Quarterly Report (10-q)

Date : 04/26/2018 @ 4:57PM
Source : Edgar (US Regulatory)
Stock : Union Pacific Corp. (UNP)
Quote : 143.92  -2.9 (-1.98%) @ 12:05AM

Quarterly Report (10-q)



 





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, 2018

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



Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company     



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

As of April 20 ,   2018 , there were 770 , 245 , 910 shares of the Registrant's Common Stock outstanding.







 

 


 



T ABLE 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, 2018 and 2017

3



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 



For the Three Months Ended March 31, 2018 and 2017

3



CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

 



At March 31, 2018 and December 31, 2017

4



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 



For the Three Months Ended March 31, 2018 and 2017

5



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

 



For the Three Months Ended March 31, 2018 and 2017

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

31

 Item 4.

Controls and Procedures

31



 PART II. OTHER INFORMATION

 

 

2


 

PA RT I. FINANCIAL INFORMATION



Ite m 1. Condensed Consolidated Financial Statements



C ondensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions, Except Per Share Amounts,

 

 

 

 

for the Three Months Ended March 31,

2018  2017 

Operating revenues:

 

 

 

 

     Freight revenues

$

5,122 

$

4,794 

     Other revenues

 

353 

 

338 

Total operating revenues

 

5,475 

 

5,132 

Operating expenses:

 

 

 

 

     Compensation and benefits

 

1,273 

 

1,262 

     Purchased services and materials

 

599 

 

566 

     Fuel

 

589 

 

460 

     Depreciation

 

543 

 

520 

     Equipment and other rents

 

266 

 

276 

     Other

 

266 

 

260 

Total operating expenses

 

3,536 

 

3,344 

Operating income

 

1,939 

 

1,788 

Other income/(expense) (Note 7)

 

(42)

 

72 

Interest expense

 

(186)

 

(172)

Income before income taxes

 

1,711 

 

1,688 

Income taxes

 

(401)

 

(616)

Net income

$

1,310 

$

1,072 

Share and Per Share (Note 9):

 

 

 

 

     Earnings per share - basic

$

1.69 

$

1.32 

     Earnings per share - diluted

$

1.68 

$

1.32 

     Weighted average number of shares - basic

 

776.4 

 

811.5 

     Weighted average number of shares - diluted

 

779.6 

 

814.8 

Dividends declared per share

$

0.73 

$

0.605 





C ondensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended March 31,

2018  2017 

Net income

$

1,310 

$

1,072 

Other comprehensive income/(loss):

 

 

 

 

    Defined benefit plans

 

19 

 

11 

    Foreign currency translation

 

 -

 

Total other comprehensive income/(loss) [a]

 

19 

 

20 

Comprehensive income

$

1,329 

$

1,092 



[a] Net of deferred taxes of $(6 ) million and $(14 ) million during the three months ended March 31, 2018 , and 2017 , respectively.

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

 

 

3


 

C ondensed Consolidated Statements of Financial Position (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 

 



 

 

 

 

 



March 31,

 

December 31,

Millions, Except Share and Per Share Amounts

2018 

 

2017 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

     Cash and cash equivalents

$

1,048 

 

$

1,275 

     Short-term investments (Note 14)

 

90 

 

 

90 

     Accounts receivable, net (Note 11)

 

1,571 

 

 

1,493 

     Materials and supplies

 

808 

 

 

749 

     Other current assets

 

380 

 

 

399 

Total current assets

 

3,897 

 

 

4,006 

Investments

 

1,810 

 

 

1,809 

Net properties (Note 12)

 

51,696 

 

 

51,605 

Other assets

 

386 

 

 

386 

Total assets

$

57,789 

 

$

57,806 

Liabilities and Common Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

     Accounts payable and other current liabilities (Note 13)

$

2,855 

 

$

3,139 

     Debt due within one year (Note 15)

 

1,891 

 

 

800 

Total current liabilities

 

4,746 

 

 

3,939 

Debt due after one year (Note 15)

 

15,697 

 

 

16,144 

Deferred income taxes

 

11,050 

 

 

10,936 

Other long-term liabilities

 

1,907 

 

 

1,931 

Commitments and contingencies (Note 17)

 

 

 

 

 

Total liabilities

 

33,400 

 

 

32,950 

Common shareholders' equity:

 

 

 

 

 

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

 

 

 

 

 

     1,111,814,739 and 1,111,371,304 issued; 772,517,399 and 780,917,756

 

 

 

 

 

     outstanding, respectively

 

2,779 

 

 

2,778 

     Paid-in-surplus

 

4,473 

 

 

4,476 

     Retained earnings

 

42,359 

 

 

41,317 

     Treasury stock

 

(23,800)

 

 

(22,574)

     Accumulated other comprehensive loss (Note 10)

 

(1,422)

 

 

(1,141)

Total common shareholders' equity

 

24,389 

 

 

24,856 

Total liabilities and common shareholders' equity

$

57,789 

 

$

57,806 



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

 

 

4


 

C ondensed Consolidated Statements of Cash Flows (Unaudited)

Union Pacific Corporation and Subsidiary Companies







 

 

 

 



 

 

 

 

Millions,

 

 

for the Three Months Ended March 31,

2018  2017 

Operating Activities

 

 

 

 

Net income

$

1,310 

$

1,072 

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

 

 

 

 

