Annual Reports

 
Quarterly Reports

  • 10-Q (Jul 20, 2017)
  • 10-Q (Apr 27, 2017)
  • 10-Q (Oct 20, 2016)
  • 10-Q (Jul 21, 2016)
  • 10-Q (Apr 21, 2016)
  • 10-Q (Oct 22, 2015)

 
8-K

 
Other

Union Pacific 10-Q 2013
10-Q
Table of Contents

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

  [X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

  SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

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

incorporation or organization)

 

(I.R.S. Employer

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)

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.

þ  Yes             ¨  No             

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).

þ  Yes            ¨  No            

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   þ        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             þ  No            

As of April 12, 2013, there were 466,778,645 shares of the Registrant’s Common Stock outstanding.

 

 

 

 

 

 


Table of Contents

TABLE OF CONTENTS

UNION PACIFIC CORPORATION

AND SUBSIDIARY COMPANIES

 

 

  PART I. FINANCIAL INFORMATION  

Item 1.

 

Condensed Consolidated Financial Statements:

 
 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended March 31, 2013 and 2012

    3   
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the Three Months Ended March  31, 2013 and 2012

    3   
 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
At March 31, 2013 and December  31, 2012

    4   
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March  31, 2013 and 2012

    5   
 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON
SHAREHOLDERS’ EQUITY (Unaudited)
     For the Three Months Ended March 31, 2013 and 2012

    6   
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

    7   

Item 2.

 

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

    20   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    32   

Item 4.

 

Controls and Procedures

    32   
  PART II. OTHER INFORMATION  

Item 1.

 

Legal Proceedings

    32   

Item 1A.

 

Risk Factors

    34   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    34   

Item 3.

 

Defaults Upon Senior Securities

    34   

Item 4.

 

Mine Safety Disclosures

    34   

Item 5.

 

Other Information

    34   

Item 6.

 

Exhibits

    35   

Signatures

    37   

Certifications

 

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, Except Per Share Amounts,

for the Three Months Ended March 31,

   2013      2012  

Operating revenues:

     

Freight revenues

   $         4,984       $         4,823   

Other revenues

     306         289   

Total operating revenues

     5,290         5,112   
                   

Operating expenses:

     

Compensation and benefits

     1,216         1,211   

Fuel

     900         926   

Purchased services and materials

     557         526   

Depreciation

     434         427   

Equipment and other rents

     313         296   

Other

     237         216   

Total operating expenses

     3,657         3,602   
                   

Operating income

     1,633         1,510   

Other income (Note 6)

     40         16   

Interest expense

     (128)         (135)   

Income before income taxes

     1,545         1,391   

Income taxes

     (588)         (528)   

Net income

   $         957       $         863   
                   

Share and Per Share (Note 8):

     

Earnings per share - basic

   $         2.05       $         1.81   

Earnings per share - diluted

   $         2.03       $         1.79   

Weighted average number of shares - basic

     467.8         477.8   

Weighted average number of shares - diluted

     470.5         481.4   

Dividends declared per share

   $         0.69       $         0.60   
                   

  

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions,

for the Three Months Ended March 31,

   2013      2012  

Net income

   $         957      $         863   

Other comprehensive income:

     

Defined benefit plans

     14        (7)   

Foreign currency translation

     3        15   

Total other comprehensive income [a]

     17         
                   

Comprehensive income

   $         974      $         871   
                   

 

[a]

Net of deferred taxes of $12 million and $8 million during the three months ended March 31, 2013 and 2012, respectively.

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

3


Table of Contents

Condensed Consolidated Statements of Financial Position (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, Except Share and Per Share Amounts

   March 31,
2013
     December 31,
2012
 

Assets

     

Current assets:

     

Cash and cash equivalents

   $         1,917       $         1,063   

Accounts receivable, net (Note 10)

     1,512         1,331   

Materials and supplies

     655         660   

Current deferred income taxes (Note 7)

     251         263   

Other current assets

     311         297   

Total current assets

     4,646         3,614   
                   

Investments

     1,240         1,259   

Net properties (Note 11)

     42,376         41,997   

Other assets

     299         283   

Total assets

   $ 48,561       $ 47,153   
                   

Liabilities and Common Shareholders’ Equity

     

Current liabilities:

     

Accounts payable and other current liabilities (Note 12)

   $ 3,058       $ 2,923   

Debt due within one year (Note 14)

     552         196   

Total current liabilities

     3,610         3,119   
                   

Debt due after one year (Note 14)

     9,309         8,801   

Deferred income taxes (Note 7)

     13,288         13,108   

Other long-term liabilities

     2,210         2,248   

Commitments and contingencies (Note 16)

                 

Total liabilities

     28,417         27,276   
                   

Common shareholders’ equity:

     

Common shares, $2.50 par value, 800,000,000 authorized;

     

554,858,135 and 554,558,034 issued; 467,137,922 and 469,465,273

     

outstanding, respectively

     1,387         1,386   

Paid-in-surplus

     4,134         4,113   

Retained earnings

     22,905         22,271   

Treasury stock

     (7,113)         (6,707)   

Accumulated other comprehensive loss (Note 9)

     (1,169)         (1,186)   

Total common shareholders’ equity

     20,144         19,877   

Total liabilities and common shareholders’ equity

   $ 48,561       $ 47,153   
                   

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

4


Table of Contents

Condensed Consolidated Statements of Cash Flows (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions,

for the Three Months Ended March 31,

   2013      2012  

Operating Activities

     

Net income

   $         957       $         863   

Adjustments to reconcile net income to cash provided by operating activities:

     

Depreciation

     434         427   

Deferred income taxes and unrecognized tax benefits

     184         124   

Other operating activities, net

            17   

Changes in current assets and liabilities:

     

Accounts receivable, net

     (181)         74   

Materials and supplies

            (68)   

Other current assets

     (14)         (58)   

Accounts payable and other current liabilities

     135         25   

Cash provided by operating activities

     1,524         1,404   

Investing Activities

     

Capital investments

     (782)         (804)   

Proceeds from asset sales

     17         13   

Other investing activities, net

     (35)         (39)   

Cash used in investing activities

     (800)         (830)   

Financing Activities

     

Debt issued (Note 14)

     944           

Common share repurchases (Note 17)

     (374)         (433)   

Dividends paid

     (323)         (289)   

Debt repaid

     (83)         (72)   

Other financing activities, net

     (34)         (2)   

Cash provided by/(used in) financing activities

     130         (796)   

Net change in cash and cash equivalents

     854         (222)   

Cash and cash equivalents at beginning of year

     1,063         1,217   

Cash and cash equivalents at end of period

   $ 1,917       $ 995   

Supplemental Cash Flow Information

     

Non-cash investing and financing activities:

     

Cash dividends declared but not yet paid

   $ 318       $ 282   

Capital investments accrued but not yet paid

     107         118   

Common shares repurchased but not yet paid

     20           

Cash paid for:

     

Interest, net of amounts capitalized

   $ (179)       $ (198)   

Income taxes, net of refunds

     (39)         (102)   
                   

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

5


Table of Contents

Condensed Consolidated Statements of Changes in Common Shareholders’ Equity (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions

 

Common

Shares

   

Treasury

Shares

    Common
Shares
    Paid-in-
Surplus
    Retained
Earnings
    Treasury
Stock
   

AOCI

[a]

    Total  

Balance at January 1, 2012

    554.3        (74.4)      $   1,386       $   4,031       $   19,508       $   (5,293)      $   (1,054)      $   18,578    

Net income

                        863                       863   

Other comp. income

                                             

Conversion, stock option
exercises, forfeitures, and other

    0.3        0.6              25                             26   

Share repurchases (Note 17)

           (3.9)                             (433)               (433)   

Cash dividends declared
($0.60 per share)

                                (287)                      (287)   

Balance at March 31, 2012

    554.6        (77.7)      $ 1,387       $ 4,056       $ 20,084       $ (5,726)      $ (1,046)      $ 18,755    
   
                                                                 

Balance at January 1, 2013

    554.6        (85.1)      $ 1,386       $ 4,113       $ 22,271       $ (6,707)      $ (1,186)      $ 19,877    

Net income

                        957                       957   

Other comp. income

                                      17        17   

Conversion, stock option
exercises, forfeitures, and other

    0.2        0.3              21               (12)               10   

Share repurchases (Note 17)

           (2.9)                             (394)               (394)   

Cash dividends declared
($0.69 per share)

                                (323)                      (323)   

Balance at March 31, 2013

    554.8        (87.7)      $ 1,387       $ 4,134       $ 22,905       $ (7,113)      $ (1,169)      $ 20,144    
                                                                 

 

[a]

AOCI = Accumulated Other Comprehensive Income/(Loss) (See Note 9)

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

6


Table of Contents

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

1. Basis of Presentation

Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP). Our Consolidated Statement of Financial Position at December 31, 2012, is derived from audited financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and notes thereto contained in our 2012 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2013, are not necessarily indicative of the results for the entire year ending December 31, 2013.

The Condensed Consolidated Financial Statements are presented in accordance with GAAP as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).

2. Adoption of New Accounting Pronouncement

On February 5, 2013, the FASB issued Accounting Standards Update 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), which adds additional disclosure requirements for items reclassified out of accumulated other comprehensive income. We adopted this ASU during the three months ended March 31, 2013.

3. Operations and Segmentation

The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide and review 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. The following table provides freight revenue by commodity group:

 

Millions,

for the Three Months Ended March 31,

   2013      2012  

Agricultural

   $         784       $         858   

Automotive

     487         430   

Chemicals

     873         768   

Coal

     936         995   

Industrial Products

     916         863   

Intermodal

     988         909   

Total freight revenues

   $ 4,984       $ 4,823   

Other revenues

     306         289   

 

Total operating revenues

   $ 5,290       $ 5,112   
                   

Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of origination or destination for some products transported by us are outside the U.S. Each of our commodity groups includes revenue from shipments to and from Mexico. Included in the above table are revenues from our Mexico business which amounted to $505 million and $482 million, respectively for the three months ended March 31, 2013 and March 31, 2012.

