 with a 3% improvement in our crossing incident rate per million train miles compared to the prior year. These results demonstrate our employees’ dedication to our safety initiatives and our
· Financial Performance – In 2015, we generated operating income of $8.1 billion, an 8% decrease compared to a record-setting
· Freight Revenues – Our freight revenues declined 10% year-over-year to $20.4 billion as a result of lower volume levels in five of our six commodity groups and overall lower fuel surcharge revenue, partially offset by core pricing gains. Volume declines in coal, international intermodal, frac sand, metals, crude oil, and grain shipments more than offset volume growth in domestic intermodal, finished vehicles, automotive parts, industrial chemicals and plastics shipments.
· Network Operations – Significant improvements were made in our operating and service metrics, as our average train speed, as reported to the AAR, increased 6% in 2015 compared to 2014, and our average terminal dwell time decreased 3%, both reflecting the impact of lower volumes and improved network fluidity.
Free cash flow is not considered a financial measure under accounting principles generally accepted in the U.S. (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):
2016 Outlook
· Network Operations – In 2016, we will continue to align resources with customer demand, continue to improve network performance, and maintain our surge capability.
· Fuel Prices – With the dramatic drop in fuel prices during 2015, fuel price projections continue to be uncertain in the current environment. We again could see volatile fuel prices during the year, as they are sensitive to global and U.S. domestic demand, refining capacity, geopolitical events, weather conditions and other factors. As prices fluctuate, there will be a timing impact on earnings, as our fuel surcharge programs trail fluctuations in fuel price by approximately two months.
Continuing 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 that we transport. Alternatively, lower fuel prices will likely have a negative impact on other commodities such as coal, frac sand and crude oil shipments.
· Capital Plan – In 2016, we expect our capital plan to be approximately $3.75 billion, including expenditures for PTC, 230 locomotives and 450 freight cars. The capital plan may be revised if business conditions warrant or if new laws or regulations affect our ability to generate sufficient returns on these investments. (See further discussion in this Item 7 under Liquidity and Capital Resources – Capital Plan.)
24 RESULTS OF OPERATIONS
Operating Revenues
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 Freight revenues from five of our six commodity groups decreased in 2015 compared to 2014 due to a 6% 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, and grain shipments more than offset volume growth in domestic intermodal, finished vehicles, automotive parts, 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.
Our fuel surcharge programs generated freight revenues of In 2015, other revenue decreased from 2014 due to lower 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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drought also negatively impacted the first three quarters of 2013, which created favorable comparisons for the first three quarters of 2014. Lower export wheat shipments due to a larger world crop partially offset gains in grain.
quarters of 2014 with improved sales and 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 ARC compared to 2013.
ARC driven by positive business mix |
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Volume gains and price improvement increased freight revenue from chemicals in 2013 versus 2012.2014 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 of crude oil from the Bakken Permian, Niobrara and Eagle FordPermian shale formations primarily to the Gulf area drovepartially offset these gains as market factors, primarily regional pricing differences for various types of crude oil, displaced some of the growth informer Gulf Coast shipments of
chemicals. In addition, shipments of industrial chemicals increased as manufacturing, housingto the East and automotive markets improved.West Coasts.
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Coal – | 2015 Coal Carloads | |
coal. This lower demand was a result of several utilities switching to other fuel sources due to lower 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 from Colorado and Utah mines increased 6% 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 exports to the Gulf Coast decreased.
2014 Coal Carloads
ARC gains driven by price increases and positive business mix, partially offset by volume declines, increased freight revenue from coal shipments in 2013 versus 2012. SPRB shipments declined 10% from 2012 due to the loss of a customer contract at the beginning of the year, relatively mild summer weather, and tighter coal inventory management by utilities. Shipments from Colorado and Utah mines decreased 13%increased 6% compared to 2012,2013, driven by soft domestic demandhigher natural gas prices for most of the year and mine production issues, partially offset by second half growthstrong exports through the West Coast. However, in international shipments. Severe flooding and washouts in Colorado also reducedthe fourth quarter volumes from certain producers inColorado and Utah mines declined as exports to the third quarter.Gulf Coast decreased.
Industrial Products – Freight revenue from industrial products |
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Volume growth, core pricing gains and positive business mix in 2014 increased freight revenue for industrial products shipments versus 2013. Shipments of non-metallic minerals (primarily frac sand, up 31%) grew as a result of drilling activity for energy products, as well as evolving drilling practices, which can increase the amount of frac sand used at certain wells. Additionally, rock and lumber shipments increased from 2013, driven by new housing and commercial construction.
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Intermodal – Lower fuel surcharge revenue and volume declines, partially offset by core pricing gains, resulted in a decline in freight revenue from intermodal shipments in 2015 compared to 2014. International shipments declined 8% resulting from the supply chain disruptions stemming from the West Coast port work disruptions and historically high retail inventories. Domestic volume increased 3% driven by continued conversions from trucks and new premium services, more than offsetting the impact of high retail inventory levels and modest retail sales activity.
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| 2015 Intermodal Carloads | |
volume growth, core pricing improvements and positive business mix. Domestic traffic increased 11% due to continued conversions from truck transportation to rail 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.
Pricing improvements and slight volume growth drove increased freight revenue from intermodal shipments in 2013
2014 Intermodal Carloads
compared to 2012. Domestic traffic increased 3% due to overall economic growth along with conversions from truck transportation to rail.rail and new premium services. International traffic declined 2%grew 5% versus 2012, reflecting market share shifts within the ocean carrier industry2013, driven primarily by new business and an increase in transloadingimproving economic conditions. International gains in the second halflast three quarters of the year. Transloading involvesyear offset the transfer of goods from internationaldeclines in the first quarter due to domestic containers at distribution centers near West coast ports, which reduces demand for rail transportation from these centers in international containers.severe weather that negatively impacted consumer demand.
Mexico Business– Each of our commodity groups includes revenue from shipments to and from Mexico. Freight revenue from Mexico business decreased 4% to $2.2 billion in 2015 compared to 2014 primarily due to lower fuel surcharge revenue. Volume levels were flat compared to 2014 as lower shipments of Intermodal, Agricultural, and Industrial Products were offset by growth in Automotive, Coal, and Chemical shipments.
Revenue from Mexico business increased 8% to $2.3 billion in 2014 versus 2013. Volume levels increased 8% from 2013, as increases in Agricultural Products, Chemicals, Intermodal, Automotive and Industrial Products offset lower export Coal shipments.
Revenue from Mexico business increased 9% to $2.1 billion in 2013 versus 2012. Shipments were up 3% versus 2012; all commodity groups grew with the exception of Agricultural Products. The largest growth came from Automotive and Industrial Products shipments.
Operating Expenses
Millions | 2014 | 2013 | 2012 | % Change 2014 v 2013 | % Change 2013 v 2012 | |||||||||||||||
Compensation and benefits | $ | 5,076 | $ | 4,807 | $ | 4,685 | 6% | 3% | ||||||||||||
Fuel | 3,539 | 3,534 | 3,608 | - | (2) | |||||||||||||||
Purchased services and materials | 2,558 | 2,315 | 2,143 | 10 | 8 | |||||||||||||||
Depreciation | 1,904 | 1,777 | 1,760 | 7 | 1 | |||||||||||||||
Equipment and other rents | 1,234 | 1,235 | 1,197 | - | 3 | |||||||||||||||
Other | 924 | 849 | 788 | 9 | 8 | |||||||||||||||
Total | $ | 15,235 | $ | 14,517 | $ | 14,181 | 5% | 2% | ||||||||||||
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Operating Expenses
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Millions | 2015 | 2014 | 2013 | 2015 v 2014 | 2014 v 2013 | |||||
Compensation and benefits | $ | 5,161 | $ | 5,076 | $ | 4,807 | 2 | % | 6 | % |
Purchased services and materials |
| 2,421 |
| 2,558 |
| 2,315 | (5) |
| 10 |
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Fuel |
| 2,013 |
| 3,539 |
| 3,534 | (43) |
| - |
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| 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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Other |
| 924 |
| 924 |
| 849 | - |
| 9 |
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Total | $ | 13,761 | $ | 15,235 | $ | 14,517 | (10) | % | 5 | % |
Operating expenses decreased nearly $1.5 billion compared to 2014 driven by significantly lower fuel prices and volume-related cost savings. Productivity gains in the second half of the year also drove expenses lower. These decreases were partially offset by wage inflation, higher depreciation, and property taxes. In addition, we incurred approximately $35 million of weather-related costs in 2014. Operating expenses increased $718 million in 2014 versus 2013. Volume-related expenses, incremental costs associated with operating a slower network, depreciation, wage and benefit inflation, and locomotive and freight car
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materials contributed to the higher costs. Lower fuel price partially offset these increases. In addition, there were approximately $35 million of weather-related costs in the first quarter of 2014.
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 offset 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, droveresulted in increased wages.wages in 2014 compared to 2013. Weather-related costs in the first quarter of 2014 also increased costs.
General wages and benefits inflation, including increased pension and other postretirement benefits, and higher work force levels drove the increases in 2013 versus 2012. The impact of ongoing productivity initiatives partially offset these increases.
Fuel – Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Volume growth of 7%, as measured by gross ton-miles, drove the increase in fuel expense. 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 fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-miles.
Lower locomotive diesel fuel prices, which averaged $3.15 per gallon (including taxes and transportation costs) in 2013, compared to $3.22 in 2012, decreased expenses by $75 million. Volume, as measured by gross ton-miles, decreased 1% while the fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-miles, increased 2% compared to 2012. Declines in heavier, more fuel-efficient coal shipments drove the variances in gross-ton-miles and the fuel consumption rate.
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 million compared to 2014 primarily due to lower volume-related costs, including a 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-
relatedvolume-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.
Expenses
Fuel – Fuel includes locomotive fuel and gasoline for purchased serviceshighway and non-highway vehicles and heavy equipment. Locomotive diesel fuel prices, which averaged $1.84 per gallon (including taxes and transportation costs) in 2015, compared to $2.97 per gallon in 2014, decreased expenses $1.2 billion. In
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addition, fuel costs were lower as gross-ton miles decreased 9%. The fuel consumption rate (c-rate), computed as gallons of fuel consumed divided by gross ton-miles in thousands, increased 10%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, compared to 2012 due to logistics management fees, an increasealong with a slight improvement in locomotive overhauls and repairs on jointly owned property.c-rate, computed as gallons of fuel consumed divided by gross ton-miles.
Depreciation– The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. A higher depreciable asset base, reflecting higher capital spending in recent years, increased depreciation expense in 2015 compared to 2014. 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 higher depreciable asset base, reflecting higher ongoing capital spending drove the increase.
Depreciation was up 1% in 2013 compared to 2012. Recent depreciation studies allowed us to use longer estimated service lives for certain equipment, which partially offset the impact of a higher depreciable asset base resulting from larger capital spending in recent years.
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. Equipment and other rents expense decreased $4 million compared to 2014 primarily from a decrease in manifest and intermodal shipments, partially offset by growth in finished vehicle shipments.
Higher intermodal volumes and longer cycle times increased short-term freight car rental expense in 2014 compared to 2013. Lower equipment leases essentially offset the higher freight car rental expense, as we exercised purchase options on some of our leased equipment.
Additional container costs resulting from the logistics management arrangement, and increased automotive shipments, partially offset by lower cycle times drove a $51 million increase in our short-term freight car rental expense in 2013 versus 2012. Conversely, lower locomotive and freight car lease expenses partially offset the higher freight car rental expense.
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 flat in 2015 compared to 2014 as higher property taxes were offset by lower costs in other areas.
Higher property taxes, personal injury expense and utilities costs partially offset by lower environmental expense and costs associated with damaged freight drove theresulted in an increase in other costs in 2014 compared to 2013.
Higher property taxes and costs associated with damaged freight and property
Non-Operating Items
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Millions | 2015 | 2014 | 2013 | 2015 v 2014 | 2014 v 2013 | |||||
Other income | $ | 226 | $ | 151 | $ | 128 | 50 | % | 18 | % |
Interest expense |
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Other Income – Other income increased other costs in 20132015 compared to 2012. Continued improvement2014 primarily due to a $113 million gain from a real estate sale in our safety performance and lower estimated liability for personal injury, which reduced our personal injury expense year-over-year,the second quarter of 2015, partially offset increasesby a gain from the sale of a permanent easement in other costs.
Non-Operating Items2014.
Millions | 2014 | 2013 | 2012 | % Change 2014 v 2013 | % Change 2013 v 2012 | |||||||||||||||
Other income | $ | 151 | $ | 128 | $ | 108 | 18% | 19% | ||||||||||||
Interest expense | (561) | (526) | (535) | 7 | (2) | |||||||||||||||
Income taxes | (3,163) | (2,660) | (2,375) | 19% | 12% |
Other Income – Other income increased in 2014 versus 2013 due to higher gains from 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.
Other income
Interest Expense – Interest expense increased in 2013 versus 20122015 compared to 2014 due to higher gainsan increased weighted-average debt level of $13.0 billion in 2015 from real estate sales and increased lease income, including the favorable impact from the $17 million settlement of a land lease contract. These increases were$10.7 billion in 2014, partially offset by the impact of a lower effective interest received from a tax refundrate of 4.8% in 2012.
Interest Expense – Interest expense increased in 2014 versus 2013 due to an increased weighted-average debt level of $10.8$10.7 billion in 2014 from $9.6 billion in 2013, which more than offset the impact of the lower effective interest rate of 5.3% in 2014 versus 5.7% in 2013.
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Income Taxes – Lower pre-tax income decreased income taxes in 2015 compared to 2014. Our effective tax rate for 2015 was 37.7% compared to 37.9% in 2014.
Interest expense decreased in 2013 versus 2012 due to a lower effective interest rate of 5.7% in 2013 versus 6.0% in 2012. The increase in the weighted-average debt level to $9.6 billion in 2013 from $9.1 billion in 2012 partially offset the impact of the lower effective interest rate.
Income Taxes – Higher pre-tax income increased income taxes in 2014 compared to 2013. Our effective tax rate for 2014 was 37.9% compared to 37.7% in 2013.
Higher pre-tax income increased income taxes in 2013 compared to 2012. Our effective tax rate for 2013 was 37.7% compared to 37.6% in 2012.
OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS
We report a number of key performance measures weekly to the Association of American Railroads (AAR).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:
2014 | 2013 | 2012 | % Change 2014 v 2013 | % Change 2013 v 2012 | ||||||||||||||||
Average train speed (miles per hour) | 24.0 | 26.0 | 26.5 | (8)% | (2)% | |||||||||||||||
Average terminal dwell time (hours) | 30.3 | 27.1 | 26.2 | 12 % | 3 % | |||||||||||||||
Gross ton-miles (billions) | 1,014.9 | 949.1 | 959.3 | 7 % | (1)% | |||||||||||||||
Revenue ton-miles (billions) | 549.6 | 514.3 | 521.1 | 7 % | (1)% | |||||||||||||||
Operating ratio | 63.5 | 66.1 | 67.8 | (2.6)pts | (1.7)pts | |||||||||||||||
Employees (average) | 47,201 | 46,445 | 45,928 | 2 % | 1 % |
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Average train speed (miles per hour) | 25.4 | 24.0 | 26.0 | 6 | % | (8) | % | |
Average terminal dwell time (hours) | 29.3 | 30.3 | 27.1 | (3) | % | 12 | % | |
Gross ton-miles (billions) | 927.7 | 1,014.9 | 949.1 | (9) | % | 7 | % | |
Revenue ton-miles (billions) | 485.0 | 549.6 | 514.3 | (12) | % | 7 | % | |
Operating ratio | 63.1 | 63.5 | 66.1 | (0.4) | pts | (2.6) | pts | |
Employees (average) | 47,457 | 47,201 | 46,445 | 1 | % | 2 | % |
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% in 2015 compared to 2014. 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 driven byas 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 train speed decreased 2% in 2013 versus 2012. The decline was driven by severe weather conditions and shifts of traffic to sections of our network with higher utilization.
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% in 2015 compared to 2014, 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.
Average terminal dwell time increased 3% in 2013 compared to 2012, primarily due to growth of manifest traffic which requires more time in terminals for switching cars and building trains.
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 weight of freight by the number of tariff miles. Gross ton-miles and revenue ton-miles decreased 9% and 12%, respectively in 2015 compared to 2014, resulting from a 6% 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.
Gross ton-miles and revenue ton-miles declined 1% in 2013 compared to 2012 and carloads remained relatively flat driven by declines in coal and agricultural products offset by growth in chemical, autos and industrial products. Changes in commodity mix drove the year-over-year variances between gross ton-miles, revenue ton-miles and carloads.
Operating Ratio – Operating ratio is our operating expenses reflected as a percentage of operating revenue. Our operating ratio improved 2.60.4 points to a new record low of 63.1% in 2015 compared to 2014. Core pricing gains, the impact of lower fuel prices, resource realignments, network efficiencies and productivity gains more than offset the impact of lower volume and inflation.
Our operating ratio improved 2.6 points to 63.5% in 2014 versus 2013. Core pricing, business demand and productivity more than offset the incremental operating costs associated with volume, a slower network, weather and inflation.
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Employees – Employee levels increased 1% in 2015 compared to 2014, driven by more employees in training and an increase in capital project work. More employees were in training as a result of the number of transportation employees hired during the last half of 2014 and early 2015 to handle expected volume increases, and who continued receiving training in 2015, most of which occurred in the first nine months of the year.
Our operating ratio improved 1.7 points to a then record low of 66.1% in 2013 versus 2012. Core pricing and productivity gains more than offset the impact of inflation.
Employees – Employee levels increased 2% in 2014 versus 2013. A decrease in our 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 growth in 2014 compared to 2013.2014.
Employee levels increased 1% in 2013 versus 2012. Shifts in our traffic mix, which required more resources, largely concentrated in the Southern region, work related to higher capital investment in positive train control and more individuals in the training pipeline contributed to the higher employee levels.