  Depreciation

 

543 

 

520 

  Deferred and other income taxes

 

112 

 

145 

  Other operating activities, net

 

339 

 

94 

  Changes in current assets and liabilities:

 

 

 

 

     Accounts receivable, net

 

(78)

 

(21)

     Materials and supplies

 

(59)

 

(43)

     Other current assets

 

(112)

 

(132)

     Accounts payable and other current liabilities

 

(379)

 

(186)

     Income and other taxes

 

225 

 

434 

Cash provided by operating activities

 

1,901 

 

1,883 

Investing Activities

 

 

 

 

Capital investments

 

(910)

 

(811)

Purchases of short-term investments (Note 14)

 

(60)

 

(90)

Maturities of short-term investments (Note 14)

 

60 

 

60 

Proceeds from asset sales

 

12 

 

17 

Other investing activities, net

 

(21)

 

(19)

Cash used in investing activities

 

(919)

 

(843)

Financing Activities

 

 

 

 

Debt issued (Note 15)

 

1,706 

 

200 

Common share repurchases (Note 18)

 

(1,166)

 

(759)

Debt repaid

 

(1,157)

 

(184)

Dividends paid

 

(568)

 

(492)

Other financing activities, net

 

(24)

 

(33)

Cash used in financing activities

 

(1,209)

 

(1,268)

Net change in cash and cash equivalents

 

(227)

 

(228)

Cash and cash equivalents at beginning of year

 

1,275 

 

1,277 

Cash and cash equivalents at end of period

$

1,048 

$

1,049 

Supplemental Cash Flow Information

 

 

 

 

  Non-cash investing and financing activities:

 

 

 

 

     Capital investments accrued but not yet paid

$

74 

$

94 

     Common shares repurchased but not yet paid

 

64 

 

43 

  Cash (paid for)/received from:

 

 

 

 

     Income taxes, net of refunds

$

$

(3)

     Interest, net of amounts capitalized

 

(230)

 

(203)



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

 

 

5


 

Co ndensed 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, 2017

1,111.0  (295.2)

 

 

$   2,777 

 

$   4,421 

 

$   32,587 

 

$   (18,581)

 

$   (1,272)

 

$    19,932 

Net income

 

 

 

 

 -

 

 -

 

1,072 

 

 -

 

 -

 

1,072 

Other comprehensive income

 

 

 

 

 -

 

 -

 

 -

 

 -

 

20 

 

20 

Conversion, stock option
   exercises, forfeitures, and other

0.4  0.5 

 

 

 

(15)

 

 -

 

 

 -

 

(7)

Share repurchases (Note 18)

 -

(7.5)

 

 

 -

 

 -

 

 -

 

(802)

 

 -

 

(802)

Cash dividends declared
   ( $0.605 per share)

 -

 -

 

 

 -

 

 -

 

(492)

 

 -

 

 -

 

(492)

Balance at March 31, 2017

1,111.4  (302.2)

 

 

$   2,779 

 

$   4,406 

 

$   33,167 

 

$   (19,377)

 

$   (1,252)

 

$    19,723 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

1,111.4  (330.5)

 

 

$   2,778 

 

$   4,476 

 

$   41,317 

 

$   (22,574)

 

$   (1,141)

 

$    24,856 

Net income

 

 

 

 

 -

 

 -

 

1,310 

 

 -

 

 -

 

1,310 

Other comprehensive income

 

 

 

 

 -

 

 -

 

 -

 

 -

 

19 

 

19 

Conversion, stock option
   exercises, forfeitures, and other

0.4  0.5 

 

 

 

(3)

 

 -

 

 

 -

 

Share repurchases (Note 18)

 -

(9.3)

 

 

 -

 

 -

 

 -

 

(1,230)

 

 -

 

(1,230)

Cash dividends declared
   ( $0.73 per share)

 -

 -

 

 

 -

 

 -

 

(568)

 

 -

 

 -

 

(568)

Reclassification due to ASU
   2018-02 adoption (Note 2)

 -

 -

 

 

 -

 

 -

 

300 

 

 -

 

(300)

 

 -

Balance at March 31, 2018

1,111.8  (339.3)

 

 

$   2,779 

 

$   4,473 

 

$   42,359 

 

$   (23,800)

 

$   (1,422)

 

$    24,389 



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

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

 

 

6


 

UN ION 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). Pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and notes thereto contained in our 2017 Annual Report on Form 10-K. Our Consolidated Statement of Financial Position at December 31, 2017 , is derived from audited financial statements. The res ults of operations for the three months ended March 31, 2018 , are not necessarily indicative of the results for the entire year ending December 31, 2018 .  



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 may require the use of more judgment and estimates in order to correctly recognize the revenue expected as an outcome of each specific performance obligation. Additionally, this guidance will require the disclosure of the nature, amount, and timing of revenue arising from contracts so as to aid in the understanding of the users of financial statements.



Effective January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective transition method. The Company analyzed its freight and other revenues and recognize s freight revenues as freight moves fr om origin to destination and recognize s other revenues as identified performance obl igations are satisfied.  We also analyzed freight and other revenues in the context of the new guidance on principal versus agent considerations and evaluated the required new disclosures. The ASU did not have an impact on our consolidated financial position, results of operations, or cash flows.



