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| UNP > SEC Filings for UNP > Form 10-K on 8-Feb-2013 | All Recent SEC Filings |
8-Feb-2013
Annual Report
The following discussion should be read in conjunction with the Consolidated Financial Statements and applicable notes to the Financial Statements and Supplementary Data, Item 8, and other information in this report, including Risk Factors set forth in Item 1A and Critical Accounting Policies and Cautionary Information at the end of this Item 7.
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable business segment. Although revenue is analyzed by commodity, we analyze the net financial results of the Railroad as one segment due to the integrated nature of the rail network.
EXECUTIVE SUMMARY
2012 Results
• Safety - Our employee safety results continued to improve in 2012. The employee injury incident rate per 200,000 employee hours declined 9% from 2011, to a new record low. These results reflect employee training, the move to standard work, and extensive efforts to identify and eliminate risk. Our use of technologies such as laser, ultrasound, and acoustic vibration monitoring, which help identify potential rail, wheel and axle failures before they occur contributed to the reduction of our equipment incident rate to 9.38 per million train miles, another best ever result. With respect to public safety, we closed 237 grade crossings in 2012 to reduce our exposure to incidents and continued use of video cameras on our locomotives to analyze public safety incidents. We now have camera-equipped locomotives in the lead position on over 97% of our through-freight trains. Despite our efforts during 2012, the rate of grade crossing incidents per million train miles increased 13% from 2011. Overall, our 2012 safety results reflect our structured approach to reduce risk and eliminate incidents for our employees, our customers and the public.
• Financial Performance - We produced another record-setting year in 2012, generating operating income of $6.7 billion, an 18% increase over 2011. Despite flat volume, core pricing gains of 4.5% and higher fuel surcharge recoveries more than offset inflation and higher depreciation expense to drive the increase. Our operating ratio for 2012 of 67.8% was an all-time best, improving from last year's operating ratio of 70.7%. Net income of $3.9 billion surpassed our previous milestone set in 2011, translating into earnings of $8.27 per diluted share for 2012.
• Freight Revenues - Our freight revenues grew 6% year-over-year to $19.7 billion. Freight revenues for four of the six commodity groups increased despite flat volume. Volume declines in Coal and Agricultural Products offset double digit volume increases in Automotive and Chemicals. Core pricing gains and higher fuel surcharges drove the growth in freight revenue in 2012 compared to 2011. Fuel surcharges increased due to higher fuel prices, the lag effect of our programs (surcharges trail fluctuations in fuel price by approximately two months) and new fuel surcharge provisions in renegotiated contracts.
• Network Operations - In 2012, our business mix changed significantly both geographically and by commodity. Nevertheless, by adjusting resources to match market and network requirements, we continued operating an efficient and fluid network. As reported to the Association of American Railroads (AAR), average train speed increased 4% in 2012 compared to 2011, reflecting more efficient operations and relatively mild weather conditions compared to 2011, which included severe winter weather, flooding, and extreme heat and drought that affected various parts of our network during the year. Average terminal dwell time remained flat despite a shift in business mix to more manifest traffic, which requires more switching, resulting in more terminal dwell time. Average rail car inventory decreased slightly, reflecting productivity improvements and ongoing initiatives designed to reduce the number of cars in our fleet. These operational improvements resulted in a record customer satisfaction index in 2012.
• Fuel Prices - Despite consistent average crude oil barrel prices in 2011 and 2012, our price per gallon of diesel fuel consumed increased 3% due to higher crude oil to diesel conversion spreads. The higher spreads increased operating expenses by $105 million (excluding any impact from year-over-year volume). A 2% decline in gross-ton miles partially offset the higher expenses. Our fuel consumption rate did not change in 2012 from the rate in 2011.
Free cash flow is not considered a financial measure under accounting principles generally accepted in the U.S. (GAAP) by SEC Regulation G and Item 10 of SEC Regulation S-K and may not be defined and calculated by other companies in the same manner. We believe free cash flow is important to management and investors in evaluating our financial performance and measures our ability to generate cash without additional external financings. Free cash flow should be considered in addition to, rather than as a substitute for, cash provided by operating activities. The following table reconciles cash provided by operating activities (GAAP measure) to free cash flow (non-GAAP measure):
Millions 2012 2011 2010 Cash provided by operating activities $ 6,161 $ 5,873 $ 4,105 Receivables securitization facility [a] - - 400 Cash provided by operating activities 6,161 5,873 4,505 adjusted for the receivables securitization facility Cash used in investing activities (3,633) (3,119) (2,488) Dividends paid (1,146) (837) (602) Free cash flow $ 1,382 $ 1,917 $ 1,415 |
[a] Effective January 1, 2010, a new accounting standard required us to account for receivables transferred under our receivables securitization facility as secured borrowings in our Consolidated Statements of Financial Position and as financing activities in our Consolidated Statements of Cash Flows. The receivables securitization facility is included in our free cash flow calculation to adjust cash provided by operating activities as though our receivables securitization facility had been accounted for under the new accounting standard for all periods presented.
