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Union Pacific 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.(A)
  4. Ex-31.(B)
  5. Ex-32
  6. Ex-32
20150331 Q1

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to ____________

 

Commission File Number 1-6075

 

UNION PACIFIC CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

UTAH

 

13-2626465

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1400 DOUGLAS STREET, OMAHA, NEBRASKA

(Address of principal executive offices)

68179

(Zip Code)

(402) 544-5000

(Registrant’s telephone number, including area code)

 

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

 Yes      No

 

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

 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 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

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

 

 Yes      No

 

As of April 17,  2015, there were 875,590,576 shares of the Registrant's Common Stock outstanding.

 

 

 

 

 

 


 

 

TABLE OF CONTENTS

UNION PACIFIC CORPORATION

AND SUBSIDIARY COMPANIES

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements:

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

 

For the Three Months Ended March 31, 2015 and 2014

3

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

For the Three Months Ended March 31, 2015 and 2014

3

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

 

 

At March 31, 2015 and December 31, 2014

4

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

For the Three Months Ended March 31, 2015 and 2014

5

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY (Unaudited)

 

 

For the Three Months Ended March 31, 2015 and 2014

6

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7

Item 2. 

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

21

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4. 

Controls and Procedures

33

 

 

PART II. OTHER INFORMATION 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Condensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 

 

Millions, Except Per Share Amounts,

 

 

 

 

for the Three Months Ended March 31,

2015 
2014 

Operating revenues:

 

 

 

 

     Freight revenues

$

5,251 

$

5,286 

     Other revenues

 

363 

 

352 

Total operating revenues

 

5,614 

 

5,638 

Operating expenses:

 

 

 

 

     Compensation and benefits

 

1,369 

 

1,254 

     Purchased services and materials

 

643 

 

607 

     Fuel

 

564 

 

921 

     Depreciation

 

491 

 

464 

     Equipment and other rents

 

311 

 

312 

     Other

 

259 

 

226 

Total operating expenses

 

3,637 

 

3,784 

Operating income

 

1,977 

 

1,854 

Other income (Note 7)

 

26 

 

38 

Interest expense

 

(148)

 

(133)

Income before income taxes

 

1,855 

 

1,759 

Income taxes

 

(704)

 

(671)

Net income

$

1,151 

$

1,088 

Share and Per Share (Notes 4 and 9):

 

 

 

 

     Earnings per share - basic

$

1.31 

$

1.20 

     Earnings per share - diluted

$

1.30 

$

1.19 

     Weighted average number of shares - basic

 

879.3 

 

908.1 

     Weighted average number of shares - diluted

 

882.8 

 

912.5 

Dividends declared per share

$

0.55 

$

0.455 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended March 31,

2015 
2014 

Net income

$

1,151 

$

1,088 

Other comprehensive income/(loss):

 

 

 

 

    Defined benefit plans

 

12 

 

20 

    Foreign currency translation

 

(20)

 

(4)

Total other comprehensive income/(loss) [a]

 

(8)

 

16 

Comprehensive income

$

1,143 

$

1,104 

 

[a] Net of deferred taxes of $(3) million and $5 million during the three months ended March 31, 2015, and 2014, respectively.

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

 

 

 

 

3


 

Condensed Consolidated Statements of Financial Position (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

Millions, Except Share and Per Share Amounts

2015 

 

2014 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

     Cash and cash equivalents

$

1,587 

 

$

1,586 

     Accounts receivable, net (Note 11)

 

1,564 

 

 

1,611 

     Materials and supplies

 

744 

 

 

712 

     Current deferred income taxes

 

250 

 

 

277 

     Other current assets

 

334 

 

 

493 

Total current assets

 

4,479 

 

 

4,679 

Investments

 

1,375 

 

 

1,390 

Net properties (Note 12)

 

46,928 

 

 

46,272 

Other assets

 

363 

 

 

375 

Total assets

$

53,145 

 

$

52,716 

Liabilities and Common Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

     Accounts payable and other current liabilities (Note 13)

$

2,974 

 

$

3,303 

     Debt due within one year (Note 15)

 

416 

 

 

462 

Total current liabilities

 

3,390 

 

 

3,765 

Debt due after one year (Note 15)

 

11,884 

 

 

11,018 

Deferred income taxes

 

14,774 

 

 

14,680 

Other long-term liabilities

 

2,040 

 

 

2,064 

Commitments and contingencies (Note 17)

 

 

 

 

 

Total liabilities

 

32,088 

 

 

31,527 

Common shareholders' equity:

 

 

 

 

 

     Common shares, $2.50 par value, 1,400,000,000 authorized;   

 

 

 

 

 

     1,110,476,743 and 1,110,100,423 issued; 877,373,800 and 883,366,476

 

 

 

 

 

     outstanding, respectively

 

2,776 

 

 

2,775 

     Paid-in-surplus

 

4,351 

 

 

4,321 

     Retained earnings

 

28,034 

 

 

27,367 

     Treasury stock

 

(12,886)

 

 

(12,064)

     Accumulated other comprehensive loss (Note 10)

 

(1,218)

 

 

(1,210)

Total common shareholders' equity

 

21,057 

 

 

21,189 

Total liabilities and common shareholders' equity

$

53,145 

 

$

52,716 

 

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

 

 

4


 

Condensed Consolidated Statements of Cash Flows (Unaudited)

Union Pacific Corporation and Subsidiary Companies

 

 

 

 

 

 

 

 

 

 

 

 

Millions,

 

 

for the Three Months Ended March 31,

2015 
2014 

Operating Activities

 

 

 

 

Net income

$

1,151 

$

1,088 

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

 

 

 

 

  Depreciation

 

491 

 

464 

  Deferred income taxes and unrecognized tax benefits

 

108 

 

75 

  Other operating activities, net

 

32 

 

(57)

  Changes in current assets and liabilities:

 

 

 

 

     Accounts receivable, net

 

47 

 

(128)

     Materials and supplies

 

(32)

 

(52)

     Other current assets

 

(75)

 

(93)

     Accounts payable and other current liabilities

 

(155)

 

84 

     Income and other taxes

 

497 

 

386 

Cash provided by operating activities

 

2,064 

 

1,767 

Investing Activities

 

 

 

 

Capital investments

 

(1,101)

 

(893)

Proceeds from asset sales

 

32 

 

27 

Other investing activities, net

 

(73)

 

(39)

Cash used in investing activities

 

(1,142)

 

(905)

Financing Activities

 

 

 

 

Debt issued (Note 15)

 

1,146 

 

995 

Dividends paid (Note 13)

 

(922)

 

(363)

Common share repurchases (Note 18)

 

(792)

 

(644)

Debt repaid

 

(333)

 

(402)

Other financing activities, net

 

(20)

 

(23)

Cash used in financing activities

 

(921)

 

(437)

Net change in cash and cash equivalents

 

 

425 

Cash and cash equivalents at beginning of year

 

1,586 

 

1,432 

Cash and cash equivalents at end of period

$

1,587 

$

1,857 

Supplemental Cash Flow Information

 

 

 

 

  Non-cash investing and financing activities:

 

 

 

 

     Capital investments accrued but not yet paid

$

146 

$

109 

     Common shares repurchased but not yet paid

 

15 

 

39 

     Cash dividends declared but not yet paid (Note 13)

 

 -

 

407 

  Cash paid for:

 

 

 

 

     Income taxes, net of refunds

$

(47)

$

(146)

     Interest, net of amounts capitalized

 

(192)

 

(178)

 

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

 

 

5


 

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, 2014 (Note 4)

1,109.7 
(197.7)

 

 

$   2,774 

 

$   4,210 

 

$   23,901 

 

$    (8,910)

 

$     (750)

 

$   21,225 

Net income

 

 

 

 

 -

 

 -

 

1,088 

 

 -

 

 -

 

1,088 

Other comp. income

 

 

 

 

 -

 

 -

 

 -

 

 -

 

16 

 

16 

Conversion, stock option
 exercises, forfeitures, and other

0.4 
1.2 

 

 

 

23 

 

 -

 

16 

 

 -

 

40 

Share repurchases (Note 18)

 -

(7.6)

 

 

 -

 

 -

 

 -

 

(683)

 

 -

 

(683)

Cash dividends declared
   ($0.455 per share)

 -

 -

 

 

 -

 

 -

 

(414)

 

 -

 

 -

 

(414)

Balance at March 31, 2014

1,110.1 
(204.1)

 

 

$   2,775 

 

$   4,233 

 

$   24,575 

 

$    (9,577)

 

$     (734)

 

$   21,272 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2015

1,110.1 
(226.7)

 

 

$   2,775 

 

$   4,321 

 

$   27,367 

 

$  (12,064)

 

$  (1,210)

 

$   21,189 

Net income

 

 

 

 

 -

 

 -

 

1,151 

 

 -

 

 -

 

1,151 

Other comp. loss

 

 

 

 

 -

 

 -

 

 -

 

 -

 

(8)

 

(8)

Conversion, stock option
 exercises, forfeitures, and other

0.4 
0.5 

 

 

 

30 

 

 -

 

(15)

 

 -

 

16 

Share repurchases (Note 18)

 -

(6.9)

 

 

 -

 

 -

 

 -

 

(807)

 

 -

 

(807)

Cash dividends declared
   ($0.55 per share)

 -

 -

 

 

 -

 

 -

 

(484)

 

 -

 

 -

 

(484)

Balance at March 31, 2015

1,110.5 
(233.1)

 

 

$   2,776 

 

$   4,351 

 

$   28,034 

 

$  (12,886)

 

$  (1,218)

 

$   21,057 

 

[a]AOCI = Accumulated Other Comprehensive Income/(Loss) (Note 10)

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

 

 

6


 

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”, “Company”, “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, 2014, 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 2014 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2015, are not necessarily indicative of the results for the entire year ending December 31, 2015.

 

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. Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition guidance in Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. This standard is effective for annual reporting periods beginning after December 15, 2017. ASU 2014-09 is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.

 

In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30). ASU 2015-03 changes the presentation of debt issuance costs in the financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will be reported as interest expense. This standard is effective for annual reporting periods beginning after December 15, 2015. ASU 2015-03 will not have a material impact on our consolidated financial position, results of operations, or cash flows.

 

 

7


 

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:

 

 

 

 

 

 

 

 

 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended March 31,

2015 
2014 

Agricultural Products

$

939 

$

910 

Automotive

 

516 

 

488 

Chemicals

 

897 

 

893 

Coal

 

915 

 

961 

Industrial Products

 

1,017 

 

1,011 

Intermodal

 

967 

 

1,023 

Total freight revenues

$

5,251 

$

5,286 

Other revenues

 

363 

 

352 

Total operating revenues

$

5,614 

$

5,638 

 

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 $544 million and $540 million, respectively for the three months ended March 31, 2015, and March 31, 2014.

 

4. Stock Split

 

On June 6, 2014, we completed a two-for-one stock split, effected in the form of a 100% stock dividend. The stock split entitled all shareholders of record at the close of business on May 27, 2014, to receive one additional share of our common stock, par value $2.50 per share, for each share of common stock held on that date. All references to common shares and per share amounts have been retroactively adjusted to reflect the stock split for all periods presented.

 

5. Stock-Based Compensation

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended March 31,

2015 
2014 

Stock-based compensation, before tax:

 

 

 

 

     Stock options

$

$

     Retention awards

 

24 

 

29 

Total stock-based compensation, before tax

$

28 

$

35 

Excess tax benefits from equity compensation plans

$

53 

$

60 

 

 

8


 

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

2015 
2014 

Risk-free interest rate

 

1.3% 

 

1.6% 

Dividend yield

 

1.8% 

 

2.1% 

Expected life (years)

 

5.1 

 

5.2 

Volatility

 

23.4% 

 

30.0% 

Weighted-average grant-date fair value of options granted

$

22.30 

$

20.18 

 

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

 

A summary of stock option activity during the three months ended March 31, 2015, is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options (thous.)

Weighted-Average
Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value (millions)

Outstanding at January 1, 2015

5,387 

$

53.56 

5.8 yrs.

$

353 

Granted

934 

 

122.85 

N/A

 

N/A

Exercised

(413)

 

44.38 

N/A

 

N/A

Forfeited or expired

(8)

 

80.00 

N/A

 

N/A

Outstanding at March 31, 2015

5,900 

$

65.14 

6.3 yrs.

$

268 

Vested or expected to vest at March 31, 2015

5,842 

$

64.76 

6.2 yrs.

$

268 

Options exercisable at March 31, 2015

3,976 

$

47.87 

4.9 yrs.

$

240 

 

Stock options are granted at the closing price on the date of grant, have ten-year contractual terms, and vest no later than three years from the date of grant. None of the stock options outstanding at March 31, 2015, are subject to performance or market-based vesting conditions.

 

At March 31, 2015, there was $31 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.8 years. Additional information regarding stock option exercises appears in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended March 31,

2015 
2014 

Intrinsic value of stock options exercised

$

32 

$

34 

Cash received from option exercises

 

14 

 

18 

Treasury shares repurchased for employee payroll taxes

 

(7)

 

(7)

Tax benefit realized from option exercises

 

12 

 

13 

Aggregate grant-date fair value of stock options vested

 

19 

 

17 

 

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.

 

 

9


 

Changes in our retention awards during the three months ended March 31, 2015, were as follows:

 

 

 

 

 

 

 

 

 

 

 

Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2015

3,403 

$

64.39 

Granted

519 

 

122.83 

Vested

(894)

 

46.94 

Forfeited

(23)

 

67.31 

Nonvested at March 31, 2015

3,005 

$

79.65 

 

Retention awards are granted at no cost to the employee or non-employee director and vest over periods lasting up to four years. At March 31, 2015, there was $131 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 2.2 years.

 

Performance Retention Awards – In February 2015, 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 2013, and February 2014, 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 2015 grant were as follows:

 

 

 

 

 

 

 

 

 

2015 

Dividend per share per quarter

$

0.55 

Risk-free interest rate at date of grant

 

0.8% 

 

Changes in our performance retention awards during the three months ended March 31, 2015, were as follows:

 

 

 

 

 

 

 

 

 

 

 

Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2015

1,583 

$

65.33 

Granted

339 

 

117.42 

Vested

(580)

 

54.38 

Forfeited

(13)

 

72.98 

Nonvested at March 31, 2015

1,329 

$

83.32 

 

At March 31, 2015, there was $66 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.7 years. This expense is subject to achievement of the ROIC levels established for the performance stock unit grants.

 

 

10


 

6. Retirement Plans

 

Pension and Other Postretirement Benefits

 

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

 

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

 

Expense

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension

OPEB

Millions

2015 
2014 
2015 
2014 

Service cost

$

24 

$

18 

$

$

Interest cost

 

40 

 

39 

 

 

Expected return on plan assets

 

(64)

 

(58)

 

 -

 

 -

Amortization of:

 

 

 

 

 

 

 

 

      Prior service credit

 

 -

 

 -

 

(2)

 

(3)

      Actuarial loss

 

26 

 

17 

 

 

Net periodic pension cost

$

26 

$

16 

$

$

 

Cash Contributions

 

For the three months ended March 31, 2015, we did not make any cash contributions to the qualified pension plan. Any contributions made during 2015 will be based on cash generated from operations and financial market considerations. Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes. At March 31, 2015, we do not have minimum cash funding requirements for 2015.

 

 

11


 

7. Other Income

 

Other income included the following:

 

 

 

 

 

 

 

 

 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended March 31,

2015 
2014 

Rental income

$

24 

$

24 

Net gain on non-operating asset dispositions

 

 

Interest income

 

 

Non-operating environmental costs and other [a]

 

(6)

 

Total

$

26 

$

38 

 

[a] 2014 includes $14 million related to the sale of a permanent easement.

 

8. Income Taxes

 

Internal Revenue Service (IRS) examinations have been completed and settled for all years prior to 2009, and the statute of limitations bars any additional tax assessments. The IRS has completed their examinations and issued notices of deficiency for tax years 2009 and 2010. We disagreed with many of their proposed adjustments, and went to IRS Appeals for those years.

 

In the first quarter of 2015, we reached an agreement in principle with IRS Appeals to resolve all issues related to tax years 2009 and 2010, except for calculations of interest. We anticipate signing a closing agreement with the IRS within the next 12 months. Once formalized, this agreement will have an immaterial effect on our income tax expense and result in an immaterial payment of tax and interest.

 

Additionally, several state tax authorities are examining our state income tax returns for years 2006 through 2010.

 

At March 31, 2015, we had a net liability for unrecognized tax benefits of $141 million. Of that amount, $29 million is classified as a current liability in the Condensed Consolidated Statements of Financial Position.

 

9. Earnings Per Share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Millions, Except Per Share Amounts,

 

 

 

 

for the Three Months Ended March 31,

2015 
2014 

Net income

$

1,151 

$

1,088 

Weighted-average number of shares outstanding:    

 

 

 

 

    Basic

 

879.3 

 

908.1 

    Dilutive effect of stock options

 

1.8 

 

2.6 

    Dilutive effect of retention shares and units 

 

1.7 

 

1.8 

Diluted

 

882.8 

 

912.5 

Earnings per share – basic

$

1.31 

$

1.20 

Earnings per share – diluted

$

1.30 

$

1.19 

Stock options excluded as their inclusion would be anti-dilutive

 

0.6 

 

0.7 

 

 

12


 

10. Accumulated Other Comprehensive Income/(Loss)

 

Reclassifications out of accumulated other comprehensive income/(loss) for the three months ended March 31, 2015, and 2014, were as follows (net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Millions

Defined
benefit
plans

Foreign
currency
translation

Total

Balance at January 1, 2015

$

(1,161)

$

(49)

$

(1,210)

Other comprehensive income/(loss) before reclassifications

 

(4)

 

(20)

 

(24)

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

 

16 

 

 -

 

16 

Net year-to-date other comprehensive income/(loss),
net of taxes of $(3) million

 

12 

 

(20)

 

(8)

Balance at March 31, 2015

$

(1,149)

$

(69)

$

(1,218)

 

 

 

 

 

 

 

Balance at January 1, 2014

$

(713)

$

(37)

$

(750)

Other comprehensive income/(loss) before reclassifications

 

10 

 

(4)

 

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

 

10 

 

 -

 

10 

Net year-to-date other comprehensive income/(loss),
net of taxes of $5 million

 

20 

 

(4)

 

16 

Balance at March 31, 2014

$

(693)

$

(41)

$

(734)

 

[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 6 Retirement Plans for additional details.

 

11. Accounts Receivable

 

Accounts receivable includes freight and other receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, credit worthiness of customers, and current economic conditions. At both March 31, 2015, and December 31, 2014, our accounts receivable were reduced by $5 million. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Condensed Consolidated Statements of Financial Position. At March 31, 2015, and December 31, 2014, receivables classified as other assets were reduced by allowances of $14 million and $16 million, respectively.

 

Receivables Securitization Facility – The Railroad maintains a $650 million, 3-year receivables securitization facility maturing in July 2017 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 at both March 31, 2015, and December 31, 2014. The facility was supported by $1.2 billion of accounts receivable as collateral at both March 31, 2015, and December 31, 2014, respectively, which, as a retained interest, is included in accounts receivable, net in our Condensed Consolidated Statements of Financial Position.

 

The outstanding amount the Railroad is allowed to maintain under the facility, with a maximum of $650 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, the allowable outstanding amount under the facility would not materially change.

 

 

13


 

The costs of the receivables securitization facility include interest, which will vary based on prevailing benchmark and commercial paper rates, program fees paid to participating banks, commercial paper issuing costs, and fees of participating banks for unused commitment availability. The costs of the receivables securitization facility are included in interest expense and were $1 million for the three months ended March 31, 2015, and 2014.

 

12. 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

 

 Accumulated

Net Book

Estimated

As of March 31, 2015

Cost

 Depreciation

Value

Useful Life

Land

$

5,215 

$

N/A

$

5,215 

N/A

Road:

 

 

 

 

 

 

 

  Rail and other track material

 

14,745 

 

5,307 

 

9,438 
37 

  Ties

 

9,194 

 

2,495 

 

6,699 
33 

  Ballast

 

4,869 

 

1,288 

 

3,581 
34 

  Other roadway [a]

 

16,615 

 

2,898 

 

13,717 
47 

Total road 

 

45,423 

 

11,988 

 

33,435 

N/A

Equipment:

 

 

 

 

 

 

 

  Locomotives

 

8,587 

 

3,775 

 

4,812 
20 

  Freight cars

 

2,106 

 

968 

 

1,138 
25 

  Work equipment and other

 

742 

 

161 

 

581 
18 

Total equipment 

 

11,435 

 

4,904 

 

6,531 

N/A

Technology and other

 

899 

 

326 

 

573 
11 

Construction in progress

 

1,174 

 

 -

 

1,174 

N/A

Total

$

64,146 

$

17,218 

$

46,928 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Millions, Except Estimated Useful Life

 

 Accumulated

Net Book

Estimated

As of December 31, 2014

Cost

 Depreciation

Value

Useful Life

Land

$

5,194 

$

N/A

$

5,194 

N/A

Road:

 

 

 

 

 

 

 

  Rail and other track material

 

14,588 

 

5,241 

 

9,347 
33 

  Ties

 

9,102 

 

2,450 

 

6,652 
33 

  Ballast

 

4,826 

 

1,264 

 

3,562 
34 

  Other roadway [a]

 

16,476 

 

2,852 

 

13,624 
47 

Total road 

 

44,992 

 

11,807 

 

33,185 

N/A

Equipment:

 

 

 

 

 

 

 

  Locomotives

 

8,276 

 

3,694 

 

4,582 
20 

  Freight cars

 

2,116 

 

968 

 

1,148 
25 

  Work equipment and other

 

684 

 

153 

 

531 
18 

Total equipment 

 

11,076 

 

4,815 

 

6,261 

N/A

Technology and other

 

872 

 

320 

 

552 
10 

Construction in progress

 

1,080 

 

 -