In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01), Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10) . ASU 2016-01 provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. Effective January 1, 2018, the Company adopted the ASU and it did not have an impact on our consolidated financial position, results of operations, or cash flows.



In March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715) . ASU 2017-07 requires the service cost component be reported separately from the other components of net benefit costs in the income statement, provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the income statement, and allows only the service cost component of net benefit cost to be eligible for capitalization. Effective January 1, 2018, we adopted the standard on a retrospective basis .     As a result of the adoption, only service costs are recorded within compensation and ben efits expense, and the other components of net benefit costs are now recorded

 

7


 

within other income /(expense) .   The retrospective adoption of ASU 2017-07 decreased operating income by $4 million and $5 million for the three months ended March 31, 2018 and 2017, respectively, and increased other income by $4 million and $5 million for the same periods.



On February 14, 2018, the FASB issued Accounting Standards Update 2018-02, (ASU 2018-02), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows entities the option to reclassify from accumulated other comprehensive income (“AOCI”) to retained earnings the income tax effects that remain in AOCI resulting from the application of the Tax Act.  ASU 2018-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption of the ASU is permitted, including adoption in any interim period.  We have adopted ASU 2018-02 during the first quarter of 2018.  As a result of this adoption, we have elected to reclassify $30 0  m illion from AOCI to retained earnings.  UP has adopted the policy that future income tax effects that are stranded in AOCI will be released only when the entire portfolio of the type of item is liquidated.



In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Subtopic 842) . ASU 2016-02 will require companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. Management is currently evaluating the impact of this standard on our consolidated financial position, results of operations, and cash flows, but expects that the adoption will result in a n increase in the Company’s assets and liabilities of over $2 billion.



 





3. Significant Accounting Policies Update



Our significant accounting policies are detailed in Note 2 of our Annual Report on Form 10-K for the year ended December 31, 2017.  Changes to our accounting policies as a result of adopting ASU 2014-09 are discussed below.



Revenue Recognition – Freight revenues are derived from contracts with customers. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Our contracts include private agreements, private rate/letter quotes, public circulars/tariffs, and interline/foreign agreements. The performance obligation in our contracts is typically delivering a specific commodity from a place of origin to a place of destination and our commitment begins with the tendering and acceptance of a freight bill of lading and is satisfied upon delivery at destination. We consider each freight shipment to be a distinct performance obligation.



We recognize freight revenues over time as freight moves from origin to destination. The allocation of revenue between reporting periods is based on the relative transit time in each reporting period with expenses recognized as incurred. Outstanding performance obligations related to freight moves in transit totaled $161 million at March 31, 2018 and $154 million at December 31, 2017 and are expected to be recognized in the next quarter as we satisfy our remaining performance obligations and deliver freight to destination. The transaction price is generally specified in a contract and may be dependent on the commodity, origin/destination, and route. Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a reduction to operating revenues based on actual or projected future customer shipments.



Under typical payment terms, our customers pay us after each performance obligation is satisfied and there are no material contract assets or liabilities associated with our freight revenues. Outstanding freight receivables are presented in our Consolidated Statement of Financial Position as Accounts Receivables, net.



Freight revenue related to interline transportation services that involve other railroads are reported on a net basis.  The portion of the gross amount billed to customers that is remitted by the Company to another party is not reflected as freight revenue.



Other revenues consist primarily of revenues earned by our subsidiaries and accessorial revenues. Non-rail subsidiary revenues are generally recognized over time as shipments move from origin to destination. The allocation of revenue between reporting periods is based on the relative transit time in each reporting

 

8


 

period with expenses recognized as incurred. Accessorial revenues are recognized at a point in time as performance obligations are satisfied.  

 





4 . 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. Our operating revenues are primarily derived from contracts with customers for the transportation of freight from origin to destination.  The following table represents a disaggregation of our freight and other revenues :





 

 

 

 



 

 

 

 



Three Months Ended



March 31,

Millions

2018  2017 

Agricultural Products

$

1,098 

$

1,094 

Energy

 

1,173 

 

1,024 

Industrial

 

1,340 

 

1,264 

Premium

 

1,511 

 

1,412 

Total freight revenues

$

5,122 

$

4,794 

Subsidiary revenues

 

217 

 

215 

Accessorial revenues

 

121 

 

106 

Other revenues

 

15 

 

17 

Total operating revenues

$

5,475 

$

5,132 

 

Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of origination or destination for some products we transport are outside the U.S. Each of our commodity groups includes revenue from shipments to and from Mexico. Included in the above table are freight revenues from our Mexico business which amounted to $ 579   million and $566 million, respectively, for the three months ended March 31, 2018, and March 31, 2017 .

 

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:





 

 

 

 



 

 

 

 



Three Months Ended



March 31,

Millions

2018  2017 

Stock-based compensation, before tax:

 

 

 

 

     Stock options

$

$

     Retention awards

 

21 

 

22 

Total stock-based compensation, before tax

$

25 

$

26 

Excess tax benefits from equity compensation plans

$

15 

$

22 

 

9


 

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

2018  2017 

Risk-free interest rate

 

2.6% 

 

2.0% 

Dividend yield

 

2.3% 

 

2.3% 

Expected life (years)

 

5.3 

 

5.3 

Volatility

 

21.1% 

 

21.7% 

Weighted-average grant-date fair value of options granted

$

21.70 

$

18.19 

 

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the expected 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 expected 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, 2018 , is presented below:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



Options (thous.)

Weighted-Average
Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value (millions)

Outstanding at January 1, 2018

5,630 

$

83.37  5.8 

yrs.

$

286 

Granted

800 

 

124.86 

 

N/A

 

N/A

Exercised

(446)

 

62.14 

 

N/A

 

N/A

Forfeited or expired

(8)

 

86.57 

 

N/A

 

N/A

Outstanding at March 31, 2018

5,976 

$

90.50  6.2 

yrs.

$

263 

Vested or expected to vest at March 31, 2018

5,918 

$

90.33  6.2 

yrs.

$

261 

Options exercisable at March 31, 2018

4,045 

$

82.73  5.0 

yrs.

$

209 

 

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, 2018 , are subject to performance or market-based vesting conditions.



At March 31, 2018 , there was $32 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



March 31,

Millions

2018  2017 

Intrinsic value of stock options exercised

$

33 

$

23 

Cash received from option exercises

 

26 

 

20 

Treasury shares repurchased for employee payroll taxes

 

(8)

 

(7)

Tax benefit realized from option exercises

 

 

Aggregate grant-date fair value of stock options vested

 

18 

 

19 

 

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.



 

10


 

Changes in our retention awards during the three months ended March 31, 2018 , were as follows:





 

 

 



 

 

 



Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2018

2,313 

$

95.04 

Granted

532 

 

125.08 

Vested

(611)

 

87.94 

Forfeited

(24)

 

97.76 

Nonvested at March 31, 2018

2,210 

$

104.20 

 

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, 2018 , there was $133 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 2.4 years.



Performance Retention Awards   – In February 2018, our Board of Directors approved performance stock unit grants. The basic terms of these performance stock units are identical to those granted in February 2017, except for different annual return on invested capital (ROIC) performance targets. The plan also includes relative operating income growth (OIG) as a modifier compared to the companies included in the S&P 500 Industrials Index. 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. The modifier can be up to +/- 25% of the award earned based on the ROIC achieved.



Stock units awarded to selected employees under these grants are subject to continued employment for 37 months and the attainment of cert ain levels of ROIC , modified for the relative OIG. 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, and with respect to the third year of the plan, the relative OIG modifier. 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 2018 grant were as follows:





 

 



 

 



2018 

Dividend per share per quarter

$

0.73 

Risk-free interest rate at date of grant

 

2.3% 

 

Changes in our performance retention awards during the three months ended March 31, 2018 , were as follows:





 

 

 



 

 

 



Shares
(thous.)

Weighted-Average
Grant-Date Fair Value

Nonvested at January 1, 2018

1,138 

$

92.92 

Granted

348 

 

117.80 

Vested

(94)

 

112.19 

Unearned

(201)

 

114.97 

Forfeited

(5)

 

78.20 

Nonvested at March 31, 2018

1,186 

$

95.02 

 

At March 31, 2018 , there was $56 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.8 years. This expense is subject to achievement of the performance measures established for the performance stock unit grants.

 

 

11


 

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 were as follows for the three months ended March 31:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Pension

 

OPEB

Millions

2018  2017 

 

2018  2017 

Service cost

$

27 

$

23 

 

$

 -

$

 -

Interest cost

 

36 

 

35 

 

 

 

Expected return on plan assets

 

(68)

 

(66)

 

 

 -

 

 -

Amortization of actuarial loss

 

23 

 

20 

 

 

 

Net periodic benefit cost

$

18 

$

12 

 

$

$



As a result of the adoption of ASU 2017-07 effective January 1, 2018, only service costs are recorded within compensation and ben efits expense, and the other components of net benefit costs are now recorded within other income /(expense) .  



Cash Contributions



For the three months ended March 31, 2018 ,   we did not make any cash contributions to the qualified pension plan. Any contributions made during 2018 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, 2018 , we do not have minimum cash funding requirements for 2018 .

 

 

12


 

7. Other Income / (Expense)



Other income / (expense) included the following:





 

 

 

 



 

 

 

 



Three Months Ended



March 31,

Millions

2018  2017 

Early extinguishment of debt [a]

$

(85)

$

 -

Rental income

 

28 

 

37 

Net gain on non-operating asset dispositions [b]

 

 

34 

Interest income

 

 

Net periodic pension and OPEB costs

 

 

Non-operating environmental costs and other

 

 

(6)

Total

$

(42)

$

72 



[a] 2018 includes a debt extinguishment charge for the early redemption of certain bonds and debentures (Note 15) .  

[b] 2017 includes $26 million related to a real estate sale in the first quarter.



8. Income Taxes



On December 22, 2017, The Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act made significant changes to federal tax law, including a reduction in the federal income tax rate from 35% to 21% effective January 1, 2018, 100% bonus depreciation for certain capital expenditures, stricter limits on deductions for interest and certain executive compensation, and a one-time transition tax on previously deferred earnings of certain foreign subsidiaries. As a result of our initial analysis of the Tax Act and existing implementation guidance, we remeasured our deferred tax assets and liabilities and computed our transition tax liability net of offsetting foreign tax credits. This resulted in a $5.9 billion reduction in our income tax expense in the fourth quarter of 2017.  We also recorded a $212 million reduction to our operating expense related to income tax adjustments at equity-method affiliates in the fourth quarter of 2017.



The SEC provided guidance in SAB 118 on accounting for the tax effects of the Tax Act. In accordance with that guidance, some of the income tax effects recorded in 2017 are provisional, including those related to our analysis of 100% bonus depreciation for certain capital expenditures, stricter limits on deductions for certain executive compensation, the one-time transition tax, and the reduction to our operating expense related to income tax adjustments at equity-method affiliates. The accounting for the income tax effects may be adjusted during 2018 as a result of continuing analysis of the Tax Act; additional implementation guidance from the IRS, state tax authorities, the SEC, the FASB, or the Joint Committee on Taxation; and new information from domestic or foreign equity affiliates.  We had no material adjustments to our initial analysis of the Tax Act during the first quarter of 2018.



UPC is not currently under examination by the Internal Revenue Service.  The statute of limitations has run for all years prior to 2014.  In 2017, UPC amended its 2013 income tax return, primarily to claim deductions resulting from the resolution of prior year IRS examinations.  The IRS and Joint Committee on Taxation have completed their review of this return and we anticipate receiving a refund of $18 million in the second quarter of 2018.



Several state tax authorities are examining our state tax returns for years 2010 through 2015.



At March 31, 2018, we had a net liability for unrecognized tax benefits of $182 million.



 

13


 

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,

2018  2017 

Net income

$

1,310 

$

1,072 

Weighted-average number of shares outstanding:    

 

 

 

 

    Basic

 

776.4 

 

811.5 

    Dilutive effect of stock options

 

1.8 

 

1.8 

    Dilutive effect of retention shares and units 

 

1.4 

 

1.5 

Diluted

 

779.6 

 

814.8 

Earnings per share – basic

$

1.69 

$

1.32 

Earnings per share – diluted

$

1.68 

$

1.32 

Stock options excluded as their inclusion would be anti-dilutive

 

0.5 

 

1.6 

 

10 . Accumulated Other Comprehensive Income/(Loss)



Reclassifications out of accumulated other comprehensive income/(loss) for the three months ended March 31, 2018 , and 2017 , were as follows (net of tax):







 

 

 

 

 

 



 

 

 

 

 

 

Millions

Defined
benefit
plans

Foreign
currency
translation

Total

Balance at January 1, 2018

$

(1,029)

$

(112)

$

(1,141)

Other comprehensive income/(loss) before reclassifications

 

 -

 

 -

 

 -

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

 

19 

 

 -

 

19 

Net year-to-date other comprehensive income/(loss),
net of taxes of $(6) million

 

19 

 

 -

 

19 

Reclassification due to ASU 2018-02 adoption (Note 2)

 

(225)

 

(75)

 

(300)

Balance at March 31, 2018

$

(1,235)

$

(187)

$

(1,422)



 

 

 

 

 

 

Balance at January 1, 2017

$

(1,132)

$

(140)

$

(1,272)

Other comprehensive income/(loss) before reclassifications

 

(3)

 

 

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

 

14 

 

 -

 

14 

Net year-to-date other comprehensive income/(loss),
net of taxes of $(14) million

 

11 

 

 

20 

Balance at March 31, 2017

$

(1,121)

$

(131)

$

(1,252)



[a] The accumulated other comprehensive income/(loss) reclassification components are 1) prior service cost/(credit) and 2) net actuarial loss which are both included in the computation of net p eriodic 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, 2018 , and December 31, 2017 , our accounts receivable were reduced by $3 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 , 2018 , and December 31, 2017 , receivables classified as other assets were reduced by allowances of   $19 million and   $17 million, respectively .  

 

14


 



Receivables Securitization Facility     The Railroad maintains a $650 million, 3 -year receivables securitiz ation facility (the Receivables Facility) maturing in July 2019 . Under the Receivables Facility, the Railroad sells most of its eligible third-party receivables to Union Pacific Receivables , Inc. (UPRI), a consolidated, 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 Receivables Facility was $ 650   million and $500 at March 31, 2018 , and December 31, 2017 , respectively. The Receivables Facility was supported by $1.2 billion and $1.1 billion of accounts receivable as collateral at March 31, 2018 , and December 31, 2017 , 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 all owed to maintain under the Receivables 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 Receivables Facility would not materially change.



The costs of the Receivables Facility include interest, which will vary based on prevailing benchmark and commercial paper rates, program fees paid to participating banks, commercial paper issuance costs, and fees of participating banks for unused commitment availability. The costs of the Receivables Facility are included in interest expense and were $4 million and   $1 million for the three months ended March 31, 2018 , and 2017 , respectively.

 

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, 2018

Cost

 Depreciation

Value

Useful Life

Land

$

5,271 

$

N/A

$

5,271 

N/A

Road:

 

 

 

 

 

 

 

  Rail and other track material

 

16,439 

 

5,997 

 

10,442  43 

  Ties

 

10,227 

 

2,935 

 

7,292  33 

  Ballast

 

5,442 

 

1,533 

 

3,909  34 

  Other roadway [a]

 

19,143 

 

3,549 

 

15,594  47 

Total road 

 

51,251 

 

14,014 

 

37,237 

N/A

Equipment:

 

 

 

 

 

 

 

  Locomotives

 

9,667 

 

3,737 

 

5,930  19 

  Freight cars

 

2,295 

 

985 

 

1,310  24 

  Work equipment and other

 

941 

 

277 

 

664  19 

Total equipment 

 

