UNION PACIFIC CORPORATION UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2020 , Compared to
Three and Nine Months Ended September 30, 2019 For purposes of this report, unless the context otherwise requires, all
references herein to "UPC", "Corporation", "Company", "we", "us", and "our"
shall mean
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 inthe 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 ofOctober 22, 2020 . 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 theSEC (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 operations, "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, and Commercial Commitments", 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 24
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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 2019 Annual Report on Form 10-K, filedFebruary 7, 2020 , and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period endedJune 30, 2020 , 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. 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 2019 Annual Report on Form 10-K. There have not been any significant changes with respect to these policies during the first nine months of 2020. RESULTS OF OPERATIONS Quarterly Summary The Company reported earnings of$2.01 per diluted share on net income of$1.4 billion and an operating ratio of 58.7% in the third quarter of 2020 compared to earnings of$2.22 per diluted share on net income of$1.6 billion and an operating ratio of 59.5% for the third quarter of 2019. Freight revenues decreased 11% in the quarter compared to the same period in 2019 driven by a 4% volume decline and a 7% lower average revenue per car (ARC) due to negative mix of traffic (for example, a relative increase in intermodal shipments, which have a lower ARC) and lower fuel surcharge revenue, partially offset by core pricing gains. The ongoing COVID-19 pandemic continued to impact multiple market segments negatively but to a lesser degree than the second quarter of 2020. Despite the weaker economic conditions, a few market segments saw growth from export demand and contract wins. Cost savings from productivity, lower volume, and lower fuel prices drove operating expenses down 12% from 2019. These reductions were not enough to offset the revenue decline resulting in a decrease of operating income down 9% in the third quarter compared to the same period in 2019. Despite the adversity from the COVID-19 pandemic throughout the quarter, our operational transformation produced an all-time best quarter operating ratio of 58.7%. Effects from COVID-19 As businesses adjusted to operating in the new COVID-19 pandemic environment, demand to ship freight began to rebound in the third quarter. Although carload volumes remain below last year's pre-COVID-19 levels, we have seen sequential improvement from the second quarter in almost every market segment. By the end of the third quarter, most automotive manufacturing plants were operating at or near capacity, but demand is still lagging as year over year volumes were down versus third quarter 2019. Other market segments that have not seen full recoveries are construction products, industrial chemicals, plastics, food, and refrigerated products. Finally, low crude oil and natural gas prices continue to negatively impact our shipments of coal, petroleum products, and sand. We adjusted demand-driven resources to reflect the lower volumes and we continue to focus on productivity initiatives to partially offset lost revenue. In addition, during the second quarter we implemented a temporary unpaid leave of absence for management and administrative employees and decreased executive salaries and retainers for members of the Board of Directors by 25%. Unpaid leave of absence and salary reductions were through July, except for our CEO. The retainer reduction for our Board of Directors and salary reduction for our CEO were through August. The repair facilities (a locomotive shop and a freight car shop), closed in the second quarter due to reduced demand, resumed limited operations in the latter part of the third quarter. We continue to incur additional expenses associated with keeping our employees, customers, 25
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and communities safe. The associated expenses were not material to our overall financial results in the third quarter, and are currently not expected to be material for the remainder of the year. Our rail network remains fluid, and we continue to serve our customers with minimal impact from disruptions caused by the COVID-19 pandemic. As international trade and domestic manufacturing began to rebound, we experienced episodic service issues in our intermodal network as we added resources to meet sharply increased demand. However, we still have ample capacity for further growth. 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 as our employees slowly transition back into our office buildings. We also have devoted resources to address protection of our technology systems and proprietary data while some of our employees are working from home. During the third quarter, we generated$1.6 billion of cash from operations. OnSeptember 30, 2020 , we had$2.6 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. Based on the strength of our cash position, in the third quarter we completed a$1.0 billion debt exchange, provided notice that we intend to redeem the$500 million principal outstanding of 4.0% notes dueFebruary 1, 2021 , onNovember 1, 2020 , and plan to repay the$300 million outstanding bilateral revolving credit lines we assumed earlier this year. We have$361 million of debt maturing, including$200 million of commercial paper and$150 million in term loans, 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. We have been, and we expect to continue to be, in compliance with our debt covenants. Our bad debt provision was adjusted in the third quarter to reflect deteriorations of customers' creditworthiness. We paid our quarterly dividend onSeptember 30, 2020 , and plan to maintain the dividend at current levels. In the third quarter, we completed our$2 billion accelerated share repurchase program entered into onFebruary 18, 2020 , and resumed share repurchases in the fourth quarter after suspending share repurchases in March. As we enter the last quarter of 2020, much still remains uncertain with COVID-19 and the economy. The resurgence of COVID-19 and how governments and consumers react could result in or contribute to customer disruptions, an elongated recovery period or a downturn from our current business levels. Therefore, the impact of the pandemic on our 2020 financial and operating results could continue to be material, but ultimately, we continue to focus on what we can manage, such as increasing productivity and seeking new business opportunities, as well as, protecting our employees, customers, and communities and providing excellent service to our customers. Operating Revenues Three Months Ended Nine Months Ended September 30, September 30, Millions 2020 2019 Change 2020 2019 Change Freight revenues$ 4,596 $ 5,146 (11) %$ 13,448 $ 15,392 (13) %
Other subsidiary revenues 193 223 (13) 557 665 (16)
Accessorial revenues 114 132 (14) 334 388 (14)
Other 16 15 7 53 51 4
Total $ 4,919 $ 5,516 (11) % $ 14,392 $ 16,496 (13) % 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 freight revenue, 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 26
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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 11% during the third quarter of 2020 compared to 2019, resulting from a 4% volume decline, negative mix of traffic, and lower fuel surcharges, partially offset by core pricing gains. Volume declined in almost every market segment due to the economic conditions brought on by the COVID-19 pandemic. Each of our commodity groups includes revenue from fuel surcharges. Freight revenues from fuel surcharge programs were$203 million and$760 million in the third quarter and year-to-date periods of 2020 compared to$393 million and$1.2 billion in the same period of 2019. The decline was driven by lower fuel prices, the lag impact on fuel surcharge recovery (it can generally take up to two months for changing fuel prices to affect fuel surcharge recoveries), and reduced volume. Other subsidiary revenues decreased in the third quarter and the year-to-date period compared to 2019 driven primarily by the disruption of the automotive supply chain which drove lower intermodal shipments and revenue at our subsidiaries that broker intermodal and transload logistics services. Accessorial revenue declined in the third quarter driven by lower industrial products traffic, partially offset by increased intermodal shipments. Year-to-date, declines in both commodities drove lower accessorial revenue in 2020 compared to 2019.
The following tables summarize the year-over-year changes in freight revenues, revenue carloads, and ARC by commodity type:
Three Months Ended Nine Months Ended
Freight Revenues September 30, September 30,
Millions 2020 2019 Change 2020 2019 Change
Grain & grain products $ 695 $ 704 (1) % $ 2,028 $ 2,080 (3) %
Fertilizer 157 161 (2) 499 492 1
Food & refrigerated 239 253 (6) 694 767 (10)
Coal & renewables 387 564 (31) 1,177 1,641 (28)
Bulk 1,478 1,682 (12) 4,398 4,980 (12)
Industrial chemicals & plastics 454 494 (8) 1,384 1,428 (3)
Metals & minerals 365 520 (30) 1,202 1,613 (25)
Forest products 284 290 (2) 853 878 (3)
Energy & specialized markets 464 598 (22) 1,522 1,759 (13)
Industrial 1,567 1,902 (18) 4,961 5,678 (13)
Automotive 481 542 (11) 1,194 1,616 (26)
Intermodal 1,070 1,020 5 2,895 3,118 (7)
Premium 1,551 1,562 (1) 4,089 4,734 (14)
Total $ 4,596 $ 5,146 (11) % $ 13,448 $ 15,392 (13) %
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Three Months Ended Nine Months Ended
Revenue Carloads September 30, September 30,
Thousands, 2020 2019 Change 2020 2019 Change
Grain & grain products 187 181 3 % 529 528 - %
Fertilizer 50 48 4 149 145 3
Food & refrigerated 48 48 - 137 147 (7)
Coal & renewables 213 271 (21) 607 771 (21)
Bulk 498 548 (9) 1,422 1,591 (11)
Industrial chemicals & plastics 144 158 (9) 439 463 (5)
Metals & minerals 156 200 (22) 492 579 (15)
Forest products 55 55 - 161 167 (4)
Energy & specialized markets 125 157 (20) 402 460 (13)
Industrial 480 570 (16) 1,494 1,669 (10)
Automotive 203 222 (9) 490 650 (25)
Intermodal [a] 863 789 9 2,296 2,443 (6)
Premium 1,066 1,011 5 2,786 3,093 (10)
Total 2,044 2,129 (4) % 5,702 6,353 (10) %
Three Months Ended Nine Months Ended
September 30, September 30,
Average Revenue per Car 2020 2019 Change 2020 2019 Change
Grain & grain products $ 3,705 $ 3,900 (5) % $ 3,832 $ 3,939 (3) %
Fertilizer 3,172 3,334 (5) 3,361 3,391 (1)
Food & refrigerated 4,891 5,203 (6) 5,053 5,211 (3)
Coal & renewables 1,820 2,082 (13) 1,938 2,129 (9)
Bulk 2,964 3,068 (3) 3,092 3,130 (1)
Industrial chemicals & plastics 3,154 3,131 1 3,150 3,087 2
Metals & minerals 2,337 2,599 (10) 2,444 2,785 (12)
Forest products 5,181 5,275 (2) 5,300 5,249 1
Energy & specialized markets 3,742 3,797 (1) 3,791 3,822 (1)
Industrial 3,271 3,336 (2) 3,321 3,402 (2)
Automotive 2,368 2,436 (3) 2,438 2,485 (2)
Intermodal [a] 1,238 1,294 (4) 1,261 1,276 (1)
Premium 1,454 1,545 (6) 1,468 1,530 (4)
Average $ 2,248 $ 2,417 (7) % $ 2,359 $ 2,423 (3) %
[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
decreased in the third quarter of 2020 compared to 2019 due to a 9% volume
decline and lower fuel surcharge revenue. Volume declines were driven by a
reduction in coal shipments, partially offset by increased shipments of export
feed grain and beverages. Continued softness in market conditions due to low
natural gas prices and weak export demand drove the 23% decline in coal
shipments in the third quarter 2020 compared to the same period in 2019. The
COVID-19 pandemic impacted production of some food products and the demand for
ethanol and related products driving the year-over-year declines in the third
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 and positive mix of traffic. Volume declines were driven by a 23%
reduction in coal shipments, partially offset by growth in renewables and export
grain shipments. The COVID-19 pandemic negatively impacted production of
imported beer, food products, and the demand for ethanol and related products in
the year-to-date period.
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Industrial - Industrial includes shipments of industrial chemicals and plastics, metals and minerals, forest products, and energy and specialized markets. Freight revenue from industrial shipments decreased in the third quarter and nine-month period compared to the same period in 2019 due to lower volume, negative mix of traffic, and lower fuel surcharge revenue, partially offset by core pricing gains. In the third quarter of 2020, low oil prices were the primary driver of a 44% decline in petroleum product shipments and a 68% decline in sand shipments compared to the third quarter of 2019. During the third quarter, the COVID-19 pandemic continued to impact a wide span of industries driving declines in many of our market segments, including rock, industrial chemicals, soda ash, and plastics. Although volume from industrial shipments were up in the first quarter, it was not enough to overcome the weak demand in the second and third quarters, resulting in a year-to-date volume decline of 10% compared to last year driven by declines in sand, petroleum products, industrial chemicals, soda ash, and rock. Premium - Premium includes shipments of finished automobiles, automotive parts, and merchandise in intermodal containers, both domestic and international. Premium freight revenue declined 1% in the third quarter compared to 2019 due to a lower fuel surcharge revenue and negative mix of traffic, partially offset by a 5% volume increase and core pricing gains. Volume increases were driven by recent contract wins and continued strength of e-commerce parcel shipments, partially offset by COVID-19 related market weakness in automobiles and products shipped fromAsia . Year-to-date, freight revenue declined 14% due to decreased volume, lower fuel surcharge revenue, and negative mix of traffic, partially offset by core pricing gains. Volume declines in international intermodal due to trade uncertainty and the COVID-19 impact on supply chains betweenAsia and theU.S. , along with the temporary automotive production halt, drove the 10% decline in premium shipments for the nine-month period of 2020 compared to 2019. These declines were partially offset by contract wins beginning in the third quarter. Mexico Business - Each of our commodity groups includes revenue from shipments to and fromMexico . Revenue fromMexico business decreased 8% to$556 million in the third quarter of 2020 compared to 2019 driven by a 6% volume decline and lower fuel surcharge revenue, partially offset by core pricing gains. The volume decline was driven by the COVID-19 pandemic with declines in automotive and intermodal shipments, partially offset by increases in beer and grain. Year-to-date, freight revenue decreased 14% to$1.5 billion as a result of volume declines in automotive, intermodal, and coal shipments and lower fuel surcharge revenue, partially offset by core pricing gains. Operating Expenses Three Months Ended Nine Months Ended September 30, September 30, Millions 2020 2019 Change 2020 2019 Change Compensation and benefits$ 1,008 $ 1,134 (11) %$ 2,972 $ 3,484 (15) % Depreciation 555 557 - 1,653 1,657 - Purchased services and materials 508 574 (11) 1,470 1,723 (15) Fuel 301 504 (40) 982 1,595 (38) Equipment and other rents 217 236 (8) 655 754 (13) Other 299 277 8 832 829 - Total$ 2,888 $ 3,282 (12) %$ 8,564 $ 10,042 (15) % Operating expenses decreased$394 million and$1.5 billion in the third quarter and year-to-date periods, respectively, compared to 2019 driven by volume declines, productivity initiatives, lower fuel prices, and lower destroyed equipment and freight costs. Partially offsetting these decreases compared to 2019 are inflation, increased bad debt expense, and higher state and local taxes. In addition, the year-to-date decreases were positively impacted by lower year-over-year weather-related costs and an insurance reimbursement for last year's weather-related losses, partially offset by an employment tax refund recognized in 2019. Compensation and Benefits - Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. For the third quarter period, expenses decreased 11% compared to 2019 due to declines in carload volumes; productivity initiatives; management's actions responding to the sharp decline in volume, including one month of temporary unpaid leave and salary reductions, and almost three months of large shop closures (a locomotive shop, a freight car shop, and a maintenance-of-way shop); partially offset by wage inflation and severance costs. The 29
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year-to-date period compared to 2019 was favorably impacted by decreased weather-related costs, offset by an employment tax refund recognized in 2019. Severance costs were relatively flat for the year-to-date period.
Depreciation - The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. Depreciation expense was essentially flat compared to the third quarter and year-to-date periods of 2020 compared to 2019. 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 11% in the third quarter compared to 2019 primarily due to lower locomotive maintenance expenses due to a smaller active fleet, lower volume-related costs for intermodal and transload services, lower costs for transportation and lodging for train crews, partially offset by costs associated with derailments. For the nine-month period purchased services and materials decreased 15% compared to the same period in 2019, driven by lower volume-related costs for intermodal and transload services, lower locomotive maintenance expenses due to a smaller active fleet, lower costs for transportation and lodging for the train crews, professional services expense, costs associated with derailments, and lower year-over-year weather-related costs. Fuel - Fuel includes locomotive fuel and fuel for highway and non-highway vehicles and heavy equipment. A 35% decline in locomotive diesel fuel prices, which averaged$1.36 per gallon (including taxes and transportation costs) in the third quarter of 2020 compared to$2.09 per gallon in the same period in 2019, a 9% decline in gross ton-miles partially offset by a 1% deterioration in the fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-mile in thousands, drove the decrease in the third quarter compared to the same period in 2019. For the nine-month period, locomotive diesel fuel prices averaged$1.51 per gallon in 2020 compared to$2.13 in 2019, the main driver of the 38% decrease in expense. In addition, gross ton-miles decreased 12% and the fuel consumption rate improved 2% during the year-to-date period, also driving lower fuel expense compared to 2019. Equipment and Other Rents - Equipment and other rents expense primarily includes rental expense that the Railroad pays for freight cars owned by other railroads or private companies; freight car, intermodal, and locomotive leases; and office and other rentals. Equipment and other rents expense decreased 8% in the third quarter compared to 2019 driven by decreased car rent expense due to improved cycle times, lower locomotive and freight car lease expenses, and volume declines. The year-to-date period was down 13% compared to the same period last year, driven by the same factors as the third quarter except expense was negatively impacted by lower equity income from our investment inTTX Company and longer auto racks cycle times. 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 increased 8% in the third quarter driven by higher state and local taxes, bad debt expense, write off of certain in-progress capital projects and lease impairments, and lower equity income from our investment in Grupo Ferroviaro Mexicano, partially offset by lower costs associated with freight loss and damage, employee travel, and destroyed equipment. In addition, we received an insurance reimbursement for weather-related expenses incurred last year in the second quarter of 2020, driving our year-to-date other expenses to be essentially flat when compared to the same period last year.
Non-Operating Items
Three Months Ended Nine Months Ended
September 30, September 30,
Millions 2020 2019 Change 2020 2019 Change
Other income $ 37 $ 53 (30) % $ 221 $ 187 18 %
Interest expense (295) (266) 11 (862) (772) 12
Income taxes (410) (466) (12) (1,218) (1,353) (10)
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Other Income - Other income decreased in the third quarter of 2020 compared to 2019 as a result of lower interest income and rental income. The year-to-date period increased due to larger gains from real estate sales, including a$69 million gain from a land and permanent easement sale to theIllinois State Toll Highway Authority partially offset by$31 million in interest income associated with an employment tax refund in 2019 and lower interest income. Interest Expense - Interest expense increased in the third quarter of 2020 compared to 2019 due to an increase in the weighted-average debt level of$28.3 billion in 2020 compared to$25.4 billion in 2019, partially offset by a lower effective interest rate of 4.1% in 2020 compared to 4.3% in 2019. Year-to-date, interest expense increased due to an increased weighted-average debt level of$28.0 billion in 2020 from$24.6 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 decreased in the third quarter and nine-month periods of 2020 compared to 2019 due to lower pre-tax income. Our effective tax rates year-to-date 2020 and 2019 were 23.5% and 23.1%, respectively.
OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS
We report a number of key performance measures weekly to the
Operating/Performance Statistics
Management continuously measures these key operating metrics to evaluate 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 Nine Months Ended
September 30, September 30,
2020 2019 Change 2020 2019 Change
Gross ton-miles (GTMs) (billions) 197.0 215.5 (9) % 568.9 645.8 (12) %
Revenue ton-miles (billions) 97.9 108.1 (9) 283.5 323.5 (12)
Freight car velocity (daily miles 220 214 3 217 203 7
per car) [a]
Average train speed (miles per hour) 25.3 25.2 - 25.8 24.8 4
[a] [b]
Average terminal dwell time (hours) 22.8 23.6 (3) 22.8 25.3 (10)
[a] [b]
Locomotive productivity (GTMs per 138 124 11 135 118 14
horsepower day)
Train length (feet) 8,984 7,924 13 8,676 7,618 14
Intermodal car trip plan compliance 77 81 (4) pts 81 72 9 pts
(%)
Manifest/Automotive car trip plan 72 67 5 pts 70 63 7 pts
compliance (%)
Workforce productivity (car miles 998 883 13 920 853 8
per employee)
Total employees (average) 30,155 36,659 (18) 31,362 38,456 (18)
Operating ratio 58.7 59.5 (0.8) pts 59.5 60.9 (1.4) 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 both decreased 9% during the
third quarter of 2020 compared to 2019, driven by a 4% decline in carloadings.
Changes in commodity mix drove the variance in year-over-year decreases between
gross ton-miles, revenue ton-miles, and carloads. Year-to-date, gross ton-miles
and revenue ton-miles both decreased 12% compared to 2019, driven by a 10%
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 our new
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operating plan was the primary driver of the improvement from 2019 as both average terminal dwell and average train speed improved in the third quarter and the nine-month period of 2020 compared to the same periods in 2019. Average terminal dwell time in 2020 decreased compared to 2019 largely due to improved terminal processes, transportation plan changes to eliminate switches, and reduced carload volumes due to COVID-19. Average train speed in 2020 improved slightly in the third quarter as weather-related challenges that slowed trains partially offset gains achieved through the implementation of our new operating plan. Locomotive Productivity - Locomotive productivity is gross ton-miles per average daily locomotive horsepower. Locomotive productivity increased in the third quarter and year-to-date period compared to the same periods in 2019 driven by a reduction in our average active fleet size due to transportation plan changes and lower locomotive dwell times. Train Length - Train length is the average maximum train length on a route measured in feet. Our train length increased in the third quarter and nine-month period compared to same periods in 2019 as a result of blending service products and transportation plan changes. 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 and manifest products. Intermodal trip plan compliance deteriorated in the third quarter of 2020 compared to same period in 2019 as a result of the surge in intermodal shipments towards the end of the second quarter. Since the drop in service performance at the beginning of the third quarter, the metric has improved sequentially throughout the quarter. Despite the deterioration in the third quarter, intermodal car trip plan compliance was better for the nine-month period compared to 2019 due to improved train speed and reduced dwell at our origin and destination ramps. Manifest car trip plan compliance improved in the third quarter and nine-month period compared to 2019 due to improved car dwell in our yards, increased train velocity across the network, and more reliable first mile last mile service. Compared to the nine month period of 2019, both metrics were aided by reduced carload volumes due to COVID-19 and milder weather. Workforce Productivity - Workforce productivity is average daily car miles per employee. Workforce productivity improved 13%, reaching a quarterly record in the third quarter as average daily car miles decreased 7% while employees decreased 18% compared to 2019. Lower volume drove the decline in average daily car miles. The 18% decline in employee levels was driven by productivity initiatives, a 4% decline in carload volumes, and a smaller capital workforce. Year-to-date, workforce productivity improved 8% as average daily car miles decreased 12% while employees decreased 18% compared to 2019. At the end of the third quarter, approximately 5,100 employees across all crafts were furloughed. OperatingRatio - Operating ratio is our operating expenses reflected as a percentage of operating revenue. Our operating ratio of 58.7% was an all-time record and improved 0.8 points compared to 2019 mainly driven by productivity initiatives, lower fuel prices, and core pricing gains; which were partially offset by a negative mix of traffic, inflation, and other cost increases. Our year-to-date operating ratio of 59.5% improved 1.4 points compared to 2019. ? 32
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Adjusted Debt / Adjusted EBITDA
Millions, Except RatiosSep. 30 , Dec.
31,
for the Trailing Twelve Months Ended [a] 2020 2019 Net income$ 5,372 $ 5,919 Add: Income tax expense 1,693 1,828 Depreciation 2,212 2,216 Interest expense 1,140 1,050 EBITDA$ 10,417 $ 11,013 Adjustments: Other income (277) (243) Interest on operating lease liabilities [b] 59 68 Adjusted EBITDA$ 10,199 $ 10,838 Debt$ 28,060 $ 25,200 Operating lease liabilities 1,601 1,833
Unfunded pension and OPEB, net of taxes of
$ 30,010 $ 27,433 Adjusted debt / Adjusted EBITDA 2.9 2.5 [a]The trailing twelve month income statement information endedSeptember 30, 2020 , is recalculated by taking the twelve months endedDecember 31, 2019 , subtracting the nine months endedSeptember 30, 2019 , and adding the nine months endedSeptember 30, 2020 .
[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, other income, and interest on operating lease liabilities) is considered a non-GAAP financial measure by SEC Regulation G and Item 10 ofSEC 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 Adjusted 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 bothSeptember 30, 2020 , andDecember 31, 2019 , the incremental borrowing rate on operating lease liabilities was 3.7%.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Cash Flows Millions, for the Nine Months Ended September 30, 2020 2019 Cash provided by operating activities$ 5,993 $ 6,264 Cash used in investing activities (2,081)
(2,507)
Cash used in financing activities (2,150)
(3,782)
Net change in cash, cash equivalents and restricted cash
Operating Activities
Cash provided by operating activities decreased in the first nine months of 2020
compared to the same period of 2019 due primarily to lower net income, partially
offset by a deferral of employment taxes paid, allowed by a provision in the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
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Investing Activities
Cash used in investing activities decreased in the first nine months of 2020 compared to the same period of 2019 primarily driven by reduced capital investment on locomotives and increased real estate sales.
The table below details cash capital investments:
Millions,
for the Nine Months Ended
$ 393 $ 418 Ties 415 328 Ballast 188 203 Other [a] 456 477
Total road infrastructure replacements 1,452 1,426 Line expansion and other capacity projects 234 240 Commercial facilities
125 109
Total capacity and commercial facilities 359 349 Locomotives and freight cars [b]
210 419
Positive train control 52 57
Technology and other 221 244
Total cash capital investments $ 2,294 $ 2,495 [a]Other includes bridges and tunnels, signals, other road assets, and road work equipment.
[b]Locomotives and freight cars include lease buyouts of
Capital Plan We estimate our 2020 capital expenditures to be approximately$2.9 billion , consistent with our previously announced reduction of$150 to$200 million to our capital plan as a result of economic uncertainties associated with the COVID-19 pandemic and the impact to our business. 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 decreased in the first nine months of 2020 compared to the same period of 2019, driven by decreased share repurchases.
See Note 14 of the Condensed Consolidated Financial Statements for a description
of all our outstanding financing arrangements and significant new borrowings and
Note 18 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 operations 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.
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The following table reconciles cash provided by operating activities (GAAP measure) to free cash flow (non-GAAP measure):
Millions,
for the Nine Months Ended
(1,974) (1,925)
Free cash flow $ 1,938 $ 1,832 The following table reconciles cash provided by operating activities (GAAP measure) to cash flow conversion rate (non-GAAP measure):
Millions,
for the Nine Months Ended
3,699 3,769
Net income (b) 3,969 4,516
Cash flow conversion rate (a/b) 93 % 83 %
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 continue to 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. During the third quarter, we generated$1.6 billion of cash from operations. OnSeptember 30, 2020 , we had$2.6 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. Based on the strength of our cash position, in the third quarter we completed a$1.0 billion debt exchange, provided notice that we intend to redeem the$500 million principal outstanding of 4.0% notes dueFebruary 1, 2021 , onNovember 1, 2020 , and plan to repay the$300 million outstanding bilateral revolving credit lines we assumed earlier this year. We have$361 million of debt maturing, including$200 million of commercial paper and$150 million in term loans, 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. We have been, and we expect to continue to be, in compliance with our debt covenants. Our bad debt provision was adjusted in the third quarter to reflect deteriorations of customers' creditworthiness. We paid our quarterly dividend onSeptember 30, 2020 , and plan to maintain the dividend at current levels. In the third quarter, we completed our$2 billion accelerated share repurchase program entered into onFebruary 18, 2020 , and resumed share repurchases in the fourth quarter after suspending share repurchases in March.
Share Repurchase Programs
EffectiveApril 1, 2019 , our Board of Directors authorized the repurchase of up to 150 million shares of our common stock byMarch 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 ofSeptember 30, 2020 , we repurchased a total of$40.1 billion of our common stock since commencement of our repurchase programs in 2007. ? 35
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The table below represents shares repurchased under repurchase programs in the first, second, and third quarters of 2020 and 2019:
Number of Shares
Purchased Average Price Paid [a]
2020 2019 2020 2019
First quarter [b] 14,305,793 18,149,450 $ 178.66 $ 165.79
Second quarter - 3,732,974 - 171.24
Third quarter [c] 4,045,575 9,529,733 98.87 163.30
Total 18,351,368 31,412,157 $ 161.07 $ 165.68
Remaining number of shares that may be repurchased under 114,803,713
current authority
[a]In the period of the final settlement, the average price paid under the accelerated share repurchase programs are calculated based on the total program value less the value assigned to the initial delivery of shares. The average price of the completed 2020 and 2019 accelerated share repurchase programs was$155.86 and$167.01 , respectively.
[b]Includes 8,786,380 and 11,795,930 shares repurchased in
[c]Includes an incremental 4,045,575 and 3,172,900 shares received upon final settlement inJuly 2020 andAugust 2019 , respectively, 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
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
On
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.
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 tables 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.
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The following tables identify material obligations and commitments as ofSeptember 30, 2020 : Oct. 1 Payments Due by Dec. 31, through Contractual Obligations Dec. 31, After Millions Total 2020 2021 2022 2023 2024 2024 Other Debt [a]$ 49,983 $ 983 $ 2,050 $ 2,680 $ 2,246 $ 2,265 $ 39,759 $ - Operating leases [b] 1,842 41 304 269 226 218 784 - Finance lease 542 15 141 115 81 68 122 - obligations [c] Purchase obligations 2,877 425 922 465 248 188 626 3 [d] Other postretirement 197 12 24 22 22 20 97 - benefits [e] Income tax 74 1 - - - - - 73 contingencies [f] Total contractual$ 55,515 $ 1,477 $ 3,441 $ 3,551 $ 2,823 $ 2,759 $ 41,388 $ 76 obligations [a]Excludes finance lease obligations of$469 million , as well as unamortized discount and deferred issuance costs of($1,552) million . Includes an interest component of$20,840 million .
[b] Includes leases for locomotives, freight cars, other equipment, and real
estate. Includes an interest component of
[c]Represents total obligations, including interest component of
[d]Purchase obligations include locomotive maintenance contracts; purchase commitments for fuel purchases, locomotives, ties, ballast, and rail; and agreements to purchase other goods and services. For amounts where we cannot reasonably estimate the year of settlement, they are included in the Other column.
[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 ofSeptember 30, 2020 . For amounts where the year of settlement is uncertain, they are included in the Other column.Oct. 1 Amount of
Commitment Expiration by
through
Other Commercial Commitments Dec. 31, After
Millions Total 2020 2021 2022 2023 2024 2024
Credit facilities [a] $ 2,000 $ - $ - $ - $ 2,000 $ - $ -
Receivables securitization 800 - - 800 - - -
facility [b]
Bilateral revolving credit 600 - 600 - - - -
lines [c]
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
[b]$400 million of the receivables securitization facility was utilized as ofSeptember 30, 2020 , which is accounted for as debt. The full program matures inJuly 2022 .
[c]
[d]Includes guaranteed obligations related to our affiliated operations.
[e]None of the letters of credit were drawn upon as of
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.
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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, theSecurities and Exchange Commission (SEC). We also make available on our website previously filedSEC reports and exhibits via a link to EDGAR on theSEC'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 theSEC and theNew 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 ourSEC 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.
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