Union Pacific Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 6, 2015. The filing reports annual results, with selected quarterly data including Q4. Union Pacific Railroad is the principal operating company and the company’s sole reportable segment. It operates 31,974 route miles across 23 states, serving six freight groups: Agricultural Products, Automotive, Chemicals, Coal, Industrial Products, and Intermodal.
Financial and operating performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Operating revenue | $23.988 billion | $21.963 billion | +9% |
| Freight revenue | $22.560 billion | $20.684 billion | +9% |
| Operating income | $8.753 billion | $7.446 billion | +18% |
| Net income | $5.180 billion | $4.388 billion | +18% |
| Diluted EPS | $5.75 | $4.71 | +22% |
| Operating ratio | 63.5% | 66.1% | Improved 2.6 points |
| Cash from operations | $7.385 billion | $6.823 billion | +8% |
| Cash capital investments | $4.346 billion | $3.496 billion | +$850 million |
| Free cash flow | $1.504 billion | $2.085 billion | −28% |
| Total debt | $11.480 billion | $9.577 billion | +$1.903 billion |
Amounts are USD; financial statement amounts are in millions except per-share data. Free cash flow is the company’s non-GAAP measure: operating cash flow less investing cash flow and dividends paid. The annual report’s shareholder letter describes capital spending as approximately $4.1 billion; the cash-flow detail reports $4.346 billion in cash capital investments.
- Volume grew 7% to 9.625 million revenue carloads; core pricing gains were 2.5%. All six commodity groups recorded freight-revenue growth. Agricultural Products and Industrial Products revenue each rose 15%; Intermodal increased 11%.
- Operating expenses increased 5% to $15.235 billion. Higher volume, slower network operations, labor and benefit inflation, purchased services, and depreciation contributed; lower fuel prices partly offset those costs.
- Return on average common equity was 24.4%, versus 21.4%. Management’s adjusted return on invested capital was 16.2%, versus 14.7% (non-GAAP).
- Cash and cash equivalents were $1.586 billion; current assets were $4.679 billion and current liabilities $3.765 billion. Management reported a modest working-capital surplus and adequate access to capital. The $1.7 billion revolving facility was undrawn; $400 million was outstanding under the $650 million receivables securitization facility.
- Debt-to-capital increased to 35.1% from 31.1%; adjusted debt-to-capital, including leases and unfunded pension and postretirement obligations, was 41.3% versus 37.6%.
- Dividends declared totaled $1.91 per share, up from $1.48; cash dividends paid were $1.632 billion. Share repurchases used $3.225 billion of cash. The company completed a two-for-one stock split in June 2014; reported per-share figures are adjusted for it.
Q4 2014 snapshot
Operating revenue was $6.153 billion, operating income $2.373 billion, and net income $1.431 billion. Diluted EPS was $1.61, compared with $1.27 in Q4 2013.
Material changes and management commentary
- Strong grain harvests and frac-sand shipments supported Agricultural and Industrial Products growth; intermodal benefited from international volume and continued truck-to-rail conversion. Coal, Automotive, and Chemicals also grew, though crude-by-rail shipments declined.
- Robust demand combined with severe weather disrupted service: average train speed fell 8% to 24.0 mph and terminal dwell rose 12% to 30.3 hours. The company added more than 1,700 train, engine, and yard employees and approximately 800 locomotives, including 261 new units, during the year.
- Safety improved in several measures: reportable personal injury rate reached a record-low 0.98 per 200,000 employee-hours and reportable rail-equipment incidents improved 7%. Grade-crossing incident rate nevertheless increased 5%.
- Capital spending supported infrastructure replacement, capacity, equipment, and Positive Train Control (PTC). Cumulative PTC investment reached approximately $1.6 billion through 2014.
- Chairman John Koraleski became executive chairman and Lance Fritz became CEO on February 5, 2015.
Outlook, risks, contingencies, and unusual items
- For 2015, management expected positive volume growth, continued margin improvement, and a moderately improving U.S. economy. It forecast a capital plan of approximately $4.3 billion, including about $450 million for PTC and 218 locomotives. These are forward-looking expectations, not guarantees.
- Fuel prices were highly uncertain after their late-2014 decline. Fuel surcharges lag price changes by about two months; lower fuel prices may benefit consumer-related shipments but weigh on coal, frac sand, and crude-oil traffic.
- The statutory PTC deadline was the end of 2015, although the filing described industry-wide implementation delays and significant technical and deployment challenges. Proposed rules for transporting flammable liquids could add tank-car, braking, speed, notification, or operating requirements.
- Principal risks include network congestion and service deterioration when demand exceeds capacity; severe weather; accidents involving hazardous materials; competition and possible expanded rail regulation; fuel-price volatility; labor negotiations; qualified-worker and supplier constraints; cyber and technology disruption; environmental liability; and economic, trade, climate, and capital-market exposures.
- Approximately 85% of employees were represented by rail unions; a new round of negotiations began January 1, 2015. Management said negotiations historically can be prolonged but work stoppages are rare.
- Environmental remediation liabilities were $182 million at year-end, covering 270 identified or potentially liable sites; the company said current obligations were not expected to materially harm results, financial condition, or liquidity. Personal-injury liabilities were $335 million, with a reasonably possible settlement-cost range of $335–$368 million; asbestos liabilities were $126 million, with a possible range of $126–$135 million.
- Fuel-surcharge antitrust litigation remained pending. Plaintiffs’ class-certification process was ongoing, and a separate Oxbow lawsuit alleged more than $50 million of improperly imposed surcharges, among other claims. Union Pacific denied the allegations and said it believed the cases were without merit and not expected to have a material adverse effect.
- A California appellate decision in a pipeline-easement rent dispute reversed part of a prior favorable judgment and remanded the case. Any recovery was treated as a gain contingency and was not recognized in the financial statements.
- Other notable items: higher 2014 cash taxes reflected increased earnings and taxes on income previously deferred through bonus depreciation; a $261 million early buyout of the headquarters lease contributed to investing outflows. The company issued $2.588 billion of debt and repurchased stock partly with debt proceeds. It also disclosed a January 2015 $1.15 billion debt offering and authorization to pursue a new shelf registration with up to $4.0 billion of debt securities.
Most important facts for investors to verify
- Whether network velocity and terminal dwell recover after the 2014 volume and weather-related service strain, and what that recovery costs.
- Whether 2015 volume and margin expectations are achieved, particularly amid energy-market changes and fuel-surcharge timing effects.
- Capital spending, PTC deployment and regulatory costs, and the funding implications of the planned $4.3 billion capital program.
- Leverage and shareholder-return funding: debt rose while the company increased dividends and repurchased $3.225 billion of shares.
- Developments in fuel-surcharge antitrust litigation, environmental and casualty estimates, the pipeline-easement case, and labor negotiations.
The independent auditor issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting as of December 31, 2014.