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 2021 Annual Report on Form 10-K. Our Consolidated Statement of Financial Position at December 31, 2021, is derived from audited financial statements. The results of operations for the nine months ended September 30, 2022, are not necessarily indicative of the results for the entire year ending December 31, 2022.
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 November 2021, the FASB issued Accounting Standards Update No. (ASU) 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities to provide certain disclosures when they have received government assistance and use a grant or contribution accounting model by analogy to other accounting guidance. The ASU was effective January 1, 2022, and had no material impact on our consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP principles to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance was effective beginning on March 12, 2020, and can be adopted on a prospective basis no later than December 31, 2022, with early adoption permitted. The Company adopted the ASU, and it did not have an impact on our consolidated financial statements.
3. Operations and Segmentation
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide and analyze revenues 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 | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
Millions | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Bulk | | $ | 1,959 | | | $ | 1,687 | | | $ | 5,604 | | | $ | 4,847 | |
Industrial | | | 2,194 | | | | 1,911 | | | | 6,206 | | | | 5,426 | |
Premium | | | 1,956 | | | | 1,568 | | | | 5,581 | | | | 4,674 | |
Total freight revenues | | $ | 6,109 | | | $ | 5,166 | | | $ | 17,391 | | | $ | 14,947 | |
Other subsidiary revenues | | | 231 | | | | 182 | | | | 669 | | | | 539 | |
Accessorial revenues | | | 212 | | | | 198 | | | | 596 | | | | 535 | |
Other | | | 14 | | | | 20 | | | | 39 | | | | 50 | |
Total operating revenues | | $ | 6,566 | | | $ | 5,566 | | | $ | 18,695 | | | $ | 16,071 | |
Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of origin or destination for some products we transport are outside the U.S. Each of our commodity groups includes revenues from shipments to and from Mexico. Included in the above table are revenues from our Mexico business, which amounted to $708 million and $592 million, respectively, for the three months ended September 30, 2022 and 2021, and $2.0 billion and $1.8 billion, respectively, for the nine months ended September 30, 2022 and 2021.
4. Stock-Based Compensation
We have several stock-based compensation plans where employees receive nonvested stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. Starting in July 2021, employees are also able to participate in our employee stock purchase plan (ESPP).
Information regarding stock-based compensation appears in the table below:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
Millions | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Stock-based compensation, before tax: | | | | | | | | | | | | | | | | |
Stock options | | $ | 4 | | | $ | 4 | | | $ | 11 | | | $ | 12 | |
Retention awards | | | 13 | | | | 16 | | | | 54 | | | | 50 | |
ESPP | | | 4 | | | | 4 | | | | 12 | | | | 4 | |
Total stock-based compensation, before tax | | $ | 21 | | | $ | 24 | | | $ | 77 | | | $ | 66 | |
Excess tax benefits from equity compensation plans | | $ | 2 | | | $ | 1 | | | $ | 20 | | | $ | 18 | |
Stock Options – Stock options are granted at the closing price on the date of grant, have 10-year contractual terms, and vest no later than 3 years from the date of grant. None of the stock options outstanding at September 30, 2022, are subject to performance or market-based vesting conditions.
The table below shows the annual weighted-average assumptions used for Black-Scholes valuation purposes:
Weighted-Average Assumptions | | 2022 | | | 2021 | |
Risk-free interest rate | | | 1.6 | % | | | 0.4 | % |
Dividend yield | | | 1.9 | % | | | 1.9 | % |
Expected life (years) | | | 4.4 | | | | 4.6 | |
Volatility | | | 28.7 | % | | | 28.3 | % |
Weighted-average grant-date fair value of options granted | | $ | 51.92 | | | $ | 39.97 | |
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 stock option.
