UNION PACIFIC CORPORATION UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2022 , Compared to
Three and Six Months Ended June 30, 2021 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 revenues by commodity group, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network.
Critical Accounting Estimates 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 estimates are available in Item 7 of our 2021 Annual Report on Form 10-K. During the first six months of 2022, there have not been any significant changes with respect to the policies used to develop our critical accounting estimates. RESULTS OF OPERATIONS Quarterly Summary The Company reported earnings of$2.93 per diluted share on net income of$1.8 billion and an operating ratio of 60.2% in the second quarter of 2022 compared to earnings of$2.72 per diluted share on net income of$1.8 billion and an operating ratio of 55.1% for the second quarter of 2021. Freight revenues increased 14% in the quarter compared to the same period in 2021 driven by a 16% increase in average revenue per car (ARC), partially offset by a 1% decline in volume. The ARC increase was due to higher fuel surcharge revenues, core pricing gains, and positive mix of traffic (for example, a relative decrease in intermodal shipments, which have a lower ARC). As we entered the quarter, our service metrics were deteriorating caused by congestion across the system hindering our ability to handle all the market demand. To address this congestion, we accelerated hiring and training new employees, temporarily relocated train, engine, and yard employees to areas with the greatest need, added locomotives to the fleet in select locations, and reduced freight car inventory from our network, including asking customers to reduce their freight car inventory by adjusting their pipeline when their inventory exceeded set thresholds in our servicing yards. These actions had a negative impact on volumes across all three commodity groups. In addition, intermodal volumes declined with the on-going supply chain disruptions and the COVID shutdowns inChina . Partially offsetting these declines were some recovery of the automotive market and strong demand for rock. Crude oil prices remained above$100 a barrel throughout most of the quarter, as the global energy market was impacted by theRussia -Ukraine conflict, driving an 87% increase in our average fuel price for the quarter. Along with the higher cost of fuel, costs increased due to the additional resources deployed to improve network fluidity, higher inflation, and higher personal injury costs. These increased costs mostly offset the higher revenues as operating income increased 1% in the second quarter compared to the same period in 2021. 19
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Operating Revenues
Three Months Ended Six Months Ended
June 30, June 30,
Millions 2022 2021 Change 2022 2021 Change
Freight revenues $ 5,842 $ 5,132 14 % $ 11,282 $ 9,781 15 %
Other subsidiary revenues 233 180 29 438 357 23
Accessorial revenues 183 176 4 384 337 14
Other 11 16 (31 ) 25 30 (17 )
Total $ 6,269 $ 5,504 14 % $ 12,129 $ 10,505 15 %
We generate freight revenues by transporting products from our three commodity
groups. 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 revenues between
reporting periods is based on the relative transit time in each reporting period
with expenses recognized as incurred.
Other subsidiary revenues (primarily logistics and commuter rail operations) are
generally recognized over time as shipments move from origin to destination. The
allocation of revenues 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 revenues increased 14% during the second quarter of 2022 compared to
2021, resulting from higher fuel surcharges, core pricing gains, and positive
mix of traffic, partially offset by a 1% volume decline. To improve service and
network fluidity Union Pacific asked customers to reduce their freight car
inventory by adjusting their pipeline when their inventory exceeded set
thresholds in our servicing yards. These actions had a negative impact on
volumes across all three commodity groups. In addition, intermodal volumes
declined with the on-going supply chain disruptions and the COVID shutdowns in
China . Partially offsetting these declines were some recovery of the automotive
market and strong demand for rock.
Each of our commodity groups includes revenues from fuel surcharges. Freight
revenues from fuel surcharge programs increased to $976 million in the second
quarter of 2022 compared to $414 million in the same period of 2021 due to
higher fuel prices.
Other subsidiary revenues increased in the second quarter and six-month period
of 2022 compared to 2021 primarily driven by some recovery of automotive
parts shipments and contract wins at our subsidiary that brokers intermodal and
transload logistics services. Accessorial revenues increased in the second
quarter and six-month period of 2022 compared to 2021 driven by increased
intermodal accessorial charges resulting primarily from ongoing global supply
chain disruptions.
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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 2022 2021 Change 2022 2021 Change
Grain & grain products $ 867 $ 795 9 % $ 1,744 $ 1,561 12 %
Fertilizer 183 179 2 363 349 4
Food & refrigerated 271 251 8 538 486 11
Coal & renewables 492 423 16 1,000 764 31
Bulk 1,813 1,648 10 3,645 3,160 15
Industrial chemicals & plastics 557 498 12 1,077 933 15
Metals & minerals 562 467 20 1,047 842 24
Forest products 386 348 11 750 664 13
Energy & specialized markets 586 546 7 1,138 1,076 6
Industrial 2,091 1,859 12 4,012 3,515 14
Automotive 561 428 31 1,062 875 21
Intermodal 1,377 1,197 15 2,563 2,231 15
Premium 1,938 1,625 19 3,625 3,106 17
Total $ 5,842 $ 5,132 14 % $ 11,282 $ 9,781 15 %
Three Months Ended Six Months Ended
Revenue Carloads June 30, June 30,
Thousands, 2022 2021 Change 2022 2021 Change
Grain & grain products 195 204 (4 )% 400 407 (2 )%
Fertilizer 53 54 (2 ) 98 98 -
Food & refrigerated 48 48 - 95 93 2
Coal & renewables 202 198 2 427 372 15
Bulk 498 504 (1 ) 1,020 970 5
Industrial chemicals & plastics 161 156 3 321 296 8
Metals & minerals 205 182 13 387 328 18
Forest products 63 64 (2 ) 127 124 2
Energy & specialized markets 141 138 2 272 277 (2 )
Industrial 570 540 6 1,107 1,025 8
Automotive 192 173 11 382 353 8
Intermodal [a] 805 878 (8 ) 1,562 1,674 (7 )
Premium 997 1,051 (5 ) 1,944 2,027 (4 )
Total 2,065 2,095 (1 )% 4,071 4,022 1 %
Three Months Ended Six Months Ended
June 30, June 30,
Average Revenue per Car 2022 2021 Change 2022 2021 Change
Grain & grain products $ 4,451 $ 3,894 14 % $ 4,357 $ 3,838 14 %
Fertilizer 3,437 3,304 4 3,701 3,550 4
Food & refrigerated 5,770 5,226 10 5,703 5,230 9
Coal & renewables 2,426 2,134 14 2,340 2,051 14
Bulk 3,642 3,266 12 3,574 3,256 10
Industrial chemicals & plastics 3,455 3,189 8 3,351 3,153 6
Metals & minerals 2,755 2,569 7 2,710 2,567 6
Forest products 6,128 5,463 12 5,898 5,357 10
Energy & specialized markets 4,161 3,944 6 4,189 3,886 8
Industrial 3,674 3,442 7 3,626 3,430 6
Automotive 2,919 2,479 18 2,780 2,482 12
Intermodal [a] 1,711 1,363 26 1,641 1,332 23
Premium 1,943 1,547 26 1,864 1,532 22
Average $ 2,830 $ 2,449 16 % $ 2,771 $ 2,432 14 %
[a] For intermodal shipments each container or trailer equals one carload.
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Bulk - Bulk includes shipments of grain and grain products, fertilizer, food and refrigerated goods, and coal and renewables. Freight revenues from bulk shipments increased in the second quarter and six-month periods of 2022 compared to 2021 due to higher fuel surcharge revenues and core pricing gains. Volume declined 1% in the second quarter compared to 2022 driven by network constraints increasing shuttle cycle times for our grain traffic, partially offset by 2% increase in coal and renewable carloads. Conversely, volume increased 5% in the year-to-date period compared to 2021 due to a 15% increase in coal and renewable shipments due to higher natural gas prices and contract wins. Negative mix of traffic from increased coal shipments partially offset some of the gains in the year-to-date period. Industrial - Industrial includes shipments of industrial chemicals and plastics, metals and minerals, forest products, and energy and specialized markets. Freight revenues from industrial shipments increased in the second quarter of 2022 compared to 2021 due to higher fuel surcharge revenues, higher volume, and core pricing gains, partially offset by negative mix of traffic from increased short haul rock shipments. Volume grew 6% in the second quarter of 2022 compared to 2021 despite the actions taken to reduce freight car inventory and slower cycle times. The growth was driven by metals and minerals due to strong demand for rock. Petroleum shipments declined in the second quarter compared to 2021 due to regulatory challenges inMexico markets. Year-to-date, freight revenue increased compared to 2021 driven by an 8% volume increase, higher fuel surcharge, and core pricing gains, partially offset by negative mix of traffic. In addition to the second quarter drivers, many of our customers in theGulf Coast experienced Winter Storm Uri interruptions for an extended period causing a significant impact on the industrial chemicals and plastics and metals and minerals industries in the first quarter of 2021. Last year's weather event coupled with 2022 strong demand drove the year-over-year increase for the impacted commodities for the year-to-date period. Premium - Premium includes shipments of finished automobiles, automotive parts, and merchandise in intermodal containers, both domestic and international. Premium freight revenues increased in the second quarter and six-month period of 2022 compared to 2021 due to higher fuel surcharge revenues, core pricing gains, positive mix of traffic from lower international intermodal shipments, partially offset by volume declines. Intermodal volume declined 8% and 7% in the second quarter and year-to-date periods, respectively, compared to 2021 driven by ongoing international supply chain disruptions and company actions to store equipment, partially offset by domestic contract wins and tight truck capacity. Automotive shipments increased 11% and 8% in the second quarter and six-month periods, respectively, compared to the same periods in 2021 driven by an increase in automotive parts and finished vehicle shipments as the automotive industry slowly recovers from the shortage of semiconductors and last year's weather disruptions in the first quarter. Mexico Business - Each of our commodity groups includes revenues from shipments to and fromMexico . Revenues fromMexico business increased 10% to$681 million in the second quarter of 2022 compared to 2021 driven by higher fuel surcharge revenues, positive business mix from lower intermodal shipments, and core pricing gains, partially offset by a 4% decline in volume. The volume decrease was driven by intermodal and petroleum shipments, partially offset by automotive parts. Year-to-date, revenues increased 13% to$1.3 billion because of higher fuel surcharge revenues, positive business mix from lower intermodal shipments, and core pricing gains, partially offset by 2% volume decline compared to 2021. Operating Expenses Three Months Ended Six Months Ended June 30, June 30, Millions 2022 2021 Change 2022 2021 Change Compensation and benefits$ 1,092 $ 1,022 7 %$ 2,193 $ 2,048 7 % Fuel 940 497 89 1,654 908 82 Purchased services and materials 622 478 30 1,183 968 22 Depreciation 559 550 2 1,114 1,099 1 Equipment and other rents 230 200 15 445 412 8 Other 331 284 17 668 604 11 Total$ 3,774 $ 3,031 25 %$ 7,257 $ 6,039 20 % Operating expenses increased$743 million and$1.2 billion in the second quarter and year-to-date periods, respectively, compared to 2021 driven by higher fuel prices, operational challenges, inflation, and higher casualty costs. In addition, the year-to-date period comparison was impacted positively by lower weather-related expenses and negatively by higher state and local taxes in 2022. Compensation and Benefits - Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, and incentive costs. For the second quarter and year-to-date periods, expenses increased 7% compared to 2021 due to a 2% increase in employee levels and wage inflation. The year-to-date period also was partially offset by last year's weather-related expenses. Employee levels increased in the second quarter and year-to-date periods to address congestion across the system, including hiring and training new employees. The year-to-date period also was affected by increased carload volumes. 22
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Fuel - Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Fuel expense increased in the second quarter of 2022 compared to the same period in 2021 driven by an 87% increase in locomotive diesel fuel prices, which averaged$4.03 and$2.16 per gallon (including taxes and transportation costs) in the second quarter of 2022 and 2021, respectively. A 1% increase in gross ton-miles also contributed to the higher expense. Fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-mile in thousands, deteriorated slightly. For the six-month period, locomotive diesel fuel prices averaged$3.48 per gallon in 2022 compared to$2.01 per gallon in 2021, driving the 82% increase in expenses. In addition, gross ton-miles increased 5% and fuel consumption rate deteriorated slightly during the year-to-date period, also driving higher fuel expense compared to 2021. Purchased Services and Materials - Expense for purchased services and materials includes the costs of services purchased from outside contractors and other service providers (including equipment maintenance and contract expenses incurred by our subsidiaries for external transportation services); materials used to maintain the Railroad's lines, structures, and equipment; costs of operating facilities jointly used by UPRR and other railroads; transportation and lodging for train crew employees; trucking and contracting costs for intermodal containers; leased automobile maintenance expenses; and tools and supplies. Purchased services and materials increased 30% and 22% in the second quarter and year-to-date periods, respectively, compared to 2021 primarily due to higher locomotive maintenance expenses due to a larger active fleet to assist in recovering the network, inflation, and increased drayage costs incurred by one of our subsidiaries. In addition, the year-to-date period comparison was positively impacted by last year's weather-related expenses. Depreciation - The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. Depreciation expense was up 2% and 1% for the second quarter and six-month periods, respectively, compared to 2021. 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 increased 15% and 8% in the second quarter and year-to-date periods, respectively, compared to 2021 driven by lower equity income from our investment inTTX Company and increased freight car rent expense due to network congestion. Other - Other expenses include state and local taxes; freight, equipment, and property damage; utilities; insurance; personal injury; environmental remediation; employee travel; telephone and cellular; computer software; bad debt; and other general expenses. Other costs increased 17% and 11% in the second quarter and year-to-date periods, respectively, compared to 2021 driven by casualty expenses, including higher personal injury expense, and increased business travel costs, partially offset by lower environmental remediation costs. In the year-to-date period, higher state and local taxes also contributed to the increase. Non-Operating Items Three Months Ended Six Months Ended June 30, June 30, Millions 2022 2021 Change 2022 2021 Change Other income, net$ 163 $ 125 30 %$ 210 $ 176 19 % Interest expense (316 ) (282 ) 12 (623 ) (572 ) 9 Income taxes (507 ) (518 ) (2 ) (994 ) (931 ) 7 Other Income, net - Other income increased in the second quarter and year-to-date periods of 2022 compared to 2021 driven by larger gains from real estate sales. Real estate sales in the second quarter of 2022 includes a$79 million gain from a land sale to theIllinois State Toll Highway Authority , while the second quarter of 2021 includes a$50 million gain from a sale to theColorado Department of Transportation . In addition, the year-to-date comparison was negatively impacted by higher environmental remediation expense at non-operating sites. Interest Expense - Interest expense increased in the second quarter of 2022 compared to 2021 due to an increased weighted-average debt level of$32.1 billion in 2022 compared to$28.0 billion in 2021, while the effective interest rate was flat at 4.0% in both years. Year-to-date, interest expense increased due to an increased weighted-average debt level of$31.5 billion in 2022 compared to$27.4 billion in 2021, partially offset by a lower effective interest rate of 4.0% in 2022 compared to 4.1% in 2021. Income Taxes - Income tax expense decreased in the second quarter of 2022 compared to 2021, driven by deferred tax adjustments from states reducing their corporate income tax rates. Second quarter 2022 included a$55 million reduction of deferred tax expense related toNebraska reducing its corporate income tax rate, while second quarter 2021 included$43 million in reductions to deferred tax expense related toIdaho ,Nebraska , andOklahoma reducing their corporate income tax rates. Year-to-date, income tax expense increased compared to the same period in 2021 due to higher pre-tax income, partially offset by the deferred tax adjustments described above. Our effective tax rates for year-to-date 2022 and 2021 were 22.3% and 22.9%, respectively. 23
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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 operational efficiency and asset utilization 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
June 30, June 30,
2022 2021 Change 2022 2021 Change
Gross ton-miles (GTMs) (billions) 209.8 207.8 1 % 419.5 400.9 5 %
Revenue ton-miles (billions) 103.4 104.8 (1 ) 210.6 202.1 4
Freight car velocity (daily miles
per car) 187 213 (12 ) 192 211 (9 )
Average train speed (miles per
hour) [a] 23.6 25.0 (6 ) 23.9 25.1 (5 )
Average terminal dwell time (hours)
[a] 24.6 22.9 7 24.3 23.2 5
Locomotive productivity (GTMs per
horsepower day) 123 140 (12 ) 126 139 (9 )
Train length (feet) 9,439 9,410 - 9,321 9,330 -
Intermodal car trip plan compliance
(%) [b] 62 71 (9 )pts 67 74 (7 )pts
Manifest/Automotive car trip plan
compliance (%) [b] 56 67 (11 )pts 59 68 (9 )pts
Workforce productivity (car miles per
employee) 1,034 1,060 (2 ) 1,045 1,031 1
Total employees (average) 30,715 30,066 2 30,452 29,910 2
Operating ratio 60.2 55.1 5.1 pts 59.8 57.5 2.3 pts
[a] As reported to the STB.
[b] Methodology used to report (described below) is not comparable with the
reporting to the STB under docket number EP 770.
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. Revenue ton-miles decreased 1% during the second quarter of 2022
compared to 2021, driven by a 1% decrease in carloadings, while gross ton-miles
increased 1%. Year-to-date, gross ton-miles and revenue ton-miles increased 5%
and 4%, respectively, driven by a 1% increase in carloadings. Changes in
commodity mix drove the variances in both periods between gross ton-miles,
revenue ton-miles, and carloads.
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). As freight car velocity, average
train speed, and average terminal dwell deteriorated, operating car inventory
levels increased and congested the network compared to the same periods in 2021.
Locomotive Productivity - Locomotive productivity is gross ton-miles per average
daily locomotive horsepower available. Locomotive productivity decreased in the
second quarter and six-month periods of 2022 compared to the same periods in
2021 driven by an increase in our average active fleet size as resources were
deployed to alleviate network congestion in both periods and handle increased
volume in the six-month period of 2022.
Train Length - Train length is the average maximum train length on a route measured in feet. Our train length was flat in the second quarter and six-month periods of 2022 compared to same periods in 2021 primarily driven by train length improvement initiatives, offset by lower international intermodal shipments.
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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 car trip plan compliance is broken into the intermodal and manifest/automotive products. Manifest/automotive car trip plan compliance and intermodal car trip plan compliance deteriorated in the second quarter and six-month periods of 2022 compared to 2021 because of network congestion. Workforce Productivity - Workforce productivity is average daily car miles per employee. Workforce productivity declined 2% in the second quarter of 2022, as average daily car miles were essentially flat while employees increased 2% compared to 2021. The 2% increase in employee levels was driven by an increase in train, engine, and yard employees to address congestion and market demands. Year-to-date, workforce productivity improved 1% as average daily car miles increased 3% and employees increased 2% compared to the same period in 2021. OperatingRatio - Operating ratio is our operating expenses reflected as a percentage of operating revenues. Our second quarter operating ratio of 60.2% deteriorated 5.1 points compared to 2021 and our year-to-date operating ratio of 59.8% deteriorated 2.3 points compared to 2021 mainly due to excess network costs, higher fuel prices, inflation, and other cost increases, partially offset by positive mix of traffic, and core pricing gains. In addition, the year-to-date comparison was positively impacted by lower weather-related expenses.
Adjusted Debt / Adjusted EBITDA
Millions, Except Ratios Jun. 30, Dec. 31, for the Trailing Twelve Months Ended [a] 2022 2021 Net income$ 6,849 $ 6,523 Add: Income tax expense 2,018 1,955 Depreciation 2,223 2,208 Interest expense 1,208 1,157 EBITDA$ 12,298 $ 11,843 Adjustments: Other income, net (331 ) (297 ) Interest on operating lease liabilities [b] 51 56 Adjusted EBITDA$ 12,018 $ 11,602 Debt$ 32,007 $ 29,729 Operating lease liabilities 1,609
1,759
Unfunded/(funded) pension and OPEB, net of tax cost/(benefit)
of (
(113 ) (72 )
Adjusted debt $ 33,503 $ 31,416
Adjusted debt / Adjusted EBITDA 2.8 2.7
[a] The trailing twelve months income statement information ended
is recalculated by taking the twelve months ended
subtracting the six months ended
ended June 30, 2022 .
[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.
[c] OPEB = other postretirement benefits
Adjusted debt to adjusted EBITDA (earnings before interest, taxes, depreciation,
amortization, and adjustments for other income and interest on present value of
operating leases) 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 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
both June 30, 2022 , and December 31, 2021 , the incremental borrowing rate on
operating leases was 3.2%.
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LIQUIDITY AND CAPITAL RESOURCES
Financial Condition Cash Flows Millions, for the Six Months EndedJune 30, 2022
2021
Cash provided by operating activities$ 4,167 $
4,219
Cash used in investing activities (1,540 ) (1,071 ) Cash used in financing activities (2,796 )
(3,807 )
Net change in cash, cash equivalents and restricted cash
Operating Activities Cash provided by operating activities decreased in the first six months of 2022 compared to the same period of 2021 due to higher income tax cash payments and an increase in our accounts receivable balances more than offsetting our higher net income. Investing Activities
Cash used in investing activities increased in the first six months of 2022 compared to the same period of 2021 driven by increased capital investment.
The table below details cash capital investments:
Millions, for the Six Months Ended
$ 263 $ 233 Ties 236 213 Ballast 98 100 Other [a] 290 250 Total road infrastructure replacements 887 796
Line expansion and other capacity projects 159 110 Commercial facilities
89 62
Total capacity and commercial facilities 248 172 Locomotives and freight cars [b]
345 93
Technology and other 165 129
Total cash capital investments [c] $ 1,645 $ 1,190 [a] Other includes bridges and tunnels, signals, other road assets, and road work
equipment.
[b] Locomotives and freight cars include lease buyouts of
immaterial.
Capital Plan
In 2022, we expect our capital expenditures to be approximately $3.3 billion , up
10 % from 2021, as we make investments to support our growth strategy. We will
continue to harden our infrastructure, replace older assets, and improve the
safety and resilience of the network. In addition, the plan includes targeted
freight car acquisitions, investments in growth-related projects to drive more
carloads to the network, certain ramps to efficiently handle volumes from new
and existing intermodal customers, continued modernization of our locomotive
fleet, and projects intended to improve operational efficiency. The capital plan
may be revised if business conditions warrant or if new laws or regulations
affect our ability to generate sufficient returns on these investments.
Financing Activities
Cash used in financing activities decreased in the first six months of 2022 compared to the same period of 2021 driven by an increase in debt issued and less share repurchases, partially offset by more debt repaid and higher dividends.
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See Note 14 of the Condensed Consolidated Financial Statements for a description of all our outstanding financing arrangements and significant new borrowings and Note 16 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 provided by operating 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
(1,540 ) (1,071 )
Dividends paid (1,556 ) (1,350 )
Free cash flow $ 1,071 $ 1,798 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
(1,645 ) (1,190 )
Total (a) $ 2,522 $ 3,029
Net income (b) $ 3,465 $ 3,139
Cash flow conversion rate (a/b) 73 % 96 %
Current Liquidity Status
We are continually evaluating our financial condition and liquidity. We 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 borrowing capacity to sustain an extended period
of lower volumes.
During the second quarter, we generated $1.9 billion of cash provided by
operating activities, paid our quarterly dividend, and repurchased $0.7 billion
under our share repurchase program, including the final settlement of the
accelerated share repurchase program entered into on February 17, 2022 . On June
30, 2022 , we had $788 million of cash and cash equivalents, $2.0 billion of
credit available under our revolving credit facility, and up to $200 million
undrawn on the Receivables Facility. In the second quarter, we drew $600 million
on the Receivables Facility and redeemed all $750 million of outstanding 4.163%
notes due July 15, 2022 . We have been, and we expect to continue to be, in
compliance with our debt covenants.
As described in the notes to the Condensed Consolidated Financial Statements and
as referenced in the table below, we have contractual obligations that may
affect our financial condition. However, based on our assessment of the
underlying provisions and circumstances of our contractual obligations,
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 like those of other comparable corporations, particularly
within the transportation industry.
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The following table identifies material obligations as of
Jul. 1 Payments Due by Dec. 31,
through
Contractual Obligations Dec. 31, After
Millions Total 2022 2023 2024 2025 2026 2026
Debt [a] $ 58,749 $ 1,530 $ 2,452 $ 2,471 $ 2,451 $ 1,990 $ 47,855
Purchase obligations [b] 3,628 568 837 794 755 274 400
Operating leases [c] 1,794 110 307 293 296 227 561
Other post retirement
benefits [d] 377 22 44 40 39 39 193
Finance lease obligations
[e] 290 32 76 63 43 35 41
Total contractual
obligations $ 64,838 $ 2,262 $ 3,716 $3,661$ 3,584 $ 2,565 $ 49,050
[a] Excludes finance lease obligations of
discount and deferred issuance costs of
interest component of $25,231 million .
[b] Purchase obligations include locomotive maintenance contracts; purchase
commitments for fuel purchases, ties, ballast, and rail; and agreements to
purchase other goods and services. [c] Includes leases for locomotives, freight cars, other equipment, and real
estate. Includes an interest component of
payments and payments made under the unfunded pension plans for the next ten
years.
[e] Represents total obligations, including interest component of
OTHER MATTERS
Accounting Pronouncements - See Note 2 to the Condensed Consolidated Financial Statements.
Asserted and Unasserted Claims - See Note 15 to the Condensed Consolidated Financial Statements.
Indemnities - See Note 15 to the Condensed Consolidated Financial Statements.
Labor Agreements - Pursuant to the Railway Labor Act (RLA), our collective bargaining agreements are subject to modification every five years. Existing agreements remain in effect until new agreements are ratified or until the RLA procedures are exhausted. The RLA procedures include mediation, potential arbitration, cooling-off periods, and the possibility of Presidential Emergency Boards and Congressional intervention. The current round of negotiations began onJanuary 1, 2020 , related to years 2020-2024. InJune 2022 , theNational Mediation Board released the parties from mediation, which initiated the first 30-day cooling-off period. Prior to the end of the first cooling-off period, the Biden administration appointed a Presidential Emergency Board (PEB) to resolve the parties' disputes. The PEB has 30 days to issue a report with its recommendations, which may be adopted or rejected by the parties. If the parties decline to adopt the PEB's recommendations, a second 30-day cooling-off period will begin. If the parties do not reach voluntary agreements by the end of the second cooling-off period, the parties may engage in self-help (i.e., lockouts or strike).Congress may act to stop self-help by extending the cool-off period or passing a law forcing a collective bargaining agreement on the parties. 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 ofJuly 21, 2022 . 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. 28
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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 of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements and information also include any other statements or information in this report regarding: potential impacts of the COVID-19 pandemic and theRussia -Ukraine conflict 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 (including those in response to increased traffic); expectations as to cost savings, revenues 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. The Risk Factors in Item 1A of our 2021 Annual Report on Form 10-K, filedFebruary 4, 2022 , 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. 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, theSEC . We also make available on our website previously filedSEC reports and exhibits via a link toEDGAR 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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