2013 Outlook
• Safety - Operating a safe railroad benefits our employees, our customers, our shareholders, and the communities we serve. We will continue using a multi-faceted approach to safety, utilizing technology, risk assessment, quality control, training and employee engagement, and targeted capital investments. We will continue using and expanding the deployment of Total Safety Culture throughout our operations, which allows us to identify and implement best practices for employee and operational safety. Derailment prevention and the reduction of grade crossing incidents are critical aspects of our safety programs. We will continue our efforts to increase rail defect detection; improve or close crossings; and educate the public and law enforcement agencies about crossing safety through a combination of our own programs (including risk assessment strategies), various industry programs and local community activities across our network.
• Network Operations - We will continue focusing on our six critical initiatives to improve safety, service and productivity during 2013. We are seeing solid contributions from reducing variability, continuous improvements, and standard work. Resource agility allows us to respond quickly to changing market conditions and network disruptions from weather or other events. The Railroad continues to benefit from capital investments that allow us to build capacity for growth and harden our infrastructure to reduce failure.
• Fuel Prices - Uncertainty about the economy makes projections of fuel prices difficult. We again could see volatile fuel prices during the year, as they are sensitive to global and U.S. domestic demand, refining capacity, geopolitical events, weather conditions and other factors. To reduce the impact of fuel price on earnings, we will continue seeking cost recovery from our customers through our fuel surcharge programs and expanding our fuel conservation efforts.
• Capital Plan - In 2013, we plan to make total capital investments of approximately $3.6 billion, including expenditures for Positive Train Control (PTC), which may be revised if business conditions warrant or if new laws or regulations affect our ability to generate sufficient returns on these investments. (See further discussion in this Item 7 under Liquidity and Capital Resources - Capital Plan.)
• Financial Expectations - We are cautious about the economic environment but if industrial production grows approximately 2% as projected, volume should exceed 2012 levels. Even with no volume growth, we expect earnings to exceed 2012 earnings, generated by real core pricing gains, on-going network improvements and operational productivity initiatives. We also expect that a new bonus depreciation program under federal tax laws will positively impact cash flows in 2013.
RESULTS OF OPERATIONS
Operating Revenues
% Change % Change
Millions 2012 2011 2010 2012 v 2011 2011 v 2010
Freight revenues $ 19,686 $ 18,508 $ 16,069 6% 15%
Other revenues 1,240 1,049 896 18 17
Total $ 20,926 $ 19,557 $ 16,965 7% 15%
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We generate freight revenues by transporting freight or other materials from our six commodity groups. Freight revenues vary with volume (carloads) and average revenue per car (ARC). Changes in price, traffic mix and fuel surcharges drive ARC. We provide some of our customers with contractual incentives for meeting or exceeding specified cumulative volumes or shipping to and from specific locations, which we record as reductions to freight revenues based on the actual or projected future shipments. We recognize freight revenues as shipments move from origin to destination. We allocate freight revenues between reporting periods based on the relative transit time in each reporting period and recognize expenses as we incur them.
Other revenues include revenues earned by our subsidiaries, revenues from our commuter rail operations, and accessorial revenues, which we earn when customers retain equipment owned or controlled by us or when we perform additional services such as switching or storage. We recognize other revenues as we perform services or meet contractual obligations.
Freight revenues from four of our six commodity groups increased during 2012 compared to 2011. Revenues from coal and agricultural products declined during the year. Our franchise diversity allowed us to take advantage of growth from shale-related markets (crude oil, frac sand and pipe) and strong automotive manufacturing, which offset volume declines from coal and agricultural products. ARC increased 7%, driven by core pricing gains and higher fuel cost recoveries. Improved fuel recovery provisions and higher fuel prices, including the lag effect of our programs (surcharges trail fluctuations in fuel price by approximately two months), combined to increase revenues from fuel surcharges.