A summary of stock option activity during the nine months ended September 30, 2022, is presented below:
| Options (thous.) | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (millions) | |
Outstanding at January 1, 2022 | | | 2,106 | | | $ | 149.84 | | | | 6.3 | | | $ | 215 | |
Granted | | | 328 | | | | 244.35 | | | | N/A | | | | N/A | |
Exercised | | | (397 | ) | | | 125.28 | | | | N/A | | | | N/A | |
Forfeited or expired | | | (29 | ) | | | 213.28 | | | | N/A | | | | N/A | |
Outstanding at September 30, 2022 | | | 2,008 | | | $ | 169.22 | | | | 6.3 | | | $ | 71 | |
Vested or expected to vest at September 30, 2022 | | | 1,987 | | | $ | 168.69 | | | | 6.2 | | | $ | 70 | |
Options exercisable at September 30, 2022 | | | 1,331 | | | $ | 143.54 | | | | 5.1 | | | $ | 69 | |
At September 30, 2022, there was $19 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.2 years. Additional information regarding stock option exercises appears in the following table:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
Millions | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Intrinsic value of stock options exercised | | $ | 7 | | | $ | 1 | | | $ | 51 | | | $ | 33 | |
Cash received from option exercises | | | 7 | | | | 1 | | | | 24 | | | | 35 | |
Treasury shares repurchased for employee payroll taxes | | | (2 | ) | | | - | | | | (7 | ) | | | (7 | ) |
Tax benefit realized from option exercises | | | 1 | | | | - | | | | 7 | | | | 6 | |
Aggregate grant-date fair value of stock options vested | | | - | | | | - | | | | 13 | | | | 14 | |
Retention Awards – Retention awards are granted at no cost to the employee, vest over periods lasting up to 4 years, and dividends and dividend equivalents are paid to participants during the vesting periods.
Changes in our retention awards during the nine months ended September 30, 2022, were as follows:
| Shares (thous.) | Weighted-Average Grant-Date Fair Value | |
Nonvested at January 1, 2022 | | | 1,287 | | | $ | 165.10 | |
Granted | | | 238 | | | | 243.92 | |
Vested | | | (408 | ) | | | 126.06 | |
Forfeited | | | (50 | ) | | | 191.59 | |
Nonvested at September 30, 2022 | | | 1,067 | | | $ | 196.37 | |
At September 30, 2022, there was $99 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1
.7
years.
Performance Retention Awards – In February 2022, our Board of Directors approved performance stock unit grants. This plan is based on performance targets for annual return on invested capital (ROIC) and operating income growth (OIG) compared to companies in the S&P 100 Industrials Index plus the Class I railroads. We define ROIC as net operating profit adjusted for interest expense (including interest on average operating lease liabilities) and taxes on interest divided by average invested capital adjusted for average operating lease liabilities.
The February 2022 stock units awarded to selected employees are subject to continued employment for 37 months, the attainment of certain levels of ROIC, and the relative three-year OIG. We expense two-thirds of 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 remaining one-third of the fair value is subject to the relative three-year OIG. We measure the fair value of performance stock units based upon the closing price of the underlying common stock as of the date of grant. Dividend equivalents are accumulated during the service period and paid to participants only after the units are earned.
Changes in our performance retention awards during the nine months ended September 30, 2022, were as follows:
| Shares (thous.) | Weighted-Average Grant-Date Fair Value | |
Nonvested at January 1, 2022 | | | 641 | | | $ | 173.03 | |
Granted | | | 209 | | | | 244.35 | |
Vested | | | (56 | ) | | | 162.64 | |
Unearned | | | (163 | ) | | | 161.57 | |
Forfeited | | | (26 | ) | | | 211.28 | |
Nonvested at September 30, 2022 | | | 605 | | | $ | 200.07 | |
At September 30, 2022, there was $28 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.4 years. This expense is subject to achievement of the performance measures established for the performance stock unit grants.
5. Retirement 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. Non-union employees hired on or after January 1, 2018, are no longer eligible for pension benefits, but are eligible for an enhanced 401(k) plan.
Expense
Pension expense is 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 5-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/loss and, if necessary, amortized as pension expense.
The components of our net periodic pension benefit/cost were as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
Millions | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Service cost | | $ | 21 | | | $ | 25 | | | $ | 73 | | | $ | 85 | |
Interest cost | | | 31 | | | | 25 | | | | 93 | | | | 78 | |
Expected return on plan assets | | | (74 | ) | | | (67 | ) | | | (220 | ) | | | (202 | ) |
Amortization of actuarial loss | | | 21 | | | | 35 | | | | 64 | | | | 106 | |
Net periodic pension (benefit)/cost | | $ | (1 | ) | | $ | 18 | | | $ | 10 | | | $ | 67 | |
Cash Contributions
For the nine months ended September 30, 2022, cash contributions totaled $0 to the qualified pension plans. Any contributions made during 2022 will be based on cash generated from operations and financial market considerations. Our policy with respect to funding the qualified pension plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes. At September 30, 2022, we do not have minimum cash funding requirements for 2022.
