UNION PACIFIC CORPORATION UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2022 , Compared to
Three and Nine Months Ended September 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 nine 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$3.05 per diluted share on net income of$1.9 billion and an operating ratio of 59.9%, which includes a$114 million one-time charge for tentative or ratified agreements with our labor unions (see Labor Agreements in Other Matters), in the third quarter of 2022 compared to earnings of$2.57 per diluted share on net income of$1.7 billion and an operating ratio of 56.3% for the third quarter of 2021. Freight revenues increased 18% in the quarter compared to the same period in 2021 driven by a 15% increase in average revenue per car (ARC) and a 3% increase in volume. The ARC increase was driven by higher fuel surcharge revenues and core pricing gains, partially offset by negative mix of traffic (for example, a relative decrease in petroleum shipments, which have a higher ARC). Volume increases were driven by strong production and inventory replenishment in the automotive industry, increased demand for coal due to higher natural gas prices, and continued strength in the industrial markets driven by sand, rock, plastics, and industrial chemicals. Along with the market improvements, our service improved sequentially allowing us to handle more of the available demand. These gains were partially offset by declines in parcel and petroleum shipments. Our service metrics improved sequentially from the second quarter but were still unfavorable to last year's performance, which was negatively impacted by the wildfires inCalifornia . To improve service and increase efficiency, the Company has hired and trained new employees, temporarily relocated employees to areas with the greatest need, added locomotives to the fleet in select locations, and reduced freight car inventory, relative to carloads, from our network. Crude oil prices declined slightly from the second quarter but our average fuel price for the quarter compared to the same period last year is up 67%. Along with the higher cost of fuel, costs increased due to the additional resources deployed to improve network fluidity, higher inflation, and higher casualty costs. In addition, Presidential Emergency Board 250 issued their report and recommendations onAugust 16, 2022 , and tentative or ratified agreements were subsequently reached with all our labor unions resulting in a one-time charge of$114 million , largely due to the award of$1,000 per year bonuses to all unionized employees (see Labor Agreements in Other Matters). Despite the increases in operating expense, revenue growth drove an 8% increase in operating income compared to third quarter of 2021. 19
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Operating Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
Millions 2022 2021 Change 2022 2021 Change
Freight revenues $ 6,109 $ 5,166 18 % $ 17,391 $ 14,947 16 %
Other subsidiary revenues 231 182 27 669 539 24
Accessorial revenues 212 198 7 596 535 11
Other 14 20 (30 ) 39 50 (22 )
Total $ 6,566 $ 5,566 18 % $ 18,695 $ 16,071 16 %
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 18% during the third quarter of 2022 compared to
2021, resulting from higher fuel surcharge revenues, 3% volume increase, and
core pricing gains, partially offset by negative mix of traffic. Volume
increases were driven by strong production and inventory replenishment in the
automotive industry, increased demand for coal due to higher natural gas prices,
and continued strength in the industrial markets driven by sand, rock, plastics,
and industrial chemicals. Along with the market improvements, our service
improved sequentially allowing us to handle more of the available demand. These
gains were partially offset by declines in parcel and petroleum shipments.
Each of our commodity groups includes revenues from fuel surcharges. Freight
revenues from fuel surcharge programs increased to $1.2 billion in the third
quarter of 2022 compared to $464 million in the same period of 2021 due to
higher fuel prices, 3% increase in volume, and lag impact on fuel surcharge (it
can generally take up to two months for changing fuel prices to affect fuel
surcharges recoveries).
Other subsidiary revenues increased in the third quarter and year-to-date
periods of 2022 compared to 2021 primarily driven by higher fuel surcharge and
an increase in automotive parts shipments due to market demand and contract
wins at our subsidiary that brokers intermodal and transload logistics services.