Freight revenues for all six commodity groups increased during 2011 compared to 2010, while volume increased in all commodity groups except intermodal. Increased demand in many market sectors, with particularly strong growth in chemicals, industrial products, and automotive shipments for the year, generated the increases. ARC increased 12%, driven by higher fuel cost recoveries and core pricing gains. Fuel cost recoveries include fuel surcharge revenue and the impact of resetting the base fuel price for certain traffic. Higher fuel prices, volume growth, and new fuel surcharge provisions in renegotiated contracts all combined to increase revenues from fuel surcharges.
Our fuel surcharge programs (excluding index-based contract escalators that contain some provision for fuel) generated freight revenues of $2.6 billion, $2.2 billion, and $1.2 billion in 2012, 2011, and 2010, respectively. Ongoing rising fuel prices and increased fuel surcharge coverage drove the increases. Additionally, fuel surcharge revenue is not entirely comparable to prior periods as we continue to convert portions of our non-regulated traffic to mileage-based fuel surcharge programs.
In 2012, other revenues increased from 2011 due primarily to higher revenues at our subsidiaries that broker intermodal and automotive services. Assessorial revenues also increased in 2012 due to container revenue related to an increase in intermodal shipments.
In 2011, other revenues increased from 2010 due primarily to higher revenues at our subsidiaries that broker intermodal and automotive services.
The following tables summarize the year-over-year changes in freight revenues, revenue carloads, and ARC by commodity type:
Freight Revenues % Change % Change
Millions 2012 2011 2010 2012 v 2011 2011 v 2010
Agricultural $ 3,280 $ 3,324 $ 3,018 (1)% 10%
Automotive 1,807 1,510 1,271 20 19
Chemicals 3,238 2,815 2,425 15 16
Coal 3,912 4,084 3,489 (4) 17
Industrial Products 3,494 3,166 2,639 10 20
Intermodal 3,955 3,609 3,227 10 12
Total $ 19,686 $ 18,508 $ 16,069 6% 15%
Revenue Carloads % Change % Change
Thousands 2012 2011 2010 2012 v 2011 2011 v 2010
Agricultural 900 934 918 (4)% 2%
Automotive 738 653 611 13 7
Chemicals 1,042 921 844 13 9
Coal 1,871 2,164 2,056 (14) 5
Industrial Products 1,185 1,146 1,073 3 7
Intermodal [a] 3,312 3,254 3,313 2 (2)
Total 9,048 9,072 8,815 -% 3%
% Change % Change
Average Revenue per Car 2012 2011 2010 2012 v 2011 2011 v 2010
Agricultural $ 3,644 $ 3,561 $ 3,286 2% 8%
Automotive 2,448 2,311 2,082 6 11
Chemicals 3,107 3,055 2,874 2 6
Coal 2,092 1,888 1,697 11 11
Industrial Products 2,947 2,762 2,461 7 12
Intermodal [a] 1,194 1,109 974 8 14
Average $ 2,176 $ 2,040 $ 1,823 7% 12%
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[a] Each intermodal container or trailer equals one carload.
Agricultural Products - Lower volume 2012 Agricultural Carloads more than offset core pricing gains and increased fuel surcharges as [[Image Removed: LOGO]] agricultural freight revenue decreased in 2012 versus 2011. Weak export demand for U.S. wheat drove a 19% decrease in wheat shipments year over year, as the foreign wheat market improved significantly from the weather affected crop in 2011. In addition, corn shipments declined 11% for the year, with more significant declines in the fourth quarter, reflecting the impact of the severe drought across the U.S. Lower gasoline demand, reduced exports and higher corn prices decreased ethanol shipments during the second half of the year. Growth in imported beer from Mexico and a strong domestic harvest of fresh potatoes partially offset these declines. |
Automotive - Increased shipments of 2012 Automotive Carloads finished vehicles and automotive parts along with core pricing gains and higher [[Image Removed: LOGO]] fuel surcharges improved automotive freight revenue from 2011 levels. Higher production and sales levels drove the volume growth. In addition, 2012 shipments compared favorably to 2011 due to lower shipments of international vehicles in 2011 following the disaster in Japan. Higher volume, core pricing gains and fuel surcharges improved automotive freight revenue in 2011, from 2010 levels. Although higher production and sales levels during 2011 contributed to volume growth, the disaster in Japan partially offset the increase in shipments. The disruption caused by this event reduced parts shipments in the second quarter and shipments of international vehicles in the second and third quarters. Finished autos shipments were up 7% in 2011 from 2010, aided by a 14% increase in the fourth quarter as the U.S. light-vehicle sales rate was the highest since the second quarter of 2008. Chemicals - Higher volume, core price 2012 Chemicals Carloads improvements and fuel surcharges increased freight revenue from chemicals [[Image Removed: LOGO]] in 2012. Shipments of crude oil primarily from the Bakken, Permian and Eagle Ford Shale formations to the Gulf area increased over three fold, driving the improvement in chemicals shipments. In addition, plastics and industrial chemicals shipments increased as low natural gas prices have made U.S. chemicals more cost competitive globally. Declines in potash due to temporary shutdowns and reduced production at several mines partially offset the increases in chemical shipments during the year. |
Volume gains, fuel surcharges and price improvements increased freight revenue from chemicals in 2011 versus 2010. In mid-2010, we began moving crude oil shipments from the Bakken formation in North Dakota to facilities in Louisiana. This new business, along with shipments from the Eagle Ford shale formation in south Texas, contributed to a 37% increase in shipments of petroleum products during 2011. Strong domestic demand and robust spring planting increased fertilizer shipments by 9% versus 2010. Additionally, improving market conditions increased demand for industrial chemicals during 2011, driving volume levels up versus 2010.
Coal - Lower volume, partially offset by 2012 Coal Carloads core pricing gains and fuel surcharge recoveries reduced freight revenue from [[Image Removed: LOGO]] coal shipments in 2012 compared to 2011. Shipments of coal from the Southern Powder River Basin (SPRB) mines decreased 15% from 2011. Above average coal stockpiles due to an unseasonably warm winter and low natural gas prices, which caused some displacement of coal in electricity production, led to the volume declines. In addition, the loss of two contracts to a competitor contributed to lower volumes from the SPRB. Coal shipments from the Colorado and Utah mines increased 2% versus 2011. Increased export shipments of Colorado and Utah coal in 2012 offset the domestic declines due to higher stockpiles and low natural gas prices. |
Core pricing gains, higher fuel surcharges, and increased volume grew coal freight revenue in 2011 versus 2010 levels. Shipments of coal from the SPRB were up 5% in 2011 compared to 2010, reflecting new business to Wisconsin facilities and the start-up of a new power plant near Waco, Texas. Completion of a year-long equipment relocation process at one of the mines in the third quarter of 2011 and minimal production problems elsewhere improved shipments from Colorado and Utah by 3% in 2011 versus 2010. These gains, along with increased exports to Europe and Asia, offset first half production problems and weak demand from eastern coal utilities.
Industrial Products - Core pricing 2012 Industrial Products Carloads improvement, higher volume and additional fuel surcharges increased [[Image Removed: LOGO]] freight revenue from industrial products in 2012 versus 2011. Shipments of non-metallic minerals (primarily frac sand), grew in response to increased horizontal drilling activity for energy products. More construction activity during a relatively mild winter led to higher demand for shipments of lumber, cement and stone compared to 2011. The growth in housing starts throughout 2012 also increased lumber shipments, up 12% from 2011. Steel shipments finished slightly down from 2011 levels as lower demand for export scrap and mine production issues in the second half of the year offset increases in the first half due to higher demand for steel coils and plate for pipe and auto production. |
Intermodal - Higher fuel surcharges, including improved fuel 2012 Intermodal Carloads recovery provisions, core pricing gains and volume growth increased freight revenue from intermodal shipments in 2012. [[Image Removed: LOGO]] Volume levels from international traffic remained flat year-over-year as the loss of a customer contract in the first half of the year offset modest West Coast import growth. Domestic traffic increased 3% versus 2011 due to better market conditions and continued conversion of traffic from truck to rail. Fuel surcharge gains, including better contract provisions for fuel cost recovery, and pricing improvements, partially offset by lower volume, increased freight revenue from intermodal shipments in 2011 compared to 2010. Volume from international traffic decreased 5% in 2011 versus 2010, |
Mexico Business - Each of our commodity groups includes revenue from shipments to and from Mexico. Revenue from Mexico business increased 8% to $1.9 billion in 2012 versus 2011. Volume levels for four of the six commodity groups (industrial products and agricultural products declined), were up 5% in aggregate versus 2011, with particularly strong growth in automotive and intermodal shipments.
Revenue from Mexico business increased 16% to $1.8 billion in 2011 versus 2010. Volume levels increased 9% in aggregate versus 2010, with particularly strong growth in automotive and industrial products. Coal was the one commodity group that declined as one of our customers conducted a supplier contract renewal during the year, shifting transportation modes from rail to truck during the process.
Operating Expenses
% Change % Change
Millions 2012 2011 2010 2012 v 2011 2011 v 2010
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