Union Pacific Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results. Comparisons are with Q1 2014 unless otherwise noted. Financial amounts are in millions of dollars, except per-share data.
Business context
Union Pacific operates one integrated railroad segment. Freight revenue is reported across six commodity groups; the company also earns other revenue from subsidiaries, commuter rail operations, and accessorial services.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change/comment |
|---|---|---|---|
| Operating revenue | $5,614 | $5,638 | Down less than 1% |
| Freight revenue | $5,251 | $5,286 | Down 1%; carloads fell 2%, partly offset by 1% higher average revenue per car |
| Operating expenses | $3,637 | $3,784 | Down 4%, principally from lower fuel costs |
| Operating income | $1,977 | $1,854 | Higher year over year |
| Operating ratio | 64.8% | 67.1% | Improved 2.3 points; company reported a first-quarter record |
| Net income | $1,151 | $1,088 | Higher year over year |
| Diluted EPS | $1.30 | $1.19 | Higher year over year |
| Cash from operations | $2,064 | $1,767 | Higher, reflecting higher net income and timing of tax payments |
| Cash capital investments | $1,101 | $893 | Higher year over year |
| Free cash flow | $0 | $499 | Company-defined non-GAAP measure: operating cash flow less investing cash use and dividends paid |
Fuel expense declined 39% to $564 million. Average locomotive diesel fuel cost was $1.95 per gallon versus $3.12. Compensation and benefits rose 9%, reflecting wage and benefit inflation, hiring and training, and a larger workforce. Interest expense increased to $148 million from $133 million; the weighted-average debt level rose, partly offset by a lower effective interest rate. The effective tax rate was 38.0%, compared with 38.1%.
Revenue and operating changes
- Coal revenue fell 5% and carloads fell 7%, amid weaker domestic demand, low natural gas prices, and a soft export market.
- Intermodal revenue declined 5%; international volume was down 12%, affected by West Coast port congestion, while domestic volume rose 9%.
- Agricultural revenue increased 3% and automotive revenue increased 6%. Chemical and industrial-products revenue was broadly steady.
- Fuel surcharge revenue fell to $447 million from $651 million. Management said the lag in surcharge adjustments added just over $100 million to operating income in the quarter.
- Train speed was essentially flat at 24.6 mph; terminal dwell improved slightly to 30.6 hours. Management said operations remained below optimal levels despite improvement.
Financial position and liquidity
At March 31, 2015, cash and cash equivalents were $1,587 million, total assets were $53,145 million, and shareholders’ equity was $21,057 million. Debt was $12.3 billion, up from $11.48 billion at year-end 2014; debt to capital rose to 36.9% from 35.1%, and adjusted debt to capital rose to 42.6% from 41.3%.
The company had $1.7 billion available under its revolving credit facility, with no borrowings under it and no commercial paper outstanding. It reported compliance with the facility’s debt-to-net-worth covenant. A $650 million receivables securitization facility had $400 million outstanding. The fair value of total debt was $14.1 billion, approximately $1.8 billion above carrying value.
Cash used in financing was $921 million. The period included $922 million of dividends paid—two quarterly payments because declaration and payment timing was aligned within the quarter—and $792 million of cash share repurchases. The quarterly dividend declared per share increased to $0.55 from $0.455.
Outlook, management commentary, risks, and unusual items
- The 2015 capital plan was revised to approximately $4.2 billion, including Positive Train Control; estimated total PTC investment through implementation was approximately $2.5 billion. Management said the plan could be revised if business conditions or regulation warrant.
- Management said resources had been added in anticipation of strong demand, but the port slowdown and lower crude oil and natural gas prices required adjustment. At quarter-end, approximately 500 employees were furloughed or in alternate work status and about 475 locomotives were in storage. No specific earnings guidance was provided.
- Q1 cash flow and free cash flow were affected by higher capital spending and dividend-payment timing. The reported free cash flow of zero is a company-defined non-GAAP measure.
- Environmental liabilities were $191 million, compared with $166 million a year earlier. Personal-injury liabilities were $299 million; the estimated possible settlement-cost range was $299 million to $327 million, with the accrual recorded at the low end.
- A federal misdemeanor Clean Water Act charge related to a 2012 sulfuric-acid release at Herington Yard was filed in March 2015. The stated penalty range is $2,500 to $200,000; a conviction could also result in facility debarment. The company said it could not predict the proceeding’s ultimate impact.
- Fuel-surcharge antitrust litigation and other claims remain pending. The company said it believed these matters would not have a material adverse effect, but outcomes are uncertain. The filing reported no material changes to previously disclosed risk factors.
- The company had not recognized a potential recovery in its pipeline-easement rent dispute because the outcome and timing remained uncertain. The 2014 comparison also included a $14 million gain related to a permanent easement sale.
Important facts for investors to verify
- Whether international intermodal volumes recover after port congestion and whether domestic intermodal growth continues.
- Coal and crude-oil shipment trends, and the effect of commodity prices and fuel-surcharge timing on revenue and operating income.
- Execution of the $4.2 billion capital plan and PTC spending, alongside dividends and share repurchases, and the resulting cash-flow and leverage trends.
- Developments in the Herington Yard proceeding, fuel-surcharge antitrust cases, and environmental and personal-injury estimates.
- The filing’s period-specific free cash flow calculation, including the unusual timing of two dividend payments in Q1 2015.