Return on Average Common Shareholders’ Equity
Millions, Except Percentages | 2014 | 2013 | 2012 | |||||||||
Net income | $ | 5,180 | $ | 4,388 | $ | 3,943 | ||||||
Average equity | $ | 21,207 | $ | 20,551 | $ | 19,228 | ||||||
Return on average common shareholders’ equity | 24.4% | 21.4% | 20.5% | |||||||||
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Millions, Except Percentages | 2015 | 2014 | 2013 | |||
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 |
Average equity | $ | 20,946 | $ | 21,207 | $ | 20,551 |
Return on average common shareholders' equity |
| 22.8% |
| 24.4% |
| 21.4% |
Return on Invested Capital as Adjusted (ROIC)
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Millions, Except Percentages | 2015 | 2014 | 2013 | |||
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 |
Interest expense |
| 622 |
| 561 |
| 526 |
Interest on present value of operating leases |
| 135 |
| 158 |
| 175 |
Taxes on interest |
| (285) |
| (273) |
| (264) |
Net operating profit after taxes as adjusted (a) | $ | 5,244 | $ | 5,626 | $ | 4,825 |
Average equity | $ | 20,946 | $ | 21,207 | $ | 20,551 |
Average debt* |
| 12,807 |
| 10,469 |
| 9,237 |
Average present value of operating leases |
| 2,814 |
| 2,980 |
| 3,077 |
Average invested capital as adjusted (b) | $ | 36,567 | $ | 34,656 | $ | 32,865 |
Return on invested capital as adjusted (a/b) |
| 14.3% |
| 16.2% |
| 14.7% |
*Adjusted for the retrospective adoption of Accounting Standard Update 2015-03 related to the presentation of deferred debt issuance costs.
Millions, Except Percentages | 2014 | 2013 | 2012 | |||||||||
Net income | $ | 5,180 | $ | 4,388 | $ | 3,943 | ||||||
Interest expense | 561 | 526 | 535 | |||||||||
Interest on present value of operating leases | 158 | 175 | 190 | |||||||||
Taxes on interest | (273) | (264) | (273) | |||||||||
Net operating profit after taxes as adjusted (a) | $ | 5,626 | $ | 4,825 | $ | 4,395 | ||||||
Average equity | $ | 21,207 | $ | 20,551 | $ | 19,228 | ||||||
Average debt | 10,529 | 9,287 | 8,952 | |||||||||
Average present value of operating leases | 2,980 | 3,077 | 3,160 | |||||||||
Average invested capital as adjusted (b) | $ | 34,716 | $ | 32,915 | $ | 31,340 | ||||||
Return on invested capital as adjusted (a/b) | 16.2% | 14.7% | 14.0% | |||||||||
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 20142015 ROIC improved 1.5decreased 1.9 points compared to 2013,2014, primarily as a result of lower earnings and a higher earnings.
Debt to Capital
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Millions, Except Percentages | 2015 | 2014 | ||
Debt* (a) | $ | 14,201 | $ | 11,413 |
Equity |
| 20,702 |
| 21,189 |
Capital (b) | $ | 34,903 | $ | 32,602 |
Debt to capital (a/b) |
| 40.7% |
| 35.0% |
*Adjusted for the retrospective adoption of Accounting Standard Update 2015-03 related to the presentation of deferred debt issuance costs.
Millions, Except Percentages | 2014 | 2013 | ||||||
Debt (a) | $ | 11,480 | $ | 9,577 | ||||
Equity | 21,189 | 21,225 | ||||||
Capital (b) | $ | 32,669 | $ | 30,802 | ||||
Debt to capital (a/b) | 35.1% | 31.1% | ||||||
Adjusted Debt to Capital
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Millions, Except Percentages | 2014 | 2013 | ||||||
Debt | $ | 11,480 | $ | 9,577 | ||||
Net present value of operating leases | 2,902 | 3,057 | ||||||
Unfunded pension and OPEB | 523 | 170 | ||||||
Adjusted debt (a) | $ | 14,905 | $ | 12,804 | ||||
Equity | 21,189 | 21,225 | ||||||
Adjusted capital (b) | $ | 36,094 | $ | 34,029 | ||||
Adjusted debt to capital (a/b) | 41.3% | 37.6% | ||||||
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Adjusted Debt to Capital
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Millions, Except Percentages | 2015 | 2014 | ||
Debt | $ | 14,201 | $ | 11,413 |
Net present value of operating leases |
| 2,726 |
| 2,902 |
Unfunded pension and OPEB, after tax |
| 463 |
| 523 |
Adjusted debt* (a) | $ | 17,390 | $ | 14,838 |
Equity |
| 20,702 |
| 21,189 |
Adjusted capital (b) | $ | 38,092 | $ | 36,027 |
Adjusted debt to capital (a/b) |
| 45.7% |
| 41.2% |
*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 5.3%4.8% and 5.7%5.3% at December 31, 20142015 and 2013,2014, 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, 20142015 debt to capital ratios increased as a result of a $1.9$2.8 billion increase in debt from December 31, 2013.2014.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2014,2015, 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, 2014.2015. We did not make any borrowings under this facility during 2014.2015. The value of the outstanding undivided interest held by investors under the $650 million capacity receivables securitization facility was $400 million as of December 31, 2014,2015, and is included in our Consolidated Statements of Financial Position as debt due after one year. 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, 20142015 and 2013,2014, we had a modest working capital surplus. This reflects a strong cash position that provides enhanced liquidity in an uncertain economic environment. In addition, we believe
we have adequate access to capital markets to meet any foreseeable cash requirements, and we have sufficient financial capacity to satisfy our current liabilities.
Cash Flows Millions | 2014 | 2013 | 2012 | |||||||||
Cash provided by operating activities | $ | 7,385 | $ | 6,823 | $ | 6,161 | ||||||
Cash used in investing activities | (4,249) | (3,405) | (3,633) | |||||||||
Cash used in financing activities | (2,982) | (3,049) | (2,682) | |||||||||
Net change in cash and cash equivalents | $ | 154 | $ | 369 | $ | (154) | ||||||
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Cash Flows |
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Millions | 2015 | 2014 | 2013 | |||
Cash provided by operating activities | $ | 7,344 | $ | 7,385 | $ | 6,823 |
Cash used in investing activities |
| (4,476) |
| (4,249) |
| (3,405) |
Cash used in financing activities |
| (3,063) |
| (2,982) |
| (3,049) |
Net change in cash and cash equivalents | $ | (195) | $ | 154 | $ | 369 |
Operating Activities
Higher net income in 2014 increased cash
Cash provided by operating activities decreased in 2015 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 (discussed below).
Higherlower net income and changes in 2013 increased cash provided by operating activities compared to 2012. In addition, we made payments in 2012 for past wages as a result of national labor negotiations, which reduced cash provided by operating activities in 2012. Lower tax benefits from bonus depreciation (as discussed below)working capital, partially offset by the increases.timing of tax payments.
Federal tax law provided for 100% bonus depreciation for qualified investments made during 2011 and 50% 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 did not havethe 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 significant benefit on ourrate of 50% for 2015, 2016 and 2017, 40% for 2018 and 30% for 2019.
Higher net income in 2014 increased cash provided by operating activities compared to 2013, despite higher income tax payments. 2014 income tax payments duringwere higher than 2013 primarily due to higher income, but also because we paid taxes previously deferred by bonus depreciation.
Investing Activities
Higher 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 in cash used in investing activities in 2015 compared to 2014.
Investing Activities
Higher capital investments, including the early buyout of the long-term operating lease of our headquarters building for approximately $261 million, drove the increase in cash used in investing activities in 2014 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.
Lower capital investments in locomotives and freight cars in 2013 drove the decrease in cash used in investing activities compared to 2012. Included in capital investments in 2012 was $75 million for the early buyout of 165 locomotives under long-term operating and capital leases during the first quarter of 2012, which we exercised due to favorable economic terms and market conditions.
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The following tables detail cash capital investments and track statistics for the years ended December 31, 2015, 2014, 2013, and 2012:2013:
Millions | 2014 | 2013 | 2012 | |||||||||
Rail and other track material | $ | 749 | $ | 743 | $ | 759 | ||||||
Ties | 415 | 438 | 434 | |||||||||
Ballast | 204 | 226 | 203 | |||||||||
Other [a] | 378 | 326 | 312 | |||||||||
Total road infrastructure replacements | 1,746 | 1,733 | 1,708 | |||||||||
Line expansion and other capacity projects | 515 | 455 | 489 | |||||||||
Commercial facilities | 217 | 146 | 169 | |||||||||
Total capacity and commercial facilities | 732 | 601 | 658 | |||||||||
Locomotives and freight cars | 1,067 | 580 | 875 | |||||||||
Positive train control | 384 | 419 | 349 | |||||||||
Technology and other [b] | 417 | 163 | 148 | |||||||||
Total cash capital investments | $ | 4,346 | $ | 3,496 | $ | 3,738 | ||||||
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Millions | 2015 | 2014 | 2013 | |||
Rail and other track material | $ | 734 | $ | 749 | $ | 743 |
Ties |
| 455 |
| 415 |
| 438 |
Ballast |
| 233 |
| 204 |
| 226 |
Other [a] |
| 438 |
| 378 |
| 326 |
Total road infrastructure replacements |
| 1,860 |
| 1,746 |
| 1,733 |
Line expansion and other capacity projects |
| 457 |
| 515 |
| 455 |
Commercial facilities |
| 227 |
| 217 |
| 146 |
Total capacity and commercial facilities |
| 684 |
| 732 |
| 601 |
Locomotives and freight cars [b] |
| 1,436 |
| 1,067 |
| 580 |
Positive train control |
| 381 |
| 384 |
| 419 |
Technology and other [c] |
| 289 |
| 417 |
| 163 |
Total cash capital investments | $ | 4,650 | $ | 4,346 | $ | 3,496 |
[a] | Other includes bridges and tunnels, signals, other road assets, and road work equipment. |
[b] | Locomotives and freight cars include early lease buyouts of $327 million in 2015, $75 million in 2014, and $16 million in 2013. |
[c] | Technology and other includes the $261 million early buyout of our headquarters building operating |
2014 | 2013 | 2012 | ||||||||||
Track miles of rail replaced | 912 | 834 | 964 | |||||||||
Track miles of rail capacity expansion | 119 | 97 | 139 | |||||||||
New ties installed (thousands) | 4,076 | 3,870 | 4,436 | |||||||||
Miles of track surfaced | 10,791 | 11,017 | 11,049 |
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| 2015 | 2014 | 2013 | |||
Track miles of rail replaced |
| 767 |
| 912 |
| 834 |
Track miles of rail capacity expansion |
| 103 |
| 119 |
| 97 |
New ties installed (thousands) |
| 4,178 |
| 4,076 |
| 3,870 |
Miles of track surfaced |
| 10,076 |
| 10,791 |
| 11,017 |
Capital Plan– In 2015,2016, we expect our capital plan to be approximately $4.3$3.75 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% of our capital investments to renew and improve existing capital assets. Our major investment categories include renewing track infrastructure and upgrading our fleet of locomotives, freight cars, and domestic intermodal containers. In 2015, we plan to acquire 218 locomotives and increase freight car and container acquisitions. Additionally, weWe will continue increasingto invest in our network and terminal capacity, especially in the Southern region, whileterminals where appropriate, balancing terminal capacity with mainline capacity. In 2015, we also plan to begin constructing a major classification yard at Hearne, Texas, and continue developing several intermodal, automotive and chemicals facilities. Significant investments in technology improvements are planned, including approximately $450$375 million for PTC. We will also continue commercial investments in rail facilities and equipment, including 230 locomotives and 450 freight cars.
We expect to fund our 20152016 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 increased in 2015 compared to 2014. An increase of $712 million in dividends paid and $240 million for the repurchase of shares under our common stock repurchase program more than offset an increase of $740 million in debt issued and a decrease of $154 million in debt repaid. The higher dividend payments primarily were a result of adjusting the dividend payable dates to align with the timing of the quarterly dividend declaration and payment 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 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. Increases for the repurchase 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.
Cash used in financing activities increased in 2013 versus 2012, driven by a $744 million increase for the repurchase of shares under our common stock repurchase program and higher dividend payments in 2013 of $1.3 billion compared to $1.1 billion in 2012. We increased our debt levels in 2013, which partially offset the increase in cash used in financing activities.
DividendsCredit Facilities – On February 5, 2015, we increased the quarterly dividend to $0.55 per share, payable on March 30, 2015, to shareholders of record on February 27, 2015, We expect to fund the increase in the quarterly dividend through cash generated from operations and cash on hand atAt December 31, 2014.
Credit Facilities – During the second quarter of 2014, we replaced our $1.8 billion revolving credit facility, which was scheduled to expire in May 2015, with a new $1.7 billion facility that expires in May 2019 (the facility). The facility is based on substantially similar terms as those in the previous credit facility. On December 31, 2014, we had $1.7 billion of credit available under theour revolving credit facility (the facility), which is designated for general corporate purposes and supports the issuance of commercial paper. We did not draw on eitherthe facility at any time during 2014.2015. 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 that the CorporationUPC to maintain a debt-to-net-worth coverage ratio as a condition to making a borrowing.ratio. At December 31, 2014,2015, and December 31, 20132014 (and at all times during the year)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, 2014,2015, the debt-to-net-worth coverage ratio allowed us to carry up to $42.4$41.4 billion of debt (as defined in the facility), and we had $11.6$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 2014,2015, we did not issue or repay any commercial paper, and at December 31, 2014,2015, and 2013,2014, 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.
(See further discussion in this Item 7 under Receivables Securitization Facility for information regarding the Company’s receivables securitization facility.)
Ratio of Earnings to Fixed Charges
For each of the years ended December 31, 2015, 2014, 2013, and 2012,2013, our ratio of earnings to fixed charges was 11.6, 13.5, 11.8, and 10.4,11.8, 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 $15.4$13.6 billion and $16.3$15.4 billion at December 31, 2014,2015, and 2013,2014, respectively.
37
Share Repurchase Program
Effective January 1, 2014, our Board of Directors authorized the repurchase of up to 120 million shares of our common stock by December 31, 2017, replacing our previous repurchase program. As of December 31, 2014,2015, we repurchased a total of $12.6$16.0 billion of our common stock since the commencement of our repurchase programs in 2007. The table below represents shares repurchased in 2013 under our previousthis repurchase program, and shares repurchased in 2014 under the new program.
Number of Shares Purchased | Average Price Paid | |||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||
First quarter | 7,640,000 | 5,762,800 | $ | 89.43 | $ | 68.29 | ||||||||||||
Second quarter | 8,320,000 | 6,122,940 | 96.84 | 75.71 | ||||||||||||||
Third quarter | 8,347,000 | 7,333,788 | 102.54 | 78.39 | ||||||||||||||
Fourth quarter | 7,736,400 | 9,858,110 | 113.77 | 79.68 | ||||||||||||||
Total | 32,043,400 | 29,077,638 | $ | 100.65 | $ | 76.26 | ||||||||||||
Remaining number of shares that may be repurchased under current authority |
| 87,956,600 | ||||||||||||||||
Management’s
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| Number of Shares Purchased | Average Price Paid | |||||
| 2015 | 2014 |
| 2015 |
| 2014 | |
First quarter | 6,881,455 | 7,640,000 | $ | 117.28 | $ | 89.43 | |
Second quarter | 7,975,100 | 8,320,000 |
| 104.62 |
| 96.84 | |
Third quarter | 13,800,700 | 8,347,000 |
| 89.65 |
| 102.54 | |
Fourth quarter | 6,646,899 | 7,736,400 |
| 88.19 |
| 113.77 | |
Total | 35,304,154 | 32,043,400 | $ | 98.14 | $ | 100.65 | |
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, 2015,2016, through February 6, 2015,4, 2016, we repurchased 2.83.7 million shares at an aggregate cost of approximately $327$268 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 2014,2015, we issued the following unsecured, fixed-rate debt securities under our current shelf registration:registrations:
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Date | Description of Securities | |
January | $250 million of 1.80% Notes due February 1, 2020 | |
$450 million of 3.375% Notes due February 1, 2035 | ||
$450 million of 3.875% Notes due February 1, 2055 | ||
June 19, 2015 | $400 million of 2.250% Notes due June 19, 2020 | |
$300 million of | ||
October 29, 2015 | $200 million of reopened 3.250% Notes due August 15, 2025 | |
$500 million of 4.050% Notes due November 15, 2045 | ||
$400 million of | ||
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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, 2014,2015, we had remaining authority to issue up to $1.15$2.2 billion of debt securities under our current shelf registration.
Subsequent Event– In 2015, we issued the following unsecured, fixed-rate debt securities under our current shelf registration:
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Proceeds from this offering are for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase program. These debt securities include change-of-control provisions. This offering exhausted our current authority to issue debt securities under our existing shelf registration.
On February 5, 2015, the Board of Directors approved proceeding with a new shelf registration statement and authorized the issuance of up to $4.0 billion of debt securities.
Equipment Trust – On May 20, 2014,12, 2015, UPRR consummated a pass-through (P/T) financing, whereby a P/T trust was created, which issued $500$399 million of P/T trust certificates with a stated interest rate of 3.227%2.695%. The P/T trust certificates will mature on May 14, 2026.12, 2027. The proceeds from the issuance of the P/T trust certificates (net of $3 million in transaction fees) were used to purchase equipment trust certificates to be issued by UPRR to finance the acquisition of 245182 locomotives. The equipment trust certificates are secured by a lien on the locomotives.
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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 three monthsyear ended September 30,December 31, 2013.
The following table lists the outstanding notes and debentures that were exchanged:
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Principal amount | ||||
| exchanged | |||
The 2024 Offers | ||||
7.000% Debentures due 2016 | $ | 8 | ||
5.650% Notes due 2017 | 38 | |||
5.750% Notes due 2017 | 70 | |||
5.700% Notes due 2018 | 103 | |||
7.875% Notes due 2019 | 20 | |||
6.125% Notes due 2020 | 238 | |||
The 2044 Offers | ||||
7.125% Debentures due 2028 | 73 | |||
6.625% Debentures due 2029 | 177 | |||
6.250% Debentures due 2034 | 19 | |||
6.150% Debentures due 2037 | 138 | |||
5.780% Notes due 2040 | 286 | |||
Total | $ | 1,170 | ||
Debt Redemption – On May 14, 2013, we redeemed all $40 million of our outstanding 5.65% Port of Corpus Christi Authority Revenue Refunding Bonds due December 1, 2022. The redemption resulted in an early extinguishment charge of $1 million in the second quarter of 2013.
Receivables Securitization Facility– On July 29, 2014, we completed the renewal of our receivables securitization facility. The newRailroad maintains a $650 million, 3-year receivables securitization facility replaces the prior $600 million, 364-day facility. Under the facility, the Railroadmaturing 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 and $0 at both December 31, 2014,2015, and December 31, 2013,2014, respectively. The facility was supported by $1.2$0.9 billion and $1.1$1.2 billion of accounts receivable as collateral at December 31, 2014,2015, and December 31, 2013,2014, 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 issuingissuance 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 $3 million for 2014, 2013, and 2012, 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.
