Jennifer Hamann
Chief Financial Officer at Union Pacific
Thanks, Eric, and good morning. I'm going to start on Slide 15 with a walk-down of our third-quarter operating ratio and earnings per share. Our reported operating ratio of 59.9% and earnings per share of $3.05 includes a $114 million change in estimate related to the Presidential Emergency Board recommendation and subsequent ratified and tentative labor agreement. At a high-level, the $114 million charge negatively impacted third-quarter operating ratio by 170 basis-points and reduced EPS by $0.14. For more granular information on the charge, please refer to the appendix slide at the back of the presentation deck. It's important to note however that while our general wage accruals weren't far off the PEB recommendation, we did not accrue for the [Technical Issue] annual bonus payments. Core results in the quarter continue to reflect inflation and network inefficiencies as our operating ratio was unfavorably impacted 310 basis-points but contributed $0.20 to EPS. Importantly, we did make sequential core improvement in our operating ratio of 40 basis-points versus the second-quarter. Decrease in fuel prices in the quarter and the roughly two-month lag in our fuel surcharge programs favorably impacted our quarterly operating ratio by 70 basis-points and added $0.37 to EPS. Finally, third-quarter results also include the favorable comparison to last year's weather and wildfire events, which adds 50 basis-points to OR and $0.05 to EPS.
Looking now at our third-quarter income statement on Slide 16, where we provide both reported and adjusted numbers that exclude the impact of the labor charge. Throughout my remarks, I will speak to the adjusted results. Operating revenue totaled $6.6 billion, up 18% versus 2021 on 3% year-over-year volume growth. As we have seen throughout the year, higher fuel prices are the primary contributor to higher operating expenses, which increased 22% to $3.8 billion, excluding the impact of higher fuel prices our expenses were up 10% in the quarter. Third-quarter adjusted operating income totaled $2.7 billion, a 13% increase versus 2021. Other income increased $86 million driven by higher real-estate income including a $35 million gain on sale and pension benefit.
Income tax expense increased 13% as a result of higher pre-tax income, partially offset by corporate income tax rate reductions in three of our operating states. As a result of those changes, we now expect our full-year tax-rate to be around 23%. Adjusted net income of $2 billion increased 18% versus 2021 and adjusted earnings per share was up 24% to $3.19. Operating revenue, operating income, net income and earnings per share were all quarterly records.
Looking more closely at third-quarter Freight revenue, Slide 17 provides a breakdown which totaled $6.1 billion, up 18% versus 2021. Year-over-year volume gains, supported by our business development efforts and sequentially improving operational fluidity, increased Freight revenue 325 basis-points. Fuel surcharge revenue impacted revenue 13 points, reflecting the impact of higher year-over-year diesel prices and the two month lag in our recovery program. Total fuel surcharge revenue was $1.2 billion in the quarter. Strong pricing gains, when combined with a slightly negative business mix, drove 200 basis-points of freight revenue growth. Lower petroleum shipments, combined with higher rock and auto parts shipments, contributed to the negative mix.
From a price standpoint, we have now lapped the positive benefit from coal contracts index to natural gas prices so the year-over-year benefit is minimal. And as we experienced in the second-quarter, network fluidity limited the upside for both price and mix. Setting these headwinds aside, we are confident that we will yield price dollars that exceed inflation dollars, even with the higher inflationary hurdle than expected at the start of the year.
Moving on to slide 18, which provides a summary of our third-quarter adjusted operating expenses, where the primary driver again this quarter was fuel, up 71% on a 67% increase in fuel prices. While we saw fuel prices come down some in the quarter, our average quarterly fuel price was $3.96 per gallon, only $0.07 lower than second-quarter's average price. Our fuel consumption rate achieved an all-time quarterly record in the quarter, improving 1% versus 2021 as a result of productivity gains and a more fuel-efficient business mix.