 

7


Table of Contents

4. Stock-Based Compensation

We have several stock-based compensation plans under which employees and non-employee directors receive stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. We have elected to issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when retention shares are granted. Information regarding stock-based compensation appears in the table below:

 

Millions,

for the Three Months Ended March 31,

   2013      2012  

Stock-based compensation, before tax:

     

Stock options

   $     4       $  

Retention awards

     21         20   

 

Total stock-based compensation, before tax

   $ 25       $     25   
                   

Excess tax benefits from equity compensation plans

   $     46       $ 39   
                   

Stock Options – We estimate the fair value of our stock option awards using the Black-Scholes option pricing model. The table below shows the annual weighted-average assumptions used for valuation purposes:

 

Weighted-Average Assumptions

     2013       2012  

Risk-free interest rate

     0.8     0.8

Dividend yield

     2.1     2.1

Expected life (years)

     5.0        5.3   

Volatility

     36.2     36.8

Weighted-average grant-date fair value of options granted

   $     34.98      $     31.29   
                  

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of grant; the expected life is based on historical and expected exercise behavior; and volatility is based on the historical volatility of our stock price over the expected life of the option.

A summary of stock option activity during the three months ended March 31, 2013 is presented below:

 

      Options
(thous.)
    

Weighted-
Average

Exercise Price

     Weighted-Average
Remaining
Contractual Term
     Aggregate
Intrinsic Value
(millions)
 

Outstanding at January 1, 2013

     4,289       $     65.68         5.8 yrs.        $     258   

Granted

     572         132.00         N/A          N/A    

Exercised

     (333)         53.17         N/A          N/A    

Forfeited or expired

     (14)         103.73         N/A          N/A    

Outstanding at March 31, 2013

     4,514       $ 74.89         6.1 yrs.        $ 305   
                                     

Vested or expected to vest at March 31, 2013

     4,476       $ 74.52         6.1 yrs.        $ 304   
                                     

Options exercisable at March 31, 2013

     3,359       $ 59.45         5.1 yrs.        $ 279   
                                     

Stock options are granted at the closing price on the date of grant, have ten-year contractual terms, and vest no later than three years from the date of grant. None of the stock options outstanding at March 31, 2013 are subject to performance or market-based vesting conditions.

 

8


Table of Contents

At March 31, 2013, there was $31 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.8 years. Additional information regarding stock option exercises appears in the table below:

 

Millions,

for the Three Months Ended March 31,

   2013      2012  

Intrinsic value of stock options exercised

   $       28       $       62   

Cash received from option exercises

     14         21   

Treasury shares repurchased for employee payroll taxes

     (5)         (8)   

Tax benefit realized from option exercises

     11         24   

Aggregate grant-date fair value of stock options vested

     16         16   

Retention Awards – The fair value of retention awards is based on the closing price of the stock on the grant date. Dividends and dividend equivalents are paid to participants during the vesting periods.

Changes in our retention awards during the three months ended March 31, 2013 were as follows:

 

      Shares
(thous.)
    

Weighted-Average

Grant-Date Fair Value

 

Nonvested at January 1, 2013

     2,355         $    73.27   

Granted

     420         132.00   

Vested

     (846)         47.46   

Forfeited

     (24)         78.52   

Nonvested at March 31, 2013

     1,905         $    97.61   
                   

Retention awards are granted at no cost to the employee or non-employee director and vest over periods lasting up to four years. At March 31, 2013, there was $105 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 2.2 years.

Performance Retention Awards – In February 2013, our Board of Directors approved performance stock unit grants. Other than different performance targets, the basic terms of these performance stock units are identical to those granted in February 2011 and February 2012, including using annual return on invested capital (ROIC) as the performance measure. We define ROIC as net operating profit adjusted for interest expense (including interest on the present value of operating leases) and taxes on interest divided by average invested capital adjusted for the present value of operating leases.

Stock units awarded to selected employees under these grants are subject to continued employment for 37 months and the attainment of certain levels of ROIC. We expense the fair value of the units that are probable of being earned based on our forecasted ROIC over the 3-year performance period. We measure the fair value of these performance stock units based upon the closing price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends. Dividend equivalents are paid to participants only after the units are earned.

The assumptions used to calculate the present value of estimated future dividends related to the February 2013 grant were as follows:

 

      2013    

Dividend per share per quarter

   $     0.69     

Risk-free interest rate at date of grant

     0.4%     
          

 

9


Table of Contents

Changes in our performance retention awards during the three months ended March 31, 2013 were as follows:

 

      Shares
(thous.)
    

Weighted-Average

Grant-Date Fair Value

 

Nonvested at January 1, 2013

     1,075         $  83.80   

Granted

     304         125.14   

Vested

     (401)         58.33   

Forfeited

     (22)         95.89   

Nonvested at March 31, 2013

     956         $  107.35   
                   

At March 31, 2013, there was $65 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.8 years. This expense is subject to achievement of the ROIC levels established for the performance stock unit grants.

5. Retirement Plans

Pension and Other Postretirement Benefits

Pension Plans – We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements.

Other Postretirement Benefits (OPEB) – We provide medical and life insurance benefits for eligible retirees. These benefits are funded as medical claims and life insurance premiums are paid.

Expense

Both pension and OPEB expense are determined based upon the annual service cost of benefits (the actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the expected return on plan assets. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a five-year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and expected returns based on long-term rate of return assumptions. Differences in actual experience in relation to assumptions are not recognized in net income immediately, but are deferred in accumulated other comprehensive income and, if necessary, amortized as pension or OPEB expense.

The components of our net periodic pension and OPEB cost/(benefit) were as follows for the three months ended March 31:

 

      Pension      OPEB  

Millions

   2013      2012      2013      2012  

Service cost

   $         19       $         13       $         1       $         1   

Interest cost

     33         35                 

Expected return on plan assets

     (51)         (47)                   

Amortization of:

           

Prior service credit

                     (4)         (4)   

Actuarial loss

     26         21                 

Net periodic pension cost

   $ 27       $ 22       $      $  
                                     

 

10


Table of Contents

Cash Contributions

For the three months ended March 31, 2013, we made $14 million of cash contributions to the qualified pension plan. Any additional contributions made during 2013 will be based on cash generated from operations and financial market considerations. All contributions made to the qualified pension plan during the three months ended March 31, 2013 were voluntary and were made with cash generated from operations. Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes. At March 31, 2013, we do not have minimum cash funding requirements for 2013.

6. Other Income

Other income included the following:

 

Millions,

for the Three Months Ended March 31,

   2013 [a]      2012  

Rental income

   $       37       $       20   

Net gain on non-operating asset dispositions

             

Non-operating environmental costs and other

     (1)         (5)   

Total

   $ 40       $ 16   
                   

 

[a]

Rental income includes $17 million related to a land lease contract settlement.

7. Income Taxes

Internal Revenue Service (IRS) examinations have been completed and settled for all years prior to 2005, although some interest calculations remain open for years prior to 2005. The IRS has completed its examinations and issued notices of deficiency for years 2005 through 2008. We disagree with many of their proposed adjustments, and we are at IRS Appeals for these years. The IRS is examining years 2009 and 2010, and we expect to receive their exam report in 2013. Additionally, several state tax authorities are examining our state income tax returns for years 2003 through 2010.

At March 31, 2013, our liability for unrecognized tax benefits was $119 million. Of that amount, $6 million is classified as a current asset in the Condensed Consolidated Statements of Financial Position.

8. Earnings Per Share

The following table provides a reconciliation between basic and diluted earnings per share:

 

Millions, Except Per Share Amounts,

for the Three Months Ended March 31,

   2013      2012  

Net income

   $       957       $       863   
                   

Weighted-average number of shares outstanding:

     

Basic

     467.8         477.8   

Dilutive effect of stock options

     1.4         2.2   

Dilutive effect of retention shares and units

     1.3         1.4   

Diluted

     470.5         481.4   
                   

Earnings per share – basic

   $ 2.05       $ 1.81   

Earnings per share – diluted

   $ 2.03       $ 1.79   

Stock options excluded as their inclusion would be antidilutive

     0.4         0.4   
                   

 

11


Table of Contents

9. Accumulated Other Comprehensive Income/(Loss)

Reclassifications out of accumulated other comprehensive income/(loss) for the three months ended March 31, 2013 and 2012, were as follows (net of tax):

 

Millions

   Defined
benefit
plans
    Foreign
currency
translation
    Derivatives     Total  

Balance at January 1, 2013

   $       (1,149 )     $       (36   $       (1 )     $       (1,186 )  
                                       

Other comprehensive income/(loss) before reclassifications

     (2 )       3       -       1  

Amounts reclassified from accumulated other comprehensive income/(loss) [a]

     16       -        -       16  
                                       

Net year-to-date other comprehensive income/(loss), net of taxes of $12 million

     14       3       -       17  
                                       

Balance at March 31, 2013

   $ (1,135 )     $ (33 )     $ (1 )     $ (1,169 )  
                                       
           
                                       

Balance at January 1, 2012

   $ (1,004 )     $ (48 )     $ (2 )     $ (1,054 )  
                                       

Other comprehensive income/(loss) before reclassifications

     (7 )       15       -        8  

Amounts reclassified from accumulated other comprehensive income/(loss)

     -        -        -        -   
                                       

Net year-to-date other comprehensive income/(loss), net of taxes of $8 million

     (7 )       15       -       8  
                                       

Balance at March 31, 2012

   $ (1,011 )     $ (33 )     $ (2 )     $ (1,046 )  
                                       

 

[a]

The accumulated other comprehensive income/(loss) reclassification components are 1) prior service cost/(benefit) and 2) net actuarial loss which are both included in the computation of net periodic pension cost. See Note 5 Retirement Plans for additional details.