The following tables identify material obligations and commitments as of December 31, 2014:2015:
Payments Due by December 31, | ||||||||||||||||||||||||||||||||
Contractual Obligations Millions | Total | 2015 | 2016 | 2017 | 2018 | 2019 | After 2019 | Other | ||||||||||||||||||||||||
Debt [a] | $ | 17,897 | $ | 829 | $ | 953 | $ | 1,372 | $ | 868 | $ | 898 | $ | 12,977 | $ | - | ||||||||||||||||
Operating leases [b] | 3,725 | 508 | 484 | 429 | 356 | 323 | 1,625 | - | ||||||||||||||||||||||||
Capital lease obligations [c] | 1,927 | 253 | 249 | 246 | 224 | 210 | 745 | - | ||||||||||||||||||||||||
Purchase obligations [d] | 6,271 | 3,446 | 1,415 | 384 | 325 | 251 | 418 | 32 | ||||||||||||||||||||||||
Other post retirement benefits [e] | 450 | 42 | 44 | 44 | 45 | 46 | 229 | - | ||||||||||||||||||||||||
Income tax contingencies [f] | 151 | 6 | - | - | - | - | - | 145 | ||||||||||||||||||||||||
Total contractual obligations | $ | 30,421 | $ | 5,084 | $ | 3,145 | $ | 2,475 | $ | 1,818 | $ | 1,728 | $ | 15,994 | $ | 177 | ||||||||||||||||
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Contractual Obligations |
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Millions | Total | 2016 | 2017 | 2018 | 2019 | 2020 | 2020 | Other | |||||||||
Debt [a] | $ | 22,885 | $ | 1,006 | $ | 1,434 | $ | 938 | $ | 981 | $ | 1,339 | $ | 17,187 | $ | - | |
Operating leases [b] |
| 3,430 |
| 491 |
| 446 |
| 371 |
| 339 |
| 282 |
| 1,501 |
| - | |
Capital lease obligations [c] |
| 1,587 |
| 217 |
| 220 |
| 198 |
| 184 |
| 193 |
| 575 |
| - | |
Purchase obligations [d] |
| 3,983 |
| 2,309 |
| 673 |
| 306 |
| 255 |
| 211 |
| 197 |
| 32 | |
Other post retirement benefits [e] |
| 453 |
| 45 |
| 45 |
| 46 |
| 46 |
| 46 |
| 225 |
| - | |
Income tax contingencies [f] |
| 94 |
| - |
| - |
| - |
| - |
| - |
| - |
| 94 | |
Total contractual obligations | $ | 32,432 | $ | 4,068 | $ | 2,818 | $ | 1,859 | $ | 1,805 | $ | 2,071 | $ | 19,685 | $ | 126 |
[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, |
[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, |
Other Commercial Commitments Millions After 2019 Credit facilities [a] Receivables securitization facility [b] Guarantees [c] Standby letters of credit [d] Total commercial commitments Amount of Commitment Expiration per Period Total 2015 2016 2017 2018 2019 $ 1,700 $ - $ - $ - $ - $ 1,700 $ - 650 - - 650 - - - 82 12 26 10 11 8 15 40 34 6 - - - - $ 2,472 $ 46 $ 32 $ 660 $ 11 $ 1,708 $ 15
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Other Commercial Commitments |
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Millions | Total | 2016 | 2017 | 2018 | 2019 | 2020 | 2020 | ||||||||
Credit facilities [a] | $ | 1,700 | $ | - | $ | - | $ | - | $ | 1,700 | $ | - | $ | - | |
Receivables securitization facility [b] |
| 650 |
| - |
| 650 |
| - |
| - |
| - |
| - | |
Guarantees [c] |
| 53 |
| 9 |
| 10 |
| 11 |
| 8 |
| 5 |
| 10 | |
Standby letters of credit [d] |
| 35 |
| 33 |
| 2 |
| - |
| - |
| - |
| - | |
Total commercial commitments | $ | 2,438 | $ | 42 | $ | 662 | $ | 11 | $ | 1,708 | $ | 5 | $ | 10 |
[a] | None of the credit facility was used as of December 31, |
[b] | $400 million of the receivables securitization facility was utilized as of December 31, |
[c] | Includes guaranteed obligations related to our |
[d] | None of the letters of credit were drawn upon as of December 31, |
Off-Balance Sheet Arrangements
Guarantees– At December 31, 2014,2015, and 2013,2014, we were contingently liable for $82$53 million and $299$82 million in guarantees. We have recorded liabilities of $0.3 million$0 and $1$0.3 million for the fair value of these obligations as of December 31, 2014,2015, and 2013,2014, respectively. We entered into these contingent guarantees in the normal course of business, and they include guaranteed obligations related to our equipment financings and 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
OTHER MATTERS
Labor Agreements– Approximately 85% of our 47,20147,457 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 reached or the Railway Labor Act’s procedures (which include mediation, cooling-off periods, and the possibility of Presidential Emergency Boards and Congressional intervention) are exhausted. 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, 20142015 and 2013,2014, 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, 2014,2015, we had variable-rate debt representing approximately 5.3%4.2% of our total debt. If variable interest rates average one percentage point higher in 20152016 than our December 31, 20142015 variable rate, which was approximately 0.9%1.1%, our interest expense would increase by approximately $4$6 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, 2014.2015.
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, 2014,2015, and amounts to an increase of approximately $1.3$1.6 billion to the fair value of our debt at December 31, 2014.2015. 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, 20142015 and 2013,2014, 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. At December 31, 2014, and 2013, we had reductions of $0 and $1 million, respectively, recorded as an accumulated other comprehensive loss. As of December 31, 2014,2015, and 2013,2014, 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 revenue 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, 2016.2017, 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.
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; however, toliquidity. 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 have recorded a liability.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.
CRCRITICALITICAL ACCOUNTING POLICIES
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 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 93%94% of the recorded liability is related to asserted claims and approximately 7%6% is related to unasserted claims at December 31, 2014.2015. 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 $335$318 million to $368$345 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:
Millions | 2014 | 2013 | 2012 | |||||||||
Beginning balance | $ | 294 | $ | 334 | $ | 368 | ||||||
Current year accruals | 96 | 87 | 121 | |||||||||
Changes in estimates for prior years | 9 | (38) | (58) | |||||||||
Payments | (64) | (89) | (97) | |||||||||
Ending balance at December 31 | $ | 335 | $ | 294 | $ | 334 | ||||||
Current portion, ending balance at December 31 | $ | 111 | $ | 82 | $ | 95 | ||||||
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Beginning balance | $ | 335 | $ | 294 | $ | 334 |
Current year accruals |
| 89 |
| 96 |
| 87 |
Changes in estimates for prior years |
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| 9 |
| (38) |
Payments |
| (103) |
| (64) |
| (89) |
Ending balance at December 31 | $ | 318 | $ | 335 | $ | 294 |
Current portion, ending balance at December 31 | $ | 63 | $ | 111 | $ | 82 |
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Our personal injury claims activity was as follows:
2014 | 2013 | 2012 | ||||||||||
Open claims, beginning balance | 2,605 | 2,792 | 2,869 | |||||||||
New claims | 2,773 | 2,705 | 2,719 | |||||||||
Settled or dismissed claims | (2,760) | (2,892) | (2,796) | |||||||||
Open claims, ending balance at December 31 | 2,618 | 2,605 | 2,792 | |||||||||
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Open claims, beginning balance | 2,618 | 2,605 | 2,792 |
New claims | 2,573 | 2,773 | 2,705 |
Settled or dismissed claims | (2,787) | (2,760) | (2,892) |
Open claims, ending balance at December 31 | 2,404 | 2,618 | 2,605 |
In conjunction with the liability update performed in 2014,2015, we also reassessed our estimated insurance recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2014,2015, and 2013.2014.
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. |
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 21%22% of the recorded liability related to asserted claims and approximately 79%78% related to unasserted claims at December 31, 2014.2015. 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 $126$120 million to $135$129 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:
Millions | 2014 | 2013 | 2012 | |||||||||
Beginning balance | $ | 131 | $ | 139 | $ | 147 | ||||||
Accruals/(Credits) | 1 | 2 | (2) | |||||||||
Payments | (6) | (10) | (6) | |||||||||
Ending balance at December 31 | $ | 126 | $ | 131 | $ | 139 | ||||||
Current portion, ending balance at December 31 | $ | 8 | $ | 9 | $ | 8 | ||||||
Our asbestos-related claims activity was as follows:
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2014 | 2013 | 2012 | ||||||||||
Open claims, beginning balance | 1,140 | 1,258 | 1,291 | |||||||||
New claims | 183 | 192 | 233 | |||||||||
Settled or dismissed claims | (258) | (310) | (266) | |||||||||
Open claims, ending balance at December 31 | 1,065 | 1,140 | 1,258 | |||||||||
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Millions | 2015 | 2014 | 2013 | |||
Beginning balance | $ | 126 | $ | 131 | $ | 139 |
Accruals/(Credits) |
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| (10) |
Ending balance at December 31 | $ | 120 | $ | 126 | $ | 131 |
Current portion, ending balance at December 31 | $ | 6 | $ | 8 | $ | 9 |
Our asbestos-related claims activity was as follows:
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Open claims, beginning balance | 1,065 | 1,140 | 1,258 |
New claims | 193 | 183 | 192 |
Settled or dismissed claims | (169) | (258) | (310) |
Open claims, ending balance at December 31 | 1,089 | 1,065 | 1,140 |
In conjunction with the liability update performed in 2014,2015, we also reassessed our estimated insurance recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2014,2015, and 2013.2014. 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 270290 sites at which we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 2931 sites that are the subject of actions taken by the U.S. government, 1619 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:
Millions | 2014 | 2013 | 2012 | |||||||||
Beginning balance | $ | 171 | $ | 170 | $ | 172 | ||||||
Accruals | 56 | 58 | 48 | |||||||||
Payments | (45) | (57) | (50) | |||||||||
Ending balance at December 31 | $ | 182 | $ | 171 | $ | 170 | ||||||
Current portion, ending balance at December 31 | $ | 60 | $ | 53 | $ | 50 | ||||||
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Millions | 2015 | 2014 | 2013 | |||
Beginning balance | $ | 182 | $ | 171 | $ | 170 |
Accruals |
| 61 |
| 56 |
| 58 |
Payments |
| (53) |
| (45) |
| (57) |
Ending balance at December 31 | $ | 190 | $ | 182 | $ | 171 |
Current portion, ending balance at December 31 | $ | 52 | $ | 60 | $ | 53 |
Our environmental site activity was as follows:
2014 | 2013 | 2012 | ||||||||||
Open sites, beginning balance | 268 | 284 | 285 | |||||||||
New sites | 55 | 41 | 56 | |||||||||
Closed sites | (53) | (57) | (57) | |||||||||
Open sites, ending balance at December 31 | 270 | 268 | 284 | |||||||||
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| 2015 | 2014 | 2013 |
Open sites, beginning balance | 270 | 268 | 284 |
New sites | 66 | 55 | 41 |
Closed sites | (46) | (53) | (57) |
Open sites, ending balance at December 31 | 290 | 270 | 268 |
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
45
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. |
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 2014,2015, the estimated service lives of the majority of this rail ranged from approximately 1819 years to approximately 3539 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.
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 $63$66 million. If the estimated useful lives of all depreciable assets were decreased by one year, annual depreciation expense would increase by approximately $68$70 million. Our recent depreciation studies have resulted in lower depreciation rates for some asset classes. TheThese lower rates combined withwill partially offset the impact of a projected higher depreciable asset base, willresulting in an increase in total depreciation expense by approximately 4%1% to 6%2% in 20152016 versus 2014.2015.
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 using (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 1% increase in future income tax rates would increase our deferred tax liability by approximately $380$390 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 20142015 and 2013,2014, 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 and expected rate of return on pension assets. For OPEB, the critical assumptions are the discount rate and health care cost trend rate.
We evaluate our critical assumptions at least annually, and selected assumptions are based on the following factors:
· | Discount rate is based on a Mercer yield curve of high quality corporate bonds (rated AA by a recognized rating agency) for which the timing and amount of cash flows matches our plans’ expected benefit payments. |
· | 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. |
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 20142015 and the estimated impact on 20142015 net periodic pension and OPEB cost/(benefit) relative to a change in those assumptions:
Assumptions | Pension | OPEB | ||||||
Discount rate | 4.72% | 4.47% | ||||||
Expected return on plan assets | 7.50% | N/A | ||||||
Compensation increase | 4.00% | N/A | ||||||
Health care cost trend rate: | ||||||||
Pre-65 current | N/A | 6.49% | ||||||
Pre-65 level in 2028 | N/A | 4.50% |
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Assumptions | Pension | OPEB |
Discount rate | 3.94% | 3.74% |
Expected return on plan assets | 7.50% | N/A |
Compensation increase | 4.00% | N/A |
Health care cost trend rate: |
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|
Pre-65 current | N/A | 6.34% |
Pre-65 level in 2028 | N/A | 4.50% |
Sensitivities Millions 0.25% decrease in discount rate 0.25% increase in compensation scale 0.25% decrease in expected return on plan assets 1% increase in health care cost trend rate Increase in Expense Pension OPEB $ 9 $ 1 $ 6 N/A $ 8 N/A N/A $ 2
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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 |
| N/A |
0.25% decrease in expected return on plan assets | $ | 8 |
| 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:
Millions | Est. 2015 | 2014 | 2013 | 2012 | ||||||||||||
Net periodic pension cost | $ | 105 | $ | 69 | $ | 110 | $ | 89 | ||||||||
Net periodic OPEB cost | 18 | 15 | 14 | 13 |
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Millions | 2016 | 2015 | 2014 | 2013 | ||||
Net periodic pension cost | $ | 42 | $ | 120 | $ | 69 | $ | 110 |
Net periodic OPEB cost |
| 13 |
| 19 |
| 15 |
| 14 |
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 increasedecrease to approximately $105$42 million in 20152016 from $69$120 million in 2014.2015. Our net periodic OPEB expense is expected to increasedecrease to approximately $18$13 million in 20152016 from $15$19 million in 2014. The increases are driven by the implementation of new mortality tables issued by the Society of Actuaries in October 2014, along with a decrease in the pension discount rate to 3.94% and a decrease in the OPEB discount rate to 3.74%.2015.
CACAUTIONARYUTIONARY INFORMATION
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 “2015“2016 Capital Expenditures”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 “2015“2016 Outlook” and; “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 expenditures for infrastructure improvements and equipment acquisitions, any strategic business acquisitions, and modifications to our transportation plans; 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
48
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.
IteItemm 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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ItItemem 8.Financial Statements and Supplementary Data
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REREPORTPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Union Pacific Corporation
Omaha, Nebraska
We have audited the accompanying consolidated statements of financial position of Union Pacific Corporation and Subsidiary Companies (the “Corporation”"Corporation") as of December 31, 20142015 and 2013,2014, and 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, 2014.2015. Our audits also included the financial statement schedule listed in the Table of Contents at Part IV, Item 15. These financial statements and financial statement schedule are 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). 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 consolidated financial statements present fairly, in all material respects, the financial position of Union Pacific Corporation and Subsidiary Companies as of December 31, 20142015 and 2013,2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014,2015, 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), the Corporation’sCorporation's internal control over financial reporting as of December 31, 2014,2015, based on the criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 6, 20155, 2016 expressed an unqualified opinion on the Corporation’sCorporation's internal control over financial reporting.
Omaha, Nebraska
February 6, 2015
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COCONSOLIDATEDNSOLIDATED STATEMENTS OF INCOME
Union Pacific Corporation and Subsidiary Companies
Millions, Except Per Share Amounts, for the Years Ended December 31, | 2014 | 2013 | 2012 | |||||||||
Operating revenues: | ||||||||||||
Freight revenues | $ | 22,560 | $ | 20,684 | $ | 19,686 | ||||||
Other revenues | 1,428 | 1,279 | 1,240 | |||||||||
Total operating revenues | 23,988 | 21,963 | 20,926 | |||||||||
Operating expenses: | ||||||||||||
Compensation and benefits | 5,076 | 4,807 | 4,685 | |||||||||
Fuel | 3,539 | 3,534 | 3,608 | |||||||||
Purchased services and materials | 2,558 | 2,315 | 2,143 | |||||||||
Depreciation | 1,904 | 1,777 | 1,760 | |||||||||
Equipment and other rents | 1,234 | 1,235 | 1,197 | |||||||||
Other | 924 | 849 | 788 | |||||||||
Total operating expenses | 15,235 | 14,517 | 14,181 | |||||||||
Operating income | 8,753 | 7,446 | 6,745 | |||||||||
Other income (Note 7) | 151 | 128 | 108 | |||||||||
Interest expense | (561) | (526) | (535) | |||||||||
Income before income taxes | 8,343 | 7,048 | 6,318 | |||||||||
Income taxes (Note 8) | (3,163) | (2,660) | (2,375) | |||||||||
Net income | $ | 5,180 | $ | 4,388 | $ | 3,943 | ||||||
Share and Per Share (Note 9): | ||||||||||||
Earnings per share - basic | $ | 5.77 | $ | 4.74 | $ | 4.17 | ||||||
Earnings per share - diluted | $ | 5.75 | $ | 4.71 | $ | 4.14 | ||||||
Weighted average number of shares - basic | 897.1 | 926.5 | 946.2 | |||||||||
Weighted average number of shares - diluted | 901.1 | 931.5 | 952.9 | |||||||||
Dividends declared per share | $ | 1.91 | $ | 1.48 | $ | 1.245 | ||||||
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Millions, Except Per Share Amounts, | 2015 | 2014 | 2013 | |||
Operating revenues: |
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Freight revenues | $ | 20,397 | $ | 22,560 | $ | 20,684 |
Other revenues |
| 1,416 |
| 1,428 |
| 1,279 |
Total operating revenues |
| 21,813 |
| 23,988 |
| 21,963 |
Operating expenses: |
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Compensation and benefits |
| 5,161 |
| 5,076 |
| 4,807 |
Purchased services and materials |
| 2,421 |
| 2,558 |
| 2,315 |
Fuel |
| 2,013 |
| 3,539 |
| 3,534 |
Depreciation |
| 2,012 |
| 1,904 |
| 1,777 |
Equipment and other rents |
| 1,230 |
| 1,234 |
| 1,235 |
Other |
| 924 |
| 924 |
| 849 |
Total operating expenses |
| 13,761 |
| 15,235 |
| 14,517 |
Operating income |
| 8,052 |
| 8,753 |
| 7,446 |
Other income (Note 7) |
| 226 |
| 151 |
| 128 |
Interest expense |
| (622) |
| (561) |
| (526) |
Income before income taxes |
| 7,656 |
| 8,343 |
| 7,048 |
Income taxes (Note 8) |
| (2,884) |
| (3,163) |
| (2,660) |
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 |
Share and Per Share (Note 9): |
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Earnings per share - basic | $ | 5.51 | $ | 5.77 | $ | 4.74 |
Earnings per share - diluted | $ | 5.49 | $ | 5.75 | $ | 4.71 |
Weighted average number of shares - basic |
| 866.2 |
| 897.1 |
| 926.5 |
Weighted average number of shares - diluted |
| 869.4 |
| 901.1 |
| 931.5 |
Dividends declared per share | $ | 2.20 | $ | 1.91 | $ | 1.48 |
CCONSOLIDATEDONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Union Pacific Corporation and Subsidiary Companies
Millions, for the Years Ended December 31, | 2014 | 2013 | 2012 | |||||||||
Net income | $ | 5,180 | $ | 4,388 | $ | 3,943 | ||||||
Other comprehensive income/(loss): | ||||||||||||
Defined benefit plans | (448) | 436 | (145) | |||||||||
Foreign currency translation | (12) | (1) | 12 | |||||||||
Derivatives | - | 1 | 1 | |||||||||
Total other comprehensive income/(loss) [a] | (460) | 436 | (132) | |||||||||
Comprehensive income | $ | 4,720 | $ | 4,824 | $ | 3,811 | ||||||
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Millions, | 2015 | 2014 | 2013 | ||||
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 | |
Other comprehensive income/(loss): |
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| |
Defined benefit plans |
| 58 |
| (448) |
| 436 | |
Foreign currency translation |
| (43) |
| (12) |
| (1) | |
Derivatives |
| - |
| - |
| 1 | |
Total other comprehensive income/(loss) [a] |
| 15 |
| (460) |
| 436 | |
Comprehensive income | $ | 4,787 | $ | 4,720 | $ | 4,824 |
[a] | Net of deferred taxes of ($8) million, $291 million, and ($264) million during 2015, 2014, and |
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
COCONSOLIDATEDNSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies
Millions, Except Share and Per Share Amounts as of December 31, | 2014 | 2013 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,586 | $ | 1,432 | ||||
Accounts receivable, net (Note 11) | 1,611 | 1,414 | ||||||
Materials and supplies | 712 | 653 | ||||||
Current deferred income taxes (Note 8) | 277 | 268 | ||||||
Other current assets | 493 | 223 | ||||||
Total current assets | 4,679 | 3,990 | ||||||
Investments | 1,390 | 1,321 | ||||||
Net properties (Note 12) | 46,272 | 43,749 | ||||||
Other assets | 375 | 671 | ||||||
Total assets | $ | 52,716 | $ | 49,731 | ||||
Liabilities and Common Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and other current liabilities (Note 13) | $ | 3,303 | $ | 3,086 | ||||
Debt due within one year (Note 15) | 462 | 705 | ||||||
Total current liabilities | 3,765 | 3,791 | ||||||
Debt due after one year (Note 15) | 11,018 | 8,872 | ||||||
Deferred income taxes (Note 8) | 14,680 | 14,163 | ||||||
Other long-term liabilities | 2,064 | 1,680 | ||||||
Commitments and contingencies (Notes 17 and 18) | ||||||||
Total liabilities | 31,527 | 28,506 | ||||||
Common shareholders’ equity: | ||||||||
Common shares, $2.50 par value, 1,400,000,000 authorized; | ||||||||
1,110,100,423 and 1,109,657,652 issued; 883,366,476 and 912,001,996 | ||||||||
outstanding, respectively | 2,775 | 2,774 | ||||||
Paid-in-surplus | 4,321 | 4,210 | ||||||
Retained earnings | 27,367 | 23,901 | ||||||
Treasury stock | (12,064) | (8,910) | ||||||
Accumulated other comprehensive loss (Note 10) | (1,210) | (750) | ||||||
Total common shareholders’ equity | 21,189 | 21,225 | ||||||
Total liabilities and common shareholders’ equity | $ | 52,716 | $ | 49,731 |
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Millions, Except Share and Per Share Amounts | 2015 | 2014 | ||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | 1,391 | $ | 1,586 |
Accounts receivable, net (Note 11) |
| 1,356 |
| 1,611 |
Materials and supplies |
| 736 |
| 712 |
Other current assets |
| 647 |
| 492 |
Total current assets |
| 4,130 |
| 4,401 |
Investments |
| 1,410 |
| 1,390 |
Net properties (Note 12) |
| 48,866 |
| 46,272 |
Other assets |
| 194 |
| 309 |
Total assets | $ | 54,600 | $ | 52,372 |
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 |
Debt due within one year (Note 15) |
| 594 |
| 461 |
Total current liabilities |
| 3,206 |
| 3,764 |
Debt due after one year (Note 15) |
| 13,607 |
| 10,952 |
Deferred income taxes (Note 8) |
| 15,241 |
| 14,403 |
Other long-term liabilities |
| 1,844 |
| 2,064 |
Commitments and contingencies (Notes 17 and 18) |
|
|
|
|
Total liabilities |
| 33,898 |
| 31,183 |
Common shareholders' equity: |
|
|
|
|
Common shares, $2.50 par value, 1,400,000,000 authorized; |
|
|
|
|
1,110,426,354 and 1,110,100,423 issued; 849,211,436 and 883,366,476 |
|
|
|
|
outstanding, respectively |
| 2,776 |
| 2,775 |
Paid-in-surplus |
| 4,417 |
| 4,321 |
Retained earnings |
| 30,233 |
| 27,367 |
Treasury stock |
| (15,529) |
| (12,064) |
Accumulated other comprehensive loss (Note 10) |
| (1,195) |
| (1,210) |
Total common shareholders' equity |
| 20,702 |
| 21,189 |
Total liabilities and common shareholders' equity | $ | 54,600 | $ | 52,372 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
53
COCONSOLIDATEDNSOLIDATED STATEMENTS OF CASH FLOWS
Union Pacific Corporation and Subsidiary Companies
Millions, for the Years Ended December 31, | 2014 | 2013 | 2012 | |||||||||
Operating Activities | ||||||||||||
Net income | $ | 5,180 | $ | 4,388 | $ | 3,943 | ||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||
Depreciation | 1,904 | 1,777 | 1,760 | |||||||||
Deferred income taxes and unrecognized tax benefits | 895 | 723 | 887 | |||||||||
Other operating activities, net | (285) | (226) | (160) | |||||||||
Changes in current assets and liabilities: | ||||||||||||
Accounts receivable, net | (197) | (83) | 70 | |||||||||
Materials and supplies | (59) | 7 | (46) | |||||||||
Other current assets | (270) | 74 | (108) | |||||||||
Accounts payable and other current liabilities | 217 | 163 | (185) | |||||||||
Cash provided by operating activities | 7,385 | 6,823 | 6,161 | |||||||||
Investing Activities | ||||||||||||
Capital investments | (4,346) | (3,496) | (3,738) | |||||||||
Proceeds from asset sales | 138 | 98 | 80 | |||||||||
Acquisition of equipment pending financing | - | - | (274) | |||||||||
Proceeds from sale of assets financed | - | - | 274 | |||||||||
Other investing activities, net | (41) | (7) | 25 | |||||||||
Cash used in investing activities | (4,249) | (3,405) | (3,633) | |||||||||
Financing Activities | ||||||||||||
Common share repurchases (Note 19) | (3,225) | (2,218) | (1,474) | |||||||||
Debt issued | 2,588 | 1,443 | 695 | |||||||||
Dividends paid | (1,632) | (1,333) | (1,146) | |||||||||
Debt repaid | (710) | (640) | (758) | |||||||||
Debt exchange | - | (289) | - | |||||||||
Other financing activities, net | (3) | (12) | 1 | |||||||||
Cash used in financing activities | (2,982) | (3,049) | (2,682) | |||||||||
Net change in cash and cash equivalents | 154 | 369 | (154) | |||||||||
Cash and cash equivalents at beginning of year | 1,432 | 1,063 | 1,217 | |||||||||
Cash and cash equivalents at end of year | $ | 1,586 | $ | 1,432 | $ | 1,063 | ||||||
Supplemental Cash Flow Information | ||||||||||||
Non-cash investing and financing activities: | ||||||||||||
Cash dividends declared but not yet paid | $ | 438 | $ | 356 | $ | 318 | ||||||
Capital investments accrued but not yet paid | 174 | 133 | 136 | |||||||||
Capital lease financings | - | 39 | 290 | |||||||||
Cash paid during the year for: | ||||||||||||
Interest, net of amounts capitalized | $ | (554) | $ | (528) | $ | (561) | ||||||
Income taxes, net of refunds | (2,492) | (1,656) | (1,552) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions, for the Years Ended December 31, | 2015 | 2014 | 2013 | |||
Operating Activities |
|
|
|
|
|
|
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 |
Adjustments to reconcile net income to cash provided |
|
|
|
|
| |
Depreciation |
| 2,012 |
| 1,904 |
| 1,777 |
Deferred and other income taxes |
| 765 |
| 895 |
| 723 |
Net gain on non-operating asset dispositions |
| (144) |
| (69) |
| (32) |
Other operating activities, net |
| 116 |
| (216) |
| (194) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
Accounts receivable, net |
| 255 |
| (197) |
| (83) |
Materials and supplies |
| (24) |
| (59) |
| 7 |
Other current assets |
| (47) |
| (35) |
| 1 |
Accounts payable and other current liabilities |
| (276) |
| 295 |
| 40 |
Income and other taxes |
| (85) |
| (313) |
| 196 |
Cash provided by operating activities |
| 7,344 |
| 7,385 |
| 6,823 |
Investing Activities |
|
|
|
|
|
|
Capital investments |
| (4,650) |
| (4,346) |
| (3,496) |
Proceeds from asset sales |
| 251 |
| 138 |
| 98 |
Other investing activities, net |
| (77) |
| (41) |
| (7) |
Cash used in investing activities |
| (4,476) |
| (4,249) |
| (3,405) |
Financing Activities |
|
|
|
|
|
|
Common share repurchases (Note 19) |
| (3,465) |
| (3,225) |
| (2,218) |
Debt issued |
| 3,328 |
| 2,588 |
| 1,443 |
Dividends paid |
| (2,344) |
| (1,632) |
| (1,333) |
Debt repaid |
| (556) |
| (710) |
| (640) |
Debt exchange |
| - |
| - |
| (289) |
Other financing activities, net |
| (26) |
| (3) |
| (12) |
Cash used in financing activities |
| (3,063) |
| (2,982) |
| (3,049) |
Net change in cash and cash equivalents |
| (195) |
| 154 |
| 369 |
Cash and cash equivalents at beginning of year |
| 1,586 |
| 1,432 |
| 1,063 |
Cash and cash equivalents at end of year | $ | 1,391 | $ | 1,586 | $ | 1,432 |
Supplemental Cash Flow Information |
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
Capital investments accrued but not yet paid | $ | 100 | $ | 174 | $ | 133 |
Capital lease financings |
| 13 |
| - |
| 39 |
Cash dividends declared but not yet paid (Note 13) |
| - |
| 438 |
| 356 |
Cash paid during the year for: |
|
|
|
|
|
|
Income taxes, net of refunds | $ | (2,156) | $ | (2,492) | $ | (1,656) |
Interest, net of amounts capitalized |
| (592) |
| (554) |
| (528) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
54
COCONSOLIDATEDNSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’SHAREHOLDERS' EQUITY
Union Pacific Corporation and Subsidiary Companies
Millions | Common Shares | Treasury Shares | Common Shares | Paid-in- Surplus | Retained Earnings | Treasury Stock | AOCI [a] | Total | ||||||||||||||||||||||||
Balance at January 1, 2012 | 1,108.7 | (148.9) | $ | 2,773 | $ | 4,031 | $ | 18,121 | $ | (5,293) | $ | (1,054) | $ | 18,578 | ||||||||||||||||||
Net income | - | - | 3,943 | - | - | 3,943 | ||||||||||||||||||||||||||
Other comp. loss | - | - | - | - | (132) | (132) | ||||||||||||||||||||||||||
Conversion, stock option | 0.6 | 4.2 | - | 82 | - | 60 | - | 142 | ||||||||||||||||||||||||
Share repurchases (Note 19) | - | (25.6) | - | - | - | (1,474) | - | (1,474) | ||||||||||||||||||||||||
Cash dividends declared | - | - | - | - | (1,180) | - | - | (1,180) | ||||||||||||||||||||||||
Balance at December 31, 2012 | 1,109.3 | (170.3) | $ | 2,773 | $ | 4,113 | $ | 20,884 | $ | (6,707) | $ | (1,186) | $ | 19,877 | ||||||||||||||||||
Net income | - | - | 4,388 | - | - | 4,388 | ||||||||||||||||||||||||||
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 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions | 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 |
Net income |
|
|
|
| - |
| - |
| 4,388 |
| - |
| - |
| 4,388 |
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 |
Conversion, stock option | 0.3 | 0.8 |
|
| 1 |
| 96 |
| - |
| - |
| - |
| 97 |
Share repurchases (Note 19) | - | (35.3) |
|
| - |
| - |
| - |
| (3,465) |
| - |
| (3,465) |
Cash dividends declared | - | - |
|
| - |
| - |
| (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 |
[a] | AOCI = Accumulated Other Comprehensive Income/(Loss) (Note 10) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
55
NOTNOTESES 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 31,97432,084 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 26,01226,064 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 reviewanalyze revenue by commodity group, we analyzetreat the net 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:
Millions | 2014 | 2013 | 2012 | |||||||||
Agricultural Products | $ | 3,777 | $ | 3,276 | $ | 3,280 | ||||||
Automotive | 2,103 | 2,077 | 1,807 | |||||||||
Chemicals | 3,664 | 3,501 | 3,238 | |||||||||
Coal | 4,127 | 3,978 | 3,912 | |||||||||
Industrial Products | 4,400 | 3,822 | 3,494 | |||||||||
Intermodal | 4,489 | 4,030 | 3,955 | |||||||||
Total freight revenues | $ | 22,560 | $ | 20,684 | $ | 19,686 | ||||||
Other revenues | 1,428 | 1,279 | 1,240 | |||||||||
Total operating revenues | $ | 23,988 | $ | 21,963 | $ | 20,926 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions | 2015 | 2014 | 2013 | |||
Agricultural Products | $ | 3,581 | $ | 3,777 | $ | 3,276 |
Automotive |
| 2,154 |
| 2,103 |
| 2,077 |
Chemicals |
| 3,543 |
| 3,664 |
| 3,501 |
Coal |
| 3,237 |
| 4,127 |
| 3,978 |
Industrial Products |
| 3,808 |
| 4,400 |
| 3,822 |
Intermodal |
| 4,074 |
| 4,489 |
| 4,030 |
Total freight revenues | $ | 20,397 | $ | 22,560 | $ | 20,684 |
Other revenues |
| 1,416 |
| 1,428 |
| 1,279 |
Total operating revenues | $ | 21,813 | $ | 23,988 | $ | 21,963 |
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 us 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 $2.2 billion in 2015, $2.3 billion in 2014, and $2.1 billion in 2013, and $1.9 billion in 2012.2013.
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.
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.
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 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.
57
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 –Our The preparation of our Consolidated Financial Statements includein conformity with GAAP requires management to make estimates and assumptions regardingthat affect certain reported assets liabilities, revenue, and expensesliabilities, and the disclosure of certain contingent assets and liabilities.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
58
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, 2016.2017, 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 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 Split
On June 6, 2014, we completed a two-for-one stock split, effected in the form of a 100% stock dividend. The stock split entitled all shareholders of record at the close of business on May 27, 2014, to receive one additional share of our common stock, par value $2.50 per share, 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.
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, 2014,2015, 36,000 restricted shares and 78,00045,400 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
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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, 2014, 4,338,6912015, 3,652,954 options and 3,677,6422,092,721 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, 2014, 969,8222015, 1,873,014 options and 1,307,9052,061,737 retention shares and stock units were outstanding under the 2013 Plan.
Pursuant to the above plans 76,548,520; 77,786,772; 79,574,896; and 64,337,04079,574,896 shares of our common stock were authorized and available for grant at December 31, 2015, 2014, 2013, and 2012,2013, 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.
Information regarding stock-based compensation appears in the table below:
Millions | 2014 | 2013 | 2012 | |||||||||
Stock-based compensation, before tax: | ||||||||||||
Stock options | $ | 21 | $ | 19 | $ | 18 | ||||||
Retention awards | 91 | 79 | 75 | |||||||||
Total stock-based compensation, before tax | $ | 112 | $ | 98 | $ | 93 | ||||||
Excess tax benefits from equity compensation plans | $ | 118 | $ | 76 | $ | 100 | ||||||
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Millions | 2015 | 2014 | 2013 | |||
Stock-based compensation, before tax: |
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Stock options | $ | 17 | $ | 21 | $ | 19 |
Retention awards |
| 81 |
| 91 |
| 79 |
Total stock-based compensation, before tax | $ | 98 | $ | 112 | $ | 98 |
Excess tax benefits from equity compensation plans | $ | 62 | $ | 118 | $ | 76 |
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:
Weighted-Average Assumptions | 2014 | 2013 | 2012 | |||||||||
Risk-free interest rate | 1.6% | 0.8% | 0.8% | |||||||||
Dividend yield | 2.1% | 2.1% | 2.1% | |||||||||
Expected life (years) | 5.2 | 5.0 | 5.3 | |||||||||
Volatility | 30.0% | 36.2% | 36.8% | |||||||||
Weighted-average grant-date fair value of options granted | $ | 20.18 | $ | 17.49 | $ | 15.65 | ||||||
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Weighted-Average Assumptions | 2015 | 2014 | 2013 | |||
Risk-free interest rate |
| 1.3% |
| 1.6% |
| 0.8% |
Dividend yield |
| 1.8% |
| 2.1% |
| 2.1% |
Expected life (years) |
| 5.1 |
| 5.2 |
| 5.0 |
Volatility |
| 23.4% |
| 30.0% |
| 36.2% |
Weighted-average grant-date fair value of options granted | $ | 22.30 | $ | 20.18 | $ | 17.49 |
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 20142015 is presented below:
Options (thous.) | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (millions) | |||||||||||||
Outstanding at January 1, 2014 | 7,443 | $ | 40.07 | 5.8 yrs. | $ | 327 | ||||||||||
Granted | 989 | 87.56 | N/A | N/A | ||||||||||||
Exercised | (2,961) | 30.59 | N/A | N/A | ||||||||||||
Forfeited or expired | (84) | 68.48 | N/A | N/A | ||||||||||||
Outstanding at December 31, 2014 | 5,387 | $ | 53.56 | 5.8 yrs. | $ | 353 | ||||||||||
Vested or expected to vest at December 31, 2014 | 5,325 | $ | 53.30 | 5.8 yrs. | $ | 351 | ||||||||||
Options exercisable at December 31, 2014 | 3,350 | $ | 40.69 | 4.4 yrs. | $ | 263 | ||||||||||
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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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| N/A |
Exercised | (716) |
| 40.10 | N/A |
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| N/A |
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 |
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, 2014,2015, are subject to performance or market-based vesting conditions.