Looking closer at the other expense lines, adjusted compensation and benefits expense was up 12% versus 2021. This includes an additional $19 million related to this quarter's accrual for wage increases and annual bonus. Total third-quarter workforce levels increased 3%. Management, engineering and mechanical workforces grew 3%, while train and engine crews were up 5%, primarily reflecting year-over-year increases in our training pipeline.
As you heard from Eric, we have now exceeded our 2022 hiring goals. Costs per employee came in higher-than-anticipated, up 8%, primarily driven by wage inflation. We also experienced continued cost pressures related to network inefficiencies with higher overtime and borrow out costs. For the fourth-quarter, we expect the year-over-year increase to be around 7%, in-line with tentative and ratified wage increases.
Purchase services and materials expense remained elevated, up 23%, driven by higher cost to maintain a larger active locomotive fleet, volume related purchase transportation expense associated with our loop subsidiary and inflation. Equipment and other rents decreased 1% driven by higher equity income that more than offset increased car hire expenses. Other expense grew 18% in the quarter, a bit higher than we anticipated as a result of increased casualty expenses associated with freight loss and damage and personal injury. For the fourth-quarter, we expect other expense to be flat versus 2021 as we are anticipating the receipt of an insurance settlement for last year's bridge fire.
Overall, inflation and cost inefficiencies offset the benefits of volume leverage and resulted in fuel adjusted incremental margins of just 2%. Although not the results we know we can achieve, it still reflects positive progress from the second-quarter and provides us with momentum as we wrap-up 2022.
Turning to slide 19 and our cash flows. Cash from operations through the third-quarter increased 9% to $7.1 billion. Our comparable cash-flow conversion rate was 80% and free-cash flow totaled $2.1 billion. Although this is a decrease of $517 million versus 2021, it includes $745 million of increased cash capital spending and 317 million in higher dividends. With the increased capital spending to-date, we now expect full-year 2022 capital to be around $3.4 billion, up slightly from our prior guidance but well within our overall guidance of less than 15% of revenue. Year-to-date, shareholders have received $7.9 billion through dividends and share repurchases. This level of cash returns demonstrates our firm commitment to rewarding shareholders with strong returns. Related to share repurchases, we now expect to buyback roughly $6.5 billion in 2022. Although we repurchased shares at a strong pace in the third-quarter and expect that to continue for the remainder of the year, we have been impacted by higher-than-anticipated inflationary pressures and service costs.
Lastly, we finished the third-quarter with a comparable adjusted debt-to-EBITDA ratio of 2.8 times as we continue to maintain a strong investment-grade credit rating. In fact, during the quarter, we received an upgrade from Moody's to A3 and we are now A-rated across all three credit agencies. Also during the quarter, we issued 1.9 billion in debt which, included $600 million of Green bonds, our first such issuance.
Wrapping up on Slide 20. With a little over two months left in the year, we are focused on building upon the positive momentum of the third-quarter. The operating team is executing on its plan to improve operating performance and capture additional unmet customer demand. As you heard from Kenny however, markets are softening a bit and that is resulting in a slight reduction in our overall volume expectations, now more in the range of 3% growth for full-year 2022. With more clarity on the impact from the new labor agreements, our operating ratio outlook also has changed. We now expect our reported full-year operating ratio to be around 60%. As we close-out 2022, attention is quickly turning to 2023. While we are not yet ready to share our outlook, it is important to reiterate our long-term view. Our focus on generating strong cash returns and improving ROIC remains unchanged, and we are firmly committed to achieving the goals established at our May 2021 Investor Day of a 55% operating ratio and incremental margins in the mid to-upper 60s. Since establishing those targets, and even achieving them in a few quarters, the environment has changed. With higher inflation and a weaker economic outlook, the road to achieving those milestones now is a bit longer but our roadmap to success is still the same. Supported by our great employees and the foundation of UP's strong and diverse franchise, we will leverage volume, pricing and productivity to achieve those goals.
With that. I will turn it now back to Lance.