10. Accounts Receivable

Accounts receivable includes freight and other receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, credit worthiness of customers, and current economic conditions. At both March 31, 2013 and December 31, 2012, our accounts receivable were reduced by $4 million. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Condensed Consolidated Statements of Financial Position. At March 31, 2013 and December 31, 2012, receivables classified as other assets were reduced by allowances of $26 million and $33 million, respectively.

Receivables Securitization Facility – The Railroad maintains a $600 million, 364-day receivables securitization facility under which it sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a wholly-owned, bankruptcy-remote subsidiary which may subsequently transfer, without recourse an undivided interest in accounts receivable to investors. The amount outstanding under the facility was $400 million and $100 million at March 31, 2013 and December 31, 2012, respectively. The amount outstanding under the facility was supported by $1.2 billion and $1.1 billion of accounts receivable as collateral at March 31, 2013 and December 31, 2012, respectively, which, as a retained interest, is included in accounts receivable, net in our Condensed Consolidated Statements of Financial Position.

The outstanding amounts the Railroad is allowed to maintain under the facility, with a maximum of $600 million, may fluctuate based on the availability of eligible receivables and is directly affected by business volumes and credit risks, including receivables payment quality measures such as default and dilution ratios. If default or dilution ratios increase one percent, amounts allowed to be outstanding under the facility would not materially change.

The costs of the receivables securitization facility include interest, which will vary based on prevailing commercial paper rates, program fees paid to banks, commercial paper issuing costs, and fees for

 

12


Table of Contents

unused commitment availability. The costs of the receivables securitization facility are included in interest expense and were $1 million for the three months ended March 31, 2013 and 2012.

The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI.

In July 2012, the receivables securitization facility was renewed for an additional 364-day period at comparable terms and conditions.

11. Properties

The following tables list the major categories of property and equipment, as well as the weighted average estimated useful life for each category (in years):

 

Millions, Except Percentages

As of March 31, 2013

   Cost      Accumulated
Depreciation
     Net Book
Value
     Estimated
Useful Life
 

Land

   $       5,106       $       N/A       $       5,106         N/A   

Road:

           

Rail and other track material

     13,359         4,812         8,547         35   

Ties

     8,501         2,194         6,307         33   

Ballast

     4,441         1,108         3,333         34   

Other roadway [a]

     14,882         2,621         12,261         48   
                                     

Total road

     41,183         10,735         30,448         N/A   

Equipment:

           

Locomotives

     7,279         3,283         3,996         20   

Freight cars

     2,010         1,004         1,006         25   

Work equipment and other

     537         97         440         19   
                                     

Total equipment

     9,826         4,384         5,442         N/A   
                                     

Technology and other

     641         255         386         11   

Construction in progress

     994         -          994         N/A   

Total

   $ 57,750       $ 15,374       $ 42,376         N/A   
                                     

 

Millions, Except Percentages

As of December 31, 2012

   Cost      Accumulated
Depreciation
     Net Book
Value
     Estimated
Useful Life
 

Land

   $       5,105      $ N/A       $ 5,105        N/A   

Road:

           

Rail and other track material

     13,220        4,756        8,464        33   

Ties

     8,404        2,157        6,247        33   

Ballast

     4,399        1,085        3,314        34   

Other roadway [a]

     14,806        2,583        12,223        49   
                                     

Total road

     40,829        10,581        30,248        N/A   

Equipment:

           

Locomotives

     7,297        3,321        3,976        19   

Freight cars

     1,991        1,018        973        23   

Work equipment and other

     535        89        446        17   

Total equipment

     9,823        4,428        5,395        N/A   

Technology and other

     633        273        360        11   

Construction in progress

     889        -           889        N/A   

Total

   $ 57,279      $       15,282      $       41,997        N/A   
                                     

 

[a]

Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets.

 

13


Table of Contents

12. Accounts Payable and Other Current Liabilities

 

Millions

   March 31,
2013
     Dec. 31,
2012
 

Accounts payable

   $       815      $       825  

Income and other taxes payable

     585        368  

Accrued wages and vacation

     379        376  

Dividends payable

     318        318  

Accrued casualty costs

     219        213  

Interest payable

     122        172  

Equipment rents payable

     100        95  

Other

     520        556  
                   

Total accounts payable and other current liabilities

   $       3,058      $       2,923  
                   

13. Financial Instruments

Strategy and Risk – We may use derivative financial instruments in limited instances for other than trading purposes to assist in managing our overall exposure to fluctuations in interest rates and fuel prices. We are not a party to leveraged derivatives and, by policy, do not use derivative financial instruments for speculative purposes. Derivative financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. We formally document the nature and relationships between the hedging instruments and hedged items at inception, as well as our risk-management objectives, strategies for undertaking the various hedge transactions, and method of assessing hedge effectiveness. Changes in the fair market value of derivative financial instruments that do not qualify for hedge accounting are charged to earnings. We may use swaps, collars, futures, and/or forward contracts to mitigate the risk of adverse movements in interest rates and fuel prices; however, the use of these derivative financial instruments may limit future benefits from favorable interest rate and fuel price movements.

Interest Rate Cash Flow Hedges – We report changes in the fair value of cash flow hedges in accumulated other comprehensive loss until the hedged item affects earnings. At both March 31, 2013 and December 31, 2012, we had reductions of $1 million recorded as an accumulated other comprehensive loss that is being amortized on a straight-line basis through September 30, 2014 for a cash flow hedge that was settled in 2004. As of March 31, 2013 and December 31, 2012, we had no interest rate cash flow hedges outstanding.

Fair Value of Financial Instruments – The fair value of our short- and long-term debt was estimated using a market value price model, which utilizes applicable U.S. Treasury rates along with current market quotes on comparable debt securities. All of the inputs used to determine the fair market value of the Corporation’s long-term debt are Level 2 inputs and obtained from an independent source. At March 31, 2013, the fair value of total debt was $11.8 billion, approximately $1.9 billion more than the carrying value. At December 31, 2012, the fair value of total debt was $11.1 billion, approximately $2.1 billion more than the carrying value. The fair value of the Corporation’s debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules. At both March 31, 2013 and December 31, 2012, approximately $203 million of debt securities contained call provisions that allow us to retire the debt instruments prior to final maturity, with the payment of fixed call premiums, or in certain cases, at par. The fair value of our cash equivalents approximates their carrying value due to the short-term maturities of these instruments.

14. Debt

Credit Facilities – At March 31, 2013, we had $1.8 billion of credit available under our revolving credit facility (the facility), which is designated for general corporate purposes and supports the issuance of commercial paper. We did not draw on the facility at any time during the three months ended March 31, 2013. Commitment fees and interest rates payable under the facility are similar to fees and rates available to comparably rated, investment-grade borrowers. The facility allows for borrowings at floating rates based on London Interbank Offered Rates, plus a spread, depending upon our senior unsecured

 

14


Table of Contents

debt ratings. The facility matures in 2015 under a four year term and requires the Corporation to maintain a debt-to-net-worth coverage ratio as a condition to making a borrowing. At March 31, 2013, and December 31, 2012 (and at all times during the first quarter), we were in compliance with this covenant.

The definition of debt used for purposes of calculating the debt-to-net-worth coverage ratio includes, among other things, certain credit arrangements, capital leases, guarantees and unfunded and vested pension benefits under Title IV of ERISA. At March 31, 2013, the debt-to-net-worth coverage ratio allowed us to carry up to $40.3 billion of debt (as defined in the facility), and we had $10.4 billion of debt (as defined in the facility) outstanding at that date. Under our current capital plans, we expect to continue to satisfy the debt-to-net-worth coverage ratio; however, many factors beyond our reasonable control could affect our ability to comply with this provision in the future. The facility does not include any other financial restrictions, credit rating triggers (other than rating-dependent pricing), or any other provision that could require us to post collateral. The facility also includes a $75 million cross-default provision and a change-of-control provision.

During the three months ended March 31, 2013, we did not issue or repay any commercial paper, and at March 31, 2013, we had no commercial paper outstanding. Our revolving credit facility supports our outstanding commercial paper balances, and, unless we change the terms of our commercial paper program, our aggregate issuance of commercial paper will not exceed the amount of borrowings available under the facility.

Shelf Registration Statement and Significant New Borrowings – We filed a new automatic shelf registration statement that became effective on February 8, 2013. The Board of Directors authorized the issuance of up to $4 billion of debt securities, replacing the $1.4 billion of authority remaining under our shelf registration filed in February 2010. SEC rules require UPC, a large accelerated filer, to file a new shelf registration statement every three years. Under the current shelf registration, we may issue, from time to time, any combination of debt securities, preferred stock, common stock, or warrants for debt securities or preferred stock in one or more offerings. We have no immediate plans to issue equity securities; however, we will continue to explore opportunities to replace existing debt or access capital through issuances of debt securities under our shelf registration, and, therefore, we may issue additional debt securities at any time.

On March 15, 2013, we issued $325 million of 2.75% unsecured fixed-rate notes and $325 million of 4.25% unsecured fixed-rate notes under our shelf registration statement. The 2.75% notes will mature on April 15, 2023, and the 4.25% notes will mature on April 15, 2043. Proceeds from this offering are for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase program. These debt securities include change-of-control provisions. At March 31, 2013, we had remaining authority from our Board of Directors to issue up to $3.35 billion of debt securities under the shelf registration.

At March 31, 2013 and December 31, 2012, we reclassified as long-term debt approximately $400 million and $100 million, respectively, of debt due within one year that we intend to refinance. This reclassification reflects our ability and intent to refinance any short-term borrowings and certain current maturities of long-term debt on a long-term basis.

Receivables Securitization Facility – As of March 31, 2013 and December 31, 2012, we recorded $400 million and $100 million, respectively, as secured debt under our receivables securitization facility. (See further discussion of our receivables securitization facility in Note 10).

