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Union Pacific 10-Q 2013
Form 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 June 30, 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 July 12, 2013, there were 463,844,338 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 June 30, 2013 and 2012

     3   
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the Three Months Ended June  30, 2013 and 2012

     3   
 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Six Months Ended June 30, 2013 and 2012

     4   
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the Six Months Ended June  30, 2013 and 2012

     4   
 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
At June 30, 2013 and December  31, 2012

     5   
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2013 and 2012

     6   
 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON
SHAREHOLDERS’ EQUITY (Unaudited)
     For the Six Months Ended June 30, 2013 and 2012

     7   
 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

     8   

Item 2.

 

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

     22   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     34   

Item 4.

 

Controls and Procedures

     34   
PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     34   

Item 1A.

 

Risk Factors

     36   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     36   

Item 3.

 

Defaults Upon Senior Securities

     37   

Item 4.

 

Mine Safety Disclosures

     37   

Item 5.

 

Other Information

     37   

Item 6.

 

Exhibits

     38   

Signatures

     39   

Certifications

  

 

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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 June 30,

   2013      2012  

Operating revenues:

     

Freight revenues

   $         5,153       $         4,913   

Other revenues

     317         308   

 

Total operating revenues

     5,470         5,221   
                   

Operating expenses:

     

Compensation and benefits

     1,185         1,151   

Fuel

     863         882   

Purchased services and materials

     585         542   

Depreciation

     438         433   

Equipment and other rents

     302         299   

Other

     219         190   

 

Total operating expenses

     3,592         3,497   
                   

Operating income

     1,878         1,724   

Other income (Note 6)

     23         21   

Interest expense

     (133)         (135)   

Income before income taxes

     1,768         1,610   

Income taxes

     (662)         (608)   

 

Net income

   $ 1,106       $ 1,002   
                   

Share and Per Share (Note 8):

     

Earnings per share - basic

   $ 2.38       $ 2.11   

Earnings per share - diluted

   $ 2.37       $ 2.10   

Weighted average number of shares - basic

     465.3         473.8   

Weighted average number of shares - diluted

     467.6         477.2   

 

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 June 30,

   2013      2012  

 

Net income

   $           1,106       $         1,002   
                   

Other comprehensive income/(loss):

     

Defined benefit plans

     17          

Foreign currency translation

            (15)   

 

Total other comprehensive income/(loss) [a]

     21         (15)   
                   

 

Comprehensive income

   $ 1,127       $ 987   
                   

 

[a]

Net of deferred taxes of $13 million and $(9) million during the three months ended June 30, 2013, and 2012, respectively.

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

 

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Table of Contents

Condensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, Except Per Share Amounts,

for the Six Months Ended June 30,

   2013      2012  

Operating revenues:

     

Freight revenues

   $         10,137      $         9,736   

Other revenues

     623         597   

 

Total operating revenues

     10,760         10,333   
                   

Operating expenses:

     

Compensation and benefits

     2,401         2,362   

Fuel

     1,763         1,808   

Purchased services and materials

     1,142         1,068   

Depreciation

     872         860   

Equipment and other rents

     615         595   

Other

     456         406   

 

Total operating expenses

     7,249         7,099   
                   

Operating income

     3,511         3,234   

Other income (Note 6)

     63         37   

Interest expense

     (261)         (270)   

Income before income taxes

     3,313         3,001   

Income taxes

     (1,250)         (1,136)   

 

Net income

   $ 2,063       $ 1,865   
                   

Share and Per Share (Note 8):

     

Earnings per share - basic

   $ 4.42       $ 3.92   

Earnings per share - diluted

   $ 4.40       $ 3.89   

Weighted average number of shares - basic

     466.6         475.8   

Weighted average number of shares - diluted

     469.1         479.3   

Dividends declared per share

   $ 1.38       $ 1.20   
                   

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions,

for the Six Months Ended June 30,

   2013      2012  

 

Net income

   $           2,063       $         1,865   
                   

Other comprehensive income/(loss):

     

Defined benefit plans

     31         (7)   

Foreign currency translation

             

Other comprehensive income/(loss) [a]

     38         (7)   
                   

 

Comprehensive income

   $ 2,101       $ 1,858   
                   

 

[a]

Net of deferred taxes of $25 million and $(1) million during the six months ended June 30, 2013, and 2012, respectively.

