Jennifer L. Hamann
Executive Vice President and Chief Financial Officer at Union Pacific
Thanks, Eric, and good morning. Let's start with fourth quarter income statement on Slide 17. Operating revenue in the quarter totaled $6.2 billion, up 8% versus 2021 on a 1% increase in volume. These gains were more than offset by a 14% increase in operating expense, which totaled $3.8 billion. Excluding the impact of higher fuel prices, expenses were up 7% in the quarter.
Operating income of $2.4 billion declined 1% versus 2021. Other income remained strong, up 11% to $92 million, driven by higher real estate income and pension benefit which offset 2021's $36 million gain on the sale of a technology investment. Interest expense increased 13% as average debt levels increased more than $3 billion year-over-year. Net income of $1.6 billion declined 4%. But when combined with share repurchases, resulted in essentially flat earnings per share at $2.67. Fourth quarter operating ratio of 61% increased 360 basis points, driven by higher inflation and operating costs. Falling fuel prices during the quarter had a favorable 20 basis point impact.
Looking more closely at fourth quarter revenue, Slide 18 provides a breakdown of our freight revenue, which totaled $5.8 billion in the fourth quarter, up 9% compared to 2021. Volume contributed 75 basis points. As fuel prices stayed high year-over-year, fourth quarter fuel surcharge revenue also remained elevated, totaling $975 million and increased freight revenue 850 basis points. Strong core pricing gains that exceeded inflation dollars were more than offset by a negative business mix, resulting in a 25 basis point decline in freight revenue. Fewer forest product shipments, combined with higher international intermodal and rock shipments, drove the negative mix.
Turning to Slide 19 for a summary of our fourth quarter operating expenses. The largest driver of the overall expense increase was again fuel, up 43% as fuel prices rose 46%. Combating these higher prices, we continue to drive productivity, improving our fuel consumption rate 2 points to produce a fourth quarter record. Our compensation and benefits expense was up 10% versus 2021. Total fourth quarter workforce levels increased 4%, reflecting our hiring efforts throughout 2022. Cost per employee grew 6%, primarily driven by wage inflation.
In addition, cost pressures from network inefficiencies in the form of higher overtime and borrow out costs continued in the quarter. Purchased services and material expense remained elevated, up 18%, driven by cost to maintain a larger active locomotive fleet, volume-related purchase transportation expense at our Loop subsidiary and inflation. Equipment and other rents increased 3%, driven by the impact of slower cycle times on car hire expenses. Other expense was flat in the quarter as higher travel and casualty expenses were offset by a partial insurance recovery related to 2021's bridge fire as well as lower state and local taxes.
Looking to 2023, we have opportunities across the board to improve efficiency, and that's job one as we recover our service product. Although we still expect to be more than volume variable with our workforce, we will continue to aggressively hire crews in critical locations and to backfill attrition. For 2023, we expect our all-in inflation to be around 4%, while cost per employee is expected to increase in the mid-single digits as elevated wage inflation is partially offset by productivity. Depreciation expense should be up around 3% versus 2022. And below the line, similar to last year, we expect other income to remain elevated versus historic levels, driven by higher real estate and interest income. Finally, we expect our 2023 annual effective tax rate to be around 24%.
Moving to Slide 20 with a quick recap of full year 2022 results, which are shown on the slide as reported and include the impact of the third quarter PEB adjustment. Revenue was up 14%, an annual record, driven by increased fuel surcharges, strong pricing gains and 2% volume growth. Record operating income increased 6% to $9.9 billion, which includes a net increase of just under $700 million from fuel surcharges. Our full year reported operating ratio of 60.1% deteriorated 290 basis points versus 2021. Network inefficiencies and inflation were the primary components of the degradation, with the PEB adjustment and higher fuel prices impacting the full year operating ratio by 30 basis points and 20 basis points respectively. Earnings per share finished the year at a record $11.21, a 13% increase versus 2021 results. Our consistent and disciplined approach to deploying capital back into our railroad, coupled with volume growth that produced increased operating income, drove a 90 basis point improvement in return on invested capital to a record 17.3%.
Turning to shareholder returns on the balance sheet on Slide 21. Full year cash from operations increased over $300 million to $9.4 billion, a 4% increase from 2021. The first priority for our cash is capital investment, which finished 2022 at $3.4 billion or just under 14% of revenue. Our cash flow conversion rate finished 2022 at 82% and free cash flow totaled $2.7 billion. Although a decrease of nearly $800 million versus 2021, that includes an almost $700 million increase in cash capital, a more than $350 million increase in dividend payments and $70 million for PEB backpay settlements.
Our dividend payout ratio for 2022 was around 45%, in line with our long-term target as we rewarded shareholders with a 10% dividend increase in the second quarter and distributed nearly $3.2 billion. We also returned cash through strong share repurchases, buying back 5% or $27 million of our common shares at an all-in cost of $6.3 billion. In total, between dividends and share repurchases, we've returned $9.4 billion to our owners in 2022, demonstrating our ongoing commitment to deliver significant shareholder value. We closed out the year at an adjusted debt-to-EBITDA ratio of 2.9 times, consistent with our resolve to maintain strong investment-grade credit ratings as we finished the year A-rated by Moody's, S&P and Fitch.
Turning now to our view on 2023. We think about the year ahead in two parts, what we can control and what we cannot. We don't control the markets we serve. And as you saw on Kenny's slide of Economic Indicators, it's a mixed bag in terms of expectations. We do control the way we compete in those markets with the great foundation of the UP franchise. Onboarding Schneider is clearly the marquee win for 2023. And with Kenny's team posting profitable wins across the board, we are positioned to further outperform the market. In 2023, that will be evidenced by car loadings that exceed industrial production.
Another area where we don't have direct control is the current inflationary environment, which continues to be elevated. However, we know we have it within our control to improve operations. As you heard from Eric, it's imperative that we improve the reliability of our service product, while regaining lost productivity. In addition, as we've demonstrated consistently, we expect to generate pricing dollars that exceed inflation dollars in 2023. Assuming current fuel prices and our thoughts on volume, productivity and price, we expect to improve our full year 2023 operating ratio on a year-over-year basis. That said, there will be a lag to fully offset the impact of inflation on our profitability until we are able to actively touch or reprice our business, while also further improving productivity.
Turning to capital allocation. We continue to make significant investments into our business with an expected 6% increase in capital investments versus 2022 to $3.6 billion. Growth is the cornerstone to the long-term financial success of Union Pacific and we are continuing to invest in opportunities that support that strategy. In addition to the locomotive and intermodal investments Eric described, we also are investing to support carload growth. The remainder of our capital allocation plans remain unchanged, rewarding our owners with an industry-leading dividend payout of around 45% and returning excess cash through share repurchases.
With our balance sheet currently leveraged at the desired levels, the amount of cash available for repurchases will be less than in prior years and predominantly funded from cash generation. With the new year comes new opportunities. And by focusing on what we can control, we are confident in our ability to provide strong value to all of our stakeholders in 2023.
So with that, I'll turn it back to Lance.
