Annual Reports

  • 10-K (Feb 9, 2018)
  • 10-K (Feb 3, 2017)
  • 10-K (Feb 5, 2016)
  • 10-K (Feb 6, 2015)
  • 10-K (Feb 7, 2014)
  • 10-K (Feb 8, 2013)

 
Quarterly Reports

 
8-K

 
Other

Union Pacific 10-K 2018
20171231 10K



 

 







UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ____________

Commission File Number 1-6075

UNION PACIFIC CORPORATION

(Exact name of registrant as specified in its charter)



 

 

UTAH

 

13-2626465

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

1400 DOUGLAS STREET, OMAHA, NEBRASKA

(Address of principal executive offices)

68179

(Zip Code)

(402) 544-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



 

 

Title of each Class

 

Name of each exchange on which registered

Common Stock (Par Value $2.50 per share)

 

New York Stock Exchange, Inc.



§

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 Yes    No

§

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 Yes    No

§

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes    No

§

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 Yes    No

§

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

§

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 



§

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 Yes    No

§

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.         



§

As of June 30, 2017, the aggregate market value of the registrant’s Common Stock held by non-affiliates (using the New York Stock Exchange closing price) was $87.3 billion.



The number of shares outstanding of the registrant’s Common Stock as of February 2, 2018 was 779,305,276.

 







 

 


 

Documents Incorporated by Reference – Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2018, are incorporated by reference into Part III of this report. The registrant’s Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A.



UNION PACIFIC CORPORATION

TABLE OF CONTENTS





 

 



Chairman’s Letter

3



Directors and Senior Management

4



 

 



PART I

 



 

 

Item 1.

Business

5

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

13

Item 2.

Properties

14

Item 3.

Legal Proceedings

16

Item 4.

Mine Safety Disclosures

17



Executive Officers of the Registrant and Principal Executive Officers of Subsidiaries

18



 

 



PART II

 



 

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

19

Item 6.

Selected Financial Data

21

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22



Critical Accounting Policies

37



Cautionary Information

42

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 8.

Financial Statements and Supplementary Data

44



Report of Independent Registered Public Accounting Firm

45

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

79

Item 9A.

Controls and Procedures

79



Management’s Annual Report on Internal Control Over Financial Reporting

80



Report of Independent Registered Public Accounting Firm

81

Item 9B.

Other Information

82



 

 



PART III

 



 

 

Item 10.

Directors, Executive Officers, and Corporate Governance

82

Item 11.

Executive Compensation

82

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

82

Item 13.

Certain Relationships and Related Transactions and Director Independence

83

Item 14.

Principal Accountant Fees and Services

83



 

 



PART IV

 



 

 

Item 15.

Exhibits, Financial Statement Schedules

84



Signatures

Certifications

85

95

 

 

 

 

2


 

February 9, 2018

Fellow Shareholders:



Looking back at 2017, I can report Union Pacific made progress building long-term value for our four key stakeholders – shareholders, communities, customers, and employees. After two consecutive years of overall volume declines, Union Pacific experienced a 2 percent increase in volume. This increase in volume, coupled with positive pricing and continued productivity improvement, generated reported earnings of $13.36 per share.  After adjusting for the impact of corporate tax reform that was passed prior to year-end, our adjusted earnings were a record $5.79 per share*.  This result is a 14 percent improvement compared to last year’s $5.07 per share.  Our adjusted operating ratio was a record 63.0 percent*, or 0.5 points better than last year’s 63.5 percent.



Carloadings were up in our Industrial Products and Coal business units 12 percent and 6 percent, respectively, driven primarily by a robust increase in frac sand shipments.  Automotive shipments were down 3 percent resulting from lower domestic sales and reduced vehicle production, while Chemical and Agricultural Product shipments were both down 2 percent as we experienced declines in our crude oil volumes and grain carloadings.  Intermodal volumes were flat compared to 2016.

 

We faced several operational challenges during 2017, from significant flooding in the western portion of our network, to the unprecedented rain and flooding that accompanied Hurricane Harvey.  Despite these challenges, the men and women of Union Pacific worked tirelessly and heroically to safely serve our customers.  I am pleased with our results and look forward to continuing to build long-term enterprise value by building our Value Tracks.



Starting with World Class Safety, 2017 was another outstanding year for employee safety performance.  Our reportable personal injury rate of 0.79 was off slightly from last year’s all-time record low of 0.75.  Our ultimate goal is zero incidents, getting every one of our employees home safely at the end of each day.  We will maintain a relentless focus on data-driven processes and root-cause evaluations, as well as on internal safety programs such as Total Safety Culture and Courage to Care. 



We have built centers of excellence around game-changing technology and other Innovation initiatives. Our Engaged Team is inspiring passion and dedication while leveraging diverse talents to extract the best ideas that will drive positive results across our Company.  The continued implementation and execution of our “Grow to 55 and Zero” initiative drives significant Resource Productivity, from successfully aligning our resources to meet the increase in demand, to being more efficient in virtually everything that we do across the entire organization.



Given the challenges I mentioned above, our service product in 2017 did not meet all our customers’ expectations, but we kept working to create an Excellent Customer Experience, anticipating customer needs, responding quickly, keeping commitments, and offering solutions.  Our robust capital program helps provide the necessary resources and network capacity to build these relationships and prepare for future growth.  It enables us to handle our business safely and efficiently, while improving network fluidity.  We invested about $3.1 billion in 2017, including about $1.9 billion in replacement capital to harden our infrastructure, and to improve the safety and resiliency of our network, as well as nearly $340 million toward completing our Positive Train Control project.



A  Maximized Franchise is much more than our unique physical footprint.  It encompasses our employees’ skills, our assets, and a strategy that emphasizes the importance of our customers’ experiences.  It also embraces a thoughtful approach to market penetration, the competitive landscape to determine future service offerings and to identify trade flow opportunities. 



This successful execution of our value track strategy to the benefit of all our stakeholders translates into value for our shareholders.  Total shareholder return increased 32 percent in 2017, compared with 22 percent for the S&P 500. Our net return on invested capital* of 13.7 percent increased a full percentage point over last year’s 12.7 percent.  We increased our quarterly declared dividend per share by 10 percent, with dividends paid in 2017 totaling $2.0 billion.  In addition, we repurchased 36 million Union Pacific shares.  In total, combining both dividends and share repurchases, Union Pacific returned $6 billion to our shareholders in 2017.



Looking to 2018, we are optimistic the economy will favor many of the segments which drive our core business, leading us to another year of positive volume growth.  We will continue to execute on our Value Tracks to benefit our employees, partner with the communities in which we serve, provide our customers an excellent experience, and generate strong returns for our shareholders.

Fritz_Lance_sig.tif





Chairman, President and Chief Executive Officer

*See Item 7 of this report for reconciliations to U.S. GAAP.

 

3


 







DIRECTORS AND SENIOR MANAGEMENT





 

 

 

 

BOARD OF DIRECTORS

 

 

 

 



 

 

 

 

Andrew H. Card, Jr.

 

Deborah C. Hopkins

 

Thomas F. McLarty III

Former White House

 

Former Chief Executive Officer

 

President

Chief of Staff

 

Citi Ventures

 

McLarty Associates

Board Committees: Audit,

 

Former Chief Innovation Officer

 

Board Committees: Finance (Chair),

Compensation and Benefits

 

Citi

 

Corporate Governance and



 

Board Committees: Corporate

 

Nominating

Erroll B. Davis, Jr.

 

Governance and Nominating, Finance

 

 

Former Chairman,

 

 

 

Bhavesh V. Patel

President & CEO

 

Jane H. Lute

 

Chief Executive Officer and

Alliant Energy Corporation

 

President and Chief Executive Officer

 

Chairman of the Management Board

Board Committees: Compensation

 

SICPA North America

 

LyondellBasell Industries N.V.

and Benefits (Chair), Corporate

 

Board Committees: Audit, Corporate

 

Board Committees: Finance,

Governance and Nominating

 

Governance and Nominating

 

Compensation and Benefits



 

 

 

 

David B. Dillon

 

Michael R. McCarthy

 

Steven R. Rogel

Former Chairman

 

Chairman

 

Former Chairman

The Kroger Company

 

McCarthy Group, LLC

 

Weyerhaeuser Company

Board Committees: Audit (Chair),

 

Lead Independent Director

 

Board Committees: Compensation

Compensation and Benefits

 

Board Committees: Corporate

 

and Benefits, Corporate Governance



 

Governance and Nominating (Chair),

 

and Nominating

Lance M. Fritz

 

Finance

 

 

Chairman, President and

 

 

 

Jose H. Villarreal

Chief Executive Officer

 

Michael W. McConnell

 

Advisor

Union Pacific Corporation and

 

General Partner and

 

Akin, Gump, Strauss, Hauer &

Union Pacific Railroad Company

 

Former Managing Partner

 

Feld, LLP



 

Brown Brothers Harriman & Co.

 

Board Committees: Audit,



 

Board Committees: Audit,  Finance

 

Compensation and Benefits



 

 

 

 



SENIOR MANAGEMENT*



 

 

 

 



 

 

 

 

Lance M. Fritz

 

Robert M. Knight, Jr.

