Business context and reporting period
Union Pacific Corporation’s Form 10-K covers the fiscal year ended December 31, 2009; it is an annual filing, not a standalone fourth-quarter report. The company’s principal operating subsidiary, Union Pacific Railroad, operates about 32,094 route miles across 23 western U.S. states and serves six freight commodity groups. The filing also reports unaudited fourth-quarter results.
Financial performance
| Metric | 2009 | 2008 |
|---|---|---|
| Operating revenue | $14.143 billion | $17.970 billion |
| Freight revenue | $13.373 billion | $17.118 billion |
| Operating income | $3.392 billion | $4.075 billion |
| Net income | $1.898 billion | $2.338 billion |
| Diluted EPS | $3.75 | $4.54 |
| Operating ratio / operating margin | 76.0% / 24.0% | 77.3% / 22.7% |
| Cash from operations | $3.234 billion | $4.070 billion |
| Cash capital investments | $2.384 billion | $2.780 billion |
| Free cash flow, company-defined | $515 million | $825 million |
| Total debt | $9.848 billion | $8.927 billion |
| Cash and cash equivalents at year-end | $1.850 billion | $1.249 billion |
Fourth-quarter 2009 revenue was $3.754 billion, operating income $1.002 billion, net income $551 million, and diluted EPS $1.08. The comparable 2008 quarter reported $4.286 billion, $1.141 billion, $661 million, and $1.31, respectively.
Changes versus the prior comparable period
- For the full year, revenue fell 21%, operating income 17%, net income 19%, and diluted EPS 17% versus 2008. Revenue carloads declined 16%; all six commodity groups had lower freight revenue.
- Automotive and industrial products were especially weak: freight revenue declined 36% and 34%, respectively. Agricultural, chemicals, energy, and intermodal revenue fell 16%, 16%, 18%, and 18%.
- Average revenue per car declined 7%, largely due to lower fuel-cost recoveries, partly offset by approximately 5% core pricing gains. Fuel surcharge revenue fell to $605 million from $2.323 billion.
- The operating ratio improved 1.3 percentage points to a company-record 76.0%, as lower fuel prices, productivity, and cost controls more than offset reduced volume. Average fuel price fell 44%; fuel expense decreased $2.220 billion.
- Operating cash flow declined $836 million. The company reported free cash flow of $515 million, down from $825 million, using its definition of operating cash flow less investing cash flow and dividends.
- Year-end debt increased $921 million. Debt-to-capital was 36.8%, versus 36.6%; adjusted debt-to-capital, including leases and other obligations, improved to 45.9% from 47.4%.
Liquidity, outlook, risks, and unusual items
Working capital was approximately $1.0 billion, compared with a deficit of about $100 million at year-end 2008. The company had $1.9 billion available on its revolving credit facility, with no borrowings outstanding, and $400 million outstanding under its receivables-sale program. Management said it had sufficient resources to meet current obligations, while noting that capital-market access and the receivables program depend in part on credit ratings and market conditions.
Management expected 2010 volume to increase from 2009 levels, with continued pricing opportunities and productivity improvements, but remained cautious about the economy. Planned 2010 capital investment was approximately $2.5 billion. The company expected to spend about $200 million on positive train control in 2010 and estimated total implementation costs of about $1.4 billion by the end of 2015. Management expected 2010 dividends to be comparable to 2009.
- Unusual items: A Colorado land sale generated a $116 million pretax gain in 2009. A locomotive lease restructuring shifted 813 locomotives from operating to capital leases and added approximately $843 million of capital lease obligations. A planned rail-grinding accounting change, effective in 2010 and to be applied retrospectively, was expected to reduce reported 2009 net income by about $8 million.
- Contingencies: The company disputed EPA claims concerning the Omaha Lead Site; the EPA’s 2005 interim-remedy order estimated work at $50 million, and a 2009 notice sought remediation at about 9,000 residential yards. The filing does not provide a clear estimate of the company’s ultimate exposure. The company also faced fuel-surcharge antitrust litigation and other environmental proceedings; management said it did not expect known claims to have a material adverse effect.
- Recorded exposures: Environmental liabilities were $217 million; personal-injury liabilities were $545 million, with a reasonably possible settlement range of $545 million to $602 million; asbestos liabilities were $174 million, with a reasonably possible range of $174 million to $189 million. Estimates and outcomes remain uncertain.
- Key risks: Prolonged economic weakness, demand and network-capacity swings, fuel-price volatility and surcharge recovery, competition, labor negotiations, severe weather, accidents involving hazardous materials, environmental and climate-related regulation, supplier concentration, and access to capital markets.
- Accounting and reporting: Beginning in 2010, the receivables transfers—$400 million outstanding at year-end—were expected to be accounted for as secured borrowings under a new standard. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management reported controls were effective.
Important facts for investors to verify
- Whether the forecast recovery in volume and ongoing pricing gains materialized, and how much revenue change reflected fuel surcharges versus core pricing.
- Whether the 76.0% operating ratio and productivity gains can be sustained if volumes recover or fuel costs rise.
- Actual capital spending and the cost, schedule, and funding implications of positive train control, alongside the planned $2.5 billion 2010 capital program.
- Debt and lease obligations, liquidity access, and the balance-sheet and cash-flow effects of accounting for receivables transfers as secured borrowings.
- Developments in the Omaha Lead Site matter, fuel-surcharge litigation, and environmental, personal-injury, and asbestos exposures.