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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20202021
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ____________
Commission File Number 1-6075
UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Utah | 13-2626465 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
1400 Douglas Street, Omaha, Nebraska
(Address of principal executive offices)
68179
(Zip Code)
(402) 544-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each Class | Trading Symbol | Name of each exchange on which registered |
Common Stock (Par Value $2.50 per share) | UNP | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | þ | Accelerated Filer | ¨ | Non-Accelerated Filer | ¨ | ||
Smaller Reporting Company | ¨ | Emerging Growth Company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨ Yes x No
As of July 17, 2020,16, 2021, there were 678,838,800652,122,933 shares of the Registrant's Common Stock outstanding.
TABLE OF CONTENTS
UNION PACIFIC CORPORATION
AND SUBSIDIARY COMPANIES
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Certifications |
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies
Millions, Except Per Share Amounts, | ||||||||
for the Three Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||
Operating revenues: | ||||||||
Freight revenues | $ | 3,972 | $ | 5,236 | $ | 5,132 | $ | 3,972 |
Other revenues | 272 | 360 | 372 | 272 | ||||
Total operating revenues | 4,244 | 5,596 | 5,504 | 4,244 | ||||
Operating expenses: | ||||||||
Compensation and benefits | 905 | 1,145 | 1,022 | 905 | ||||
Depreciation | 551 | 551 | 550 | 551 | ||||
Purchased services and materials | 441 | 573 | 478 | 441 | ||||
Fuel | 247 | 560 | 497 | 247 | ||||
Equipment and other rents | 211 | 260 | 200 | 211 | ||||
Other | 235 | 247 | 284 | 235 | ||||
Total operating expenses | 2,590 | 3,336 | 3,031 | 2,590 | ||||
Operating income | 1,654 | 2,260 | 2,473 | 1,654 | ||||
Other income (Note 6) | 131 | 57 | ||||||
Other income, net (Note 6) | 125 | 131 | ||||||
Interest expense | (289) | (259) | (282) | (289) | ||||
Income before income taxes | 1,496 | 2,058 | 2,316 | 1,496 | ||||
Income taxes | (364) | (488) | (518) | (364) | ||||
Net income | $ | 1,132 | $ | 1,570 | $ | 1,798 | $ | 1,132 |
Share and Per Share (Note 8): | ||||||||
Earnings per share - basic | $ | 1.67 | $ | 2.23 | $ | 2.73 | $ | 1.67 |
Earnings per share - diluted | $ | 1.67 | $ | 2.22 | $ | 2.72 | $ | 1.67 |
Weighted average number of shares - basic | 677.7 | 705.5 | 658.5 | 677.7 | ||||
Weighted average number of shares - diluted | 679.2 | 708.0 | 660.1 | 679.2 | ||||
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies
Millions, | ||||||||
for the Three Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||
Net income | $ | 1,132 | $ | 1,570 | $ | 1,798 | $ | 1,132 |
Other comprehensive income/(loss): | ||||||||
Defined benefit plans | 18 | 82 | 24 | 18 | ||||
Foreign currency translation | (61) | (2) | 19 | (61) | ||||
Total other comprehensive income/(loss) [a] | (43) | 80 | 43 | (43) | ||||
Comprehensive income | $ | 1,089 | $ | 1,650 | $ | 1,841 | $ | 1,089 |
[a]Net of deferred taxes of ($5)10) million and ($27)5) million during the three months ended June 30, 2021 and 2020, and 2019, respectively.
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies
Millions, Except Per Share Amounts, | ||||||||
for the Six Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||
Operating revenues: | ||||||||
Freight revenues | $ | 8,852 | $ | 10,246 | $ | 9,781 | $ | 8,852 |
Other revenues | 621 | 734 | 724 | 621 | ||||
Total operating revenues | 9,473 | 10,980 | 10,505 | 9,473 | ||||
Operating expenses: | ||||||||
Compensation and benefits | 1,964 | 2,350 | 2,048 | 1,964 | ||||
Depreciation | 1,098 | 1,100 | 1,099 | 1,098 | ||||
Purchased services and materials | 962 | 1,149 | 968 | 962 | ||||
Fuel | 681 | 1,091 | 908 | 681 | ||||
Equipment and other rents | 438 | 518 | 412 | 438 | ||||
Other | 533 | 552 | 604 | 533 | ||||
Total operating expenses | 5,676 | 6,760 | 6,039 | 5,676 | ||||
Operating income | 3,797 | 4,220 | 4,466 | 3,797 | ||||
Other income (Note 6) | 184 | 134 | ||||||
Other income, net (Note 6) | 176 | 184 | ||||||
Interest expense | (567) | (506) | (572) | (567) | ||||
Income before income taxes | 3,414 | 3,848 | 4,070 | 3,414 | ||||
Income taxes | (808) | (887) | (931) | (808) | ||||
Net income | $ | 2,606 | $ | 2,961 | $ | 3,139 | $ | 2,606 |
Share and Per Share (Note 8): | ||||||||
Earnings per share - basic | $ | 3.83 | $ | 4.16 | $ | 4.73 | $ | 3.83 |
Earnings per share - diluted | $ | 3.82 | $ | 4.15 | $ | 4.72 | $ | 3.82 |
Weighted average number of shares - basic | 681.0 | 711.2 | 663.1 | 681.0 | ||||
Weighted average number of shares - diluted | 682.7 | 713.8 | 664.7 | 682.7 | ||||
Condensed Consolidated SStatementstatements of Comprehensive Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies
Millions, | ||||||||
for the Six Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||
Net income | $ | 2,606 | $ | 2,961 | $ | 3,139 | $ | 2,606 |
Other comprehensive income/(loss): | ||||||||
Defined benefit plans | 40 | 92 | 49 | 40 | ||||
Foreign currency translation | (56) | 25 | (7) | (56) | ||||
Total other comprehensive income/(loss) [a] | (16) | 117 | 42 | (16) | ||||
Comprehensive income | $ | 2,590 | $ | 3,078 | $ | 3,181 | $ | 2,590 |
[a]Net of deferred taxes of ($12)18) million and ($31)12) million during the six months ended June 30, 2021 and 2020, and 2019, respectively.
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Financial Position (Unaudited)
Union Pacific Corporation and Subsidiary Companies
June 30, | December 31, | June 30, | December 31, | |||||
Millions, Except Share and Per Share Amounts | 2020 | 2019 | 2021 | 2020 | ||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,706 | $ | 831 | $ | 1,115 | $ | 1,799 |
Short-term investments (Note 13) | 60 | 60 | 46 | 60 | ||||
Accounts receivable, net (Note 10) | 1,388 | 1,595 | 1,666 | 1,505 | ||||
Materials and supplies | 668 | 751 | 688 | 638 | ||||
Other current assets | 261 | 222 | 249 | 212 | ||||
Total current assets | 5,083 | 3,459 | 3,764 | 4,214 | ||||
Investments | 2,042 | 2,050 | 2,277 | 2,164 | ||||
Net properties (Note 11) | 54,270 | 53,916 | ||||||
Operating lease assets (Note 16) | 1,700 | 1,812 | ||||||
Properties, net (Note 11) | 54,148 | 54,161 | ||||||
Operating lease assets | 1,635 | 1,610 | ||||||
Other assets | 460 | 436 | 249 | 249 | ||||
Total assets | $ | 63,555 | $ | 61,673 | $ | 62,073 | $ | 62,398 |
Liabilities and Common Shareholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and other current liabilities (Note 12) | $ | 3,289 | $ | 3,094 | $ | 3,247 | $ | 3,104 |
Debt due within one year (Note 14) | 1,990 | 1,257 | 1,110 | 1,069 | ||||
Total current liabilities | 5,279 | 4,351 | 4,357 | 4,173 | ||||
Debt due after one year (Note 14) | 26,439 | 23,943 | 27,702 | 25,660 | ||||
Operating lease liabilities (Note 16) | 1,320 | 1,471 | ||||||
Operating lease liabilities | 1,256 | 1,283 | ||||||
Deferred income taxes | 12,171 | 11,992 | 12,389 | 12,247 | ||||
Other long-term liabilities | 1,894 | 1,788 | 2,066 | 2,077 | ||||
Commitments and contingencies (Note 17) |
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Commitments and contingencies (Note 15) |
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Total liabilities | 47,103 | 43,545 | 47,770 | 45,440 | ||||
Common shareholders' equity: | ||||||||
Common shares, $2.50 par value, 1,400,000,000 authorized; | ||||||||
1,112,266,423 and 1,112,014,480 issued; 678,710,739 and 692,100,651 | ||||||||
1,112,456,322 and 1,112,227,784 issued; 652,954,892 and 671,351,360 | ||||||||
outstanding, respectively | 2,781 | 2,780 | 2,781 | 2,781 | ||||
Paid-in-surplus | 4,135 | 4,523 | 4,499 | 4,864 | ||||
Retained earnings | 49,892 | 48,605 | 53,116 | 51,326 | ||||
Treasury stock | (38,984) | (36,424) | (44,542) | (40,420) | ||||
Accumulated other comprehensive loss (Note 9) | (1,372) | (1,356) | (1,551) | (1,593) | ||||
Total common shareholders' equity | 16,452 | 18,128 | 14,303 | 16,958 | ||||
Total liabilities and common shareholders' equity | $ | 63,555 | $ | 61,673 | $ | 62,073 | $ | 62,398 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Union Pacific Corporation and Subsidiary Companies
Millions, | ||||||||
for the Six Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||
Operating Activities | ||||||||
Net income | $ | 2,606 | $ | 2,961 | $ | 3,139 | $ | 2,606 |
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation | 1,098 | 1,100 | 1,099 | 1,098 | ||||
Deferred and other income taxes | 171 | 209 | 128 | 171 | ||||
Other operating activities, net | (9) | 41 | (128) | (9) | ||||
Changes in current assets and liabilities: | ||||||||
Accounts receivable, net | 207 | (54) | (161) | 207 | ||||
Materials and supplies | 83 | (33) | (50) | 83 | ||||
Other current assets | (36) | (85) | (3) | (36) | ||||
Accounts payable and other current liabilities | (197) | (185) | 73 | (197) | ||||
Income and other taxes | 469 | (54) | 122 | 469 | ||||
Cash provided by operating activities | 4,392 | 3,900 | 4,219 | 4,392 | ||||
Investing Activities | ||||||||
Capital investments | (1,599) | (1,560) | (1,190) | (1,599) | ||||
Proceeds from asset sales | 107 | 30 | 101 | 107 | ||||
Maturities of short-term investments (Note 13) | 75 | 105 | 48 | 75 | ||||
Purchases of short-term investments (Note 13) | (75) | (100) | (24) | (75) | ||||
Other investing activities, net | 75 | (85) | (6) | 75 | ||||
Cash used in investing activities | (1,417) | (1,610) | (1,071) | (1,417) | ||||
Financing Activities | ||||||||
Share repurchase programs (Note 16) | (4,085) | (2,556) | ||||||
Debt issued (Note 14) | 4,004 | 2,992 | 2,896 | 4,004 | ||||
Share repurchase programs (Note 18) | (2,556) | (3,629) | ||||||
Dividends paid | (1,319) | (1,248) | (1,350) | (1,319) | ||||
Debt repaid | (770) | (604) | (691) | (770) | ||||
Accelerated share repurchase programs pending final settlement | (400) | (500) | (400) | (400) | ||||
Debt exchange | (268) | - | ||||||
Net issuance of commercial paper (Note 14) | (1) | 471 | 125 | (1) | ||||
Other financing activities, net | (65) | (29) | (34) | (65) | ||||
Cash used in financing activities | (1,107) | (2,547) | (3,807) | (1,107) | ||||
Net change in cash, cash equivalents and restricted cash | 1,868 | (257) | (659) | 1,868 | ||||
Cash, cash equivalents, and restricted cash at beginning of year | 856 | 1,328 | 1,818 | 856 | ||||
Cash, cash equivalents, and restricted cash at end of period | $ | 2,724 | $ | 1,071 | $ | 1,159 | $ | 2,724 |
Supplemental Cash Flow Information | ||||||||
Non-cash investing and financing activities: | ||||||||
Capital investments accrued but not yet paid | $ | 141 | $ | 136 | $ | 104 | $ | 141 |
Common shares repurchased but not yet paid | - | 19 | 32 | - | ||||
Cash (paid for)/received from: | ||||||||
Income taxes, net of refunds | $ | (158) | $ | (717) | $ | (712) | $ | (158) |
Interest, net of amounts capitalized | (489) | (504) | (535) | (489) | ||||
Reconciliation of cash, cash equivalents, and restricted cash | ||||||||
to the Condensed Consolidated Statement of Financial Position: | ||||||||
Cash and cash equivalents | $ | 2,706 | $ | 1,049 | $ | 1,115 | $ | 2,706 |
Restricted cash equivalents in other current assets | 6 | 10 | 32 | 6 | ||||
Restricted cash equivalents in other assets | 12 | 12 | 12 | 12 | ||||
Total cash, cash equivalents and restricted cash equivalents per above | $ | 2,724 | $ | 1,071 | $ | 1,159 | $ | 2,724 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Changes in Common Shareholders’ Equity (Unaudited)
Union Pacific Corporation and Subsidiary Companies
| Common | Treasury | Common Shares | Paid-in-Surplus | Retained Earnings | Treasury Stock | AOCI | Total | Common | Treasury | Common Shares | Paid-in-Surplus | Retained Earnings | Treasury Stock | AOCI | Total | ||||||||||||||
Balance at April 1, 2019 | 1,112.0 | (403.6) | $ 2,780 | $ 3,929 | $ 46,049 | $ (33,638) | $ (1,378) | $ 17,742 | ||||||||||||||||||||||
Net income | - | - | 1,570 | - | - | 1,570 | ||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 80 | 80 | ||||||||||||||||||||||||
Conversion, stock option | - | 0.3 | - | 25 | - | 15 | - | 40 | ||||||||||||||||||||||
Share repurchase programs | - | (3.8) | - | - | - | (639) | - | (639) | ||||||||||||||||||||||
Cash dividends declared | - | - | - | - | (622) | - | - | (622) | ||||||||||||||||||||||
Balance at June 30, 2019 | 1,112.0 | (407.1) | $ 2,780 | $ 3,954 | $ 46,997 | $ (34,262) | $ (1,298) | $ 18,171 | ||||||||||||||||||||||
Balance at April 1, 2020 | 1,112.3 | (433.7) | $ 2,781 | $ 4,112 | $ 49,419 | $ (38,992) | $ (1,329) | $ 15,991 | 1,112.3 | (433.7) | $ 2,781 | $ 4,112 | $ 49,419 | $ (38,992) | $ (1,329) | $ 15,991 | ||||||||||||||
Net income | - | - | 1,132 | - | - | 1,132 | - | - | 1,132 | - | - | 1,132 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (43) | (43) | - | - | - | - | (43) | (43) | ||||||||||||||||||
Conversion, stock option | - | 0.1 | - | 23 | - | 8 | - | 31 | - | 0.1 | - | 23 | - | 8 | - | 31 | ||||||||||||||
Share repurchase programs | - | - | - | - | - | - | - | - | ||||||||||||||||||||||
Share repurchase programs | - | - | - | - | - | - | - | - | ||||||||||||||||||||||
Cash dividends declared | - | - | - | - | (659) | - | - | (659) | - | - | - | - | (659) | - | - | (659) | ||||||||||||||
Balance at June 30, 2020 | 1,112.3 | (433.6) | $ 2,781 | $ 4,135 | $ 49,892 | $ (38,984) | $ (1,372) | $ 16,452 | 1,112.3 | (433.6) | $ 2,781 | $ 4,135 | $ 49,892 | $ (38,984) | $ (1,372) | $ 16,452 | ||||||||||||||
| Common | Treasury | Common Shares | Paid-in-Surplus | Retained Earnings | Treasury Stock | AOCI | Total | ||||||||||||||||||||||
Balance at January 1, 2019 | 1,111.7 | (386.6) | $ 2,779 | $ 4,449 | $ 45,284 | $ (30,674) | $ (1,415) | $ 20,423 | ||||||||||||||||||||||
Balance at April 1, 2021 | 1,112.5 | (447.4) | $ 2,781 | $ 4,874 | $ 52,019 | $ (41,826) | $ (1,594) | $ 16,254 | ||||||||||||||||||||||
Net income | - | - | 2,961 | - | - | 2,961 | - | - | 1,798 | - | - | 1,798 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 117 | 117 | - | - | - | - | 43 | 43 | ||||||||||||||||||
Conversion, stock option | 0.3 | 1.4 | 1 | 5 | - | 60 | - | 66 | - | 0.1 | - | 25 | - | (1) | - | 24 | ||||||||||||||
Share repurchase programs | - | (21.9) | - | (500) | - | (3,648) | - | (4,148) | ||||||||||||||||||||||
Cash dividends declared | - | - | - | - | (1,248) | - | - | (1,248) | ||||||||||||||||||||||
Balance at June 30, 2019 | 1,112.0 | (407.1) | $ 2,780 | $ 3,954 | $ 46,997 | $ (34,262) | $ (1,298) | $ 18,171 | ||||||||||||||||||||||
Share repurchase programs | - | (12.2) | - | (400) | - | (2,715) | - | (3,115) | ||||||||||||||||||||||
Cash dividends declared | - | - | - | - | (701) | - | - | (701) | ||||||||||||||||||||||
Balance at June 30, 2021 | 1,112.5 | (459.5) | $ 2,781 | $ 4,499 | $ 53,116 | $ (44,542) | $ (1,551) | $ 14,303 | ||||||||||||||||||||||
| Common | Treasury | Common Shares | Paid-in-Surplus | Retained Earnings | Treasury Stock | AOCI | Total | ||||||||||||||||||||||
Balance at January 1, 2020 | 1,112.0 | (419.9) | $ 2,780 | $ 4,523 | $ 48,605 | $ (36,424) | $ (1,356) | $ 18,128 | 1,112.0 | (419.9) | $ 2,780 | $ 4,523 | $ 48,605 | $ (36,424) | $ (1,356) | $ 18,128 | ||||||||||||||
Net income | - | - | 2,606 | - | - | 2,606 | - | - | 2,606 | - | - | 2,606 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (16) | (16) | - | - | - | - | (16) | (16) | ||||||||||||||||||
Conversion, stock option | 0.3 | 0.6 | 1 | 12 | - | (4) | - | 9 | 0.3 | 0.6 | 1 | 12 | - | (4) | - | 9 | ||||||||||||||
Share repurchase programs | - | (14.3) | - | (400) | - | (2,556) | - | (2,956) | ||||||||||||||||||||||
Share repurchase programs | - | (14.3) | - | (400) | - | (2,556) | - | (2,956) | ||||||||||||||||||||||
Cash dividends declared | - | - | - | - | (1,319) | - | - | (1,319) | - | - | - | - | (1,319) | - | - | (1,319) | ||||||||||||||
Balance at June 30, 2020 | 1,112.3 | (433.6) | $ 2,781 | $ 4,135 | $ 49,892 | $ (38,984) | $ (1,372) | $ 16,452 | 1,112.3 | (433.6) | $ 2,781 | $ 4,135 | $ 49,892 | $ (38,984) | $ (1,372) | $ 16,452 | ||||||||||||||
Balance at January 1, 2021 | 1,112.2 | (440.9) | $ 2,781 | $ 4,864 | $ 51,326 | $ (40,420) | $ (1,593) | $ 16,958 | ||||||||||||||||||||||
Net income | - | - | 3,139 | - | - | 3,139 | ||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 42 | 42 | ||||||||||||||||||||||||
Conversion, stock option | 0.3 | 0.3 | - | 35 | - | (5) | - | 30 | ||||||||||||||||||||||
Share repurchase programs | - | (18.9) | - | (400) | - | (4,117) | - | (4,517) | ||||||||||||||||||||||
Cash dividends declared | - | - | - | - | (1,349) | - | - | (1,349) | ||||||||||||||||||||||
Balance at June 30, 2021 | 1,112.5 | (459.5) | $ 2,781 | $ 4,499 | $ 53,116 | $ (44,542) | $ (1,551) | $ 14,303 | ||||||||||||||||||||||
[a]AOCI = Accumulated Other Comprehensive Income/(Loss)Loss (Note 9)
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. Basis of Presentation
Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP). Pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and notes thereto contained in our 20192020 Annual Report on Form 10-K. Our Consolidated Statement of Financial Position at December 31, 2019,2020, is derived from audited financial statements. The results of operations for the six months ended June 30, 2020,2021, are not necessarily indicative of the results for the entire year ending December 31, 2020.2021.
