Union Pacific 2012 Annual Report Download - page 24

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24
Positive Train Control – In response to a legislative mandate to implement PTC, we expect to spend
approximately $450 million during 2013 on developing and deploying PTC. We currently estimate
that PTC, in accordance with implementing rules issued by the Federal Rail Administration (FRA), will
cost us approximately $2 billion by the end of the project. This includes costs for installing the new
system along our tracks, upgrading locomotives to work with the new system, and adding digital data
communication equipment to integrate the components of the system.
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
Millions 2012 2011 2010 % Change
2012 v 2011 % Change
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%
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.