12,903 

 

4,999 

 

7,904 

N/A

Technology and other

 

1,099 

 

462 

 

637  11 

Construction in progress

 

647 

 

 -

 

647 

N/A

Total

$

71,171 

$

19,475 

$

51,696 

N/A

 

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





 

15


 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Millions, Except Estimated Useful Life

 

 Accumulated

Net Book

Estimated

As of December 31, 2017

Cost

 Depreciation

Value

Useful Life

Land

$

5,258 

$

      N/A

$

5,258 

N/A

Road:

 

 

 

 

 

 

 

  Rail and other track material

 

16,327 

 

5,929 

 

10,398  43 

  Ties

 

10,132 

 

2,881 

 

7,251  33 

  Ballast

 

5,406 

 

1,509 

 

3,897  34 

  Other roadway [a]

 

18,972 

 

3,482 

 

15,490  47 

Total road 

 

50,837 

 

13,801 

 

37,036 

N/A

Equipment:

 

 

 

 

 

 

 

  Locomotives

 

9,686 

 

3,697 

 

5,989  19 

  Freight cars

 

2,255 

 

983 

 

1,272  24 

  Work equipment and other

 

936 

 

267 

 

669  19 

Total equipment 

 

12,877 

 

4,947 

 

7,930 

N/A

Technology and other

 

1,105 

 

460 

 

645  11 

Construction in progress

 

736 

 

 -

 

736 

N/A

Total

$

70,813 

$

19,208 

$

51,605 

N/A



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

 

13 . Accounts Payable and Other Current Liabilities





 

 

 

 



 

 

 

 



Mar. 31,

Dec. 31,

Millions

2018  2017 

Accounts payable

$

768 

$

1,013 

Income and other taxes payable

 

641 

 

547 

Accrued wages and vacation

 

388 

 

384 

Accrued casualty costs

 

189 

 

194 

Interest payable

 

165 

 

220 

Equipment rents payable

 

113 

 

110 

Other

 

591 

 

671 

Total accounts payable and other current liabilities

$

2,855 

$

3,139 

 

14 . Financial Instruments



Short-Term Investments – The Company’s short-term investments consist of time deposits ( $90 million as of March 31, 2018 ). These investments are considered level 2 investments and are valued at amortized cost, which approximates fair value . All short-term investments have a maturity of less than one year and are classified as held-to-maturity.  There were no transfers out of Level 2 during the three months ended March 31, 2018 .



Fair Value of Financial Instruments – The fair value of our short- and long-term debt was estimated using a market value price model, which utilizes applicable U.S. Treasury rates along with current market quotes on comparable debt securities. All of the inputs used to determine the fair market value of the Corporation’s long-term debt are Level 2 inputs and obtained from an independent source. At March 31, 2018 , the fair value of total debt was $18.0 billion, approximately $0.4 billion more than the carrying value. At December 31, 2017 , the fair value of total debt was $18.2 billion, approximately $1.3 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 March 31, 2018 , and December 31, 2017 , approxim ately $0 and   $155 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.

 

 

16


 

15 . Debt



Credit Facilities – At March 31, 2018 , we had $ 1.7 billion of credit available under our revolving credit facility, which is designated for general corporate purposes and supports the issuance of commercial paper. We did not draw on the facility during the three months ended March 31, 2018 . 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 credit ratings for our senior unsecured debt. The facility matures in May 2019 under a five -year term and requires UPC to maintain a debt-to-net-worth coverage ratio.



The definition of debt used for purposes of calculating the debt-to-net-worth coverage ratio includes, among other things, certain credit arrangements, capital leases, guarantees and unfunded and vested pension benefits under Title IV of ERISA. At March 31, 2018 , the Company was in compliance with the debt-to-net-worth coverage ratio, which allows us to carry up to $48.8 billion of debt (as defined in the facility), and we had $17.6 billion of debt (as defined in the facility) outstanding at that date. Under our current financial 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 $125 million cross-default provision and a change-of-control provision.  



Duri ng the three months ended March 31, 2018, we issued $1.56 billion and repaid $920 million of commercial pape r with maturities ranging from 1 to 34 days, and at March 31, 2018, we had $637 million of 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 an automatic shelf registration statement with the SEC that became effective on February 12, 2018.  The Board of Directors authorized the issuance of up to $6 billion of debt securities, replacing the prior Board authorization in July 2016 , which had $1.55 billion of authority remaining. Under our 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.



During the three months ended March 31, 2018, we did not issue any debt securities under this registration statement. At   March 31, 2018 , we had remaining authority to issue up to $6 billion of debt securities under our shelf registration.



Receivables Securitization Facility – As of March 31, 2018 , and December 31, 2017 , we recorded $650 million and $500 million , respectively, of borrowings under our Receivables Facility as secured debt. (See further discussion of our receivables securitization facility in Note 1 1 ).



Debt Redemption On March 15, 2018 , we effectively redeemed, in entirety, the Missouri Pacific 5% Income Debentures due 2045 , the Chicago and Eastern Illinois 5% Income Debentures due 2054 , and the Missouri Pacific 4.75% General Mortgage Income Bonds Series A due 2020 and Series B due 2030 .  The debentures had principal outstanding of $96 million and $2 million, respectively, and the bonds had principal outstanding of $30 million and $27 million, respectively.  The bonds and debentures were assumed by the Railroad in the 1982 acquisition of the Missouri Pacific Railroad Company, with a weighted average interest rate of 4.9% .  The carrying value of all four bonds and debentures at the time of redemption was $70 million, due to fair value purchase accounting adjustments related to the acquisition. The redemption resulted in an early extinguishment charge of $85 million in the first quarter of 2018 .

 

16 . 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) 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

 

17


 

assets at fixed prices. Depending on market conditions, fixed-price purchase options available in the leases could potentially provide benefits to us; however, these benefits are not expected to be significant.



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 options are not considered to be potentially significant to the VIEs. The future minimum lease payments associated with the VIE leases totaled $ 1.8 billion as of March 31, 2018 .

 

17 . 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. To the extent possible, we have recorded a liability where asserted and unasserted claims are considered probable and where such claims can be reasonably estimated. 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 95% of the recorded liability is related to asserted claims and approximately 5% is related to unasserted claims at March 31, 2018 . 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 $272 million to $296 million. We record an accrual at the low end of the range as no amount of loss within the range is more probable than any other. Estimates can vary over time due to evolving trends in litigation.



Our personal injury liability activity was as follows :





 

 

 

 



 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended March 31,

2018  2017 

Beginning balance

$

285 

$

290 

Current year accruals

 

19 

 

19 

Changes in estimates for prior years

 

(11)

 

Payments

 

(21)

 

(22)

Ending balance at March 31

$

272 

$

291 

Current portion, ending balance at March 31

$

70 

$

65 

 

We have insurance coverage for a portion of the costs incurred to resolve personal injury-related claims, and we have recognized an asset for estimated insurance recoveries at March 31, 2018 , and December 31, 2017 .  Any changes to recorded insurance recoveries are included in the above table in the Changes in estimates for prior years category.



 

18


 

Environmental Costs We are subject to federal, state, and local environmental laws and regulations. We have identified 310 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, 21 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. Our environmental liability is not discounted to present value due to the uncertainty surrounding the timing of future payments.



Our environmental liability activity was as follows:





 

 

 

 



 

 

 

 

Millions,

 

 

 

 

for the Three Months Ended March 31,

2018  2017 

Beginning balance

$

196 

$

212 

Accruals

 

16 

 

Payments

 

(14)

 

(11)

Ending balance at March 31

$

198 

$

203 

Current portion, ending balance at March 31

$

57 

$

53 

 

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   March 31, 2018 , and December 31, 2017 , we were contingently liable for   $33 million in guarantees. The fair value of these obligations as of both March 31 , 2018 , and December 31, 2017 was $0 . We entered into these contingent guarantees in the normal course of business, and they include guaranteed obligations related to our 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.



 

19


 

Indemnities –   We are contingently obligated under a variety of indemnification arrangements, although in some cases the extent of our potential liability is limited, depending on the nature of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions .  



Operating Leases – At March 31, 2018 , 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 $2.4 billion.



18. Share Repurchase Program



Effective January 1, 2017, our Board of Directors authorized the repurchase of up to 120 million shares of our common stock by December 31, 2020, replacing our previous repurchase program. As of March 31, 2018, we repurchased a total of $24.4 billion of our common stock since the commencement of our repurchase programs in 2007. The table below represents shares repurchased under this repurchase program during this reporting period.  





 

 

 

 

 

 



 

 

 

 

 

 



Number of Shares Purchased

Average Price Paid



2018  2017  2018  2017 

First quarter

9,259,004  7,531,300 

$

132.84 

$

106.55 

Remaining number of shares that may be repurchased under current authority

 

74,388,148 

 

Management's assessments of market conditions and other pertinent factors 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.



From April 1, 2018, through April 25, 2018, we repurchased 2.8 million shares at an aggregate cost of approximately $375 million.



19 . Related Parties



UPRR and other North American railroad companies jointly own TTX Company (TTX ). UPRR has a 36.79% economic and voting interest in TTX while the oth er North American railroads own the remaining interest. In accordance with ASC 323 Investments - Equity Method and Joint Venture , UPRR applies the equ ity method of accounting to our investment in TTX.



TTX is a railcar pooling company that owns railcars and intermodal wells to serve North America’s railroads. TTX assists railroads in meeting the needs of their customers by providing railcars in an efficient, pooled environment. All railroads have the ability to utilize TTX railcars through car hire by renting railcars at stated rates.



UPRR had $1.2  b illion recognized as investments related to TTX in our Condensed Consolidated Statements of Financial Position as of both   March 31, 2018 , and December 31, 2017 . TTX car hire expenses of $105 million and   $86 million for the three months ended March 31, 2018 , and 2017 ,   respectively , are included in equipment and other rents in our Condensed Consolidated Statements of Income. In addition, UPRR had accounts payable to TTX of $ 68 million and   $6 9 million as of March 31, 2018 , and December 31, 2017 , respectively. 



 

20


 

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



UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

RESULTS OF OPERATIONS



Three Months Ended March 31, 2018 , Compared to

Three Months Ended March 31, 2017





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



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: Corporate Secretary, Union Pacific Corporation, 1400 Douglas Street, Omaha, NE 68179.



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



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 2017 Annual Report on Form 10-K. In   2018, there were changes to our significant accounting policies as a result of adopting ASU 2014-09

 

21


 

on January 1, 2018.  See Notes 2 and 3 of the Condensed Consolidated Financial Statements for further information.

 

RESULTS OF OPERATIONS



Quarterly Summary



We reported earnings of $1.68 per diluted share on net income of $1.3 billion in the first quarter of 2018 compared to earnings of $1.32 per diluted share on net income of $1.1 billion for the first quarter of 2017 .   Freight revenues increased   7% in the first quarter compared to the same period in 2017 driven by a 5% increase in average revenue per car (ARC) due to higher fuel surcharge revenue and core pricing gains Volume grew 2% , with increased demand in shale-related frac sand, intermodal, petroleum products, and automotive parts shipments, which more than offset declines in grain, coal, and rock shipments.  These top line results contributed to operating income growth of 8% compared to 2017, despite a 22% increase in fuel price.  Net income increased 22%, driven by base business operations and a lower federal tax rate, which was implemented on January 1, 2018, resulting from the passage of The Tax Cuts and Jobs Act (the “Tax Act”) in late 2017.



In the first quarter of 2018, our productivity initiatives yielded approximately $35 million, net of additional expenses due to network operational challenges, including higher labor, equipment rental, locomotive maintenance ,   and fuel consumption costs .   Despite our operational challenges, we handled volume growth of 2% with a 1% decline in work force levels, demonstrating progress i n   other resource productivity initiatives , including engineering capital projects along with management and administrative reductions .  At the end of the first quarter, approximately 300   employees across all crafts were either furloughed or in alternate work status, and approximately 300 high-horsepower, road locomoti ves were in storage.



As reported to the Association of American Railroads (AAR) in the first quarter 2018, average train speed decreased 4% to 24.8 miles per hour while average terminal dwell time increased 8% to 33.0 hours compared to the same period of 2017.  Network congestion on key routes and terminals, created in part by high freight car inventory levels, negatively impacted overall fluidity, average train speed, and terminal dwell.  Continued implementation and testing of Positive Train Control across a larger portion of our network also negatively impacted overall average train speed.



Operating Revenues





 

 

 

 

 

 



 

 

 

 

 

 

Millions,

 

 

 

 

 

%

for the Three Months Ended March 31,

2018  2017 

Change

Freight revenues

$

5,122 

$

4,794 

%

Subsidiary revenues

 

217 

 

215 

 

Accessorial revenues

 

121 

 

106  14 

 

Other

 

15 

 

17  (12)

 

Total

$

5,475 

$

5,132 

%

 

We generate freight revenues by transporting freight or other materials from our four commodity groups.  Prior to 2018, we reported on six commodity groups , thus 2017 commodity, average revenue per car, and carloadings have been realigned to the new reporting format .  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 freig ht revenues over time as shipments move from origin to destination. The allocation of revenue between reporting periods is based on the relative transit time in each reporting period with expenses recognized as incurred.



Other revenues consist primarily of revenues earned by our subsidiaries and accessorial revenues.   Non-rail s ubsidiary revenues are generally recognized over time as freight moves from origin to destination. The allocation of revenue between reporting periods is based on the relative transit time in each reporting period with expenses recognized as incurred. Accessorial revenues are recognized at a point in time as performance obligations are satisfied.  



 

22


 

Freight revenues increased 7% during the first quarter of 2018 compared to 2017 resulting from higher fuel surcharge revenue, core pricing gains, and 2% volume growth.  Growth in frac sand, intermodal, petroleum products, and automotive parts shipments more than offset declines in grain, coal, and rock shipments.



Each of our commodity groups includes revenue from fuel surcharges. Freight revenues from fuel surcharge programs were $353 million in the first quarter of 2018 compared to $ 212 million in the same period of 2017 . Higher fuel surcharge revenue resulted from higher year-over-year fuel prices , par tially offset by a lag in fuel surcharge recovery due to the sequential increase in fuel price from the fourth quarter of 2017 (it can generally take up to two m onths for changing fuel prices to affect fuel surcharge recoveries).  



Non-freight revenues increased in the   first   quarter of 2018 compared to 2017   driven primarily by h igher accessorial revenues associated with carload and container volume growth.



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





 

 

 

 

 

 



 

 

 

 

 

 

Freight Revenues

 

 

 

 

Millions,

 

 

 

 

%  

for the Three Months Ended March 31,

2018  2017 

Change

Agricultural Products

$

1,098 

$

1,094 

 -

%

Energy

 

1,173 

 

1,024  15 

 

Industrial

 

1,340 

 

1,264 

 

Premium

 

1,511 

 

1,412 

 

Total

$

5,122 

$

4,794 

%







 

 

 

 



 

 

 

 

Revenue Carloads

 

 

 

Thousands,

 

 

%  

for the Three Months Ended March 31,

2018  2017 

Change

Agricultural Products

279  290  (4)

%

Energy

419  395 

 

Industrial

411  403 

 

Premium

1,016  1,000 

 

Total

2,125  2,088 

%







 

 

 

 

 

 



 

 

 

 

 

 

Average Revenue per Car

 

%

for the Three Months Ended March 31,

2018  2017 

Change

Agricultural Products

$

3,942 

$

3,768 

%

Energy

 

2,799 

 

2,593 

 

Industrial

 

3,262 

 

3,140 

 

Premium

 

1,487 

 

1,413 

 

Average 

$

2,411 

$

2,297