15. Variable Interest Entities

We have entered into various lease transactions in which the structure of the leases contain variable interest entities (VIEs). These VIEs were created solely for the purpose of doing lease transactions (principally involving railroad equipment and facilities, including our headquarters building) and have no other activities, assets or liabilities outside of the lease transactions. Within these lease arrangements, we have the right to purchase some or all of the assets at fixed prices. Depending on market conditions, fixed-price purchase options available in the leases could potentially provide benefits to us; however, these benefits are not expected to be significant.

 

15


Table of Contents

We maintain and operate the assets based on contractual obligations within the lease arrangements, which set specific guidelines consistent within the railroad industry. As such, we have no control over activities that could materially impact the fair value of the leased assets. We do not hold the power to direct the activities of the VIEs and, therefore, do not control the ongoing activities that have a significant impact on the economic performance of the VIEs. Additionally, we do not have the obligation to absorb losses of the VIEs or the right to receive benefits of the VIEs that could potentially be significant to the VIEs.

We are not considered to be the primary beneficiary and do not consolidate these VIEs because our actions and decisions do not have the most significant effect on the VIE’s performance and our fixed-price purchase price options are not considered to be potentially significant to the VIE’s. The future minimum lease payments associated with the VIE leases totaled $3.5 billion as of March 31, 2013.

16. Commitments and Contingencies

Asserted and Unasserted Claims – Various claims and lawsuits are pending against us and certain of our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our consolidated results of operations, financial condition, or liquidity; however, to the extent possible, where asserted and unasserted claims are considered probable and where such claims can be reasonably estimated, we have recorded a liability. We do not expect that any known lawsuits, claims, environmental costs, commitments, contingent liabilities, or guarantees will have a material adverse effect on our consolidated results of operations, financial condition, or liquidity after taking into account liabilities and insurance recoveries previously recorded for these matters.

Personal Injury – The cost of personal injuries to employees and others related to our activities is charged to expense based on estimates of the ultimate cost and number of incidents each year. We use an actuarial analysis to measure the expense and liability, including unasserted claims. The Federal Employers’ Liability Act (FELA) governs compensation for work-related accidents. Under FELA, damages are assessed based on a finding of fault through litigation or out-of-court settlements. We offer a comprehensive variety of services and rehabilitation programs for employees who are injured at work.

Our personal injury liability is not discounted to present value. Approximately 90% of the recorded liability is related to asserted claims and approximately 10% is related to unasserted claims at March 31, 2013. Because of the uncertainty surrounding the ultimate outcome of personal injury claims, it is reasonably possible that future costs to settle these claims may range from approximately $335 to $369 million. We record an accrual at the low end of the range as no amount of loss within the range is more probable than any other. Estimates can vary over time due to evolving trends in litigation.

Our personal injury liability activity was as follows:

 

Millions,

for the Three Months Ended March 31,

   2013      2012  

Beginning balance

   $     334       $     368   

Current year accruals

     27         30   

Changes in estimates for prior years

     (8)          

Payments

     (18)         (29)   

 

Ending balance at March 31

   $ 335       $ 372   

Current portion, ending balance at March 31

   $ 97       $ 107   
                   

 

16


Table of Contents

Asbestos – We are a defendant in a number of lawsuits in which current and former employees and other parties allege exposure to asbestos. We assess our potential liability using a statistical analysis of resolution costs for asbestos-related claims. This liability is updated annually and excludes future defense and processing costs. The liability for resolving both asserted and unasserted claims was based on the following assumptions:

 

   

The ratio of future claims by alleged disease would be consistent with historical averages adjusted for inflation.

   

The number of claims filed against us will decline each year.

   

The average settlement values for asserted and unasserted claims will be equivalent to historical averages.

   

The percentage of claims dismissed in the future will be equivalent to historical averages.

Our liability for asbestos-related claims is not discounted to present value due to the uncertainty surrounding the timing of future payments. Approximately 23% of the recorded liability related to asserted claims and approximately 77% related to unasserted claims at March 31, 2013.

Our asbestos-related liability activity was as follows:

 

Millions,

for the Three Months Ended March 31,

   2013      2012  

Beginning balance

   $     139       $     147   

Accruals

             

Payments

     (3)         (2)   

Ending balance at March 31

   $ 136       $ 145   

Current portion, ending balance at March 31

   $      $  

We have insurance coverage for a portion of the costs incurred to resolve asbestos-related claims, and we have recognized an asset for estimated insurance recoveries at March 31, 2013, and December 31, 2012.

We believe that our estimates of liability for asbestos-related claims and insurance recoveries are reasonable and probable. The amounts recorded for asbestos-related liabilities and related insurance recoveries were based on currently known facts. However, future events, such as the number of new claims filed each year, average settlement costs, and insurance coverage issues, could cause the actual costs and insurance recoveries to be higher or lower than the projected amounts. Estimates also may vary in the future if strategies, activities, and outcomes of asbestos litigation materially change; federal and state laws governing asbestos litigation increase or decrease the probability or amount of compensation of claimants; and there are material changes with respect to payments made to claimants by other defendants.

Environmental Costs – We are subject to federal, state, and local environmental laws and regulations. We have identified 284 sites at which we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 33 sites that are the subject of actions taken by the U.S. government, 17 of which are currently on the Superfund National Priorities List. Certain federal legislation imposes joint and several liability for the remediation of identified sites; consequently, our ultimate environmental liability may include costs relating to activities of other parties, in addition to costs relating to our own activities at each site.

When we identify an environmental issue with respect to property owned, leased, or otherwise used in our business, we perform, with assistance of our consultants, environmental assessments on the property. We expense the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is probable and such costs can be reasonably estimated. We do not discount our environmental liabilities when the timing of the anticipated cash payments is not fixed or readily determinable. At both March 31, 2013 and December 31, 2012, none of our environmental liability was discounted.

 

17


Table of Contents

Our environmental liability activity was as follows:

 

Millions,

for the Three Months Ended March 31,

   2013      2012  

Beginning balance

   $     170       $     172   

Accruals

            13   

Payments

     (11)         (7)   

Ending balance at March 31

   $ 166       $ 178   
                   

Current portion, ending balance at March 31

   $ 50       $ 45   
                   

The environmental liability includes future costs for remediation and restoration of sites, as well as ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates are based on information available for each site, financial viability of other potentially responsible parties, and existing technology, laws, and regulations. The ultimate liability for remediation is difficult to determine because of the number of potentially responsible parties, site-specific cost sharing arrangements with other potentially responsible parties, the degree of contamination by various wastes, the scarcity and quality of volumetric data related to many of the sites, and the speculative nature of remediation costs. Estimates of liability may vary over time due to changes in federal, state, and local laws governing environmental remediation. Current obligations are not expected to have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.

Insurance – The Company has a consolidated, wholly-owned captive insurance subsidiary (the captive), that provides insurance coverage for certain risks including FELA claims and property coverage which are subject to reinsurance. The captive entered into annual reinsurance treaty agreements that insure workers compensation, general liability, auto liability and FELA risk. The captive cedes a portion of its FELA exposure through the treaty and assumes a proportionate share of the entire risk. The captive receives direct premiums, which are netted against the Company’s premium costs in other expenses in the Condensed Consolidated Statements of Income. The treaty agreements provide for certain protections against the risk of treaty participants’ non-performance, and we do not believe our exposure to treaty participants’ non-performance is material at this time. In the event the Company leaves the reinsurance program, the Company is not relieved of its primary obligation to the policyholders for activity prior to the termination of the treaty agreements. We record both liabilities and reinsurance receivables using an actuarial analysis based on historical experience in our Condensed Consolidated Statement of Financial Position.

Guarantees – At March 31, 2013, we were contingently liable for $307 million in guarantees. We have recorded a liability of $2 million for the fair value of these obligations as of March 31, 2013, and December 31, 2012. We entered into these contingent guarantees in the normal course of business, and they include guaranteed obligations related to our headquarters building, equipment financings, and affiliated operations. The final guarantee expires in 2022. We are not aware of any existing event of default that would require us to satisfy these guarantees. We do not expect that these guarantees will have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.

Indemnities – Our maximum potential exposure under indemnification arrangements, including certain tax indemnifications, can range from a specified dollar amount to an unlimited amount, depending on the nature of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions.

Operating Leases – At March 31, 2013, we had commitments for future minimum lease payments under operating leases with initial or remaining non-cancelable lease terms in excess of one year of approximately $4.1 billion.

Gain Contingency – UPRR and Santa Fe Pacific Pipelines (SFPP, a subsidiary of Kinder Morgan Energy Partners, L.P.) currently are engaged in a proceeding to resolve the fair market rent payable to UPRR under a 10-year agreement commencing on January 1, 2004 for pipeline easements on UPRR

 

18


Table of Contents

rights-of-way (Union Pacific Railroad Company vs. Santa Fe Pacific Pipelines, Inc., SFPP, L.P., Kinder Morgan Operating L.P. “D” Kinder Morgan G.P., Inc., et al., Superior Court of the State of California for the County of Los Angeles, filed July 28, 2004). In February 2007, a trial began to resolve this issue, and, on September 28, 2011, the judge issued a tentative Statement of Decision, which concluded that SFPP owes back rent to UPRR for the years 2004 through 2011. On May 29, 2012, the court entered judgment, awarding UPRR back rent and prejudgment interest. SFPP is appealing the final judgment. A favorable final judgment may materially affect our results of operations in the period of any monetary recoveries; however, due to the uncertainty regarding the amount and timing of any recovery, including the outcome of SFPP’s appeal of this judgment or any subsequent proceeding, we consider this a gain contingency and do not reflect any amounts in the Condensed Consolidated Financial Statements as of March 31, 2013.

17. Share Repurchase Program

Effective April 1, 2011, our Board of Directors authorized the repurchase of 40 million shares of our common stock by March 31, 2014, replacing our previous repurchase program. As of March 31, 2013, we repurchased a total of $7.5 billion of our common stock since the commencement of our repurchase programs. The table below represents shares repurchased under the new repurchase program.