At December 31, 2014,2015, there was $15$18 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 11.0 year. Additional information regarding stock option exercises appears in the table below:
Millions | 2014 | 2013 | 2012 | |||||||||
Intrinsic value of stock options exercised | $ | 194 | $ | 112 | $ | 244 | ||||||
Cash received from option exercises | 54 | 51 | 84 | |||||||||
Treasury shares repurchased for employee payroll taxes | (24) | (21) | (30) | |||||||||
Tax benefit realized from option exercises | 74 | 43 | 93 | |||||||||
Aggregate grant-date fair value of stock options vested | 17 | 16 | 16 |
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Millions | 2015 | 2014 | 2013 | |||
Intrinsic value of stock options exercised | $ | 50 | $ | 194 | $ | 112 |
Cash received from option exercises |
| 27 |
| 54 |
| 51 |
Treasury shares repurchased for employee payroll taxes |
| (12) |
| (24) |
| (21) |
Tax benefit realized from option exercises |
| 19 |
| 74 |
| 43 |
Aggregate grant-date fair value of stock options vested |
| 19 |
| 17 |
| 16 |
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 20142015 were as follows:
Shares (thous.) | Weighted-Average Grant-Date Fair Value | |||||||
Nonvested at January 1, 2014 | 3,712 | $ 49.02 | ||||||
Granted | 871 | 88.14 | ||||||
Vested | (1,080) | 31.33 | ||||||
Forfeited | (100) | 57.82 | ||||||
Nonvested at December 31, 2014 | 3,403 | $ 64.39 | ||||||
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| Shares (thous.) | Weighted-Average | |
Nonvested at January 1, 2015 | 3,403 | $ | 64.39 |
Granted | 521 |
| 122.79 |
Vested | (934) |
| 47.66 |
Forfeited | (90) |
| 72.87 |
Nonvested at December 31, 2015 | 2,900 | $ | 80.01 |
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, 2014,2015, there was $87$88 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.61.5 years.
Performance Retention Awards– In February 2014,2015, our Board of Directors approved performance stock unit grants. Other than different performance targets, the basic terms of these performance stock units are identical to those granted in February 20122013 and February 2013,2014, including using annual return on invested capital (ROIC) as the performance measure. 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.
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. We expense the fair value of the units that are
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probable of being earned based on our forecasted ROIC over the 3-year performance period. 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 20142015 grant were as follows:
2015 | ||||
Dividend per share per quarter | $ | 0.55 | ||
Risk-free interest rate at date of grant | 0.8% |
Changes in our performance retention awards during 20142015 were as follows:
Shares (thous.) | Weighted-Average Grant-Date Fair Value | |||||||
Nonvested at January 1, 2014 | 1,888 | $ 53.70 | ||||||
Granted | 456 | 83.06 | ||||||
Vested | (661) | 44.94 | ||||||
Forfeited | (100) | 61.36 | ||||||
Nonvested at December 31, 2014 | 1,583 | $ 65.33 | ||||||
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| Shares (thous.) | Weighted-Average | |
Nonvested at January 1, 2015 | 1,583 | $ | 65.33 |
Granted | 339 |
| 117.42 |
Vested | (580) |
| 54.38 |
Forfeited | (87) |
| 86.66 |
Nonvested at December 31, 2015 | 1,255 | $ | 82.98 |
At December 31, 2014,2015, there was $36$19 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1 year.0.7 years. This expense is subject to achievement of the ROIC levels established for the performance stock unit grants.
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.
Other Postretirement Benefits (OPEB)– We provide medical and life insurance benefits for eligible retirees. 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.
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Changes in our PBO and plan assets were as follows for the years ended December 31:
Funded Status | Pension | OPEB | ||||||||||||||
Millions | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Projected Benefit Obligation | ||||||||||||||||
Projected benefit obligation at beginning of year | $ | 3,372 | $ | 3,591 | $ | 330 | $ | 372 | ||||||||
Service cost | 70 | 72 | 2 | 3 | ||||||||||||
Interest cost | 158 | 134 | 14 | 12 | ||||||||||||
Actuarial loss/(gain) | 735 | (257) | 33 | (34) | ||||||||||||
Gross benefits paid | (193) | (168) | (25) | (23) | ||||||||||||
Projected benefit obligation at end of year | $ | 4,142 | $ | 3,372 | $ | 354 | $ | 330 | ||||||||
Plan Assets | ||||||||||||||||
Fair value of plan assets at beginning of year | $ | 3,429 | $ | 2,875 | $ | - | $ | - | ||||||||
Actual return on plan assets | 185 | 506 | - | - | ||||||||||||
Voluntary funded pension plan contributions | 200 | 200 | - | - | ||||||||||||
Non-qualified plan benefit contributions | 33 | 16 | 25 | 23 | ||||||||||||
Gross benefits paid | (193) | (168) | (25) | (23) | ||||||||||||
Fair value of plan assets at end of year | $ | 3,654 | $ | 3,429 | $ | - | $ | - | ||||||||
Funded status at end of year | $ | (488) | $ | 57 | $ | (354) | $ | (330) | ||||||||
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Funded Status | Pension | OPEB | ||||||
Millions | 2015 | 2014 | 2015 | 2014 | ||||
Projected Benefit Obligation |
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Projected benefit obligation at beginning of year | $ | 4,142 | $ | 3,372 | $ | 354 | $ | 330 |
Service cost |
| 106 |
| 70 |
| 3 |
| 2 |
Interest cost |
| 163 |
| 158 |
| 13 |
| 14 |
Actuarial loss/(gain) |
| (267) |
| 735 |
| (18) |
| 33 |
Gross benefits paid |
| (186) |
| (193) |
| (23) |
| (25) |
Projected benefit obligation at end of year | $ | 3,958 | $ | 4,142 | $ | 329 | $ | 354 |
Plan Assets |
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Fair value of plan assets at beginning of year | $ | 3,654 | $ | 3,429 | $ | - | $ | - |
Actual return on plan assets |
| (43) |
| 185 |
| - |
| - |
Voluntary funded pension plan contributions |
| 100 |
| 200 |
| - |
| - |
Non-qualified plan benefit contributions |
| 19 |
| 33 |
| 23 |
| 25 |
Gross benefits paid |
| (186) |
| (193) |
| (23) |
| (25) |
Fair value of plan assets at end of year | $ | 3,544 | $ | 3,654 | $ | - | $ | - |
Funded status at end of year | $ | (414) | $ | (488) | $ | (329) | $ | (354) |
Amounts recognized in the statement of financial position as of December 31, 20142015 and 20132014 consist of:
Pension | OPEB | |||||||||||||||
Millions | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Noncurrent assets | $ | 1 | $ | 364 | $ | - | $ | - | ||||||||
Current liabilities | (19) | (16) | (23) | (25) | ||||||||||||
Noncurrent liabilities | (470) | (291) | (331) | (305) | ||||||||||||
Net amounts recognized at end of year | $ | (488) | $ | 57 | $ | (354) | $ | (330) | ||||||||
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| Pension | OPEB | ||||||
Millions | 2015 | 2014 | 2015 | 2014 | ||||
Noncurrent assets | $ | 1 | $ | 1 | $ | - | $ | - |
Current liabilities |
| (22) |
| (19) |
| (23) |
| (23) |
Noncurrent liabilities |
| (393) |
| (470) |
| (306) |
| (331) |
Net amounts recognized at end of year | $ | (414) | $ | (488) | $ | (329) | $ | (354) |
The change in the funded status and accumulated other comprehensive income/(loss) is primarily a result of implementing a new set of mortality tables issued by the Society of Actuaries in October 2014 and lower discount rates.
Pre-tax amounts recognized in accumulated other comprehensive income/(loss) as of December 31, 20142015 and 20132014 consist of:
2014 | 2013 | |||||||||||||||||||||||
Millions | Pension | OPEB | Total | Pension | OPEB | Total | ||||||||||||||||||
Prior service (cost)/credit | $ | - | $ | 17 | $ | 17 | $ | - | $ | 28 | $ | 28 | ||||||||||||
Net actuarial loss | (1,727) | (148) | (1,875) | (1,018) | (125) | (1,143) | ||||||||||||||||||
Total | $ | (1,727) | $ | (131) | $ | (1,858) | $ | (1,018) | $ | (97) | $ | (1,115) | ||||||||||||
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Millions | Pension | OPEB | Total | Pension | OPEB | Total | ||||||
Prior service (cost)/credit | $ | - | $ | 7 | $ | 7 | $ | - | $ | 17 | $ | 17 |
Net actuarial loss |
| (1,652) |
| (117) |
| (1,769) |
| (1,727) |
| (148) |
| (1,875) |
Total | $ | (1,652) | $ | (110) | $ | (1,762) | $ | (1,727) | $ | (131) | $ | (1,858) |
Pre-tax changes recognized in other comprehensive income/(loss) during 2015, 2014 2013 and 20122013 were as follows:
Pension | OPEB | |||||||||||||||||||||||
Millions | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||||||
Net actuarial (loss)/gain | $ | (780) | $ | 561 | $ | (265) | $ | (33) | $ | 34 | $ | (42) | ||||||||||||
Amortization of: | ||||||||||||||||||||||||
Prior service cost/(credit) | - | - | 1 | (11) | (16) | (18) | ||||||||||||||||||
Actuarial loss | 71 | 106 | 83 | 10 | 15 | 13 | ||||||||||||||||||
Total | $ | (709) | $ | 667 | $ | (181) | $ | (34) | $ | 33 | $ | (47) | ||||||||||||
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Millions | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||
Net actuarial (loss)/gain | $ | (31) | $ | (780) | $ | 561 | $ | 18 | $ | (33) | $ | 34 |
Amortization of: |
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Prior service cost/(credit) |
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| - |
| - |
| (10) |
| (11) |
| (16) |
Actuarial loss |
| 106 |
| 71 |
| 106 |
| 13 |
| 10 |
| 15 |
Total | $ | 75 | $ | (709) | $ | 667 | $ | 21 | $ | (34) | $ | 33 |
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Amounts included in accumulated other comprehensive income/(loss) expected to be amortized into net periodic cost during 2015:2016:
Millions | Pension | OPEB | Total | |||||||||
Prior service credit | $ | - | $ | 10 | $ | 10 | ||||||
Net actuarial loss | (103) | (13) | (116) | |||||||||
Total | $ | (103) | $ | (3) | $ | (106) | ||||||
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Millions | Pension | OPEB | Total | |||
Prior service credit | $ | - | $ | 9 | $ | 9 |
Net actuarial loss |
| (80) |
| (10) |
| (90) |
Total | $ | (80) | $ | (1) | $ | (81) |
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, 20142015 and 2013,2014, the non-qualified (supplemental) plan ABO was $379$388 million and $302$379 million, 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:
Underfunded Accumulated Benefit Obligation Millions | 2014 | 2013 | ||||||
Projected benefit obligation | $ | 388 | $ | 308 | ||||
Accumulated benefit obligation | $ | 379 | $ | 302 | ||||
Fair value of plan assets | - | - | ||||||
Underfunded accumulated benefit obligation | $ | (379) | $ | (302) | ||||
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Underfunded Accumulated Benefit Obligation |
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Millions | 2015 | 2014 | ||
Projected benefit obligation | $ | 398 | $ | 388 |
Accumulated benefit obligation | $ | 388 | $ | 379 |
Fair value of plan assets |
| - |
| - |
Underfunded accumulated benefit obligation | $ | (388) | $ | (379) |
The ABO for all defined benefit pension plans was $3.9$3.7 billion and $3.2$3.9 billion at December 31, 2015 and 2014, and 2013, respectively.
Assumptions– The weighted-average actuarial assumptions used to determine benefit obligations at December 31:
Pension | OPEB | |||||||||||||||
Percentages | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Discount rate | 3.94% | 4.72% | 3.74% | 4.47% | ||||||||||||
Compensation increase | 4.00% | 4.00% | N/A | N/A | ||||||||||||
Health care cost trend rate (employees under 65) | N/A | N/A | 6.34% | 6.49% | ||||||||||||
Ultimate health care cost trend rate | N/A | N/A | 4.50% | 4.50% | ||||||||||||
Year ultimate trend rate reached | N/A | N/A | 2028 | 2028 |
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| Pension | OPEB | ||
Percentages | 2015 | 2014 | 2015 | 2014 |
Discount rate | 4.37% | 3.94% | 4.16% | 3.74% |
Compensation increase | 4.10% | 4.00% | N/A | N/A |
Health care cost trend rate (employees under 65) | N/A | N/A | 6.52% | 6.34% |
Ultimate health care cost trend rate | N/A | N/A | 4.50% | 4.50% |
Year ultimate trend rate reached | N/A | N/A | 2038 | 2028 |
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.
64
The components of our net periodic pension and OPEB cost/(benefit) were as follows for the years ended December 31:
Pension | OPEB | |||||||||||||||||||||||
Millions | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||||||
Net Periodic Benefit Cost: | ||||||||||||||||||||||||
Service cost | $ | 70 | $ | 72 | $ | 54 | $ | 2 | $ | 3 | $ | 3 | ||||||||||||
Interest cost | 158 | 134 | 141 | 14 | 12 | 15 | ||||||||||||||||||
Expected return on plan assets | (230) | (202) | (190) | - | - | - | ||||||||||||||||||
Amortization of: | ||||||||||||||||||||||||
Prior service cost/(credit) | - | - | 1 | (11) | (16) | (18) | ||||||||||||||||||
Actuarial loss | 71 | 106 | 83 | 10 | 15 | 13 | ||||||||||||||||||
Net periodic benefit cost/(benefit) | $ | 69 | $ | 110 | $ | 89 | $ | 15 | $ | 14 | $ | 13 | ||||||||||||
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| Pension | OPEB | ||||||||||
Millions | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||
Net Periodic Benefit Cost: |
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Service cost | $ | 106 | $ | 70 | $ | 72 | $ | 3 | $ | 2 | $ | 3 |
Interest cost |
| 163 |
| 158 |
| 134 |
| 13 |
| 14 |
| 12 |
Expected return on plan assets |
| (255) |
| (230) |
| (202) |
| - |
| - |
| - |
Amortization of: |
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Prior service cost/(credit) |
| - |
| - |
| - |
| (10) |
| (11) |
| (16) |
Actuarial loss |
| 106 |
| 71 |
| 106 |
| 13 |
| 10 |
| 15 |
Net periodic benefit cost/(benefit) | $ | 120 | $ | 69 | $ | 110 | $ | 19 | $ | 15 | $ | 14 |
Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows:
Pension | OPEB | |||||||||||||||||||||||
Percentages | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||||||
Discount rate | 4.72% | 3.78% | 4.54% | 4.47% | 3.48% | 4.36% | ||||||||||||||||||
Expected return on plan assets | 7.50% | 7.50% | 7.50% | N/A | N/A | N/A | ||||||||||||||||||
Compensation increase | 4.00% | 3.43% | 3.69% | N/A | N/A | N/A | ||||||||||||||||||
Health care cost trend rate (employees under 65) | N/A | N/A | N/A | 6.49% | 6.64% | 6.91% | ||||||||||||||||||
Ultimate health care cost trend rate | N/A | N/A | N/A | 4.50% | 4.50% | 4.50% | ||||||||||||||||||
Year ultimate trend reached | N/A | N/A | N/A | 2028 | 2028 | 2028 |
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| Pension | OPEB | ||||
Percentages | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 |
Discount rate | 3.94% | 4.72% | 3.78% | 3.74% | 4.47% | 3.48% |
Expected return on plan assets | 7.50% | 7.50% | 7.50% | N/A | N/A | N/A |
Compensation increase | 4.00% | 4.00% | 3.43% | N/A | N/A | N/A |
Health care cost trend rate (employees under 65) | N/A | N/A | N/A | 6.34% | 6.49% | 6.64% |
Ultimate health care cost trend rate | N/A | N/A | N/A | 4.50% | 4.50% | 4.50% |
Year ultimate trend reached | N/A | N/A | N/A | 2028 | 2028 | 2028 |
The discount rate was based on a yield curve of high quality corporate bonds with cash flows matching our plans’ expected benefit payments. 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 return on pension plan assets, net of fees, was approximately (1)% in 2015, 6% in 2014, and 17% in 2013, and 13% in 2012.2013.
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 20152016 assumed health care cost trend rate for employees under 65 is 6.49%6.34%. It is assumed the rate will decrease gradually to an ultimate rate of 4.5% in 2028 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:
Millions | One % pt. Increase | One % pt. Decrease | ||||||
Effect on total service and interest cost components | $ | 1 | $ | (1) | ||||
Effect on accumulated benefit obligation | 19 | (16) |
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Millions | One % pt. | One % pt. | ||
Effect on total service and interest cost components | $ | 1 | $ | (1) |
Effect on accumulated benefit obligation |
| 17 |
| (14) |
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:
Pension | ||||||||||||
Millions | Qualified | Non-qualified | OPEB | |||||||||
2013 | $ | 200 | $ | 16 | $ | 23 | ||||||
2014 | 200 | 33 | 25 |
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| Pension |
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| |||
Millions | Qualified | Non-qualified | OPEB | ||||
2014 | $ | 200 | $ | 33 | $ | 25 | |
2015 |
| 100 |
| 19 |
| 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 20142015 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 20152016 supplemental pension and OPEB payments will be made from cash generated from operations.