 

Todd M. Rynaski

Chairman, President and

 

Executive Vice President

 

Vice President and Controller

Chief Executive Officer

 

and Chief Financial Officer

 

 



 

 

 

Cameron A. Scott

Bryan L. Clark

 

Sherrye L. Hutcherson

 

Executive Vice President and

Vice President-Tax

 

Senior Vice President and

 

Chief Operating Officer



 

Chief Human Resource Officer

 

 

Rhonda S. Ferguson

 

 

 

Lynden L. Tennison

Executive Vice President, Chief Legal

 

Scott D. Moore

 

Senior Vice President and

Officer and Corporate Secretary

 

Senior Vice President and

 

Chief Information Officer



 

Chief Administrative Officer

 

 

D. Lynn Kelley

 

 

 

Elizabeth F. Whited

Senior Vice President-Supply and

 

Jon T. Panzer

 

Executive Vice President and

Continuous Improvement

 

Vice President and Treasurer

 

Chief Marketing Officer



 

 

 

 



 

Michael A. Rock

 

 



 

Vice President-External Relations

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 

*Senior management are elected officers of both Union Pacific Corporation and Union Pacific Railroad Company, except Mr. Scott, Ms. Kelley and Ms. Whited are elected officers for Union Pacific Railroad Company.

.

 



 

4


 

PART I



Item 1. Business



GENERAL



Union Pacific Railroad Company is the principal operating company of Union Pacific Corporation. One of America's most recognized companies, Union Pacific Railroad Company links 23 states in the western two-thirds of the country by rail, providing a critical link in the global supply chain.  The Railroad’s diversified business mix includes Agricultural Products, Automotive, Chemicals, Coal, Industrial Products and Intermodal. Union Pacific serves many of the fastest-growing U.S. population centers, operates from all major West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems and is the only railroad serving all six major Mexico gateways. Union Pacific provides value to its roughly 10,000 customers by delivering products in a safe, reliable, fuel-efficient and environmentally responsible manner.



Union Pacific Corporation was incorporated in Utah in 1969 and maintains its principal executive offices at 1400 Douglas Street, Omaha, NE 68179. The telephone number at that address is (402) 544-5000. The common stock of Union Pacific Corporation is listed on the New York Stock Exchange (NYSE) under the symbol “UNP”.



For purposes of this report, unless the context otherwise requires, all references herein to “UPC”, “Corporation”, “Company”, “we”, “us”, and “our” shall mean Union Pacific Corporation and its subsidiaries, including Union Pacific Railroad Company, which we separately refer to as “UPRR” or the “Railroad”.



Available Information – Our Internet website is www.up.com. We make available free of charge on our website (under the “Investors” caption link) our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; eXtensible Business Reporting Language (XBRL) documents; our current reports on Form 8-K; our proxy statements; Forms 3, 4, and 5, filed on behalf of our directors and certain executive officers; and amendments to such reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act). We provide these reports and statements as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We also make available on our website previously filed SEC reports and exhibits via a link to EDGAR on the SEC’s Internet site at www.sec.gov. Additionally, our corporate governance materials, including By-Laws, Board Committee charters, governance guidelines and policies, and codes of conduct and ethics for directors, officers, and employees are available on our website. From time to time, the corporate governance materials on our website may be updated as necessary to comply with rules issued by the SEC and the NYSE or as desirable to promote the effective and efficient governance of our Company. Any security holder wishing to receive, without charge, a copy of any of our SEC filings or corporate governance materials should send a written request to: Secretary, Union Pacific Corporation, 1400 Douglas Street, Omaha, NE 68179.



We have included the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) certifications regarding our public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31(a) and (b) to this report.



References to our website address in this report, including references in Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7, are provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.



OPERATIONS



The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide revenue by commodity group, we analyze the net financial results of the Railroad as one segment due to the integrated nature of our rail network. Additional information regarding our business and operations, including revenue and financial information and data and other information regarding environmental matters, is presented in Risk Factors, Item 1A; Legal Proceedings, Item 3; Selected Financial Data, Item 6; Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7; and the Financial Statements and Supplementary Data, Item 8 (which include information regarding revenues, statements of income, and total assets). 





 

 

5


 

Operations  – UPRR is a Class I railroad operating in the U.S. We have 32,122 route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and eastern U.S. gateways and providing several corridors to key Mexican gateways. We serve the Western two-thirds of the country and maintain coordinated schedules with other rail carriers to move freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada, and Mexico. Export and import traffic moves through Gulf Coast and Pacific Coast ports and across the Mexican and Canadian borders. Our freight traffic consists of bulk,

2017 Freight Revenue

Picture 2

manifest, and premium business. Bulk traffic primarily consists of coal, grain, soda ash, ethanol, rock and crude oil shipped in unit trains – trains transporting a single commodity from one origin to one destination. Manifest traffic includes individual carload or less than train-load business involving commodities such as lumber, steel, paper, food and chemicals. The transportation of finished vehicles, auto parts, intermodal containers and truck trailers are included as part of our premium business. In 2017, we generated freight revenues totaling $19.8 billion from the following six commodity groups:



Agricultural Products – Transportation of grains, commodities produced from these grains, and food and beverage products generated 19% of the Railroad’s 2017 freight revenue. We access most major grain markets, linking the Midwest and Western U.S. producing areas to export terminals in the Pacific Northwest and Gulf Coast ports, as well as Mexico. We also serve significant domestic markets, including grain processors, animal feeders and ethanol producers in the Midwest, West, South and Rocky Mountain states. Unit trains, which transport a single commodity between producers and export terminals or domestic markets, represent approximately 41% of our agricultural shipments.



Automotive – We are the largest automotive carrier west of the Mississippi River and operate or access 38 vehicle distribution centers. The Railroad’s extensive franchise serves five vehicle assembly plants and connects to West Coast ports, all six major Mexico gateways, and the Port of Houston to accommodate both import and export shipments. In addition to transporting finished vehicles, UPRR provides expedited handling of automotive parts in both boxcars and intermodal containers destined for Mexico, the U.S. and Canada. The automotive group generated 10% of Union Pacific’s freight revenue in 2017.



Chemicals – Transporting chemicals generated 18% of our freight revenue in 2017. The Railroad’s unique franchise serves the chemical producing areas along the Gulf Coast, where roughly 55% of the Company’s chemical business originates, travels through, or terminates. Our chemical franchise also accesses chemical producers in the Rocky Mountains and on the West Coast. The Company’s chemical shipments include six categories:  industrial chemicals, plastics, fertilizer, petroleum and liquid petroleum gases, crude oil and soda ash. Currently, these products move primarily to and from the Gulf Coast region. Fertilizer movements originate in the Gulf Coast region, the western U.S. and Canada (through interline access) for delivery to major agricultural users in the Midwest, western U.S., as well as abroad. Soda ash originates in southwestern Wyoming and California, destined for chemical and glass producing markets in North America and abroad.



Coal – Shipments of coal, petroleum coke, and biomass accounted for 13% of our freight revenue in 2017. The Railroad’s network supports the transportation of coal, petroleum coke, and biomass to independent and regulated power companies and industrial facilities throughout the U.S. Through interchange gateways and ports, UPRR’s reach extends to eastern U.S. utilities, as well as to Mexico and other international destinations. Coal traffic originating in the Powder River Basin (PRB) area of Wyoming is the largest segment of the Railroad’s coal business.



Industrial Products – Our extensive network facilitates the movement of numerous commodities between thousands of origin and destination points throughout North America. The Industrial Products group consists of several categories, including construction products, minerals, consumer goods, metals, lumber, paper, and other miscellaneous products.  In 2017, this group generated 21% of our total freight revenue. Commercial, residential and governmental infrastructure investments drive shipments of steel, aggregates (cement components), cement and wood products.  Oil and gas drilling generates demand for raw steel, finished pipe, frac sand, stone and drilling fluid commodities. Industrial and light manufacturing plants

 

6


 

receive steel, nonferrous materials, minerals and other raw materials. Paper and packaging commodities, as well as appliances, move to major metropolitan areas for consumers. Lumber shipments originate primarily in the Pacific Northwest and western Canada and move throughout the U.S. for use in new home construction and repair and remodeling.



Intermodal – Our Intermodal business includes two segments: international and domestic. International business consists of import and export container traffic that mainly passes through West Coast ports served by UPRR’s extensive terminal network. Domestic business includes container and trailer traffic picked up and delivered within North America for intermodal marketing companies (primarily shipper agents and logistics companies), as well as truckload carriers. Less-than-truckload and package carriers with time-sensitive business requirements are also an important part of domestic shipments. Together, our international and domestic Intermodal business generated 19% of our 2017 freight revenue.



Seasonality – Some of the commodities we carry have peak shipping seasons, reflecting either or both the nature of the commodity and the demand cycle for the commodity (such as certain agricultural and food products that have specific growing and harvesting seasons). The peak shipping seasons for these commodities can vary considerably each year depending upon various factors, including the strength of domestic and international economies and currencies and the strength of harvests and market prices for agricultural products.



Working CapitalAt December 31, 2017, we had a working capital surplus. We maintain adequate resources, and when necessary, have adequate access to capital markets to meet any foreseeable cash requirements, in addition to sufficient financial capacity to satisfy our current liabilities. At December 31, 2016, we had a working capital deficit, due primarily to a decrease in other current assets related to a tax receivable for the late extension of bonus depreciation at December 31, 2015, along with an increase at December 31, 2016, in accounts payable and upcoming debt maturities.