Accessorial revenues increased in the third quarter and year-to-date periods 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 Nine Months Ended
Freight Revenues September 30, September 30,
Millions 2022 2021 Change 2022 2021 Change
Grain & grain products $ 880 $ 731 20 % $ 2,624 $ 2,292 14 %
Fertilizer 178 172 3 541 521 4
Food & refrigerated 290 253 15 828 739 12
Coal & renewables 611 531 15 1,611 1,295 24
Bulk 1,959 1,687 16 5,604 4,847 16
Industrial chemicals & plastics 579 503 15 1,656 1,436 15
Metals & minerals 601 488 23 1,648 1,330 24
Forest products 390 342 14 1,140 1,006 13
Energy & specialized markets 624 578 8 1,762 1,654 7
Industrial 2,194 1,911 15 6,206 5,426 14
Automotive 601 417 44 1,663 1,292 29
Intermodal 1,355 1,151 18 3,918 3,382 16
Premium 1,956 1,568 25 5,581 4,674 19
Total $ 6,109 $ 5,166 18 % $ 17,391 $ 14,947 16 %
Three Months Ended Nine Months Ended
Revenue Carloads September 30, September 30,
Thousands, 2022 2021 Change 2022 2021 Change
Grain & grain products 190 185 3 % 590 592 - %
Fertilizer 51 55 (7 ) 149 153 (3 )
Food & refrigerated 48 48 - 143 141 1
Coal & renewables 243 232 5 670 604 11
Bulk 532 520 2 1,552 1,490 4
Industrial chemicals & plastics 165 153 8 486 449 8
Metals & minerals 202 188 7 589 516 14
Forest products 62 63 (2 ) 189 187 1
Energy & specialized markets 140 145 (3 ) 412 422 (2 )
Industrial 569 549 4 1,676 1,574 6
Automotive 198 166 19 580 519 12
Intermodal [a] 811 809 - 2,373 2,483 (4 )
Premium 1,009 975 3 2,953 3,002 (2 )
Total 2,110 2,044 3 % 6,181 6,066 2 %
Three Months Ended Nine Months Ended
September 30, September 30,
Average Revenue per Car 2022 2021 Change 2022 2021 Change
Grain & grain products $ 4,641 $ 3,937 18 % $ 4,449 $ 3,869 15 %
Fertilizer 3,504 3,125 12 3,634 3,398 7
Food & refrigerated 6,017 5,246 15 5,809 5,235 11
Coal & renewables 2,514 2,298 9 2,403 2,146 12
Bulk 3,685 3,244 14 3,612 3,252 11
Industrial chemicals & plastics 3,508 3,277 7 3,404 3,195 7
Metals & minerals 2,969 2,596 14 2,799 2,577 9
Forest products 6,347 5,457 16 6,044 5,390 12
Energy & specialized markets 4,434 3,996 11 4,273 3,924 9
Industrial 3,852 3,482 11 3,702 3,448 7
Automotive 3,030 2,500 21 2,866 2,488 15
Intermodal [a] 1,672 1,424 17 1,651 1,362 21
Premium 1,939 1,608 21 1,890 1,557 21
Average $ 2,895 $ 2,528 15 % $ 2,814 $ 2,464 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 third quarter and year-to-date periods of 2022 compared to 2021 due to higher fuel surcharge revenues, volume increases, and core pricing gains, partially offset by negative mix from increased coal shipments. Volume grew 2% and 4% in the third quarter and year-to-date periods, respectively, compared to 2021 driven by increases in coal and renewable shipments due to higher natural gas prices and contract wins, partially offset by declines in fertilizer shipments. In the year-to-date period compared to 2021, grain and grain products shipments slightly declined as network constraints increased shuttle cycle times for our grain traffic. 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 third quarter and year-to-date periods 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 decreased petroleum and increased short haul rock shipments. Volume grew 4% in the third quarter compared to 2021. The growth was driven by metals and minerals due to strong demand for sand and rock as well as new business wins, expansions, and market demand for industrial chemicals and plastics shipments. In addition to the third 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 strong demand this year drove the year-over-year increase for the impacted commodities for the year-to-date period. Petroleum shipments, within the energy and specialized markets commodity line, declined in the third quarter and year-to-date periods compared to 2021 primarily due to regulatory challenges inMexico markets. Premium - Premium includes shipments of finished automobiles, automotive parts, and merchandise in intermodal containers, both domestic and international. Premium freight revenues increased in the third quarter compared to 2021 due to higher fuel surcharge revenues, 3% volume growth, and core pricing gains. Automotive shipments increased 19% and 12% in the third quarter and year-to-date periods, respectively, compared to the same periods in 2021 driven by an increase in finished vehicle shipments and automotive parts as the automotive industry continued to recover from the shortage of semiconductors and last year's weather disruptions in the first quarter. Year-to-date, freight revenues increased compared to 2021 driven by fuel surcharge revenues, core pricing gains, and positive mix of traffic, partially offset by a 2% volume decline. The volume increases from automotive shipments, domestic intermodal contract wins, and market strength due to tight truck capacity earlier in the year were more than offset by ongoing international supply chain disruptions and Company actions to store equipment to restore network fluidity. Mexico Business - Each of our commodity groups includes revenues from shipments to and fromMexico . Revenues fromMexico business increased 20% to$708 million in the third quarter of 2022 compared to 2021 driven by higher fuel surcharge revenues, 3% volume growth, positive business mix from lower intermodal shipments, and core pricing gains. The volume increase was driven by automotive parts, finished automobiles, and construction, partially offset by intermodal and petroleum shipments. Year-to-date, revenues increased 15% to$2.0 billion due to higher fuel surcharge revenues, positive business mix from lower intermodal shipments, and core pricing gains, partially offset by a slight volume decline compared to 2021. Operating Expenses Three Months Ended Nine Months Ended September 30, September 30, Millions 2022 2021 Change 2022 2021 Change Compensation and benefits$ 1,278 $ 1,040 23 %$ 3,471 $ 3,088 12 % Fuel 932 544 71 2,586 1,452 78 Purchased services and materials 626 510 23 1,809 1,478 22 Depreciation 563 553 2 1,677 1,652 2 Equipment and other rents 215 217 (1 ) 660 629 5 Other 319 270 18 987 874 13 Total$ 3,933 $ 3,134 25 %$ 11,190 $ 9,173 22 % Operating expenses increased$799 million and$2.0 billion in the third quarter and year-to-date periods, respectively, compared to 2021 driven by higher fuel prices, a one-time charge for the tentative or ratified agreements reached with our labor unions (see Labor Agreements in Other Matters), inflation, operational challenges, volume related costs, higher casualty costs, and state and local taxes. In addition, the year-to-date period comparison was impacted positively by lower weather-related expenses in 2022. 22
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Compensation and Benefits - Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, and incentive costs. For the third quarter and year-to-date periods, expenses increased 23% and 12%, respectively, compared to 2021 due to a$114 million one-time charge for the tentative or ratified agreements reached with our labor unions (see Labor Agreements in Other Matters), wage inflation, and an increase in employee levels. Employee levels increased in the third quarter and year-to-date periods to address congestion across the system and increased carload volumes. The year-to-date comparison was also partially offset by last year's weather-related expenses. Fuel - Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Fuel expense increased in the third quarter of 2022 compared to the same period in 2021 driven by a 67% increase in locomotive diesel fuel prices, which averaged$3.96 and$2.37 per gallon (including taxes and transportation costs) in the third quarter of 2022 and 2021, respectively. A 4% increase in gross ton-miles also contributed to the higher expense, partially offset by a 1% improvement in the fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-miles in thousands. For the year-to-date period, locomotive diesel fuel prices averaged$3.64 per gallon in 2022 compared to$2.13 per gallon in 2021, and gross ton-miles increased 4% driving the 78% increase in expense. Fuel consumption rate was essentially flat during the year-to-date period. 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 23% and 22% in the third 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, increased drayage costs incurred by one of our subsidiaries, volume related costs, and inflation. 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% for both the third quarter and year-to-date periods 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. Increased freight car rent expense due to higher volume and network congestion drove increases in equipment and other rents expense in the third quarter and year-to-date periods. Higher equity income more than offset these increases in the third quarter. 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 18% and 13% in the third quarter and year-to-date periods, respectively, compared to 2021 driven by casualty expenses, including higher personal injury expense and damaged freight; higher state and local taxes; and increased business travel costs. In the year-to-date period, lower environmental remediation costs partially offset the increases. Non-Operating Items Three Months Ended Nine Months Ended September 30, September 30, Millions 2022 2021 Change 2022 2021 Change Other income, net$ 124 $ 38 F %$ 334 $ 214 56 % Interest expense (315 ) (290 ) 9 (938 ) (862 ) 9 Income taxes (547 ) (507 ) 8 (1,541 ) (1,438 ) 7 Other Income, net - Other income increased in the third quarter and year-to-date periods of 2022 compared to 2021 driven by higher real estate income and net periodic pension benefit. Real estate sales in the third quarter of 2022 includes a$35 million gain from a land sale to theColorado Department of Transportation . The year-to-date period for 2022 also includes a$79 million gain from a land sale to theIllinois State Toll Highway Authority , while the 2021 year-to-date period 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. 23
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Interest Expense - Interest expense increased in the third quarter of 2022 compared to 2021 due to an increased weighted-average debt level of$32.2 billion in 2022 compared to$29.0 billion in 2021, partially offset by a lower effective interest rate of 3.9% in 2022 compared to 4.0% in 2021. Year-to-date, interest expense increased due to an increased weighted-average debt level of$31.8 billion in 2022 compared to$27.9 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 increased in the third quarter of 2022 compared to 2021, driven by higher pre-tax income, partially offset by reductions of$40 million in deferred tax expense fromIowa ,Arkansas , andIdaho reducing their corporate income tax rates. Year-to-date, income tax expense increased compared to the same period in 2021, driven by higher pre-tax income, partially offset by the reductions in deferred tax expense described above and a$55 million reduction in deferred tax expense fromNebraska reducing its corporate income tax rate. Year-to-date 2021 income tax expense included reductions of$43 million in deferred tax expense fromNebraska ,Oklahoma , andIdaho reducing their corporate income tax rates. Our effective tax rates for year-to-date 2022 and 2021 were 22.3% and 23.0%, 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 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 Nine Months Ended
September 30, September 30,
2022 2021 Change 2022 2021 Change
Gross ton-miles (GTMs) (billions) 215.0 207.1 4 % 634.5 607.9 4 %
Revenue ton-miles (billions) 107.2 104.3 3 317.8 306.4 4
Freight car velocity (daily miles per car) 191 195 (2 ) 192 205 (6 )
Average train speed (miles per hour) [a] 23.7 24.2 (2 ) 23.8 24.8 (4 )
Average terminal dwell time (hours) [a] 24.4 24.0 2 24.3 23.5 3
Locomotive productivity (GTMs per horsepower day) 124 127
(2 ) 126 135 (7 )
Train length (feet) 9,483 9,359 1 9,376 9,340 -
Intermodal car trip plan compliance (%) [b] 62 66 (4 ) pts 65 72 (7 ) pts
Manifest/Automotive car trip plan compliance (%) [b] 58 60 (2 ) pts 59 65 (6 ) pts
Workforce productivity (car miles per employee) 1,045 1,044
- 1,045 1,036 1
Total employees (average) 30,841 29,810 3 30,582 29,877 2
Operating ratio 59.9 56.3 3.6 pts 59.9 57.1 2.8 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. Gross ton-miles and revenue ton-miles increased 4% and 3%,
respectively, during the third quarter of 2022 compared to 2021, driven by a 3%
increase in carloadings. Year-to-date, gross ton-miles and revenue ton-miles
both increased 4% driven by a 2% 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. While year-over-year comparisons deteriorated, the fluidity of the network
has improved from the second quarter as freight car velocity, average train
speed, and average terminal dwell improved sequentially as crew availability
increased throughout the third quarter.
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Locomotive Productivity - Locomotive productivity is gross ton-miles per average daily locomotive horsepower available. Locomotive productivity decreased in the third quarter and year-to-date 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 compared to the same periods in 2021.
Train Length - Train length is the average maximum train length on a route measured in feet. Our train length increased 1% in the third quarter due to train length improvement initiatives, partially offset by efforts to recover the network. The year-to-date comparison was flat due to lower international intermodal shipments and recovery efforts offsetting productivity initiatives.
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 third quarter and year-to-date periods of 2022 compared to 2021 because of network congestion. Workforce Productivity - Workforce productivity is average daily car miles per employee. Workforce productivity was flat in the third quarter of 2022, as average daily car miles increased 4% and employees increased 3% compared to 2021. The 3% increase in employee levels was driven by an increase in train, engine, and yard employees to address volume increases and congestion. 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 third quarter operating ratio of 59.9% deteriorated 3.6 points compared to 2021 and our year-to-date operating ratio of 59.9% deteriorated 2.8 points compared to 2021 mainly due to the one-time charge for the tentative or ratified agreements reached with our labor unions (see Labor Agreements in Other Matters), excess network costs, inflation, and other cost increases, partially offset by core pricing gains. In addition, the year-to-date comparison was positively impacted by mix of traffic and lower weather-related expenses and negatively impacted by higher fuel prices.
Adjusted Debt / Adjusted EBITDA
Millions, Except Ratios Sep. 30, Dec. 31, for the Trailing Twelve Months Ended [a] 2022 2021 Net income$ 7,071 $ 6,523 Add: Income tax expense 2,058 1,955 Depreciation 2,233 2,208 Interest expense 1,233 1,157 EBITDA$ 12,595 $ 11,843 Adjustments: Other income, net (417 ) (297 ) Interest on operating lease liabilities [b] 52 56 Adjusted EBITDA$ 12,230 $ 11,602 Debt$ 33,422 $ 29,729 Operating lease liabilities 1,629
1,759
Unfunded/(funded) pension and OPEB, net of tax cost/(benefit)
of (
(139 ) (72 )
Adjusted debt $ 34,912 $ 31,416
Adjusted debt / adjusted EBITDA 2.9 2.7
[a] The trailing twelve months income statement information ended
2022, is recalculated by taking the twelve months ended
subtracting the nine months ended
months ended September 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 post retirement benefits
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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 bothSeptember 30, 2022 , andDecember 31, 2021 , the incremental borrowing rate on operating leases was 3.2%.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition Cash Flows Millions, for the Nine Months EndedSeptember 30, 2022
2021
Cash provided by operating activities$ 7,070 $
6,503
Cash used in investing activities (2,559 ) (1,792 ) Cash used in financing activities (4,210 )
(5,291 )
Net change in cash, cash equivalents and restricted cash
Operating Activities
Cash provided by operating activities increased in the first nine months of 2022 compared to the same period of 2021 due to higher net income.
Investing Activities
Cash used in investing activities increased in the first nine 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 Nine Months Ended
$ 405 $ 367 Ties 346 334 Ballast 160 156 Other [a] 474 467 Total road infrastructure replacements 1,385 1,324 Line expansion and other capacity projects 228 173 Commercial facilities 175 104 Total capacity and commercial facilities 403 277 Locomotives and freight cars [b] 608 192 Technology and other 294 152 Total cash capital investments [c]$ 2,690 $ 1,945
[a] Other includes bridges and tunnels, signals, other road assets, and road work
equipment.
[b] Locomotives and freight cars include lease buyouts of
2021, are immaterial.
Capital Plan
In 2022, we expect our capital expenditures to be approximately $3.4 billion , up
13% 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.
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Table of Contents Financing Activities
Cash used in financing activities decreased in the first nine months of 2022 compared to the same period of 2021 driven by an increase in debt issued, partially offset by more debt repaid.
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 Nine Months Ended
$ 7,070 $ 6,503 Cash used in investing activities (2,559 ) (1,792 ) Dividends paid (2,362 ) (2,045 ) Free cash flow$ 2,149 $ 2,666
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
$ 7,070 $ 6,503 Cash used in capital investments (2,690 ) (1,945 ) Total (a)$ 4,380 $ 4,558 Net income (b)$ 5,360 $ 4,812 Cash flow conversion rate (a/b) 82 % 95 % 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 third quarter, we generated$2.9 billion of cash provided by operating activities, paid our quarterly dividend, and repurchased$2.1 billion worth of shares under our share repurchase program. OnSeptember 30, 2022 , we had$1.3 billion of cash and cash equivalents,$2.0 billion of credit available under our revolving credit facility, and up to$600 million undrawn on the Receivables Facility. In the third quarter, we issued$1.9 billion in fixed-rate long-term debt, including a$600 million 30-year green bond. The net proceeds of the green bond will be used to finance eligible projects with environmental benefits. Additionally, we paid down$400 million on the Receivables Facility. We have been, and we expect to continue to be, in compliance with our debt covenants. As described in the notes to the Condensed Consolidated Financial Statements and as referenced in the table below, we have contractual obligations that may affect our financial condition. However, based on our assessment of the underlying provisions and circumstances of our contractual obligations, including material sources of off-balance sheet and structured finance arrangements, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity. In addition, our commercial obligations, financings, and commitments are customary transactions that are like those of other comparable corporations, particularly within the transportation industry. 27
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The following table identifies material obligations as ofSeptember 30, 2022 : Oct. 1 Payments Due by Dec. 31, through Contractual Obligations Dec. 31, After Millions Total 2022 2023 2024 2025 2026 2026 Debt [a]$ 61,936 $ 373 $ 2,637 $ 2,562 $ 2,742 $ 2,080 $ 51,542 Purchase obligations [b] 3,435 277 855 823 815 273 392 Operating leases [c] 1,808 52 326 309 312 241 568 Other post retirement benefits [d] 366 11 44 40 39 39 193 Finance lease obligations [e] 266 8 76 63 43 35 41 Total contractual obligations$ 67,811 $ 721 $ 3,938 $
3,797$ 3,951 $ 2,668 $ 52,736
[a] Excludes finance lease obligations of
discount and deferred issuance costs of
interest component of $26,969 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 Presidential Emergency Board 250 (PEB) to resolve the parties' disputes. The PEB issued a report with its recommendations onAugust 16, 2022 , initiating the second 30-day cooling-off period. Over the second cooling-off period, tentative agreements were reached with all the labor unions, averting a potential work stoppage. As ofOctober 20, 2022 , six labor unions ratified their respective tentative agreements. One labor union did not ratify its tentative agreement, and the parties have agreed to maintain the status quo as negotiations continue. Tentative agreements with the remaining labor unions are still in the ratification process. If a tentative agreement fails ratification, and the parties do not reach a voluntary agreement by the end of the agreed upon status quo period, the parties may engage in self-help (i.e., lockouts or strike).Congress may act to stop self-help by extending the status quo period or passing a law imposing a resolution 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 ofOctober 20, 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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