 

      Number of Shares Purchased      Average Price Paid  
      2013      2012      2013      2012  

First quarter

     2,881,400         3,917,369       $     136.58       $ 110.64   
                                     

Remaining number of shares that may be repurchased under current authority

  

     12,154,549  
                                     

Management’s assessments of market conditions and other pertinent facts guide the timing and volume of all repurchases. We expect to fund any share repurchases under this program through cash generated from operations, the sale or lease of various operating and non-operating properties, debt issuances, and cash on hand. Repurchased shares are recorded in treasury stock at cost, which includes any applicable commissions and fees.

 

19


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

RESULTS OF OPERATIONS

Three Months Ended March 31, 2013, Compared to

Three Months Ended March 31, 2012

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

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and applicable notes to the Condensed Consolidated Financial Statements, Item 1, and other information included in this report. Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP).

The Railroad, along with its subsidiaries and rail affiliates, is our one reportable business segment. Although 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.

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 directors and executive officers; and amendments to such reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We also make available on our website previously filed SEC reports and exhibits via a link to EDGAR on the SEC’s Internet site at www.sec.gov. Additionally, our corporate governance materials, including By-Laws, Board Committee charters, governance guidelines and policies, and codes of conduct and ethics for directors, officers, and employees are available on our website. From time to time, the corporate governance materials on our website may be updated as necessary to comply with rules issued by the SEC and the New York Stock Exchange or as desirable to promote the effective and efficient governance of our company. Any security holder wishing to receive, without charge, a copy of any of our SEC filings or corporate governance materials should send a written request to: Secretary, Union Pacific Corporation, 1400 Douglas Street, Omaha, NE 68179.

References to our website address in this report, including references in Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 2, are provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.

Critical Accounting Policies and Estimates

We base our discussion and analysis of our financial condition and results of operations upon our Condensed Consolidated Financial Statements. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, expenses, assets, and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ materially from actual results, the impact on the Condensed Consolidated Financial Statements may be material. Our critical accounting policies are available in Item 7 of our 2012 Annual Report on Form 10-K. There have not been any significant changes with respect to these policies during the first three months of 2013.

 

20


Table of Contents

RESULTS OF OPERATIONS

Quarterly Summary

We reported earnings of $2.03 per diluted share on net income of $957 million in the first quarter of 2013 compared to earnings of $1.79 per diluted share on net income of $863 million for the first quarter of 2012. Freight revenues increased $161 million in the first quarter compared to the same period in 2012 driven by core pricing gains. Our diverse portfolio of business offset lower shipments of coal and agricultural products with increases in other markets, including strong growth in shale-related products (crude oil and frac sand), international intermodal and lumber shipments. Core pricing gains, our ongoing focus on safety, service and network efficiency and continued cost control measures drove record financial results in the first quarter.

We continued operating an efficient and fluid network, adjusting resources to match significant shifts in our business mix. Average train speed, as reported to the Association of American Railroads (AAR), improved slightly compared to 2012. Average terminal dwell time increased 4% compared to first quarter 2012, primarily due to continuing growth of manifest traffic concentrated in the Southern Region. Average rail car inventory decreased 4% in the first quarter as volume declined 2%, despite a shift in traffic mix to more manifest shipments, which have longer cycle times.

Operating Revenues

 

Millions,

for the Three Months Ended March 31,

   2013      2012      %
Change
 

Freight revenues

   $     4,984       $     4,823         3%    

Other revenues

     306         289         6       

Total

   $     5,290       $     5,112         3%    
                            

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 our commuter rail operations, and 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. We recognize other revenues as we perform services or meet contractual obligations.

Freight revenues for four of the six commodity groups increased during the first quarter of 2013 compared to 2012, driven by core pricing gains, partially offset by an overall decline in volume levels. Substantial decreases in coal and agricultural products offset strong chemical and intermodal shipments.

Each of our commodity groups includes revenue from fuel surcharges. Freight revenues from fuel surcharge programs were $636 million in the first quarter of 2013, compared to $614 million in the same period of 2012. Higher fuel surcharge recoveries, due to the lag impact of our programs partially offset by volume declines drove the increase from 2012.

In the first quarter of 2013, other revenues increased from 2012 due primarily to higher revenues at our subsidiaries that broker intermodal and automotive services.

 

21


Table of Contents

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

 

Freight Revenues

Millions,

for the Three Months Ended March 31,

   2013      2012      %
Change
 

Agricultural

   $ 784       $ 858         (9)%   

Automotive

     487         430         13      

Chemicals

     873         768         14      

Coal

     936         995         (6)      

Industrial Products

     916         863         6      

Intermodal

     988         909         9      

Total

   $ 4,984       $ 4,823         3%    
                            
        

Revenue Carloads

Thousands,

for the Three Months Ended March 31,

   2013      2012      %
Change
 

Agricultural

     212         234         (9)%   

Automotive

     184         180         2      

Chemicals

     271         241         12      

Coal

     402         495         (19)      

Industrial Products

     289         290         -      

Intermodal [a]

     810         778         4      

Total

     2,168         2,218         (2)%   
                            
        

Average Revenue per Car

for the Three Months Ended March 31,

   2013      2012      %
Change
 

Agricultural

   $ 3,694       $ 3,664         1%    

Automotive

     2,648         2,390         11      

Chemicals

     3,225         3,184         1      

Coal

     2,329         2,010         16      

Industrial Products

     3,174         2,977         7      

Intermodal [a]

     1,219         1,169         4      

Average

   $       2,299       $       2,175         6%    
                            

 

[a]

Each intermodal container or trailer equals one carload.

Agricultural Products – Lower volume, partially offset by price improvements, reduced freight revenue from agricultural shipments in the first quarter of 2013 versus 2012. Corn shipments decreased 31% in the first quarter of 2013 versus 2012, reflecting the impact of the severe drought in 2012 that affected Railroad served territory. The tight supply of corn and resulting high corn prices contributed to lower livestock counts, exports to Mexico and ethanol production, driving the volume decline.

Automotive – Higher ARC due to price increases, fuel surcharge, and a new logistics management arrangement that covers fees and container costs, coupled with increased shipments of finished vehicles and automotive parts improved automotive revenue in the first quarter of 2013 compared to 2012. Higher production and sales levels during the quarter drove the volume growth as the automobile industry continued to gain momentum.

Chemicals – Higher volume and core price improvements increased freight revenue from chemicals in the first quarter of 2013 versus 2012. Shipments of crude oil from the Bakken, Permian and Eagle Ford shale formations primarily to the Gulf area drove the growth in shipments of chemicals. Shipments of liquid petroleum gases increased due to strong demand from eastern origins to Louisiana and new business secured for shipments to the Gulf Coast. Plastics shipments also increased due to strong domestic demand in the first quarter of 2013.

 

22


Table of Contents

Coal – Lower volume, partially offset by higher ARC driven by core pricing gains, positive business mix and fuel surcharge recoveries, reduced freight revenue from coal shipments in the first quarter of 2013 compared to 2012. High coal stockpiles due to low natural gas prices in 2012 along with mine production issues and tighter inventory management at some utilities drove the decline in coal volume. Shipments from Southern Powder River Basin (SPRB) and Colorado and Utah mines decreased 19% and 16%, respectively, from the first quarter of 2012. The loss of a customer contract at the beginning of the year also contributed to lower volumes from the SPRB.

Industrial Products – Core pricing gains increased freight revenue from industrial products in the first quarter of 2013 versus 2012. Shipments of non-metallic minerals (primarily frac sand) grew as a result of drilling activity for energy products. Additionally, growth in new housing construction and home improvements drove an increase in lumber shipments. These volume increases were offset by a decline in hazardous waste shipments in 2012.

Intermodal – Volume growth and core pricing gains increased freight revenue from intermodal shipments in the first quarter of 2013 compared to the same period in 2012. First quarter volume levels from international traffic increased 7% versus the first quarter of 2012, reflecting modest improvements in economic conditions. Domestic traffic for the quarter was flat with the first quarter of 2012.

Mexico Business – Each of our commodity groups includes revenue from shipments to and from Mexico. Revenue from Mexico business increased 5% to $505 million in the first quarter of 2013 versus the same period in 2012. Volume levels were essentially flat with the first quarter of 2012, as increases in automotive, industrial products, intermodal and coal offset declines in agricultural products and chemicals.

Operating Expenses

 

Millions,

for the Three Months Ended March 31,

   2013      2012      %
Change
 

Compensation and benefits

   $ 1,216       $ 1,211         - %   

Fuel

     900         926         (3)       

Purchased services and materials

     557         526         6        

Depreciation

     434         427         2        

Equipment and other rents

     313         296         6        

Other

     237         216         10        

Total

   $       3,657       $       3,602         2 %   
                            

Operating expenses increased $55 million in the first quarter of 2013 versus the comparable period in 2012. Wage and benefit inflation, new logistics management fees and container costs for automotive business, property taxes, locomotive overhauls and short-term freight car rental costs contributed to higher expenses during the period. In the first quarter of 2013, lower volume related expenses (including fuel) and personal injury expense partially offset these increases.

Compensation and Benefits – Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. The slight increase was driven by general wage and benefit inflation and higher pension and other postretirement benefits offset by volume related expenses in the first quarter of 2013 versus 2012.

Fuel – Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Locomotive diesel fuel prices were essentially flat, averaging $3.23 (including taxes and transportation costs) in the first quarter of 2013 and 2012. Fuel costs were lower as gross-ton miles declined 5% in the first quarter. The fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-miles in thousands, increased 3% compared to the first quarter of 2012. Declines in heavier, more fuel-efficient coal shipments drove the gross-ton-mile and fuel consumption rate variances.

Purchased Services and Materials – Expense for purchased services and materials includes the costs of services purchased from outside contractors (including equipment maintenance and contract expenses incurred by our subsidiaries for external transportation services); materials used to maintain the Railroad’s lines, structures, and equipment; costs of operating facilities jointly used by UPRR and other railroads;

 

23


Table of Contents

transportation and lodging for train crew employees; trucking and contracting costs for intermodal containers; leased automobile maintenance expenses; and tools and supplies. Contract services increased 12% compared to the first quarter of 2012, primarily due to increased locomotive overhauls and new logistics management fees.