Competition – We are subject to competition from other railroads, motor carriers, ship and barge operators, and pipelines. Our main railroad competitor is Burlington Northern Santa Fe LLC. Its primary subsidiary, BNSF Railway Company (BNSF), operates parallel routes in many of our main traffic corridors. In addition, we operate in corridors served by other railroads and motor carriers. Motor carrier competition exists for five of our six commodity groups (excluding most coal shipments). Because of the proximity of our routes to major inland and Gulf Coast waterways, barges can be particularly competitive, especially for grain and bulk commodities in certain areas where we operate. In addition to price competition, we face competition with respect to transit times, quality and reliability of service from motor carriers and other railroads. Motor carriers in particular can have an advantage over railroads with respect to transit times and timeliness of service.  However, railroads are much more fuel-efficient than trucks, which reduces the impact of transporting goods on the environment and public infrastructure, and we have been making efforts to convert certain truck traffic to rail.  Additionally, we must build or acquire and maintain our rail system; trucks and barges are able to use public rights-of-way maintained by public entities. Any of the following could also affect the competitiveness of our transportation services for some or all of our commodities: (i) improvements or expenditures materially increasing the quality or reducing the costs of these alternative modes of transportation, (ii) legislation that eliminates or significantly increases the size or weight limitations applied to motor carriers, or (iii) legislation or regulatory changes that impose operating restrictions on railroads or that adversely affect the profitability of some or all railroad traffic. Finally, many movements face product or geographic competition where our customers can use different products (e.g. natural gas instead of coal, sorghum instead of corn) or commodities from different locations (e.g. grain from states or countries that we do not serve, crude oil from different regions). Sourcing different commodities or different locations allows shippers to substitute different carriers and such competition may reduce our volume or constrain prices. For more information regarding risks we face from competition, see the Risk Factors in Item 1A of this report.



Key Suppliers – We depend on two key domestic suppliers of high horsepower locomotives. Both suppliers provide parts for locomotives and one also provides maintenance under a service agreement. Due to the capital intensive nature of the locomotive manufacturing business and sophistication of this equipment, potential new suppliers face high barriers of entry into this industry. Therefore, if one of these domestic suppliers discontinues manufacturing locomotives, supplying parts or providing maintenance for any reason, including insolvency or bankruptcy, we could experience a significant cost increase and risk reduced availability of the locomotives that are necessary to our operations. Additionally, for a high percentage of our rail purchases, we utilize two steel producers (one domestic and one international) that meet our specifications. Rail is critical for maintenance, replacement, improvement, and expansion of our network and facilities. Rail manufacturing also has high barriers of entry, and, if one of those suppliers

 

7


 

discontinues operations for any reason, including insolvency or bankruptcy, we could experience cost increases and difficulty obtaining rail.



Employees  Approximately 85% of our 41,992 full-time-equivalent employees are represented by 14 major rail unions. On January 1, 2015, current labor agreements became subject to modification and we began the current round of negotiations with the unions. Existing agreements remain in effect until new agreements are ratified or the Railway Labor Act’s (RLA) procedures (which include mediation, potential arbitration, cooling-off periods, and the possibility of Presidential Emergency Boards and Congressional intervention) are exhausted. Through industry and local negotiations, UPRR reached tentative new agreements with 12 of our 14 major rail unions. Nine unions (representing nearly 70% of our agreement work force) have ratified those agreements by significant margins. The tentative agreement failed ratification with two unions in early February 2018 (representing about 10% of our agreement work force) returning any further discussions with them to the jurisdiction of the National Mediation Board. Another small union (less than 1%) is still out for ratification. UPRR and the industry currently continue in active mediation with the remaining coalition of two unions (representing about 20% of our agreement work force).  Under the Railway Labor Act, the National Mediation Board controls timing and location of mediation conferences and when to terminate mediation, moving the parties to the next stages of the RLA process.  Contract negotiations historically continue for an extended period of time and we rarely experience work stoppages while negotiations are pending.



Railroad Security – Our security efforts consist of a wide variety of measures including employee training, engagement with our customers, training of emergency responders, and partnerships with numerous federal, state, and local government agencies.  While federal law requires us to protect the confidentiality of our security plans designed to safeguard against terrorism and other security incidents, the following provides a general overview of our security initiatives. 



UPRR Security Measures – We maintain a comprehensive security plan designed to both deter and respond to any potential or actual threats as they arise.  The plan includes four levels of alert status, each with its own set of countermeasures.  We employ our own police force, consisting of more than 250 commissioned and highly-trained officers. Our employees also undergo recurrent security and preparedness training, as well as federally-mandated hazardous materials and security training. We regularly review the sufficiency of our employee training programs. We maintain the capability to move critical operations to back-up facilities in different locations.



We operate an emergency response management center 24 hours a day.  The center receives reports of emergencies, dangerous or potentially dangerous conditions, and other safety and security issues from our employees, the public, law enforcement and other government officials.  In cooperation with government officials, we monitor both threats and public events, and, as necessary, we may alter rail traffic flow at times of concern to minimize risk to communities and our operations.  We comply with the hazardous materials routing rules and other requirements imposed by federal law.  We also design our operating plan to expedite the movement of hazardous material shipments to minimize the time rail cars remain idle at yards and terminals located in or near major population centers.  Additionally, in compliance with Transportation Security Agency regulations, we deployed information systems and instructed employees in tracking and documenting the handoff of Rail Security Sensitive Materials with customers and interchange partners.



We also have established a number of our own innovative safety and security-oriented initiatives ranging from various investments in technology to The Officer on Train program, which provides local law enforcement officers with the opportunity to ride with train crews to enhance their understanding of railroad operations and risks. Our staff of information security professionals continually assesses cyber security risks and implements mitigation programs that evolve with the changing technology threat environment. To date, we have not experienced any material disruption of our operations due to a cyber threat or attack directed at us.



Cooperation with Federal, State, and Local Government Agencies – We work closely on physical and cyber security initiatives with government agencies, including the U.S. Department of Transportation (DOT) and the Department of Homeland Security (DHS) as well as local police departments, fire departments, and other first responders.  In conjunction with the Association of American Railroads (AAR), we sponsor Ask Rail, a mobile application which provides first responders with secure links to electronic information, including commodity and emergency response information required by emergency personnel to respond to accidents and other situations.  We also participate in the National Joint Terrorism Task Force, a multi-agency effort established by the U.S. Department of Justice and the Federal Bureau of Investigation to combat and prevent terrorism. 

 

8


 



We work with the Coast Guard, U.S. Customs and Border Protection (CBP), and the Military Transport Management Command, which monitor shipments entering the UPRR rail network at U.S. border crossings and ports.  We were the first railroad in the U.S. to be named a partner in CBP’s Customs-Trade Partnership Against Terrorism, a partnership designed to develop, enhance, and maintain effective security processes throughout the global supply chain.



Cooperation with Customers and Trade Associations –  Through TransCAER (Transportation Community Awareness and Emergency Response) we work with the AAR, the American Chemistry Council, the American Petroleum Institute, and other chemical trade groups to provide communities with preparedness tools, including the training of emergency responders.  In cooperation with the Federal Railroad Administration (FRA) and other interested groups, we are also working to develop additional improvements to tank car design that will further limit the risk of releases of hazardous materials.



GOVERNMENTAL AND ENVIRONMENTAL REGULATION



Governmental RegulationOur operations are subject to a variety of federal, state, and local regulations, generally applicable to all businesses.  (See also the discussion of certain regulatory proceedings in Legal Proceedings, Item 3.)



The operations of the Railroad are also subject to the regulatory jurisdiction of the Surface Transportation Board (STB).  The STB has jurisdiction over rates charged on certain regulated rail traffic; common carrier service of regulated traffic; freight car compensation; transfer, extension, or abandonment of rail lines; and acquisition of control of rail common carriers. The STB continues its efforts to explore expanding rail regulation and is reviewing proposed rulemaking in various areas, including reciprocal switching, commodity exemptions, and expanding and easing procedures for smaller rate complaints. The STB also continues to develop a methodology for determining railroad revenue adequacy and the possible use of a revenue adequacy constraint in regulating railroad rates.  The STB posts quarterly reports on rate reasonableness cases and maintains a database on service complaints, and has the authority to initiate investigations, among other things.



The operations of the Railroad also are subject to the regulations of the FRA and other federal and state agencies. In 2010, the FRA issued initial rules governing installation of Positive Train Control (PTC) that now has a deadline of December 31, 2018. The PTC implementation deadline may be extended to December 31, 2020, provided certain other criteria are satisfied. PTC is a collision avoidance technology intended to override engineer controlled locomotives and stop train-to-train and overspeed accidents, misaligned switch derailments, and unauthorized entry to work zones. Final implementation of PTC will require us to adapt and integrate our system with other railroads whose implementation plan may be different than ours.  Through 2017, we have invested approximately $2.6 billion in the ongoing development of PTC.



DOT, the Occupational Safety and Health Administration, the Pipeline and Hazardous Materials Safety Administration, and DHS, along with other federal agencies, have jurisdiction over certain aspects of safety, movement of hazardous materials and hazardous waste, emissions requirements, and equipment standards. Additionally, various state and local agencies have jurisdiction over disposal of hazardous waste and seek to regulate movement of hazardous materials in ways not preempted by federal law.



Environmental Regulation – We are subject to extensive federal and state environmental statutes and regulations pertaining to public health and the environment. The statutes and regulations are administered and monitored by the Environmental Protection Agency (EPA) and by various state environmental agencies. The primary laws affecting our operations are the Resource Conservation and Recovery Act, regulating the management and disposal of solid and hazardous wastes; the Comprehensive Environmental Response, Compensation, and Liability Act, regulating the cleanup of contaminated properties; the Clean Air Act, regulating air emissions; and the Clean Water Act, regulating waste water discharges.



Information concerning environmental claims and contingencies and estimated remediation costs is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Environmental, Item 7 and Note 18 to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.

 

 

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Item 1A. Risk Factors



The information set forth in this Item 1A should be read in conjunction with the rest of the information included in this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7, and Financial Statements and Supplementary Data, Item 8.