Benefit Payments
The following table details expected benefit payments for the years 20152016 through 2024:2025:
Millions | Pension | OPEB | ||||||
2015 | $ | 180 | $ | 23 | ||||
2016 | 186 | 23 | ||||||
2017 | 191 | 23 | ||||||
2018 | 196 | 23 | ||||||
2019 | 201 | 23 | ||||||
Years 2020 - 2024 | 1,069 | 107 |
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Millions | Pension | OPEB | ||
2016 | $ | 191 | $ | 23 |
2017 |
| 194 |
| 23 |
2018 |
| 198 |
| 23 |
2019 |
| 202 |
| 23 |
2020 |
| 205 |
| 22 |
Years 2021 - 2025 |
| 1,077 |
| 102 |
Asset Allocation Strategy
Our pension plan asset allocation at December 31, 20142015 and 2013,2014, and target allocation for 2015,2016, are as follows:
Target | Percentage of Plan Assets December 31, | |||||||||||
Allocation 2015 | 2014 | 2013 | ||||||||||
Equity securities | 60% to 70% | 68% | 70% | |||||||||
Debt securities | 20% to 30% | 23 | 21 | |||||||||
Real estate | 2% to 8% | 4 | 4 | |||||||||
Commodities | 4% to 6% | 5 | 5 | |||||||||
Total | 100% | 100% | ||||||||||
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| Percentage of Plan Assets | |
| Target |
| December 31, | |
| Allocation 2016 |
| 2015 | 2014 |
Equity securities | 60% to 70% |
| 67% | 68% |
Debt securities | 20% to 30% |
| 23 | 23 |
Real estate | 2% to 8% |
| 6 | 4 |
Commodities | 4% to 6% |
| 4 | 5 |
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%. While we believe we can achieve a long-term average rate of return of 7.5%, 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, if 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 of December 31, 2015 and A+ as of December 31, 2014 and 2013.2014. 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 12 years at both December 31, 20142015 and 2013.2014.
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.
Registered Investment Companies – Registered Investment Companies are real estate investments and bond investments 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 investments are classified as Level 1 investments. The bond investments 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.
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 U.S. 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 income securities issued by U.S. and non-U.S. corporations as well as state local, and non-U.S.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 theeach partnership’s net asset value (NAV) per share,, which is derived from the valuation method described here. The Plan’s holdings of limited partnership interests are classified as Level 3 investments.
Real Estate Partnerships– Most of the Plan’s real estate investments are interestspartnership interests. The Real Estate Partnership category also includes real estate investments held in partnerships or
other commingled funds.similar structures such as private real estate investment trusts and limited liability companies. 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 per share,for each investment, which is derived from the valuation methodmethods described here. The Plan’s interests in private real estate partnerships, investment trusts, and other commingled fundslimited liability companies are classified as Level 3 investments.
CommonCollective Trust and Other FundsFunds – CommonCollective trust funds are comprised of shares or units in commingled funds that are not publicly traded. The underlying assets in these funds (U.S. stock funds, non-U.S. stock funds, commodity funds, and short term investment funds) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. HoldingsThe Plan’s holdings of common trust funds are classified as Level 2 investments.
This category also includes investments in limited liability companies that invest in publicly-traded convertible securities, commodities, and other assets.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.
67
As of December 31, 2015, 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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| ||
| in Active |
| Other |
| Significant |
|
| ||||
| Markets for |
| Observable |
| Unobservable |
|
| ||||
| Identical Inputs |
| Inputs |
| Inputs |
|
|
| |||
Millions | (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Plan assets: |
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|
|
|
|
|
|
|
|
Temporary cash investments | $ | 13 |
| $ | - |
| $ | - |
| $ | 13 |
Registered investment companies |
| 179 |
|
| 270 |
|
| - |
|
| 449 |
Federal government securities |
| - |
|
| 125 |
|
| - |
|
| 125 |
Bonds & debentures |
| - |
|
| 383 |
|
| - |
|
| 383 |
Corporate stock |
| 1,034 |
|
| 7 |
|
| - |
|
| 1,041 |
Venture capital and buyout partnerships |
| - |
|
| - |
|
| 256 |
|
| 256 |
Real estate partnerships |
| - |
|
| - |
|
| 199 |
|
| 199 |
Collective trust and other funds |
| - |
|
| 1,075 |
|
| - |
|
| 1,075 |
Total plan assets at fair value | $ | 1,226 |
| $ | 1,860 |
| $ | 455 |
|
| 3,541 |
Other assets [a] |
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|
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|
| 3 |
Total plan assets |
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| $ | 3,544 |
[a] | Other assets include accrued receivables and pending broker settlements. |
As of December 31, 2014, the pension plan assets measured at fair value on a recurring basis were as follows:
Millions | Quoted Prices in Active Markets for Identical Inputs (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
Plan assets: | ||||||||||||||||
Temporary cash investments | $ | 22 | $ | - | $ | - | $ | 22 | ||||||||
Registered investment companies | 12 | 282 | - | 294 | ||||||||||||
Federal government securities | - | 163 | - | 163 | ||||||||||||
Bonds & debentures | - | 381 | - | 381 | ||||||||||||
Corporate stock | 1,076 | 15 | - | 1,091 | ||||||||||||
Venture capital and buyout partnerships | - | - | 234 | 234 | ||||||||||||
Real estate partnerships | - | - | 139 | 139 | ||||||||||||
Common trust and other funds | - | 1,340 | - | 1,340 | ||||||||||||
Total plan assets at fair value | $ | 1,110 | $ | 2,181 | $ | 373 | 3,664 | |||||||||
Other assets [a] | (10) | |||||||||||||||
Total plan assets | $ | 3,654 | ||||||||||||||
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| Quoted Prices |
| Significant |
|
|
|
|
|
| ||
| in Active |
| Other |
| Significant |
|
| ||||
| Markets for |
| Observable |
| Unobservable |
|
| ||||
| Identical Inputs |
| Inputs |
| Inputs |
|
|
| |||
Millions | (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Plan assets: |
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|
|
|
|
|
|
|
|
|
|
Temporary cash investments | $ | 22 |
| $ | - |
| $ | - |
| $ | 22 |
Registered investment companies |
| 12 |
|
| 282 |
|
| - |
|
| 294 |
Federal government securities |
| - |
|
| 163 |
|
| - |
|
| 163 |
Bonds & debentures |
| - |
|
| 381 |
|
| - |
|
| 381 |
Corporate stock |
| 1,076 |
|
| 15 |
|
| - |
|
| 1,091 |
Venture capital and buyout partnerships |
| - |
|
| - |
|
| 234 |
|
| 234 |
Real estate partnerships |
| - |
|
| - |
|
| 139 |
|
| 139 |
Collective trust and other funds |
| - |
|
| 1,340 |
|
| - |
|
| 1,340 |
Total plan assets at fair value | $ | 1,110 |
| $ | 2,181 |
| $ | 373 |
|
| 3,664 |
Other assets [a] |
|
|
|
|
|
|
|
|
|
| (10) |
Total plan assets |
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|
|
|
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| $ | 3,654 |
[a] | Other assets include accrued receivables and pending broker settlements. |
As of December 31, 2013, the pension plan assets measured at fair value on a recurring basis were as follows:
Millions | Quoted Prices in Active Markets for Identical Inputs (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
Plan assets: | ||||||||||||||||
Temporary cash investments | $ | 16 | $ | - | $ | - | $ | 16 | ||||||||
Registered investment companies | 11 | 253 | - | 264 | ||||||||||||
Federal government securities | - | 126 | - | 126 | ||||||||||||
Bonds & debentures | - | 310 | - | 310 | ||||||||||||
Corporate stock | 983 | 16 | - | 999 | ||||||||||||
Venture capital and buyout partnerships | - | - | 213 | 213 | ||||||||||||
Real estate partnerships | - | - | 139 | 139 | ||||||||||||
Common trust and other funds | - | 1,357 | - | 1,357 | ||||||||||||
Total plan assets at fair value | $ | 1,010 | $ | 2,062 | $ | 352 | 3,424 | |||||||||
Other assets [a] | 5 | |||||||||||||||
Total plan assets | $ | 3,429 | ||||||||||||||
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For the years ended December 31, 20142015 and 2013,2014, there were no significant transfers in or out of Levels 1, 2, or 3.
68
The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3 investments) during 2015:
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| Venture Capital |
|
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|
| |||
| 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 |
The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3 investments) during 2014:
Millions | Venture Capital and Buyout Partnerships | Real Estate 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 | ||||||
The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3 investments) during 2013:
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| Venture Capital |
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| |||||||||||||||
and Buyout |
| Real Estate |
|
| ||||||||||||||||
Millions | Venture Capital and Buyout Partnerships | Real Estate Partnerships | Total | Partnerships |
| Partnerships |
| Total | ||||||||||||
Beginning balance - January 1, 2013 | $ | 179 | $ | 143 | $ | 322 | ||||||||||||||
Beginning balance - January 1, 2014 | $ | 213 |
| $ | 139 |
| $ | 352 | ||||||||||||
Realized gain | 7 | 8 | 15 |
| 17 |
|
| 8 |
|
| 25 | |||||||||
Unrealized gain | 24 | 3 | 27 |
| 5 |
|
| 6 |
|
| 11 | |||||||||
Purchases | 43 | 23 | 66 |
| 54 |
|
| 19 |
|
| 73 | |||||||||
Sales | (40) | (38) | (78) |
| (55) |
|
| (33) |
|
| (88) | |||||||||
Ending balance - December 31, 2013 | $ | 213 | $ | 139 | $ | 352 | ||||||||||||||
Ending balance - December 31, 2014 | $ | 234 |
| $ | 139 |
| $ | 373 |
Other Retirement Programs
401(k)/Thrift Plan – 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 percent of compensation contributed. Our plan contributions were $20 million in 2015, $19 million in 2014, and $18 million in 2013, and $15 million in 2012.2013.
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 $749 million in 2015, $711 million in 2014, and $670 million in 2013, and $644 million in 2012.2013.
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 $46 million in 2015, $52 million in 2014, and $57 million in 2013, and $62 million in 2012.2013.
7. Other Income
Other income included the following for the years ended December 31:
Millions | 2014 [a] | 2013 [b] | 2012 | |||||||||||
Rental income | $ | 96 | $ | 106 | $ | 83 | ||||||||
Net gain on non-operating asset dispositions | 69 | 32 | 29 | |||||||||||
Interest income | 4 | 4 | 3 | |||||||||||
Non-operating environmental costs and other | (18) | (14) | (7) | |||||||||||
Total | $ | 151 | $ | 128 | $ | 108 | ||||||||
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|
|
Millions | 2015 | 2014 | 2013 | ||||
Net gain on non-operating asset dispositions [a] | $ | 144 | $ | 69 | $ | 32 | |
Rental income [b] |
| 96 |
| 96 |
| 106 | |
Interest income |
| 5 |
| 4 |
| 4 | |
Non-operating environmental costs and other [c] |
| (19) |
| (18) |
| (14) | |
Total | $ | 226 | $ | 151 | $ | 128 |
| 2015 includes $113 million related to a real estate sale. |
[b] | 2013 includes $17 million related to a land lease contract settlement. |
[c] | 2014 includes $14 million related to the sale of a permanent easement. |
69
|
8. Income Taxes
Components of income tax expense were as follows for the years ended December 31:
Millions | 2014 | 2013 | 2012 | |||||||||
Current tax expense: | ||||||||||||
Federal | $ | 2,029 | $ | 1,738 | $ | 1,335 | ||||||
State | 239 | 199 | 153 | |||||||||
Total current tax expense | 2,268 | 1,937 | 1,488 | |||||||||
Deferred tax expense: | ||||||||||||
Federal | 667 | 659 | 760 | |||||||||
State | 136 | 119 | 120 | |||||||||
Total deferred tax expense | 803 | 778 | 880 | |||||||||
Unrecognized tax benefits: | ||||||||||||
Federal | 86 | (54) | 5 | |||||||||
State | 6 | (1) | 2 | |||||||||
Total unrecognized tax benefits expense/(benefits) | 92 | (55) | 7 | |||||||||
Total income tax expense | $ | 3,163 | $ | 2,660 | $ | 2,375 | ||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
Millions | 2015 | 2014 | 2013 | |||
Current tax expense: |
|
|
|
|
|
|
Federal | $ | 1,901 | $ | 2,019 | $ | 1,727 |
State |
| 210 |
| 239 |
| 199 |
Foreign |
| 8 |
| 10 |
| 11 |
Total current tax expense |
| 2,119 |
| 2,268 |
| 1,937 |
Deferred and other tax expense: |
|
|
|
|
|
|
Federal |
| 644 |
| 753 |
| 605 |
State |
| 121 |
| 142 |
| 118 |
Total deferred and other tax expense |
| 765 |
| 895 |
| 723 |
Total income tax expense | $ | 2,884 | $ | 3,163 | $ | 2,660 |
For the years ended December 31, reconciliations between statutory and effective tax rates are as follows:
Tax Rate Percentages | 2014 | 2013 | 2012 | |||||||||
Federal statutory tax rate | 35.0% | 35.0% | 35.0% | |||||||||
State statutory rates, net of federal benefits | 3.1 | 3.1 | 3.1 | |||||||||
Deferred tax adjustments | - | (0.1) | (0.1) | |||||||||
Tax credits | (0.4) | (0.2) | (0.5) | |||||||||
Other | 0.2 | (0.1) | 0.1 | |||||||||
Effective tax rate | 37.9% | 37.7% | 37.6% | |||||||||
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|
|
|
|
|
|
|
Tax Rate Percentages | 2015 |
| 2014 |
| 2013 |
|
Federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % |
State statutory rates, net of federal benefits | 3.1 |
| 3.1 |
| 3.1 |
|
Tax credits | (0.5) |
| (0.4) |
| (0.2) |
|
Deferred tax adjustments | - |
| - |
| (0.1) |
|
Other | 0.1 |
| 0.2 |
| (0.1) |
|
Effective tax rate | 37.7 | % | 37.9 | % | 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.
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Deferred income tax (liabilities)/assets were comprised of the following at December 31:
Millions | 2014 | 2013 | ||||||
Deferred income tax liabilities: | ||||||||
Property | $ | (15,173) | $ | (14,448) | ||||
Other | (411) | (260) | ||||||
Total deferred income tax liabilities | (15,584) | (14,708) | ||||||
Deferred income tax assets: | ||||||||
Accrued wages | 74 | 71 | ||||||
Accrued casualty costs | 228 | 223 | ||||||
Accrued stock compensation | 69 | 66 | ||||||
Debt and leases | 86 | 41 | ||||||
Retiree benefits | 392 | 100 | ||||||
Credits | 164 | 182 | ||||||
Other | 168 | 130 | ||||||
Total deferred income tax assets | $ | 1,181 | $ | 813 | ||||
Net deferred income tax liability | $ | (14,403) | $ | (13,895) | ||||
Current portion of deferred taxes | $ | 277 | $ | 268 | ||||
Non-current portion of deferred taxes | (14,680) | (14,163) | ||||||
Net deferred income tax liability | $ | (14,403) | $ | (13,895) | ||||
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|
|
|
|
|
|
|
|
Millions | 2015 | 2014 | ||
Deferred income tax liabilities: |
|
|
|
|
Property | $ | (16,079) | $ | (15,173) |
Other |
| (352) |
| (411) |
Total deferred income tax liabilities |
| (16,431) |
| (15,584) |
Deferred income tax assets: |
|
|
|
|
Accrued wages |
| 76 |
| 74 |
Accrued casualty costs |
| 237 |
| 228 |
Stock compensation |
| 72 |
| 69 |
Debt and leases |
| 149 |
| 86 |
Retiree benefits |
| 204 |
| 392 |
Credits |
| 156 |
| 164 |
Other |
| 296 |
| 168 |
Total deferred income tax assets [a] | $ | 1,190 | $ | 1,181 |
Net deferred income tax liability | $ | (15,241) | $ | (14,403) |
[a] | Prior to the adoption of Accounting Standard Update (ASU) 2015-17, deferred tax assets were required to be presented as current and non-current on the Consolidated Statement of Financial Position. In 2015, UP adopted ASU 2015-17 retrospectively. Current deferred income tax assets at December 31, 2014 of $277 million were reclassified from current to non-current for 2015 presentation. |
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 20142015 and 2013,2014, 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:
Millions | 2014 | 2013 | 2012 | |||||||||
Unrecognized tax benefits at January 1 | $ | 59 | $ | 115 | $ | 107 | ||||||
Increases for positions taken in current year | 92 | 24 | 29 | |||||||||
Increases for positions taken in prior years | 21 | 15 | 4 | |||||||||
Decreases for positions taken in prior years | (14) | (30) | (19) | |||||||||
Payments to and settlements with taxing authorities | (7) | (63) | - | |||||||||
Increases/(decreases) for interest and penalties | 1 | - | (4) | |||||||||
Lapse of statutes of limitations | (1) | (2) | (2) | |||||||||
Unrecognized tax benefits at December 31 | $ | 151 | $ | 59 | $ | 115 | ||||||
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|
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|
|
|
|
|
|
|
|
|
|
Millions | 2015 | 2014 | 2013 | |||
Unrecognized tax benefits at January 1 | $ | 151 | $ | 59 | $ | 115 |
Increases for positions taken in current year |
| 38 |
| 92 |
| 24 |
Increases for positions taken in prior years |
| 13 |
| 22 |
| 15 |
Decreases for positions taken in prior years |
| (87) |
| (14) |
| (35) |
Payments to and settlements with taxing authorities |
| (13) |
| (8) |
| (58) |
Increases/(decreases) for interest and penalties |
| (5) |
| 1 |
| - |
Lapse of statutes of limitations |
| (3) |
| (1) |
| (2) |
Unrecognized tax benefits at December 31 | $ | 94 | $ | 151 | $ | 59 |
We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest and penalties were $2 million and $6 million at both December 31, 2015 and 2014, and 2013.respectively. Total interest and penalties recognized as part of income tax expense (benefit) were $(3) million for 2015, $9 million for 2014, and $7 million for 2013, and $(4) million for 2012.2013.
Internal Revenue Service (IRS) examinations have been completed and settled for all years prior to 2009,2011, and the statute of limitations bars any additional tax assessments. TheUPC is not currently under audit by the Internal Revenue Service.
In the third quarter of 2015, UPC and the IRS has completed their examinations and issued notices of deficiencysigned a closing agreement resolving all tax matters for tax
71
years 2009 through 2010. We disagree with many of their proposed adjustments, and we are at IRS Appeals for those years. Additionally, several state tax authorities are examining2009-2010. The settlement had an immaterial effect on our state income tax returns for years 2006 through 2010.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.