Depreciation – The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. A higher depreciable asset base, reflecting higher ongoing capital spending, increased depreciation expense in the first quarter of 2013 compared to the same period in 2012, partially offset by changes in estimated service lives as a result of recent depreciation studies.

Equipment and Other Rents – Equipment and other rents expense primarily includes rental expense that the Railroad pays for freight cars owned by other railroads or private companies; freight car, intermodal, and locomotive leases; other rent expenses; and office and other rentals. Additional container costs resulting from a new logistics management arrangement, increased automotive and intermodal shipments and higher freight car rental rates drove a $20 million increase in our short-term freight car rental expense in the first quarter of 2013, compared to the same period in 2012. Conversely, lower locomotive and freight car lease expenses compared to 2012 partially offset the higher freight car rental expense.

Other – Other expenses include personal injury, freight and property damage, destruction of equipment owned by others, insurance, environmental, bad debt, state and local taxes, utilities, telephone and cellular, employee travel, computer software, and other general expenses. Other costs in the first quarter of 2013 were higher than the same period in 2012 as higher property tax, damaged freight and destroyed equipment costs more than offset lower personal injury expenses.

Non-Operating Items

 

Millions,

for the Three Months Ended March 31,

   2013      2012      %
Change
 

Other income

   $         40       $         16         F      

Interest expense

     (128)        (135)         (5)     

 

Income taxes

     (588)         (528)         11%   
                            

Other Income – Other income increased in the first quarter of 2013 versus the same period of 2012 due to a $17 million land lease contract settlement and lower environmental expenses.

Interest Expense – Interest expense decreased in the first quarter of 2013 versus 2012 due to a lower effective interest rate of 5.6% versus 6.1%, partially offset by an increased weighted-average debt level in 2013 of $9.3 billion versus $8.9 billion in 2012.

Income Taxes – Higher pre-tax income drove the increase in income taxes in the first quarter of 2013 compared to 2012. Our effective tax rate for the first quarter of 2013 was 38.1% compared to 38.0% in 2012.

OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS

We report key Railroad performance measures weekly to the Association of American Railroads (AAR), including carloads, average daily inventory of rail cars on our system, average train speed, and average terminal dwell time. We provide this data on our website at www.up.com/investors/reports/index.shtml.

 

24


Table of Contents

Operating/Performance Statistics

Railroad performance measures reported to the AAR, as well as other performance measures, are included in the table below:

 

For the Three Months Ended March 31,

   2013              2012      %
    Change
 

Average train speed (miles per hour)

     26.4         26.3         - %    

Average terminal dwell time (hours)

     27.4         26.4         4 %    

Average rail car inventory (thousands)

     263.8         275.4         (4)%    

Gross ton-miles (billions)

     227.7         240.5         (5)%    

Revenue ton-miles (billions)

     124.0         132.7         (7)%    

Operating ratio

     69.1         70.5         (1.4)pts  

Employees (average)

     46,437         45,642         2 %    

Customer satisfaction index

     94         93         1 pt   

Average Train Speed – Average train speed is calculated by dividing train miles by hours operated on our main lines between terminals. Average train speed, as reported to the Association of American Railroads (AAR), improved slightly in the first quarter of 2013 versus 2012.

Average Terminal Dwell Time – Average terminal dwell time is the average time that a rail car spends at our terminals. Lower average terminal dwell time improves asset utilization and service. Average terminal dwell time increased 4% in the first quarter of 2013 compared to 2012, primarily due to continuing growth of manifest traffic concentrated in the Southern Region.

Average Rail Car Inventory – Average rail car inventory is the daily average number of rail cars on our lines, including rail cars in storage. Traffic volumes and rail car productivity influence inventory levels. Productivity may be improved through faster train speeds, lower terminal dwell, lower customer dwell and lower hold dwell. Average rail car inventory decreased 4% in the first quarter as volume declined 2%, despite a shift in traffic mix to more manifest shipments, which have longer cycle times.

Gross and Revenue Ton-Miles – Gross ton-miles are calculated by multiplying the weight of loaded and empty freight cars by the number of miles hauled. Revenue ton-miles are calculated by multiplying the weight of freight by the number of tariff miles. Gross ton-miles declined 5% during the first quarter of 2013 compared to the same period in 2012, while revenue ton-miles decreased 7% and carloads declined 2%. Changes in commodity mix drove the variance in year-over-year declines between gross ton-miles, revenue ton-miles and carloads.

Operating Ratio – Operating ratio is our operating expenses reflected as a percentage of operating revenue. Our operating ratio improved 1.4 points to a record low 69.1% in the first quarter of 2013 versus the same period of 2012. Core pricing gains more than offset the impact of inflation and lower volume in the first quarter of 2013 versus the same period in 2012.

Employees – Employee levels increased 2% in the first quarter of 2013 compared to the same period in 2012, driven by a shift in our traffic mix which requires more resources, largely concentrated in the Southern region. In addition, increased work on capital projects contributed to the higher employee levels.

Customer Satisfaction Index – Our customer satisfaction survey asks customers to rate how satisfied they are with our performance over the last 12 months on a variety of attributes. A higher score indicates higher customer satisfaction. The improvement in survey results generally reflects customer recognition of our service quality.

 

25


Table of Contents

Debt to Capital / Adjusted Debt to Capital

 

Millions, Except Percentages

   Mar. 31,
2013
     Dec. 31,
2012
 

Debt (a)

   $ 9,861       $ 8,997   

Equity

     20,144         19,877   

Capital (b)

   $ 30,005       $ 28,874   

 

Debt to capital (a/b)

     32.9%          31.2%    
                   
     

Millions, Except Percentages

   Mar. 31,
2013
     Dec. 31,
2012
 

Debt

   $ 9,861       $ 8,997   

Net present value of operating leases

     3,044         3,096   

Unfunded pension and OPEB

     662         679   

Adjusted debt (a)

     13,567         12,772   

Equity

     20,144         19,877   

Adjusted capital (b)

   $     33,711       $     32,649   

 

Adjusted debt to capital (a/b)

     40.2%          39.1%    
                   

Adjusted debt to capital is a non-GAAP financial measure under SEC Regulation G and Item 10 of SEC Regulation S-K, and may not be defined and calculated by other companies in the same manner. We believe this measure is important to management and investors in evaluating the total amount of leverage in our capital structure, including off-balance sheet lease obligations, which we generally incur in connection with financing the acquisition of locomotives and freight cars and certain facilities. Operating leases were discounted using 5.6% at March 31, 2013 and 6.0% at December 31, 2012. The discount rate reflects our effective interest rate. We monitor the ratio of adjusted debt to capital as we manage our capital structure to balance cost-effective and efficient access to the capital markets with the Corporation’s overall cost of capital. Adjusted debt to capital should be considered in addition to, rather than as a substitute for, debt to capital. The tables above provide reconciliations from debt to capital to adjusted debt to capital.

LIQUIDITY AND CAPITAL RESOURCES

Financial Condition

 

Cash Flows

Millions,

for the Three Months Ended March 31

   2013      2012  

Cash provided by operating activities

   $       1,524       $       1,404   

Cash used in investing activities

     (800)         (830)   

Cash provided by/(used in) financing activities

     130         (796)   

 

Net change in cash and cash equivalents

   $ 854       $ (222)   
                   

Operating Activities

Higher net income in the first three months of 2013 increased cash provided by operating activities compared to the same period of 2012.

Investing Activities

Lower capital investments in the first three months of 2013 drove the decrease in cash used in investing activities compared to the same period in 2012.

 

26


Table of Contents

The table below details cash capital investments:

 

Millions,

for the Three Months Ended March 31,

   2013      2012  

Rail and other track material

   $ 174       $ 177   

Ties

     112         108   

Ballast

     46         46   

Other [a]

     46         48   

Total road infrastructure replacements

     378         379   

Line expansion and other capacity projects

     93         94   

Commercial facilities

     19         28   

Total capacity and commercial facilities

     112         122   

Locomotives and freight cars

     150         177   

Positive train control

     96         75   

Technology and other

     46         51   

 

Total cash capital investments

   $       782       $       804   
                   

 

[a]

Other includes bridges and tunnels, signals, other road assets, and road work equipment.

Capital Plan – In 2013, we intend to make new capital investments of approximately $3.6 billion under our capital plan, which may be revised if business conditions warrant or if new laws or regulations affect our ability to generate sufficient returns on these investments.

Financing Activities

Cash provided by financing activities increased in the first three months of 2013 versus the same period of 2012 driven by the issuance of debt in 2013 of $944 million compared to none in 2012.

Free Cash Flow – Free cash flow is defined as cash provided by operating activities less cash used in investing activities and dividends paid. Free cash flow was higher in 2013 due to higher net income.

Free cash flow is not considered a financial measure under accounting principles generally accepted in the U.S. (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,

for the Three Months Ended March 31,

   2013      2012  

Cash provided by operating activities

   $       1,524       $         1,404   

Cash used in investing activities

     (800)         (830)   

Dividends paid

     (323)         (289)   

 

Free cash flow

   $ 401       $ 285   
                   

Credit Facilities – At March 31, 2013, we had $1.8 billion of credit available under our revolving credit facility (the facility), which is designated for general corporate purposes and supports the issuance of commercial paper. We did not draw on the facility at any time during the three months ended March 31, 2013. Commitment fees and interest rates payable under the facility are similar to fees and rates available to comparably rated, investment-grade borrowers. The facility allows for borrowings at floating rates based on London Interbank Offered Rates, plus a spread, depending upon our senior unsecured debt ratings. The facility matures in 2015 under a four year term and requires the Corporation to maintain a debt-to-net-worth coverage ratio as a condition to making a borrowing. At March 31, 2013, and December 31, 2012 (and at all times during the first quarter), we were in compliance with this covenant.