The Condensed Consolidated Financial Statements are presented in accordance with GAAP as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).
2. Accounting Pronouncements
In June 2016,December 2019, the FASB issued Accounting Standards Update No. 2016-132019-12 (ASU 2016-13)2019-12), MeasurementIncome Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting and disclosure requirements for income taxes by clarifying existing guidance to improve consistency in application of Credit LossesAccounting Standards Codification (ASC) 740. The Company adopted the ASU on Financial Instruments, which replaces the existing incurred credit loss model for an expected credit loss model. Effective January 1, 2020, the Company adopted ASU 2016-132021 (the effective date), and it did not have a material impact on ourthe Company’s consolidated financial position, results of operations, or cash flows.statements and related disclosures.
In August 2018,March 2020, the FASB issued Accounting Standards Update No. 2018-142020-04 (ASU 2018-14)2020-04), ChangesReference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP principles to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pensioncontracts, hedging relationships, and other postretirement plans. The ASU istransactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance was effective for the Company beginning January 1, 2021,on March 12, 2020, and can be adopted on a prospective basis no later than December 31, 2022, with early adoption permitted. The Company is permitted. Adoption ofcurrently evaluating the standard is not expected toeffect that the new guidance will have a material impact on the Company’sour consolidated financial statement disclosure requirements.statements and related disclosures.
3. Operations and Segmentation
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide and analyze revenue by three commodity groups, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network. Our operating revenues are primarily derived from contracts with customers for the transportation of freight from origin to destination. Prior to 2020, we reported on four commodity groups, thus 2019 freight revenues have been realigned to the new reporting format.
The following table represents a disaggregation of our freight and other revenues:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||
Millions | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||
Bulk | $ | 1,386 | $ | 1,678 | $ | 2,920 | $ | 3,298 | $ | 1,648 | $ | 1,386 | $ | 3,160 | $ | 2,920 | ||
Industrial | 1,500 | 1,937 | 3,394 | 3,776 | 1,859 | 1,500 | 3,515 | 3,394 | ||||||||||
Premium | 1,086 | 1,621 | 2,538 | 3,172 | 1,625 | 1,086 | 3,106 | 2,538 | ||||||||||
Total freight revenues | $ | 3,972 | $ | 5,236 | $ | 8,852 | $ | 10,246 | $ | 5,132 | $ | 3,972 | $ | 9,781 | $ | 8,852 | ||
Other subsidiary revenues | 150 | 219 | 364 | 442 | 180 | 150 | 357 | 364 | ||||||||||
Accessorial revenues | 103 | 123 | 220 | 256 | 176 | 103 | 337 | 220 | ||||||||||
Other | 19 | 18 | 37 | 36 | 16 | 19 | 30 | 37 | ||||||||||
Total operating revenues | $ | 4,244 | $ | 5,596 | $ | 9,473 | $ | 10,980 | $ | 5,504 | $ | 4,244 | $ | 10,505 | $ | 9,473 | ||
Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of origin or destination for some products we transport are outside the U.S. Each of our commodity groups includes revenue from shipments to and from Mexico. Included in the above table are freight revenues from our Mexico business which amounted to $389$618 million and $603$389 million, respectively, for the three months ended June 30, 2021 and 2020, and June 30, 2019,$1.2 billion and $972 million and $1,179 million, respectively, for the six months ended June 30, 2020,2021 and June 30, 20192020.
4. Stock-Based Compensation
We have several stock-based compensation plans under whichwhere employees and non-employee directors receive nonvested 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:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||
Millions | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||
Stock-based compensation, before tax: | ||||||||||||||||||
Stock options | $ | 4 | $ | 4 | $ | 8 | $ | 9 | $ | 4 | $ | 4 | $ | 8 | $ | 8 | ||
Retention awards | 14 | 20 | 32 | 42 | 18 | 14 | 34 | 32 | ||||||||||
Total stock-based compensation, before tax | $ | 18 | $ | 24 | $ | 40 | $ | 51 | $ | 22 | $ | 18 | $ | 42 | $ | 40 | ||
Excess tax benefits from equity compensation plans | $ | 2 | $ | 6 | $ | 35 | $ | 45 | $ | 2 | $ | 2 | $ | 17 | $ | 35 | ||
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 | 2020 | 2019 | 2021 | 2020 | ||||
Risk-free interest rate | 1.5% | 2.5% | 0.4% | 1.5% | ||||
Dividend yield | 2.1% | 2.2% | 1.9% | 2.1% | ||||
Expected life (years) | 4.9 | 5.2 | 4.6 | 4.9 | ||||
Volatility | 23.4% | 22.7% | 28.3% | 23.4% | ||||
Weighted-average grant-date fair value of options granted | $ | 32.20 | $ | 30.37 | $ | 39.97 | $ | 32.20 |
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.
A summary of stock option activity during the six months ended June 30, 2020,2021, is presented below:
Options (thous.) | Weighted-Average | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (millions) | ||||
Outstanding at January 1, 2020 | 3,502 | $ | 113.38 | 6.1 | yrs. | $ | 236 |
Granted | 558 | 176.63 | N/A | N/A | |||
Exercised | (849) | 102.61 | N/A | N/A | |||
Forfeited or expired | (12) | 150.52 | N/A | N/A | |||
Outstanding at June 30, 2020 | 3,199 | $ | 127.13 | 6.6 | yrs. | $ | 142 |
Vested or expected to vest at June 30, 2020 | 3,165 | $ | 126.74 | 6.6 | yrs. | $ | 142 |
Options exercisable at June 30, 2020 | 2,059 | $ | 108.52 | 5.5 | yrs. | $ | 125 |
Options (thous.) | Weighted-Average | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (millions) | ||||
Outstanding at January 1, 2021 | 2,569 | $ | 132.49 | 6.4 | yrs. | $ | 195 |
Granted | 387 | 204.45 | N/A | N/A | |||
Exercised | (341) | 122.63 | N/A | N/A | |||
Forfeited or expired | (53) | 152.07 | N/A | N/A | |||
Outstanding at June 30, 2021 | 2,562 | $ | 144.27 | 6.5 | yrs. | $ | 194 |
Vested or expected to vest at June 30, 2021 | 2,537 | $ | 143.78 | 6.5 | yrs. | $ | 193 |
Options exercisable at June 30, 2021 | 1,725 | $ | 123.50 | 5.4 | yrs. | $ | 166 |
Stock options are granted at the closing price on the date of grant, have 10 year contractual terms, and vest no later than 3 years from the date of grant. None of the stock options outstanding at June 30, 2020,2021, are subject to performance or market-based vesting conditions.
At June 30, 2020,2021, there was $24$22 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.4 years. Additional information regarding stock option exercises appears in the following table:
Three Months Ended | Six Months Ended | |||||||||||||||||
Three Months Ended | Six Months Ended | June 30, | June 30, | |||||||||||||||
June 30, | June 30, | |||||||||||||||||
Millions | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||
Intrinsic value of stock options exercised | $ | 17 | $ | 26 | $ | 65 | $ | 164 | $ | 9 | $ | 17 | $ | 32 | $ | 65 | ||
Cash received from option exercises | 18 | 26 | 51 | 98 | 4 | 18 | 34 | 51 | ||||||||||
Treasury shares repurchased for employee taxes | (4) | (7) | (12) | (29) | (1) | (4) | (7) | (12) | ||||||||||
Tax benefit realized from option exercises | 3 | 6 | 14 | 40 | 2 | 3 | 6 | 14 | ||||||||||
Aggregate grant-date fair value of stock options vested | - | - | 14 | 15 | - | - | 14 | 14 | ||||||||||
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 the six months ended June 30, 2020,2021, were as follows:
Shares | Weighted-Average | Shares | Weighted-Average | |||
Nonvested at January 1, 2020 | 1,898 | $ | 112.12 | |||
Nonvested at January 1, 2021 | 1,476 | $ | 141.06 | |||
Granted | 304 | 185.97 | 284 | 204.87 | ||
Vested | (611) | 76.13 | (410) | 107.88 | ||
Forfeited | (36) | 136.99 | (39) | 161.63 | ||
Nonvested at June 30, 2020 | 1,555 | $ | 140.12 | |||
Nonvested at June 30, 2021 | 1,311 | $ | 164.65 | |||
Retention awards are granted at no cost to the employee or non-employee director and vest over periods lasting up to 4 years. At June 30, 2020,2021, there was $115$113 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.9 years.
Performance Retention Awards – In February 2020,2021, our Board of Directors approved performance stock unit grants. The basic terms of theseThis plan is based on performance stock units are identical to those granted in February 2019, excepttargets for different annual return on invested capital (ROIC) performance targets. The plan also includes relativeand operating income growth (OIG) as a modifier compared to the companies included in the S&P 500 Industrials Index.100 Industries Index plus the Class I railroads. We define ROIC as net operating profit adjusted for interest expense (including interest on average operating lease liabilities) and taxes on interest divided by average invested capital adjusted for average operating lease liabilities. The modifier can be up to +/- 25% of the award earned based on the ROIC achieved.
StockThe February 2021 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, modified forand the relative three-year OIG. We expense two-thirds of the fair value of the units that are probable of being earned based on our forecasted ROIC over the 3-year performance period, and with respect to the third year of the plan, the remaining one-third of the fair value is subject to the relative OIG modifier.three-year OIG. 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.grant. Dividend equivalents are accumulated during the service period and 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 2020 grant were as follows:
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Changes in our performance retention awards during the six months ended June 30, 2020,2021, were as follows:
Shares | Weighted-Average | Shares | Weighted-Average | |||
Nonvested at January 1, 2020 | 929 | $ | 123.32 | |||
Nonvested at January 1, 2021 | 773 | $ | 148.17 | |||
Granted | 287 | 166.63 | 227 | 204.45 | ||
Vested | (339) | 102.91 | (140) | 129.60 | ||
Unearned | (8) | 150.42 | (150) | 128.78 | ||
Forfeited | (35) | 138.98 | (28) | 183.78 | ||
Nonvested at June 30, 2020 | 834 | $ | 145.60 | |||
Nonvested at June 30, 2021 | 682 | $ | 173.52 | |||
At June 30, 2020,2021, there was $24$30 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.41.8 years. This expense is subject to achievement of the performance measures established for the performance stock unit grants.
5. Retirement Plans
Pension and Other Postretirement Benefits
Pension Plans – We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements. Non-union employees hired on or after January 1, 2018, are no longer eligible for pension benefits, but are eligible for an enhanced 401(k) plan.
Other Postretirement Benefits (OPEB) – We provide medical and life insurance benefits for eligible retirees hired before January 1, 2004. These benefits are funded as medical claims and life insurance premiums are paid.
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 5 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 incomeincome/loss and, if necessary, amortized as pension or OPEB expense.
The components of our net periodic pension cost were as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||
Millions | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||
Service cost | $ | 26 | $ | 22 | $ | 53 | $ | 44 | $ | 30 | $ | 26 | $ | 60 | $ | 53 | ||
Interest cost | 35 | 40 | 69 | 80 | 27 | 35 | 53 | 69 | ||||||||||
Expected return on plan assets | (70) | (68) | (140) | (136) | (68) | (70) | (135) | (140) | ||||||||||
Amortization of actuarial loss | 24 | 16 | 52 | 32 | 35 | 24 | 71 | 52 | ||||||||||
Net periodic pension cost | $ | 15 | $ | 10 | $ | 34 | $ | 20 | $ | 24 | $ | 15 | $ | 49 | $ | 34 | ||
The components of our net periodic OPEB costs were as follows:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||
Millions | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||
Service cost | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | ||
Interest cost | 2 | 2 | 3 | 5 | 1 | 2 | 2 | 3 | ||||||||||
Amortization of: | ||||||||||||||||||
Prior service cost | (4) | - | (7) | - | ||||||||||||||
Prior service cost/(credit) | (3) | (4) | (7) | (7) | ||||||||||||||
Actuarial loss | 2 | 2 | 4 | 3 | 1 | 2 | 3 | 4 | ||||||||||
Net periodic OPEB cost | $ | 1 | $ | 5 | $ | 1 | $ | 9 | $ | - | $ | 1 | $ | (1) | $ | 1 | ||
On June 30, 2019, the OPEB plan was remeasured to reflect an announced plan amendment effective January 1, 2020 that reduced and eliminated certain medical benefits for Medicare-eligible retirees. This plan amendment resulted in a reduction in the accumulated postretirement benefit obligation of approximately $92 million with a corresponding adjustment of $69 million in other comprehensive income, net of $23 million in deferred taxes. This amount is being amortized as a reduction of future net periodic OPEB cost over approximately 8 years, which represents the future remaining service period of eligible employees.
0
Cash Contributions
For the six months ended June 30, 2020,2021, cash contributions totaled $0 to the qualified pension plan. Any contributions made during 20202021 will be based on cash generated from operations and financial market considerations. 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. At June 30, 2020,2021, we do not have minimum cash funding requirements for 2020.2021.
6. Other Income
Other income included the following:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||
Millions | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||
Net gain on non-operating asset dispositions [a] | $ | 83 | $ | 6 | $ | 94 | $ | 10 | ||||||||||
Gain on non-operating asset dispositions [a] | $ | 63 | $ | 83 | $ | 72 | $ | 94 | ||||||||||
Rental income | 30 | 33 | 61 | 62 | 34 | 30 | 67 | 61 | ||||||||||
Unrealized gain on fair value of investments (Note 13) | 20 | - | 20 | - | ||||||||||||||
Net periodic pension and OPEB costs | 11 | 8 | 19 | 16 | 7 | 11 | 13 | 19 | ||||||||||
Interest income | 3 | 6 | 9 | 15 | 1 | 3 | 2 | 9 | ||||||||||
Interest income on employment tax refund | - | 3 | - | 30 | ||||||||||||||
Non-operating environmental costs and other | 4 | 1 | 1 | 1 | - | 4 | 2 | 1 | ||||||||||
Total | $ | 131 | $ | 57 | $ | 184 | $ | 134 | $ | 125 | $ | 131 | $ | 176 | $ | 184 | ||
[a]2021 includes a $50 million gain from a sale to the Colorado Department of Transportation. 2020 includes a $69 million gain from a land and permanent easement sale to the Illinois State Toll Highway Authority.
7. Income Taxes
In the second quarter of 2021, Nebraska, Oklahoma, and Idaho enacted legislation to reduce their corporate income tax rates for future years resulting in a $43 million reduction of our deferred tax expense.
7. Income Taxes
UPC is not currently under examination by the Internal Revenue Service (IRS). The statute of limitations has run for all years prior to 2016. Several state tax authorities are examining our state tax returns for years 2015 through 2018. At June 30, 2020, we had a net liability for unrecognized tax benefits of $69 million.
8. Earnings Per Share
The following table provides a reconciliation between basic and diluted earnings per share:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||
Millions, Except Per Share Amounts | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||
Net income | $ | 1,132 | $ | 1,570 | $ | 2,606 | $ | 2,961 | $ | 1,798 | $ | 1,132 | $ | 3,139 | $ | 2,606 | ||
Weighted-average number of shares outstanding: | ||||||||||||||||||
Basic | 677.7 | 705.5 | 681.0 | 711.2 | 658.5 | 677.7 | 663.1 | 681.0 | ||||||||||
Dilutive effect of stock options | 0.7 | 1.3 | 0.8 | 1.3 | 0.8 | 0.7 | 0.8 | 0.8 | ||||||||||
Dilutive effect of retention shares and units | 0.8 | 1.2 | 0.9 | 1.3 | 0.8 | 0.8 | 0.8 | 0.9 | ||||||||||
Diluted | 679.2 | 708.0 | 682.7 | 713.8 | 660.1 | 679.2 | 664.7 | 682.7 | ||||||||||
Earnings per share – basic | $ | 1.67 | $ | 2.23 | $ | 3.83 | $ | 4.16 | $ | 2.73 | $ | 1.67 | $ | 4.73 | $ | 3.83 | ||
Earnings per share – diluted | $ | 1.67 | $ | 2.22 | $ | 3.82 | $ | 4.15 | $ | 2.72 | $ | 1.67 | $ | 4.72 | $ | 3.82 | ||
Stock options excluded as their inclusion would be anti-dilutive | 1.0 | 0.6 | 0.8 | 0.5 | 0.4 | 1.0 | 0.3 | 0.8 | ||||||||||
9. Accumulated Other Comprehensive Income/(Loss)Loss
Reclassifications out of accumulated other comprehensive income/(loss)loss for the three and six months ended June 30, 2020,2021 and 2019,2020, were as follows (net of tax):
Millions | Defined | Foreign | Total | Defined | Foreign | Total | ||||||
Balance at April 1, 2021 | $ | (1,356) | $ | (238) | $ | (1,594) | ||||||
Other comprehensive income/(loss) before reclassifications | (1) | 19 | 18 | |||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | 25 | - | 25 | |||||||||
Net quarter-to-date other comprehensive income/(loss), | 24 | 19 | 43 | |||||||||
Balance at June 30, 2021 | $ | (1,332) | $ | (219) | $ | (1,551) | ||||||
Balance at April 1, 2020 | $ | (1,128) | $ | (201) | $ | (1,329) | $ | (1,128) | $ | (201) | $ | (1,329) |
Other comprehensive income/(loss) before reclassifications | 1 | (61) | (60) | 1 | (61) | (60) | ||||||
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | 17 | - | 17 | 17 | - | 17 | ||||||
Net quarter-to-date other comprehensive income/(loss), | 18 | (61) | (43) | 18 | (61) | (43) | ||||||
Balance at June 30, 2020 | $ | (1,110) | $ | (262) | $ | (1,372) | $ | (1,110) | $ | (262) | $ | (1,372) |
Balance at April 1, 2019 | $ | (1,182) | $ | (196) | $ | (1,378) | ||||||
Other comprehensive income/(loss) before reclassifications | (22) | (2) | (24) | |||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | 12 | - | 12 | |||||||||
OPEB Plan amendment (Note 5) | 92 | - | 92 | |||||||||
Net quarter-to-date other comprehensive income/(loss), | 82 | (2) | 80 | |||||||||
Balance at June 30, 2019 | $ | (1,100) | $ | (198) | $ | (1,298) | ||||||
[a]The accumulated other comprehensive income/(loss)loss reclassification components are 1) prior service cost/(credit)credit and 2) net actuarial loss which are both included in the computation of net periodic pension cost. See Note 5 Retirement Plans for additional details.
Millions | Defined | Foreign | Total | Defined | Foreign | Total | ||||||
Balance at January 1, 2021 | $ | (1,381) | $ | (212) | $ | (1,593) | ||||||
Other comprehensive income/(loss) before reclassifications | (2) | (7) | (9) | |||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | 51 | - | 51 | |||||||||
Net year-to-date other comprehensive income/(loss), | 49 | (7) | 42 | |||||||||
Balance at June 30, 2021 | $ | (1,332) | $ | (219) | $ | (1,551) | ||||||
Balance at January 1, 2020 | $ | (1,150) | $ | (206) | $ | (1,356) | $ | (1,150) | $ | (206) | $ | (1,356) |
Other comprehensive income/(loss) before reclassifications | 3 | (56) | (53) | 3 | (56) | (53) | ||||||
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | 37 | - | 37 | 37 | - | 37 | ||||||
Net year-to-date other comprehensive income/(loss), | 40 | (56) | (16) | 40 | (56) | (16) | ||||||
Balance at June 30, 2020 | $ | (1,110) | $ | (262) | $ | (1,372) | $ | (1,110) | $ | (262) | $ | (1,372) |
Balance at January 1, 2019 | $ | (1,192) | $ | (223) | $ | (1,415) | ||||||
Other comprehensive income/(loss) before reclassifications | (25) | 25 | - | |||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | 25 | - | 25 | |||||||||
OPEB Plan amendment (Note 5) | 92 | - | 92 | |||||||||
Net year-to-date other comprehensive income/(loss), | 92 | 25 | 117 | |||||||||
Balance at June 30, 2019 | $ | (1,100) | $ | (198) | $ | (1,298) | ||||||
[a]The accumulated other comprehensive income/(loss)loss reclassification components are 1) prior service cost/(credit)credit and 2) net actuarial loss which are both included in the computation of net periodic pension cost. See Note 5 Retirement Plans for additional details.
10. Accounts Receivable
Accounts receivable includes freight and other receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, creditworthiness of customers, and current economic conditions. At June 30, 2020,2021, and December 31, 2019,2020, our accounts receivable were reduced by $20$12 million and $4$17 million, respectively. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Condensed Consolidated Statements of Financial Position. At June 30, 2020,2021, and December 31, 2019,2020, receivables classified as other assets were reduced by allowances of $44$45 million and $35$51 million, respectively.
Receivables Securitization Facility – The Railroad maintains an $800 million, 3-year receivables securitization facility (the Receivables Facility) maturing in July 2022. Under the Receivables Facility, the Railroad sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a consolidated, wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without recourse, an undivided interest in accounts receivable to investors. The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI.
The amount recorded under the Receivables Facility was $400 million and $0 at both June 30, 2020,2021, and December 31, 2019.2020, respectively. The Receivables Facility was supported by $1.1$1.3 billion and $1.3$1.2 billion of accounts receivable as collateral at June 30, 2020,2021, and December 31, 2019,2020, respectively, which, as a retained interest, is included in accounts receivable, net in our Condensed Consolidated Statements of Financial Position.
The outstanding amount the Railroad is allowed to maintainmaintains under the Receivables Facility with a maximum of $800 million, may fluctuate based on current cash needs. The maximum allowed under the facility is $800 million with availability ofdirectly impacted by 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 Receivables Facility would not materially change.
The costs of the Receivables Facility include interest, which will vary based on prevailing benchmark and commercial paper rates, program fees paid to participating banks, commercial paper issuance costs, and fees of participating banks for unused commitment availability. The costs of the Receivables Facility are included in interest expense and were $1 million and $3 million for both the three months ended June 30, 2021 and 2020, and $2 million and $4 million for the six months ended June 30, 2021 and 2020, respectively.
and 2019, respectively, and $4 million and $7 million for the six months ended June 30, 2020 and 2019, respectively.
11. 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 | Accumulated | Net Book | Estimated | Accumulated | Net Book | Estimated | ||||||||
As of June 30, 2020 | Cost | Depreciation | Value | Useful Life | ||||||||||
As of June 30, 2021 | Cost | Depreciation | Value | Useful Life | ||||||||||
Land | $ | 5,274 | $ | N/A | $ | 5,274 | N/A | $ | 5,279 | $ | N/A | $ | 5,279 | N/A |
Road: | ||||||||||||||
Rail and other track material | 17,391 | 6,496 | 10,895 | 42 | 17,795 | 6,746 | 11,049 | 43 | ||||||
Ties | 10,886 | 3,264 | 7,622 | 34 | 11,208 | 3,428 | 7,780 | 34 | ||||||
Ballast | 5,855 | 1,704 | 4,151 | 34 | 5,997 | 1,808 | 4,189 | 34 | ||||||
Other roadway [a] | 20,629 | 4,195 | 16,434 | 48 | 21,175 | 4,467 | 16,708 | 49 | ||||||
Total road | 54,761 | 15,659 | 39,102 | N/A | 56,175 | 16,449 | 39,726 | N/A | ||||||
Equipment: | ||||||||||||||
Locomotives | 9,400 | 3,456 | 5,944 | 17 | 9,315 | 3,674 | 5,641 | 17 | ||||||
Freight cars | 2,095 | 784 | 1,311 | 24 | 2,145 | 806 | 1,339 | 25 | ||||||
Work equipment and other | 1,098 | 338 | 760 | 18 | 1,117 | 377 | 740 | 18 | ||||||
Total equipment | 12,593 | 4,578 | 8,015 | N/A | 12,577 | 4,857 | 7,720 | N/A | ||||||
Technology and other | 1,196 | 510 | 686 | 12 | 1,207 | 528 | 679 | 13 | ||||||
Construction in progress | 1,193 | - | 1,193 | N/A | 744 | - | 744 | N/A | ||||||
Total | $ | 75,017 | $ | 20,747 | $ | 54,270 | N/A | $ | 75,982 | $ | 21,834 | $ | 54,148 | N/A |
Millions, Except Estimated Useful Life | Accumulated | Net Book | Estimated | Accumulated | Net Book | Estimated | ||||||||
As of December 31, 2019 | Cost | Depreciation | Value | Useful Life | ||||||||||
As of December 31, 2020 | Cost | Depreciation | Value | Useful Life | ||||||||||
Land | $ | 5,276 | $ | N/A | $ | 5,276 | N/A | $ | 5,246 | $ | N/A | $ | 5,246 | N/A |
Road: | ||||||||||||||
Rail and other track material | 17,178 | 6,381 | 10,797 | 42 | 17,620 | 6,631 | 10,989 | 42 | ||||||
Ties | 10,693 | 3,186 | 7,507 | 34 | 11,051 | 3,331 | 7,720 | 34 | ||||||
Ballast | 5,752 | 1,669 | 4,083 | 34 | 5,926 | 1,753 | 4,173 | 34 | ||||||
Other roadway [a] | 20,331 | 4,056 | 16,275 | 48 | 21,030 | 4,329 | 16,701 | 48 | ||||||
Total road | 53,954 | 15,292 | 38,662 | N/A | 55,627 | 16,044 | 39,583 | N/A | ||||||
Equipment: | ||||||||||||||
Locomotives | 9,467 | 3,434 | 6,033 | 18 | 9,375 | 3,555 | 5,820 | 17 | ||||||
Freight cars | 2,083 | 779 | 1,304 | 25 | 2,118 | 789 | 1,329 | 25 | ||||||
Work equipment and other | 1,081 | 322 | 759 | 18 | 1,107 | 351 | 756 | 18 | ||||||
Total equipment | 12,631 | 4,535 | 8,096 | N/A | 12,600 | 4,695 | 7,905 | N/A | ||||||
Technology and other | 1,136 | 503 | 633 | 12 | 1,199 | 520 | 679 | 13 | ||||||
Construction in progress | 1,249 | - | 1,249 | N/A | 748 | - | 748 | N/A | ||||||
Total | $ | 74,246 | $ | 20,330 | $ | 53,916 | N/A | $ | 75,420 | $ | 21,259 | $ | 54,161 | N/A |
[a]Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets.
12. Accounts Payable and Other Current Liabilities
Jun. 30, | Dec. 31, | Jun. 30, | Dec. 31, | |||||
Millions | 2020 | 2019 | 2021 | 2020 | ||||
Income and other taxes payable | $ | 970 | $ | 496 | $ | 769 | $ | 635 |
Accounts payable | 595 | 749 | 612 | 612 | ||||
Accrued wages and vacation | 345 | 370 | 340 | 340 | ||||
Interest payable | 342 | 289 | 330 | 326 | ||||
Current operating lease liabilities (Note 16) | 319 | 362 | ||||||
Current operating lease liabilities | 297 | 321 | ||||||
Accrued casualty costs | 182 | 190 | 186 | 177 | ||||
Equipment rents payable | 83 | 100 | 99 | 101 | ||||
Other | 453 | 538 | 614 | 592 | ||||
Total accounts payable and other current liabilities | $ | 3,289 | $ | 3,094 | $ | 3,247 | $ | 3,104 |
13. Financial Instruments
Short-Term Investments – All of the Company’s short-term investments consist of time deposits and government agency securities. These investments are considered Level 2 investments and are valued at amortized cost, which approximates fair value. As of June 30, 2020,2021, the Company had $75$46 million of short-term investments, of which $15 million are in a trust for the purpose of providing collateral for payment of certain other long-term liabilities, and as such are classified as other assets.investments. All short-term investments have a maturity of less than one year and are classified as held-to-maturity.
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 June 30, 2020,2021, the fair value of total debt was $33.6$31.2 billion, approximately $5.2$2.4 billion more than the carrying value. At December 31, 2019,2020, the fair value of total debt was $27.2$31.9 billion, approximately $2.0$5.1 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. The fair value of our cash equivalents approximates their carrying value due to the short-term maturities of these instruments.
We have equity investments that are carried at fair value with changes in unrealized gains and losses recognized in other income on our Condensed Consolidated Statements of Income. These investments are valued based on quoted prices in active markets for publicly traded securities and are classified in Level 1 of the fair value hierarchy. We recorded unrealized gains of $20 million during the three and six months ended June 30, 2021.
14. Debt
Debt Exchange - On April 6, 2021, we exchanged approximately $1.7 billion of various outstanding notes and debentures due between 2028 and 2065 (Existing Notes) for $701 million of 2.891% notes due April 6, 2036 (New 2036 Notes) and $1.0 billion of 3.799% notes due April 6, 2071 (New 2071 Notes), plus cash consideration of approximately $257 million in addition to $14 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 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 $12 million and were included in interest expense during the quarter ended March 31, 2021.
Credit Facilities – At June 30, 2020,2021, we had $2.0 billion of credit available under our revolving credit facility (the Facility), which is designated for general corporate purposes and can be used to support the issuance of commercial paper. Credit facility withdrawals totaled $0 during the six months ended June 30, 2020.2021. 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,LIBOR, plus a spread, depending upon credit ratings for our senior unsecured debt. The 5 year facility, set to expire on June 8, 2023, requires UPC to maintain a debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) coverage ratio.
The definition of debt used for purposes of calculating the debt-to-EBITDA coverage ratio includes, among other things, certain credit arrangements, finance leases, guarantees, unfunded and vested pension benefits under Title IV of ERISA, and unamortized debt discount and deferred debt issuance costs. At June 30, 2020,2021, the Company was in compliance with the debt-to-EBITDA coverage ratio, which allows us to carry up to $36.9$38.9 billion of debt (as defined in the Facility), and we had $29.7$30.6 billion of debt (as defined in the Facility) outstanding at that date. 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 $150 million cross-default provision and a change-of-control provision.
During the six months ended June 30, 2020,2021, we issued $1.5 billion$945 million and repaid $1.5 billion$820 million of commercial paper with maturities ranging from 147 to 3948 days, and at June 30, 2020,2021, we had $200 million of commercial paper outstanding. Our revolving credit facility can be used to support 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.
In May 2020, we entered into three bilateral revolving credit lines, which mature by May 18, 2021 totaling $600 million of available credit. During the threesix months ended June 30, 2020,2021, we drew $300 million$0 and repaid $0, and at June 30, 2020, we had $300 million outstanding.$0. All three bilateral revolving credit lines matured by May 18, 2021.
Shelf Registration Statement and Significant New Borrowings – In 2019, ourWe filed an automatic shelf registration statement with the SEC that became effective on February 10, 2021. The Board of Directors reauthorizedauthorized the issuance of up to $6 billion of debt securities.securities, replacing the prior Board authorization in November 2019, which had $2.25 billion of authority remaining. Under our shelf registration, we may issue, from time to time, any combination of debt securities, preferred stock, common stock, or warrants for debt securities or preferred stock in one or more offerings.
During the six months ended June 30, 2020,2021, we issued the following unsecured, fixed-rate debt securities
under our current shelf registrationregistration.
:
Date | Description of Securities |
| $ |
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$1.0 billion of | |
$ | |
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We used the net proceeds from these offerings for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase programs. These debt securities include change-of-controlchange-of- control provisions. At June 30, 2020,2021, we had remaining authority from the Board of Directors to issue up to $2.25$3.5 billion of debt securities under our shelf registration.
Receivables Securitization Facility – As of both June 30, 2020,2021, and December 31, 2019,2020, we recorded $400 million and $0, respectively, of borrowings under our Receivables Facility as secured debt. (See further discussion of our receivables securitization facility in Note 10).
15. 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.
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 $1.3 billion as of June 30, 2020 and are recorded as operating lease liabilities at present value in our Consolidated Statements of Financial Position.
16. Leases
We lease certain locomotives, freight cars, and other property for use in our rail operations. We determine if an arrangement is or contains a lease at inception. We have lease agreements with lease and non-lease components and we have elected to not separate lease and non-lease components for all classes of underlying assets. Leases with an initial term of 12 months or less are not recorded on our Consolidated Statements of Financial Position; we recognize lease expense for these leases on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as operating or financing leases in our Consolidated Statement of Financial Position. Operating leases are included in operating lease assets, accounts payable and other current liabilities, and operating lease liabilities on our Consolidated Statements of Financial Position. Finance leases are included in net properties, debt due within one year, and debt due after one year on our Consolidated Statements of Financial Position.
Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use a collateralized incremental borrowing rate for all operating leases based on the information available at commencement date, including lease term, in determining the present value of future payments. The operating lease asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Operating lease expense is recognized on a straight-line basis over the lease term and reported in equipment and other rents and financing lease expense is recorded as depreciation and interest expense in our Consolidated Statements of Income.
The following are additional details related to our lease portfolio:
Jun. 30, | Dec. 31, | ||||
Millions | Classification | 2020 | 2019 | ||
Assets | |||||
Operating leases | Operating lease assets | $ | 1,700 | $ | 1,812 |
Finance leases | Net properties [a] | 427 | 468 | ||
Total leased assets | $ | 2,127 | $ | 2,280 | |
Liabilities | |||||
Current | |||||
Operating leases | Accounts payable and other current liabilities | $ | 319 | $ | 362 |
Finance leases | Debt due within one year | 105 | 114 | ||
Noncurrent | |||||
Operating leases | Operating lease liabilities | 1,320 | 1,471 | ||
Finance leases | Debt due after one year | 427 | 491 | ||
Total lease liabilities | $ | 2,171 | $ | 2,438 | |
[a] Finance lease assets are recorded net of accumulated amortization of $774 million and $797 million as of June 30, 2020 and December 31, 2019.
The lease cost components are classified as follows:
Three Months Ended | Six Months Ended | |||||||||
June 30, | June 30, | |||||||||
Millions | Classification | 2020 | 2019 | 2020 | 2019 | |||||
Operating lease cost [a] | Equipment and other rents | $ | 68 | $ | 85 | $ | 137 | $ | 178 | |
Finance lease cost | ||||||||||
Amortization of leased assets | Depreciation | 17 | 18 | 34 | 36 | |||||
Interest on lease liabilities | Interest expense | 7 | 8 | 14 | 17 | |||||
Net lease cost | $ | 92 | $ | 111 | $ | 185 | $ | 231 | ||
[a] Includes short-term lease costs of $0.6 million and $0.2 million for the three months ended June 30, 2020, and 2019, respectively, and $0.8 million and $0.4 million for the six months ended June 30, 2020, and 2019, respectively, and variable lease costs of $1.4 million and $2.1 million for the three months ended June 30, 2020, and 2019, respectively, and $3.2 million and $4.0 million for the six months ended June 30, 2020, and 2019, respectively.
The following table presents aggregate lease maturities as of June 30, 2020:
Millions | Operating Leases | Finance Leases | Total | |||
2020 | $ | 103 | $ | 62 | $ | 165 |
2021 | 302 | 142 | 444 | |||
2022 | 267 | 127 | 394 | |||
2023 | 225 | 88 | 313 | |||
2024 | 216 | 75 | 291 | |||
After 2024 | 781 | 124 | 905 | |||
Total lease payments | $ | 1,894 | $ | 618 | $ | 2,512 |
Less: Interest | 255 | 86 | 341 | |||
Present value of lease liabilities | $ | 1,639 | $ | 532 | $ | 2,171 |
The following table presents the weighted average remaining lease term and discount rate:
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The following table presents other information related to our operating and finance leases:
Millions, | ||||
for the Six Months Ended June 30, | 2020 | 2019 | ||
Cash paid for amounts included in the measurement of lease liabilities | ||||
Operating cash flows from operating leases | $ | 252 | 255 | |
Operating cash flows from finance leases | 15 | 20 | ||
Financing cash flows from finance leases | 66 | 79 | ||
Leased assets obtained in exchange for finance lease liabilities | - | - | ||
Leased assets obtained in exchange for operating lease liabilities | 50 | 27 | ||
17.15. Commitments and Contingencies
Asserted and Unasserted Claims – Various claims and lawsuits are pending against us and certain of our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our consolidated results of operations, financial condition, or liquidity. To the extent possible, we have recorded a liability where asserted and unasserted claims are considered probable and where such claims can be reasonably estimated. We do not expect that any known lawsuits, claims, environmental costs, commitments, contingent liabilities, or guarantees will have a material adverse effect on our consolidated results of operations, financial condition, or liquidity after taking into account liabilities and insurance recoveries previously recorded for these matters.
Personal Injury – The cost of personal injuries to employees and others related to our activities is charged to expense based on estimates of the ultimate cost and number of incidents each year. We use an actuarial analysis to measure the expense and liability, including unasserted claims. The Federal Employers’ Liability Act (FELA) governs compensation for work-related accidents. Under FELA, damages are assessed based on a finding of fault through litigation or out-of-court settlements. We offer a comprehensive variety of services and rehabilitation programs for employees who are injured at work.
Our personal injury liability is not discounted to present value due to the uncertainty surrounding the timing of future payments. Approximately 95% of the recorded liability is related to asserted claims and
approximately 5% is related to unasserted claims at June 30, 2020.2021. 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 $259$301 million to $283$330 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, | ||||||||
for the Six Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||
Beginning balance | $ | 265 | $ | 271 | $ | 270 | $ | 265 |
Current year accruals | 34 | 36 | 45 | 34 | ||||
Changes in estimates for prior years | (4) | (11) | 17 | (4) | ||||
Payments | (36) | (31) | (31) | (36) | ||||
Ending balance at June 30 | $ | 259 | $ | 265 | $ | 301 | $ | 259 |
Current portion, ending balance at June 30 | $ | 65 | $ | 63 | $ | 62 | $ | 65 |
We reassess our estimated insurance recoveries annually and have recognized an asset for estimated insurance recoveries at both June 30, 2020, and December 31, 2019. Any changes to recorded insurance recoveries are included in the above table in the Changes in estimates for prior years category.
Environmental Costs – We are subject to federal, state, and local environmental laws and regulations. We have identified 379385 sites at whichwhere we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 3128 sites that are the subject of actions taken by the U.S. government, 2018 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, | ||||||||
for the Six Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||
Beginning balance | $ | 227 | $ | 223 | $ | 233 | $ | 227 |
Accruals | 28 | 32 | 43 | 28 | ||||
Payments | (27) | (35) | (26) | (27) | ||||
Ending balance at June 30 | $ | 228 | $ | 220 | $ | 250 | $ | 228 |
Current portion, ending balance at June 30 | $ | 63 | $ | 63 | $ | 63 | $ | 63 |
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 Condensed 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. We record both liabilities and reinsurance receivables using an actuarial analysis based on historical experience in our Condensed Consolidated Statements of Financial Position. Effective January 2019, the captive insurance subsidiary no longer participates in the reinsurance treaty agreement. The Company established a trust in the fourth quarter of 2018 for the purpose of providing collateral as required under the reinsurance treaty agreement for prior years’ participation.
Guarantees – At both June 30, 2020 and December 31, 2019, we were contingently liable for $15 million in guarantees. The fair value of these obligations as of both June 30, 2020, and December 31, 2019 was $0. We entered into these contingent guarantees in the normal course of business, and they include guaranteed obligations related to our affiliated operations. The final guarantee expires in 2022. We are not aware of any existing event of default that would require us to satisfy these guarantees. We do not expect that these guarantees will have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.
Indemnities – We are contingently obligated under a variety of indemnification arrangements, although in some cases the extent of our potential liability is limited, depending on the nature of the transactions and 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.
18.16. Share Repurchase Programs
Effective April 1, 2019, our Board of Directors authorized the repurchase of up to 150 million shares of our common stock by March 31, 2022. These repurchases may be made on the open market or through other transactions. Our management has sole discretion with respect to determining the timing and amount of these transactions. As of June 30, 2020,2021, we repurchased a total of $39.7$45.0 billion of our common stock since commencement of our repurchase programs in 2007. The table below represents shares repurchased under repurchase programs in the first and second quarters of 20202021 and 2019:2020:
Number of Shares Purchased | Average Price Paid | Number of Shares Purchased | Average Price Paid [a] | |||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||
First quarter [a] | 14,305,793 | 18,149,450 | $ | 178.66 | $ | 165.79 | ||||||
Second quarter | - | 3,732,974 | - | 171.24 | ||||||||
First quarter [b] | 6,691,421 | 14,305,793 | $ | 209.50 | $ | 178.66 | ||||||
Second quarter [c] | 12,204,409 | - | 222.46 | - | ||||||||
Total | 14,305,793 | 21,882,424 | $ | 178.66 | $ | 166.72 | 18,895,830 | 14,305,793 | $ | 217.87 | $ | 178.66 |
Remaining number of shares that may be repurchased under current authority | Remaining number of shares that may be repurchased under current authority | 118,849,288 | Remaining number of shares that may be repurchased under current authority | 92,127,140 | ||||||||
[a]In the period of the final settlement, the average price paid under the accelerated share repurchase programs is calculated based on the total program value less the value assigned to the initial delivery of shares. The average price of the completed 2020 accelerated share repurchase programs was $155.86. The average price of the initial settlement of the 2021 accelerated share repurchase programs was $221.94.
[b]Includes 8,786,380 and 11,795,930 shares repurchased in February 2020 and 2019, respectively, under accelerated share repurchase programs.
[c]Includes 7,209,156 shares repurchased in May 2021 under accelerated share repurchase programs.
Management's assessments of market conditions and other pertinent factors 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. Open market repurchases are recorded in treasury stock at cost, which includes any applicable commissions and fees.
From July 1, 2021, through July 21, 2021, we repurchased 1.1 million shares at an aggregate cost of approximately $237 million.
Accelerated Share Repurchase Programs – The Company has established accelerated share repurchase programs (ASRs) with financial institutions to repurchase shares of our common stock. These
ASRs have been structured so that at the time of commencement, we pay a specified amount to the financial institutions and receive an initial delivery of shares. Additional shares may be received at the time of settlement. The final number of shares to be received is based on the volume weighted average price of
the Company’s common stock during the ASR term, less a discount and subject to potential adjustments pursuant to the terms of such ASR.
On February 19, 2020,May 26, 2021, the Company received 8,786,3807,209,156 shares of its common stock repurchased under ASRs for an aggregate of $2.0 billion. When the shares were received, the exchange was accounted for as an equity transaction with $1.6 billion of the aggregate amount allocated to treasury stock and the remaining $0.4 billion allocated to paid-in-surplus. This delivery of shares represents the initial and likely minimum number of shares that we may receive under the ASRs initiated in 2020.2021. The final settlement is expected to be completed prior to the end of the thirdfourth quarter of 2020.2021.
On February 26, 2019,19, 2020, the Company received 11,795,9308,786,380 shares of its common stock repurchased under ASRs for an aggregate of $2.5$2.0 billion. Upon settlement of these ASRs in the third quarter of 2019,2020, we received 3,172,9004,045,575 additional shares.
ASRs are accounted for as equity transactions, and at the time of receipt, shares are included in treasury stock at fair market value as of the corresponding initiation or settlement date. The Company reflects shares received as a repurchase of common stock in the weighted average common shares outstanding calculation for basic and diluted earnings per share.
19.17. Related Parties
UPRR and other North American railroad companies jointly own TTX Company (TTX). UPRR has a 36.79% economic and voting interest in TTX while the other North American railroads own the remaining interest. In accordance with ASC 323 Investments - Equity Method and Joint Venture, UPRR applies the equity method of accounting to our investment in TTX.
TTX is a railcarrail car pooling company that owns railcarsrail cars and intermodal wells to serve North America’s railroads. TTX assists railroads in meeting the needs of their customers by providing railcarsrail cars in an efficient, pooled environment. All railroads have the ability to utilize TTX railcarsrail cars through car hire by renting railcarsrail cars at stated rates.
UPRR had $1.4$1.6 billion and $1.5 billion recognized as investments related to TTX in our Condensed Consolidated Statements of Financial Position as of both June 30, 2020,2021, and December 31, 2019.2020, respectively. TTX car hire expenses of $88$95 million and $108$88 million for the three months ended June 30, 2020,2021 and 2019,2020, respectively, and $184$191 and $215$184 million for the six months ended June 30, 2020,2021 and 2019,2020, respectively, are included in equipment and other rents in our Condensed Consolidated Statements of Income. In addition, UPRR had accounts payable to TTX of $61$62 million and $62$59 million as of June 30, 2020,2021, and December 31, 2019,2020, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2020,2021, Compared to
Three and Six Months Ended June 30, 20192020
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”.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and applicable notes to the Condensed Consolidated Financial Statements, Item 1, and other information included in this report. Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP).
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable business segment. Although we provide and analyze revenue by commodity group, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network.
Cautionary Information
Statements in this Form 10-Q/filing, including forward-looking statements, speak only as of and are based on information we have learned as of July 23, 2020.22, 2021. We assume no obligation to update any such information to reflect subsequent developments, changes in assumptions, or changes in other factors affecting forward-looking information. If we do update one or more of these statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other statements.
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 forward-looking statements within the meaning of Section 27A Securities Act of 1933 and the Section 21E of the Exchange Act. These forward-looking statements and information include, without limitation, the statements and information set forth under the caption “Effects from COVID-19” in Item 2 regarding the impact of the coronavirus (COVID-19) pandemic on our business and operationsoperations;, “Liquidity and Capital Resources” in Item 2 regarding our capital plan, statements under the caption “Share Repurchase Programs”, statements under the caption “Off-Balance Sheet Arrangements, Contractual Obligations,contractual obligations, and Commercial Commitments”,commercial commitment; and statements under the caption “Other Matters.” Forward-looking statements and information also include any other statements or information in this report regarding: potential impacts of the COVID-19 pandemic on our business operations, financial results, liquidity, and financial position, and on the world economy (including our customers and supply chains), including as a result of decreased volume and carloadings; closing of customer manufacturing, distribution or production facilities; expectations as to operational or service improvements; expectations regarding the effectiveness of steps taken or to be taken to improve operations, service, infrastructure improvements, and transportation plan modifications; expectations as to cost savings, revenue growth, and earnings; 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; proposed new products and services; 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 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 risks and uncertainties over which management has little or no influence or control, and many of these risks and uncertainties are currently
amplified by and may continue to be amplified by, or in the future may be amplified by, the COVID-19
pandemic. The Risk Factors in Item 1A of our 20192020 Annual Report on Form 10-K, filed February 7, 2020 and in Part II, Item 1A of this report,5, 2021, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements, and this report, including this Item 2, should be read in conjunction with these Risk Factors. To the extent circumstances require or we deem it otherwise necessary, we will update or amend these risk factors in a Form 10-Q or Form 8-K. 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 information is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.
Critical Accounting Policies and Estimates
We base our discussion and analysis of our financial condition and results of operations upon our Condensed Consolidated Financial Statements. 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 are believed to be 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. If these estimates differ materially from actual results, the impact on the Condensed Consolidated Financial Statements may be material. Our critical accounting policies are available in Item 7 of our 20192020 Annual Report on Form 10-K. There have not been any significant changes with respect to these policies during the first six months of 2020.2021.
RESULTS OF OPERATIONS
Quarterly Summary
The Company reported earnings of $2.72 per diluted share on net income of $1.8 billion and an operating ratio of 55.1% in the second quarter of 2021 compared to earnings of $1.67 per diluted share on net income of $1.1 billion and an operating ratio of 61.0% for the second quarter of 2020. After freight revenues declined 24% year-over-year in the second quarter of 2020 compared to earningsdriven by the economic impact of $2.22 per diluted share on net income of $1.6 billionCOVID-19 and an operating ratio of 59.6% for the economic shutdown that reduced volumes by 20%, our second quarter of 2019. Freight2021 freight revenues decreased 24% in the quarterincreased 29% compared to the same period in 20192020 driven by a 20% volume decline. Average6% higher average revenue per car (ARC) and a 22% volume increase. The ARC increase was down 6% due to negative mix of traffic and lowerhigher fuel surcharge revenue and core pricing gains. Operating expenses increased 17% driven by higher fuel prices, volume related costs, and higher casualty costs, partially offset by core pricing gains. Volume declined in almost every market segment due to the deteriorating economic conditions brought on by the COVID-19 pandemic. Cost savings from lower volume, productivity, and lower fuel prices drove operating expenses down 22% from 2019. These reductions were not enough to offset the revenue declines asproductivity. After operating income decreased 27% year-over-year in the second quarter of 2020, our second quarter of 2021 operating income increased 50% compared to the same period in 2019. Despite the adversity from the COVID-19 pandemic throughout the quarter, we continued our operational transformation, largely mitigating the impact of the volume loss, while our employees improved the safety of the railroad and provided our customers an uninterrupted, enhanced service product.2020.
Effects from COVID-19
The spreadeconomy continues to improve as pandemic restrictions ease and society reopens. However, supply chain disruptions continue. Most notably, the semiconductor chip shortage continues to impact the automotive industry, while strong international intermodal demand is contributing to network congestion. The impact of COVID-19 throughout the United Statessemiconductor chip shortage is masked in our year-over-year comparison as the second quarter causedof 2020 saw a dramatic slowdown of the economy as businesses navigated operations along with protecting the health and safety of their employees, customers and communities. The varying levels of action across different industries in an attempt to slow the spread had a significant impact on the demand to ship freight. The most notable impact on our revenue was the temporary suspension of automotive production due to the pandemic. The pandemic also has upended the intermodal supply chain as demand for consumer goods remains high. This high demand has strained the ports, railroad equipment and chassis availability, truck driver supply, and warehouse receiving capacity. These disruptions limit our revenue growth by slowing asset turns and increasing costs through lower freight car velocity and multiple handlings, which will continue to impact our third quarter and potentially the corollary effect it had on products used for auto manufacturing. While production resumed in mid-May and our volume sequentially increased through the latter partremainder of the quarter, the sustainability of the auto manufacturing recovery will ultimately be driven by consumer demand and the ability of the auto manufacturing industry to maintain production. Other reductionsyear. Demand in production duringmost other markets positively impacted the second quarter drove volume declinesof 2021 as they recover from the dramatic slowdown caused by the spread of COVID-19 in industrial chemicals, plastics, food and beverages and lumber. COVID-19 also disrupted supply chains between Asiathe second quarter of 2020.
The safety of our employees, our customers, and the United States driving declines in intermodal shipments. Withcommunities we serve remains a high priority. In an effort to mitigate the reopeningspread of retail storesCOVID-19, we are promoting and consumer demand increasing, trans-Pacific volumes improved sequentially throughout the quarter. Finally, low crude oil and natural gas prices continueencouraging all of our employees through financial incentives to negatively impact our shipments of coal, petroleum products and sand.get vaccinated.
We adjusted demand driven resources to reflect the lower volumes and we continue to focus on productivity initiatives to partially offset some of the lost revenue. In addition, we implemented a temporary unpaid leave of absence for management and administrative employees, decreased executive and Board of Director
salaries by 25% for the same period, and temporarily closed three of our repair facilities. Although we have incurred and expect to continue to incur additional expenses associated with keeping our employees, customers and communities safe, the associated expense was not material to our overall financial results in the second quarter, and are currently not expected to be material for the remainder of the year.
While the fluidity of our operations has not been significantly affected by the pandemic, we have and are continuing to adapt to protect the safety of our employees, our customers and the communities we serve. We are committed to continuing to implement appropriate investments and operational changes to protect the health and wellbeing of our employees, as they play the most critical role in keeping our operations running. Enhanced safety procedures have been implemented across the system and adjusted based on the local working environment, along with new procedures and policies as our employees transition back into our office buildings.
Our rail network remains fluid and we continue to serve our customers with minimal impact. As volume increases, we are returning some locomotives and freight cars to service along with recalling employees from furlough, and we have ample capacity for further growth. Select locomotives, although not currently in use, are stored and maintained so they can be returned to service immediately. We also have devoted resources to maintaining and adapting our processes and procedures including, but not limited to, processes and procedures to address protection of our technology systems and proprietary data while a significant number of our employees are working from home.
We believe the steps we have taken to enhance our capital structure and liquidity have strengthened our ability to operate through current conditions. During the second quarter, we generated $2.2 billion of cash from operations. On June 30, 2020, we had $2.7 billion of cash and cash equivalents, $2 billion of credit available under our revolving credit facility and up to $400 million undrawn on the Receivables Facility. In addition, we entered into $600 million of additional short-term bilateral revolving credit linesin the second quarter which are currently 50% drawn. On April 7, 2020, we issued $750 million of long-term debt. We have $470 million of debt maturing, including $250 million in term loans and $200 million of commercial paper, before the end of the year. Depending upon market conditions, we plan to renew the term loans and continue to maintain the commercial paper program. However, based on our current cash position and outlook, we expect to be able to fund our 2020 debt maturities if we choose not to renew those programs. We have been, and we expect to continue to be, in compliance with our debt covenants. We utilized the provisions of IRS Notice 2020-23 to shift our federal estimated income tax payment of $584 million from the second quarter to the third quarter and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to defer approximately $150 million of our employment tax deposits to future years. Our bad debt provision was unadjusted in the second quarter, but it may increase if the creditworthiness of our significant customers deteriorates. We paid our quarterly dividend on June 30,2020, and plan to maintain the dividend at current levels. However, we have suspended our share repurchase activity with the exception of the final settlement on our $2 billion accelerated share repurchase program entered into on February 18, 2020.
As we look ahead to the balance of 2020, the economic environment remains uncertain, and, while we are seeing the industrial sector begin to rebound during the third quarter, the resurgence of COVID-19 and how governments and consumers react could result in customer disruptions or an elongated recovery period. Therefore, the impact of the pandemic on our 2020 financial and operating results could continue to be material. Ultimately, we will continue to focus on what we can control, such as managing costs, increasing productivity, and seeking new business opportunities, as well as, protecting our employees, customers and communities and providing excellent service to our customers.
Operating Revenues
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||
Millions | 2020 | 2019 | Change | 2020 | 2019 | Change | 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||
Freight revenues | $ | 3,972 | $ | 5,236 | (24) | % | $ | 8,852 | $ | 10,246 | (14) | % | $ | 5,132 | $ | 3,972 | 29 | % | $ | 9,781 | $ | 8,852 | 10 | % | ||
Other subsidiary revenues | 150 | 219 | (32) | 364 | 442 | (18) | 180 | 150 | 20 | 357 | 364 | (2) | ||||||||||||||
Accessorial revenues | 103 | 123 | (16) | 220 | 256 | (14) | 176 | 103 | 71 | 337 | 220 | 53 | ||||||||||||||
Other | 19 | 18 | 6 | 37 | 36 | 3 | 16 | 19 | (16) | 30 | 37 | (19) | ||||||||||||||
Total | $ | 4,244 | $ | 5,596 | (24) | % | $ | 9,473 | $ | 10,980 | (14) | % | $ | 5,504 | $ | 4,244 | 30 | % | $ | 10,505 | $ | 9,473 | 11 | % | ||
We generate freight revenues by transporting freight or other materials from our three commodity groups. Prior to 2020, we reported on four commodity groups, thus 2019 commodity, ARC, and carloadings have
been realigned to the new reporting format. Freight revenues vary with volume (carloads) and ARC. Changes in price, traffic mix, and fuel surcharges drive ARC. Customer incentives, which are primarily provided for shipping to/from specific locations or based on cumulative volumes, are recorded as a reduction to operating revenues. Customer incentives that include variable consideration based on cumulative volumes are estimated using the expected value method, which is based on available historical, current, and forecasted volumes, and recognized as the related performance obligation is satisfied. We recognize freight revenues over time as shipments move 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 consist primarily of revenues earned by our other subsidiaries (primarily logistics and commuter rail operations) and accessorial revenues. Other subsidiary revenues are generally recognized over time as shipments move 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. Accessorial revenues are recognized at a point in time as performance obligations are satisfied.
Freight revenue decreased 24%increased 29% during the second quarter of 20202021 compared to 2019,2020, resulting from a 20%22% volume decline, negative mix of trafficincrease, higher fuel surcharge revenue, and lower fuel surcharges, partially offset by core pricing gains. Volume declined in almost every market segment due toincreases were primarily driven by recovery from the deteriorating economic conditions brought ondramatic slowdown caused by the spread of COVID-19 pandemic.in the second quarter of 2020.
Each of our commodity groups includes revenue from fuel surcharges. Freight revenues from fuel surcharge programs were $206$414 million in the second quarter of 20202021 compared to $399$206 million in the same period of 2019.2020. The declineincrease was driven by lowerhigher fuel pricesprice and reducedincreased volume, partially offset by the lag impact on fuel surcharge recovery (it can generally take up to two months for changing fuel prices to affect fuel surcharge recoveries).
Accessorial revenue increased in the second quarter and the year-to-date period compared to 2020 driven by increased intermodal shipments. Other subsidiary and accessorial revenues decreasedincreased in the second quarter compared to 20192020 driven primarily by the U.S. automotive plant shut downs and declines in intermodal shipments. The disruptionthe second quarter of the automotive supply chain drove lower intermodal shipments and revenue at2020 impacting our subsidiariessubsidiary that brokerbrokers intermodal and transload logistics services. In addition, lower intermodal shipments drove lower accessorial revenue for the second quarter and the year-to-date periodYear-to-date, subsidiary revenues are down compared to 2019.the same period in 2020 as the semi-conductor shortage impacting 2021 automobile production outweighs the recovery from COVID-19 declines in 2020.
The following tables summarize the year-over-year changes in freight revenues, revenue carloads, and ARC by commodity type:
Three Months Ended | Six Months Ended | ||||||||||||
Freight Revenues | June 30, | June 30, | |||||||||||
Millions | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||
Grain & grain products | $ | 644 | $ | 711 | (9) | % | $ | 1,333 | $ | 1,376 | (3) | % | |
Fertilizer | 168 | 172 | (2) | 342 | 331 | 3 | |||||||
Food & refrigerated | 205 | 272 | (25) | 455 | 514 | (11) | |||||||
Coal & renewables | 369 | 523 | (29) | 790 | 1,077 | (27) | |||||||
Bulk | 1,386 | 1,678 | (17) | 2,920 | 3,298 | (11) | |||||||
Industrial chemicals & plastics | 435 | 482 | (10) | 930 | 934 | - | |||||||
Metals & minerals | 368 | 557 | (34) | 837 | 1,093 | (23) | |||||||
Forest products | 266 | 303 | (12) | 569 | 588 | (3) | |||||||
Energy & specialized markets | 431 | 595 | (28) | 1,058 | 1,161 | (9) | |||||||
Industrial | 1,500 | 1,937 | (23) | 3,394 | 3,776 | (10) | |||||||
Automotive | 189 | 554 | (66) | 713 | 1,074 | (34) | |||||||
Intermodal | 897 | 1,067 | (16) | 1,825 | 2,098 | (13) | |||||||
Premium | 1,086 | 1,621 | (33) | 2,538 | 3,172 | (20) | |||||||
Total | $ | 3,972 | $ | 5,236 | (24) | % | $ | 8,852 | $ | 10,246 | (14) | % | |
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||
Revenue Carloads | June 30, | June 30, | ||||||||||||||||||||
Thousands, | 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
Freight Revenues | June 30, | June 30, | ||||||||||||||||||||
Millions | 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||
Grain & grain products | 167 | 178 | (6) | % | 342 | 347 | (1) | % | $ | 795 | $ | 644 | 23 | % | $ | 1,561 | $ | 1,333 | 17 | % | ||
Fertilizer | 53 | 54 | (2) | 99 | 97 | 2 | 179�� | 168 | 7 | 349 | 342 | 2 | ||||||||||
Food & refrigerated | 41 | 52 | (21) | 89 | 99 | (10) | 251 | 205 | 22 | 486 | 455 | 7 | ||||||||||
Coal & renewables | 186 | 244 | (24) | 394 | 500 | (21) | 423 | 369 | 15 | 764 | 790 | (3) | ||||||||||
Bulk | 447 | 528 | (15) | 924 | 1,043 | (11) | 1,648 | 1,386 | 19 | 3,160 | 2,920 | 8 | ||||||||||
Industrial chemicals & plastics | 141 | 157 | (10) | 295 | 305 | (3) | 498 | 435 | 14 | 933 | 930 | - | ||||||||||
Metals & minerals | 162 | 199 | (19) | 336 | 379 | (11) | 467 | 368 | 27 | 842 | 837 | 1 | ||||||||||
Forest products | 50 | 56 | (11) | 106 | 112 | (5) | 348 | 266 | 31 | 664 | 569 | 17 | ||||||||||
Energy & specialized markets | 115 | 156 | (26) | 277 | 303 | (9) | 546 | 431 | 27 | 1,076 | 1,058 | 2 | ||||||||||
Industrial | 468 | 568 | (18) | 1,014 | 1,099 | (8) | 1,859 | 1,500 | 24 | 3,515 | 3,394 | 4 | ||||||||||
Automotive | 79 | 218 | (64) | 287 | 428 | (33) | 428 | 189 | F | 875 | 713 | 23 | ||||||||||
Intermodal [a] | 724 | 823 | (12) | 1,433 | 1,654 | (13) | ||||||||||||||||
Intermodal | 1,197 | 897 | 33 | 2,231 | 1,825 | 22 | ||||||||||||||||
Premium | 803 | 1,041 | (23) | 1,720 | 2,082 | (17) | 1,625 | 1,086 | 50 | 3,106 | 2,538 | 22 | ||||||||||
Total | 1,718 | 2,137 | (20) | % | 3,658 | 4,224 | (13) | % | $ | 5,132 | $ | 3,972 | 29 | % | $ | 9,781 | $ | 8,852 | 10 | % | ||
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||
Average Revenue per Car | 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||
Revenue Carloads | June 30, | June 30, | ||||||||||||||||||||
Thousands, | 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||
Grain & grain products | $ | 3,861 | $ | 3,993 | (3) | % | $ | 3,901 | $ | 3,959 | (1) | % | 204 | 167 | 22 | % | 407 | 342 | 19 | % | ||
Fertilizer | 3,181 | 3,182 | - | 3,456 | 3,419 | 1 | 54 | 53 | 2 | 98 | 99 | (1) | ||||||||||
Food & refrigerated | 4,986 | 5,211 | (4) | 5,142 | 5,215 | (1) | 48 | 41 | 17 | 93 | 89 | 4 | ||||||||||
Coal & renewables | 1,979 | 2,147 | (8) | 2,001 | 2,155 | (7) | 198 | 186 | 6 | 372 | 394 | (6) | ||||||||||
Bulk | 3,099 | 3,179 | (3) | 3,161 | 3,163 | - | 504 | 447 | 13 | 970 | 924 | 5 | ||||||||||
Industrial chemicals & plastics | 3,086 | 3,081 | - | 3,148 | 3,064 | 3 | 156 | 141 | 11 | 296 | 295 | - | ||||||||||
Metals & minerals | 2,276 | 2,806 | (19) | 2,494 | 2,883 | (13) | 182 | 162 | 12 | 328 | 336 | (2) | ||||||||||
Forest products | 5,256 | 5,324 | (1) | 5,361 | 5,236 | 2 | 64 | 50 | 28 | 124 | 106 | 17 | ||||||||||
Energy & specialized markets | 3,739 | 3,807 | (2) | 3,813 | 3,835 | (1) | 138 | 115 | 20 | 277 | 277 | - | ||||||||||
Industrial | 3,201 | 3,408 | (6) | 3,345 | 3,436 | (3) | 540 | 468 | 15 | 1,025 | 1,014 | 1 | ||||||||||
Automotive | 2,388 | 2,546 | (6) | 2,487 | 2,510 | (1) | 173 | 79 | F | 353 | 287 | 23 | ||||||||||
Intermodal [a] | 1,241 | 1,295 | (4) | 1,274 | 1,268 | - | 878 | 724 | 21 | 1,674 | 1,433 | 17 | ||||||||||
Premium | 1,354 | 1,557 | (13) | 1,476 | 1,523 | (3) | 1,051 | 803 | 31 | 2,027 | 1,720 | 18 | ||||||||||
Average | $ | 2,312 | $ | 2,450 | (6) | % | $ | 2,420 | $ | 2,425 | - | % | ||||||||||
Total | 2,095 | 1,718 | 22 | % | 4,022 | 3,658 | 10 | % | ||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
Average Revenue per Car | 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||
Grain & grain products | $ | 3,894 | $ | 3,861 | 1 | % | $ | 3,838 | $ | 3,901 | (2) | % | |
Fertilizer | 3,304 | 3,181 | 4 | 3,550 | 3,456 | 3 | |||||||
Food & refrigerated | 5,226 | 4,986 | 5 | 5,230 | 5,142 | 2 | |||||||
Coal & renewables | 2,134 | 1,979 | 8 | 2,051 | 2,001 | 2 | |||||||
Bulk | 3,266 | 3,099 | 5 | 3,256 | 3,161 | 3 | |||||||
Industrial chemicals & plastics | 3,189 | 3,086 | 3 | 3,153 | 3,148 | - | |||||||
Metals & minerals | 2,569 | 2,276 | 13 | 2,567 | 2,494 | 3 | |||||||
Forest products | 5,463 | 5,256 | 4 | 5,357 | 5,361 | - | |||||||
Energy & specialized markets | 3,944 | 3,739 | 5 | 3,886 | 3,813 | 2 | |||||||
Industrial | 3,442 | 3,201 | 8 | 3,430 | 3,345 | 3 | |||||||
Automotive | 2,479 | 2,388 | 4 | 2,482 | 2,487 | - | |||||||
Intermodal [a] | 1,363 | 1,241 | 10 | 1,332 | 1,274 | 5 | |||||||
Premium | 1,547 | 1,354 | 14 | 1,532 | 1,476 | 4 | |||||||
Average | $ | 2,449 | $ | 2,312 | 6 | % | $ | 2,432 | $ | 2,420 | - | % | |
[a] For intermodal shipments each container or trailer equals one carload.
Bulk – Bulk includes shipments of grain and grain products, fertilizer, food and refrigerated goods, and coal and renewables. Freight revenue from bulk shipments decreasedincreased in the second quarter of 20202021 compared to 20192020 due to a 15%13% volume decline, lowerincrease, core pricing gains, and higher fuel surcharge revenue,revenue. Strong demand for export grain and negative business mix, partially offset by core pricing gains. Volume declines were driven byincreased ethanol demand from the COVID-19 recovery drove a reduction22% increase in coal shipments, food and refrigerated products, and ethanol shipments, partially offset by increased shipments of export feed grain and renewables. Continued softness in marketgrain products. Market conditions due to historically low natural gas prices and weak export demand drove the 25% decline infor coal shipmentswere favorable in the second quarter as worldwide electricity demand recovered from the pandemic and natural gas prices rose, driving a 9% increase in volume compared to the second quarter of 2020, despite a contract loss. Year-to-date, freight revenue from bulk shipments increased compared to the same period in 2019. The COVID-19 pandemic impacted production2020, driven by 5% higher volume, core pricing gains, and positive mix of imported beer and thetraffic. Strong demand for ethanolexport grain drove a 19% increase in shipments of grain and relatedgrain products driving the year-over-year declinesyear-to-date, which partially offset lower volume from coal and renewables shipments in the second quarter compared to the same period in 2019. Year-to-date, freight revenue from bulk shipments decreased compared to the same period in 2019, driven by an 11% volume decline and lower fuel surcharge revenue, partially offset by core pricing gains. Volume declines were driven by a 23% reduction in coal shipments, partially offset by growth in renewables and export grain shipments.first quarter.
Industrial – Industrial includes shipments of industrial chemicals and plastics, metals and minerals, forest products, and energy and specialized markets. Freight revenue from industrial shipments decreasedincreased in the second quarter and six-month period compared to the same period in 20192020 due to lowerhigher volume, negativepositive mix of traffic, core pricing gains, and lowerhigher fuel surcharge revenue, partially offset by core pricing gains. Inrevenue. Volume increases in the second quarter of 2020, low oil prices2021 were primarily driven by the primary driver of a 43% decline in petroleum product shipments and a 79% decline in sand shipments compared torecovery from the second quarter of 2019. During the second quarter, the COVID-19 pandemic slowdown that impacted production across a wide spanarray of industries driving declines in manythe second quarter of our market segments, including industrial chemicals, soda ash, steel and lumber. Although volume2020. Year-to-date, freight revenue from industrial shipments were upincreased compared to the same period in 2020, driven by core pricing gains, positive mix of traffic, and a 1% volume increase. The pandemic recovery in the second quarter offset a majority of the losses in the first quarter it was not enough to overcome the weak demandcaused by weather interruptions in the second quarter, resulting in year-to-date volume down 8% comparedGulf Coast impacting industrial chemicals and plastics and metals and mineral industries, and unfavorable regional crude oil pricing spreads impacting petroleum shipments. Forest product shipments increased due to last year driven by declines in sand, petroleum products, soda ash,high demand for cardboard boxes and industrial chemicals.lumber.
Premium – Premium includes shipments of finished automobiles, automotive parts, and merchandise in intermodal containers, both domestic and international. Premium freight revenue declined 33%increased in the second quarter and year-to-date periods compared to 2019same periods in 2020 due to a 23% decrease in volume negativeincreases, higher fuel surcharge revenue, positive mix of traffic, and lower fuel surcharge revenue, partially offset by core pricing gains. The impacts of the COVID-19 pandemic continued into the second quarter for international intermodalAutomotive shipments while Asian manufacturing recovered and freight began to move in April, the virus started to effect the U.S. and retailers began cancelling orders in May, driving shipments down 20% in the second quarter 2020 compared to 2019. Domestic intermodal declined 4%of 2021 were more than double the shipments in the second quarter compared to 2019,same period last year, as depressed truckload shipments, due to pandemic driven economic slowdown, were partially offset by surging parcel shipments, reflecting the strength of e-commerce. Automotive shipments declined 64% in the second quarter 2020 compared to 2019, as a result of most of the North American manufacturing plants temporarily suspendingsuspended production due to the pandemic. The weeklyThis recovery is masking the impact to automotive shipments declined as much as 90% from mid-April to mid-May and, although production has resumed, it is not at pre-pandemic levels. Year-to-date, freight revenue declined 20%in the second quarter of 2021 due to decreased volume, lower fuel surcharge revenue, and negative mixthe shortage of traffic, partially offset by core pricing gains. Volume declinessemiconductors. Despite the supply chain disruptions, intermodal shipments increased 21% in international intermodalthe second quarter of 2021 due to trade uncertaintyimproving economic conditions, inventory restocking, contract wins, and COVID-19 impact oncontinued strength of e-commerce and parcel shipments. The year-to-date period also was negatively impacted by weather disruptions in the supply chains between Asia and the U.S., along with the temporary automotive production halt, drove the 17% decline in premium shipments for the six-month periodfirst quarter of 2020 compared to 2019.2021.
Mexico Business – Each of our commodity groups includes revenue from shipments to and from Mexico. Revenue from Mexico business decreased 35%increased 59% to $389$618 million in the second quarter of 20202021 compared to 20192020 driven by a 39%53% volume decline and lowerincrease, higher fuel surcharge revenue, partially offset byand core pricing gains. The volume decline wasVolume increases in the second quarter of 2021 were driven by the COVID-19recovery from the pandemic with declinesslowdown in automotivethe second quarter of 2021, including shipments intermodalof auto parts, finished vehicles, petroleum products, brewers and beer.beverage, and grain. Year-to-date, freight revenue decreased 18%increased 22% to $972$1,183 million as a result of increased volume, declines in automotive, intermodal, coalhigher fuel surcharges, and beer shipments and lower fuel surcharge revenue, partially offset by core pricing gains.
Operating Expenses
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||
Millions | 2020 | 2019 | Change | 2020 | 2019 | Change | 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||
Compensation and benefits | $ | 905 | $ | 1,145 | (21) | % | $ | 1,964 | $ | 2,350 | (16) | % | $ | 1,022 | $ | 905 | 13 | % | $ | 2,048 | $ | 1,964 | 4 | % | ||
Depreciation | 551 | 551 | - | 1,098 | 1,100 | - | 550 | 551 | - | 1,099 | 1,098 | - | ||||||||||||||
Purchased services and materials | 441 | 573 | (23) | 962 | 1,149 | (16) | 478 | 441 | 8 | 968 | 962 | 1 | ||||||||||||||
Fuel | 247 | 560 | (56) | 681 | 1,091 | (38) | 497 | 247 | U | 908 | 681 | 33 | ||||||||||||||
Equipment and other rents | 211 | 260 | (19) | 438 | 518 | (15) | 200 | 211 | (5) | 412 | 438 | (6) | ||||||||||||||
Other | 235 | 247 | (5) | 533 | 552 | (3) | 284 | 235 | 21 | 604 | 533 | 13 | ||||||||||||||
Total | $ | 2,590 | $ | 3,336 | (22) | % | $ | 5,676 | $ | 6,760 | (16) | % | $ | 3,031 | $ | 2,590 | 17 | % | $ | 6,039 | $ | 5,676 | 6 | % | ||
Operating expenses decreased $746increased $441 million and $1.1 billion$363 million in the second quarter and year-to-date periods, respectively, compared to 20192020 driven by volume declines, productivity initiatives, lowerhigher fuel prices, lower year-over-year weather-relatedvolume-related costs, inflation, 2020 management actions responding to the sharp decline in volume (temporary unpaid leave, salary reductions, and shop closures), incentive compensation, higher casualty costs, an insurance reimbursement for last year’s weather-related lossesrecognized in 2020, and lower destroyed equipmenthigher state and freight costs.local taxes. Partially offsetting these decreasesincreases compared to 20192020 are an employment tax refund recognized in 2019 and inflation.productivity initiatives. In addition, the year-to-date period comparison was impacted negatively by increased bad debt expense. weather-related expenses.
Compensation and Benefits – Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. For the second quarter and year-
to-dateyear-to-date periods, expenses decreased 21%increased 13% and 16%4%, respectively, compared to 20192020 due to declinesincreases in carload volumes; productivity initiatives; and management’svolumes, wage inflation, 2020 management actions responding to the sharp decline in volume including temporary(temporary unpaid leave, salary reductions, and shop closures; partially offset by wage inflation. Comparisons with 2019closures), and incentive compensation. Partially offsetting these increases are productivity initiatives resulting in employee levels that were flat and down 6% in the second quarter and year-to-date periods, were favorably impacted by decreased weather-related costs, offset by an employment tax refund recognized in 2019. Therespectively, compared to 2020 despite volume increases. In addition, the year-to-date period comparison was favorably impacted negatively by lower severance costs.weather-related expenses.
Depreciation – The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. Depreciation expense was essentially flat compared tofor the second quarter and year-to-datesix-month periods of 20202021 compared to 2019.2020.
Purchased Services and Materials – Expense for purchased services and materials includes the costs of services purchased (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 23%increased 8% and 16%1% in the second quarter and year-to-date periods, respectively, compared to 20192020 primarily due to lowerhigher volume-related costs for intermodal and transload services lowerincurred by one of our subsidiaries and other volume-related costs forsuch as transportation and lodging for train crews. In addition, the train crews,year-to-date period was negatively impacted by weather-related expense and positively impacted by lower locomotive and freight car maintenance expenses due to a smaller active fleet costs associated with derailments, professional services costs and lower year-over-year weather-related costs.in the first quarter.
Fuel – Fuel includes locomotive fuel and fuel for highway and non-highway vehicles and heavy equipment. A 43% declineFuel expense increased in the second quarter of 2021 compared to the same period in 2020 driven by a 71% increase in locomotive diesel fuel prices, which averaged $2.16 and $1.26 per gallon (including taxes and transportation costs) in the second quarter of 2021 and 2020, compared to $2.21 per gallon in the same period in 2019,respectively, and a 22% declineincrease in gross ton-miles and a slight improvement in theton-miles. The fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-mile in thousands, drove the decrease inimproved 3% versus the second quarter comparedin 2020 offsetting some of the increased costs due to the same period in 2019.higher price and increased volume. For the six-month period, locomotive diesel fuel prices averaged $1.59$2.01 per gallon in 20192021 compared to $2.14$1.59 in 2019, decreasing2020, driving the increase in expenses by 38%33%. In addition, gross ton-miles decreased 14% and fuel consumption rate improved 3%increased 8% during the year-to-date period, also driving lowerhigher fuel expense compared to 2019.2020. The higher costs were partially offset by fuel consumption rate improvement of 2%.
Equipment and Other Rents – EquipmentEquipment 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 rentals. Equipment and other rents expense decreased 19% and 15%5% in the second quarter and 6% in the year-to-date periods, respectively,period compared to 20192020 driven by decreased carlower rent expense due to volume declines, lower locomotiveon stored equipment and freight car lease expenses, partially offset by longer auto rack cycle times, and lowerhigher equity income from our investment in TTX Company.Company, partially offset by increased freight car rent expense due to volume increases.
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 costs decreased 5%increased 21% and 3%13% in the second quarter and year-to-date period,periods, respectively, compared to 20192020 driven primarily by casualty expenses including personal injury, environmental, destroyed equipment, and damaged freight, an insurance reimbursement for weather-related expenses incurred last year, lower costs associated with employee travel and lower costs associated with destroyed equipment and freight loss and damage costs. Conversely, lease impairments, lower equity income from our investmentrecognized in Grupo Ferroviaro Mexicano2020, and higher state and local taxes offset these decreases versus 2019. The year-to-date period comparison was impacted negatively by additional bad debt expense associated with the pandemic-induced uncertainty related to certain customer receivables.taxes.
Non-Operating Items
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
Millions | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||
Other income | $ | 131 | $ | 57 | F | % | $ | 184 | $ | 134 | 37 | % | |
Interest expense | (289) | (259) | 12 | (567) | (506) | 12 | |||||||
Income taxes | (364) | (488) | (25) | (808) | (887) | (9) | |||||||
Non-Operating Items
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
Millions | 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||
Other income, net | $ | 125 | $ | 131 | (5) | % | $ | 176 | $ | 184 | (4) | % | |
Interest expense | (282) | (289) | (2) | (572) | (567) | 1 | |||||||
Income taxes | (518) | (364) | 42 | (931) | (808) | 15 | |||||||
Other Income, net – Other income increaseddecreased in the second quarter of 20202021 and year-to-date periods compared to 2019 as a result of larger2020 driven by smaller gains from real estate sales. Real estate sales includingin the second quarter of 2021 includes a $50 million gain from a sale to the Colorado Department of Transportation, while the second quarter of 2020 includes a $69 million gain from a land and permanent easement sale to the Illinois State Toll Highway Authority. The year-to-date period was partially offset by $30 million in interest income associated with an employment tax refund in 2019.
Interest Expense – Interest expense increaseddecreased in the second quarter of 20202021 compared to 20192020 due to an increasea lower effective interest rate of 4.0% in 2021 compared to 4.1% in 2020, in addition to a decrease in the weighted-average debt level of $28.0 billion in 2021 compared to $28.4 billion in 2020 compared to $25.1 billion2020. Year-to-date, interest expense increased as a result of the debt exchange fees incurred in 2019,the first quarter, partially offset by a lowerdecrease in the weighted-average debt levels of $27.4 billion in 2021 compared to $27.8 billion in 2020. Year-to-date, in both periods the effective interest rate ofwas 4.1% in 2020 compared to 4.2% in 2019. Year-to-date, interest expense increased due to an increased weighted-average debt level of $27.8 billion in 2020 from $24.2 billion in 2019, partially offset by a lower effective interest rate of 4.1% in 2020 compared to 4.3% in 2019..
Income Taxes – Income taxes decreasedincreased in the second quarter and six-month periods of 20202021 compared to 20192020 due to lowerhigher pre-tax income. Our effective tax rates year-to-date 2021 and 2020 were 22.9% and 2019 were 23.7% and 23.1%, respectively. In the second quarter of 2021, Nebraska, Oklahoma, and Idaho enacted legislation to reduce their corporate income tax rates for future years resulting in a reduction of our deferred tax expense. This reduced our 2021 effective tax rate.
OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS
We report a number of key performance measures weekly to the Surface Transportation Board (STB). We provide this data on our website at www.up.com/investor/aar-stb_reports/index.htm.
Operating/Performance Statistics
In an effort to operate a safe, reliable and efficient railroad, management usesManagement continuously measures these key operating metrics to evaluate the health of our network. The metrics are continuously measured to determine our productivity, asset utilization, and network efficiency in striving to provide a consistent, reliable service product to our customers.
Railroad performance measures are included in the table below:
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||
Gross ton-miles (GTMs) (billions) | 170.6 | 220.0 | (22) | % | 371.9 | 430.3 | (14) | % | 207.8 | 170.6 | 22 | % | 400.9 | 371.9 | 8 | % | ||
Revenue ton-miles (billions) | 85.9 | 108.7 | (21) | 185.6 | 215.4 | (14) | 104.8 | 85.9 | 22 | 202.1 | 185.6 | 9 | ||||||
Freight car velocity (daily miles per car) [a] | 225 | 202 | 11 | 216 | 198 | 9 | 213 | 227 | (6) | 211 | 218 | (3) | ||||||
Average train speed (miles per hour) [a] [b] | 26.9 | 24.5 | 10 | 26.0 | 24.6 | 6 | ||||||||||||
Average terminal dwell time (hours) [a] [b] | 21.6 | 25.7 | (16) | 22.8 | 26.2 | (13) | ||||||||||||
Average train speed (miles per hour) [b] | 25.0 | 26.9 | (7) | 25.1 | 26.0 | (3) | ||||||||||||
Average terminal dwell time (hours) [b] | 22.9 | 21.6 | 6 | 23.2 | 22.8 | 2 | ||||||||||||
Locomotive productivity (GTMs per horsepower day) | 136 | 121 | 12 | 133 | 116 | 15 | 140 | 136 | 3 | 139 | 133 | 5 | ||||||
Train length (feet) | 8,664 | 7,652 | 13 | 8,517 | 7,472 | 14 | 9,410 | 8,664 | 9 | 9,330 | 8,517 | 10 | ||||||
Intermodal car trip plan compliance (%) | 82 | 69 | 13 | pts | 83 | 68 | 15 | pts | 71 | 82 | (11) | pts | 74 | 83 | (9) | pts | ||
Manifest/Automotive car trip plan compliance (%) | 76 | 59 | 17 | pts | 69 | 61 | 8 | pts | 67 | 76 | (9) | pts | 68 | 69 | (1) | pts | ||
Workforce productivity (car miles per employee) | 868 | 866 | - | 882 | 839 | 5 | 1,060 | 868 | 22 | 1,031 | 882 | 17 | ||||||
Total employees (average) | 30,059 | 38,657 | (22) | 31,965 | 39,355 | (19) | 30,066 | 30,059 | - | 29,910 | 31,965 | (6) | ||||||
Operating ratio | 61.0 | 59.6 | 1.4 | pts | 59.9 | 61.6 | (1.7) | pts | 55.1 | 61.0 | (5.9) | pts | 57.5 | 59.9 | (2.4) | pts | ||
[a]Prior years have been recast to conform to the current year presentation which reflects minor refinements.
[b]As reported to the STB.
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 decreasedboth increased 2 22% and 21%, respectively, 2% during the second quarter of 20202021 compared to 2019,2020, driven by a 20% decline22% increase in carloadings. Year-to-date, gross ton-miles and revenue ton-miles increased 8% and 9%, respectively, driven by a 10% increase in carloadings. Changes in commodity mix drove the variance in year-over-year decreasesincreases between gross ton-miles, and revenue ton-miles, and carloads. Year-to-date, gross ton-miles and revenue ton-miles both decreased 14% compared to 2019, driven by a 13% decrease in carloadings.
Freight Car Velocity – Freight car velocity measures the average daily miles per car on our network. The two key drivers of this metric are the speed of the train between terminals (average train speed) and the time a rail car spends at the terminals (average terminal dwell time). Continued implementation of Unified
Plan 2020 was the primary driver of the improvement from 2019 as both averageBoth train speed and terminal dwell and average train speed improvedslowed in the second quarter and the six-month periodperiods of 20202021 compared to the same periods in 2019. Average terminal dwell time in 2020 decreased compared to 2019 largelypartially driven by intermodal supply chain disruptions due to improved terminal processes, transportationcontinued high demand for consumer goods as well as incidents affecting the network. Continued implementation of our operating plan changeshelped to eliminate switches, and reduced carload volumes due to COVID-19. Average train speedpartially offset these declines. Weather-related challenges in 2020 improved comparedthe first quarter of 2021 also contributed to the second quarter of 2019 as weather-related challenges slowed trainsdeclines in 2019.the year-to-date period.
Locomotive Productivity – Locomotive productivity is gross ton-miles per average daily locomotive horsepower. Locomotive productivity increased in the second quarter and year-to-date periodperiods compared to the same periods in 2019 driven by a reduction in2020 as continued implementation of our average active fleet size due to operating plan prompted transportation plan changes and lower locomotive dwell times.times that more than offset the increased active fleet required by increased volume.
Train Length – Train length is the average maximum train length on a route measured in feet. Our train length increased in the second quarter and six-month periodperiods compared to same periods in 20192020 as a result of blending service products and transportation plan changes.changes designed to improve overall operational efficiency.
Car Trip Plan Compliance – Car trip plan compliance is the percentage of cars delivered on time in accordance with our original trip plan. Our network trip plan compliance is broken into the intermodal containers / trailers and manifest / manifest/automotive railcars.products. Intermodal car trip plan compliance improveddeteriorated in the second quarter and six-month periodyear-to-date periods of 20202021 compared to same periods in 20192020 as a result of improved train speedhigh demand for consumer goods that strained the ports, railroad equipment and reduced dwell at our originchassis availability, truck driver supply, and destination ramps.warehouse receiving capacity; and incidents affecting the network. Manifest / automotive car trip plan compliance was betterdeteriorated in the second quarter and six-month periodyear-to-date periods of 2021 compared to 20192020 as volume increases and incidents within the quarter presented network challenges that required increased resource allocation and rebalancing compared to historically low 2020 volumes due to improved car dwell in our yards, increased train velocity across the network, and more reliable first mile last mile service.COVID-19. Both metrics were aided as a result of reduced carload volumes due to COVID-19 and milder weather relative to the series of significant weather eventsnegatively impacted by weather-related challenges in the both the second quarter and six-month period of 2019.year-to-date period.
Workforce Productivity – Workforce productivity is average daily car miles per employee. Workforce productivity wasimproved 22%, as employee counts were essentially flat compared to 2020, while higher carload volumes increased average daily car miles. Productivity initiatives and smaller capital workforce offset a 22% increase in carload volumes to keep employee levels flat with last year for the second quarter. Although impacted by weather-related challenges in the first quarter, year-to-date, workforce productivity improved 17% as average daily car miles decreased 22%increased 9% while employees decreased 22%6% compared to 2019. Lower volume drove the decline in average daily car miles. The 22% decline in employee levels was driven by a 20% decline in carload volumes, productivity initiatives and a smaller capital workforce. Year-to-date, workforce productivity improved 5% as average daily car miles decreased 15% while employees decreased 19% compared to 2019. At the end of the second quarter, approximately 5,700 employees across all crafts were furloughed.2020.
Operating Ratio – Operating ratio is our operating expenses reflected as a percentage of operating revenue. Our second quarter operating ratio of 61.0% deteriorated 1.455.1% improved 5.9 points compared to 2019 mainly driven by a 20% volume decline. Productivity initiatives2020 and lower fuel prices could not overcome a 24% reduction of revenue. Ourour year-to-date operating ratio of 59.9%57.5% improved 1.72.4 points compared to 2019.2020 mainly due to productivity initiatives and core pricing gains, partially offset by higher fuel prices, inflation, and other cost increases.
Adjusted Debt / Adjusted EBITDA
Millions, Except Ratios | Jun. 30, | Dec. 31, | Jun. 30, | Dec. 31, | ||||
for the Trailing Twelve Months Ended [a] | 2020 | 2019 | 2021 | 2020 | ||||
Net income | $ | 5,564 | $ | 5,919 | $ | 5,882 | $ | 5,349 |
Add: | ||||||||
Income tax expense | 1,749 | 1,828 | 1,754 | 1,631 | ||||
Depreciation | 2,214 | 2,216 | 2,211 | 2,210 | ||||
Interest expense | 1,111 | 1,050 | 1,146 | 1,141 | ||||
EBITDA | $ | 10,638 | $ | 11,013 | $ | 10,993 | $ | 10,331 |
Adjustments: | Adjustments: | Adjustments: | ||||||
Other income | (293) | (243) | ||||||
Other income, net | (279) | (287) | ||||||
Interest on operating lease liabilities [b] | 61 | 68 | 53 | 59 | ||||
Adjusted EBITDA | $ | 10,406 | $ | 10,838 | $ | 10,767 | $ | 10,103 |
Debt | $ | 28,429 | $ | 25,200 | $ | 28,812 | $ | 26,729 |
Operating lease liabilities | 1,639 | 1,833 | 1,553 | 1,604 | ||||
Unfunded pension and OPEB, net of taxes of $115 and $124 | 370 | 400 | ||||||
Unfunded pension and OPEB, net of taxes of $180 and $195 | 607 | 637 | ||||||
Adjusted debt | $ | 30,438 | $ | 27,433 | $ | 30,972 | $ | 28,970 |
Adjusted debt / Adjusted EBITDA | 2.9 | 2.5 | 2.9 | 2.9 | ||||
[a]The trailing twelve month income statement information ended June 30, 20202021, is recalculated by taking the twelve months ended December 31, 2019,2020, subtracting the six months ended June 30, 2019,2020, and adding the six months ended June 30, 2020.
2021.
[b]Represents the hypothetical interest expense we would incur (using the incremental borrowing rate) if the property under our operating leases were owned or accounted for as finance leases.
Adjusted debt to Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and adjustments for other income, net and interest on operating lease liabilities) 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 Company’s ability to sustain given debt levels (including leases) with the cash generated from operations. In addition, a comparable measure is used by rating agencies when reviewing the Company’s credit rating. Adjusted debt to Adjustedadjusted EBITDA should be considered in addition to, rather than as a substitute for, net income. The table above provides reconciliations from net income to
adjusted debt to adjusted EBITDA. At both June 30, 20202021, and December 31, 2019,2020, the incremental borrowing rate on operating lease liabilitiesleases was 3.4% and 3.7%., respectively.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Cash Flows | ||||||||
Millions, | ||||||||
for the Six Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||
Cash provided by operating activities | $ | 4,392 | $ | 3,900 | $ | 4,219 | $ | 4,392 |
Cash used in investing activities | (1,417) | (1,610) | (1,071) | (1,417) | ||||
Cash used in financing activities | (1,107) | (2,547) | (3,807) | (1,107) | ||||
Net change in cash, cash equivalents and restricted cash | $ | 1,868 | $ | (257) | $ | (659) | $ | 1,868 |
Operating Activities
Cash provided by operating activities increaseddecreased in the first six months of 20202021 compared to the same period of 2019 due primarily to lower income taxes paid under the2020 driven by increased tax payments, partially offset by higher net income. Tax payments in 2020 were deferred by provisions of IRS Notice 2020-23 which allowed us to defer $584 million of our federal estimated income tax payments from second quarter to third quarter, and the CARESCoronavirus Aid, Relief, and Economic Security Act which allowed us to defer approximately $150 million of our employment tax deposits to future years.(CARES Act).
Investing Activities
Cash used in investing activities decreased in the first six months of 20202021 compared to the same period of 20192020 primarily driven by proceeds from real estate sales.reduced capital investment in all asset categories.
The table below details cash capital investments:
Millions, | ||||||||
for the Six Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||
Rail and other track material | $ | 282 | $ | 281 | $ | 233 | $ | 282 |
Ties | 271 | 214 | 213 | 271 | ||||
Ballast | 139 | 122 | 100 | 139 | ||||
Other [a] | 312 | 274 | 232 | 312 | ||||
Total road infrastructure replacements | 1,004 | 891 | 778 | 1,004 | ||||
Line expansion and other capacity projects | 144 | 180 | 110 | 144 | ||||
Commercial facilities | 68 | 55 | 62 | 68 | ||||
Total capacity and commercial facilities | 212 | 235 | 172 | 212 | ||||
Locomotives and freight cars [b] | 164 | 222 | 93 | 164 | ||||
Positive train control | 35 | 34 | 31 | 35 | ||||
Technology and other | 184 | 178 | 116 | 184 | ||||
Total cash capital investments | $ | 1,599 | $ | 1,560 | $ | 1,190 | $ | 1,599 |
[a]Other includes bridges and tunnels, signals, other road assets, and road work equipment.
[b]Locomotives and freight cars include lease buyouts of $23 million in 2021 and $14 million in 2020 and $97 million in 2019.2020.
Capital Plan
We estimateIn 2021, we expect our 2020 capital expenditures to be approximately $2.9 billion, consistentessentially flat with 2020. We will continue to harden our previously announced reductioninfrastructure, replace older assets, and improve the safety and resilience of $150the network. Although implementation of our new transportation plan has generated capacity, the 2021 plan includes additional investments intended to $200 million to our capital plan as a result of economic uncertainties associated with the COVID-19 pandemicsupport growth and the impact to our business.improve productivity and operational efficiency. Further revisions may occur if business conditions or the regulatory environment affect our ability to generate sufficient returns on these investments.
Financing Activities
Cash used in financing activities decreasedincreased in the first six months of 20202021 compared to the same period of 2019,2020 driven by decreased share repurchasesan increase in shares repurchased and additionala decrease in debt issued.
See Note 14 of the Condensed Consolidated Financial Statements for a description of all our outstanding financing arrangements and significant new borrowings and Note 1816 of the Condensed Consolidated Financial Statements for a description of our share repurchase programs.
Free Cash Flow – Free cash flow is defined as cash provided by operating activities less cash used in investing activities and dividends paid. Cash flow conversion rate is cash from operationsoperating activities less cash used for capital investments as a ratio of net income.
Free cash flow and cash flow conversion rate are not considered financial measures under 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 and cash flow conversion rate are important to management and investors in evaluating our financial performance and measures our ability to generate cash without additional external financing. Free cash flow and cash flow conversion rate should be considered in addition 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):
Millions, | ||||||||||
for the Six Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||||
Cash provided by operating activities | $ | 4,392 | $ | 3,900 | $ | 4,219 | $ | 4,392 | ||
Cash used in investing activities | (1,417) | (1,610) | (1,071) | (1,417) | ||||||
Dividends paid | (1,319) | (1,248) | (1,350) | (1,319) | ||||||
Free cash flow | $ | 1,656 | $ | 1,042 | $ | 1,798 | $ | 1,656 | ||
The following table reconciles cash provided by operating activities (GAAP measure) to cash flow conversion rate (non-GAAP measure):
Millions, | ||||||||||
for the Six Months Ended June 30, | 2020 | 2019 | 2021 | 2020 | ||||||
Cash provided by operating activities | $ | 4,392 | $ | 3,900 | $ | 4,219 | $ | 4,392 | ||
Cash used in capital investments | (1,599) | (1,560) | (1,190) | (1,599) | ||||||
Total (a) | 2,793 | 2,340 | $ | 3,029 | $ | 2,793 | ||||
Net income (b) | 2,606 | 2,961 | $ | 3,139 | $ | 2,606 | ||||
Cash flow conversion rate (a/b) | 107 | % | 79 | % | 96 | % | 107 | % | ||
Current Liquidity Status
We are continually evaluating the impact of COVID-19 on our financial condition and liquidity. Although the situation is fluid and highly uncertain, we have analyzedWe analyze a wide range of economic scenarios and the impact on our ability to generate cash. These analyses inform our liquidity plans and activities outlined below and indicate we have sufficient capacity to sustain an extended period of lower volumes.
Year-to-date,During the second quarter, we have generated $4.4$2.3 billion of cash from operations.operating activities. On June 30, 2020,2021, we had $2.7$1.1 billion of cash and cash equivalents, and $2$2.0 billion of credit available under our revolving credit facility, and up to $400 million undrawn on the Receivables Facility. In addition, we entered into $600 million of additional short-term bilateral revolving credit linesin the second quarter which are currently 50% drawn. On April 7, 2020, we issued $750 million of long-term debt. We have $470$506 million of debt maturing before the end of the year, including $250 million in term loans and $200 million of commercial paper, before the end of the year.paper. Depending upon market conditions, we plan to renew theour term loans and continue to maintain the commercial paper program. However, based on our current cash position and outlook, we expect to be able to fund our 2020 debt maturities if we choose not to renew those programs. We have been, and we expect to continue to be, in compliance with our debt covenants. We utilized the provisions of IRS Notice 2020-23 to shift our federal estimated income tax payment of $584 million from the second quarter to the third quarter and the CARES Act to defer approximately $150 million of our employment tax deposits to future years. Our bad debt provision was unadjusted in the second quarter but it may increase in 2020 if the creditworthiness of our significant customers deteriorates. We paid out our quarterly dividend on June 30,2020, 2021. Our financing activities in the second quarter of 2021 continue to lower our effective interest rate. In April, we completed a $1.7 billion debt exchange and plan to maintain going forward but have currently suspended our share repurchase activity with the exception of the final settlement on our $2 billion accelerated share repurchase program entered into on February 18, 2020.
Share Repurchase Programs
Effective April 1, 2019, our Board of Directors authorized the repurchase of up to 150drew $400 million shares of our common stock by March 31, 2022. These repurchases may be made on the open market or through other transactions. Our management has sole discretion with respect to determining the timing and amount of these transactions. As of June 30, 2020,Receivables Facility. In May, we repurchased a total of $39.7issued $2.5 billion of our common stock since commencement of our repurchase programs in 2007.
The table below represents sharessecond quarter, we repurchased $2.7 billion under our share repurchase programs, in the first and second quarters of 2020 and 2019:
Number of Shares Purchased | Average Price Paid | |||||
2020 | 2019 | 2020 | 2019 | |||
First quarter [a] | 14,305,793 | 18,149,450 | $ | 178.66 | $ | 165.79 |
Second quarter | - | 3,732,974 | - | 171.24 | ||
Total | 14,305,793 | 21,882,424 | $ | 178.66 | $ | 166.72 |
Remaining number of shares that may be repurchased under current authority | 118,849,288 | |||||
[a]Includes 8,786,380 and 11,795,930 shares repurchased in February 2020 and 2019, respectively, underincluding entering into a $2.0 billion accelerated share repurchase programs.
Management's assessments of market conditions and other pertinent factors 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. Open market repurchases are recorded in treasury stock at cost, which includes any applicable commissions and fees.
Accelerated Share Repurchase Programs –The Company has established accelerated share repurchase programs (ASRs) with financial institutions to repurchase shares of our common stock. These ASRs have been structured so that at the time of commencement, we pay a specified amount($1.6 billion assigned to the financial institutions and receive an initial delivery of shares. Additional shares may be received at the time of settlement. The final number of shares to be received is based on the volume weighted average price of the Company’s common stock during the ASR term, less a discount and subject to potential adjustments pursuant to the terms of such ASR.
On February 19, 2020, the Company received 8,786,380 shares of its common stock repurchased under ASRs for an aggregate of $2.0 billion. When the shares were received, the exchange was accounted for as an equity transaction with $1.6 billion of the aggregate amount allocated to treasury stock and the remaining $0.4 billion allocated to paid-in-surplus. This delivery of shares represents the initial and likely minimum number of shares that we may receive under the ASRs initiated in 2020. The final settlement is expected to be completed prior to the end of the third quarter of 2020.
On February 26, 2019, the Company received 11,795,930 shares of its common stock repurchased under ASRs for an aggregate of $2.5 billion. Upon settlement of these ASRs in the third quarter of 2019, we received 3,172,900 additional shares.
ASRs are accounted for as equity transactions, and at the time of receipt, shares are included in treasury stock at fair market value as of the corresponding initiation or settlement date. The Company reflects shares received as a repurchase of common stock in the weighted average common shares outstanding calculation for basic and diluted earnings per shareshares).
Off-Balance Sheet Arrangements, Contractual Obligations, and Commercial Commitments
As described in the notes to the Condensed Consolidated Financial Statements and as referenced in the tablestable below, we have contractual obligations and commercial commitments that may affect our financial condition. However, 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, 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 identifytable identifies material obligations and commitments as of June 30, 2020:2021.
Jul. 1 | Payments Due by Dec. 31, | Jul. 1 | Payments Due by Dec. 31, | |||||||||||||||||||||||||||||
through | through | |||||||||||||||||||||||||||||||
Contractual Obligations | Dec. 31, | After | Dec. 31, | After | ||||||||||||||||||||||||||||
Millions | Total | 2020 | 2021 | 2022 | 2023 | 2024 | Other | Total | 2021 | 2022 | 2023 | 2024 | 2025 | Other | ||||||||||||||||||
Debt [a] | $ | 50,124 | $ | 982 | $ | 2,475 | $ | 2,695 | $ | 2,260 | $ | 2,280 | $ | 39,432 | $ | - | $ | 52,724 | $ | 982 | $ | 2,743 | $ | 2,308 | $ | 2,327 | $ | 2,308 | $ | 42,056 | $ | - |
Operating leases [b] | 1,894 | 103 | 302 | 267 | 225 | 216 | 781 | - | ||||||||||||||||||||||||
Finance lease obligations [c] | 618 | 62 | 142 | 127 | 88 | 75 | 124 | - | ||||||||||||||||||||||||
Purchase obligations [d] | 3,079 | 796 | 822 | 443 | 202 | 187 | 626 | 3 | ||||||||||||||||||||||||
Purchase obligations [b] | 2,863 | 882 | 882 | 272 | 208 | 162 | 457 | - | ||||||||||||||||||||||||
Operating leases [c] | 1,766 | 91 | 291 | 249 | 238 | 240 | 657 | - | ||||||||||||||||||||||||
Finance lease obligations [d] | 454 | 72 | 111 | 81 | 68 | 45 | 77 | - | ||||||||||||||||||||||||
Other postretirement benefits [e] | Other postretirement benefits [e] | 209 | 24 | 24 | 22 | 22 | 20 | 97 | - | Other postretirement benefits [e] | 386 | 25 | 45 | 44 | 39 | 39 | 194 | - | ||||||||||||||
Income tax contingencies [f] | 69 | 1 | - | - | - | - | - | 68 | 78 | 1 | - | - | - | - | - | 77 | ||||||||||||||||
Total contractual obligations | $ | 55,993 | $ | 1,968 | $ | 3,765 | $ | 3,554 | $ | 2,797 | $ | 2,778 | $ | 41,060 | $ | 71 | $ | 58,271 | $ | 2,053 | $ | 4,072 | $ | 2,954 | $ | 2,880 | $ | 2,794 | $ | 43,441 | $ | 77 |
[a]Excludes finance lease obligations of $532$396 million, as well as unamortized discount and deferred issuance costs of ($1,247)1,789) million. Includes an interest component of $20,980$22,519 million.
[b] Includes leases for locomotives, freight cars, other equipment, and real estate. Includes an interest component of $255 million.
[c]Represents total obligations, including interest component of $86 million.
[d]Purchase obligations include locomotive maintenance contracts; purchase commitments for fuel purchases, locomotives, ties, ballast, and rail; and agreements to purchase other goods and services. For amounts where we cannot reasonably estimate the year of settlement, they are included in the Other column.
[c]Includes leases for locomotives, freight cars, other equipment, and real estate. Includes an interest component of $213 million.
[d]Represents total obligations, including interest component of $58 million.
[e]Includes estimated other postretirement, medical, and life insurance payments and 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 any interest or penalties, as of June 30, 2020.2021. For amounts where the year of settlement is uncertain, they are included in the Other column.
Jul. 1 | Amount of Commitment Expiration by Dec. 31, | |||||||||||||
through | ||||||||||||||
Other Commercial Commitments | Dec. 31, | After | ||||||||||||
Millions | Total | 2020 | 2021 | 2022 | 2023 | 2024 | 2024 | |||||||
Credit facilities [a] | $ | 2,000 | $ | - | $ | - | $ | - | $ | 2,000 | $ | - | $ | - |
Receivables securitization facility [b] | 800 | - | - | 800 | - | - | - | |||||||
Bilateral revolving credit lines [c] | 600 | - | 600 | - | - | - | - | |||||||
Guarantees [d] | 15 | 5 | 5 | 5 | ||||||||||
Standby letters of credit [e] | 18 | 7 | 11 | - | - | - | - | |||||||
Total commercial commitments | $ | 3,433 | $ | 12 | $ | 616 | $ | 805 | $ | 2,000 | $ | - | $ | - |
[a] None of the credit facility was used as of June 30, 2020.
[b] $400 million of the receivables securitization facility was utilized as of June 30, 2020, which is accounted for as debt. The full program matures in July 2022.
[c]$300 million of the bilateral revolving credit lines were utilized as of June 30, 2020, which is accounted for as debt. The programs mature in May 2021.
[d]Includes guaranteed obligations related to our affiliated operations.
[e]None of the letters of credit were drawn upon as of June 30, 2020.
OTHER MATTERS
Asserted and Unasserted Claims – Various claims and lawsuits are pending against us and certain of our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our consolidated results of operations, financial condition, or liquidity. To the extent possible, we have recorded a liability where asserted and unasserted claims are considered probable and where such claims can be reasonably estimated. We do not expect that any known lawsuits, claims, environmental costs, commitments, contingent liabilities, or guarantees will have a material adverse effect on our consolidated results of operations, financial condition, or liquidity after taking into account liabilities and insurance recoveries previously recorded for these matters.
Indemnities – We are contingently obligated under a variety of indemnification arrangements, although in some cases the extent of our potential liability is limited, depending on the nature of the transactions and 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.
Accounting Pronouncements – See Note 2 to the Condensed Consolidated Financial Statements.
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; our current reports on Form 8-K; our proxy statements; Forms 3, 4, and 5, filed on behalf of directors and executive officers; and amendments to any such reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), 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. We provide these previously filed reports as a convenience and their contents reflect only information that was true and correct as of the date of the report. We assume no obligation to update this historical information. 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 New York Stock Exchange or as desirable to promote the effective and efficient governance of our company. Any security holder wishing to receive, without charge, a copy of any of our SEC filings or corporate governance materials should send a written request to: Corporate Secretary, Union Pacific Corporation, 1400 Douglas Street, Omaha, NE 68179.
References to our website address in this report, including references in Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 2, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the Quantitative and Qualitative Disclosures About Market Risk previously disclosed in our 20192020 Annual Report on Form 10-K.
Item 4. 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 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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)$1,000,000), and such other pending matters that we may determine to be appropriate.
Environmental Matters
We receive notices from the EPA and state environmental agencies alleging that we are or may be liable under federal or state environmental laws for remediation costs at various sites throughout the U.S., including sites on the Superfund National Priorities List or state superfund lists. We cannot predict the ultimate impact of these proceedings and suits because of the number of potentially responsible parties involved, the degree of contamination by various wastes, the scarcity and quality of volumetric data related to many of the sites, and the speculative nature of remediation costs.
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, of our 20192020 Annual Report on Form 10-K.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, see the risk factor below and the information under Item 1A offactors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. These risks could materially and adversely affect our business, financial condition, results of operations (including revenues and profitability), and/or stock price. Our business also could be affected by risks that we are not presently aware of or that we currently consider immaterial to our operations.
Our business, financial condition and results of operations have been adversely affected and in the future could be materially adversely affected by the COVID-19 pandemic.
Our business, financial condition and results of operations have been adversely affected by the COVID-19 pandemic that has caused, and is expected to continue to cause, a global slowdown of economic activity (including the decrease in demand for a broad variety of goods), disruptions in global supply chains and significant volatility and disruption of financial markets and that also has adversely affected workforces, customers, and regional and local economies.
Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business and financial condition remains uncertain and difficult to predict. The ultimate impact of the COVID-19 pandemic on our results of operations and financial condition remains uncertain and depends on numerous evolving factors, many of which are not within our control, and which we may not be able to effectively respond to, including, but not limited to: governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including restrictions on travel and transport, workforce pressures and social distancing and shelter-in-place orders); the effect of the pandemic on economic activity and actions taken in response; the effect on our customers and their demand for our services; the effect of the pandemic on the credit-worthiness of our customers; national or global supply chain challenges or disruption; facility closures; commodity cost volatility; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides, as well as response to a potential reoccurrence.
Further, the COVID-19 pandemic, and the volatile regional and global economic conditions stemming from the pandemic, could also precipitate and aggravate the other risk factors that we identify in our 2019 Annual
Report on Form 10-K, which could materially adversely affect our business, financial condition, results of operations (including revenues and profitability) and/or stock price. Additionally, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities – The following table presents common stock repurchases during each month for the second quarter of 2020:2021:
Period | Total Number of | Average | Total Number of Shares | Maximum Number of | Total Number of | Average | Total Number of Shares | Maximum Number of | ||
Apr. 1 through Apr. 30 | 41,125 | $ | 163.16 | - | 118,849,288 | 1,828,790 | $ | 222.73 | 1,823,146 | 102,508,403 |
May. 1 through May. 31 | 5,449 | 165.97 | - | 118,849,288 | ||||||
May 1 through May 31 | 9,268,489 | 222.07 | 9,216,757 | 93,291,646 | ||||||
Jun. 1 through Jun. 30 | 25,049 | 182.19 | - | 118,849,288 | 1,165,179 | 220.62 | 1,164,506 | 92,127,140 | ||
Total | 71,623 | $ | 170.03 | - | N/A | 12,262,458 | $ | 222.03 | 12,204,409 | N/A |
[a]Total number of shares purchased during the quarter includes 71,62358,049 shares delivered or attested to UPC by employees to pay stock option exercise prices, satisfy excess tax withholding obligations for stock option exercises or vesting of retention units, and pay withholding obligations for vesting of retention shares.
[b]The average price of the initial settlement of the 2021 accelerated share repurchase programs was $221.94.
[b]c]Total number of shares purchased as part of a publicly announced plan or program includes 7,209,156 shares repurchases in May under ASRs. See Note 16 to the Condensed Consolidated Financial Statements for additional information.
[d]Effective April 1, 2019, our Board of Directors authorized the repurchase of up to 150 million shares of our common stock by March 31, 2022. These repurchases may be made on the open market or through other transactions. Our management has sole discretion with respect to determining the timing and amount of these transactions.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. | Description | |
Filed with this Statement | ||
31(a) | ||
31(b) | ||
32 | ||
101 | The following financial and related information from Union Pacific Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, | |
104 | Cover Page Interactive Data File, formatted in Inline XBRL (contained in Exhibit 101). | |
Incorporated by Reference | ||
3(a) | ||
3(b) | ||
4(a) | ||
4(b) | ||
4(c) | ||
10 | ||
SIGNATURES
Pursuant to the requirements 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.
Dated: July 23, 202022, 2021
UNION PACIFIC CORPORATION (Registrant)
By | /s/ Jennifer L. Hamann | |
Jennifer L. Hamann | ||
Executive Vice President and | ||
Chief Financial Officer | ||
(Principal Financial Officer) | ||
By | /s/ Todd M. Rynaski | |
Todd M. Rynaski | ||
Vice President and Controller | ||
(Principal Accounting Officer) | ||