Jennifer L. Hamann
Executive Vice President and Chief Financial Officer, Union Pacific Corporation at Union Pacific
Thanks, Eric, and good morning. Let me start with a look at the walk-down of our second quarter operating ratio and earnings per share on Slide 14. Union Pacific's earnings per share increased $0.21 to $2.93 and our quarterly operating ratio of 60.2% worsened by 510 basis points. Rapidly rising fuel prices throughout the quarter, the lag on our fuel surcharge programs and the widening refining spreads negatively impacted our quarterly operating ratio by 130 basis points, while adding $0.18 to earnings per share. Our operating ratio and EPS were further negatively impacted 380 basis points and $0.02 per share, respectively, as core results reflect the impact of network recovery efforts that more than offset the benefits of our top line growth.
Below the line, real estate sales and lower state tax rates netted to a year-over-year benefit of $0.05 per share. We closed the second half of a land sale with the Illinois Tollway authority, which we announced in May. And then the state of Nebraska changed its corporate tax rate in the quarter. Looking now at our second quarter income statement on Slide 15, operating revenue totaled $6.3 billion, up 14% versus 2021 on a 1% year-over-year volume decline. Operating expense increased 25% to $3.8 billion. Excluding the impact of higher fuel prices, expenses were up 11% in the quarter. Second quarter operating income was $2.5 billion, a 1% increase versus last year. Interest expense increased 12% compared to 2021, reflecting higher debt levels. Income tax decreased 2% due to the Nebraska corporate tax rate reduction I just mentioned and contributing to lower second quarter effective tax rate.
Net income of $1.8 billion increased 2% versus 2021, which, when combined with the share repurchases, resulted in earnings per share, up 8% to $2.93. Looking more closely at second quarter revenue, Slide 16 provides a breakdown of our freight revenue, which totaled $5.8 billion, up 14% versus 2021. Lower year-over-year volume reduced revenue 150 basis points. Fuel surcharge revenue increased freight revenue, 11.25% points, reflecting the rising diesel prices. Total fuel surcharge revenue was $976 million in the quarter. Strong pricing gains combined with the positive business mix drove 425 basis points of freight revenue growth. The significant decline in international intermodal volumes contributed positively to mix.
However, the usually strong mix impact of year-over-year industrial growth was muted by strength in short-haul rock movements. Overall, the demand environment continues to support actions that yield price dollars exceeding inflation dollars. It's important to note, though, that our network recovery efforts limited our upside for both price and mix as we only count price if we move the cars.
Moving on to Slide 17, which provides a summary of our second quarter operating expenses were the primary driver of the increased expense was fuel up 89% on an 87% increase in fuel prices. We saw a dramatic rise in prices through the quarter, paying record highs as they surge from an average of $3.71 per gallon in April to $4.34 per gallon in June. Our fuel consumption rate was relatively flat compared to 2021 as negative productivity was partially offset by a more fuel-efficient business mix. Looking further at the expense lines. Compensation and benefits expense was up 7% versus 2021. Second quarter workforce levels increased 2%. Management, engineering and mechanical workforces grew 1%, while train and engine crews were up 5%, primarily reflecting year-over-year increases in our training pipeline.
As you heard from Eric, strong third quarter graduations position us to support our network recovery efforts and prepare for future growth. Cost per employee increased 5% as a result of wage inflation and continued elevated costs relating to network inefficiencies that come in the form of higher recrew, overtime and borrow out costs. For the balance of the year, we expect year-over-year increases to be sequentially lower from the second quarter in both the third and fourth quarters. Purchase services and materials expense was up 30% driven by higher cost to maintain a larger active locomotive fleet, inflation and volume-related purchase transportation expense associated with our Loup subsidiary. We also had an unfavorable comparison in the quarter versus 2021 where we called out a $35 million favorable onetime item.
Equipment and other rents grew 15%, driven by lower TTX equity income and increased car hire expense related to network congestion. Other expense grew 17% in the quarter, driven by a $35 million increase in casualty expenses associated with adverse adjustments to older claims and increased business travel. For the full year, we now expect other expense to be up low single digits versus 2021. Although fuel was clearly the driver of higher quarterly costs, the added expense from our service performance resulted in 69% fuel-adjusted decremental margins. Turning to Slide 18 and our cash flow. Cash from operations in the first half of 2022 decreased slightly to just under $4.2 billion, down 1%. Our cash flow conversion rate was 73% and free cash flow of $1.1 billion declined $727 million.
This, of course, includes the impact of $455 million increased cash capital spending and $206 million in higher dividends. Capital spending year-to-date is up 38% versus 2021, which reflects both a more normalized spend trajectory and an increased capital budget for 2022. Year-to-date, we returned $5 billion to shareholders through dividends and share repurchases. This includes a 10% dividend payout increase announced in May, the third such increase in a little over a year's time. And we finished the second quarter with an adjusted debt-to-EBITDA ratio of 2.8 times as we continue to maintain a strong investment-grade credit rating. Wrapping up on Slide 19. As we've discussed this morning, it was a difficult second quarter but necessary to position ourselves for success in the second half of the year.
Importantly, we're demonstrating greater network fluidity as evidenced by the metrics and Kenny just described for you that there is still solid demand for our services despite some indications of economic softening. For example, full year industrial production is still forecasted at nearly 5%, but back half 2022 estimates are weaker. Against that backdrop, we expect to be back on track to exceed industrial production in the second half of 2022 and produce full year carload growth of 4% to 5%. As it relates to our operating ratio, the first half performance makes achievement of year-over-year improvement unlikely. However, we do expect year-over-year improvement in the second half of 2022 and a full year operating ratio around 58%.
While our 2022 results won't match our view coming into the year, we remain committed to our goal of ultimately achieving a 55% operating ratio. We're also revising our guidance for incremental margins, which we now expect to be around 50% for the back half of the year. Beyond 2022, we still expect to achieve our longer-term guidance of mid- to upper 60% incremental margins. Our capital allocation plans remain unchanged. Capital spending at $3.3 billion for the year, well within our long-term guidance of below 15% of revenue and we remain committed to leading the industry with our long-term dividend payout ratio and share repurchases on par with 2021.
Finally, I feel fortunate to work with such a fantastic team of railroaders at Union Pacific. Every time I return from the field visit, I'm energized about the future of our company. Thanks to a great team. We have a bright future ahead.
So with that, I'll turn it back to Lance.