In 2012, UPC and the IRS signed a closing agreement resolving all
Several state tax matters for tax years 1999-2004. The settlement had an immaterial effect onauthorities are examining our state income tax expense. In connection with the settlement, we received refunds of $8 million in 2013.returns for years 2006 through 2012.
We do not expect our unrecognized tax benefits to change significantly in the next 12 months. At December 31, 2014,2015, we had a net unrecognized tax benefit liability of $151$94 million. Of that amount, $6 million is classified as a current liability in the Consolidated Statement of Financial Position.
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:
Millions | 2014 | 2013 | 2012 | |||||||||
Unrecognized tax benefits that would reduce the effective tax rate | $ | 33 | $ | 34 | $ | 41 | ||||||
Unrecognized tax benefits that would not reduce the effective tax rate | 118 | 25 | 74 | |||||||||
Total unrecognized tax benefits | $ | 151 | $ | 59 | $ | 115 | ||||||
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|
|
|
|
|
|
Millions | 2015 | 2014 | 2013 | |||
Unrecognized tax benefits that would reduce the effective tax rate | $ | 31 | $ | 33 | $ | 34 |
Unrecognized tax benefits that would not reduce the effective tax rate |
| 63 |
| 118 |
| 25 |
Total unrecognized tax benefits | $ | 94 | $ | 151 | $ | 59 |
9. Earnings Per Share
The following table provides a reconciliation between basic and diluted earnings per share for the years ended December 31:
Millions, Except Per Share Amounts | 2014 | 2013 | 2012 | |||||||||
Net income | $ | 5,180 | $ | 4,388 | $ | 3,943 | ||||||
Weighted-average number of shares outstanding: | ||||||||||||
Basic | 897.1 | 926.5 | 946.2 | |||||||||
Dilutive effect of stock options | 2.1 | 2.4 | 3.6 | |||||||||
Dilutive effect of retention shares and units | 1.9 | 2.6 | 3.1 | |||||||||
Diluted | 901.1 | 931.5 | 952.9 | |||||||||
Earnings per share – basic | $ | 5.77 | $ | 4.74 | $ | 4.17 | ||||||
Earnings per share – diluted | $ | 5.75 | $ | 4.71 | $ | 4.14 |
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|
|
|
Millions, Except Per Share Amounts | 2015 | 2014 | 2013 | |||
Net income | $ | 4,772 | $ | 5,180 | $ | 4,388 |
Weighted-average number of shares outstanding: |
|
|
|
|
|
|
Basic |
| 866.2 |
| 897.1 |
| 926.5 |
Dilutive effect of stock options |
| 1.5 |
| 2.1 |
| 2.4 |
Dilutive effect of retention shares and units |
| 1.7 |
| 1.9 |
| 2.6 |
Diluted |
| 869.4 |
| 901.1 |
| 931.5 |
Earnings per share – basic | $ | 5.51 | $ | 5.77 | $ | 4.74 |
Earnings per share – diluted | $ | 5.49 | $ | 5.75 | $ | 4.71 |
Common stock options totaling 1.1 million, 0.4 million, and 0.5 million for 2015, 2014, and 1.1 million for 2014, 2013, and 2012, 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):
Millions | Defined benefit plans | Foreign currency translation | Derivatives | Total | ||||||||||||
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), net of taxes of $291 million | (448) | (12) | - | (460) | ||||||||||||
Balance at December 31, 2014 | $ | (1,161) | $ | (49) | $ | - | $ | (1,210) | ||||||||
| ||||||||||||||||
Balance at January 1, 2013 | $ | (1,149) | $ | (36) | $ | (1) | $ | (1,186) | ||||||||
Other comprehensive income/(loss) before reclassifications | (1) | (1) | 1 | (1) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | 437 | - | - | 437 | ||||||||||||
Net year-to-date other comprehensive income/(loss), net of taxes of ($264) million | 436 | (1) | 1 | 436 | ||||||||||||
Balance at December 31, 2013 | $ | (713) | $ | (37) | $ | - | $ | (750) | ||||||||
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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) | |
|
|
|
|
|
|
|
|
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) |
[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, 2014,2015, and 2013,2014, our accounts receivable were reduced by $5 million and $1 million, respectively.million. 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 December 31, 2014,2015, and 2013,2014, receivables classified as other assets were reduced by allowances of $16$11 million and $22$16 million, respectively.
Receivables Securitization Facility– On July 29, 2014, we completed the renewal of our receivables securitization facility. The newRailroad maintains a $650 million, 3-year receivables securitization facility replaces the prior $600 million, 364-day facility. Under the facility, the Railroadmaturing 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 and $0 at both December 31, 2014,2015, and December 31, 2013, respectively.2014. The facility was supported by $1.2$0.9 billion and $1.1$1.2 billion of accounts receivable as collateral at December 31, 2014,2015, and December 31, 2013,2014, 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 issuingissuance costs, and fees of participating banks for unused commitment availability. The costs of the
73
receivables securitization facility are included in interest expense and were $5 million, $4 million and $5 million for 2015, 2014, and $3 million for 2014, 2013, and 2012, 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):
Millions, Except Estimated Useful Life As of December 31, 2014 | Cost | Accumulated Depreciation | Net Book Value | Estimated Useful Life | ||||||||||||
Land | $ | 5,194 | $ | N/A | $ | 5,194 | N/A | |||||||||
Road: | ||||||||||||||||
Rail and other track material | 14,588 | 5,241 | 9,347 | 33 | ||||||||||||
Ties | 9,102 | 2,450 | 6,652 | 33 | ||||||||||||
Ballast | 4,826 | 1,264 | 3,562 | 34 | ||||||||||||
Other roadway [a] | 16,476 | 2,852 | 13,624 | 47 | ||||||||||||
Total road | 44,992 | 11,807 | 33,185 | N/A | ||||||||||||
Equipment: | ||||||||||||||||
Locomotives | 8,276 | 3,694 | 4,582 | 20 | ||||||||||||
Freight cars | 2,116 | 968 | 1,148 | 25 | ||||||||||||
Work equipment and other | 684 | 153 | 531 | 18 | ||||||||||||
Total equipment | 11,076 | 4,815 | 6,261 | N/A | ||||||||||||
Technology and other | 872 | 320 | 552 | 10 | ||||||||||||
Construction in progress | 1,080 | - | 1,080 | N/A | ||||||||||||
Total | $ | 63,214 | $ | 16,942 | $ | 46,272 | N/A | |||||||||
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Millions, Except Estimated Useful Life |
| Accumulated | Net Book | Estimated | ||||
As of December 31, 2015 | Cost | Depreciation | Value | Useful Life | ||||
Land | $ | 5,195 | $ | N/A | $ | 5,195 | N/A | |
Road: |
|
|
|
|
|
|
| |
Rail and other track material |
| 15,236 |
| 5,495 |
| 9,741 | 37 | |
Ties |
| 9,439 |
| 2,595 |
| 6,844 | 33 | |
Ballast |
| 5,024 |
| 1,350 |
| 3,674 | 34 | |
Other roadway [a] |
| 17,374 |
| 3,021 |
| 14,353 | 47 | |
Total road |
| 47,073 |
| 12,461 |
| 34,612 | N/A | |
Equipment: |
|
|
|
|
|
|
| |
Locomotives |
| 9,027 |
| 3,726 |
| 5,301 | 19 | |
Freight cars |
| 2,203 |
| 962 |
| 1,241 | 24 | |
Work equipment and other |
| 897 |
| 191 |
| 706 | 19 | |
Total equipment |
| 12,127 |
| 4,879 |
| 7,248 | N/A | |
Technology and other |
| 919 |
| 358 |
| 561 | 11 | |
Construction in progress |
| 1,250 |
| - |
| 1,250 | N/A | |
Total | $ | 66,564 | $ | 17,698 | $ | 48,866 | N/A |
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|
Millions, Except Estimated Useful Life |
| Accumulated | Net Book | Estimated | ||||
As of December 31, 2014 | Cost | Depreciation | Value | Useful Life | ||||
Land | $ | 5,194 | $ | N/A | $ | 5,194 | N/A | |
Road: |
|
|
|
|
|
|
| |
Rail and other track material |
| 14,588 |
| 5,241 |
| 9,347 | 33 | |
Ties |
| 9,102 |
| 2,450 |
| 6,652 | 33 | |
Ballast |
| 4,826 |
| 1,264 |
| 3,562 | 34 | |
Other roadway [a] |
| 16,476 |
| 2,852 |
| 13,624 | 47 | |
Total road |
| 44,992 |
| 11,807 |
| 33,185 | N/A | |
Equipment: |
|
|
|
|
|
|
| |
Locomotives |
| 8,276 |
| 3,694 |
| 4,582 | 20 | |
Freight cars |
| 2,116 |
| 968 |
| 1,148 | 25 | |
Work equipment and other |
| 684 |
| 153 |
| 531 | 18 | |
Total equipment |
| 11,076 |
| 4,815 |
| 6,261 | N/A | |
Technology and other |
| 872 |
| 320 |
| 552 | 10 | |
Construction in progress |
| 1,080 |
| - |
| 1,080 | N/A | |
Total | $ | 63,214 | $ | 16,942 | $ | 46,272 | N/A |
[a] | Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets. |
Millions, Except Estimated Useful Life As of December 31, 2013 Accumulated Depreciation Net Book Value Estimated Useful Life Land Road: Rail and other track material Ties Ballast Other roadway [a] Total road Equipment: Locomotives Freight cars Work equipment and other Total equipment Technology and other Construction in progress Total Cost $ 5,120 $ N/A $ 5,120 N/A 13,861 4,970 8,891 35 8,785 2,310 6,475 33 4,621 1,171 3,450 34 15,596 2,726 12,870 48 42,863 11,177 31,686 N/A 7,518 3,481 4,037 20 2,085 1,000 1,085 25 561 119 442 18 10,164 4,600 5,564 N/A 711 286 425 10 954 - 954 N/A $ 59,812 $ 16,063 $ 43,749 N/A
|
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
74
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. |
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 using (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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appropriate statistical bases. Total expense for repairs and maintenance incurred was $2.5 billion for 2015, $2.4 billion for 2014, and $2.3 billion for 2013, and $2.1 billion for 2012.2013.
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, | ||
Millions | 2015 | 2014 | ||
Accounts payable | $ | 743 | $ | 877 |
Income and other taxes payable |
| 434 |
| 412 |
Accrued wages and vacation |
| 391 |
| 409 |
Interest payable |
| 208 |
| 178 |
Accrued casualty costs |
| 181 |
| 249 |
Equipment rents payable |
| 105 |
| 100 |
Dividends payable [a] |
| - |
| 438 |
Other |
| 550 |
| 640 |
Total accounts payable and other current liabilities | $ | 2,612 | $ | 3,303 |
[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.
Millions | Dec. 31, 2014 | Dec. 31, 2013 | ||||||
Accounts payable | $ | 877 | $ | 803 | ||||
Dividends payable | 438 | 356 | ||||||
Income and other taxes payable | 412 | 491 | ||||||
Accrued wages and vacation | 409 | 385 | ||||||
Accrued casualty costs | 249 | 207 | ||||||
Interest payable | 178 | 169 | ||||||
Equipment rents payable | 100 | 96 | ||||||
Other | 640 | 579 | ||||||
Total accounts payable and other current liabilities | $ | 3,303 | $ | 3,086 | ||||
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 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, 2014,2015, and 2013,2014, 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’s fair value attributable to the changes in interest rates. We account for swaps 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, 2014,2015, and 2013,2014, 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. At December 31, 2014, and 2013, we had reductions of $0 and $1 million, respectively, recorded as an accumulated other comprehensive loss. As of December 31, 2014,2015, and 2013,2014, 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 years ended December 31, 2015, 2014, 2013, and 2012.2013.
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, the fair value of total debt was $15.2 billion, approximately $1.0 billion more than the carrying value. At December 31, 2014, the fair value of total debt was $13.0 billion, approximately $1.5 billion more than the carrying value. At December 31, 2013, the fair value of total debt was $10.2 billion, approximately $0.6 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, and 2014, approximately $155 million and 2013, approximately $163 million, respectively, of debt securities contained call provisions that allow us to retire the debt instruments prior to final maturity, with the payment of fixed call premiums, or in certain cases, at par. The fair value of our cash equivalents approximates their carrying value due to the short-term maturities of these instruments.
15. Debt
Total debt as of December 31, 2014,2015, and 2013,2014, is summarized below:
Millions | 2014 | 2013 | ||||||
Notes and debentures, 2.3% to 7.9% due through 2054 | $ | 9,266 | $ | 8,068 | ||||
Capitalized leases, 3.1% to 8.4% due through 2028 | 1,520 | 1,702 | ||||||
Equipment obligations, 3.2% to 6.7% due through 2031 | 597 | 110 | ||||||
Receivables Securitization (Note 11) | 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 | 32 | ||||||
Tax-exempt financings - floating rate, due in 2015 | 8 | 12 | ||||||
Unamortized discount | (591) | (604) | ||||||
Total debt | 11,480 | 9,577 | ||||||
Less: current portion | (462) | (705) | ||||||
Total long-term debt | $ | 11,018 | $ | 8,872 | ||||
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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 |
[a] | Includes deferred debt issuance costs of $89 million and $67 million as of December 31, 2015, and 2014, respectively, as a result of the retrospective adoption of Accounting Standard Update (ASU) 2015-03 on December 31, 2015. Prior to the ASU adoption, deferred debt issuance costs were presented in other assets. |
Debt Maturities – The following table presents aggregate debt maturities as of December 31, 2014,2015, excluding market value adjustments:
Millions | ||||
2015 | $ | 462 | ||
2016 | 606 | |||
2017 | 1,065 | |||
2018 | 578 | |||
2019 | 652 | |||
Thereafter | 8,117 | |||
Total debt | $ | 11,480 | ||
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|
|
Millions |
|
|
2016 | $ | 594 |
2017 |
| 1,052 |
2018 |
| 566 |
2019 |
| 637 |
2020 |
| 1,034 |
Thereafter |
| 10,318 |
Total debt | $ | 14,201 |
Equipment Encumbrances– Equipment with a carrying value of approximately $2.8$2.6 billion and $2.9$2.8 billion at December 31, 2014,2015, and 2013,2014, 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 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– During the second quarter of 2014, we replaced our $1.8 billion revolving credit facility, which was scheduled to expire in May 2015, with a new $1.7 billion facility that expires in May 2019 (the facility). The facility is based on substantially similar terms as those in the previous credit facility. OnAt December 31, 2014,2015, we had $1.7 billion of credit available under the facility, which is designated for general corporate purposes and supports the issuance of commercial paper. We did not draw on eitherthe facility at any time during 2014.2015. 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 that the CorporationUPC to maintain a debt-to-net-worth coverage ratio as a condition to making a borrowing. At December 31, 2014, and December 31, 2013 (and at all times during the year), we were in compliance with this covenant. 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, 2014,2015, the debt-to-net-worth coverage ratio allowed us to carry up to $42.4$41.4 billion of debt (as defined in the facility), and we had $11.6$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 2014,2015, we did not issue or repay any commercial paper, and at December 31, 2014,2015, and 2013,2014, 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 $15.4$13.6 billion and $16.3$15.4 billion at December 31, 2014,2015, and 2013,2014, respectively.
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 2014,2015, we issued the following unsecured, fixed-rate debt securities under our current shelf registration:registrations:
| ||
Date | Description of Securities | |
January | $250 million of 1.80% Notes due February 1, 2020 | |
$450 million of 3.375% Notes due February 1, 2035 | ||
$450 million of 3.875% Notes due February 1, 2055 | ||
June 19, 2015 | $400 million of 2.250% Notes due June 19, 2020 | |
$300 million of | ||
October 29, 2015 | $200 million of reopened 3.250% Notes due August 15, 2025 | |
$500 million of 4.050% Notes due November 15, 2045 | ||
$400 million of | ||
| ||
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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, 2014,2015, we had remaining authority to issue up to $1.15$2.2 billion of debt securities under our shelf registration.
Subsequent Event– In 2015, we issued the following unsecured, fixed-rate debt securities under our current shelf registration:
| ||
| ||
Proceeds from this offering are for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase program. These debt securities include change-of-control provisions. This offering exhausted our current authority to issue debt securities under our existing shelf registration.
On February 5, 2015, the Board of Directors approved proceeding with a new shelf registration statement and authorized the issuance of up to $4.0 billion of debt securities.
Equipment Trust– On May 20, 2014,12, 2015, UPRR consummated a pass-through (P/T) financing, whereby a P/T trust was created, which issued $500$399 million of P/T trust certificates with a stated interest rate of 3.227%2.695%. The P/T trust certificates will mature on May 14, 2026.12, 2027. The proceeds from the issuance of the
P/T trust certificates (net of $3 million in transaction fees) were used to purchase equipment trust certificates to be issued by UPRR to finance the acquisition of 245182 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 three monthsyear ended September 30,December 31, 2013.
The following table lists the outstanding notes and debentures that were exchanged:
| ||||
Principal amount | ||||
| exchanged | |||
The 2024 Offers | ||||
7.000% Debentures due 2016 | $ | 8 | ||
5.650% Notes due 2017 | 38 | |||
5.750% Notes due 2017 | 70 | |||
5.700% Notes due 2018 | 103 | |||
7.875% Notes due 2019 | 20 | |||
6.125% Notes due 2020 | 238 | |||
The 2044 Offers | ||||
7.125% Debentures due 2028 | 73 | |||
6.625% Debentures due 2029 | 177 | |||
6.250% Debentures due 2034 | 19 | |||
6.150% Debentures due 2037 | 138 | |||
5.780% Notes due 2040 | 286 | |||
Total | $ | 1,170 | ||
Debt Redemption – On May 14, 2013, we redeemed all $40 million of our outstanding 5.65% Port of Corpus Christi Authority Revenue Refunding Bonds due December 1, 2022. The redemption resulted in an early extinguishment charge of $1 million in the second quarter of 2013.
Receivables Securitization Facility –As of both December 31, 20142015 and 2013,2014, we recorded $400 million and $0 of borrowings under our receivables securitization facility, respectively, 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 $3.0$2.6 billion as of December 31, 2014.2015.