6. Other Income
Other income included the following:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
Millions | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Real estate income [a] [b] | | $ | 103 | | | $ | 53 | | | $ | 309 | | | $ | 209 | |
Net periodic pension benefit/(cost) | | | 22 | | | | 7 | | | | 63 | | | | 18 | |
Environmental remediation and restoration | | | (4 | ) | | | (4 | ) | | | (35 | ) | | | (13 | ) |
Other [a] | | | 3 | | | | (18 | ) | | | (3 | ) | | | - | |
Total | | $ | 124 | | | $ | 38 | | | $ | 334 | | | $ | 214 | |
[a] | Prior periods have been reclassified to conform to the current period financial statement presentation. |
[b] |
The three months ended September 30, 2022, includes a $35 million gain from a sale to the Colorado Department of Transportation. The nine months ended September 30, 2022, also includes a $79 million gain from a land sale to the Illinois State Toll Highway Authority. The nine months ended September 30, 2021, includes a $50 million gain from a sale to the Colorado Department of Transportation.
|
7. Income Taxes
In the third quarter of 2022, the states of Iowa, Arkansas, and Idaho enacted legislation to reduce their corporate income tax rates for future years resulting in a $40 million reduction of our deferred tax expense.
In the second quarter of 2022, the state of Nebraska enacted legislation to reduce its corporate income tax rate for future years resulting in a $55 million reduction of our deferred tax expense.
In the second quarter of 2021, the states of Nebraska, Oklahoma, and Idaho enacted legislation to reduce their corporate income tax rates for future years resulting in a $43 million reduction of our deferred tax expense.
8. Earnings Per Share
The following table provides a reconciliation between basic and diluted earnings per share:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
Millions, Except Per Share Amounts | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Net income | | $ | 1,895 | | | $ | 1,673 | | | $ | 5,360 | | | $ | 4,812 | |
Weighted-average number of shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 620.4 | | | | 648.7 | | | | 626.1 | | | | 658.3 | |
Dilutive effect of stock options | | | 0.5 | | | | 0.8 | | | | 0.7 | | | | 0.8 | |
Dilutive effect of retention shares and units | | | 0.6 | | | | 0.8 | | | | 0.6 | | | | 0.8 | |
Diluted | | | 621.5 | | | | 650.3 | | | | 627.4 | | | | 659.9 | |
Earnings per share – basic | | $ | 3.05 | | | $ | 2.58 | | | $ | 8.56 | | | $ | 7.31 | |
Earnings per share – diluted | | $ | 3.05 | | | $ | 2.57 | | | $ | 8.54 | | | $ | 7.29 | |
Stock options excluded as their inclusion would be anti-dilutive | | | 0.3 | | | | 0.4 | | | | 0.3 | | | | 0.3 | |
9. Accumulated Other Comprehensive Income/Loss
Reclassifications out of accumulated other comprehensive income/loss were as follows (net of tax):
Millions | Defined benefit plans | Foreign currency translation | Total | |
Balance at July 1, 2022 | | $ | (629) | | | $ | (212) | | | $ | (841) | |
Other comprehensive income/(loss) before reclassifications | | | - | | | | (6) | | | | (6) | |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | | | 15 | | | | - | | | | 15 | |
Net quarter-to-date other comprehensive income/(loss), net of taxes of ($6) million | | | 15 | | | | (6) | | | | 9 | |
Balance at September 30, 2022 | | $ | (614) | | | $ | (218) | | | $ | (832) | |
| | | | | | | | | | | | |
Balance at July 1, 2021 | | $ | (1,332) | | | $ | (219) | | | $ | (1,551) | |
Other comprehensive income/(loss) before reclassifications | | | (1) | | | | (6) | | | | (7) | |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | | | 25 | | | | - | | | | 25 | |
Net quarter-to-date other comprehensive income/(loss), net of taxes of ($8) million | | | 24 | | | | (6) | | | | 18 | |
Balance at September 30, 2021 | | $ | (1,308) | | | $ | (225) | | | $ | (1,533) | |
Millions | Defined benefit plans | Foreign currency translation | Total | |
Balance at January 1, 2022 | | $ | (658 | ) | | $ | (256 | ) | | $ | (914 | ) |
Other comprehensive income/(loss) before reclassifications | | | - | | | | 38 | | | | 38 | |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | | | 44 | | | | - | | | | 44 | |
