Union Pacific Corporation — 2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015, with comparisons to 2014 and 2013. Union Pacific operates an integrated Class I railroad spanning 32,084 route miles across 23 states, with rail access to major U.S. ports and Mexico. Its six freight groups are Agriculture, Automotive, Chemicals, Coal, Industrial Products, and Intermodal.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenues | $21.813 billion | $23.988 billion | Down 9% |
| Freight revenues | $20.397 billion | $22.560 billion | Down 10% |
| Operating income | $8.052 billion | $8.753 billion | Down 8% |
| Net income | $4.772 billion | $5.180 billion | Down 8% |
| Diluted EPS | $5.49 | $5.75 | Down 5% |
| Operating ratio | 63.1% | 63.5% | Improved 0.4 points |
| Cash from operations | $7.344 billion | $7.385 billion | Down slightly |
| Cash used in investing | $4.476 billion | $4.249 billion | Higher use |
| Cash and cash equivalents at year-end | $1.391 billion | $1.586 billion | Down $195 million |
| Total debt | $14.201 billion | $11.413 billion | Up $2.788 billion |
| Debt to capital | 40.7% | 35.0% | Up 5.7 points |
Free cash flow, a company-defined non-GAAP measure calculated as operating cash flow less investing cash flow and dividends paid, was $524 million, down from $1.504 billion. The company reported a modest working-capital surplus and $1.7 billion available under its revolving credit facility, with no borrowings outstanding. Long-term debt due after one year was $13.607 billion; $594 million of debt was due within one year.
Cash capital investments were $4.650 billion, including $1.860 billion for road infrastructure replacements, $684 million for capacity and commercial facilities, and $381 million for Positive Train Control (PTC). Dividends declared were $2.20 per share, up from $1.91; cash dividends paid totaled $2.344 billion. The company repurchased $3.465 billion of shares.
Material changes versus the prior period
- Revenue carloads fell 6%, to 9.062 million. Coal carloads declined 17%, Industrial Products 11%, and Intermodal 3%; Automotive carloads rose 7% and were the only commodity group with volume growth.
- Freight revenue fell across five of six commodity groups. Coal revenue decreased 22%, Industrial Products 13%, Intermodal 9%, Agriculture 5%, and Chemicals 3%; Automotive revenue increased 2%.
- Core pricing gains of 3.7% and productivity partly offset lower volumes. A 38% decline in average diesel prices reduced fuel expense by $1.2 billion, while lower fuel surcharges reduced revenue by $1.5 billion.
- Operating expenses declined 10%, led by lower fuel expense and volume-related savings, partly offset by wage inflation and higher depreciation. Operating ratio improved to a record low, although operating income and net income declined.
- Adjusted return on invested capital was 14.3%, down from 16.2%; return on average common equity was 22.8%, down from 24.4%. Debt and leverage rose as the company issued debt and returned substantial capital through dividends and buybacks.
- Fourth-quarter revenue was $5.208 billion versus $6.153 billion in 2014; operating income was $1.918 billion versus $2.373 billion, net income $1.117 billion versus $1.431 billion, and diluted EPS $1.31 versus $1.61.
Outlook, management commentary, risks, and unusual items
Management expected 2016 volumes to be down slightly from 2015, depending on economic and market conditions, while anticipating continued margin improvement from pricing, productivity, and resource efficiency. The 2016 capital plan was approximately $3.75 billion, including about $375 million for PTC, 230 locomotives, and 450 freight cars. No specific 2016 earnings or EPS guidance was provided.
Management cited uncertainty in energy markets, low commodity prices, a strong U.S. dollar, and overall economic conditions. It attributed weaker demand to low natural gas prices and coal inventories, lower shale drilling and associated frac sand and steel shipments, weaker grain demand, and West Coast port disruptions and elevated retail inventories affecting international intermodal. Improved train speed and terminal dwell were attributed to lower volumes and better network fluidity. Average train speed rose 6% and terminal dwell improved 3% year over year. The reportable personal injury rate reached a record low of 0.87.
- Regulation and safety: PTC implementation was extended to December 31, 2018, potentially to 2020 subject to criteria. The company had invested about $2.0 billion in PTC through 2015. New rules for flammable-liquid transportation may require additional tank-car, braking, notification, and operating measures.
- Litigation: A federal judge dismissed a criminal Clean Water Act charge related to a 2012 sulfuric-acid release; the EPA was considering appeal or civil penalties. Fuel-surcharge antitrust cases remained pending, including a shipper class-certification process and the Oxbow case. The company denied wrongdoing and said it expected no material adverse effect, but outcomes remained uncertain.
- Contingencies: Recorded liabilities included $318 million for personal-injury claims, with a reasonably possible settlement range of $318–345 million; $120 million for asbestos claims, with a range of $120–129 million; and $190 million for environmental matters across 290 identified sites. Management said current environmental obligations were not expected to have a material adverse effect.
- Unusual item: Other income included a $113 million gain from a 2015 real-estate sale. The company also received a favorable $100,000 settlement in an Illinois environmental matter.
- Other principal risks: Demand and network-capacity fluctuations, accidents involving hazardous materials, severe weather, labor negotiations, fuel-price volatility and surcharge timing, environmental and climate regulation, cyber and technology risks, competition, supplier concentration, and access to capital markets.
The independent auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at year-end.
Investor verification priorities
- Track whether forecast 2016 volume declines and energy-market weakness persist, and how they affect commodity mix, revenue, and pricing.
- Assess whether margin gains and operating-ratio improvement can continue despite lower volumes, wage inflation, and rising depreciation.
- Review debt growth, maturities, financing needs, and shareholder distributions against operating cash flow and the low reported free cash flow.
- Monitor PTC spending, implementation milestones, regulatory changes, and the impact of the 2016 capital plan on returns.
- Follow outcomes and potential exposure in fuel-surcharge litigation, environmental proceedings, and personal-injury and asbestos claims.