17. Leases
We lease certain locomotives, freight cars, and other property. The Consolidated Statements of Financial Position as of December 31, 2015 and 2014 included $2,273 million, net of $1,189 million of accumulated depreciation, and 2013 included $2,454 million, net of $1,210 million of accumulated depreciation, and $2,486 million, net of $1,092 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, 2014,2015, were as follows:
Millions | Operating Leases | Capital Leases | ||||||
2015 | $ | 508 | $ | 253 | ||||
2016 | 484 | 249 | ||||||
2017 | 429 | 246 | ||||||
2018 | 356 | 224 | ||||||
2019 | 323 | 210 | ||||||
Later years | 1,625 | 745 | ||||||
Total minimum lease payments | $ | 3,725 | $ | 1,927 | ||||
Amount representing interest | N/A | (407) | ||||||
Present value of minimum lease payments | N/A | $ | 1,520 | |||||
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Millions | Operating | Capital | ||
2016 | $ | 491 | $ | 217 |
2017 |
| 446 |
| 220 |
2018 |
| 371 |
| 198 |
2019 |
| 339 |
| 184 |
2020 |
| 282 |
| 193 |
Later years |
| 1,501 |
| 575 |
Total minimum lease payments | $ | 3,430 | $ | 1,587 |
Amount representing interest |
| N/A |
| (319) |
Present value of minimum lease payments |
| N/A | $ | 1,268 |
Approximately 95% of capital lease payments relate to locomotives. Rent expense for operating leases with terms exceeding one month was $590 million in 2015, $593 million in 2014, and $618 million in 2013, and $631 million in 2012.2013. 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; however, toliquidity. 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 have recorded a liability.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 93%94% of the recorded liability is related to asserted claims and
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approximately 7%6% is related to unasserted claims at December 31, 2014.2015. 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 $335$318 million to $368$345 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:
Millions | 2014 | 2013 | 2012 | |||||||||
Beginning balance | $ | 294 | $ | 334 | $ | 368 | ||||||
Current year accruals | 96 | 87 | 121 | |||||||||
Changes in estimates for prior years | 9 | (38) | (58) | |||||||||
Payments | (64) | (89) | (97) | |||||||||
Ending balance at December 31 | $ | 335 | $ | 294 | $ | 334 | ||||||
Current portion, ending balance at December 31 | $ | 111 | $ | 82 | $ | 95 | ||||||
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Millions | 2015 | 2014 | 2013 | |||
Beginning balance | $ | 335 | $ | 294 | $ | 334 |
Current year accruals |
| 89 |
| 96 |
| 87 |
Changes in estimates for prior years |
| (3) |
| 9 |
| (38) |
Payments |
| (103) |
| (64) |
| (89) |
Ending balance at December 31 | $ | 318 | $ | 335 | $ | 294 |
Current portion, ending balance at December 31 | $ | 63 | $ | 111 | $ | 82 |
In conjunction with the liability update performed in 2014,2015, we also reassessed our estimated insurance recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2014,2015, and 2013.2014.
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. |
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 21%22% of the recorded liability related to asserted claims and approximately 79%78% related to unasserted claims at December 31, 2014.2015. 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 $126$120 million to $135$129 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:
Millions | 2014 | 2013 | 2012 | |||||||||
Beginning balance | $ | 131 | $ | 139 | $ | 147 | ||||||
Accruals/(Credits) | 1 | 2 | (2) | |||||||||
Payments | (6) | (10) | (6) | |||||||||
Ending balance at December 31 | $ | 126 | $ | 131 | $ | 139 | ||||||
Current portion, ending balance at December 31 | $ | 8 | $ | 9 | $ | 8 | ||||||
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|
Millions | 2015 | 2014 | 2013 | |||
Beginning balance | $ | 126 | $ | 131 | $ | 139 |
Accruals/(Credits) |
| - |
| 1 |
| 2 |
Payments |
| (6) |
| (6) |
| (10) |
Ending balance at December 31 | $ | 120 | $ | 126 | $ | 131 |
Current portion, ending balance at December 31 | $ | 6 | $ | 8 | $ | 9 |
In conjunction with the liability update performed in 2014,2015, we also reassessed our estimated insurance recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2014,2015, and 2013.2014. 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 270290 sites at which we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 2931 sites that are the subject of actions taken by the U.S. government, 1619 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:
Millions | 2014 | 2013 | 2012 | |||||||||
Beginning balance | $ | 171 | $ | 170 | $ | 172 | ||||||
Accruals | 56 | 58 | 48 | |||||||||
Payments | (45) | (57) | (50) | |||||||||
Ending balance at December 31 | $ | 182 | $ | 171 | $ | 170 | ||||||
Current portion, ending balance at December 31 | $ | 60 | $ | 53 | $ | 50 | ||||||
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|
Millions | 2015 | 2014 | 2013 | |||
Beginning balance | $ | 182 | $ | 171 | $ | 170 |
Accruals |
| 61 |
| 56 |
| 58 |
Payments |
| (53) |
| (45) |
| (57) |
Ending balance at December 31 | $ | 190 | $ | 182 | $ | 171 |
Current portion, ending balance at December 31 | $ | 52 | $ | 60 | $ | 53 |
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, 2014,2015, and 2013,2014, we were contingently liable for $53 million and $82 million and $299 million in guarantees.guarantees, respectively. We have recorded liabilities of $0.3 million$0 and $1$0.3 million for the fair value of these obligations as of December 31, 2014,2015, and 2013,2014, respectively. We entered into these contingent guarantees in the normal course of business, and they include guaranteed obligations related to our equipment financings and 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 – Our maximum potential exposureWe are contingently obligated under a variety of indemnification arrangements, including certain tax indemnifications, can range from a specified dollar amount to an unlimited amount,although in some cases the extent of our potential liability is limited, depending on the nature of the transactions and
82
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 Federalfederal 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’sUPRR'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 dohave not reflectrecognized any amounts in the Consolidated Financial Statements as of December 31, 2014.2015.
19. Share Repurchase Program
Effective January 1, 2014, our Board of Directors authorized the repurchase of up to 120 million shares of our common stock by December 31, 2017, replacing our previous repurchase program. As of December 31, 2014,2015, we repurchased a total of $12.6$16.0 billion of our common stock since the commencement of our repurchase programs in 2007. The table below represents shares repurchased in 2013 under our previousthis repurchase program, and shares repurchased in 2014 under the new program.
Number of Shares Purchased | Average Price Paid | |||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||
First quarter | 7,640,000 | 5,762,800 | $ | 89.43 | $ | 68.29 | ||||||||||||
Second quarter | 8,320,000 | 6,122,940 | 96.84 | 75.71 | ||||||||||||||
Third quarter | 8,347,000 | 7,333,788 | 102.54 | 78.39 | ||||||||||||||
Fourth quarter | 7,736,400 | 9,858,110 | 113.77 | 79.68 | ||||||||||||||
Total | 32,043,400 | 29,077,638 | $ | 100.65 | $ | 76.26 | ||||||||||||
Remaining number of shares that may be repurchased under current authority |
| 87,956,600 | ||||||||||||||||
Management’s
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| Number of Shares Purchased | Average Price Paid | |||||
| 2015 | 2014 |
| 2015 |
| 2014 | |
First quarter | 6,881,455 | 7,640,000 | $ | 117.28 | $ | 89.43 | |
Second quarter | 7,975,100 | 8,320,000 |
| 104.62 |
| 96.84 | |
Third quarter | 13,800,700 | 8,347,000 |
| 89.65 |
| 102.54 | |
Fourth quarter | 6,646,899 | 7,736,400 |
| 88.19 |
| 113.77 | |
Total | 35,304,154 | 32,043,400 | $ | 98.14 | $ | 100.65 | |
Remaining number of shares that may be repurchased under current authority | 52,652,446 |
Management's assessments of market conditions and other pertinent factsfactors 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, 2015,2016, through February 6, 2015,4, 2016, we repurchased 2.83.7 million shares at an aggregate cost of approximately $327$268 million.
20. Related Parties
20.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 and $795 million recognized as investments related to TTX in our consolidated statements of financial position as of December 31, 2015 and 2014, respectively.TTX car hire expenses
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of $376 million in 2015, $350 million in 2014, and $326 million in 2013 are included in equipment and other rents in our consolidated statements of income. In addition, UPRR had accounts payable to TTX of $61 million and $53 million as of December 31, 2015 and 2014, respectively.
21. Selected Quarterly Data (Unaudited)
Millions, Except Per Share Amounts | ||||||||||||||||
2014 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | ||||||||||||
Operating revenues | $ | 5,638 | $ | 6,015 | $ | 6,182 | $ | 6,153 | ||||||||
Operating income | 1,854 | 2,196 | 2,330 | 2,373 | ||||||||||||
Net income | 1,088 | 1,291 | 1,370 | 1,431 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | 1.20 | 1.43 | 1.53 | 1.62 | ||||||||||||
Diluted | 1.19 | 1.43 | 1.53 | 1.61 | ||||||||||||
Millions, Except Per Share Amounts | ||||||||||||||||
2013 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | ||||||||||||
Operating revenues | $ | 5,290 | $ | 5,470 | $ | 5,573 | $ | 5,630 | ||||||||
Operating income | 1,633 | 1,878 | 1,962 | 1,973 | ||||||||||||
Net income | 957 | 1,106 | 1,151 | 1,174 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | 1.02 | 1.19 | 1.25 | 1.28 | ||||||||||||
Diluted | 1.02 | 1.18 | 1.24 | 1.27 |
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Millions, Except Per Share Amounts |
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2015 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | ||||
Operating revenues | $ | 5,614 | $ | 5,429 | $ | 5,562 | $ | 5,208 |
Operating income |
| 1,977 |
| 1,949 |
| 2,208 |
| 1,918 |
Net income |
| 1,151 |
| 1,204 |
| 1,300 |
| 1,117 |
Net income per share: |
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Basic |
| 1.31 |
| 1.38 |
| 1.51 |
| 1.31 |
Diluted |
| 1.30 |
| 1.38 |
| 1.50 |
| 1.31 |
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Millions, Except Per Share Amounts |
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2014 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | ||||
Operating revenues | $ | 5,638 | $ | 6,015 | $ | 6,182 | $ | 6,153 |
Operating income |
| 1,854 |
| 2,196 |
| 2,330 |
| 2,373 |
Net income |
| 1,088 |
| 1,291 |
| 1,370 |
| 1,431 |
Net income per share: |
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Basic |
| 1.20 |
| 1.43 |
| 1.53 |
| 1.62 |
Diluted |
| 1.19 |
| 1.43 |
| 1.53 |
| 1.61 |
Per share net income for the four quarters combined may not equal the per share net income for the year due to rounding.
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ItItemem 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ItItemem 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.
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MAMANAGEMENT’SNAGEMENT’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, 2014.2015. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control – Integrated Framework (2013).Based on our assessment, management believes that, as of December 31, 2014,2015, 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 5, 2015
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RREPORTEPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Union Pacific Corporation
Omaha, Nebraska
We have audited the internal control over financial reporting of Union Pacific Corporation and Subsidiary Companies (the Corporation) as of December 31, 2014,2015, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 accompanyingManagement’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
A company’scompany's internal control over financial reporting is a process designed by, or under the supervision of, the company’scompany's principal executive and principal financial officers, or persons performing similar functions, and effected by the company’scompany'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 the 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 prevented or detected on a timely basis. 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, 2014,2015, based on the criteria established inInternal 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, 2014,2015 of the Corporation and our report dated February 6, 20155, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule.
Omaha, Nebraska
February 6, 2015
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None.
IteItemm 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/investors/investor/governance. We intend to disclose any amendments to the Code or any waiver from a provision of the Code on our website.
ItItemem 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 2014,2015, Outstanding Equity Awards at 20142015 Fiscal Year-End, Option Exercises and Stock Vested in Fiscal Year 2014,2015, Pension Benefits at 20142015 Fiscal Year-End, Nonqualified Deferred Compensation at 20142015 Fiscal Year-End, Potential Payments Upon Termination or Change in Control and Director Compensation in Fiscal Year 20142015 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.
ItItemem 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.
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The following table summarizes the equity compensation plans under which UPC common stock may be issued as of December 31, 2014:2015:
Column (a) | Column (b) | Column (c) | ||||||||||
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 by security holders | 7,948,925 [1] | $ | 53.54 [2] | 77,786,772 | ||||||||
Total | 7,948,925 | $ | 53.54 | 77,786,772 | ||||||||
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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 | 7,720,201 | [1] | $ | 66.67 | [2] | 76,548,520 | |
Total | 7,720,201 |
| $ | 66.67 |
| 76,548,520 |
[1] | Includes |
[2] | Does not include the retention units or retention shares described above in footnote 1. |
IteItemm 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.
IteItemm 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.
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IteItemm 15.Exhibits, Financial Statement Schedules
(a) Financial Statements, Financial Statement Schedules, and Exhibits: |
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(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 50.50.
(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.
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(3) Exhibits
Exhibits are listed in the exhibit index beginning on page 93.93. 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.
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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 6th5th day of February, 2015.
UNION PACIFIC CORPORATION
By /s/ Lance M. Fritz2016.
UNION PACIFIC CORPORATION | |||
By | /s/ Lance M. Fritz | ||
Lance M. Fritz, | |||
Chairman, President and | |||
Chief Executive Officer | |||
Union Pacific Corporation |
President and
Chief Executive Officer
Union Pacific Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, on this 6th5th day of February, 2015,2016, by the following persons on behalf of the registrant and in the capacities indicated.
PRINCIPAL EXECUTIVE OFFICER | ||||
AND DIRECTOR: | ||||
By | /s/ Lance M. Fritz |
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Lance M. Fritz, | ||||
Chairman, President and |
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Chief Executive Officer |
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Union Pacific Corporation |
PRINCIPAL FINANCIAL OFFICER: | ||||
By | /s/ Robert M. Knight, Jr. |
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Robert M. Knight, Jr., |
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Executive Vice President - Finance |
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and Chief Financial Officer |
PRINCIPAL ACCOUNTING OFFICER: | ||||
By | /s/ | | ||
| Todd M. Rynaski, | |||
Vice President and Controller |
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DIRECTORS:
Andrew H. Card, Jr.* | Michael R. McCarthy* | |
Erroll B. Davis, Jr.* | Michael W. McConnell* | |
David B. Dillon* | Thomas F. McLarty III* | |
Judith Richards Hope* | Steven R. Rogel* | |
Charles C. Krulak* | Jose H. Villarreal* | |
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* By /s/ James J. Theisen, Jr.
James J. Theisen, Jr., Attorney-in-fact
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Union Pacific Corporation and Subsidiary Companies
Millions, for the Years Ended December 31, | 2014 | 2013 | 2012 | |||||||||
Allowance for doubtful accounts: | ||||||||||||
Balance, beginning of period | $ | 23 | $ | 37 | $ | 50 | ||||||
Charges/(reduction) to expense | 5 | (4) | (1) | |||||||||
Net recoveries/(write-offs) | (7) | (10) | (12) | |||||||||
Balance, end of period | $ | 21 | $ | 23 | $ | 37 | ||||||
Allowance for doubtful accounts are presented in the Consolidated Statements of Financial Position as follows: | ||||||||||||
Current | $ | 5 | $ | 1 | $ | 4 | ||||||
Long-term | 16 | 22 | 33 | |||||||||
Balance, end of period | $ | 21 | $ | 23 | $ | 37 | ||||||
Accrued casualty costs: | ||||||||||||
Balance, beginning of period | $ | 702 | $ | 734 | $ | 778 | ||||||
Charges to expense | 256 | 188 | 190 | |||||||||
Cash payments and other reductions | (201) | (220) | (234) | |||||||||
Balance, end of period | $ | 757 | $ | 702 | $ | 734 | ||||||
Accrued casualty costs are presented in the Consolidated Statements of Financial Position as follows: | ||||||||||||
Current | $ | 249 | $ | 207 | $ | 213 | ||||||
Long-term | 508 | 495 | 521 | |||||||||
Balance, end of period | $ | 757 | $ | 702 | $ | 734 | ||||||
UNION PACIFIC CORPORATION
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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 | |||
Allowance for doubtful accounts: |
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Balance, beginning of period | $ | 21 | $ | 23 | $ | 37 |
Charges/(reduction) to expense |
| 1 |
| 5 |
| (4) |
Net recoveries/(write-offs) |
| (6) |
| (7) |
| (10) |
Balance, end of period | $ | 16 | $ | 21 | $ | 23 |
Allowance for doubtful accounts are presented in the |
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Current | $ | 5 | $ | 5 | $ | 1 |
Long-term |
| 11 |
| 16 |
| 22 |
Balance, end of period | $ | 16 | $ | 21 | $ | 23 |
Accrued casualty costs: |
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Balance, beginning of period | $ | 757 | $ | 702 | $ | 734 |
Charges to expense |
| 227 |
| 256 |
| 188 |
Cash payments and other reductions |
| (248) |
| (201) |
| (220) |
Balance, end of period | $ | 736 | $ | 757 | $ | 702 |
Accrued casualty costs are presented in the |
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Current | $ | 181 | $ | 249 | $ | 207 |
Long-term |
| 555 |
| 508 |
| 495 |
Balance, end of period | $ | 736 | $ | 757 | $ | 702 |
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UNION PACIFIC CORPORATION
3(b)
93
4(b) Indenture, dated as of April 1, 1999, between UPC and The Bank of New York, as successor to JP Morgan Chase Bank, formerly The Chase Manhattan Bank, as Trustee, is incorporated herein by reference to Exhibit 4.2 to UPC’s Registration Statement on Form S-3 (No. 333-75989). 4(c) Form of 2.250% Note due 2020 is incorporated by reference to Exhibit 4.1 to the Corporation’s Current Report on Form 8-K dated June 19, 2015. 4(d) Form of 3.250% Note due 2025 is incorporated by reference to Exhibit 4.2 to the Corporation’s Current Report on Form 8-K dated June 19, 2015. 4(e) Form of 3.250% Note due 2025 is incorporated herein by reference to Exhibit 4.1 to the Corporation’s Current Report on Form 8-K dated October 29, 2015. 4(f) Form of 4.050% Note due 2045 is incorporated herein by reference to Exhibit 4.2 to the Corporation’s Current Report on Form 8-K dated October 29, 2015. 4(g) Form of 4.375% Note due 2065 is incorporated herein by reference to Exhibit 4.3 to the Corporation’s Current Report on Form 8-K dated October 29, 2015.
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10(v)
10(dd) Form of Non-Qualified Stock Option Agreement for Directors is incorporated herein by reference to Exhibit 10(d) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. 10(ee) Executive Incentive Plan (2005) – Deferred Compensation Program, dated December 21, 2005 is incorporated herein by reference to Exhibit 10(g) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005. 99 Form of U.S. $1,700,000,000 5-Year Revolving Credit Agreement dated as of May 21, 2014, is incorporated herein by reference to Exhibit 99(a) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014. |
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