Net year-to-date other comprehensive income/(loss), net of taxes of ($17) million | | | 44 | | | | 38 | | | | 82 | |
Balance at September 30, 2022 | | $ | (614 | ) | | $ | (218 | ) | | $ | (832 | ) |
| | | | | | | | | | | | |
Balance at January 1, 2021 | | $ | (1,381 | ) | | $ | (212 | ) | | $ | (1,593 | ) |
Other comprehensive income/(loss) before reclassifications | | | (3 | ) | | | (13 | ) | | | (16 | ) |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | | | 76 | | | | - | | | | 76 | |
Net year-to-date other comprehensive income/(loss), net of taxes of ($26) million | | | 73 | | | | (13 | ) | | | 60 | |
Balance at September 30, 2021 | | $ | (1,308 | ) | | $ | (225 | ) | | $ | (1,533 | ) |
[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 periodic pension benefit/cost. See Note 5 Retirement Plans for additional details. |
10. Accounts Receivable
Accounts receivable includes freight and other receivables reduced by an allowance for doubtful accounts. At September 30, 2022, and December 31, 2021, our accounts receivable were reduced by $11 million and $10 million, respectively. 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 both September 30, 2022, and December 31, 2021, receivables classified as other assets were reduced by an allowance of $51 million.
Receivables Securitization Facility – On July 29, 2022, the Railroad completed the renewal of the receivables securitization facility (the Receivables Facility). The new $800 million, 3-year facility replaces the prior $800 million facility and will mature in July 2025. 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 recorded under the Receivables Facility was $200 million and $300 million at September 30, 2022, and December 31, 2021, respectively. The Receivables Facility was supported by $1.7 billion and $1.3 billion of accounts receivable as collateral at September 30, 2022, and December 31, 2021, 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 maintains under the Receivables Facility may fluctuate based on current cash needs. The maximum allowed under the Receivables Facility is $800 million with availability directly impacted by eligible receivables, 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
September 30, 2022 and 2021
, respectively, and $8
mi
llion and $3 million for the nine months ended
September 30, 2022 and 2021
, respectively.
11. Properties
The following tables list the major categories of property and equipment, as well as the weighted-average estimated useful life for each category (in years):
Millions, Except Estimated Useful Life | | | | Accumulated | | Net Book | | Estimated | |
As of September 30, 2022 | | Cost | | Depreciation | | Value | | Useful Life | |
Land | | $ | 5,334 | | | $ | N/A | | | $ | 5,334 | | | | N/A | |
Road: | | | | | | | | | | | | | | | | |
Rail and other track material | | | 18,329 | | | | 7,024 | | | | 11,305 | | | | 43 | |
Ties | | | 11,610 | | | | 3,648 | | | | 7,962 | | | | 34 | |
Ballast | | | 6,182 | | | | 1,925 | | | | 4,257 | | | | 34 | |
Other roadway [a] | | | 22,151 | | | | 4,890 | | | | 17,261 | | | | 47 | |
Total road | | | 58,272 | | | | 17,487 | | | | 40,785 | | | | N/A | |
Equipment: | | | | | | | | | | | | | | | | |
Locomotives | | | 9,214 | | | | 3,693 | | | | 5,521 | | | | 18 | |
Freight cars | | | 2,511 | | | | 879 | | | | 1,632 | | | | 23 | |
Work equipment and other | | | 1,216 | | | | 457 | | | | 759 | | | | 17 | |
Total equipment | | | 12,941 | | | | 5,029 | | | | 7,912 | | | | N/A | |
Technology and other | | | 1,255 | | | | 536 | | | | 719 | | | | 13 | |
Construction in progress | | | 939 | | | | - | | | | 939 | | | | N/A | |
Total | | $ | 78,741 | | | $ | 23,052 | | | $ | 55,689 | | | | N/A | |
Millions, Except Estimated Useful Life | | | | Accumulated | | Net Book | | Estimated | |
As of December 31, 2021 | | Cost | | Depreciation | | Value | | Useful Life | |
Land | | $ | 5,339 | | | $ | N/A | | | $ | 5,339 | | | | N/A | |
Road: | | | | | | | | | | | | | | | | |
Rail and other track material | | | 17,980 | | | | 6,844 | | | | 11,136 | | | | 44 | |
Ties | | | 11,364 | | | | 3,516 | | | | 7,848 | | | | 34 | |
Ballast | | | 6,070 | | | | 1,852 | | | | 4,218 | | | | 34 | |
Other roadway [a] | | | 21,593 | | | | 4,657 | | | | 16,936 | | | | 47 | |
Total road | | | 57,007 | | | | 16,869 | | | | 40,138 | | | | N/A | |
Equipment: | | | | | | | | | | | | | | | | |
Locomotives | | | 9,371 | | | | 3,779 | | | | 5,592 | | | | 17 | |
Freight cars | | | 2,227 | | | | 822 | | | | 1,405 | | | | 24 | |
Work equipment and other | | | 1,161 | | | | 411 | | | | 750 | | | | 18 | |
Total equipment | | | 12,759 | | | | 5,012 | | | | 7,747 | | | | N/A | |
Technology and other | | | 1,209 | | | | 523 | | | | 686 | | | | 12 | |
Construction in progress | | | 961 | | | | - | | | | 961 | | | | N/A | |
Total | | $ | 77,275 | | | $ | 22,404 | | | $ | 54,871 | | | | N/A | |
[a] | Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets. |
12. Accounts Payable and Other Current Liabilities
| Sep. 30, | Dec. 31, | |
Millions | | 2022 | | | 2021 | |
Accounts payable | | $ | 916 | | | | 752 | |
Compensation-related accruals [a] [b] | | | 889 | | | | 654 | |
Income and other taxes payable | | | 854 | | | | 823 | |
Current operating lease liabilities | | | 326 | | | | 330 | |
Interest payable | | | 237 | | | | 330 | |
Accrued casualty costs | | | 220 | | | | 187 | |
Equipment rents payable | | | 109 | | | | 98 | |
Other [a] | | | 483 | | | | 404 | |
Total accounts payable and other current liabilities | | $ | 4,034 | | | $ | 3,578 | |
[a] | Prior periods have been reclassified to conform to the current period financial statement presentation. |
[b] | 2022 includes a $114 million one-time accrual for labor agreements with our unions. |
13. Financial Instruments
Short-Term Investments – All of the Company’s short-term investments consist of time deposits and government agency securities. These investments are considered Level 2 investments and are valued at amortized cost, which approximates fair value. As of September 30, 2022, the Company had $46 million of short-term investments. All short-term investments have a maturity of less than one year and are classified as held-to-maturity.
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 September 30, 2022, the fair value of total debt was $26.8 billion, approximately $6.6 billion less than the carrying value. At December 31, 2021, the fair value of total debt was $32.9 billion, approximately $3.2 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. The fair value of our cash equivalents approximates their carrying value due to the short-term maturities of these instruments.
14. Debt
Credit Facilities – During the second quarter 2022, we replaced our $2.0 billion revolving credit facility, which was scheduled to expire on June 8, 2023, with a new $2.0 billion facility that expires May 20, 2027 (the Facility). The Facility is based on substantially similar terms as those in the previous credit facility as described below. At September 30, 2022, we had $2.0 billion of credit available under our revolving credit facility, which is designated for general corporate purposes and supports the issuance of commercial paper. Credit facility withdrawals totaled $0 during the nine months ended September 30, 2022. 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 Term Secured Overnight Financing Rate (SOFR), plus a spread, depending upon credit ratings for our senior unsecured debt. The Facility, requires UPC to maintain a debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) coverage ratio.
The definition of debt used for purposes of calculating the debt-to-EBITDA coverage ratio includes, among other things, certain credit arrangements, finance leases, guarantees, unfunded and vested pension benefits under Title IV of ERISA, and unamortized debt discount and deferred debt issuance costs. At
September 30, 2022
, the Company was in compliance with the debt-to-EBITDA coverage ratio, which allows us to carry up to $48.3 billion of debt (as defined in the Facility), and we had $35.2 billion of debt (as defined in the Facility) outstanding at that date. 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 $150
million cross-default provision and a change-of-control provision.
During the nine months ended September 30, 2022, we issued $2.8 billion and repaid $3.0 billion of commercial paper with maturities ranging from 7 to 86 days, and at September 30, 2022, we had $200 million of commercial paper with a weighted average interest rate of 2.9% 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 – On February 3, 2022, the Board of Directors renewed its authorization for the Company to issue up to $12.0 billion of debt securities under the Company’s current three-year shelf registration filed on February 10, 2021. This reauthorization replaces the original Board authorization, which had $2.5 billion in remaining authority. 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 nine months ended September 30, 2022, we issued the following unsecured, fixed-rate debt securities under our shelf registration:
Date | Description of Securities |
February 14, 2022 | $1.25 billion of 2.800% Notes due February 14, 2032 |
| $0.50 billion of 3.375% Notes due February 14, 2042 |
| $1.25 billion of 3.500% Notes due February 14, 2053 |
| $0.50 billion of 3.850% Notes due February 14, 2072 |
September 9, 2022 | $0.90 billion of 4.500% Notes due January 20, 2033 |
| $0.60 billion of 4.950% Notes due September 9, 2052 |
| $0.40 billion of 5.150% Notes due January 20, 2063 |
The net proceeds of the 4.950% Notes due September 9, 2052, will be used to finance or refinance, in whole or in part, new or existing eligible projects with environmental benefits as outlined in our Green Financing Framework (located at www.up.com/investor). We used the net proceeds from all other offerings listed for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase programs. All debt securities listed include change-of-control provisions. At September 30, 2022, we had remaining authority to issue up to $6.6 billion of debt securities under our shelf registration.
Debt Redemption – On April 15, 2022, we redeemed all $750 million of outstanding 4.163% notes due July 15, 2022, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.
Receivables Securitization Facility – As of September 30, 2022, and December 31, 2021, we recorded $200 million and $300 million, respectively, of borrowings under our Receivables Facility as secured debt. (See further discussion of our receivables securitization facility in Note 10).
15. 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 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.
Approximately 94% of the recorded liability is related to asserted claims and approximately 6% is related to unasserted claims at September 30, 2022. 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 $347 million to $381 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 Nine Months Ended September 30, | | 2022 | | | 2021 | |
Beginning balance | | $ | 325 | | | $ | 270 | |
Current year accruals | | | 79 | | | | 69 | |
Changes in estimates for prior years | | | 36 | | | | 19 | |
Payments | | | (93 | ) | | | (55 | ) |
Ending balance at September 30, | | $ | 347 | | | $ | 303 | |
Current portion, ending balance at September 30, | | $ | 77 | | | $ | 62 | |
Environmental Costs – We are subject to federal, state, and local environmental laws and regulations. We have identified 357 sites where we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 30 sites that are the subject of actions taken by the U.S. government, including 20 that 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.
Our environmental liability activity was as follows:
Millions, for the Nine Months Ended September 30, | | 2022 | | | 2021 | |
Beginning balance | | $ | 243 | | | $ | 233 | |
Accruals | | | 65 | | | | 56 | |
Payments | | | (45 | ) | | | (41 | ) |
Ending balance at September 30, | | $ | 263 | | | $ | 248 | |
Current portion, ending balance at September 30, | | $ | 64 | | | $ | 60 | |
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 workers compensation, general liability, auto liability, and FELA claims. The Captive receives direct premiums, which are netted against the Company’s premium costs in other expenses in the Condensed Consolidated Statements of Income. We record both liabilities and reinsurance receivables using an actuarial analysis based on historical experience in our Condensed Consolidated Statements of Financial Position.
Indemnities – Our maximum potential exposure under indemnification arrangements, including certain tax indemnifications, can range from a specified dollar amount to an unlimited amount, depending on the nature of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions.
16. Share Repurchase Programs
Effective April 1, 2022, our Board of Directors authorized the repurchase of up to 100 million shares of our common stock by March 31, 2025. As of September 30, 2022, we repurchased a total of 12.6 million shares of our common stock under the 2022 authorization. These repurchases may be made on the open market or through other transactions. Our management has sole discretion with respect to determining the timing and amount of these transactions.
Our previous authorization, which was effective April 1, 2019, through March 31, 2022, was approved by our Board of Directors for up to 150 million shares of common stock. As of March 31, 2022, we repurchased a total of 83.3 million shares of our common stock under the 2019 authorization.
The table below represents shares repurchased under the repurchase program in the nine months ended September 30, 2022 and 2021:
| Number of Shares Purchased | Average Price Paid [a] | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
First quarter [b] | | | 11,014,201 | | | | 6,691,421 | | | $ | 249.95 | | | $ | 209.50 | |
Second quarter [c] | | | 3,100,683 | | | | 12,204,409 | | | | 232.87 | | | | 222.46 | |
Third quarter [d] | | | 9,490,339 | | | | 8,604,239 | | | | 221.52 | | | | 210.31 | |
Total | | | 23,605,223 | | | | 27,500,069 | | | $ | 236.28 | | | $ | 215.51 | |
Remaining number of shares that may be repurchased under current authority | 87,408,978 | |
[a] | In the period of the final settlement, the average price paid under the accelerated share repurchase programs is calculated based on the total program value less the value assigned to the initial delivery of shares. The average price of the completed 2022 and 2021 accelerated share repurchase programs was $248.32 and $217.56, respectively. |
[b] | Includes 7,012,232 shares repurchased in 2022 under accelerated share repurchase programs. |
[c] | Includes an incremental 1,847,185 shares received upon final settlement in 2022 and 7,209,156 shares repurchased in 2021 under accelerated share repurchase programs. |
[d] | Includes an incremental 1,983,859 shares received upon final settlement in 2021 under accelerated share repurchase programs. |
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. Open market repurchases are recorded in treasury stock at cost, which includes any applicable commissions and fees.
From October 1, 2022, through October 19, 2022, we repurchased 1.3 million shares at an aggregate cost of approximately $260 million.
Accelerated Share Repurchase Programs – The Company has established accelerated share repurchase programs (ASRs) with financial institutions to repurchase shares of our common stock. These ASRs have been structured so that at the time of commencement, we pay a specified amount to the financial institutions and receive an initial delivery of shares. Additional shares may be received at the time of settlement. The final number of shares to be received is based on the volume weighted average price of the Company’s common stock during the ASR term, less a discount and subject to potential adjustments pursuant to the terms of such ASR.
On February 18, 2022, the Company received 7,012,232 shares of its common stock repurchased under ASRs for an aggregate of $2.2 billion. Upon settlement of these ASRs in the second quarter of 2022, we received 1,847,185 additional shares.
On May 26, 2021, the Company received 7,209,156 shares of its common stock repurchased under ASRs for an aggregate of $2.0 billion. Upon settlement of these ASRs in the third quarter of 2021, we received 1,983,859 additional shares.
ASRs are accounted for as equity transactions, and at the time of receipt, shares are included in treasury stock at fair market value as of the corresponding initiation or settlement date. The Company reflects shares received as a repurchase of common stock in the weighted average common shares outstanding calculation for basic and diluted earnings per share.
17. 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 other North American railroads own the remaining interest. In accordance with ASC 323 Investments - Equity Method and Joint Venture, UPRR applies the equity method of accounting to our investment in TTX.
TTX is a rail car pooling company that owns rail cars and intermodal wells to serve North America’s railroads. TTX assists railroads in meeting the needs of their customers by providing rail cars in an efficient, pooled environment. All railroads have the ability to utilize TTX rail cars through car hire by renting rail cars at stated rates.
UPRR had $1.7 billion and $1.6 billion recognized as investments related to TTX in our Condensed Consolidated Statements of Financial Position as of September 30, 2022, and December 31, 2021, respectively. TTX car hire expenses of $106 million and $92 million for the three months ended September 30, 2022 and 2021, respectively, and $298 million and $283 million for the nine months ended September 30, 2022 and 2021, respectively, are included in equipment and other rents in our Condensed Consolidated Statements of Income. In addition, UPRR had accounts payable to TTX of $71 million and $57 million as of September 30, 2022, and December 31, 2021, respectively.