 

27


Table of Contents

The definition of debt used for purposes of calculating the debt-to-net-worth coverage ratio includes, among other things, certain credit arrangements, capital leases, guarantees and unfunded and vested pension benefits under Title IV of ERISA. At March 31, 2013, the debt-to-net-worth coverage ratio allowed us to carry up to $40.3 billion of debt (as defined in the facility), and we had $10.4 billion of debt (as defined in the facility) outstanding at that date. Under our current capital plans, we expect to continue to satisfy the debt-to-net-worth coverage ratio; however, many factors beyond our reasonable control could affect our ability to comply with this provision in the future. The facility does not include any other financial restrictions, credit rating triggers (other than rating-dependent pricing), or any other provision that could require us to post collateral. The facility also includes a $75 million cross-default provision and a change-of-control provision.

During the three months ended March 31, 2013, we did not issue or repay any commercial paper, and at March 31, 2013, we had no commercial paper outstanding. Our revolving credit facility supports our outstanding commercial paper balances, and, unless we change the terms of our commercial paper program, our aggregate issuance of commercial paper will not exceed the amount of borrowings available under the facility.

Shelf Registration Statement and Significant New Borrowings – We filed a new automatic shelf registration statement that became effective on February 8, 2013. The Board of Directors authorized the issuance of up to $4 billion of debt securities, replacing the $1.4 billion of authority remaining under our shelf registration filed in February 2010. SEC rules require UPC, a large accelerated filer, to file a new shelf registration statement every three years. Under the current shelf registration, we may issue, from time to time, any combination of debt securities, preferred stock, common stock, or warrants for debt securities or preferred stock in one or more offerings. We have no immediate plans to issue equity securities; however, we will continue to explore opportunities to replace existing debt or access capital through issuances of debt securities under our shelf registration, and, therefore, we may issue additional debt securities at any time.

On March 15, 2013, we issued $325 million of 2.75% unsecured fixed-rate notes and $325 million of 4.25% unsecured fixed-rate notes under our shelf registration statement. The 2.75% notes will mature on April 15, 2023, and the 4.25% notes will mature on April 15, 2043. Proceeds from this offering are for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase program. These debt securities include change-of-control provisions. At March 31, 2013, we had remaining authority from our Board of Directors to issue up to $3.35 billion of debt securities under the shelf registration.

At March 31, 2013 and December 31, 2012, we reclassified as long-term debt approximately $400 million and $100 million, respectively, of debt due within one year that we intend to refinance. This reclassification reflects our ability and intent to refinance any short-term borrowings and certain current maturities of long-term debt on a long-term basis.

Receivables Securitization Facility – The Railroad maintains a $600 million, 364-day receivables securitization facility under which it sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a wholly-owned, bankruptcy-remote subsidiary which may subsequently transfer, without recourse an undivided interest in accounts receivable to investors. The amount outstanding under the facility was $400 million and $100 million at March 31, 2013 and December 31, 2012, respectively. The amount outstanding under the facility was supported by $1.2 billion and $1.1 billion of accounts receivable as collateral at March 31, 2013 and December 31, 2012, respectively, which, as a retained interest, is included in accounts receivable, net in our Condensed Consolidated Statements of Financial Position.

The outstanding amounts the Railroad is allowed to maintain under the facility, with a maximum of $600 million, may fluctuate based on the availability of eligible receivables and is directly affected by business volumes and credit risks, including receivables payment quality measures such as default and dilution ratios. If default or dilution ratios increase one percent, amounts allowed to be outstanding under the facility would not materially change.

The costs of the receivables securitization facility include interest, which will vary based on prevailing commercial paper rates, program fees paid to banks, commercial paper issuing costs, and fees for

 

28


Table of Contents

unused commitment availability. The costs of the receivables securitization facility are included in interest expense and were $1 million for the three months ended March 31, 2013 and 2012.

The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI.

In July 2012, the receivables securitization facility was renewed for an additional 364-day period at comparable terms and conditions.

Share Repurchase Program

Effective April 1, 2011, our Board of Directors authorized the repurchase of 40 million shares of our common stock by March 31, 2014, replacing our previous repurchase program. As of March 31, 2013, we repurchased a total of $7.5 billion of our common stock since the commencement of our repurchase programs. The table below represents shares repurchased under the new repurchase program.

 

      Number of Shares Purchased      Average Price Paid  
       2013        2012        2013        2012  

First quarter

     2,881,400        3,917,369      $     136.58      $ 110.64  

Remaining number of shares that may be repurchased under current authority

  

     12,154,549  
                                     

Management’s assessments of market conditions and other pertinent facts guide the timing and volume of all repurchases. We expect to fund any share repurchases under this program through cash generated from operations, the sale or lease of various operating and non-operating properties, debt issuances, and cash on hand. Repurchased shares are recorded in treasury stock at cost, which includes any applicable commissions and fees.

Off-Balance Sheet Arrangements, Contractual Obligations, and Commercial Commitments

As described in the notes to the Condensed Consolidated Financial Statements and as referenced in the tables below, we have contractual obligations and commercial commitments that may affect our financial condition. However, based on our assessment of the underlying provisions and circumstances of our contractual obligations and commercial commitments, including material sources of off-balance sheet and structured finance arrangements, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity. In addition, our commercial obligations, financings, and commitments are customary transactions that are similar to those of other comparable corporations, particularly within the transportation industry.

 

29


Table of Contents

The following tables identify material obligations and commitments as of March 31, 2013:

 

Contractual Obligations

 

Millions

          

Apr. 1

through

Dec. 31,

2013

     Payments Due by Dec. 31,  
   Total         2014      2015      2016      2017      After
2017
     Other  

Debt [a]

   $ 13,942       $ 711       $ 926       $ 655       $ 791       $ 923      $ 9,936       $   

Operating leases [b]

     4,080         329         462         419         384         350        2,136           

Capital lease obligations [c]

     2,333         174         265         253         232         243        1,166           

Purchase obligations [d]

     5,502         2,260         1,594         379         337         210        690         32   

Other postretirement benefits [e]

     441         32         44         45         45         46        229           

Income tax contingencies [f]

     119                                                         119   

 

Total contractual obligations

   $   26,417       $   3,506      $   3,291      $   1,751      $   1,789      $   1,772      $   14,157      $   151   
                                                                         

 

[a]

Excludes capital lease obligations of $1,772 million and unamortized discount of ($368) million. Includes an interest component of $5,485 million.

 

[b]

Includes leases for locomotives, freight cars, other equipment, and real estate.

 

[c]

Represents total obligations, including interest component of $561 million.

 

[d]

Purchase obligations include locomotive maintenance contracts; purchase commitments for fuel purchases, locomotives, ties, ballast, and rail; and agreements to purchase other goods and services. For amounts where we cannot reasonably estimate the year of settlement, they are reflected in the Other column.

 

[e]

Includes estimated other postretirement, medical, and life insurance payments and payments made under the unfunded pension plan for the next ten years.

 

[f]

Future cash flows for income tax contingencies reflect the recorded liabilities and assets for unrecognized tax benefits, including interest and penalties, as of March 31, 2013. For amounts where the year of settlement is uncertain, they are reflected in the Other column.

 

             

Apr. 1

through

Dec. 31,

2013

    

 

Amount of Commitment Expiration by Dec. 31,

 

Other Commercial Commitments

 

Millions

   Total         2014      2015      2016      2017      After
2017
 

Credit facilities [a]

   $     1,800       $       $       $ 1,800       $       $       $   

Receivables securitization facility [b]

     600         600                                           

Guarantees [c]

     307                214         12         30         10         33   

Standby letters of credit [d]

     24                15                                   

 

Total commercial commitments

   $ 2,731       $ 617       $ 229       $ 1,812       $     30       $     10       $     33   
                                                                

 

[a]

None of the credit facility was used as of March 31, 2013.

 

[b]

$400 million of the receivables securitization facility was utilized at March 31, 2013, which is accounted for as debt. The full program matures in July 2013.

 

[c]

Includes guaranteed obligations related to our headquarters building, equipment financings, and affiliated operations.

 

[d]

None of the letters of credit were drawn upon as of March 31, 2013.

 

30


Table of Contents

OTHER MATTERS

Asserted and Unasserted Claims – Various claims and lawsuits are pending against us and certain of our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our consolidated results of operations, financial condition, or liquidity; however, to the extent possible, where asserted and unasserted claims are considered probable and where such claims can be reasonably estimated, we have recorded a liability. We do not expect that any known lawsuits, claims, environmental costs, commitments, contingent liabilities, or guarantees will have a material adverse effect on our consolidated results of operations, financial condition, or liquidity after taking into account liabilities and insurance recoveries previously recorded for these matters.

Indemnities – Our maximum potential exposure under indemnification arrangements, including certain tax indemnifications, can range from a specified dollar amount to an unlimited amount, depending on the nature of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions.

Accounting Pronouncements – On February 5, 2013, the FASB issued Accounting Standards Update 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), which adds additional disclosure requirements for items reclassified out of accumulated other comprehensive income. We adopted this ASU during the three months ended March 31, 2013.

CAUTIONARY INFORMATION

Certain statements in this report, and statements in other reports or information filed or to be filed with the SEC (as well as information included in oral statements or other written statements made or to be made by us), are, or will be, forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements and information include, without limitation, the statements and information set forth under the caption “Liquidity and Capital Resources” in Item 2 regarding our capital plan and statements under the caption “Off-Balance Sheet Arrangements, Contractual Obligations, and Commercial Commitments”. Forward-looking statements and information also include any other statements or information in this report regarding: expectations as to operational or service improvements; expectations regarding the effectiveness of steps taken or to be taken to improve operations, service, infrastructure improvements, and transportation plan modifications; expectations as to cost savings, revenue growth, and earnings; the time by which goals, targets, or objectives will be achieved; projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, future economic performance, and general economic conditions; proposed new products and services; estimates of costs relating to environmental remediation and restoration; estimates and expectations regarding tax matters, expectations that claims, litigation, environmental costs, commitments, contingent liabilities, labor negotiations or agreements, or other matters will not have a material adverse effect on our consolidated results of operations, financial condition, or liquidity and any other similar expressions concerning matters that are not historical facts.

Forward-looking statements and information reflect the good faith consideration by management of currently available information, and may be based on underlying assumptions believed to be reasonable under the circumstances. However, such information and assumptions (and, therefore, such forward-looking statements and information) are or may be subject to variables or unknown or unforeseeable events or circumstances over which management has little or no influence or control. The Risk Factors in Item 1A of our 2012 Annual Report on Form 10-K, filed February 8, 2013, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements, and this report, including this Item 2, should be read in conjunction with these Risk Factors. To the extent circumstances require or we deem it otherwise necessary, we will update or amend these risk factors in a Form 10-Q or Form 8-K. Information regarding new risk factors or material changes to our risk factors, if any, is set forth in Item 1A of Part II of this report. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times that, or by which, such performance or results will be achieved. Forward-looking information is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.

 

31


Table of Contents

Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to the Quantitative and Qualitative Disclosures About Market Risk previously disclosed in our 2012 Annual Report on Form 10-K.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer (CEO) and Executive Vice President – Finance and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based upon that evaluation, the CEO and the CFO concluded that, as of the end of the period covered by this report, the Corporation’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Additionally, the CEO and CFO determined that there were no changes to the Corporation’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Environmental Matters

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

Information concerning environmental claims and contingencies and estimated remediation costs is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Environmental, Item 7 of our 2012 Annual Report on Form 10-K.

 

32


Table of Contents

Other Matters

Antitrust Litigation - As 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. (one railroad was eventually dropped from 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 total number of complaints stands at 30. These suits allege that the named railroads engaged in price-fixing by establishing common fuel surcharges for certain rail traffic.

In addition to suits filed by direct purchasers of rail transportation, a few of the suits involved plaintiffs alleging that they are or were indirect purchasers of rail transportation and sought to represent a purported class of indirect purchasers of rail transportation that paid fuel surcharges. These complaints added allegations under state antitrust and consumer protection laws. On November 6, 2007, the Judicial Panel on Multidistrict Litigation ordered that all of the rail fuel surcharge cases be transferred to Judge Paul Friedman of the U.S. District Court in the District of Columbia for coordinated or consolidated pretrial proceedings. Following numerous hearings and rulings, Judge Friedman dismissed the complaints of the indirect purchasers, which the indirect purchasers appealed. On April 16, 2010, the U.S. Court of Appeals for the District of Columbia affirmed Judge Friedman’s ruling dismissing the indirect purchasers’ claims based on various state laws.

With respect to the direct purchasers’ complaint, Judge Friedman conducted a two-day hearing on October 6 and 7, 2010, on the class certification issue and the railroad defendants’ motion to exclude evidence of interline communications. On April 7, 2011, Judge Friedman issued an order deferring any decision on class certification until the Supreme Court issued its decision in the Wal-Mart employment discrimination case.

On June 21, 2012, Judge Friedman issued his decision certifying a class of plaintiffs to be represented by eight named plaintiffs. The class includes 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 1, 2008. This is a procedural ruling, which does not affirm any of the claims asserted by the plaintiffs and does not affect the ability of the railroad defendants to disprove the allegations made by the plaintiffs. 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 28, 2012, a panel of the Circuit Court of the District of Columbia referred the petition to a merits panel of the court to address the issues in the petition and to address whether the district court properly granted class certification. The Circuit Court will hear oral argument on May 3, 2013.

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 complaint named the Railroad and one other U.S. Class I Railroad as defendants and alleged that the named railroads engaged in price-fixing and monopolistic practices in connection with fuel surcharge programs and pricing of shipments of certain commodities, including coal and petroleum coke. The complaint seeks injunctive relief and payment of damages of over $30 million, and other unspecified damages, including treble damages. Some of the allegations in the complaint are addressed in the existing fuel surcharge litigation referenced above. The complaint also included additional unrelated allegations regarding alleged limitations on competition for shipments of Oxbow’s commodities. Judge Friedman, who presides over the fuel surcharge matter described above, also presides over this matter. On February 26, 2013, Judge Friedman granted the defendants’ motion to dismiss Oxbow’s complaint for failure to state properly a claim under the antitrust laws. However, the dismissal was without prejudice to refile the complaint. Judge Friedman has approved a schedule that allows Oxbow to file a revised complaint by May 1, 2013. In the event Oxbow files a revised complaint, we then will decide whether to file another motion to dismiss or otherwise respond to the complaint.

We 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.

 

33


Table of Contents

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in our 2012 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities – The following table presents common stock repurchases during each month for the first quarter of 2013:

 

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 That May Be

Purchased Under Current

Authority [b]

 

Jan. 1 through Jan. 31

     258,373       $ 133.13         250,000         14,785,949   

Feb. 1 through Feb. 28

     1,580,418         134.60         1,300,000         13,485,949   

Mar. 1 through Mar. 31

     1,379,377         138.96         1,331,400         12,154,549   

 

Total

     3,218,168       $ 136.35         2,881,400         N/A    
                                     

 

[a]

Total number of shares purchased during the quarter includes 336,768 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]

On April 1, 2011, our Board of Directors authorized the repurchase of up to 40 million shares of our common stock by March 31, 2014. 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.

Dividend Restrictions – Our revolving credit facility includes a debt-to-net worth covenant that, under certain circumstances, restricts the payment of cash dividends to our shareholders. The amount of retained earnings available for dividends was $14.9 billion and $15.1 billion at March 31, 2013 and December 31, 2012, respectively.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

 

34


Table of Contents

Item 6. Exhibits

 

Exhibit No.

  

Description

Filed with this Statement

10(a)

  

Deferred Compensation Plan (409A Non-Grandfathered Component) of Union Pacific Corporation, as amended March 1, 2013.

10(b)

  

Deferred Compensation Plan (409A Grandfathered Component) of Union Pacific Corporation, as amended March 1, 2013.

10(c)

  

Supplemental Thrift Plan (409A Non-Grandfathered Component) of Union Pacific Corporation, as amended March 1, 2013.

10(d)

  

Supplemental Thrift Plan (409A Grandfathered Component) of Union Pacific Corporation, as amended March 1, 2013.

10(e)

  

Supplemental Pension Plan for Officers and Managers (409A Non-Grandfathered Component) of Union Pacific Corporation and Affiliates, as amended February 1, 2013 and March 1, 2013.

10(f)

  

Supplemental Pension Plan for Officers and Managers (409A Grandfathered Component) of Union Pacific Corporation and Affiliates, as amended February 1, 2013 and March 1, 2013.

10(g)

  

Union Pacific Corporation 2004 Stock Incentive Plan, as amended March 1, 2013.

10(h)

  

Union Pacific Corporation 2001 Stock Incentive Plan, as amended March 1, 2013.

12

  

Ratio of Earnings to Fixed Charges for the Three Months Ended March 31, 2013 and 2012.

31(a)

  

Certifications Pursuant to Rule 13a-14(a), of the Exchange Act, as Adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—John J. Koraleski.

31(b)

  

Certifications Pursuant to Rule 13a-14(a), of the Exchange Act, as Adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Robert M. Knight, Jr.

32

  

Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – John J. Koraleski and Robert M. Knight, Jr.

101

  

eXtensible Business Reporting Language (XBRL) documents submitted electronically: 101.INS (XBRL Instance Document), 101.SCH (XBRL Taxonomy Extension Schema Document), 101.CAL (XBRL Calculation Linkbase Document), 101.LAB (XBRL Taxonomy Label Linkbase Document), 101.DEF (XBRL Taxonomy Definition Linkbase Document) and 101.PRE (XBRL Taxonomy Presentation Linkbase Document). The following financial and related information from Union Pacific Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2013 (filed with the SEC on April 18, 2013), is formatted in XBRL and submitted electronically herewith: (i) Condensed Consolidated Statements of Income for the periods ended March 31, 2013 and 2012, (ii) Condensed Consolidated Statements of Comprehensive Income for the periods ended March 31, 2013 and 2012, (iii) Condensed Consolidated Statements of Financial Position at March 31, 2013 and December 31, 2012, (iv) Condensed Consolidated Statements of Cash Flows for the periods ended March

 

35


Table of Contents
  

31, 2013 and 2012, (v) Condensed Consolidated Statements of Changes in Common Shareholders’ Equity for the periods ended March 31, 2013 and 2012, and (vi) the Notes to the Condensed Consolidated Financial Statements.

Incorporated by Reference

3(a)

  

Revised Articles of Incorporation of UPC, as amended through June 27, 2011, are incorporated herein by reference to Exhibit 3(a) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.

3(b)

  

By-Laws of UPC, as amended, effective May 14, 2009, are incorporated herein by reference to Exhibit 3.2 to the Corporation’s Current Report on Form 8-K dated May 15, 2009.

4(a)

  

Form of 2.75% Note due 2023 is incorporated herein by reference to Exhibit 4.1 to the Corporation’s Current Report on Form 8-K dated March 15, 2013.

4(b)

  

Form of 4.25% Note due 2043 is incorporated herein by reference to Exhibit 4.2 to the Corporation’s Current Report on Form 8-K dated March 15, 2013.

 

36


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: April 18, 2013

UNION PACIFIC CORPORATION

(Registrant)

By

 

  /s/ Robert M. Knight, Jr.

 

  Robert M. Knight, Jr.

 

  Executive Vice President – Finance and

 

  Chief Financial Officer

 

  (Principal Financial Officer)

By

 

  /s/ Jeffrey P. Totusek

 

  Jeffrey P. Totusek

 

  Vice President and Controller

 

  (Principal Accounting Officer)

 

37

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki