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UNION PACIFIC CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES RESULTS OF OPERATIONS Three Months Ended March 31, 2014, Compared to Three Months Ended March 31, 2013 For purposes of this report, unless the context otherwise requires, all references herein to "UPC", "Corporation", "Company", "we", "us", and "our" shall mean Union Pacific Corporation and its subsidiaries, including Union Pacific Railroad Company, which we separately refer to as "UPRR" or the "Railroad". The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and applicable notes to the Condensed Consolidated Financial Statements, Item 1, and other information included in this report. Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP). The Railroad, along with its subsidiaries and rail affiliates, is our one reportable business segment. Although we provide and analyze revenue by commodity group, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network. Available Information Our Internet website is www.up.com. We make available free of charge on our website (under the "Investors" caption link) our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; eXtensible Business Reporting Language (XBRL) documents; our current reports on Form 8-K; our proxy statements; Forms 3, 4, and 5, filed on behalf of directors and executive officers; and amendments to any such reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We also make available on our website previously filed SEC reports and exhibits via a link to EDGAR on the SEC's Internet site at www.sec.gov. We provide these previously filed reports as a convenience and their contents reflect only information that was true and correct as of the date of the report. We assume no obligation to update this historical information. Additionally, our corporate governance materials, including By-Laws, Board Committee charters, governance guidelines and policies, and codes of conduct and ethics for directors, officers, and employees are available on our website. From time to time, the corporate governance materials on our website may be updated as necessary to comply with rules issued by the SEC and the New York Stock Exchange or as desirable to promote the effective and efficient governance of our company. Any security holder wishing to receive, without charge, a copy of any of our SEC filings or corporate governance materials should send a written request to: Secretary, Union Pacific Corporation, 1400 Douglas Street, Omaha, NE 68179. References to our website address in this report, including references in Management's Discussion and Analysis of Financial Condition and Results of Operations, Item 2, are provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report. Critical Accounting Policies and Estimates We base our discussion and analysis of our financial condition and results of operations upon our Condensed Consolidated Financial Statements. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, expenses, assets, and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ materially from actual results, the impact on the Condensed Consolidated Financial Statements may be material. Our critical accounting policies are available in Item 7 of our 2013 Annual 20-------------------------------------------------------------------------------- Table of Contents Report on Form 10-K. There have not been any significant changes with respect to these policies during the first three months of 2014. RESULTS OF OPERATIONS Quarterly Summary We reported earnings of $2.38 per diluted share on net income of $1.1 billion in the first quarter of 2014 compared to earnings of $2.03 per diluted share on net income of $1.0 billion for the first quarter of 2013. Freight revenues increased 6%, or $302 million, in the first quarter compared to the same period in 2013 driven by 5% volume growth and higher average revenue per car (ARC) due to core pricing gains. Volume growth in grain, coal, domestic intermodal, frac sand and rock offset declines in international intermodal and crude oil. Despite incremental cost increases due to the severe winter, the first quarter of 2014 generated record financial results, reflecting our ability to leverage additional volumes and the impact of improved pricing and lower fuel prices. As reported to the Association of American Railroads (AAR), average train speed decreased 7% and average terminal dwell time increased 12% during the first quarter of 2014 compared to 2013. The results were driven by severe winter weather, impacting all major U.S. and Canadian railroads, and increased demand. Moderating weather, along with effective deployment of surge resources, improved the fluidity of the network late in the quarter. Operating Revenues Millions, % for the Three Months Ended March 31, 2014 2013 Change Freight revenues $ 5,286 $ 4,984 6% Other revenues 352 306 15 Total $ 5,638 $ 5,290 7% We generate freight revenues by transporting freight or other materials from our six commodity groups. Freight revenues vary with volume (carloads) and 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 commuter rail operations that we manage, 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, and miscellaneous contract revenue. We recognize other revenues as we perform services or meet contractual obligations. Freight revenues for all six commodity groups increased during the first quarter of 2014 compared to 2013 as a result of economic improvements in certain market sectors. Volume levels increased for five of the six commodity groups, with particularly strong growth in agricultural products and industrial products. ARC increased 1% during the period driven by pricing gains. Each of our commodity groups includes revenue from fuel surcharges. Freight revenues from fuel surcharge programs were $651 million in the first quarter of 2014, compared to $636 million in the same period of 2013. Higher fuel surcharge recoveries were driven by increased volume partially offset by the lower fuel prices and the lag impact of our fuel surcharge programs (it can generally take up to two months for changing fuel prices to affect fuel surcharge recoveries). In the first quarter of 2014, other revenues increased from 2013 due to higher revenues at our subsidiaries, primarily those that broker intermodal and automotive services, and accessorial revenue. 21-------------------------------------------------------------------------------- Table of Contents The following tables summarize the year-over-year changes in freight revenues, revenue carloads, and ARC by commodity type: Freight Revenues Millions, % for the Three Months Ended March 31, 2014 2013 Change Agricultural $ 910 $ 784 16% Automotive 488 487 - Chemicals 893 873 2 Coal 961 936 3 Industrial Products 1,011 916 10 Intermodal 1,023 988 4 Total $ 5,286 $ 4,984 6% Revenue Carloads Thousands, % for the Three Months Ended March 31, 2014 2013 Change Agricultural 239 212 13% Automotive 188 184 2 Chemicals 270 271 - Coal 430 402 7 Industrial Products 314 289 9 Intermodal [a] 833 810 3 Total 2,274 2,168 5% Average Revenue per Car % for the Three Months Ended March 31, 2014 2013 Change Agricultural $ 3,815 $ 3,694 3% Automotive 2,591 2,648 (2) Chemicals 3,307 3,225 3 Coal 2,236 2,329 (4) Industrial Products 3,218 3,174 1 Intermodal [a] 1,227 1,219 1 Average $ 2,324 $ 2,299 1% [a] Each intermodal container or trailer equals one carload. Agricultural Products - Higher volume and price increases drove the increase in freight revenue from agricultural shipments in the first quarter of 2014 versus 2013. Grain shipments increased 39% in the first quarter of 2014 versus 2013, reflecting the impact of the severe drought in 2012 that affected territory served by us during the first quarter of 2013. Higher grain exports also drove the increase in grain shipments. Automotive - Freight revenue from automotive shipments increased slightly compared to the first quarter of 2013. Declines in shipments of finished vehicles partially offset core price improvements and more shipments of automotive parts. Winter weather negatively impacted vehicle sales and shipments of finished vehicles, while volume for automotive parts increased from the first quarter of 2013 driven by continued strength in production. Chemicals - Core price improvements increased freight revenue from chemicals in the first quarter of 2014 versus 2013. Shipments of industrial chemicals increased due to continuing strong demand in the drilling market in the first quarter of 2014. Shipments of crude oil from the Bakken, Permian and Eagle Ford shale formations to the Gulf area declined as crude to diesel spread differentials and the growing Gulf supply have displaced some of the shipments, previously moving to the Gulf area, to the East Coast. Coal - Higher volume, partially offset by lower ARC driven by negative business mix, increased freight revenue from coal shipments in the first quarter of 2014 compared to 2013. Severe winter weather 22-------------------------------------------------------------------------------- Table of Contents conditions, low inventories at utilities and higher natural gas prices drove the increase in coal volume. Shipments from Southern Powder River Basin (SPRB) and Colorado and Utah mines increased 3% and 12%, respectively, from the first quarter of 2013. Industrial Products - Volume growth and core pricing gains increased freight revenue from industrial products in the first quarter of 2014 versus 2013. Shipments of non-metallic minerals (primarily frac sand) grew as a result of drilling activity for energy products. Additionally, growth in construction-related materials increased from the first quarter of 2013. Pricing gains were partially offset by a shift in business mix, including traffic with shorter lengths of haul impacting ARC. Intermodal - Increased shipments and core pricing improvement drove higher freight revenue from intermodal shipments in the first quarter of 2014 compared to the same period in 2013. First quarter volume levels from domestic traffic increased 8% versus the first quarter of 2013 driven by continued conversions from trucks and new premium services. International traffic for the quarter was down 1% compared to a strong prior year as severe weather negatively impacted consumer demand. Mexico Business - Each of our commodity groups includes revenue from shipments to and from Mexico. Revenue from Mexico business increased 7% to $540 million in the first quarter of 2014 versus the same period in 2013. Volume levels increased 8% from the first quarter of 2013, as increases in agricultural products, automotive, intermodal and chemicals more than offset declines in coal and industrial products. Operating Expenses Millions, % for the Three Months Ended March 31, 2014 2013 Change Compensation and benefits $ 1,254 $ 1,216 3% Fuel 921 900 2 Purchased services and materials 607 557 9 Depreciation 464 434 7 Equipment and other rents 312 313 - Other 226 237 (5) Total $ 3,784 $ 3,657 3% Operating expenses increased $127 million in the first quarter of 2014 versus the comparable period in 2013. Volume related expenses (including fuel), depreciation, wage and benefit inflation, and locomotive and freight car materials contributed to higher expenses during the period. In the first quarter of 2014, lower fuel price and damaged freight and equipment expense partially offset these increases. In addition, weather related costs increased expenses by approximately $35 million for the first quarter of 2014. Compensation and Benefits - Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. Volume-related expenses from a larger train and engine work force, weather related costs, and general wage and benefit inflation drove the 3% increase versus the first quarter of 2013. Fuel - Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Fuel costs were higher as gross-ton miles increased 5% in the first quarter. The fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-miles in thousands, increased slightly compared to the first quarter of 2013. Increases in heavier, more fuel-efficient shipments, which generally move from a single source to a single destination, drove the gross-ton-mile increase and kept the fuel consumption rate essentially flat despite negative operational impacts of severe winter weather. Locomotive diesel fuel prices, which averaged $3.12 per gallon (including taxes and transportation costs) in the first quarter of 2014, compared to $3.23 per gallon in the same period in 2013, decreased expenses by $30 million. Purchased Services and Materials - Expense for purchased services and materials includes the costs of services purchased from outside contractors and other service providers (including equipment maintenance and contract expenses incurred by our subsidiaries for external transportation services); materials used to maintain the Railroad's lines, structures, and equipment; costs of operating facilities 23 -------------------------------------------------------------------------------- Table of Contents jointly used by UPRR and other railroads; transportation and lodging for train crew employees; trucking and contracting costs for intermodal containers; leased automobile maintenance expenses; and tools and supplies. Purchased services increased 6% compared to the first quarter of 2013, primarily due to volume-related expense incurred by our logistics subsidiaries for external transportation; increased crew transportation and lodging due to volume and weather; and snow removal. Locomotive and freight car material expenses increased in the first quarter of 2014 compared to the first quarter of 2013, due to additional volumes including equipment taken out of storage to support operational issues caused by weather conditions and demand. Depreciation - The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. A higher depreciable asset base, reflecting higher ongoing capital spending, increased depreciation expense in the first quarter of 2014 compared to 2013. Equipment and Other Rents - Equipment and other rents expense primarily includes rental expense that the Railroad pays for freight cars owned by other railroads or private companies; freight car, intermodal, and locomotive leases; and office and other rentals. More intermodal and automotive shipments and longer cycle times increased short-term freight car rental expense in the first quarter of 2014, compared to 2013. Conversely, lower container lease expense offset the higher freight car rental expense as we exercised purchase options on some of our leased equipment. Other - Other expenses include state and local taxes; freight, equipment and property damage; utilities, insurance, personal injury, environmental, employee travel, telephone and cellular, computer software, bad debt and other general expenses. Other costs in the first quarter decreased from 2013 as lower freight and equipment damage, environmental, and personal injury expense more than offset higher utility costs. Non-Operating Items Millions, % for the Three Months Ended March 31, 2014 2013 Change Other income $ 38 $ 40 (5) Interest expense (133) (128) 4 Income taxes (671) (588) 14% Other Income - Other income decreased in the first quarter of 2014 versus the same period of 2013 as the $17 million received from a settlement of a land lease arrangement in 2013 more than offset an increase due to the sale of a permanent easement in the first quarter of 2014. Interest Expense - Interest expense increased in the first quarter of 2014 versus 2013 due to an increased weighted-average debt level of $10.1 billion in 2014 versus $9.3 billion in 2013. Income Taxes - Higher pre-tax income increased income taxes in the first quarter of 2014 compared to 2013. Our effective tax rate for both periods was 38.1%. OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS We report a number of key performance measures weekly to the Association of American Railroads (AAR). We provide this data on our website at www.up.com/investors/reports/index.shtml. 24-------------------------------------------------------------------------------- Table of Contents Operating/Performance Statistics Railroad performance measures are included in the table below: % For the Three Months Ended March 31, 2014 2013 Change Average train speed (miles per hour) 24.5 26.4 (7) % Average terminal dwell time (hours) 30.7 27.4 12 % Gross ton-miles (billions) 240.2 227.7 5 % Revenue ton-miles (billions) 131.5 124.0 6 % Operating ratio 67.1 69.1 (2.0) pts Employees (average) 46,166 46,437 (1) % Average Train Speed - Average train speed is calculated by dividing train miles by hours operated on our main lines between terminals. Average train speed, as reported to the Association of American Railroads (AAR), decreased 7% in the first quarter of 2014 versus the first quarter of 2013. Severe weather conditions impacting all major U.S. and Canadian railroads, volume increases and continuing shifts of traffic to areas that are operating closer to current capacity drove this decline. Average Terminal Dwell Time - Average terminal dwell time is the average time that a rail car spends at our terminals. Lower average terminal dwell time improves asset utilization and service. Average terminal dwell time increased 12% in the first quarter of 2014 compared to the first quarter of 2013, reflecting the impact of winter weather and higher volumes. Gross and Revenue Ton-Miles - Gross ton-miles are calculated by multiplying the weight of loaded and empty freight cars by the number of miles hauled. Revenue ton-miles are calculated by multiplying the weight of freight by the number of tariff miles. Gross ton-miles and revenue ton-miles increased 5% and 6%, respectively, during the first quarter of 2014 compared to 2013, driven by a 5% increase in carloadings. Operating Ratio - Operating ratio is our operating expenses reflected as a percentage of operating revenue. Our operating ratio improved 2.0 points to a first quarter record of 67.1% in 2014 versus the same period of 2013. Core pricing gains and productivity more than offset the impact of higher volume, weather costs, and inflation. Employees - Employee levels decreased 1% in the first quarter of 2014 compared to the same period in 2013. The impact of weather reduced the amount of work we could perform on capital projects, which partially offset the larger train and engine work force required for higher volume levels. We successfully managed the growth of our full-time-equivalent train and engine force levels at a rate less than our carload growth in the first quarter of 2014 compared to the same period in 2013. 25 -------------------------------------------------------------------------------- Table of Contents Debt to Capital / Adjusted Debt to Capital Mar. 31, Dec. 31, Millions, Except Percentages 2014 2013 Debt (a) $ 10,176 $ 9,577 Equity 21,272 21,225 Capital (b) $ 31,448 $ 30,802 32.4% 31.1% Debt to capital (a/b) Mar. 31, Dec. 31, Millions, Except Percentages 2014 2013 Debt $ 10,176 $ 9,577 Net present value of operating leases 2,946 3,057 Unfunded pension and OPEB 154 170 Adjusted debt (a) 13,276 12,804 Equity 21,272 21,225 Adjusted capital (b) $ 34,548 $ 34,029 Adjusted debt to capital (a/b) 38.4% 37.6% Adjusted debt to capital is a non-GAAP financial measure under 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 this measure is important to management and investors in evaluating the total amount of leverage in our capital structure, including off-balance sheet lease obligations, which we generally incur in connection with financing the acquisition of locomotives and freight cars and certain facilities. Operating leases were discounted using 5.6% at March 31, 2014, and 5.7% at December 31, 2013. The discount rate reflects our effective interest rate. We monitor the ratio of adjusted debt to capital as we manage our capital structure to balance cost-effective and efficient access to the capital markets with the Corporation's overall cost of capital. Adjusted debt to capital should be considered in addition to, rather than as a substitute for, debt to capital. The tables above provide reconciliations from debt to capital to adjusted debt to capital. LIQUIDITY AND CAPITAL RESOURCES Financial Condition Cash Flows Millions, for the Three Months Ended March 31 2014 2013 Cash provided by operating activities $ 1,767 $ 1,524 Cash used in investing activities (905) (800) Cash (used in)/provided by financing activities (437) 130 $ 854 Net change in cash and cash equivalents $ 425 Operating Activities Higher net income in the first three months of 2014 increased cash provided by operating activities compared to the same period of 2013. Investing Activities Higher capital investments in the first three months of 2014 drove the increase in cash used in investing activities compared to the same period in 2013. 26-------------------------------------------------------------------------------- Table of Contents The table below details cash capital investments: Millions, for the Three Months Ended March 31, 2014 2013 Rail and other track material $ 175 $ 174 Ties 95 112 Ballast 44 46 Other [a] 60 46 Total road infrastructure replacements 374 378 Line expansion and other capacity projects 108 93 Commercial facilities 46 19 Total capacity and commercial facilities 154 112 Locomotives and freight cars 227 150 Positive train control 87 96 Technology and other 51 46 Total cash capital investments $ 893 $ 782 [a] Other includes bridges and tunnels, signals, other road assets, and road work equipment. Capital Plan As previously announced, we intend to make new capital investments of approximately $3.9 billion under our capital plan in 2014, which we may revise if business conditions warrant or if new laws or regulations affect our ability to generate sufficient returns on these investments. Financing Activities Cash used in financing activities increased in the first three months of 2014 versus the same period of 2013, driven by higher dividend payments in 2014 of $363 million compared to $323 million in 2013, an increase of $319 million in debt repaid, and an increase of $270 million for the repurchase of shares under our common stock repurchase program. Free Cash Flow - Free cash flow is defined as cash provided by operating activities less cash used in investing activities and dividends paid. Higher net income increased free cash flow in the first quarter of 2014. 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, for the Three Months Ended March 31, 2014 2013 Cash provided by operating activities $ 1,767 $ 1,524 Cash used in investing activities (905) (800) Dividends paid (363) (323) Free cash flow $ 499 $ 401 Credit Facilities - At March 31, 2014, we had $1.8 billion of credit available under our revolving credit facility (the facility), which is designated for general corporate purposes and supports the issuance of commercial paper. We did not draw on the facility at any time during the three months ended March 31, 2014. Commitment fees and interest rates payable under the facility are similar to fees and rates 27 -------------------------------------------------------------------------------- Table of Contents available to comparably rated, investment-grade borrowers. The facility allows for borrowings at floating rates based on London Interbank Offered Rates, plus a spread, depending upon credit ratings for our senior unsecured debt. The facility matures in 2015 under a four-year term and requires the Corporation to maintain a debt-to-net-worth coverage ratio as a condition to making a borrowing. At March 31, 2014, and December 31, 2013 (and at all times during the first quarter), we were in compliance with this covenant. The definition of debt used for purposes of calculating the debt-to-net-worth coverage ratio includes, among other things, certain credit arrangements, capital leases, guarantees and unfunded and vested pension benefits under Title IV of ERISA. At March 31, 2014, the debt-to-net-worth coverage ratio allowed us to carry up to $43 billion of debt (as defined in the facility), and we had $10.5 billion of debt (as defined in the facility) outstanding at that date. Under our current capital plans, we expect to continue to satisfy the debt-to-net-worth coverage ratio; however, many factors beyond our reasonable control could affect our ability to comply with this provision in the future. The facility does not include any other financial restrictions, credit rating triggers (other than rating-dependent pricing), or any other provision that could require us to post collateral. The facility also includes a $75 million cross-default provision and a change-of-control provision. During the three months ended March 31, 2014, we did not issue or repay any commercial paper, and at March 31, 2014, we had no commercial paper outstanding. Our revolving credit facility supports our outstanding commercial paper balances, and, unless we change the terms of our commercial paper program, our aggregate issuance of commercial paper will not exceed the amount of borrowings available under the facility. Shelf Registration Statement and Significant New Borrowings - Under our current shelf registration, we may issue, from time to time, any combination of debt securities, preferred stock, common stock, or warrants for debt securities or preferred stock in one or more offerings. We have no immediate plans to issue equity securities; however, we will continue to explore opportunities to replace existing debt or access capital through issuances of debt securities under our shelf registration, and, therefore, we may issue additional debt securities at any time. During the three months ended March 31, 2014, we issued the following unsecured, fixed-rate debt securities under our current shelf registration: Date Description of Securities January 10, 2014 $300 million of 2.25% Notes due February 15, 2019 $400 million of 3.75% Notes due March 15, 2024 $300 million of 4.85% Notes due June 15, 2044 We used the net proceeds from this offering for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase program. These debt securities include change-of-control provisions. At March 31, 2014, we had remaining authority to issue up to $1.85 billion of debt securities under our shelf registration. Receivables Securitization Facility - The Railroad maintains a $600 million, 364-day receivables securitization facility under which it sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without recourse, an undivided interest in accounts receivable to investors. The investors have no recourse to the Railroad's other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI. No amount was outstanding under the facility at both March 31, 2014, and December 31, 2013. The facility was supported by $1.2 billion and $1.1 billion of accounts receivable as collateral at March 31, 2014, and December 31, 2013, respectively, which, as a retained interest, is included in accounts receivable, net in our Condensed Consolidated Statements of Financial Position. The outstanding amount the Railroad is allowed to maintain under the facility, with a maximum of $600 million, may fluctuate based on the availability of eligible receivables and is directly affected by business volumes and credit risks, including receivables payment quality measures such as default and dilution 28 -------------------------------------------------------------------------------- Table of Contents ratios. If default or dilution ratios increase one percent, the allowable outstanding amount under the facility would not materially change. The costs of the receivables securitization facility include interest, which will vary based on prevailing benchmark and commercial paper rates, program fees paid to participating banks, commercial paper issuing costs, and fees of participating banks for unused commitment availability. The costs of the receivables securitization facility are included in interest expense and were $1 million for the three months ended March 31, 2014, and 2013. In July 2013, the $600 million receivables securitization facility was renewed for an additional 364-day period at comparable terms and conditions. Share Repurchase Program Effective January 1, 2014, our Board of Directors authorized the repurchase of up to 60 million shares of our common stock by December 31, 2017, replacing our previous repurchase program. As of March 31, 2014, we repurchased a total of $10.0 billion of our common stock since the commencement of our repurchase programs in 2007. The table below represents shares repurchased in the first quarter of 2013 under our previous repurchase program, and shares repurchased in the first quarter of 2014 under the new program. Number of Shares Purchased Average Price Paid 2014 2013 2014 2013 First quarter 3,820,000 2,881,400 $ 178.85 $ 136.58 Remaining number of shares that may be repurchased under current authority 56,180,000 Management's assessments of market conditions and other pertinent factors guide the timing and volume of all repurchases. We expect to fund any share repurchases under this program through cash generated from operations, the sale or lease of various operating and non-operating properties, debt issuances, and cash on hand. Repurchased shares are recorded in treasury stock at cost, which includes any applicable commissions and fees. Off-Balance Sheet Arrangements, Contractual Obligations, and Commercial Commitments As described in the notes to the Condensed Consolidated Financial Statements and as referenced in the tables below, we have contractual obligations and commercial commitments that may affect our financial condition. However, based on our assessment of the underlying provisions and circumstances of our contractual obligations and commercial commitments, including material sources of off-balance sheet and structured finance arrangements, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity. In addition, our commercial obligations, financings, and commitments are customary transactions that are similar to those of other comparable corporations, particularly within the transportation industry. 29 -------------------------------------------------------------------------------- Table of Contents The following tables identify material obligations and commitments as of March 31, 2014: Apr. 1 Contractual Obligations through Payments Due by Dec. 31, Dec. 31, After Millions Total 2014 2015 2016 2017 2018 2018 Other Debt [a] $ 15,686 $ 504 $ 690 $ 819 $ 852 $ 759 $ 12,062 $ - Operating leases [b] 3,893 320 482 445 404 334 1,908 - Capital lease obligations [c] 2,033 144 242 242 242 223 940 - Purchase obligations [d] 4,883 2,235 919 456 320 257 664 32 Other postretirement benefits [e] 426 31 42 43 44 45 221 - Income tax contingencies [f] 61 26 - - - - - 35 $ 26,982 $ 3,260 $ 2,375 $ 2,005 $ 1,862 $ 1,618 $ 15,795 $ 67 Total contractual obligations [a] Excludes capital lease obligations of $1,615 million and unamortized discount of ($603) million. Includes an interest component of $6,522 million. [b] Includes leases for locomotives, freight cars, other equipment, and real estate. [c] Represents total obligations, including interest component of $418 million. [d] Purchase obligations include locomotive maintenance contracts; purchase commitments for fuel purchases, locomotives, ties, ballast, and rail; and agreements to purchase other goods and services. For amounts where we cannot reasonably estimate the year of settlement, they are reflected in the Other column. [e] Includes estimated other postretirement, medical, and life insurance payments and payments made under the unfunded pension plan for the next ten years. [f] Future cash flows for income tax contingencies reflect the recorded liabilities and assets for unrecognized tax benefits, including interest and penalties, as of March 31, 2014. For amounts where the year of settlement is uncertain, they are reflected in the Other column. Apr. 1 Other Commercial Commitments through Amount of Commitment Expiration by Dec. 31, Dec. 31, After Millions Total 2014 2015 2016 2017 2018 2018 Credit facilities [a] $ 1,800 $ - $ 1,800 $ - $ - $ - $ - Receivables securitization facility [b] 600 600 - - - - - Guarantees [c] 299 214 12 30 10 11 22 Standby letters of credit [d] 26 10 16 - - - - $ 2,725 $ 824 $ 1,828 $ 30 $ 10 $ 11 $ 22 Total commercial commitments [a] None of the credit facility was used as of March 31, 2014. [b] None of the receivables securitization facility was utilized at March 31, 2014. The full program matures in July 2014. [c] Includes guaranteed obligations related to our headquarters building, equipment financings, and affiliated operations. [d] None of the letters of credit were drawn upon as of March 31, 2014. OTHER MATTERS Asserted and Unasserted Claims - Various claims and lawsuits are pending against us and certain of our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our consolidated results of operations, financial condition, or liquidity; however, to the extent possible, where asserted and unasserted claims are considered probable and where such claims can be reasonably estimated, we have recorded a liability. We do not expect that any known lawsuits, claims, environmental costs, commitments, contingent liabilities, or guarantees will have a material adverse effect on our consolidated results of operations, financial condition, or liquidity after taking into account liabilities and insurance recoveries previously recorded for these matters. Indemnities - Our maximum potential exposure under indemnification arrangements, including certain tax indemnifications, can range from a specified dollar amount to an unlimited amount, depending on the nature of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or 30 -------------------------------------------------------------------------------- Table of Contents reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions. CAUTIONARY INFORMATION Certain statements in this report, and statements in other reports or information filed or to be filed with the SEC (as well as information included in oral statements or other written statements made or to be made by us), are, or will be, forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements and information include, without limitation, the statements and information set forth under the caption "Liquidity and Capital Resources" in Item 2 regarding our capital plan and statements under the caption "Off-Balance Sheet Arrangements, Contractual Obligations, and Commercial Commitments". Forward-looking statements and information also include any other statements or information in this report regarding: expectations as to operational or service improvements; expectations regarding the effectiveness of steps taken or to be taken to improve operations, service, infrastructure improvements, and transportation plan modifications; expectations as to cost savings, revenue growth, and earnings; the time by which goals, targets, or objectives will be achieved; projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, future economic performance, and general economic conditions; proposed new products and services; estimates of costs relating to environmental remediation and restoration; estimates and expectations regarding tax matters, expectations that claims, litigation, environmental costs, commitments, contingent liabilities, labor negotiations or agreements, or other matters will not have a material adverse effect on our consolidated results of operations, financial condition, or liquidity and any other similar expressions concerning matters that are not historical facts. Forward-looking statements and information reflect the good faith consideration by management of currently available information, and may be based on underlying assumptions believed to be reasonable under the circumstances. However, such information and assumptions (and, therefore, such forward-looking statements and information) are or may be subject to variables or unknown or unforeseeable events or circumstances over which management has little or no influence or control. The Risk Factors in Item 1A of our 2013 Annual Report on Form 10-K, filed February 7, 2014, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements, and this report, including this Item 2, should be read in conjunction with these Risk Factors. To the extent circumstances require or we deem it otherwise necessary, we will update or amend these risk factors in a Form 10-Q or Form 8-K. Information regarding new risk factors or material changes to our risk factors, if any, is set forth in Item 1A of Part II of this report. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times that, or by which, such performance or results will be achieved. Forward-looking information is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements. |