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

 

4


Table of Contents

Condensed Consolidated Statements of Financial Position (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions, Except Share and Per Share Amounts

   June 30,
2013
     December 31,
2012
 

Assets

     

Current assets:

     

Cash and cash equivalents

   $         1,845       $         1,063   

Accounts receivable, net (Note 10)

     1,468         1,331   

Materials and supplies

     654         660   

Current deferred income taxes (Note 7)

     242         263   

Other current assets

     334         297   

 

Total current assets

     4,543         3,614   
                   

Investments

     1,272         1,259   

Net properties (Note 11)

     42,911         41,997   

Other assets

     300         283   

 

Total assets

   $ 49,026       $ 47,153   
                   

Liabilities and Common Shareholders’ Equity

     

Current liabilities:

     

Accounts payable and other current liabilities (Note 12)

   $ 3,092       $ 2,923   

Debt due within one year (Note 14)

     733         196   

 

Total current liabilities

     3,825         3,119   
                   

Debt due after one year (Note 14)

     9,076         8,801   

Deferred income taxes (Note 7)

     13,477         13,108   

Other long-term liabilities

     2,124         2,248   

Commitments and contingencies (Note 16)

                 

 

Total liabilities

     28,502         27,276   
                   

Common shareholders’ equity:

     

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

     

554,840,853 and 554,558,034 issued; 464,363,763 and 469,465,273

     

outstanding, respectively

     1,387         1,386   

Paid-in-surplus

     4,162         4,113   

Retained earnings

     23,690         22,271   

Treasury stock

     (7,567)         (6,707)   

Accumulated other comprehensive loss (Note 9)

     (1,148)         (1,186)   

 

Total common shareholders’ equity

     20,524         19,877   
                   

Total liabilities and common shareholders’ equity

   $ 49,026       $ 47,153   
                   

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

 

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Table of Contents

Condensed Consolidated Statements of Cash Flows (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

Millions,

for the Six Months Ended June 30,

   2013      2012  

Operating Activities

     

Net income

   $         2,063       $         1,865   

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

     

Depreciation

     872         860   

Deferred income taxes and unrecognized tax benefits

     365         274   

Other operating activities, net

     (83)         (25)   

Changes in current assets and liabilities:

     

Accounts receivable, net

     (137)         (96)   

Materials and supplies

            (32)   

Other current assets

     (37)         (99)   

Accounts payable and other current liabilities

     169         29   

Cash provided by operating activities

     3,218         2,776   

Investing Activities

     

Capital investments

     (1,730)         (1,816)   

Proceeds from asset sales

     42         30   

Other investing activities, net

     (51)         (96)   

Cash used in investing activities

     (1,739)         (1,882)   

Financing Activities

     

Debt issued (Note 14)

     944         695   

Common share repurchases (Note 17)

     (833)         (833)   

Dividends paid

     (646)         (575)   

Debt repaid

     (139)         (193)   

Other financing activities, net

     (23)         (4)   

Cash used in financing activities

     (697)         (910)   

Net change in cash and cash equivalents

     782         (16)   

Cash and cash equivalents at beginning of year

     1,063         1,217   

Cash and cash equivalents at end of period

   $ 1,845       $ 1,201   

Supplemental Cash Flow Information

     

Non-cash investing and financing activities:

     

Cash dividends declared but not yet paid

   $ 316       $ 280   

Capital investments accrued but not yet paid

     119         129   

Common shares repurchased but not yet paid

     24         15   

Cash paid for:

     

Income taxes, net of refunds

   $ (715)       $ (766)   

Interest, net of amounts capitalized

     (251)         (267)   
                   

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

 

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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

                        1,865                       1,865   

Other comp. loss

                                      (7)        (7)   

Conversion, stock option
exercises, forfeitures, and other

    0.3        1.1              46               24               70   

Share repurchases (Note 17)

           (7.7)                             (848)               (848)   

Cash dividends declared
($1.20 per share)

                                (571)                      (571)   

Balance at June 30, 2012

    554.6        (81.0)      $ 1,386       $ 4,077       $ 20,802       $ (6,117)      $ (1,061)      $ 19,087    
   
                                                                 

Balance at January 1, 2013

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

Net income

                        2,063                       2,063   

Other comp. income

                                      38        38   

Conversion, stock option
exercises, forfeitures, and other

    0.2        0.6              49               (3)               47   

Share repurchases (Note 17)

           (5.9)                             (857)               (857)   

Cash dividends declared
($1.38 per share)

                                (644)                      (644)   

Balance at June 30, 2013

    554.8        (90.4)      $ 1,387       $ 4,162       $ 23,690       $ (7,567)      $ (1,148)      $ 20,524    
                                                                 

 

[a]

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

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

 

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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 six months ended June 30, 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 analyze revenue by commodity group, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network. The following table provides freight revenue by commodity group:

 

     

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 

Millions

   2013      2012      2013      2012  

Agricultural

   $ 784       $ 854       $ 1,568       $ 1,712   

Automotive

     534         475         1,021         905   

Chemicals

     890         795         1,763         1,563   

Coal

     975         869         1,911         1,864   

Industrial Products

     977         917         1,893         1,780   

Intermodal

     993         1,003         1,981         1,912   

Total freight revenues

     5,153         4,913         10,137         9,736   

Other revenues

     317         308         623         597   

 

Total operating revenues

   $     5,470       $     5,221       $     10,760       $     10,333   
                                     

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 $519 million and $503 million, respectively for the three months ended June 30, 2013, and June 30, 2012, and $1,024 million and $985 million, respectively for the six months ended June 30, 2013, and June 30, 2012.

 

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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:

 

     

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 

Millions

   2013      2012      2013      2012  

Stock-based compensation, before tax:

           

Stock options

   $      $      $ 10       $  

Retention awards

     20         20         41         40   

 

Total stock-based compensation, before tax

   $ 26       $ 24       $ 51       $ 49   

 

Excess tax benefits from equity compensation plans

   $     19       $     14       $     65       $     53   
                                     

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 six months ended June 30, 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

    (853)        51.48        N/A         N/A    

Forfeited or expired

    (22)        106.00        N/A         N/A    

 

Outstanding at June 30, 2013

    3,986        $    78.01        6.1 yrs.         $    304   

 

Vested or expected to vest at June 30, 2013

    3,986        $    77.99        6.1 yrs.         $    304   

 

Options exercisable at June 30, 2013

    2,839        $    61.11        5.0 yrs.         $    265   
                                 

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 June 30, 2013, are subject to performance or market-based vesting conditions.

 

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At June 30, 2013, there was $26 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.6 years. Additional information regarding stock option exercises appears in the table below:

 

     

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 

Millions

   2013      2012      2013      2012  

Intrinsic value of stock options exercised

     $      54         $      41         $      82         $      103   

Cash received from option exercises

     17         24         31         45   

Treasury shares repurchased for employee payroll taxes

     (7)         (8)         (12)         (16)   

Tax benefit realized from option exercises

     21         15         32         39   

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 six months ended June 30, 2013, were as follows:

 

      Shares
(thous.)
    

Weighted-Average

Grant-Date Fair Value

 

Nonvested at January 1, 2013

     2,355         $    73.27   

Granted

     421         132.02   

Vested

     (850)         47.50   

Forfeited

     (48)         81.74   

 

Nonvested at June 30, 2013

     1,878         $    97.89   
                   

Retention awards are granted at no cost to the employee or non-employee director and vest over periods lasting up to four years. At June 30, 2013, there was $95 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 2.0 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%     
          

 

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Changes in our performance retention awards during the six months ended June 30, 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

     (32)         96.85   

 

Nonvested at June 30, 2013

     946         $  107.44   
                   

At June 30, 2013, there was $55 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.6 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 cost were as follows:

 

     

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 

Millions

   2013      2012      2013      2012  

Service cost

     $        18         $        14         $        37         $        27   

Interest cost

     33         35         66         70   

Expected return on plan assets

     (50)         (48)         (101)         (95)   

Amortization of:

           

Prior service cost

                           

Actuarial loss

     27         21         53         42   

 

Net periodic pension cost

     $        28         $        22         $        55         $        44   
                                     

 

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The components of our net periodic OPEB cost were as follows:

 

     

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 

Millions

   2013      2012      2013      2012  

Service cost

   $         1       $         1       $         2       $         2   

Interest cost

                           

Amortization of:

           

Prior service credit

     (4)         (4)         (8)         (8)   

Actuarial loss

                           

 

Net periodic OPEB cost

   $      $      $      $  
                                     

Cash Contributions

For the six months ended June 30, 2013, we made $70 million of cash contributions to the qualified pension plan. Any additional contributions made in the second half of the year will be based on cash generated from operations and financial market considerations. All contributions made to the qualified pension plan during the six months ended June 30, 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 June 30, 2013, we do not have minimum cash funding requirements for 2013.

6. Other Income

Other income included the following:

 

     

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 

Millions

   2013      2012      2013 [a]      2012  

Rental income

   $       21       $       21       $       58       $       41   

Net gain on non-operating asset dispositions

            11                12   

Early extinguishment of debt

     (1)         (2)         (1)         (2)   

Non-operating environmental costs and other

            (9)                (14)   

 

Total

   $ 23       $ 21       $ 63       $ 37   
                                     

 

[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 2006 through 2010.

At June 30, 2013, our liability for unrecognized tax benefits was $114 million. Of that amount, $9 million is classified as a current asset in the Condensed Consolidated Statements of Financial Position.

 

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8. Earnings Per Share

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

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 

Millions, Except Per Share Amounts

   2013      2012      2013      2012  

 

Net income

   $       1,106       $       1,002       $       2,063       $       1,865   
                                     

Weighted-average number of shares outstanding:

           

Basic

     465.3         473.8         466.6         475.8   

Dilutive effect of stock options

     1.3         1.4         1.4         1.4   

Dilutive effect of retention shares and units

     1.0         2.0         1.1         2.1   

 

Diluted

     467.6         477.2         469.1         479.3   
                                     

Earnings per share – basic

   $       2.38       $       2.11       $       4.42       $       3.92   

Earnings per share – diluted

   $       2.37       $       2.10       $       4.40       $       3.89   

Stock options excluded as their inclusion would be antidilutive

     0.6         0.6         0.5         0.5   
                                     

9. Accumulated Other Comprehensive Income/(Loss)

Reclassifications out of accumulated other comprehensive income/(loss) for the three and six months ended June 30, 2013, and 2012, were as follows (net of tax):

 

Millions

   Defined
benefit plans
     Foreign
currency
translation
     Derivatives      Total  

Balance at April 1, 2013

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

Other comprehensive income/(loss) before

reclassifications

                           

Amounts reclassified from accumulated other

comprehensive income/(loss) [a]

     16                       16   

Net quarter-to-date other comprehensive

income/(loss), net of taxes of $13 million

     17                       21   

Balance at June 30, 2013

   $ (1,118)       $ (29)       $ (1)       $ (1,148)   
                                     
                                     

Balance at April 1, 2012

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

Other comprehensive income/(loss) before

reclassifications

            (15)                (15)   

Amounts reclassified from accumulated other

comprehensive income/(loss)

                           

Net quarter-to-date other comprehensive

income/(loss), net of taxes of ($9) million

            (15)                (15)   

Balance at June 30, 2012

   $ (1,011)       $       (48)       $ (2)       $ (1,061)   
                                     

 

[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.

 

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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)                        

Amounts reclassified from accumulated other

comprehensive income/(loss) [a]

     33                       33   

Net year-to-date other comprehensive

income/(loss), net of taxes of $25 million

     31                       38   

Balance at June 30, 2013

   $ (1,118)       $ (29)       $ (1)       $ (1,148)   
                                     
                                     

Balance at January 1, 2012

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

Other comprehensive income/(loss) before

reclassifications

     (7)                       (7)   

Amounts reclassified from accumulated other

comprehensive income/(loss)

                           

Net year-to-date other comprehensive

income/(loss), net of taxes of ($1) million

     (7)                       (7)   

Balance at June 30, 2012

   $       (1,011)       $     (48)       $       (2)       $       (1,061)   
                                     

 

[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 June 30, 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 June 30, 2013, and December 31, 2012, receivables classified as other assets were reduced by allowances of $27 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 that may subsequently transfer, without recourse an undivided interest in accounts receivable to investors. 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.

The amount outstanding under the facility was $400 million and $100 million at June 30, 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 June 30, 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 unused commitment availability. The costs of the receivables securitization facility are included in interest

 

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expense and were $1 million for the three months ended June 30, 2013, and 2012, and $2 million for the six months ended June 30, 2013, and 2012.

We are currently in the process of renewing the receivables securitization facility 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 Estimated Useful Life

As of June 30, 2013

   Cost      Accumulated
Depreciation
     Net Book
Value
     Estimated
Useful Life
 

 

Land

   $ 5,100       $ N/A        $ 5,100         N/A    
                                     

Road:

           

Rail and other track material

     13,519         4,869         8,650         35   

Ties

     8,608         2,227         6,381         33   

Ballast

     4,491         1,127         3,364         34   

Other roadway [a]

     14,989         2,651         12,338         48   

 

Total road

     41,607         10,874         30,733         N/A    
                                     

Equipment:

           

Locomotives

     7,408         3,315         4,093         20   

Freight cars

     2,042         1,009         1,033         25   

Work equipment and other

     546         105         441         19   

 

Total equipment

     9,996         4,429         5,567         N/A    
                                     

Technology and other

     658         269         389         11   

Construction in progress

     1,122                1,122         N/A    

 

Total

   $   58,483       $   15,572       $   42,911         N/A    
                                     

 

Millions, Except Estimated Useful Life
  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.

 

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12. Accounts Payable and Other Current Liabilities

 

Millions

   June 30,
2013
     Dec. 31,
2012
 

Accounts payable

   $ 908       $ 825   

Income and other taxes payable

     413         368   

Accrued wages and vacation

     375         376   

Dividends payable

     316         318   

Accrued casualty costs

     224         213   

Interest payable

     183         172   

Equipment rents payable

     99         95   

Other

     574         556   

 

Total accounts payable and other current liabilities

   $     3,092       $     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 June 30, 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 June 30, 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 June 30, 2013, the fair value of total debt was $11 billion, approximately $1.2 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 June 30, 2013, and December 31, 2012, approximately $163 and $203 million, respectively, 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 June 30, 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 six months ended June 30, 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.

 

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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 June 30, 2013, and December 31, 2012 (and at all times during the first and second quarters), 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 June 30, 2013, the debt-to-net-worth coverage ratio allowed us to carry up to $41 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 and six months ended June 30, 2013, we did not issue or repay any commercial paper, and at June 30, 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 June 30, 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 June 30, 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.

Debt Redemption – On May 14, 2013, we redeemed all $40 million of our outstanding 5.65% Port of Corpus Christi Authority Revenue Refunding Bonds due December 1, 2022. The redemption resulted in an early extinguishment charge of $1 million during the three months ended June 30, 2013.

Receivables Securitization Facility – As of June 30, 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,

 

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fixed-price purchase options available in the leases could potentially provide benefits to us; however, these benefits are not expected to be significant.

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 VIEs. The future minimum lease payments associated with the VIE leases totaled $3.4 billion as of June 30, 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 due to the uncertainty surrounding the timing of future payments. Approximately 90% of the recorded liability is related to asserted claims and approximately 10% is related to unasserted claims at June 30, 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 $315 to $343 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 Six Months Ended June 30,

   2013      2012  

Beginning balance

   $     334       $     368   

Current year accruals

     47         58   

Changes in estimates for prior years

     (22)         (36)   

Payments

     (44)         (50)   

 

Ending balance at June 30

   $ 315       $ 340   
                   

 

Current portion, ending balance at June 30

   $ 90       $ 102   
                   

 

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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 June 30, 2013.

Our asbestos-related liability activity was as follows:

 

Millions,
  for the Six Months Ended June 30,

   2013      2012  

Beginning balance

   $     139       $     147   

Accruals

             

Payments

     (5)         (4)   

 

Ending balance at June 30

   $ 134       $ 143   
                   

 

Current portion, ending balance at June 30

   $      $  
                   

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 June 30, 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 279 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 June 30, 2013, and December 31, 2012, none of our environmental liability was discounted.

 

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Our environmental liability activity was as follows:

 

Millions,
  for the Six Months Ended June 30,

   2013      2012  

Beginning balance

   $ 170       $ 172   

Accruals

     19         24   

Payments

     (21)         (16)   

 

Ending balance at June 30

   $       168       $       180   
                   

 

Current portion, ending balance at June 30

   $ 49       $ 47   
                   

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 Statements of Financial Position.

Guarantees – At both June 30, 2013, and December 31, 2012, we were contingently liable for $307 million in guarantees. We have recorded a liability of $1 million and $2 million for the fair value of these obligations as of June 30, 2013, and December 31, 2012, respectively. 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 June 30, 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 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

 

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UPRR under a 10-year agreement commencing on January 1, 2004, for pipeline easements on UPRR 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 June 30, 2013.

17. Share Repurchase Program

Effective April 1, 2011, our Board of Directors authorized the repurchase of up to 40 million shares of our common stock by March 31, 2014, replacing our previous repurchase program. As of June 30, 2013, we repurchased a total of $8.0 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   

Second quarter

     3,061,470         3,770,528         151.42         110.02   

 

Total

     5,942,870         7,687,897         144.23         110.33   
                                     

 

Remaining number of shares that may be repurchased under current authority

  

     9,093,079   
                                     

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.

 

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

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2013, Compared to

Three and Six Months Ended June 30, 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 we provide and analyze revenue by commodity group, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network.

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 any such reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after such material is electronically filed with, or furnished to, 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. We provide these previously filed reports as a convenience and their contents reflect only information that was true and correct as of the date of the report. We assume no obligation to update this historical information. Additionally, our corporate governance materials, including By-Laws, Board Committee charters, governance guidelines and policies, and codes of conduct and ethics for directors, officers, and employees are available on our website. From time to time, the corporate governance materials on our website may be updated as necessary to comply with rules issued by 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

 

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Report on Form 10-K. There have not been any significant changes with respect to these policies during the first six months of 2013.

RESULTS OF OPERATIONS

Quarterly Summary

We reported earnings of $2.37 per diluted share on net income of $1.1 billion in the second quarter of 2013 compared to earnings of $2.10 per diluted share on net income of $1 billion for the second quarter of 2012. Year-to-date, net income was $2.1 billion versus $1.9 billion for the same period in 2012. Freight revenues increased 5%, or $240 million, in the second quarter compared to the same period in 2012 driven by higher average revenue per car (ARC) due to core pricing gains and growth in higher ARC shipments. Continued volume growth in shale-related products (crude oil, frac sand and pipe), automotives and domestic intermodal nearly offset the declines from agricultural products and international intermodal. Consistent with the first quarter, core pricing gains, our ongoing focus on safety, service and network efficiency, and continuing cost control measures drove record financial results in the second quarter.

Average train speed, as reported to the Association of American Railroads (AAR), declined 3% compared to 2012 due to weather and incident interruptions and increased work on capital projects in higher volume corridors. Average terminal dwell time increased 4% compared to the second quarter of 2012, primarily due to continuing growth of manifest traffic concentrated in the Southern Region. Even with the growth in manifest shipments, which have longer cycle times, average rail car inventory decreased 3% in the second quarter as volumes declined 1%. Despite these challenges, we continue to effectively manage our network.

Operating Revenues

 

      Three Months Ended
June 30,
    

%
Change

     Six Months Ended
June 30,
    

%
Change

 

Millions

   2013              2012         2013              2012     

Freight revenues

   $ 5,153       $ 4,913         5%        $ 10,137       $ 9,736         4%    

Other revenues

     317         308         3            623         597         4      

 

Total

   $       5,470       $       5,221         5%        $       10,760       $       10,333         4%    
                                                       

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

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

Freight revenues for four of the six commodity groups increased during the second quarter of 2013 and five of the six increased during the year-to-date period of 2013 compared to 2012, driven by core pricing gains, partially offset by an overall decline in carloads. Substantial volume declines in agricultural products offset strong chemical, automotive and domestic intermodal shipments in the second quarter. Year-to-date, declines in coal shipments also contributed to the decrease in carloads.

Each of our commodity groups includes revenue from fuel surcharges. Freight revenues from fuel surcharge programs were $665 million and $1.3 billion in the second quarter and year-to-date periods of 2013, compared to $685 and $1.3 billion in the same periods of 2012. Lower fuel surcharge recoveries, due to lower fuel prices along with lower volumes, drove the decrease in the second quarter of 2013 from

 

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2012. Year-to-date, fuel surcharge revenue was essentially flat as lower volume was offset by the lag impact of our programs.

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

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

 

Freight Revenues

   Three Months Ended
June 30,
    

%

Change

     Six Months Ended
June 30,
    

%

Change

 

Millions

   2013      2012         2013      2012     

Agricultural

   $ 784       $ 854         (8)%        $ 1,568       $ 1,712         (8)%    

Automotive

     534         475         12             1,021         905         13       

Chemicals

     890         795         12             1,763         1,563         13       

Coal

     975         869         12             1,911         1,864         3       

Industrial Products

     977         917         7             1,893         1,780         6       

Intermodal

     993         1,003         (1)             1,981         1,912         4       

 

Total

   $ 5,153       $ 4,913         5%         $ 10,137       $ 9,736         4%     
                                                       
                                                 

Revenue Carloads

  

Three Months Ended

June 30,

    

%

Change

    

Six Months Ended

June 30,

    

%

Change

 

Thousands

   2013      2012         2013      2012     

Agricultural

     209         233         (10)%          421         467         (10)%    

Automotive

     197         190         4             381         370         3       

Chemicals

     287         261         10             558         502         11       

Coal

     414         412         -              816         907         (10)       

Industrial Products

     317         316         -              606         606         -        

Intermodal [a]

     822         846         (3)             1,632         1,624         -        

 

Total

     2,246         2,258         (1)%          4,414         4,476         (1)%    
                                                       
                                                 
      Three Months Ended
June 30,
    

%

Change

     Six Months Ended
June 30,
    

%

Change

 

Average Revenue per Car

   2013      2012         2013      2012     

Agricultural

   $ 3,750       $ 3,665         2%         $ 3,721       $ 3,665         2%     

Automotive

     2,715         2,505         8             2,683         2,449         10       

Chemicals

     3,098         3,044         2             3,160         3,111         2       

Coal

     2,353         2,109         12             2,341         2,055         14       

Industrial Products

     3,079         2,907         6             3,124         2,941         6       

Intermodal [a]

     1,210         1,185         2             1,214         1,177         3       

 

Average

   $       2,295       $       2,176         5%         $       2,297       $       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 second quarter and year-to-date periods of 2013 versus 2012. Corn shipments decreased 20% and 25% in the second quarter and year-to-date periods of 2013 versus 2012, reflecting the impact of the severe drought in 2012 that affected territory served by us. The tight supply of corn contributed to lower livestock counts and exports to Mexico, driving the volume decline. Ethanol shipments increased in the second quarter of 2013 versus 2012, but remained down for the year to date period.

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 second quarter and year-to-date periods of

 

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2013 compared to 2012. Higher production and auto sales, currently at a five-year high, drove the growth as the automobile industry continued gaining momentum.

Chemicals – Higher volume and core price improvements increased freight revenue from chemicals in the second quarter and year-to-date periods 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 for the year to date period. 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. In addition, shipments of petroleum products and industrial chemicals increased 11% and 6%, respectively, in the second quarter of 2013 compared to 2012.

Coal – Higher ARC driven by pricing gains and positive business mix, increased freight revenue from coal shipments in the second quarter of 2013 compared to 2012. Year-to-date, higher ARC offset the volume declines, resulting in increased freight revenue in 2013. Shipments from Southern Powder River Basin (SPRB) increased 1% from second quarter 2012 as an easier year-over-year comparison was mostly offset by significant plant outages and the loss of a customer contract at the beginning of the year. Increasing natural gas prices in the second quarter improved demand for coal. However, SPRB shipments were 10% lower than last year for the first half of the year. First quarter declines driven by mine production issues, high inventory levels and loss of a customer contract more than offset the second quarter gains. Shipments from Colorado and Utah mines decreased 11% and 13%, from the second quarter and first half of 2012, respectively, driven by high coal stockpiles, soft international demand and mine production issues.

Industrial Products – Freight revenue from industrial products increased in the second quarter and year-to-date periods of 2013 versus 2012 driven by higher ARC due to pricing gains along with positive business mix. 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. A decline in hazardous waste and ferrous scrap shipments from 2012 affect these volume increases.

Intermodal – Volume declines, partially offset by pricing gains, decreased freight revenue from intermodal shipments in the second quarter of 2013 compared to the same period in 2012. Pricing gains and positive business mix increased freight revenue year-to-date. International shipments declined 8% and 1%, from the second quarter and first half of 2012, respectively, offsetting the increases in the first quarter due to slowing worldwide economic growth and strong results in 2012. Domestic traffic for the quarter and year-to-date periods increased 3% and 2%, respectively, driven by conversions from truck to rail.

Mexico Business – Each of our commodity groups includes revenue from shipments to and from Mexico. Revenue from Mexico business increased 3% to $519 million in the second quarter of 2013 versus the same period in 2012. Volume levels declined 2% in aggregate versus 2012 despite higher carloads from four of our six commodity groups. Declining agricultural products and intermodal shipments offset strong growth in chemicals and industrial products. Year-to-date, revenue grew 4% versus 2012 to $1.0 billion, driven by higher ARC and strong volume growth in industrial products and automotives shipments. Lower shipments of agricultural products partially offset revenue growth during the first half of 2013.

Operating Expenses

 

      Three Months Ended
June 30,
    

%

Change

     Six Months Ended
June 30,
    

%

Change

 

Millions

   2013      2012         2013      2012     

Compensation and benefits

   $ 1,185       $ 1,151         3%         $ 2,401       $ 2,362         2%     

Fuel

     863         882         (2)             1,763         1,808         (2)       

Purchased services and materials

     585         542         8             1,142         1,068         7       

Depreciation

     438         433         1             872         860         1       

Equipment and other rents

     302         299         1             615         595         3       

Other

     219         190         15             456         406         12       

 

Total

   $       3,592       $       3,497         3%         $       7,249       $       7,099         2%     
                                                       

 

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Operating expenses increased $95 million and $150 million in the second quarter and six-month periods of 2013, respectively, versus 2012. Wage and benefit inflation, personal injury expense, new logistics management fees and container costs for automotive business, short-term freight car rental costs, locomotive overhauls and property taxes contributed to higher expenses during the periods. Lower fuel prices offset the cost increases.

Compensation and Benefits – Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. General wage and benefit inflation, higher employment levels and increased pension and other postretirement benefits drove the increases in the second quarter and year-to-date periods of 2013 versus 2012. Lower volumes during both periods partially offset these increases.

Fuel – Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Locomotive diesel fuel prices, which averaged $3.10 per gallon (including taxes and transportation costs) in the second quarter of 2013 compared to $3.21 per gallon in the same period in 2012, reduced expenses $30 million. For the six month period, lower locomotive diesel fuel prices that averaged $3.16 per gallon versus $3.22 per gallon in 2012, reduced expenses by $31 million. In the second quarter, fuel costs were higher as gross-ton miles increased slightly and the fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-miles in thousands, increased 2% compared to 2012. Year-to-date, fuel costs were lower as gross-ton miles declined 3%, mostly offset by a 2% increase in the fuel consumption rate. Declines in heavier, more fuel-efficient coal shipments drove the variances in gross-ton-miles and fuel consumption rate.

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 logistics subsidiaries for external transportation services); materials used to maintain the Railroad’s lines, structures, and equipment; costs of operating facilities jointly used by UPRR and other railroads; transportation and lodging for train crew employees; trucking and contracting costs for intermodal containers; leased automobile maintenance expenses; and tools and supplies. Contract services increased 11% and 12% compared to the second quarter and year-to-date periods of 2012, respectively, 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 second quarter and year-to-date periods of 2013 compared to the same periods in 2012, partially offset by changes in estimated equipment 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 shipments and higher freight car rental rates drove an $11 million and $31 million increase in our short-term freight car rental expense in the second quarter and year-to-date periods of 2013, respectively, compared to the same periods 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 second quarter were higher than 2012 as higher personal injury, property tax and damaged freight and property costs more than offset lower destroyed equipment costs. Personal injury expense increased as the reduction of the liability for prior years based on our recent actuarial study was less than the reduction from our 2012 study. Year-to-date, higher property tax, damaged freight and property and personal injury costs drove the increase from the same period in 2012.

 

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Non-Operating Items

 

     

Three Months Ended

June 30,

    

%

Change

    

Six Months Ended

June 30,

    

%

Change

 

Millions

   2013      2012         2013      2012     

Other income

     $        23         $        21         10 %         $        63         $        37         70 %   

Interest expense

     (133)         (135)         (1)            (261)         (270)         (3)      

Income taxes

     (662)         (608)         9            (1,250)         (1,136)         10      
                                                       

Other Income – Other income increased slightly in the second quarter of 2013 versus 2012. Year-to-date, other income increased due to a favorable $17 million land lease contract settlement and lower environmental expenses.

Interest Expense – Interest expense decreased in the second quarter of 2013 versus 2012 due to a lower effective interest rate of 5.5% versus 6.0%, partially offset by an increased weighted-average debt level of $9.8 billion in 2013 versus $9.0 billion in 2012. A lower effective interest rate of 5.6% versus 6.1% drove the decline in interest for the year-to-date period of 2013 compared to the same period of 2012. The increase in the weighted-average debt level to $9.5 billion in 2013 from $8.9 billion in 2012 partially offset the impact of the lower effective interest rate.

Income Taxes – Higher pre-tax income increased income taxes in the second quarter and year-to-date periods of 2013 compared to 2012. Our effective tax rate for the second quarter of 2013 was 37.4% compared to 37.8% in 2012. Our 2013 year-to-date effective tax rate was 37.7% compared to 37.9% 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.

Operating/Performance Statistics

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

 

     

Three Months Ended

June 30,

    

%

    Change

   

Six Months Ended

June 30,

    

%

    Change

 
     2013              2012        2013              2012     

Average train speed (miles per hour)

     25.7         26.6         (3)%         26.1         26.5         (2)%    

Average terminal dwell time (hours)

     26.6         25.5         4 %         27.0         26.0         4 %    

Average rail car inventory (thousands)

     261.6         268.6         (3)%         262.7         272.0         (3)%    

Gross ton-miles (billions)

     235.4         234.5         - %         463.1         475.0         (3)%    

Revenue ton-miles (billions)

     127.4         126.6         1 %         251.4         259.3         (3)%    

Operating ratio

     65.7         67.0         (1.3)pt     67.4         68.7         (1.3)pt

Employees (average)

     46,787         45,797         2 %         46,612         45,720         2 %    

Customer satisfaction index

     93         93         - pt     93         93         - 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), declined 3% and 2% in the second quarter and year-to-date periods of 2013 versus 2012, respectively. The declines were due to weather and incident interruptions and increased work on capital projects in higher volume corridors.

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 both the second quarter and year-to-date periods of 2013 compared to 2012,

 

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primarily due to continuing growth of manifest traffic concentrated in the Southern Region, which requires more time in terminals for building trains and removing cars from trains.

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 3% in both the second quarter and year-to-date periods of 2013 compared to 2012, as volume declined 1% in both periods, 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 3% during the first half of 2013 compared to the same period in 2012, while revenue ton-miles decreased 3% and carloads declined 1%. 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 1.3 points to a record low 65.7% in the second quarter of 2013 versus the same period of 2012 and 1.3 points to 67.4% in the six-month period of 2013 versus 2012. Core pricing gains more than offset the impact of inflation and lower volume in both periods.

Employees – Employee levels increased 2% in both the second quarter and six-month period of 2013 compared to the same periods 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, including positive train control, 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. An improvement in survey results generally reflects customer recognition of our service quality.

Debt to Capital / Adjusted Debt to Capital

 

Millions, Except Percentages

   June 30,
2013
     Dec. 31,
2012
 

Debt (a)

   $ 9,809       $ 8,997   

Equity

     20,524