We Must Manage Fluctuating Demand for Our Services and Network Capacity – If there are significant reductions in demand for rail services with respect to one or more commodities or changes in consumer preferences that affect the businesses of our customers, we may experience increased costs associated with resizing our operations, including higher unit operating costs and costs for the storage of locomotives, rail cars, and other equipment; work-force adjustments; and other related activities, which could have a material adverse effect on our results of operations, financial condition, and liquidity. If there is significant demand for our services that exceeds the designed capacity of our network, we may experience network difficulties, including congestion and reduced velocity, that could compromise the level of service we provide to our customers. This level of demand may also compound the impact of weather and weather-related events on our operations and velocity. Although we continue to improve our transportation plan, add capacity, improve operations at our yards and other facilities, and improve our ability to address surges in demand for any reason with adequate resources, we cannot be sure that these measures will fully or adequately address any service shortcomings resulting from demand exceeding our planned capacity.  We may experience other operational or service difficulties related to network capacity, dramatic and unplanned fluctuations in our customers’ demand for rail service with respect to one or more commodities or operating regions, or other events that could negatively impact our operational efficiency, any of which could have a material adverse effect on our results of operations, financial condition, and liquidity. 



We Transport Hazardous Materials – We transport certain hazardous materials and other materials, including crude oil, ethanol, and toxic inhalation hazard (TIH) materials, such as chlorine, that pose certain risks in the event of a release or combustion. Additionally, U.S. laws impose common carrier obligations on railroads that require us to transport certain hazardous materials regardless of risk or potential exposure to loss. A rail accident or other incident or accident on our network, at our facilities, or at the facilities of our customers involving the release or combustion of hazardous materials could involve significant costs and claims for personal injury, property damage, and environmental penalties and remediation in excess of our insurance coverage for these risks, which could have a material adverse effect on our results of operations, financial condition, and liquidity.



We Are Subject to Significant Governmental Regulation – We are subject to governmental regulation by a significant number of federal, state, and local authorities covering a variety of health, safety, labor, environmental, economic (as discussed below), and other matters.  Many laws and regulations require us to obtain and maintain various licenses, permits, and other authorizations, and we cannot guarantee that we will continue to be able to do so. Our failure to comply with applicable laws and regulations could have a material adverse effect on us. Governments or regulators may change the legislative or regulatory frameworks within which we operate without providing us any recourse to address any adverse effects on our business, including, without limitation, regulatory determinations or rules regarding dispute resolution, increasing the amount of our traffic subject to common carrier regulation, business relationships with other railroads, calculation of our cost of capital or other inputs relevant to computing our revenue adequacy, the prices we charge, and costs and expenses. Significant legislative activity in Congress or regulatory activity by the STB could expand regulation of railroad operations and prices for rail services, which could reduce capital spending on our rail network, facilities and equipment and have a material adverse effect on our results of operations, financial condition, and liquidity. As part of the Rail Safety Improvement Act of 2008, rail carriers were to implement PTC by the end of 2015 (the Rail Safety Improvement Act).  The Surface Transportation Extension Act of 2015 amended the Rail Safety Improvement Act to require implementation of PTC by the end of 2018, which deadline may be extended to December 31, 2020, provided certain other criteria are satisfied.  Final implementation of PTC will require us to adapt and integrate our system with other railroads whose implementation plan may be different than ours.  This implementation could have a material adverse effect on our results of operations and financial condition. Additionally, one or more consolidations of Class I railroads could also lead to increased regulation of the rail industry.



We May Be Affected by General Economic Conditions – Prolonged severe adverse domestic and global economic conditions or disruptions of financial and credit markets may affect the producers and consumers of the commodities we carry and may have a material adverse effect on our access to liquidity and our results of operations and financial condition.



 

10


 

We Face Competition from Other Railroads and Other Transportation Providers – We face competition from other railroads, motor carriers, ships, barges, and pipelines. In addition to price competition, we face competition with respect to transit times and quality and reliability of service. We must build or acquire and maintain our rail system, while trucks, barges and maritime operators are able to use public rights-of-way maintained by public entities. Any future improvements or expenditures materially increasing the quality or reducing the cost of alternative modes of transportation, or legislation that eliminates or significantly increases the size or weight limitations currently applicable to motor carriers, could have a material adverse effect on our results of operations, financial condition, and liquidity. Additionally, any future consolidation of the rail industry could materially affect the competitive environment in which we operate.



We Rely on Technology and Technology Improvements in Our Business Operations – We rely on information technology in all aspects of our business. If we do not have sufficient capital to acquire new technology or if we are unable to develop or implement new technology such as PTC or the latest version of our transportation control systems, we may suffer a competitive disadvantage within the rail industry and with companies providing other modes of transportation service, which could have a material adverse effect on our results of operations, financial condition, and liquidity. Additionally, if a cyber attack or other event causes significant disruption or failure of one or more of our information technology systems, including computer hardware, software, and communications equipment, we could suffer a significant service interruption, safety failure, security breach, or other operational difficulties, which could have a material adverse impact on our results of operations, financial condition, and liquidity.



We May Be Subject to Various Claims and Lawsuits That Could Result in Significant Expenditures – As a railroad with operations in densely populated urban areas and other cities and a vast rail network, we are exposed to the potential for various claims and litigation related to labor and employment, personal injury, property damage, environmental liability, and other matters. Any material changes to litigation trends or a catastrophic rail accident or series of accidents involving any or all of property damage, personal injury, and environmental liability that exceed our insurance coverage for such risks could have a material adverse effect on our results of operations, financial condition, and liquidity.



We Are Subject to Significant Environmental Laws and Regulations – Due to the nature of the railroad business, our operations are subject to extensive federal, state, and local environmental laws and regulations concerning, among other things, emissions to the air; discharges to waters; handling, storage, transportation, disposal of waste and other materials; and hazardous material or petroleum releases. We generate and transport hazardous and non-hazardous waste in our operations, and we did so in our former operations. Environmental liability can extend to previously owned or operated properties, leased properties, and properties owned by third parties, as well as to properties we currently own. Environmental liabilities have arisen and may also arise from claims asserted by adjacent landowners or other third parties in toxic tort litigation. We have been and may be subject to allegations or findings that we have violated, or are strictly liable under, these laws or regulations. We currently have certain obligations at existing sites for investigation, remediation and monitoring, and we likely will have obligations at other sites in the future.  Liabilities for these obligations affect our estimate based on our experience and, as necessary, the advice and assistance of our consultants.  However, actual costs may vary from our estimates due to any or all of several factors, including changes to environmental laws or interpretations of such laws, technological changes affecting investigations and remediation, the participation and financial viability of other parties responsible for any such liability and the corrective action or change to corrective actions required to remediate any existing or future sites. We could incur significant costs as a result of any of the foregoing, and we may be required to incur significant expenses to investigate and remediate known, unknown, or future environmental contamination, which could have a material adverse effect on our results of operations, financial condition, and liquidity.



We May Be Affected by Climate Change and Market or Regulatory Responses to Climate Change – Climate change, including the impact of global warming, could have a material adverse effect on our results of operations, financial condition, and liquidity.  Restrictions, caps, taxes, or other controls on emissions of greenhouse gasses, including diesel exhaust, could significantly increase our operating costs.  Restrictions on emissions could also affect our customers that (a) use commodities that we carry to produce energy, (b) use significant amounts of energy in producing or delivering the commodities we carry, or (c) manufacture or produce goods that consume significant amounts of energy or burn fossil fuels, including chemical producers, farmers and food producers, and automakers and other manufacturers.  Significant cost increases, government regulation, or changes of consumer preferences for goods or services relating to alternative sources of energy or emissions reductions could materially affect the markets for the commodities we carry, which in turn could have a material adverse effect on our results of operations, financial condition, and liquidity.  Government incentives encouraging the use of alternative sources of

 

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energy could also affect certain of our customers and the markets for certain of the commodities we carry in an unpredictable manner that could alter our traffic patterns, including, for example, increasing royalties charged to producers of PRB coal by the U.S. Department of Interior and the impacts of ethanol incentives on farming and ethanol producers. Finally, we could face increased costs related to defending and resolving legal claims and other litigation related to climate change and the alleged impact of our operations on climate change.  Any of these factors, individually or in operation with one or more of the other factors, or other unforeseen impacts of climate change could reduce the amount of traffic we handle and have a material adverse effect on our results of operations, financial condition, and liquidity.



Severe Weather Could Result in Significant Business Interruptions and Expenditures – As a railroad with a vast network, we are exposed to severe weather conditions and other natural phenomena, including earthquakes, hurricanes, fires, floods, mudslides or landslides, extreme temperatures, and significant precipitation. Line outages and other interruptions caused by these conditions can adversely affect our entire rail network and can adversely affect revenue, costs, and liabilities, which could have a material adverse effect on our results of operations, financial condition, and liquidity.



Strikes or Work Stoppages Could Adversely Affect Our Operations – The U.S. Class I railroads are party to collective bargaining agreements with various labor unions. The majority of our employees belong to labor unions and are subject to these agreements. Disputes with regard to the terms of these agreements or our potential inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages, slowdowns, or lockouts, which could cause a significant disruption of our operations and have a material adverse effect on our results of operations, financial condition, and liquidity. Additionally, future national labor agreements, or renegotiation of labor agreements or provisions of labor agreements, could compromise our service reliability or significantly increase our costs for health care, wages, and other benefits, which could have a material adverse impact on our results of operations, financial condition, and liquidity.  Labor disputes, work stoppages, slowdowns or lockouts at loading/unloading facilities, ports or other transport access points could compromise our service reliability and have a material adverse impact on our results of operations, financial condition, and liquidity.  Labor disputes, work stoppages, slowdowns or lockouts by employees of our customers or our suppliers could compromise our service reliability and have a material adverse impact on our results of operations, financial condition, and liquidity.



The Availability of Qualified Personnel Could Adversely Affect Our Operations – Changes in demographics, training requirements, and the availability of qualified personnel could negatively affect our ability to meet demand for rail service. Unpredictable increases in demand for rail services and a lack of network fluidity may exacerbate such risks, which could have a negative impact on our operational efficiency and otherwise have a material adverse effect on our results of operations, financial condition, and liquidity.



We May Be Affected By Fluctuating Fuel Prices – Fuel costs constitute a significant portion of our transportation expenses. Diesel fuel prices can be subject to dramatic fluctuations, and significant price increases could have a material adverse effect on our operating results. Although we currently are able to recover a significant amount of our fuel expenses from our customers through revenue from fuel surcharges, we cannot be certain that we will always be able to mitigate rising or elevated fuel costs through our fuel surcharges. Additionally, future market conditions or legislative or regulatory activities could adversely affect our ability to apply fuel surcharges or adequately recover increased fuel costs through fuel surcharges. As fuel prices fluctuate, our fuel surcharge programs trail such fluctuations in fuel price by approximately two months, and may be a significant source of quarter-over-quarter and year-over-year volatility, particularly in periods of rapidly changing prices. International, political, and economic factors, events and conditions affect the volatility of fuel prices and supplies. Weather can also affect fuel supplies and limit domestic refining capacity. A severe shortage of, or disruption to, domestic fuel supplies could have a material adverse effect on our results of operations, financial condition, and liquidity.  Alternatively, lower fuel prices could have a positive impact on the economy by increasing consumer discretionary spending that potentially could increase demand for various consumer products we transport. However, lower fuel prices could have a negative impact on other commodities we transport, such as coal and domestic drilling-related shipments, which could have a material adverse effect on our results of operations, financial condition, and liquidity.



We Utilize Capital Markets – Due to the significant capital expenditures required to operate and maintain a safe and efficient railroad, we rely on the capital markets to provide some of our capital requirements.  We utilize long-term debt instruments, bank financing and commercial paper from time-to-time, and we pledge certain of our receivables.  Significant instability or disruptions of the capital markets, including the credit markets, or deterioration of our financial condition due to internal or external factors could restrict or prohibit

 

12


 

our access to, and significantly increase the cost of, commercial paper and other financing sources, including bank credit facilities and the issuance of long-term debt, including corporate bonds. A significant deterioration of our financial condition could result in a reduction of our credit rating to below investment grade, which could restrict, or at certain credit levels below investment grade may prohibit us, from utilizing our current receivables securitization facility. This may also limit our access to external sources of capital and significantly increase the costs of short and long-term debt financing.



A Significant Portion of Our Revenue Involves Transportation of Commodities to and from International Markets – Although revenues from our operations are attributable to transportation services provided in the U.S., a significant portion of our revenues involves the transportation of commodities to and from international markets, including Mexico and Southeast Asia, by various carriers and, at times, various modes of transportation. Significant and sustained interruptions of trade with Mexico or countries in Southeast Asia, including China, could adversely affect customers and other entities that, directly or indirectly, purchase or rely on rail transportation services in the U.S. as part of their operations, and any such interruptions could have a material adverse effect on our results of operations, financial condition and liquidity. Any one or more of the following could cause a significant and sustained interruption of trade with Mexico or countries in Southeast Asia: (a) a deterioration of security for international trade and businesses; (b) the adverse impact of new laws, rules and regulations or the interpretation of laws, rules and regulations by government entities, courts or regulatory bodies, including modifications to the North American Free Trade Agreement (NAFTA) and actions of taxing authorities that affect our customers doing business in foreign countries; (c) any significant adverse economic developments, such as extended periods of high inflation, material disruptions in the banking sector or in the capital markets of these foreign countries, and significant changes in the valuation of the currencies of these foreign countries that could materially affect the cost or value of imports or exports; (d) shifts in patterns of international trade that adversely affect import and export markets; and (e) a material reduction in foreign direct investment in these countries.



We Are Subject to Legislative, Regulatory, and Legal Developments Involving Taxes – Taxes are a significant part of our expenses.  We are subject to U.S. federal, state, and foreign income, payroll, property, sales and use, fuel, and other types of taxes. Changes in tax rates, such as those included in the recently enacted U.S. Tax Cuts and Jobs Act, enactment of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could result in a material effect to our results of operations, financial condition, and liquidity.  Higher tax rates could have a material adverse effect on our results of operations, financial condition, and liquidity.



We Are Dependent on Certain Key Suppliers of Locomotives and Rail – Due to the capital intensive nature and sophistication of locomotive equipment, parts and maintenance, potential new suppliers face high barriers to entry.  Therefore, if one of the domestic suppliers of high horsepower locomotives discontinues manufacturing locomotives, supplying parts or providing maintenance for any reason, including bankruptcy or insolvency, we could experience significant cost increases and reduced availability of the locomotives that are necessary for our operations.  Additionally, for a high percentage of our rail purchases, we utilize two steel producers (one domestic and one international) that meet our specifications.  Rail is critical to our operations for rail replacement programs, maintenance, and for adding additional network capacity, new rail and storage yards, and expansions of existing facilities.  This industry similarly has high barriers to entry, and if one of these suppliers discontinues operations for any reason, including bankruptcy or insolvency, we could experience both significant cost increases for rail purchases and difficulty obtaining sufficient rail for maintenance and other projects.



We May Be Affected by Acts of Terrorism, War, or Risk of War – Our rail lines, facilities, and equipment, including rail cars carrying hazardous materials, could be direct targets or indirect casualties of terrorist attacks. Terrorist attacks, or other similar events, any government response thereto, and war or risk of war may adversely affect our results of operations, financial condition, and liquidity. In addition, insurance premiums for some or all of our current coverages could increase dramatically, or certain coverages may not be available to us in the future.

 

Item 1B. Unresolved Staff Comments



None.



 

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Item 2. Properties



We employ a variety of assets in the management and operation of our rail business. Our rail network covers 23 states in the western two-thirds of the U.S.



Picture 5



TRACK



Our rail network includes 32,122 route miles.  We own 26,042 miles and operate on the remainder pursuant to trackage rights or leases. The following table describes track miles at December 31, 2017, and 2016:







 

 



 

 



2017  2016 

Route

32,122  32,070 

Other main line

7,107  7,070 

Passing lines and turnouts

3,255  3,245 

Switching and classification yard lines

9,199  9,115 

Total miles

51,683  51,500 



HEADQUARTERS BUILDING



We own our headquarters building in Omaha, Nebraska. The facility has 1.2 million square feet of space that can accommodate approximately 4,000 employees.



HARRIMAN DISPATCHING CENTER



The Harriman Dispatching Center (HDC), located in Omaha, Nebraska, is our primary dispatching facility. It is linked to regional dispatching and locomotive management facilities at various locations along our network. HDC employees coordinate moves of locomotives and trains, manage traffic and train crews on

 

14


 

our network, and coordinate interchanges with other railroads. Approximately 900 employees currently work on-site in the facility. In the event of a disruption of operations at HDC due to a cyber attack, flooding or severe weather or other event, we maintain the capability to conduct critical operations at back-up facilities in different locations.



RAIL FACILITIES



In addition to our track structure, we operate numerous facilities, including terminals for intermodal and other freight; rail yards for building trains (classification yards), switching, storage-in-transit (the temporary storage of customer goods in rail cars prior to shipment) and other activities; offices to administer and manage our operations; dispatching centers to direct traffic on our rail network; crew quarters to house train crews along our network; and shops and other facilities for fueling, maintenance, and repair of locomotives and repair and maintenance of rail cars and other equipment.  The following table includes the major yards and terminals on our system:







 



 

Major Classification Yards

Major Intermodal Terminals

North Platte, Nebraska

Joliet (Global 4), Illinois

North Little Rock, Arkansas

East Los Angeles, California

Englewood (Houston), Texas

ICTF (Los Angeles), California

Fort Worth, Texas

Global I (Chicago), Illinois

Livonia, Louisiana

DIT (Dallas), Texas

Proviso (Chicago), Illinois

Mesquite, Texas

Roseville, California

City of Industry, California

West Colton, California

Global II (Chicago), Illinois

Pine Bluff, Arkansas

Marion (Memphis), Tennessee

Neff (Kansas City), Missouri

Lathrop, California



RAIL EQUIPMENT



Our equipment includes owned and leased locomotives and rail cars; heavy maintenance equipment and machinery; other equipment and tools in our shops, offices, and facilities; and vehicles for maintenance, transportation of crews, and other activities. As of December 31, 2017, we owned or leased the following units of equipment:







 

 

 

 



 

 

 

 



 

 

Average

Locomotives

Owned

Leased

Total

Age (yrs.)

Multiple purpose

6,392  1,852  8,244  20.0 

Switching

213  12  225  36.9 

Other

47  57  104  38.5 

Total locomotives

6,652  1,921  8,573 

N/A







 

 

 

 



 

 

 

 



 

 

 

Average

Freight cars

Owned

Leased

Total

Age (yrs.)

Covered hoppers

13,804  12,629  26,433  20.4 

Open hoppers

6,897  2,427  9,324  30.9 

Gondolas

5,798  2,772  8,570  26.7 

Boxcars

2,957  6,780  9,737  36.1 

Refrigerated cars

2,600  3,486  6,086  25.4 

Flat cars

2,533  1,147  3,680  32.4 

Other

353  361  29.9 

Total freight cars

34,597  29,594  64,191 

N/A





 

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Average

Highway revenue equipment

Owned

Leased

Total

Age (yrs.)

Containers

38,655  15,327  53,982  8.8 

Chassis

23,711  21,771  45,482  10.9 

Total highway revenue equipment

62,366  37,098  99,464 

N/A



CAPITAL EXPENDITURES



Our rail network requires significant annual capital investments for replacement, improvement, and expansion. These investments enhance safety, support the transportation needs of our customers, and improve our operational efficiency. Additionally, we add new locomotives and freight cars to our fleet to replace older, less efficient equipment, to support growth and customer demand, and to reduce our impact on the environment through the acquisition of more fuel-efficient and low-emission locomotives.



2017 Capital Program – During 2017, our capital program totaled approximately $3.1 billion. (See the cash capital expenditures table in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 7.)



2018 Capital PlanIn 2018, we expect our capital plan to be approximately $3.3 billion.  The plan includes expenditures to renew and improve our existing infrastructure as well as new capacity investments, including initial construction work on a new classification yard in our Southern Region.  In addition, expenditures will be made for PTC, locomotives, intermodal containers and chassis, and freight cars.  We may revise our 2018 capital plan if business conditions warrant or if new laws or regulations affect our ability to generate sufficient returns on these investments.  (See discussion of our 2018 capital plan in Management’s Discussion and Analysis of Financial Condition and Results of Operations – 2018 Outlook, Item 7.)



OTHER



Equipment Encumbrances – Equipment with a carrying value of approximately $2.0 billion and $2.3 billion at December 31, 2017, and 2016, respectively served as collateral for capital leases and other types of equipment obligations in accordance with the secured financing arrangements utilized to acquire or refinance such railroad equipment.



As a result of the merger of Missouri Pacific Railroad Company (MPRR) with and into UPRR on January 1, 1997, and pursuant to the underlying indentures for the MPRR mortgage bonds, UPRR must maintain the same value of assets after the merger in order to comply with the security requirements of the mortgage bonds. As of the merger date, the value of the MPRR assets that secured the mortgage bonds was approximately $6.0 billion. In accordance with the terms of the indentures, this collateral value must be maintained during the entire term of the mortgage bonds irrespective of the outstanding balance of such bonds.



Environmental Matters – Certain of our properties are subject to federal, state, and local laws and regulations governing the protection of the environment.  (See discussion of environmental issues in Business – Governmental and Environmental Regulation, Item 1, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Environmental, Item 7, and Note 18 of the Consolidated Financial Statements.)

 

Item 3. Legal Proceedings



From time to time, we are involved in legal proceedings, claims, and litigation that occur in connection with our business. We routinely assess our liabilities and contingencies in connection with these matters based upon the latest available information and, when necessary, we seek input from our third-party advisors when making these assessments. Consistent with SEC rules and requirements, we describe below material pending legal proceedings (other than ordinary routine litigation incidental to our business), material proceedings known to be contemplated by governmental authorities, other proceedings arising under federal, state, or local environmental laws and regulations (including governmental proceedings involving potential fines, penalties, or other monetary sanctions in excess of $100,000), and such other pending matters that we may determine to be appropriate.



 

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ENVIRONMENTAL MATTERS



We receive notices from the EPA and state environmental agencies alleging that we are or may be liable under federal or state environmental laws for remediation costs at various sites throughout the U.S., including sites on the Superfund National Priorities List or state superfund lists. We cannot predict the ultimate impact of these proceedings and suits because of the number of potentially responsible parties involved, the degree of contamination by various wastes, the scarcity and quality of volumetric data related to many of the sites, and the speculative nature of remediation costs.



On May 2, 2015, a UPRR train en route from Chicago, IL. to St. Louis, MO. experienced an accidental release of diesel fuel in the vicinity of Sidney, IL. It is believed that the release was caused by a puncture to a fuel tank under one or more of the locomotives attached to the train. The impacted fuel tank(s) released the majority of their contents onto the ground, approximately 400 feet from an unnamed creek. Some of the fuel migrated into that creek, which discharges to the Salt Fork River. We immediately notified federal, state and local authorities and dispatched our own emergency response resources to the scene. On May 29, 2015, we entered into an agreed-upon interim order to perform a comprehensive site investigation and remedial measures at the release site. On March 13, 2017, the State of Illinois issued a demand for $125,000 in civil penalties as part of the ongoing enforcement action. We are currently evaluating the State's demand.



Information concerning environmental claims and contingencies and estimated remediation costs is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Environmental, Item 7.  See also Note 18 of the Consolidated Financial Statements.



OTHER MATTERS



Antitrust LitigationAs we reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, 20 rail shippers (many of whom are represented by the same law firms) filed virtually identical antitrust lawsuits in various federal district courts against us and four other Class I railroads in the U.S. Currently, UPRR and three other Class I railroads are the named defendants in the lawsuit. The original plaintiff filed the first of these claims in the U.S. District Court in New Jersey on May 14, 2007. The number of complaints reached a total of 30. These suits allege that the named railroads engaged in price-fixing by establishing common fuel surcharges for certain rail traffic.

   

On June 21, 2012, Judge Friedman issued a decision that certified a class of plaintiffs with eight named plaintiff representatives. The decision included in the class all shippers that paid a rate-based fuel surcharge to any one of the defendant railroads for rate-unregulated rail transportation from July 1, 2003, through December 31, 2008. On July 5, 2012, the defendant railroads filed a petition with the U.S. Court of Appeals for the District of Columbia requesting that the court review the class certification ruling. On August 9, 2013, the Circuit Court vacated the class certification decision and remanded the case to the district court to reconsider the class certification decision in light of a recent Supreme Court case and incomplete consideration of errors in the expert report of the plaintiffs. After reviewing an intervening case, supplemental expert materials and related briefing from the parties, Judge Friedman scheduled and completed a new class certification hearing during the week of September 26, 2016. On October 10, 2017, the parties received a ruling from Judge Friedman denying class certification. Plaintiffs have sought appellate review of that ruling and on December 20, 2017, were granted the right of an interlocutory appeal by the U.S. Court of Appeals for the District of Columbia Circuit. 



As we reported in our Current Report on Form 8-K, filed on June 10, 2011, the Railroad received a complaint filed in the U.S. District Court for the District of Columbia on June 7, 2011, by Oxbow Carbon & Minerals LLC and related entities (Oxbow).  The parties are currently conducting discovery in this matter.  For additional information on Oxbow, please refer to Item 3. Legal Proceedings, under Other Matters, Antitrust Litigation in our Annual Report on Form 10-K for the year ended December 31, 2016. 



We continue to deny the allegations that our fuel surcharge programs violate the antitrust laws or any other laws. We believe that these lawsuits are without merit, and we will vigorously defend our actions. Therefore, we currently believe that these matters will not have a material adverse effect on any of our results of operations, financial condition, and liquidity.



Item 4. Mine Safety Disclosures



Not applicable. 

 

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Executive Officers of the Registrant and Principal Executive Officers of Subsidiaries



The Board of Directors typically elects and designates our executive officers on an annual basis at the board meeting held in conjunction with the Annual Meeting of Shareholders, and they hold office until their successors are elected. Executive officers also may be elected and designated throughout the year, as the Board of Directors considers appropriate. There are no family relationships among the officers, nor is there any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information current as of February 9, 2018, relating to the executive officers.







 

 

 

 



 

 

 

 



 

 

 

Business



 

 

 

Experience During

Name

Position

Age

Past Five Years

Lance M. Fritz

Chairman, President and Chief Executive Officer of UPC and the Railroad

55

[1]

Robert M. Knight, Jr.

Executive Vice President and Chief Financial Officer of UPC and the Railroad

60

Current Position

Rhonda S. Ferguson

Executive Vice President, Chief Legal Officer and Corporate Secretary of UPC and the Railroad

48

[2]

Todd M. Rynaski

Vice President and Controller of UPC and Chief Accounting Officer and Controller of the Railroad

47

[3]

Cameron A. Scott

Executive Vice President and Chief Operating Officer of the Railroad

55

[4]

Elizabeth F. Whited

Executive Vice President and Chief Marketing Officer of the Railroad

52

[5]



 

 

 

[1]

On July 30, 2015, Mr. Fritz was named Chairman of the Board of UPC and the Railroad effective October 1, 2015. Mr. Fritz was elected President and Chief Executive Officer of UPC and the Railroad effective February 5, 2015. Previously, Mr. Fritz was President and Chief Operating Officer of the Railroad effective February 6, 2014, Executive Vice President – Operations of the Railroad effective September 1, 2010, and Vice President – Operations of the Railroad effective January 1, 2010.

[2]

Ms. Ferguson was elected Corporate Secretary of UPC and the Railroad effective December 1, 2017, and Executive Vice President and Chief Legal Officer of UPC and the Railroad effective July 11, 2016. She previously was Vice President, Corporate Secretary and Chief Ethics Officer of FirstEnergy Corp. since 2007.

[3]

Mr. Rynaski was elected Vice President and Controller of UPC and Chief Accounting Officer and Controller of the Railroad effective September 1, 2015. He previously was Assistant Vice President – Accounting of the Railroad effective January 1, 2014, and Assistant Vice President – Financial Reporting and Analysis effective April 1, 2011.

[4]

Mr. Scott was elected to his current position effective February 6, 2014. He previously was Vice President Network Planning and Operations effective June 30, 2012.

[5]

Ms. Whited was elected Executive Vice President and Chief Marketing Officer effective December 1, 2016. She previously was Vice President and General Manager – Chemicals effective October 1, 2012.

 

18


 

PART II



Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities



Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol “UNP”.  The following table presents the dividends declared and the high and low prices of our common stock for each of the indicated quarters.







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

2017 - Dollars Per Share

 

Q1

 

Q2

 

Q3

 

Q4

Dividends

$

0.605 

$

0.605 

$

0.605 

$

0.665 

Common stock price:

 

 

 

 

 

 

 

 

    High

 

111.38 

 

115.15 

 

116.93 

 

136.32 

    Low

 

101.20 

 

104.12 

 

101.06 

 

108.71 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

2016 - Dollars Per Share

 

Q1

 

Q2

 

Q3

 

Q4

Dividends

$

0.55 

$

0.55 

$

0.55 

$

0.605 

Common stock price:

 

 

 

 

 

 

 

 

    High

 

85.30 

 

90.14 

 

98.00 

 

106.62 

    Low

 

67.06 

 

77.29 

 

86.01 

 

87.06 



At February 2, 2018, there were 779,305,276 shares of common stock outstanding and 30,653 common shareholders of record. On that date, the closing price of the common stock on the NYSE was $129.36. We paid dividends to our common shareholders during each of the past 118 years. We declared dividends totaling $1,982 million in 2017 and $1,879 million in 2016. On February 8, 2018, we increased the quarterly dividend to $0.73 per share, payable on March 30, 2018, to shareholders of record on February 28, 2018. We are subject to certain restrictions regarding retained earnings with respect to the payment of cash dividends to our shareholders. The amount of retained earnings available for dividends increased to $16.4 billion at December 31, 2017, from $12.4 billion at December 31, 2016.  (See discussion of this restriction in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 7.)  We do not believe the restriction on retained earnings will affect our ability to pay dividends, and we currently expect to pay dividends in 2018.



Comparison Over One- and Three-Year Periods – The following table presents the cumulative total shareholder returns, assuming reinvestment of dividends, over one- and three-year periods for the Corporation (UNP), a peer group index (comprised of CSX Corporation and Norfolk Southern Corporation), the Dow Jones Transportation Index (DJ Trans), and the Standard & Poor’s 500 Stock Index (S&P 500).







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Period

UNP

 

Peer Group

 

DJ Trans

 

S&P 500

 

1 Year (2017)

32.2 

%

46.5 

%

19.0 

%

21.8 

%

3 Year (2015 - 2017)

20.7 

 

52.4 

 

21.2 

 

38.3 

 



 

19


 

Five-Year Performance Comparison – The following graph provides an indicator of cumulative total shareholder returns for the Corporation as compared to the peer group index (described above), the DJ Trans, and the S&P 500. The graph assumes that $100 was invested in the common stock of Union Pacific Corporation and each index on December 31, 2012 and that all dividends were reinvested. The information below is historical in nature and is not necessarily indicative of future performance.



Picture 1



Purchases of Equity Securities – During 2017, we repurchased 37,122,405 shares of our common stock at an average price of $110.50. The following table presents common stock repurchases during each month for the fourth quarter of 2017:







 

 

 

 

 

 



 

 

 

 

 

 

Period

Total Number of Shares Purchased [a]

 

Average Price Paid Per Share

Total Number of Shares Purchased as Part of a Publicly Announced
Plan or Program [b]

Maximum Number of  Shares Remaining Under the Plan or Program [b]

Oct. 1 through Oct. 31

3,831,636 

$

113.61  3,800,000  89,078,662 

Nov. 1 through Nov. 30

3,005,225 

 

117.07  2,937,410  86,141,252 

Dec. 1 through Dec. 31

2,718,319 

 

130.76  2,494,100  83,647,152 

Total

9,555,180 

$

119.58  9,231,510 

N/A



[a]

Total number of shares purchased during the quarter includes approximately 323,670 shares delivered or attested to UPC by employees to pay stock option exercise prices, satisfy excess tax withholding obligations for stock option exercises or vesting of retention units, and pay withholding obligations for vesting of retention shares.

[b]

Effective January 1, 2017, our Board of Directors authorized the repurchase of up to 120 million shares of our common stock by December 31, 2020. 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.

 

20


 

Item 6. Selected Financial Data



The following table presents as of, and for the years ended, December 31, our selected financial data for each of the last five years. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7, and with the Financial Statements and Supplementary Data, Item 8. The information below is historical in nature and is not necessarily indicative of future financial condition or results of operations.







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Millions, Except per Share Amounts,

 

 

 

 

 

 

 

 

 

 

Carloads, Employee Statistics, and Ratios

2017[a]

2016  2015  2014  2013 

For the Year Ended December 31

 

 

 

 

 

 

 

 

 

 

Operating revenues [b]

$

21,240 

$

19,941 

$

21,813 

$

23,988 

$

21,963 

Operating income

 

8,061 

 

7,272 

 

8,052 

 

8,753 

 

7,446 

Net income

 

10,712 

 

4,233 

 

4,772 

 

5,180 

 

4,388 

Earnings per share - basic [c]

 

13.42 

 

5.09 

 

5.51 

 

5.77 

 

4.74 

Earnings per share - diluted [c]

 

13.36 

 

5.07 

 

5.49 

 

5.75 

 

4.71 

Dividends declared per share [c]

 

2.48 

 

2.255 

 

2.20 

 

1.91 

 

1.48 

Cash provided by operating activities

 

7,230 

 

7,525 

 

7,344 

 

7,385 

 

6,823 

Cash used in investing activities

 

(3,086)

 

(3,393)

 

(4,476)

 

(4,249)

 

(3,405)

Cash used in financing activities

 

(4,146)

 

(4,246)

 

(3,063)

 

(2,982)

 

(3,049)

Cash used for common share repurchases

 

(4,013)

 

(3,105)

 

(3,465)

 

(3,225)

 

(2,218)

At December 31

 

 

 

 

 

 

 

 

 

 

Total assets

$

57,806 

$

55,718 

$

54,600 

$

52,372 

$

49,410 

Long-term obligations [d]

 

29,011 

 

32,146 

 

30,692 

 

27,419 

 

24,395 

Debt due after one year

 

16,144 

 

14,249 

 

13,607 

 

10,952 

 

8,820 

Common shareholders' equity

 

24,856 

 

19,932 

 

20,702 

 

21,189 

 

21,225 

Additional Data

 

 

 

 

 

 

 

 

 

 

Freight revenues [b]

$

19,837 

$

18,601 

$

20,397 

$

22,560 

$

20,684 

Revenue carloads (units) (000)

 

8,588 

 

8,442 

 

9,062 

 

9,625 

 

9,022 

Operating ratio (%) [e]

 

62.0 

 

63.5 

 

63.1 

 

63.5 

 

66.1 

Average employees (000)

 

42.0 

 

42.9 

 

47.5 

 

47.2 

 

46.4 

Financial Ratios (%)

 

 

 

 

 

 

 

 

 

 

Debt to capital [f]

 

40.5 

 

43.0 

 

40.7 

 

35.0 

 

31.0 

Return on average common
     shareholders' equity [g]

 

47.8 

 

20.8 

 

22.8 

 

24.4 

 

21.4 



[a]

2017 includes a $5.9 billion non-cash reduction to income tax expense and $212 million non-cash reduction to operating expenses related to the Tax Cuts and Jobs Act enacted on December 22, 2017.

[b]

Includes fuel surcharge revenue of $966 million, $560 million, $1.3 billion, $2.8 billion, and $2.6 billion, for 2017, 2016, 2015, 2014, and 2013, respectively, which partially offsets increased operating expenses for fuel. (See further discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Operating Revenues, Item 7.)

[c]

Earnings per share and dividends declared per share are retroactively adjusted to reflect the June 6, 2014 stock split.

[d]

Long-term obligations is determined as follows: total liabilities less current liabilities.

[e]

Operating ratio is defined as operating expenses divided by operating revenues.

[f]

Debt to capital is determined as follows: total debt divided by total debt plus common shareholders' equity.

[g]

Return on average common shareholders' equity is determined as follows: Net income divided by average common shareholders' equity.

 

 

21


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following discussion should be read in conjunction with the Consolidated Financial Statements and applicable notes to the Financial Statements and Supplementary Data, Item 8, and other information in this report, including Risk Factors set forth in Item 1A and Critical Accounting Policies and Cautionary Information at the end of this Item 7.



The Railroad, along with its subsidiaries and rail affiliates, is our one reportable business segment. Although revenue is analyzed by commodity, we analyze the net financial results of the Railroad as one segment due to the integrated nature of the rail network.



EXECUTIVE SUMMARY



2017 Results



·

Safety – During 2017, we continued our focus on safety to reduce risk and eliminate incidents for our employees, our customers and the public. We finished 2017 with a 3% improvement in our reportable derailment incident rate per million train miles compared to 2016.   Although reportable personal injury incidents per 200,000 employee-hours increased 5% from last year’s record low, it is our second lowest year and a 9% decrease from 2015. Despite our efforts in 2017, our crossing incidents rate increased 5% from 2016.  Overall, our 2017 safety results reflect our employees’ dedication to our safety initiatives and our efforts to further engage the workforce through programs such as Courage to Care, Total Safety Culture, and UP Way (our continuous improvement culture).



·

Network Operations  –  Our average train speed, as reported to the AAR, decreased 5% compared to 2016, and our average terminal dwell time increased 8% from 2016.  Disruptions across our network, including the impact of Hurricane Harvey, negatively impacted network fluidity.  Continued implementation and testing of Positive Train Control across a growing number of routes in our network also negatively impacted overall average train speed and terminal dwell.  Network operational challenges in the latter part of the year also negatively impacted terminal dwell.

·

Tax Reform – The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017.  The Tax Act reduced the federal income tax rate from 35% to 21% effective January 1, 2018.  As a result, we remeasured our deferred tax assets and liabilities which resulted in a $5.9 billion non-cash reduction in our income tax expense in 2017.  In addition, we recognized a $212 million non-cash reduction to operating expense related to income tax adjustments recognized at certain equity-method affiliates.  See Note 8 of the Consolidated Financial Statements for additional information.

For comparability purposes, the following table reconciles our full year 2017 reported results under accounting principles generally accepted in the U.S. (GAAP) to our 2017 adjusted results (non-GAAP) for the tax related items described above.  We believe the adjusted results provide relevant information to our investors as they more accurately reflect on-going financial performance.  In addition, these measures should be considered in addition to, and not a substitute for operating income, income taxes, net income, diluted EPS, operating ratio, and effective tax rate.







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Millions, Except Per Share Amounts and

 

Operating

 

Income

 

Net

 

Diluted

Operating

Effective

Percentages

 

Income

 

Taxes

 

Income

 

EPS

Ratio

Tax Rate

2017 Reported results (GAAP)

$

8,061 

$

(3,080)

$

10,712 

$

13.36  62.0 

%

(40.4)

%

Factors Affecting Comparability:

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments for Tax Cuts and Jobs Act

 

 

 

 

 

 

 

 

 

 

 

 

     Equity-method affiliates

 

(212)

 

(73)

 

(139)

 

(0.17) 1.0 

pts

 

     Deferred taxes

 

 

5,935 

 

(5,935)

 

(7.40)

 

77.9 

 

2017 Adjusted results (non-GAAP)

$

7,849 

$

2,782 

$

4,638 

$

5.79  63.0 

%

37.5 

%

2016 Reported results (GAAP)

$

7,272 

$

2,533 

$

4,233 

$

5.07  63.5 

%

37.4 

%





·

2017 Adjusted Results Non-GAAP  In 2017, we generated adjusted operating income of more than $7.8 billion, an 8% increase compared to 2016.  Volume growth of 2%, combined with core pricing and productivity gains, generated solid financial performance improvement and more than offset $86 million of operating expense associated with our workforce reduction plan implemented in the third quarter of 2017.  Our 2017 adjusted operating ratio was an all-time record 63.0%, improving 0.5 points from 2016. 

 

22


 

Adjusted net income of $4.6 billion translated into adjusted earnings of $5.79 per diluted share, a best-ever performance.

·

Freight RevenuesOur freight revenues increased 7% year-over-year to $19.8 billion driven by volume growth of 2%, higher fuel surcharge revenue, and core pricing gains. Growth in frac sand, coal, and intermodal shipments more than offset declines in grain, crude oil, finished vehicles, and rock shipments.



·

Fuel Prices – Our average price of diesel fuel in 2017 was $1.81 per gallon, an increase of 22% from 2016, as both crude oil and conversion spreads between crude oil and diesel increased in 2017. The higher price resulted in increased operating expenses of  $334 million (excluding any impact from year-over-year volume growth). Gross-ton miles increased 5%, which also drove higher fuel expense.  Our fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-miles in thousands,  improved 2%.    



·

Free Cash Flow – Cash generated by operating activities totaled $7.2 billion, yielding free cash flow of $2.2 billion after reductions of $3.1 billion for cash used in investing activities and $2 billion in dividends, which included a 10% increase in our quarterly dividend per share from $0.605 to $0.665 declared and paid in the fourth quarter of 2017. Free cash flow is defined as cash provided by operating activities less cash used in investing activities and dividends paid.



Free cash flow is not considered a financial measure 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 is important to management and investors in evaluating our financial performance and measures our ability to generate cash without additional external financings. Free cash flow should be considered in addition 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

2017  2016  2015 

Cash provided by operating activities

$

7,230 

$

7,525 

$

7,344 

Cash used in investing activities

 

(3,086)

 

(3,393)

 

(4,476)

Dividends paid

 

(1,982)

 

(1,879)

 

(2,344)

Free cash flow

$

2,162 

$

2,253 

$

524 



2018 Outlook



·

SafetyOperating a safe railroad benefits all our constituents: our employees, customers, shareholders and the communities we serve.  We will continue using a multi-faceted approach to safety, utilizing technology, risk assessment, training and employee engagement, quality control, and targeted capital investments.  We will continue using and expanding the deployment of Total Safety Culture and Courage to Care throughout our operations, which allows us to identify and implement best practices for employee and operational safety.  We will continue our efforts to increase detection of rail defects; improve or close crossings; and educate the public and law enforcement agencies about crossing safety through a combination of our own programs (including risk assessment strategies), industry programs and local community activities across our network.



·

Network OperationsIn 2018, we will continue to align resources with customer demand, maintain an efficient network, and ensure surge capability of our assets.



·

Fuel PricesFuel price projections for crude oil and natural gas continue to fluctuate in the current environment.  We again could see volatile fuel prices during the year, as they are sensitive to global and U.S. domestic demand, refining capacity, geopolitical events, weather conditions and other factors.  As prices fluctuate, there will be a timing impact on earnings, as our fuel surcharge programs trail increases or decreases in fuel price by approximately two months.



Lower fuel prices could have a positive impact on the economy by increasing consumer discretionary spending that potentially could increase demand for various consumer products that we transport. Alternatively, lower fuel prices could likely have a negative impact on other commodities such as coal and domestic drilling-related shipments.

 

23


 

·

Capital Plan  – In 2018, we expect our capital plan to be approximately $3.3 billion, up around 5% compared to 2017. The plan includes expenditures to renew and improve our existing infrastructure as well as new capacity investments, including initial construction work on a new classification yard in our Southern Region. In addition, expenditures will be made for PTC, locomotives, intermodal containers and chassis, and freight cars. We expect to take delivery of approximately 60 new locomotives in 2018, which will complete our multi-year purchase commitments. The capital plan may be revised if business conditions warrant or if new laws or regulations affect our ability to generate sufficient returns on these investments. (See further discussion in this Item 7 under Liquidity and Capital Resources – Capital Plan.)



·

Financial ExpectationsEconomic conditions in many of our market sectors continue to drive uncertainty with respect to our volume levels.  We expect volume to grow in the low single digit range in 2018 compared to 2017, but it will depend on the overall economy and market conditions.  One of the more significant uncertainties is the outlook for energy markets, which will bring both challenges and opportunities.  In the current environment, we expect continued margin improvement driven by continued pricing opportunities, ongoing productivity initiatives, and the ability to leverage our resources and strengthen our franchise. Over the longer term, we expect the overall U.S. economy to continue to improve at a modest pace, with some markets outperforming others.



·

Tax Reform –  The Tax Act was enacted on December 22, 2017.  The Tax Act reduced the federal income tax rate from 35% to 21% effective January 1, 2018.  Due to the tax rate change, we expect to generate additional cash from operations in 2018 of approximately $1 billion, assuming normal business conditions prevail.  We will continue to evaluate the best use of that cash, which will include pursuing capital projects with adequate returns, and returning cash to shareholders through share repurchases and dividends.    



RESULTS OF OPERATIONS



Operating Revenues







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

% Change

% Change

Millions

2017  2016  2015 

2017 v 2016

2016 v 2015

Freight revenues

$

19,837 

$

18,601 

$

20,397 

%

(9)

%

Other revenues

 

1,403 

 

1,340 

 

1,416 

%

(5)

%

Total

$

21,240 

$

19,941 

$

21,813 

%

(9)

%



We generate freight revenues by transporting freight or other materials from our six commodity groups. Freight revenues vary with volume (carloads) and average revenue per car (ARC). Changes in price, traffic mix and fuel surcharges drive ARC. We provide some of our customers with contractual incentives for meeting or exceeding specified cumulative volumes or shipping to and from specific locations, which we record as reductions to freight revenues based on the actual or projected future shipments. We recognize freight revenues as shipments move from origin to destination. We allocate freight revenues between reporting periods based on the relative transit time in each reporting period and recognize expenses as we incur them.



Other revenues include revenues earned by our subsidiaries, revenues from commuter rail operations that we manage, accessorial revenues, which we earn when customers retain equipment owned or controlled by us or when we perform additional services such as switching or storage, and miscellaneous contract revenue. We recognize other revenues as we perform services or meet contractual obligations.



Freight revenues increased 7% year-over-year to $19.8 billion driven by volume growth of 2%, higher fuel surcharge revenue, and core pricing gains. Growth in frac sand, coal, and intermodal shipments more than offset declines in grain, crude oil, finished vehicles, and rock shipments.



Freight revenues decreased 9% in 2016 compared to 2015 due to a 7% decline in carloadings, and lower fuel surcharge revenue, partially offset by core pricing gains.  Volume declines in coal, intermodal, frac sand, crude oil, finished vehicles, and metals shipments more than offset volume growth in grain, automotive parts, and industrial chemicals shipments.



 

24


 

Our fuel surcharge programs generated freight revenues of $966 million, $560 million, and $1.3 billion in 2017, 2016, and 2015, respectively. Fuel surcharge revenue in 2017 increased $406 million as a result of a 22% increase in fuel price and 2% growth in carloadings.   Fuel surcharge revenue in 2016 decreased $740 million as a result of a 20% decrease in fuel price, a 7% reduction in carloadings, and the lag impact on fuel surcharge (it can generally take up to two months for changing fuel prices to affect fuel surcharge recoveries)



In 2017, other revenue increased from 2016 due to higher revenues at our subsidiaries, primarily those that broker intermodal, transload, and refrigerated warehousing logistics services. 



In 2016, other revenue decreased from 2015 due to lower revenues at our subsidiaries, primarily those that broker intermodal and transload services, and lower intermodal accessorial revenue and demurrage fees. 



The following tables summarize the year-over-year changes in freight revenues, revenue carloads, and ARC by commodity type: